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

Saturday, August 7, 2010

week ending Aug 7

A Look Inside the Fed’s Balance Sheet — Updated 8/6/10 - Assets on the Fed’s balance sheet expanded slightly in the latest week, rising to $2.309 trillion from $2.308 trillion. Most assets were essentially flat with an increase in other credit and a drop in the Term Asset-Backed Securities Loan Facility, or TALF. The TALF ended in March, and is falling as the last loans made through the program mature. Mortgage-backed-secuties holdings rose slightly, but this is the result of changing valuations of the portfolio not new acquisitions. The central bank had stopped new purchases of the securities, and the portfolio has decreased as some of the holding mature. But policy makers are considering reinvesting those funds into MBS or Treasurys, which may keep the balance sheet from declining as much in the weeks or months ahead. Direct-bank lending rose slightly this week, but overall it has dropped to the precrisis levels of 2007.See a full-size version. Click on chart in large version to sort by asset class.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--August 5, 2010

A Look Inside the Fed’s Balance Sheet - (previous week) Assets on the Fed’s balance sheet contracted a bit in the latest week, dropping to $2.308 trillion from $2.315 trillion. Most of the decline came from a decline in the value of the Fed’s mortgage-backed securities. The central bank had stopped new purchases of the securities, and the portfolio has decreased as some of the holding mature. But policy makers are considering reinvesting those funds into MBS or Treasurys, which may keep the balance sheet from declining as much in the weeks or months ahead. Direct-bank lending has dropped to the precrisis levels of 2007. In an effort to track the Fed’s actions, Real Time Economics has created an interactive graphic that will mark the expansion of the central bank’s balance sheet. The chart will be updated as often as possible with the latest data released by the Fed. See a full-size version. Click on chart in large version to sort by asset class.

The Danger In Shrinking The Fed's Balance Sheet - For a long time now people have been talking about the need for the Fed to "unwind" or "shrink" its balance sheet, sometimes, it is said, to pre-crisis levels. On Tuesday, in a front-page article titled "Fed Mulls Symbolic Shift," The Wall Street Journal reported that Fed officials are considering whether to reinvest money from the central bank's maturing mortgage-bond holdings "instead of allowing its portfolio to shrink gradually, as it is expected to do in the months ahead." "Moving to stop the Fed's portfolio from shrinking would prevent monetary policy from slightly tightening in the face of a weakening recovery." I don't know what I'm missing. Significant shrinking of the balance sheet would be a draconian tightening of monetary policy. It would be way more than a "symbolic shift."

Fed Finding No Good Deed Goes Unpunished as Mortgage Trades Fail- For all the good the Federal Reserve’s $1.25 trillion of mortgage-bond purchases have done, they’ve also left part of the market broken. By acquiring about a quarter of home-loan bonds with government-backed guarantees to bolster housing prices and the U.S. economy, the Fed helped make some securities so hard to find that Wall Street has been unable to complete an unprecedented amount of trades. Failures to deliver or receive mortgage debt totaled $1.34 trillion in the week ended July 21, compared with a weekly average of $150 billion in the five years through 2009, according to Fed data. The difficulty of executing transactions may eventually drive investors away from the $5.2 trillion mortgage-bond market, which has historically been the most liquid behind U.S. Treasuries, potentially causing yields to rise.

WSJ: FOMC considering reinvesting when MBS Matures - From the WSJ: Fed Mulls Symbolic Shift Federal Reserve officials will consider a modest but symbolically important change in the management of their massive securities portfolio ...The issue: Whether to use cash the Fed receives when its mortgage-bond holdings mature to buy new mortgage or Treasury bonds, instead of allowing its portfolio to shrink gradually, as it is expected to do in the months ahead. ... Buying new bonds with this stream of cash from maturing bonds—projected at about $200 billion by 2011—would show the public and markets that the Fed is seeking ways to support economic growth. This seems unlikely to happen at the Aug 10th meeting based on Chairman Bernanke's speech this morning, and his testimony to Congress less than two weeks ago.

Fed to consider symbolic shift as economy wavers - WSJ - (Reuters) - U.S. Federal Reserve officials will consider a modest but symbolically important change in the management of its massive securities portfolio when they meet next week, amid signs the economy may be losing momentum, the Wall Street Journal reported.Any change only four months after the central bank ended a massive bond-buying programme would signal deepening concern about the U.S. economic outlook, the newspaper said in the report on its website on Tuesday. Fed officials meeting on Aug. 10 will consider whether to use cash the Fed receives when its mortgage-bond holdings mature to buy new mortgage or Treasury bonds, instead of allowing its portfolio to shrink gradually, as it is expected to do in the months ahead, the report said, without citing sources.  Buying more assets was one of several options Fed Chairman Ben Bernanke outlined in testimony to a congressional committee on July 21

The Fed Prepares Its First Step Into Quantitative Easing Part II - According to WSJ, the Federal Reserve may make its first shift to a more accommodative stance regarding its asset portfolio.Specifically, rather than simply letting its portfolio of mortgage-backed securities naturally dwindle down, as they get paid off, the Fed may reinvest that cash into more mortgage-backed securities.It's not a huge move, but letting the MBS portfolio slowly burn off is inherently tightening (cash goes into the Fed, it doesn't go back out into the economy). Rolling over that portfolio, therefore, maintains the status quo.We can't be surprised at all that the Fed is considering this. There's obviously a huge debate going on among the governors, and Bernanke is well aware of the slowdown numbers, and the compelling deflation arguments.This is, of course, an incredibly minor move, and if things keep deflating, it won't be nearly enough.

Bernanke faces US growth mysteries - If Ben Bernanke, Federal Reserve chairman, expected the release of second-quarter growth data to clear up the “unusually uncertain” outlook for the US economy, then he will have been sorely disappointed. On the surface, the numbers were easy to interpret. Growth over the previous quarter at an annualised rate fell from 3.7 per cent in the first three months of this year to 2.4 per cent in the second. That fits with many other signs that the recovery is slowing down. The details, however, hide a series of economic mysteries – about how fast the economy can grow, how weak it actually is, and what US consumers have been up to for the past few years – that policymakers will have to solve.The most interesting numbers in the release were not about the second quarter at all – they were revisions for 2007, 2008 and 2009. These showed that the recession was even deeper than previously thought. Output in 2009 was 1 per cent below the previous estimate

Options for monetary stimulus - The latest economic data have surely warranted a downward revision in the Federal Reserve's assessment of near-term economic performance. It therefore might be a good time to review the steps the Fed could take if it wishes to provide further economic stimulus. One option that has been discussed is lowering or eliminating the interest that the Fed pays on deposits that banks maintain in their accounts with the Fed. These accounts typically amounted to about $10 billion in normal times, but have grown to over a trillion dollars since the Fed began paying interest on reserves in the fall of 2008.But Dave Altig isn't persuaded that eliminating interest on reserves would make much difference. He notes that the gap between what banks can earn by leaving the funds idle in their accounts with the Fed at the end of the day (0.25%) and a used car loan (about 8%) is so large that increasing it another 25 basis points by eliminating the payment of interest on reserves really wouldn't make much difference for banks' incentives to make this kind of loan.

NY Fed Plans More Tests for Eventual Balance-Sheet Reductions - The New York Federal Reserve Wednesday will begin carrying out more small scale reverse repo transactions with primary dealers, which will for the first time include agency mortgage-backed securities, the New York Fed said Tuesday. Reverse repos are one tool the Federal Reserve has at its disposal to help it shrink its balance sheet once it becomes evident the economy can get by on its own. In reverse-repo operations, the Fed sells dealers securities for cash with the agreement to buy them back later at a higher price.The Fed has been working with market participants on operational aspects of reverse repos since last year to ensure the tool will be ready if the Fed decides it should be used. In November 2009, the Fed announced a series of small-scale transactions with primary dealers using Treasury and direct agency debt securities. On Wednesday it will carry out similar transactions with primary dealers using all eligible collateral types, including agency mortgage-backed securities.

Fed Watch: Handicapping the Next FOMC Meeting - The game is on. The relatively weak data flow in recent weeks, culminating with the clearly subpar GDP report, has combined with rumblings from the Federal Reserve that yes, we can do more. The net result is growing expectations that additional easing will occur sooner than later. As early as next week, in fact. Logically, the story hangs together reasonably well except for one key ingredient - the top dog, Federal Reserve Chairman Ben Bernanke, does not appear overly concerned with the economic outlook. But the chatter is becoming almost undeniable. Someone is sourcing the press to believe that a policy change is imminent. And Fedspeak aside, that source cannot be ignored. Hat tip to Calculated Risk, for seeing this CNBC report today: Japan's Nomura has become the first investment bank to predict the Federal Reserve will begin to ease monetary policy following the recent slowdown in growth in the world's biggest economy.

The sound of one central bank clapping - Compare and contrast, central banking psychology edition.Here’s a Bank of England angle on the Fed’s got a stimulus problem this summer — in which there’s mixed but growing evidence for a downturn – deflation, even – but not much agreement or will behind what measures (if any) are needed to deal with it. After all, curiously enough, the BoE has managed the opposite — to keep on easing, despite stronger evidence of a recovery in the UK. And will probably continue to do such at this week’s Monetary Policy Committee.

Wow... Diamond Rejected...Wow. There goes any hope for monetary policy... The article doesn't say how Republicans alone could block the appointment w/ just 41 senators in the entire senate. How'd they get a majority on the Senate Banking Committee??? I wonder if now some wheels are starting to turn at the White House. If, now, they might start to reconsider how smart it was to leave Monetary Policy to a bunch of partisan-Republicans when they could have made these appointments 15 months ago, and whether it was smart to re-nominate a Republican inflation hawk in the midst of a liquidity trap. Now, of course, apparently the Republicans can easily block any dovish appointment with just 41 senators... I wonder if they can even grasp the importance of this.

Monetary policy: Fed up | The Economist - THE failure of the nomination to the Federal Reserve Board of Peter Diamond is an embarrassment all the way around. It's certainly another embarrassment for the Senate, which increasingly behaves more like a sad joke than an august legislative body. Bloomberg notes: Diamond received the most opposition of the three nominees in Banking Committee votes last week. The panel voted 16-7 in favor of Diamond, 17-6 for Yellen and 21-2 for Raskin, Maryland’s commissioner of financial regulation. All of the opposition came from Republican members. But wait, you say, the panel voted in favour of Mr Diamond? Under Senate rules, all nominations that aren’t completed before a lengthy recess go back to the White House and have to be resubmitted unless the Senate unanimously agrees to hold onto them and act later, If a single senator objects, the name goes back to the president’s office. In Diamond’s case, at least one senator did that. Emphasis mine. That's perfect, isn't it? When the relevant committee approves a nominee to a crucial economic post by a large margin and it nonetheless gets returned to the president because a single senator (perhaps) wished to delay the process.

Peter Diamond, Macro Maven - Paul Krugman - This is disgusting: Senate Republicans holding up Peter Diamond’s nomination to the Federal Reserve Board on the grounds that he may not be qualified to make monetary policy. Aside from the fact that the same Senators cheerfully confirmed Bush nominees who didn’t know much about economics of any kind, this is especially stupid right now. Why? Because right now one of the hot topics is whether the apparent shift in the Beveridge curve signals a rise in structural unemployment — and Diamond wrote the seminal paper on the whole subject — the top result on Google scholar. Diamond is exactly the man we need — which, given the way things have been going lately, probably means he won’t get confirmed

Taking Down The Goalposts - Paul Krugman - So I just read the latest speech from Richard Fisher of the Dallas Fed; it’s one of the most depressing things I’ve read lately, and given what I read that’s saying a lot. Much of the speech is taken up with arguing that it’s not the Fed’s job to help the struggling economy, because the big problem there is business uncertainty about future regulation. Urk. Like others, I’ve tried to point out that there is no evidence for this claim: business investment is no lower than you’d expect given the state of the economy, while surveys say that weak sales, not fear of regulation, are holding back business expansion. Oh, and just to make it perfect, Fisher cites Mort Zuckerman to bolster his case. But what’s really striking here is the way Fisher basically takes the Fed completely off the hook. Hitherto, the Fed has been charged with two goals: full employment, and price stability, defined as roughly 2 percent inflation. But in this speech Fisher essentially takes down one of those goalposts, arguing that there’s nothing the Fed can or should be doing about the weak economy; and he moves the other post, redefining price stability as “keeping inflation extremely low and stable”.

What were they thinking? One view - Krugman on Sunday bemoaned the thinking at the US Fed, writing So I just read the latest speech from Richard Fisher of the Dallas Fed; it’s one of the most depressing things I’ve read lately, and given what I read that’s saying a lot. Much of the speech is taken up with arguing that it’s not the Fed’s job to help the struggling economy, because the big problem there is business uncertainty about future regulation. Urk. Krugman goes on to lament the fact that Fisher really only seems to care about the inflation part of the Fed’s dual mandate and appears to neglect the importance of economic stabilization. That intrigued me enough to try to find out more about this President and CEO of the Federal Reserve Bank of Dallas, who helps to set US monetary policy.

Richard Fisher on Financial Regulatory Uncertainty - Krugman is right, this is depressing:So I just read the latest speech from Richard Fisher of the Dallas Fed; it’s one of the most depressing things I’ve read lately.What freaks me out about the speech is that he’s blaming the financial reform bill, of all things, as one of the major sources of uncertainty. I can’t believe that Fisher went around aggressively promoting financial size caps, saying we need to break up the largest 5 banks into the largest 15 banks (or whatever he imagined the solution being practically), but is now complaining about uncertainty coming from the fact that the capital to be held against liquidity risks wasn’t explicitly written into the bill and the existence of the CFPB. The bill looks pretty close to the Obama White Paper, which has been in existence for well over a year now.   All the major banks have already finished their comments on Basel III and the strongest Basel you could imagine is likely already common knowledge, and it’s just a matter of where the final effort lands.

Bernanke: Challenges for the Economy and State Governments - From Fed Chairman Ben Bernanke: Challenges for the Economy and State Governments -While the support to economic activity from stimulative fiscal policies and firms' restocking of their inventories will diminish over time, rising demand from households and businesses should help sustain growth. In particular, in the household sector, growth in real consumer spending seems likely to pick up in coming quarters from its recent modest pace, supported by gains in income and improving credit conditions. In the business sector, investment in equipment and software has been increasing rapidly, in part as a result of the deferral of capital outlays during the downturn and the need of many businesses to replace aging equipment. At the same time, rising U.S. exports, reflecting the expansion of the global economy and the recovery of world trade, have helped foster growth in the U.S. manufacturing sector.

Bernanke Says Rising Wages Will Lift Spending - NYTimes - While the United States has “a considerable way to go” for a full recovery, “rising demand from households and businesses should help sustain growth,” Mr. Bernanke said on Monday in a speech in Charleston, S.C. “We are maintaining strong monetary policy support for the recovery,” he said in response to an audience question, without discussing any further action the Fed could take to aid growth. The remarks signal that Mr. Bernanke and his colleagues, when they meet in Washington next week, will stop short of making major changes in their policy statement or taking new steps to lower interest rates and reduce unemployment, said John Ryding, a former Fed researcher. Consumer spending, which accounts for about 70 percent of the economy, “seems likely to pick up in coming quarters from its recent modest pace,” Mr. Bernanke said.

The inactive Fed - ANOTHER day brings another speech by Ben Bernanke, in which he optimistically indicates that private economic activity should begin powering the American recovery any day now, before going on to detail the many obstacles to sustained growth—the end of stimulus, weak housing markets, weak labour markets, rickety financial markets, and so on. And so for another day, the internet wonders why the Fed isn't doing more to prevent a prolonged period of high unemployment and disinflation (if not outright deflation), in violation of its chief mandates. Economics of Contempt cites recent comments by Dallas Fed President Richard Fisher: [W]e at the Fed must continue to comport ourselves in a manner that exorcises any lingering worries about our willingness to brook any political interference with our commitment to fostering price stability and maximum sustainable employment. We delivered on our duty to restore liquidity to the commercial paper, asset-backed securities, interbank lending and other markets.

An Argument for More From the Fed - Larry Meyer of Macroeconomic Advisers makes the case for doing more for to help the recovery which you will probably be hearing a lot more about in the next few days. It’s what he calls the “risk management” approach to Fed policy making, something former Federal Reserve Chairman Alan Greenspan employed during his tenure.The thinking goes like this: Right now, the downside risks to the economy, even if they aren’t more likely than the upside risks, would be more damaging. Therefore, the Fed needs to overweight them in its decisions and lean heavily against the chance of a downside shock. Some people might bristle at the idea of employing ideas used by Mr. Greenspan in the leadup to the housing bubble, but this thinking is generating some buzz. Here’s a slice of Mr. Meyer’s take in an email he sent to clients:

"Bernanke Says Rising Wages Will Lift Spending" - When I saw this: Federal Reserve Chairman Ben S. Bernanke said rising wages would probably spur household spending in the next few quarters, even as weak job gains dragged down consumer confidence.  I wondered what Bernanke was talking about. Dean Baker had the same reaction:The NYT headline told readers that, "Bernanke Says Rising Wages Will Lift Spending." Real wages have been virtually unchanged over the last year. Let's hope that the NYT got the story wrong and that Bernanke knows this. What do the latest data show?: Personal incomes were ... flat in June as private wages and salaries fell. There have been several instances lately where things Bernanke has said make me wonder how familiar he is with what recent data are telling us about the economy. Lately the Fed seems more interested justifying why it doesn't need to do anything more to boost the economy rather than grappling with actual data showing that the economy needs more help from the Fed.

Proposal for "Getting Through" To Ben Bernanke - Although the logic for politician non-involvement in Monetary Policy is reversed in a liquidity trap, I still don't like the idea... That said, I do think the CEA and administration should try to "work the refs" -- create momentum from top economists for more QE. Two people Larry Summers might want to have a word with are Mark Gertler and Michael Woodford, who've written such real-world-relevant papers as "Monetary policy in a world without Money", are prestigious, well-respected theoretical Monetary Economists who don't often privilege us with comments on real-world economic phenomena. Yet, from their theoretical papes, they should be all over more QE today, and, of course, they are well-respected by Ben Bernanke.

Krugman on the Fed’s Failure - Prophesies of doom: The Fed, after all, is supposed to pursue two goals: full employment and price stability, usually defined in practice as an inflation rate of about 2 percent. Since unemployment is very high and inflation well below target, you might expect the Fed to be taking aggressive action to boost the economy. But it isn’t. The difference between this situation and the situation with Congress and fiscal policy—and the reason I’m not necessarily as pessimistic as Krugman—is that there is a tractable path forward for improving monetary policy. Congress is only going to become more hostile to fiscal stimulus, but Barack Obama’s two appointments to the Federal Reserve Board of Governors are going to get confirmed one of these days and perhaps they’ll shift the median vote on the Open Market Committee in a better direction. If they don’t, we’re in big trouble. But they might. The puzzling thing is that both the White House and the Congressional leadership have been so lackadaisical about getting this done.

Why the Fed Isn't Doing More - I've suspected this for a few months now, but Dallas Fed president Richard Fisher's recent speech — which Paul Krugman takes apart here — may provide some actual evidence to back up my suspicions. One big question has been why the Fed doesn't seem willing to do more to stimulate the economy, even in the face of persistently high unemployment and looming deflation. Krugman has suggested that the Fed is afraid to try something unorthodox because no one knows how well it would work, and failing would be very embarrassing for the Fed. I think that's part of the story.But I also suspect that the Fed is reluctant to do more because the last time they went out on a limb and took extraordinary/unorthodox actions — bailing out AIG, establishing currency swap lines, supporting the money market funds — they were eventually savaged by politicians and the press for those actions. If this is the reaction the Fed can expect when its extraordinary/unorthodox actions work, who knows what would happen if the Fed tried something unorthodox and failed. And I think this scares the Fed. \

The Fed is Running out of Options to Spark the Economy - Federal Reserve chairman Ben S. Bernanke told Congress recently that there are some steps the Fed could take that would help, and that if the economy weakens the central bank will consider acting. He gave no details on what those steps might be.The Fed has already cut its target for the overnight interest rate, traditionally its key tool for influencing the economy, almost to zero. Last year, research by economist Glenn D. Rudebusch at the San Francisco Federal Reserve Bank concluded that the recession was so severe that the only way the Fed could provide the economy with the same degree of support as it has in past slumps was to cut that target to a negative 5 percent. That's impossible, of course, since interest rates cannot fall below zero — the so-called zero bound for monetary policy. Joseph Gagnon, a former Fed economist now at the Peter G. Peterson Institute for International Economics, proposes that the Fed try to get around that limitation by reducing some longer-term rates nearly to zero as well.

Fed's QE II Set to Sail on 'Unusually Uncertain' Seas - “Unusually uncertain,” was Fed chief and Great Depression scholar Ben Bernanke’s description of the U.S. economic outlook testifying before Congress late last month. As opposed to the normal, more prevalent usual uncertainty, we would imagine, based on mountains of economic data from the last century ranging from the arcane to the familiar which the Fed and thousands of economists draw upon to make predictions about an unknowable fat-tail future. We also would imagine “unusually uncertain,” when uttered by such a prominent and closely watched figure as Dr. Bernanke, often viewed as the first or second most powerful man in the world depending on the day of the week, as with the language of diplomacy, readily can be translated into plainer, more definitive English

Always keep them guessing - HERE'S what we've seen from the Fed over the last 48 hours. Yesterday, in a speech in South Carolina, Ben Bernanke indicated his belief that consumer spending was ready to begin sustaining America's economy recovery:While the support to economic activity from stimulative fiscal policies and firms' restocking of their inventories will diminish over time, rising demand from households and businesses should help sustain growth. In particular, in the household sector, growth in real consumer spending seems likely to pick up in coming quarters from its recent modest pace, supported by gains in income and improving credit conditions.This morning, in a rather timely data release, the Bureau of Economic Analysis noted: Personal income increased $3.0 billion, or less than 0.1 percent, and disposable personal income (DPI) increased $5.1 billion, or less than 0.1 percent, in June, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) decreased $2.9 billion, or less than 0.1 percent. So far, no good, in other words. This, along with the near-constant stream of disappointing economic data, has led to increasing speculation that the Fed would take some additional expansionary action at the FOMC meeting next week.

Jobs Report May Hold Key to Fed Action - The U.S. jobs report may hold the key to whether the Federal Reserve decides to take new steps to support the economy. Fed officials have in recent weeks been looking at what they could do to prevent the recovery from stalling as data continued to point to a weaker economy in the second half.The mainstream view at the U.S. central bank is still that the slow recovery, which began around July 2009, will continue and that a pledge to maintain interest rates near zero for an extended period should be enough to keep consumers spending and companies investing. But some officials are starting to worry that with unemployment still so high and consumer prices recently dropping, the U.S. economy runs the risk of falling into a Japan-like deflationary trap of very slow growth and falling prices.

Jim Rickards Explains Why Jim "Son Of Helicopter" Bullard's Reverse Psychology QE2 Plan Is Fatally Flawed -  Still confused by Jim Bullard's critical paper from last week Seven Face of The Peril in which the St. Louis Fed president, and voting Fed member, stated that he has no qualms about buying up Treasuries, further debasing the currency, and raise interest rates at the same time should deflation persist? Is Bullard's entire well-orchestrated PR campaign merely a reverse psychology attempt at managing deflationary expectations, and represent that even though the Fed is now expected to keep rates at zero for years (an "expectation" that will certainly not spur lending as consumers have no fear of rising rates tomorrow... or a year down the line), that the Fed in fact sees material inflation behind the corner and will consider every option to keep it down (thus giving debtors a presumably far shorter horizon in which to borrow money from the bank at acceptable rates)? Jim Rickards provides some, as usual, very astute observations, in calling Bullard "Son of Helicopter" (for obvious reasons) and particularly notes the velocity of money dynamic seen during the Weimar Republic, when years of excess monetization had no impact on inflation, then overnight hyperinflation set in without warning

QE3: A plan to stabilize the global monetary system - Nothing changed fundamentally to the US or global economies in July to warrant such a sudden and sharp divergence between equities and precious metals (almost 13%). Investor perception, however, did seem to congeal around a unifying theme – “deflation”. Fed Chairman Bernanke and even his hawkish colleague, James Bullard, set the table in July for QE2, as we suspected the Fed would eventually have to do. We should not be surprised with an announcement sometime soon that the Fed will buy more securities related to residential real estate and maybe even commercial real estate. Such quantitative easing equals inflation and we think it should benefit us greatly. In the US we expect the Fed to buy more MBS and, perhaps, CMBS receivables from creditors, ostensibly freeing their balance sheets to eventually extend more credit. The Fed would pay creditors for the mortgages with newly-digitized money. We expect the markets will begin discounting this likelihood in advance of the November elections. We remain dubious as to how much new money would actually become economically stimulative in the near term. There remains a substantial real estate debt overhang on bank and GSE books, (they remain mismarked awaiting further bailouts), and grass roots borrowers would still lack incentives to sink deeper into debt.

The Non-Relationship Between Interest Rates and the Money Supply - The graph shows that all but one recession since 1948 was preceded by a big drop in the real money supply per person over the length of a year. The exception – July of 1953 – wasn’t much of an exception; the 12 month change in the real money stock per capita went negative in August of 1953 and remained negative throughout the length of that recession. Now, I use real M1 per capita a lot in my posts; I think it’s a largely unused but very good (in part because it is largely unused) measure of monetary policy, and its one Michael Kanell and I use in Presimetrics . For instance, we discuss how it affects economic growth, and we look at how much real M1 per capita increased over the length of each administration. (Note – the change in real M1 per capita, like other measures of monetary policy, is under the control of the Federal Reserve, not the executive branch.)

The Fed's great something-flation debate - With the economic recovery starting to lose steam, the Federal Reserve has the unenviable task of trying to figure out which "flation" battle to fight. Inflation or deflation? The Fed will hopefully provide more clues following its policy meeting next Tuesday. It's all but certain the central bank will once again leave its benchmark federal funds rate in a range of 0 to 0.25% - the range it has maintained since December 2008.  What's not as clear, however, is what the Fed might say about the economy and what it plans to do to combat its slowing momentum.  The Fed's official party line for months has been that inflation is not a concern. In the statement following its last meeting in June, the Fed reiterated that longer-term inflation expectations are "stable" and that "inflation is likely to be subdued for some time."

Inflation Expectations Are Not Stable! - Many observers, including myself, have been puzzled by the Fed's lack of urgency in recent months over the apparent slowing down of aggregate demand.  The one thing monetary policy is capable of doing is stabilizing total current dollar spending, but it isn't and this inaction effectively amounts to a tightening of monetary policy.  There have been many reasons given for this seeming complacency by the Fed: internal divisions over policy, fear of political backlash, opportunistic disinflation, fear of awakening bond vigilettentes, and sheer exhaustion.  Another potential reason is that the Fed simply doesn't see this aggregate demand slowdown in the data.  I actually considered this possibility some time ago but never put too much weight on it since this is the Federal Reserve after all.  It has far more resources than I do and  surely sees what I see in the data. However, after Fed Chairman Ben Bernanke's speech yesterday I am beginning to wonder. I was stunned to read this sentence in the speech: Meanwhile, measures of expected inflation generally have remained stable. Uhm, unless I have been living in parallel universe and just got phased into a different one this  statement is completely wrong.  Inflation expectations, as I show below, have been persistently declining  since  the start of  2010.

Woe the 14 month wait... Compare: Charles Plosser, president of the Philadelphia Fed, said in an interview this week that “I don’t think deflation, or sustained deflation, is a real problem at this point. It is hard to imagine how you can get that when you have got a trillion dollars in excess reserves sitting in the banking system or as long as expectations of inflation are well anchored.”To: Peter Diamond, nominated to be a Fed governor, said this month in a written response to questions from Senator Richard Shelby, that deflation is a “greater risk” than inflation.Would have been nice to have had Diamond on the Fed 14 months ago...

 Bullard Says Fed Must Be Ready to Confront Deflation - The Federal Reserve must have a plan in place to deal with the threat of a new economic downturn, St. Louis Fed President James Bullard said on Monday. Bullard, who last week published a highly publicized paper on the risk of deflation, said the fall in inflation expectations during Europe's debt debacle in the spring gave him pause for concern. "We have to be ready for the idea that if there's further shocks to the economy, we could get into a deflationary scenario," Bullard said in a telephone interview with Reuters Insider. Bullard again argued that the central bank's commitment to keeping rates low for an "extended period" might actually boost the risk of deflation by leading consumers to expect continuously falling prices.

Fed Watch: More on Disinflation - Paul Krugman pulls together three charts to illustrate the link between high unemployment and disinflation in two major disinflationary episodes, 1974-1977 (Series 1 in chart below) and 1980-1986 (Series 2). He then tracks the pattern of the current cycle (Series 3), which suggests that the combination of high unemployment and past disinflationary responses to such unemployment is very likely deflationary. Krugman asks: How can you look at this record and not conclude that deflation is a very real risk? I have no idea where the complacency of many at the Fed comes from. An explanation for the Fed's complacency can be found by plotting all three episodes on the same chart:I believe when monetary policymakers look at this chart, they ask a different question: Why has the disinflationary response been so muted in this cycle? It would have been reasonable to conclude that unemployment rates at this magnitude should have long ago pushed the US economy into deflationary territory. What is the Fed's explanation for the relatively tame disinflation? Krugman already has the answer...

Federal Reserve To Start The Deflation Fight Next Week, Expert Claims -Paul Sheard, Nomura's chief global economist, argues that the current conditions are ripe for the American central bank to take affirmative action to put the US recovery back on track. In the first call of its kind from a Wall Street economist, Mr Sheard says that given subdued growth and concern about inflation, the Federal Open Markets Committee will act when it meets a week today.  His comments follow those of James Bullard, president of the St Louis Fed, who last week said the central bank needs to equip itself with a plan for further quantitative easing should it be required, and after the latest US growth figures showed the American economy deteriorated somewhat in the second quarter.

Comparative Disinflations - Paul Krugman - Tim Duy has taken my clockwise spirals of disinflation during slumps and put them on a single graph; here’s a cleaned-up version: As Duy points out, disinflation hasn’t proceeded as rapidly this time around as in the previous slumps. But what are we to make of this? One answer is that inflation expectations have been slower to fall, which kind of makes sense: But there’s another possibility: we went into this slump with much lower inflation than in previous episodes — and a flattening of the unemployment-inflation relationship at low inflation rates is exactly what you’d expect in the face of downward nominal wage rigidity. So we may be approaching deflation more slowly than some might fear — but only because we live in a world in which excessively low inflation is actually a very bad thing, and we’re already in the problem zone. Oh, and  the inflation expectations don’t look all that anchored over the past 6 months, with the 5-year TIPS spread falling more than half a percentage point since the winter. I wonder if people are starting to realize that the Fed can’t or won’t actually achieve its supposed inflation target.

Why Is Deflation Bad? – Krugman -There are actually three different reasons to worry about deflation, two on the demand side and one on the supply side. So first of all: when people expect falling prices, they become less willing to spend, and in particular less willing to borrow. After all, when prices are falling, just sitting on cash becomes an investment with a positive real yield.  A second effect: even aside from expectations of future deflation, falling prices worsen the position of debtors, by increasing the real burden of their debts. Now, you might think this is a zero-sum affair, since creditors experience a corresponding gain. But as Irving Fisher pointed out long ago (pdf), debtors are likely to be forced to cut their spending when their debt burden rises, while creditors aren’t likely to increase their spending by the same amount. Finally, in a deflationary economy, wages as well as prices often have to fall – and it’s a fact of life that it’s very hard to cut nominal wages — there’s downward nominal wage rigidity. What this means is that in general economies don’t manage to have falling wages unless they also have mass unemployment, so that workers are desperate enough to accept those wage declines.

Reducing Krugman (And All Like Him) To Size - Krugman has "explained" why deflation is "bad".  Well, he's tried.  But in fact he's made the case for deflation, especially following insane bouts of INflation. His idiocy requires a response....Ok, point-by-point:So first of all: when people expect falling prices, they become less willing to spend, and in particular less willing to borrow. Why is this bad?  Real capital formation comes from savings.  Indeed, it is the essence of capital formation of all sorts.  You can't lend except from excess capital (production ex required spending, that is, surplus) so being less willing to borrow or spend is a net public good over time.Yes, it makes the Madison Avenue people go nuts, and it particularly makes those people nuts who want to blow bubbles with borrowed money (which always ends in a bust with a huge number of people going bankrupt) but in terms of public policy saving of surplus and thus capital formation should be encouraged, not punished. A second effect: even aside from expectations of future deflation, falling prices worsen the position of debtors, by increasing the real burden of their debts.  GOOD! It's supposed to be expensive to borrow.

Big Investors Fear Deflation - Some of the world's leading investors are becoming more worried about deflation and are re-shaping their portfolios to prepare for a possible period of falling prices. Bond-fund heavyweight Bill Gross, investment manager Jeremy Grantham and hedge-fund managers David Tepper and Alan Fournier are among the best-known investors who are bracing for a possible bout of deflation, a development that could cripple global economies and world stock markets.   The investors cite weak economic figures and a mounting consensus that global policy makers are reluctant, or unable, to take further steps to boost economic growth as reasons for their market positions.   "Deflation isn't just a topic of intellectual curiosity, it's happening," says Mr. Gross, who runs the $239 billion mutual fund Pimco Total Return Fund, citing an annualized 0.1% decline over the past two years in the U.S. consumer-price index. "It's an uncertain world that's tipping toward deflation."

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.

AEI's John Makin: The Deflation Is Already Here - John Makin of Caxton Associates and the American Enterprise Institute spoke with CNBC this morning about the threat of deflation now hanging over the U.S. economy. Makin explains that deflation is already here. He talks about how CPI is only at 0.9% right now, and heading lower. That prices and wages in the U.S. are falling, and that we are now exporting deflation to Europe and Japan via a weakening dollar. Housing is where this starts, and Makin thinks that the American public believes that house and car prices will be cheaper in the future. He also argues that, if we included housing prices in the CPI, we would already be in a deflationary period.

2 Top Economists Differ Sharply on Deflation - Mr. Hatzius is arguably Wall Street’s most prominent pessimist. He warns that the American economy is poised for a sharp slowdown in the second half of the year. That would send unemployment higher again and raise the risk of deflation. A rare occurrence, deflation can have a devastating effect on a struggling economy as prices and wages fall. He says he may be compelled to downgrade his already anemic growth predictions for the economy. For months, Mr. Berner has been sticking to a more optimistic forecast, despite growing evidence in favor of Mr. Hatzius’s view. Last week, Mr. Berner was caught by surprise when the federal government reported that the economy grew at a 2..4 percent pace in the second quarter, well below the 3.8 percent he had forecast a month before. Mr. Hatzius came closer to hitting the mark, having projected a 2 percent growth rate.

Are lower prices scarier than higher ones? - As political bogeymen go, deflation must be one of the strangest. Very few living Americans have experienced deflation firsthand. It's a reasonable bet that many Americans would have difficulty defining deflation, and the majority would wonder why lower prices for everything should be considered bad.  No matter how obscure deflation may be, however, it is apparently the biggest threat to our country right now, according to some. Writing in The Nation, William Greider warns of "a full-blown monetary deflation that would truly put the US economy in ruin. In a general deflation, everything falls—prices, output, wages, profits. Unchecked, this can lead to another Big D—the Depression Obama claims he has avoided." James Bullard, president of the Federal Reserve of St. Louis, last week publicly expressed his fear that "the U.S. economy may become enmeshed in a Japanese-style, deflationary outcome within the next several years."  The Wall Street Journal reported this week that such financial heavyweights as Pimco's Bill Gross and major hedge funds are stocking up on securities that they think will perform best in a deflationary environment.

A deflation refresher -  It’s a deflation déjà vu. The looming Lost Decade. The exfiltration of inflation. The summer of 2009 was characterised by one almighty debate between those expecting Japan-style deflation, those who forecast inflation — and those who thought monetary conditions would be ‘just right.’ (Where, we ask, are the stagflationists?) Fast forward a year and we’re having the same argument, though the emphasis has shifted dramatically. The deflationistas appear to have suddenly grabbed the upper hand. What changed? Wells Fargo economists Mark Vitner and Azhar Iqbal have come out with a timely special report titled, “Understanding the risk of deflation.” And it really sums up the sentiment-shift....

What's Been Keeping us out of Deflation? With the inflation/unemployment circles posted recently on Krugman's blog and others, one thing has been clear -- the disinflation this time around was actually not that severe given the dramatic rise in unemployment.  One reason this might be the case, and this is pure speculation, is that health care is a larger fraction of the economy today, especially compared to oil, than it was in the 1970s. From the BLS, the past three months "benefits" inflation has been three times the wage inflation. And then see this -- health care costs are expected to rise 9% again next year (after being forecast to rise 9.5% this year), are basically on autopilot, and just not that responsive to anything. This is unlikely to be the whole story, but it certainly seems plausible... Any thoughts?

Deflation Alert: Employers Cutting Pay, Consumer Growth Index Points to Downturn - Yves Smith - Even though St. Louis Fed President Jim Bullard created a bit of frisson last week by discussing deflation, and Treasury yields are awfully reminiscent of Japan, investors and consumers have been so conditioned to be on the watch for inflation (particularly increases in food and fuel prices), that the suck of deflation on much bigger fronts (housing and increasingly, pay) is not being weighted as seriously as it deserves to be.  It is hard to prove in a tidy way, but I see more signs of discounting in the economy, even in goods and services aimed at upper income consumers supposedly unaffected by the downturn. There is a great deal of price cutting afoot, even in TARP/Fed funded Manhattan, via keeping nominal prices the same but offering more widespread and deeper “special” discounts or freebies. Readers are welcome to add to this list: rentals (free months, free amenities), health club memberships, cruises, decorators.

Deflation Watch: Deflation is Right - Good big-picture perspective from Sovereign Speculator: Also remember that the public sector has gotten itself into huge trouble, which is just starting to take effect with austerity measures in Europe and pending bankruptcies in US municipalities. US states are also broke and will have to finally deal with their union problems. Shrinking government worker salaries, if not payrolls, will put further pressure on demand for goods and leave banks with more bad loans. None of this is inflationary.  The last couple of years should give deflationists confidence that we’re able to correctly assess the situation. Where is that dollar crash? What about $200 oil? What, in 2010 China still owns trillions in treasuries? Bernanke has tripled the US base money supply but a dozen eggs is still $1.50 and the long bond yields 4%? Obama spent how much, and unemployment is 17% ? One of the biggest stories of the year is deflationists and Treasury bulls being proven right.

Deflation Means Pay Raises, 'Strong Leg Up': Market Pro - Need a pay raise? Try deflation. American employees may have trouble getting a raise these days, but deflation may work in their favor, Jim Rickards, senior managing director for market intelligence at Omnis, a consulting firm, told CNBC Monday."Deflation is a very positive thing," he said.  "Let's say you make $40,000 and you go to your boss and say 'Give me a raise,' and the boss says, 'Are you crazy? You're lucky I don't fire you; go back to your desk.' But if the price level drops 10 percent, he just had a 10 percent increase in his real standard of living."

Even If Deflation Is Bad, We Know How to Solve It - "Even if deflation is a bad thing, we know how to solve it. Print enough new money and people will eventually start spending it. It’s alleged that no matter how much you print, it can all just fall into the liquidity trap, and it’s alleged that this is what happened in Japan over the past decade. But I am sure the Japanese just didn’t try hard enough. Liquidity trap or not, I guarantee you there’s a central banker in Zimbabwe who knows how to fight deflation. If we really get into trouble, all we have to do is hire him."

Economist predicts UK and US will be forced to print more money - The chief economist of Ignis Asset Management say the US and UK may not avoid a second, big round of 'quantitative easing' (QE) to prevent their economies falling back into recession. Stuart Thomson thinks the US Federal Reserve will have to print as much as $2.5 trillion (£1.61 trillion) of money in order to rebuild business confidence and kick-start the economy, despite the trillions of dollars already pumped in thus far.  In the UK, Thomson thinks that most lead indicators have peaked and that the cyclical bounce enjoyed over the past 15 months is now over. He believes an economic slowdown is back on the cards.

The President's Council of Economic Advisers' Forecasts and the Memory Hole... Remember back in the beginning of 2009, when the administration was telling us a small stimulus was sufficient? Well, part of the reason may have been the rose-tinted glasses with which the administrations' economists saw the recession. Check this CEA report from February, 2009, in which they projected that this recession would be one of the lightest and briefest in the postwar era. They projected GDP would decrease only 1.2% in 2009 (following a contraction of 6.4% in Q4 2008 and an expected 6.0% contraction in Q1 2009), making the 2009 recession the 3rd lightest of 11 post-war recessions.  I'm not sure how the deepest financial crises since the Great Depression, in which the Fed hits liquidity trap territory early on, leads any economist to think it's going to be a light, quick recession. In any case, the latest revision was that GDP shrank 2.6%. So, what seemed at the time to be a hopelessly optimistic forecast turned out to have been a hopelessly optimistic forecast by the "best and brightest" economists around.

What makes forecasting tough -  Atlanta Fed's macroblog - Bloomberg's Caroline Baum recounts her recent conversation with the Atlanta Fed's own Mike Bryan under the headline For Good Economic Forecasts, Try Flipping a Coin: "How do economists fare when it comes to real forecasting, to predicting [gross domestic product] GDP growth and inflation one year out? About as good as a coin toss, according to Bryan's research. Less than half the economists did better than the naive forecast, which is based on no understanding of the economy and merely assumes next year's outcome will be the same as this year's. It's what you'd expect if the results were purely random." A case in point could be found yesterday on Bloomberg, which featured a "chart of the day" that looked something like the one below (though I've updated the data for manufacturing inventories, given today's factory orders report):

Bill Gross on quantitative easing, economic stimulus and recovery. - Bill Gross, manager of the world’s biggest bond fund at Pacific Investment Management Co., recently wrote that he now takes a less optimistic view of what he dubs "Keynesian consumption remedies." As a result, he talks to Bloomberg about the possible need for more, non-fiscal, economic stimulus in the wake of James Bullard’s call for more quantitative easing.  Two things: QE is just a shuffling of new net financial assets. It’s basically an asset swap since T-bills yield next to nothing. Get ready for another pile up of excess reserves QE could work well in inflating asset prices more than consumer prices – but that could serve the Fed’s purpose too. I have always viewed QE with scepticism. It wasn’t effective the first go round except in regards to asset prices. And I don’t see QE preventing a slowdown in growth in the US this time either. That means yields will remain low. Gross’s Total Return fund has been doing quite well as yields have come down. See Bloomberg’s post "Pimco’s Bill Gross Rolls Down Treasury Yield Curve for Non-Normal Returns."

IMF: U.S. Real Estate Sectors Could Bring Banking Crisis 2.0 The International Monetary Fund (IMF) stress tested 53 large banking holding companies and published its findings last month. The report concluded that despite restoration of some stability, there remain certain important risks to the U.S. financial system and economy mainly coming from the real estate sectors. IMF noted financial institutions will face rollover risks with large loan maturities in 2011–13, which could bring rapidly rising foreclosures and bank losses. The small and medium-sized banks, which are most heavily exposed to the commercial real estate sector, are causing the most concern

Greenspan Says Drop in Home Prices Might Bring Back Recession - Former Federal Reserve Chairman Alan Greenspan said the slowing economic recovery in the U.S. feels like a “quasi-recession” and the economy might contract again if home prices decline. “We’re in a pause in a recovery, a modest recovery, but a pause in the modest recovery feels like a quasi-recession,” Greenspan said in an interview on NBC’s “Meet the Press” broadcast yesterday.  Asked if another economic contraction, a so-called “double dip,” was possible, Greenspan said, “It is possible if home prices go down. Home prices, as best we can judge, have really flattened out in the last year.”

The Economy Needs a Bit of Ingenuity - THE steps being taken by government officials to help the economy are based on a faulty premise. The diagnosis is that the economy is “constrained” by a deficiency of aggregate demand, the total demand for American goods and services. The officials’ prescription is to stimulate that demand, for as long as it takes, to facilitate the recovery of an otherwise undamaged economy — as if the task were to help an uninjured skater get up after a bad fall. The prescription will fail because the diagnosis is wrong. There are no symptoms of deficient demand, like deflation, and no signs of anything like a huge liquidity shortage that could cause a deficiency. Rather, our economy is damaged by deep structural faults that no stimulus package will address — our skater has broken some bones and needs real attention.

The US economy is not yet on the road to recovery - The 2.4% GDP growth figure reported for the second quarter caused many economists to once again be surprised about the state of the US economy. It seems that most had expected a higher number. Some had expected a much higher number. It is not clear what these economists use to form their expectations about growth, but it doesn't seem that they have been paying much attention to the economy. For those following the economy, a weak second quarter growth number was hardly a surprise. The economy has been going through a classic inventory cycle in the last five quarters. Inventories had been shrinking rapidly in the second quarter of 2009. This is standard in a recession as firms look to dump a backlog of unsold goods. Inventories shrank less rapidly in the third quarter, which means they added to growth. Inventories started growing again in the fourth quarter, and growing rapidly in the first two quarters of 2010. Inventories added considerably to growth in these quarters, making GDP growth considerably more rapid and erratic than the growth of final demand.

We’re Still #1 (Unfortunately) The Bureau of Economic Analysis rewrote history on Friday. Along with GDP data for the second quarter, BEA also published revisions to its GDP estimates since the start of 2007.Bottom line: The recession was worse than originally thought. The economy contracted by 4.1% from peak to trough (Q2 2008 to Q2 2009), up from the 3.9% previously estimated. The Great Recession has thus solidified its position as the worst downturn since World War II:

A Silver Lining in Second Quarter GDP? - Last Friday the Bureau of Economic Analysis released its first look at GDP growth in the second quarter. BEA estimates that the economy grew at a moderate 2.4% annual pace in the quarter, notably slower than the 3.7% pace in the first quarter and the 5.0% pace in the fourth quarter of 2009 (both those figures were revised in this release).As usual, I think it’s helpful to break down economic growth into its key components. The following chart illustrates how much various types of economic activity contributed to (or subtracted from) second quarter growth: The chart illustrates the silver lining in an otherwise tepid GDP report: every major category of domestic demand expanded in the second quarter. Consumers, businesses, export markets, and governments all increased their purchases. That’s a good sign. Indeed, you have to go back more than five years, to the first quarter of 2005, for the last time that happened.

How To Read The REAL GDP Chart - Since I keep getting asked, I have put the revisions to the GDP report and the original on one graph.  Note that the "non-revised" numbers will stop updating after this particular series, obviously.  Also note that the 2nd Quarter numbers will be revised.Here's the chart: First, note that the Treasury Data (blue line) is not revised.  That's because it never really is.  It is what it is, so to speak.  This, incidentally, is the total outstanding Federal Borrowings, and thus "captures" the theft from the Social Security and Medicare accounts - something the government's "deficit" pronouncements do not.The source of this data is the Treasury's own web site - "Debt to the Penny", which they conveniently provide on a daily basis. The green lines are the nominal reported GDP.  The annualized change is computed - the raw numbers are nominal (not inflation-adjusted) GDP series.  Finally, the Red Line is simply the difference between the budget deficit as a percentage of GDP and the reported GDP rate. That is, it removes the influence of government deficit spending from the reported private GDP numbers.

Deflation, Not Deficit, Is the Real Threat - The economic specter stalking Barack Obama is not the nonsense debate that captivates deficit hawks and witless political reporters. It is the threat of a full-blown monetary deflation that would truly put the US economy in ruin. In a general deflation, everything falls—prices, output, wages, profits. Unchecked, this can lead to another Big D—the Depression Obama claims he has avoided.Depression was the fate that befell Herbert Hoover after 1929 and the outlines of this larger catastrophe are present again. It is easy to dismiss deflation warnings from curbstone critics, including from me. But it is more significant—and truly scary—when senior policy makers of the Federal Reserve begin to express the same fear, as the New York Times reported. The Fed has done quite a lot in the last two years to prevent this disaster from unfolding, but some officials are now worried the Fed hasn't done enough.

Welcome to the Recovery - Geithner - THE devastation wrought by the great recession is still all too real for millions of Americans who lost their jobs, businesses and homes. The scars of the crisis are fresh, and every new economic report brings another wave of anxiety. That uncertainty is understandable, but a review of recent data on the American economy shows that we are on a path back to growth.  The recession that began in late 2007 was extraordinarily severe, but the actions we took at its height to stimulate the economy helped arrest the freefall, preventing an even deeper collapse and putting the economy on the road to recovery.  While the economy has a long way to go before reaching its full potential, last week’s data on economic growth show that large parts of the private sector continue to strengthen. Business investment and consumption — the two keys to private demand — are getting stronger, better than last year and better than last quarter. Uncertainty is still inhibiting investment, but business capital spending increased at a solid annual rate of about 17 percent.

Always Look On The Bright Side - Krugman - I’m still somewhat amazed to see Tim Geithner’s happy talk in today’s Times. Here’s the reality: the stimulus was too small; we’re not seeing growth at a pace that will bring unemployment down rapidly, if at all; we clearly should be doing more; but obstructionism from Republicans is preventing action. And the administration knows all this perfectly well. So one way to play this politically would be to tell the truth, and try to place the onus on Republicans, accusing them of perpetuating high unemployment. Instead, however, the administration has decided to engage in happy talk, saying that it’s all good. Do they really think this will work? I mean, I live in fairly rarefied circles (that’s not a boast, it’s an admission of inadequacy), and even so I know a number of people whose lives have become a living hell: men in their late 50s who fear they’ll never work again, small business owners who have lost everything. Does the administration really believe that it can convince these people that it’s all on the mend?I just don’t get it.

Are We There Yet? - Mauldin - As a nation and indeed the developed world, it is not unreasonable to be asking “Are We There Yet?” about the road to recovery. The NBER, those self-appointed economists who are the official keepers of the score sheet of recessions and recoveries, have yet to tell us we are out of recession. Yet the economy is growing. Kind of. Today we look at the most recent data on second-quarter US GDP (which came out this morning), and even though it is backward-looking data, we’ll see what we can discern that might help us chart the direction of the future. And then, if there is time, I’ll highlight what is a very serious and growing problem for our state and local governments. There is a lot to cover and so, with no “but firsts,” let’s dive in.

The econ blogosphere speaks - The economic blogosphere has spoken — and it is not too happy with what it sees. The Kauffman Foundation has just published a survey of 68 economic (but not necessarily economist) bloggers showing that they are pretty gloomy about the U.S. economy’s progress. Feedback from the likes of  Oregon University’s Mark Thoma and UC San Diego’s James Hamilton suggests the U.S. is at some kind of tipping point with a good number expecting it to fall rather than maintain balance: 68 percent (said) that conditions are mixed, and the rest split three to one toward weakness rather than growth. For an economy in which growth is the norm, 47 percent of respondents think that the U.S. economy is worse than official statistics indicate, and only 5 percent believe it is better. It is also worth noting, however, that only a minority, albeit a large one — 35 percent — thought the U.S. had a more than 60 percent chance of entering a double-dip recession. You can download the full survey here, but the gist of the report is summed up by a though cloud created by the Foundation. Uncertainty it is.

Econ Bloggers' Consensus is Grim - Growthology - Sometimes a picture really is worth a thousand words. But why stop with one picture? The Kauffman Foundation’s Q3 of economics bloggers was just released, and uncertainty rules the mood, literally.  Here some of the best charts.   First, I composed this word cloud based on "five adjectives" that each blogger used to describe the current state of the U.S. economy.  It speaks for itself (and the fine print is truly worth examination). The biggest surprise in blogger attitudes is revealed by the simplest questions.  Below, for instance, is the overall assessment when confined to five choices.  Looking at the chart for the first time, I would be shocked that this was the assessment of an economy in recovery. Some 68 percent of respondents described the economy as “mixed” – a word that seems today’s modern day equivalent of the 1970s “malaise.” But I'm not looking at this for the first time.  The charts from the previous quarter showed negative attitudes, but not this negative. Literally nobody thnk the economy is strong and growing now.

A little perspective - LET'S take a step back for a moment. I believe I come across as bearish with regards to the prospects for the American economy, but it's worth asking what exactly "bearish" means. Is the expectation below-trend growth, and if so, for how long? Is a double-dip likely? Would a return to contraction be mild or steep? Pessimism can cover a lot of ground, and it's probably a good idea to get a little more specific. There are real risks to the American economy, but I don't see many of them as being fatal. So far as negative scenarios go, the Japanese case—low growth and constant deflation fighting, which will ultimately require aggressive fiscal or monetary stimulus of some sort combined with big structural reforms—is among the likeliest of the truly bad scenarios. Somewhat less bad but still painful would be a recovery that looked a lot like the last one, only worse—a very uneven recovery that leaves many currently unemployed workers marginally attached or out of the labour force. A new period of contraction strikes me as fairly unlikely.

Second Quarter G.D.P. Was Probably Worse Than Reported - The economy most likely grew much less in the second quarter of 2010 than initially estimated. On Friday, in its preliminary estimate of gross domestic product, the Bureau of Economic Analysis said it believed the economy grew at an annual rate of 2.4 percent last quarter. The number was slightly less than economists had forecast, and significantly lower than the 3.7 percent annual growth rate the economy had experienced in the first quarter. It gets worse. G.D.P. numbers go through several revisions as the bureau receives more complete data, and it now looks as if the revisions may be significant. According to the June factory order data, released today, the number the bureau used to calculated the inventory component of G.D.P. was badly off. As a result, economists are predicting that the second quarter G.D.P. number will be revised downward from 2.4 percent to somewhere around 1.7 percent.

Second-Quarter Slowdown Likely Worse Than First Thought - The slowdown in economic growth recorded in the second quarter was likely even less robust than initially reported on Friday, according to new inventory data released today.Inventories have had a major impact on growth over the past few quarters, and the change was estimated to have added more than one percentage point to the 2.4% annual rate of gross domestic product growth reported by the Commerce Department Friday. But factory-order data for June shows that the estimate used to calculate the preliminary number was way off. The report noted a 1.7% plunge in nondurable goods inventories in June on top of a 2.5% drop in May. The Commerce Department had assumed a 0.5% rise for last month. “This was an enormous miss,” said Ted Wieseman at Morgan Stanley. He estimates that second-quarter GDP growth will be revised down to 1.9%. Nomura Securites economist Aichi Amemiya put the revision at 2%, while J.P. Morgan Chase’s Michael Feroli said the number will be closer to 1.7%.

The Vanishing Inventory Bounce - Gavyn Davies explains that economic conditions are in many ways even worse than they appear since growth in recent quarters has been driven by firms rebuilding their inventories rather than by growth in final sales.  Inventory effects produce sporadic episodes of exaggeratedly low growth followed by unsustainable bounces. We’re now ending a bounce cycle, and we’re not seeing the underlying sources of demand growth step up to the plate. What’s more, “inventories have started to rise more rapidly than companies may be intending” so we may go back into an inventory downswing cycle.  

Final Demand and the Inventory Cycle - The basic story is that firms were shedding inventory as fast as they could in the 4th quarter of 2008, with the rate of decline increasing into the first quarter of 2008. Although inventories continued to decline in the second quarter, they declined at a slower rate, which meant that inventories added to growth. Eventually firms stopped cutting inventories and began rebuilding. In the most recent quarter they were adding inventories at a very rapid pace, $85.9 billion a year. With the latest figure, the inventory cycle has come to an end. I don't have a crystal ball telling me the rate of inventory accumulation in the next few quarters, but it is unlikely that it will be much higher than the current rate. This means that inventories will provide little boost to growth in future quarters, making GDP growth look like final demand growth and that is not very good.

2nd Half Slowdown Update - My view is that the real GDP growth rate will slow in the 2nd half, and I've posted a list of the reasons over the last few months:
1) less Federal stimulus spending in the 2nd half of 2010,
2) the end of the inventory correction,
3) more household saving leading to slower growth in personal consumption expenditures,
4) another downturn in housing (lower prices, less residential investment),
5) slowdown in China and Europe and
6) cutbacks at the state and local level.

US Expects To Issue $350 Billion In Debt In July-Sept Quarter - The U.S. plans to borrow less than it had initially forecast for July through September but intends to borrow more for the next three months. The Treasury Department Monday estimated it would borrow $350 billion in the quarter, down from its May forecast of $376 billion. A cash balance at the end of the quarter is $270 billion. Treasury attributed the lower estimate to lower spending, Treasury said. But Treasury expects to borrow $380 billion for the quarter October through December, with a cash balance of $270 billion at the end of the three-month period.

Putting Public Debt in Context - In the midst of the most severe recession since the Great Depression, large increases in the federal budget defi cit were inevitable and remain necessary to address the jobs crisis. The United States must create more than 10 million jobs to move the unemployment rate back to even its undistinguished pre-recession level, and debt-financed public safety net spending and investment remain the most plausible way to enable this.This Briefing Paper aims to answer the most fundamental questions raised by these projections: (1) what has caused the rise in public debt; and (2) does this increase provide cause to worry about the future growth prospects of the American economy.Read Briefing Paper #272

Treasuries Lack Safety, Liquidity for China, Yu Yongding Says -- U.S. Treasuries fail to provide safety or liquidity when it comes to managing China’s $2.45 trillion foreign-exchange reserves, said Yu Yongding, a former central bank adviser. “I do not think U.S. Treasuries are safe in the medium-and long-run,” Yu, a member of the state-backed Chinese Academy of Social Sciences, wrote yesterday in an e-mailed response to questions. China is unable to sell the securities in a “big way” and a “scary trajectory” of budget deficits and a growing supply of U.S. dollars put their value at risk, he said. ""The cost of pegging the Chinese currency to the dollar is “intolerably high” and threatens the welfare of Chinese people, Zhang Ming, deputy chief of the International Finance Research Office at the Chinese Academy of Social Sciences, wrote today on the website of China Finance 40 Forum.

More Incoherent Remarks From China on Its Dollar Holdings - Yves Smith - Dean Baker has regularly made fun of the idea that the Chinese are concerned that they will show losses on their large dollar positions, mainly in invested mainly in US Treasuries. As serious traders will tell you, it’s actually easy to manipulate a market, but hard to make money doing it. As Baker put it: The argument that China is worried that it will lose money on its dollar holding because of a fall in the value of the dollar implies that the Chinese are morons. There can be no doubt that the dollar will fall and that the Chinese will lose money on their dollar holdings. The only thing that keeps the dollar from falling now is the decision by the Chinese government to buys hundreds of billions of dollars a year. China knows it will take a bath, arguing otherwise is saying that the Chinese leadership is stupid. Yves here. Um, an article at Bloomberg tonight suggests that the Chinese are stupid, or maybe crazy like foxes. U.S. Treasuries fail to provide safety or liquidity when it comes to managing China’s $2.45 trillion foreign-exchange reserves, said Yu Yongding, a former central bank adviser.

Candy From Strangers, Or Who Is Buyng All Those Treasuries? - When TrimTabs Charles Biderman questioned the source of the money that propelled stocks 65% from the March 2009 lows, he got beaten with the idiot stick so badly that he actually turned bullish in April 2010.  Lost in the ensuing choke-out was the fact that no one ever actually answered his question, unless scoffing and muttering “dark pools and stuff,” under your breath counts (and he’s the one who should be wearing the tin-foil hat?).  Here we go again. The first thing you should notice when looking at The Treasury’s 2010 Q1 Bulletin is that it’s  incomplete, as I’m sure most of Secretary Tim Geithner’s homework assignments were.  Of the 12 columns on Table OFS-2 (Estimated Ownership of U.S. Treasury Securities), Turbo managed to fill in only 5 (FYI: it takes Treasury more than two months to prepare the bulletin).

Do Deficits Matter? Foreign Lending to the Treasury - Deficit hawks raise three objections to persistent federal government budget deficits: a) they pose a solvency risk that could force to government to default on its debt; b) they pose an inflation, or even a hyperinflation, risk; and c) they impose a burden on our grandkids, who will have to pay interest in perpetuity to the Chinese who are accumulating treasuries as well as power over the fate of the dollar. I have argued that federal budget deficits and debts do not matter so far as national solvency goes (see here). The sovereign issuer of the currency cannot be forced into an involuntary default. I have also dealt with possible inflation effects of deficit spending (see here). In this blog I will address the connection between trade deficits and foreign accumulation of treasuries, the interest burden supposedly imposed on our grandkids, and the possibility that foreign holders might decide to abandon the dollar.

Dollar faces gathering headwinds - Only a few weeks ago, the dollar was powering towards its highest levels in four years, the beneficiary of widespread gloom about Europe’s debt crisis and rising optimism about the US recovery. Since then, investors have soured on the world’s largest economy. The dollar has tumbled 9 per cent on a trade-weighted basis in two months, and on Wednesday fell to Y85.29, within a whisker of a 15-year low.The sickly euro, by contrast, has recovered sharply, rising above $1.32 on Wednesday to a three-month high. Sterling is now at its highest for six months and approaching $1.60. “If the currency markets were a human being it would be locked up in a lunatic asylum at the moment,” says David Bloom, head of currency strategy at HSBC. “One moment it is extreme joy, the next moment extreme sadness. It’s extraordinary. We’re just swinging violently from one extreme view to another.” A wave of weak economic data, including disappointing jobs figures, and expectations of further monetary easing by the US Federal Reserve to head off the risk of a double-dip recession have been the main drivers of the dollar’s fall

IMF blueprint for a global currency – yes really - FT Alphaville missed this IMF paper when it first came out in April, 2010. Authored by Reza Moghadam, director of the IMF’s strategy, policy and review department, it discusses how the IMF sees the International Monetary System evolving after the financial crisis. We’ll cut to the chase and draw readers’ attention to the final bubble in the following chart, found on page 4: Which means, in the eyes of the IMF at least, the best way to ensure the stability of the international monetary system (post crisis) is actually by launching a global currency. And that, the IMF says, is largely because sovereigns — as they stand — cannot be trusted to redistribute surplus reserves, or battle their deficits, themselves.

The Money Market Piggybank is Shattered -So where did a trillion dollars just go when it left the universe of over 1600 money market funds? Easy.  Some of it may have gone to bond funds, but my bet is that an inordinate amount went toward everyday Americans paying their everyday bills.  That's right, I believe that the investor class is finally starting to pay regular expenses and cover the bills with their money market funds, turning that New Normal maxim about the coming of higher savings rates on its ear.

Debt Capacity Is a Resource To Be Used When Necessary - Live at The Economist: Q: Are current deficit reduction plans likely to boost growth?A: No, and debt capacity is a resource to be used in hard times: MY GUESS is that current deficit-reduction plans in Europe are unlikely to boost growth. They appear to do too much in the short term to diminish aggregate demand, and not enough in the long term to assure investors that the long-run financing dilemmas of the social insurance state are being tackled. Thus the deficit-reduction plans are likely to increase risk and reduce business confidence rather than to reduce risk.As to what is the appropriate debt-to-GDP ratio to pursue in the long run, that is a difficult empirical question: when marginal increases in the debt-to-GDP ratio sharply raise expectations of long-run inflation and sharply raise real interest rates, then the debt-to-GDP ratio is more than high enough and should not go any higher. But until you reach that stage, a government's debt capacity is a resource to be used and should be used as long as the need exists.

The old line back to free market ideology still intact - The US economy is showing signs of slowing as the fiscal stimulus is withdrawn and the spending contractions of the state and local government increasingly undermine the injections from the federal sphere. The recent US National Accounts demonstrate that things are looking very gloomy there at present. In the last week some notable former and current policy makers have come out in favour of austerity though. Some of these notables contributed to the problem in the first place through their criminal neglect of the economy. Others remain in positions of power and help design the policy response. A common thread can be found in their positions though. A blind faith in the market which links them intellectually to the erroneous views espoused by Milton Friedman. His influence remains a dominant presence in the policy debate. That is nothing short of a tragedy.

Defining Prosperity Down - Krugman - I’m starting to have a sick feeling about prospects for American workers — but not, or not entirely, for the reasons you might think. Yes, growth is slowing, and the odds are that unemployment will rise, not fall, in the months ahead. That’s bad. But what’s worse is the growing evidence that our governing elite just doesn’t care — that a once-unthinkable level of economic distress is in the process of becoming the new normal. ...First, we see Congress sitting on its hands, with Republicans and conservative Democrats refusing to spend anything to create jobs, and unwilling even to mitigate the suffering of the jobless. We’re told that we can’t afford to help the unemployed — that we must get budget deficits down immediately or the “bond vigilantes” will send U.S. borrowing costs sky-high. Some of us have tried to point out that those bond vigilantes are ... figments of the deficit hawks’ imagination... But the fearmongers are unmoved: fighting deficits, they insist, must take priority over everything else — everything else, that is, except tax cuts for the rich, which must be extended, no matter how much red ink they create.

A Little Panic Would be Good - Kenneth Rogoff: In the short term, it is important that monetary policy in the US and Europe vigilantly fight Japanese-style deflation, which would only exacerbate debt problems by lowering incomes relative to debts. In fact,... it would be far better to have two or three years of mildly elevated inflation, deflating debts across the board. With credit markets impaired, further quantitative easing may still be needed. As for fiscal policy, it is already in high gear and needs gradual tightening over several years, lest already troubling government-debt levels deteriorate even faster. Those who believe – often with quasi-religious conviction – that we need even more Keynesian fiscal stimulus, and should ignore government debt, seem to me to be panicking. Since we're giving opinions rather analysis, let me give mine:Those who believe – often with quasi-religious neoclassical conviction – that no further  Keynesian fiscal stimulus is needed, and that government debt cannot be ignored, seem to me to be insensitive to the needs of the millions of unemployed, and at odds with the available evidence.

The Appeal of Austerity Is Fading -- Where Is Obama? -This fall, Congress will either follow the conventional wisdom and prematurely cut government outlay before an economic recovery arrives, or it will increase public spending, put jobless Americans back to work, and reduce the deficit in a less painful fashion thanks to increasing economic tailwinds. The road that Congress takes depends on presidential leadership. Until very recently, deficit hawks were hogging every available megaphone, claiming that deficits and debts were more ominous than protracted joblessness and recession. But you know that this foolish consensus is beginning to crack when political moderates such as columnist Matt Miller, budget guru Robert Greenstein, and Yale economist Robert Shiller take a different view.

James K. Galbraith Champions The Beast Manifesto - Don't be fooled by hawks who warn of a "long-term deficit crisis," says the celebrated economist—expanding entitlement programs will save money and free up jobs for those who really need them: young people. Plus, read the manifesto here. In the Great Crisis, the United States lost about eight million private jobs. The unemployment rate rose above ten percent. And the ratio of employment to population fell almost five percentage points. Very few lost jobs have been replaced: private employment has risen only about a million since the worst days. In the public sector the effect of the American Recovery and Reinvestment Act was only to offset large layoffs being made by state and local governments, so public employment has hardly risen at all.

Is Jamie Galbraith Crazy? - Sometimes I think if Jamie Galbraith were as heterodox in the conservative direction as he is in the liberal direction he would be mercilessly skewered in the econ-blogosphere. What is the conservative equivalent of “deficits never matter”? It’s probably somewhere between “cutting taxes always raises revenues” and “FDR caused the Great Depression”.That, again, was my initial reaction when I read his proposal (via Mark Thoma) that we shouldn’t be cutting medicare and social security, but expanding them. Then, much to my surprise, somewhere about halfway down the page I found myself somewhat convinced, or at the very least intrigued and open to persuasion, by part of it. He argues that we should lower the social security age to 62 for three years. This would allow older workers to leave the workforce, and would open up job vacancies for younger workers. You can see some appeal to this. If you have to subsidize the unemployment of some workers, it should be the older ones who no longer need to accumulate skills.

Is Jamie Galbraith Crazy, Ctd - Picking up from Adam. So, Jamie Galbraith actually echoes a lot of the things I have said: Deficit Projections are mechanical and of limited use. Market interest rates aren’t forecasting a deficit crisis. The projections for Medicare / Medicaid are just nuts.  There is no more reason to be concerned about unfunded Entitlements than unfunded Defense, unfunded FBI agents or unfunded trips to Mars. However, he also says some things that make me go WOAH! If the market is irrational then don’t worry because you can’t please an irrational beast. Deficits are the only way to inject financial resources into the economy.  Government does not need money to spend just as a bowling alley does not run out of points. I want to go through these briefly

Nonsense on the Deficit Question - Taxpayers are ultimately on the hook for the federal debt, regardless of financial finagling. And yet Galbraith acts as if adding trillions of dollars to the federal debt carries no strings at all. In a recent piece I reported the shocking ignorance in a Huffington Post article on the alleged harmlessness of the federal deficit. Several readers wrote to tell me that as bad as the HuffPo article was, James Galbraith's interview with Ezra Klein was even worse. They were right. In today's piece I'll walk through some of Galbraith's biggest whoppers. Right out of the chute, Galbraith pulls no punches:[Ezra Klein]: You think the danger posed by the long-term deficit is overstated by most economists and economic commentators. [James Galbraith]: No, I think the danger is zero. It's not overstated. It's completely misstated.

More WTF from the CBO... Doug Henwood has a nice article showing what appears to be the CBO inserting itself into a political debate on the side of budget-cutting now. What did they do? Their budget projections assume that productivity growth in the future will be less than it has been historically, making the future budget situation look worse. Longtime readers of this blog will remember how awful the CBOs projections were from the middle of December, 2008, when their projection was that the "worst case scenario" would result in unemployment maxing out at 8.5% in 2009, and that the "best case scenario" would see it hit 7.6% (if memory serves), a rate it hit just six weeks later. Six weeks which saw no real unemployment surprises... This extremely positive economic assessment bolstered the arguments of those who said the stimulus was too big, and then it bolstered the arguments of those, like Greg Mankiw, who pointed to the original CBO estimates as proof that the stimulus had a negative impact on growth!

The Federal Budget Deficit So Far This Year—About $1.2 Trillion - CBO Director's Blog - The federal budget deficit was about $1.2 trillion in the first ten months of fiscal year 2010, CBO estimates in its latest Monthly Budget Review—about $90 billion less than the roughly $1.3 trillion deficit incurred through July 2009. By CBO’s estimate, spending during the first 10 months of the fiscal year was about $81 billion (or 2.7 percent) less than outlays at the same point in 2009. That decline includes a net reduction of close to $370 billion in major components of spending related to the recent financial crisis: the Troubled Asset Relief Program (down $277 billion), federal deposit insurance (down $50 billion), and Treasury payments to Fannie Mae and Freddie Mac (down $42 billion).

CBO: Federal Budget Deficit Reaches $1.2 Trillion Through July -(Dow Jones)- The federal budget deficit reached $1.2 trillion through the first 10 months of fiscal 2010, a slight improvement from the same point last year, the Congressional Budget Office said Thursday evening. The deficit in July was $169 billion, around $11 billion less than in July last year, the non-partisan congressional scorekeeper said in its monthly budget assessment. The federal government's deficit for the fiscal year is on track to be between $1.2 trillion and $1.3 trillion, the CBO said recently in its most up-to-date yearly forecast. That would be slightly less than the $1.4 trillion recorded in fiscal 2009, the highest mark ever

Editorial - What They’re Not Telling You About the Deficit…There is a lot of heated talk in Washington these days about the deficit, unfortunately little of it serious. Playing on Americans’ deep anxiety about the economy, Republican politicians have seized the deficit issue as their own — eagerly blaming the stimulus and even an extension of unemployment insurance for the problem — while denying their own culpability for helping dig this deep hole with years of irresponsible tax cuts. The deficit’s size is alarming. In the 2010 fiscal year, the government is projected to collect $2.2 trillion in taxes and spend $3.6 trillion, leaving a gap of $1.4 trillion. If current tax and spending policies continue, deficits are estimated to remain near $1 trillion a year for the next decade. After that they will explode — to twice the size of today’s deficit as a share of the economy by 2050 — as health costs rise and the population ages, and outlays for Medicare, Medicaid and, to a lesser extent, Social Security continue to grow faster than revenues.

It’s Hard To Take The Fiscal Hawks Seriously: Testimony To The Senate Budget Committee - Simon Johnson - Most of the discussion of federal budget issues today is misdirected.  The shorter run issues are dominated by the likelihood of another financial crisis – and the implications that would have for the budget deficit – but no “fiscal hawks” even want to acknowledge the issue.  It is very hard to take anyone seriously if they refuse to look at these (uncontroversial) numbers.  Medium term, we obviously need tax reform.  The good news, in a sense, is that the US has an antiquated and inefficient tax system; it would not be hard to improve how this operates, raising revenue and actually reducing distortion.  Longer term, Medicare is obviously a tough problem with no easy solutions yet in sight.  But the argument “just cut entitlements” cannot be taken seriously. Below is my testimony this week to the Senate Budget Committee on these issues.  (This link is to a pdf version; also see this page for my testimony to congressional committees over the past 2 years).

Current fiscal deficit hawks...oops! - Projected growth in spending on the federal government's big health and retirement programs--Medicare, Medicaid, and Social Security--dominates the long-run budget outlook. If current policies continue, that spending is likely to grow significantly faster than the economy as a whole over the next few decades. By 2040, the Congressional Budget Office (CBO) projects those outlays will rise to about 17 percent of gross domestic product (GDP)-- more than double their current share.  CBO report ready for hawking in year 2000.  Was this before or after our deficit hawks started crowing in year 2000? (a figure virtually identical to current estimates...oops...2010) Hat tip Simon Johnson in It's heard to take the fiscal hawks seriously.

Bond Vigilantes Are Now Deficit Cheerleaders - The story is that the bond market forced President Bill Clinton to change his budget plans.  The anonymous traders were dubbed “bond market vigilantes” because they were more than willing to use the weapon at their disposal — higher interest rates — to force fiscal policy in their preferred direction. It’s clear that the bond market is now giving at least as strong a signal about its desired fiscal policy as it did in the early 1990s. But instead of demanding reductions in the deficit and government borrowing and threatening higher interest rates if those don’t happen, today’s vigilantes are unmistakably saying just the opposite. They want Washington to do more to stimulate the economy, and they welcome the deficit and debt it will take to do it.

Bond Market Deficit Cheerleaders - Krugman --Stan Collender has a terrific piece about the bond market that I wish I had written (I can offer no higher praise). The key takeaway: It’s clear that the bond market is now giving at least as strong a signal about its desired fiscal policy as it did in the early 1990s... They want Washington to do more to stimulate the economy, and they welcome the deficit and debt it will take to do it. In other words, the former bond market vigilantes have now become the biggest supporters of federal deficits and borrowing. Just to add a further point: the austerity now now now crowd poses as the sober voices warning governments not to ignore the dictates of all-powerful financial markets. But the signals from the financial markets don’t at all point to a need for early austerity. So what the austerity people are in effect saying is that they are smarter than bond investors — that they know what the bond market is going to want, it just doesn’t know it yet. And on this basis they want us to ignore the plight of tens of millions of jobless workers.

Me And The Bond Market - Krugman --Whenever I point out that bond markets are not, in fact, demanding immediate fiscal austerity, I get comments along the lines of “So now you believe markets are perfect?” That’s missing the point. The starting point for the argument people like me make is that markets shouldn’t be demanding immediate austerity, because the long-run fiscal effects of short-run deficits are relatively small; the burden of proof is therefore on the other side to show that markets will demand something they shouldn’t.Think of the dialogue as going like this:Stimulist: Yes, long-run fiscal issues matter — but what we spend now is virtually irrelevant to those issues. A trillion dollars of spending will raise real interest costs by less than 0.1 % of GDP, and might even help the long-run position by avoiding a permanent loss of potential output.Austerian: No, we must cut immediately to satisfy the bond market!Stimulist: But the bond market isn’t demanding immediate cuts — it seems quite unworried by current deficits.Austerian: But I know what the bond market will want, never mind what it’s saying now.

Austerity Vs. Defecit Spending - A Catch 22 - A vivid debate is currently going between two groups of economists, politicians and financial analysts. One camp argues that government deficits have to be kept within reasonable limits or avoided altogether, because fast-increasing public debt will become unmanageable in the foreseeable future. We wholeheartedly agree. The other group advocates a continuation of stimulus spending and credit driven investment by governments. In a New York Times op-ed piece published on June 17, 2010, Paul Krugman explained why slamming the breaks on government spending would throw us back into recession. On June 28, he doubled up, now arguing that with reduced government stimulus, we’re headed straight towards a new depression. We fully agree with his assessment. How come IIER is simultaneously able to agree with two camps which are ready to turn to fists when making their argument? It’s quite simple: both have a point. But equally, both have no real answer.

A Wealthy Stimulus Needed - Just when things seem like they can’t get any worse, we receive the distressing news that the wealthy are starting to cut back. An Associated Press article earlier this week, As Spending by Wealthy Weakens, so does Economy, detailed the sad plight of the wealthy. Economists say the economy is slowing because the richest 5%  of Americans — those earning at least $207,000 — are buying less. They account for about 14% of total consumer spending. According to the article:“Think of the wealthy as the main engine of the economy: When they buy more, the economy hums. When they cut back, it sputters. The rest of us mainly go along for the ride.” So the 5% of the population are the engine in the Hummer and the other 95% of us are the baggage strapped to the roof just going along for the ride. I’m sure if the engine isn’t humming along as well as expected, we can throw some of the baggage overboard to lighten the load. It’s OK if the middle class suffers a little more. They are used to it.

Could a New Stimulus Plan really be a "Slam Dunk"? - Want to stimulate the economy and lower the foreclosure rate without adding a dime to the federal deficit. Not possible you say. Not so, says Morgan Stanley. Economists at the Wall Street firm are promoting what they are calling the Slam Dunk Stimulus plan, which they say could add $46 billion a year to the economy. The plan is getting attention in Washington. On Tuesday, a Morgan Stanley top economist ran the idea past members of the Senate Banking Committee (h/t calculated risk): The Fed – and market forces – have pushed mortgage rates to historic lows. However, many homeowners are unable to take advantage of the low rates because they are blocked from refinancing by a high loan-to-value ratio (LTV), appraisal problems, unemployment, and low credit score, etc. This problem could be addressed if the Government merely recognized the guarantee that already exists on the principal value of a very large portion of the mortgage market – specifically, the mortgages that are backed by Fannie, Freddie and Ginnie – and acted to streamline the refi process.

Does the Effectiveness of Fiscal Stimulus Depend on How It Is Delivered? -Recent fiscal policies have aimed to stimulate household spending. In 2008, most households received one-time economic stimulus payments. In 2009, most working households received the Making Work Pay tax credit in the form of reduced withholding; other households, mainly retirees, received one-time payments. This paper quantifies the spending response to these different policies and examines whether the spending response differed according to whether the stimulus was delivered as a one-time payment or as a flow of payments in the form of reduced withholding. Based on responses from a representative sample of households in the Thomson Reuters/University of Michigan Surveys of Consumers, the paper finds that the reduction in withholding led to a substantially lower rate of spending than the one-time payments.

Hey, Small Spender - One of the things everyone knows right now is that Obama has presided over a huge increase in government spending. But like so many of the things everyone knows, it isn’t true. A few considerations to bear in mind:. You don’t want dollar amounts, especially when comparing over time; you really want to scale spending by the size of the US economy. But even dividing by GDP isn’t quite enough, because we’re still a deeply depressed economy, so government spending as a share of GDP will look high even if actual spending hasn’t risen at all, simply because it’s divided by a smaller number. So a better guide is spending as a share of potential GDP, for which I use the CBO measure. You really want to consolidate federal spending with state and local — especially because a significant part of the stimulus was aid to state and local governments designed to help them limit spending cuts.  So what do the numbers look like when you look at total government spending as a percentage of potential GDP?

The Obama Agenda and the Enthusiasm Gap - Robert B. Reich - In case after case, the administration went far enough to fuel the opposition but not far enough to provide immediate help to the average voter. Consider the stimulus package. Although it's difficult to separate the consequences of fiscal and monetary policy, most knowledgeable observers conclude that the stimulus has had a positive effect. Real GDP is now increasing at an annual rate of 2.4%, and although the recovery is still fragile it's unlikely we'll fall back into a full-fledged recession. Yet the official rate of unemployment remains above 9%, not including millions either too discouraged to look for work or working part-time when they'd rather have full-time jobs. Almost half of the jobless have been without work for more than six months, a level not seen since the Great Depression.

Christina Romer, Top Obama Economic Adviser, To QUIT White House Job: REPORT - Christina Romer, chairwoman of Pres. Obama's Council of Economic Advisers, has decided to resign, according to a source familiar with her plans. Romer, an economics professor at the University of California (Berkeley) before taking the key admin post, did not respond to repeated calls to her office.  "She has been frustrated," a source with insight into the WH economics team said. "She doesn't feel that she has a direct line to the president. She would be giving different advice than Larry Summers [director of the National Economic Council], who does have a direct line to the president."  "She is ostensibly the chief economic adviser, but she doesn't seem to be playing that role," the source said. The WH has been pounded for its faulty forecast that unemployment would not top 8% after its economic stimulus proposal passed.

Christina Romer to Resign - Chair of the President’s Council of Economic Advisers Christina Romer will become the second member of the White House economic team to resign in a few months, according to Reid Wilson. But unlike Peter Orszag, who was reportedly burnt out, Romer is resigning in frustration with the inability to penetrate the inner circle of Larry Summers and Tim Geithner, and reach the President on economic issues. This is a much more revealing resignation. Romer came from the academic world, and Summers clearly outflanked her from a tactical standpoint in making sure that Obama listened to him directly. On macroeconomic issues, the policies of this White House have clearly been driven by the axis of Summers and Geithner. Romer’s initial forecast for the stimulus, showing the need for a $1.2 trillion dollar jolt to the economy, was internally overruled. But more than that, the strategies with the banks, with foreclosures, basically with respect to the entire economy reflects the fact that Summers has corraled the White House and isn’t allowing competing information in. Clearly Romer couldn’t take the damage to her economic reputation that the iron fist of Summers was exacting. She didn’t have enough of a voice at the White House. So she quit.

The Defining Moment - Krugman - I have no insight into Christy Romer’s departure from the administration. But I do think it’s worth going to the tape over the critical discussion, early on, about how strong a policy response to offer. Here’s Ryan Lizza: The most important question facing Obama that day was how large the stimulus should be. Since the election, as the economy continued to worsen, the consensus among economists kept rising. A hundred-billion-dollar stimulus had seemed prudent earlier in the year. Congress now appeared receptive to something on the order of five hundred billion. Joseph Stiglitz, the Nobel laureate, was calling for a trillion. Romer had run simulations of the effects of stimulus packages of varying sizes: six hundred billion dollars, eight hundred billion dollars, and $1.2 trillion. The best estimate for the output gap was some two trillion dollars over 2009 and 2010. Because of the multiplier effect, filling that gap didn’t require two trillion dollars of government spending, but Romer’s analysis, deeply informed by her work on the Depression, suggested that the package should probably be more than $1.2 trillion. The memo to Obama, however, detailed only two packages: a five-hundred-and-fifty-billion-dollar stimulus and an eight-hundred-and-ninety-billion-dollar stimulus. Summers did not include Romer’s $1.2-trillion projection.

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.  However, Hamsher rightly points out that Joe Stiglitz and Paul Volcker also were right and ignored, so Obama’s team didn’t ignore only women who were right.  Instead, Hamsher notes “They don’t want to listen to people who could be giving them good advice, period.”

Boehner: Dems Scamper Back to Washington to Double Down on ‘Stimulus’ Failure “The American people don’t want more Washington ‘stimulus’ spending – especially in the form of a pay-off to union bosses and liberal special interests. This stunning display of tone-deafness comes at the expense of American workers, who will be hit by another job-killing tax hike because Washington Democrats can’t kick their addiction to more government ‘stimulus’ spending. Democrats should be listening to their constituents – who are asking ‘where are the jobs?’ – instead of scampering back to Washington to push through more special interest bailouts and job-killing tax hikes.

Symbolic deficit reduction - The deficit battles in Congress are reaching a level of absurdity that makes your head spin.   Every day brings new confirmation that the economic recovery is sputtering.  GDP growth plunged in the 2nd quarter; consumer spending is anemic; the housing market has slumped; private-sector job growth has been well below 100,000 per month since May.  Meanwhile, state and local governments are poised to cut another 300,000 jobs over the next year to deal with their acute budget shortfalls -- that's on top of about 200,000 jobs they have cut already. Yet here is the Senate, bogged down for more than a month on a bill to provide $26 billion for states -- $10 billion to prevent teacher layoffs and $16 billion for state Medicaid programs.   David Rogers of Politico reports on the latest impass: Senate Majority Leader Harry Reid hastily postponed a cloture vote Monday night because the Congressional Budget Office estimated that the bill wasn't entirely paid for -- tax changes and savings were still about $5 billion short.

This Is Neither Effective Deficit Reduction Nor Personnel Policy - I hate the idea of salary freezes.  In one sentence: If you freeze salaries, then only the people who don't deserve a raise get the raise they deserve.  Everyone else gets less, and the discrepancy is widest for the most productive people.  Who decided this was an effective personnel policy?  Here's the relevance today.  The first two paragraph's of Scott Wilson's Washington Post article on the freeze on bonuses are these:President Obama ordered a freeze Tuesday on all bonuses and other monetary awards to federal political appointees, saying: "Like households and businesses across the country, the federal government is tightening its belt"

Tax Cuts vs. Deficits - Washington has struggled with dealing with the long-term U.S. deficit while supporting short-term growth. An analysis from forecasting firm Macroeconomic Advisers suggests that letting tax cuts expire just for higher-income Americans strikes that balance.  According to MA economists, the expiration of any of the tax cuts will depress economic growth, but the effects are more pronounced if the reductions run out for everyone. “Full sunsets would shave 0.9 and 0.3 percentage point off real GDP growth in 2011 and 2012, respectively,” the report says. “Allowing only tax cuts on high-income individuals to sunset would trim only 0.2 percentage points from growth over both 2011 and 2012.” Allowing the cuts to expire for everyone is also expected to boost the unemployment rate — currently at 9.5% — by 0.6 percentage point. As Real Time Economics recently noted, ending the tax cuts won’t make a huge dent in the deficit. The Tax Policy Center points to Treasury estimates that show a cost of $199 billion in fiscal year 2011 and $3.7 trillion over 10 years for extending all the tax cuts. Meanwhile, the cost of extending them only for under $250,000-a-year taxpayers, as President Barack Obama proposes, is $167 billion in fiscal year 2011 and $3.0 trillion over 10 years.

What Reagan Didn’t Do - Paul Krugman - Via Ezra Klein, I see that the latest thing on the right is to compare the economic recovery from the 1981-2 recession with our current state and claim that it proves the superiority of conservative economic policies. This shows why I can’t maintain the pretense that we’re having any kind of intelligent, or remotely honest, discussion.The 1981-2 recession was a very different kind of event from the 2007-9 recession: basically, it was a recession deliberately created by the Fed to bring down inflation. The Fed raised interest rates sky-high, causing a plunge in home construction, which was the main driver of the slump. When Paul Volcker believed that we had suffered enough, he cut rates, housing sprang back — and it was housing that mainly drove the recovery. Reaganomics was basically irrelevant.

Filibusters and arcane obstructions in the Senate - “Sit and watch us for seven days,” one senator says of the deadlocked chamber. “You know what you’ll see happening? Nothing.” Between speeches, there are quorum calls, time killers in which a Senate clerk calls the roll at the rate of one name every few minutes. The press gallery, above the dais, is typically deserted, as journalists prefer to hunker down in the press lounge, surfing the Web for analysis of current Senate negotiations; television screens alert them if something of interest actually happens in the chamber. The only people who pay attention to a speech are the Senate stenographers. On this afternoon, two portly bald men in suits stood facing the speaker from a few feet away, tapping at the transcription machines, which resembled nineteenth-century cash registers, slung around their necks. The Senate chamber is an intimate room where men and women go to talk to themselves for the record.

The case against tax expenditures - There are two obvious ways to reduce the federal deficit (spend less or tax more), and then there's the really compelling one—stop using the tax code to guide the way people make decisions. Bloomberg recently reported that the President's debt commission is focusing "a lot" on tax expenditures—the deductions, exemptions and other tax breaks that the government often bestows on individuals and corporations instead of spending money directly. The government passes up about $1 trillion in revenue a year this way. Why hate on tax expenditures? Partly because of the particular things the money goes for, like the mortgage interest deduction. As you know, I'm not the world's biggest fan. If you go to this PDF from the Office of Management and Budget and scroll down to page 220 (table 16-2), you can see a rundown of all the major tax expenditures. They're ranked in order of amount, which provides a fantastic comparison. The deductibility of mortgage interest is the second largest. For 2011, it is projected to cost the government $105 billion.

Five Myths About the Bush Tax Cuts and the Scourge of Stimulus - Coming up in tomorrow's Washington Post, Brookings economist Bill Gale discusses these five myths about the tax cuts passed in 2001 and 2003:

  1. Extending the tax cuts would be a good way to stimulate the economy.
  2. Allowing the high-income tax cuts to expire would hurt small businesses.
  3. Making the tax cuts permanent will lead to long-term growth.
  4. The Bush tax cuts are the main cause of the budget deficit.
  5. Continuing the tax cuts won't doom the long-term fiscal picture; entitlements are the real problem.

Four Deformations of the Apocalypse, by David Stockman - IF there were such a thing as Chapter 11 for politicians, the Republican push to extend the unaffordable Bush tax cuts would amount to a bankruptcy filing. The nation’s public debt — if honestly reckoned to include municipal bonds and the $7 trillion of new deficits baked into the cake through 2015 — will soon reach $18 trillion. That’s a Greece-scale 120 percent of gross domestic product, and fairly screams out for austerity and sacrifice. It is therefore unseemly for the Senate minority leader, Mitch McConnell, to insist that the nation’s wealthiest taxpayers be spared even a three-percentage-point rate increase. Republicans used to believe that prosperity depended upon the regular balancing of accounts — in government, in international trade, on the ledgers of central banks and in the financial affairs of private households and businesses, too. But the new catechism, as practiced by Republican policymakers for decades now, has amounted to little more than money printing and deficit finance — vulgar Keynesianism robed in the ideological vestments of the prosperous classes.

David Stockman bombshell: How my Republican Party destroyed the American economy. - The "debt explosion has resulted not from big spending by the Democrats, but instead the Republican Party’s embrace, about three decades ago, of the insidious doctrine that deficits don’t matter if they result from tax cuts." David Stockman, director of the Office of Management and Budget under President Ronald Reagan, has dared to call out his own party for creating our current economic problems.  His NYT op-ed, “Four Deformations of the Apocalypse,” begins: IF there were such a thing as Chapter 11 for politicians, the Republican push to extend the unaffordable Bush tax cuts would amount to a bankruptcy filing. Huffpost reports that in an interview today on NBC’s Meet the Press, “Former Fed Chairman Alan Greenspan said that the push by congressional Republicans to extend the Bush tax cuts without offsetting the costs elsewhere could end up being ‘disastrous’ for the economy.”

Stockman on the Latest “Triumph of Politics”–the Bush Tax Cuts -When Peter Orszag first announced he was leaving the Obama Administration, I was itching to post something about Reagan’s budget director, David Stockman, and how Peter would now be free to write the latest version of Stockman’s “Triumph of Politics” book.  My idea was that Peter would finally be able to talk about how he really feels about the economic wisdom (or not) of the Bush tax cuts–the policy President Obama is now trying to turn into his own.You see, Peter spent many years researching and writing about the Bush tax cuts with his Brookings colleague Bill Gale (who just wrote this nice updated summary of stubborn myths on the Bush tax cuts in the Washington Post), and most of what the two of them had to say over all those years and papers was not very flattering.  I’ve assumed that Peter’s been biting his tongue a lot over the past couple years So that’s why I immediately was reminded of David Stockman’s “Triumph of Politics” book when Peter announced he was leaving. But it turns out I didn’t have to build any bridge to make that connection between Peter Orszag and the Bush/Obama tax cuts and David Stockman (and the Reagan tax cuts).  Stockman himself built it for me, in his opening paragraph of his recent op-ed in the New York Times:

Still Sleazy After All These Years - David Stockman (yes Reagan's OMB director David Stockman) denounces the Republican Party for its irresponsible love of tax cuts for the rich. This is wonderful. With such a large target, he manages many hits. He also manages to demonstrate that he is still intellectually dishonest, as is shown after the jump. Stockman argues that, under Bush Jr the Republicans spent like drunken sailors. This is true. However, it does not justify presenting nominal figures without correcting for inflation and population growth (if not GNP growth). Stockman writes "my statistics are still damn lies" oops I mean "George W. Bush surrendered on domestic spending cuts, too — signing into law $420 billion in non-defense appropriations, a 65 percent gain from the $260 billion he had inherited eight years earlier." The New York Times disgraces itself. It should have a policy that all comparisons are, at least, in constant dollars. Also the numbers are weirdly low. Stockman clearly refers to non-defence discretionary spending not to all non-defence appropriations.

The Eclectic Ideological Journey of David Stockman - David Stockman, wunderkind of American economic policy in the early 1980s, recently resurfaced after a couple of decades in the business world with a blistering op-ed article in the New York Times on July 31. Republicans were his principal target, whom he excoriated for destroying the nation’s finances with unaffordable tax cuts and  blamed for “serial financial bubble and Wall Street depredations that have crippled our economy” and many other sins. In short, it was vintage Stockman. Stockman is unquestionably one of the most interesting people I’ve ever known. I first met him in 1977 right after he had been elected to Congress. Although only 30 years old, he was already a congressional veteran, having worked for Rep. John Anderson of Illinois for five years, three as executive director of the House Republican Conference—a very high level position for someone so young.

To deal with the deficit, let the tax cuts expire - For the past few months, we have heard powerful, passionate arguments about the need to cut America's massive budget deficit. Republican senators have claimed that we are in danger of permanently crippling the economy. Conservative economists and pundits warn of a Greece-like crisis in which America will be able to borrow only at exorbitant interest rates. So when an opportunity presents itself to cut those deficits by about a quarter -- more than $300 billion! -- permanently and relatively easily, you would think that these people would be leading the way. Far from it.  The "Bush tax cuts," passed in 2001 and 2003, remain the single largest cause of America's structural deficit -- that is, the deficit not caused by the collapse in tax revenue when the economy goes into recession. The Bush administration inherited budget surpluses from the Clinton administration. .

Greenspan Calls for Repeal of Bush Tax Cuts - NYTimes - It was not enough, it seems, for Alan Greenspan, the former Federal Reserve chairman and a self-described lifelong Republican libertarian, to call for stringent government regulation of giant banks, as he did a few months ago. Now Mr. Greenspan is wading into the most fierce economic policy debate in Washington — what to do with the tax cuts adopted, in large part because of his implicit backing, under President George W. Bush — with a position not only contrary to Republican orthodoxy, but decidedly to the left of President Obama. “I’m in favor of tax cuts, but not with borrowed money,” Mr. Greenspan, 84, said Friday in a telephone interview. “Our choices right now are not between good and better; they’re between bad and worse. The problem we now face is the most extraordinary financial crisis that I have ever seen or read about.”

Tax Cuts And The Economy - Paul Krugman - If we could wave away political reality, I’d let all the Bush tax cuts expire, and use the improvement in the budget outlook to justify a large, temporary increase in public spending. Unfortunately, that’s not going to happen. Given the political realities, I’d go for a temporary extension of the lower-end cuts, and just letting the upper-end cuts expire. Why? It comes down to the dual fiscal problem the U.S. economy faces: short-term, the government needs to do all it can to prop up spending; long-term, it needs to reduce the deficit. The latter concern means that it would be a terrible idea to make the high-end tax cuts permanent; that would be a huge drain on the public finances, serving no good purpose. But why not a temporary extension? Because it would do very little to promote spending.   Telling rich people that we’ll keep their taxes low for a couple more years is, for them, a transitory income gain; they’ll save the bulk of it.

I Think Paul Krugman Agrees with Me on This One… on what to do about the Bush tax cuts at least.  What he writes today goes beyond Treasury Secretary Geithner’s call to let the high-end Bush tax cuts expire as scheduled (at end of this year), although he does punctuate that overlap.  Paul pretty clearly recognizes there’s not much of an economic case for a deficit-financed and permanent extension (i.e., beyond the next couple years) of even the so-called “middle-class” Bush tax cuts, when he says this (emphasis added): Given the political realities, I’d go for a temporary extension of the lower-end cuts, and just letting the upper-end cuts expire. Paul emphasizes the long-term concerns and the “huge drain on public finances” that permanent extension of the upper-end Bush tax cuts would produce–but he at least implicitly recognizes that argument applies even more to the permanent deficit-financed extension of the “middle-class” Bush tax cuts as proposed in the Obama budget, by choosing to call for only temporary extension of even those middle-class cuts. 

Letting Tax Cuts Expire Is Republican Policy - The debate over whether or not to allow some or all of the Bush tax cuts to expire reminds me of an op-ed I wrote two years ago on this topic. I point out that if Republicans didn't want their tax cuts to expire then they shouldn't have passed them with expiration dates. This suggests that their intention was to allow them to expire when the time came

September Senate Debate Expected on Extending Tax Cuts - Senate leaders said Wednesday that debate would most likely begin in September over whether to let the Bush income tax cuts for the rich expire at the end of this year as scheduled, setting up a new battle just weeks before the midterm elections. Nervousness among politically vulnerable Democrats had led some in the party to predict that Congress would not take up the issue until after the elections, in a lame-duck session. But partisan lines have already been forming. Republicans, emboldened by President Obama’s slipping support in the polls, charge that Democrats are advocating a big tax increase; Democrats counter that Republicans are shilling for the wealthy and driving up the national debt.

Why We Really Shouldn't Keep the Bush Tax Cut for the Wealthy - Robert Reich - From a strictly economic standpoint – as if economics had anything to do with this – it makes sense to preserve the Bush tax cuts at least through 2011 for the middle class. There’s no way consumers – who comprise 70 percent of the economy – will start buying again if their federal income taxes rise while they’re still struggling to repay their debts, they can’t borrow more, can no longer use their homes as ATMs, and they’re worried about keeping their jobs.But the same logic doesn’t apply to people at the top, earning over $250K, who represent roughly 2 percent of tax filers. Restoring their marginal tax rates to what they were during the Clinton administration (36 and 39 percent) won’t inhibit their spending. That’s because they already save a large portion of what they earn, and already spend what they want to spend. (During the Clinton years the economy created 22 million net new jobs and unemployment dropped to 4 percent.)

The Return of the Tax Fairy - Yet for the last few years, we haven't spent much time debating taxes. And to use a word conservatives like so much when it comes to this subject, it was a relief. However, since the Bush tax cuts will be expiring at the end of the year, we're in for another round of ridiculous arguments, disingenuous talking points, and maddening stupidity. We have already seen the return of the Tax Fairy, the absurd belief, depressingly widespread in Republican circles, that cutting taxes increases revenue. Even Greg Mankiw, chair of George W. Bush's Council of Economic Advisers, called those who believe this fiction "charlatans and cranks." But it has become almost doctrine within the GOP.

The Democrats’ Big Tax Problem - The only time income taxes were popular was when few Americans had to pay them. In 1914, the first year the 16th amendment went into effect, fewer than 400,000 people filed returns and, except for a brief period when the U.S. was engaged in World War I, only the wealthy had to do so until the 1940s. The highest rate was less than ten percent. This changed dramatically during World War II when the need for revenue was both urgent and insatiable. By 1945, most citizens were paying some tax—a grievance which helped Republicans win control of both houses of Congress a year later.Ever since, Democrats have struggled to convert the argument that the rich should pay a good deal more than the poor and the middle class into law.

Would ending the Bush tax cuts on the rich hurt small business? - So it was probably inevitable that small business would end up at the center of the war over extending the Bush tax cuts for the top 2 percent of households with incomes above $250,000.  Republicans claim this would be a disaster for small business owners, because "50 percent'' of small business income would be "captured" by the higher tax rates.  Democrats say that's baloney, because only 3 percent of small business owners make enough money to be in the top bracket. Who's right? Over at the Fiscal Times, I dissected the issue.  Short answer: the Republicans are right, but only if your idea of "small business'' includes income from hedge fund investments, royalties, real estate partnerships and that trust fund your rich grandfather left you.  Here are the details:

Squeezing the Rich Is Poor Way to Spur Growth – Thirty-six years after an academic economist named Arthur Laffer drew a curved line on a cocktail napkin, the debate over supply-side tax cuts paying for themselves is still going strong.  Why, after all this time and an extensive body of data, are we still questioning whether reductions in marginal and capital- gains tax rates increase economic activity enough to generate more revenue for the federal government?  “Because they don’t like the answer,” Laffer says of the doubters. “It’s not tax cuts that pay for themselves. Tax cuts on the poor cost you lots of money. Tax cuts on the rich pay for themselves. Rich people can afford lawyers, accountants, and can defer income.”  That’s one answer. Another may be that, unlike the hard sciences, there is no conclusive test. In a dynamic economy, it’s impossible to hold everything else constant except tax rates.

The Art of Tax War - As Sun Tzu observed about 2,500 years ago, “All warfare is based on deception.”The highly charged partisan debate over the future of the Bush tax cuts (scheduled to expire at the end of December) is a kind of war. Whether you term it a class war depends on what you mean by class, but it is certainly a war between the very rich (the top 2 percent of income earners) and a host of other individuals allied with them, against everybody else who gives a darn.Battlefield success will be largely determined by the outcomes in the coming Congressional elections. A key issue in these races will be public perceptions of President Obama’s proposal to let expire the federal income-tax cuts put in place by the Bush administration for the very rich, while maintaining those tax cuts – and others implemented by his administration – for everybody else. Voters’ perceptions are not primarily driven by facts. A February CBS poll showed that only 12 percent of voters recognize that the Obama administration has cut taxes. About 24 percent of voters (and about 64 percent of Tea Party supporters) said they believed it had raised taxes.

And you thought you knew what Draconian was! - I wonder sometimes if Paul Krugman may not need a little further education in economics. I specifically do not agree with Paul Ryan just about across the board. I definitely want to return the Tax rates to the pre-Bush 2000 settings. I definitely want to boost the fed fund’s rate. I want Business and Bank to have to work harder to make their Profits under higher taxation. They definitely cannot afford to stand idle, when and if it costs more to do so, and what Profits there are become taxed at higher rates. Like Ryan, I believe that Banks and Business will work harder if compelled with some degree of distress. I have to tell the two Pauls that there will be little incentive to achieve greater things, if the Businessman and Banker can sit still while the Profits roll in. The Question becomes How do We get this hard work out of them? Paul Krugman believes We only have to supply more Cash, while Paul Ryan sees need only for Tax Cuts. I believe both are failed policies.

Life in the Fast Lane - I was talking to some of my friends last Week about letting the Bush Tax Cuts expire. I stated then, right or wrong, that they could expect about a 5% increase in Personal Income tax, and about a 7-8% increase in Capital Gains tax. A lot of people claim this added taxation would be bad for business, but I seriously doubt it. The reason I doubt it stands as these Individuals have opportunity to attain higher maximization of their Income with due diligence–they work a little harder–and the fact that Government debt pulls as much or more of Investment capital from the Market as they would contribute to that capital. Menzie Chinn may provide a more balanced look at the entire Question, but ultimately doubts that removal of the Tax Cuts will have much impact. I would like to approach the problem in a different manner.

Which Age Groups Bear the Largest Share of the Tax Burden? -Debates over tax policy - such as the question of whether or not the Bush tax cuts should be allowed to expire - tend to be waged on the basis of class grounds. In other words, should we raise taxes on the "rich" as opposed to extending tax cuts for the "middle-class." Rarely, however, does age enter these discussions. Perhaps it should. New data from the IRS provides us some insights on the composition of tax filers by age and how much of the nation's tax burden they pay. While the data does not break down the income levels of taxpayers by age, the data can still give lawmakers a new perspective on which age groups could be most impacted by changes in tax policy. Table 1 below shows the distribution of tax filers by age and how much of the nation's adjusted gross income they account for.

Effect of Expiring Tax Cuts on Average Middle-Income Family in Each State & Congressional District - The Tax Foundation has released a report showing how the expiration of the Bush-era tax cuts would affect the average middle-income family in each state and congressional district. The report looks at the average family in the middle 20 percent of the income spectrum and compares their 2011 federal income tax liability if all the tax cuts expire to their tax bill if all the tax cuts are extended. Nationally, the typical middle-income family, which has a median income of $63,366, would see its federal income tax burden increase by $1,540 if the Bush-era tax cuts expire. For the full results, see Tax Foundation Fiscal Fact, No. 238, "Effect of Expiration of Bush-Era Tax Cuts on Average Middle-Income Family, By State and Congressional District." To see how the expiration of the Bush-era tax cuts would affect a specific taxpayer, visit the Tax Foundation's interactive calculator at, which allows taxpayers to compare their 2011 federal income tax liabilities under three scenarios:

Real Ryan Roadmap: Tax Freedom for Billionaires - The Ryan Budget Roadmap was introduced in January, and then sank like a stone. But with Ryan's appointment to the Catfood Commission it and its author have drawn some new attention which borders on fawning. Or at least part of the plan has drawn attention, that part which would privatize Social Security and voucherize Medicare. What is getting less attention is his radical tax plan which if fully implemented would mean inheritors of great wealth would never pay federal taxes. EVER. To set the background we have this article from the WaPo Monday Rep. Ryan pushes budget reform, and his party winces And it turn frames it as follows:  He speaks in apocalyptic terms, saying the debt is "completely unsustainable" and warning that "it will crash our economy." He urges fellow politicians, and voters, to stop pretending that this problem will go away on its own. So what is step one and two in cutting "completely unsustainable" debt? Well slashing Social Security and Medicare. And step three? ELIMINATE ALL TAXATION FOR BILLIONAIRES AND THEIR HEIRS. Details directly from Ryan's website under the fold.

The Flimflam Man, by Paul Krugman - One depressing aspect of American politics is the susceptibility of the political and media establishment to charlatans. You might have thought, given past experience, that D.C. insiders would be on their guard against conservatives with grandiose plans. But no: as long as someone on the right claims to have bold new proposals, he’s hailed as an innovative thinker. And nobody checks his arithmetic. Which brings me to the innovative thinker du jour: Representative Paul Ryan of Wisconsin ... has become the Republican Party’s poster child for new ideas thanks to his “Roadmap for America’s Future,” a plan for a major overhaul of federal spending and taxes. News media coverage has been overwhelmingly favorable... But it’s the audacity of dopes. Mr. Ryan isn’t offering fresh food for thought; he’s serving up leftovers from the 1990s, drenched in flimflam sauce.  Mr. Ryan’s plan calls for steep cuts in both spending and taxes. He’d have you believe that the combined effect would be much lower budget deficits, and, according to that Washington Post report, he speaks about deficits “in apocalyptic terms.”

How To Read A CBO Report - Krugman - One thing that has been overwhelmingly obvious in the discussion of Paul Ryan’s roadmap is that lots of people who should know better — including, alas, reporters at the Washington Post — don’t know how to read a CBO report. They think you can just skim it and get the gist; and people like Mr. Ryan have taken advantage of that misconception. What you need to realize is that the CBO is the servant of members of Congress, which means that if a Congressman asks it to analyze a plan under certain assumptions, it will do just that — no matter how unrealistic the assumptions may be. CBO will tell you what’s going on, but it will do so deadpan, doing nothing in terms of emphasis or placement to highlight the funny business. So, the key table in the CBO report on the Ryan plan (pdf) looks like this

Republican Jobs Plan: Bigger Tax Cuts For The Rich - After opposing, stalling, stonewalling and filibustering almost every recession-related bill for the past year, Republican lawmakers have finally proposed a jobs plan of their own: a bigger, more expensive version of George W. Bush's tax cuts for the rich.The Economic Freedom Act of 2010 -- introduced by Reps. Jim Jordan (R-Ohio) and Jason Chaffetz (R-Utah) -- proposes deep tax cuts favoring the wealthiest in America, a reduction in regulatory oversight and the elimination of a federal tax on the estates of millionaires, which will allow wealthy investors to escape taxes entirely on a significant portion of their income. Republicans say the bill will create jobs where President Obama's policies have failed to do so.  "A growing private sector economy is the only 'stimulus program' that will create the jobs needed to restore America's economic strength."

More on UBS and Secret Banking Jurisdictions: Birkenfeld Tells All to Global Post - Bradley Birkenfeld, the UBS banker who opened the floodgates of information on the bank's nefarious practices of aiding and abetting tax evasion, is currently in prison. But he has also done a tell-all interview with the Global Post, a series that began on August 5. See Michael Bronner, Telling Swiss Secrets: A Banker's Betrayal, GlobalPost, Aug. 5, 2010. Links to additional articles in the series are provided at the end of each post and here:
Part 2: 222 billionaires
Part 3: The golden goose
Part 4: A triple-double cross
Part 5: A reversal of fortune

Economic Recovery for the Few - During 2009, as tens of millions lost their jobs, the number of High Net Worth Individuals rose by 17.1 per cent and their combined wealth rose by 18.9 per cent. They had a genuine "recovery." HNWIs regained in wealth most of what they lost in 2008. No wonder they celebrate "recovery" while the rest of the world wonders (or rages at) what they are talking about. In the US, for example, the HNWI population grew by 16.6 per cent in 2009 while the US GDP fell by 2.4 per cent.Capitalism is the name of the global economic system that delivers the outcomes summarized in these numbers.  Capitalism produces "recovery" for those who need it least while offering austerity for nearly everyone else.  Today's business and political leaders tell the people of all advanced industrial countries that there is no alternative to years of government budget austerity (raised taxes and/or reduced government employment and services).

The rich are different from you and me - They are more selfish (The Economist) LIFE at the bottom is nasty, brutish and short. For this reason, heartless folk might assume that people in the lower social classes will be more self-interested and less inclined to consider the welfare of others than upper-class individuals, who can afford a certain noblesse oblige. A recent study, however, challenges this idea. Experiments by Paul Piff and his colleagues at the University of California, Berkeley, reported this week in the Journal of Personality and Social Psychology, suggest precisely the opposite. It is the poor, not the rich, who are inclined to charity.

Go Find Me the Peak of the Laffer Curve - My New Year's Plea from 2007 has been getting some attention in the recent discussions over whether cutting tax rates will raise revenue.  In this post, I'd like to follow up on the last line of that plea, which I have not seen recently quoted:If I'm wrong, show me the evidence ... and tell me why the tax cuts were so small given their effects on revenues.Restated, if these tax cuts raised revenue, then why not keep cutting them until the point at which revenues actually begin to fall?

 Tax Cuts Leave Nothing Behind -- Infrastructure Investment Leaves Behind Infrastructure - If we spend money on tax cuts, the next year we only have debt and pay interest on the debt. For a clear example, just look at the damage the Bush tax cuts have done to the country. They left behind worse than nothing -- we had years of slow growth, and the cuts caused a massive deficit and debt that plagues us now. And, because we didn't have the money to use to maintain the infrastructure we are that much further behind on that task now. If we spend money on improving the country's infrastructure, we get all the job creation that comes from that work, and the next year you have that infrastructure there to help drive the economy. For a clear example, how did all that government spending on the Interstate Highway System work out for the economy? For a clear example, look at China's investment in high-speed rail. They can now move people and goods so much more efficiently and faster between their cities, and they developed an industry that is now selling its expertise to the rest of the world.

The Case For More Infrastructure Spending -In the current uncertain environment with plenty of unused capacity, private investment appears unlikely to grow fast enough to sustain a robust jobs recovery. If that’s the case, the logical solution is accelerated investment in productivity-enhancing infrastructure, which has seen underinvestment for years.But there are a few major obstacles to more infrastructure spending. The biggest is obviously money. Congress is already having trouble figuring out how to fund current levels of transportation spending.The Democrats’ idea for new funding is an accounting trick — transferring $20 billion in past foregone interest to the highway trust fund.Finding a way to pay for a substantial increase in infrastructure spending would require bipartisan agreement on how to offset the cost (through future cuts in spending or tax increases beyond those already scheduled to take effect). No such proposals appear to be circulating on Capitol Hill.

The Road to Serfdom Is Gravel, by Maxine Udall - Richard Green sends readers to this article about how China has been expanding its network of paved roads, despite a dearth of cars and car owners at present. They are devoid of traffic now, but ready for the day when growth in China's economy produces millions of car owners. Now the Wall Street Journal tells us that the economic downturn is causing some small towns in more rural sections of the US to tear up asphalt roads and return them to gravel. Are the number and condition of our roads leading indicators of a lost sense of common cause, lost shared purpose, crumbling political stability? Do we stop investing in and maintaining public goods because we feel no common cause with the other people likely to benefit from them? How do empire's crumble? Surely from within, at least at first. The internal weakening of shared purpose and sympathy, bolstered by mindlessly shrinking tax revenues that  otherwise would have maintained the infrastructure of a complex, advanced capitalist and commercial society, must make it easier for the barbarians to storm the maintenance-deferred, crumbling gate.

Economists Call for Clarity on Government Policy - A panel of economists Tuesday urged U.S. lawmakers to resolve outstanding uncertainty over tax and other policies to help the sluggish recovery, a difficult assignment for Congress as it heads into a contentious campaign season.“Market participants are used to thinking that political gridlock is good, that it prevents politicians from interfering with the marketplace,” said Richard Berner, co-head of global economics and chief U.S. economist at Morgan Stanley during a hearing before the Senate Budget Committee.But “gridlock today is more likely to be bad for markets” because the county’s long-term economic challenges demand politicians to act, he said.In particular, the economists said that lawmakers need to formulate a plan for tackling ballooning federal budget deficits, including the looming impact of Medicare and Social Security. Without a clear plan, businesses and consumers will hold back on spending, fearing massive tax hikes, they said. MIT economist Simon Johnson warned that it is “dangerous” to assume that the U.S. government will continue to enjoy cheap borrowing from foreign governments as it currently does, and that interest rates could increase soon as other countries’ economies improve.

Geithner tells bankers not to fear new financial regulations…Timothy F. Geithner, traveling salesman, swept through Manhattan on Monday making a pitch to skeptical bankers, business leaders and even the mayor.  His central message: Far-reaching financial regulations signed into law by President Obama last month aren't something to fear. Rather, they are the foundation of a stronger economy for the months and years ahead. "Our system allowed too much freedom for predation, abuse and excess risk," the Treasury secretary told a crowd of 150 business executives, lobbyists and others during a speech at New York University's Stern School of Business.  Even as Geithner spoke to the mostly friendly crowd in Greenwich Village, scores of people in nearby skyscrapers were looking for ways to maintain large profits despite the new rules. Two miles south in the financial district, big banks have been examining everything from how to retool their massive derivatives operations to how to deal with new restrictions on proprietary trading, an activity in which banks trade on their own accounts.

The Treasury's Worrisome Position - Simon Johnson - Senators Carl Levin of Michigan and Jeff Merkley of Oregon, after considerable effort, were able to place strong language in the Dodd-Frank financial-sector legislation – enacting a version of the “Volcker Rule” that would require big banks to become significantly less risky. While this idea originated with Paul Volcker, the former Fed chairman and senior adviser to President Obama, and was announced with great fanfare by the president himself in January, it was clear – from the beginning and throughout the detailed negotiations this spring – that the Treasury Department was less than fully enthusiastic about this approach. Treasury’s position – ranging from lukewarm support to outright opposition at times – created an uphill task for Senators Levin and Merkley. And now that they have reached the top of the Dodd-Frank hill, what do they see? Another even steeper climb awaits, because the Treasury Department is digging in publicly against the drafting of detailed regulatory rules that would actually make Volcker-Levin-Merkley effective.

Goldman Hops Over the Volcker Fence – So much for the Volcker Rule.  One of the more aggressive new requirements, the so-called Volcker Rule, would limit proprietary trading to 3% of Tier 1 capital. But the rule may be easy to sidestep. Goldman Sachs is leading the way around the regulation, by simply reclassifying many of its prop traders as asset managers. One major initial criticism of the Volcker rule was that it's hard to distinguish prop trading from market making. Goldman is using this blurry line to its advantage. Charlie Gasparino from Fox Business reports: But by having the traders work in asset management, where they will take market positions while dealing with clients, Goldman believes it can meet the rule's mandates, avoid large-scale layoffs and preserve some of the same risk taking that has earned it enormous profits, people close to the firm say.

Overcoming the Volcker rule, with ETFs - We heard last week how Goldman Sachs was taking its prop trading over to the asset management side of its business, in a bid to outmanoeuvre US financial reform’s use of the Volcker rule to clamp down on in-house risk-taking. Compone accomoda supera – improvise, adapt and overcome, so to speak. But is it actually such a novel move? Evidence suggests risk-taking has already been creeping over to asset management in banks — thanks in part to the growing popularity of ‘delta one‘ desks as well as the merging of banks’ prime brokerage and custodian roles. Paul Amery over at Index Universe also makes the hugely valid point that a bank with an existing exchange traded fund business is likely to fair much better under Volckerisation than one that doesn’t.

Wall Street's Big Win - Obama's speech introducing the massive law brimmed with celebratory finality. He threw around lofty phrases like "never again" and "no more." He proclaimed the end of unfair credit-card-rate hikes and issued a fatwa on abusive mortgage practices and the shady loans that helped fuel the debt bubble. The message was clear: The sheriff was padlocking the Wall Street casino, and the government was taking decisive steps to unfuck our hopelessly broken economy. But is the nightmare really over, or is this just another Inception-style trick ending? It's hard to figure, given all the absurd rhetoric emanating from the leadership of both parties. Obama and the Democrats boasted that the bill is the "toughest financial reform since the ones we created in the aftermath of the Great Depression" – a claim that would maybe be more impressive if Congress had passed any financial reforms since the Great Depression, or at least any that didn't specifically involve radically undoing the Depression-era laws.

The Tilted Playing Field - It’s been widely noted that financial reform is now entering a new phase as the action moves from Congress to the regulatory agencies that will write the hundreds of rules necessary to implement the reforms. During the congressional fight, the financial sector had a huge advantage in money and lobbyists, but we had one advantage: the fact that there was (from time to time) a lot of media coverage, and Congressmen care at least a little about public opinion. In the rule-writing phase, the banks still have a huge advantage in money, lobbyists, and lawyers–and are hiring as many ex-regulators as they can to press their case. As our friend Jennifer Taub writes at The Pareto Commons: What lies ahead, over the next year and beyond, will require far larger armies of lawyers, economists, finance experts and just plain able bodies and minds to monitor and influence the rulemaking process. Rumor has it that one bank alone plans to set up 100 teams of employees, tasked with particular rule makings. And that is just one bank.Unfortunately, however, the pressure of the public spotlight is largely off, tilting the battlefield in favor of industry.

There's a Derivative in Your Cereal - Over-the-counter (OTC) derivatives are perhaps the most feared and despised of all financial creations, even more than sub-prime mortgages. After all, Warren Buffet famously referred to them as "financial weapons of mass destruction." Though few know it, Americans' everyday lives are touched by the hidden hand of OTC derivatives. They can affect the grains in our breakfast cereal, the steel in our SUVs, the rates on our loans to the currency with which we pay for it all. Many of the inputs used to produce the goods and services we depend on are hedged with OTC derivatives, so to reduce the risk of cost increases. With the enactment of the Dodd-Frank financial regulation bill signed by President Obama last week, the cost of such hedging is likely to increase and the impact will be widespread.

Commodity ETFs: Toxic, deadly, evil - And just in case you didn't get the warning, B/W repeats it twice more, on the cover: "Do Not Buy Commodity ETFs ... Do Not Buy Commodity ETFs." Then, as if afraid you still won't get it, they scream even louder: Commodity ETFs are "America's worst investment." Worst? Add toxic, deadly, evil. Commodity ETFs are rapidly becoming a malicious virus breeding chaos in the global markets pricing all commodities: food, farm lands, metals, oil, natural gas, livestock, water and other natural resources are the assets under commodity derivatives and their ETFs, pricing that's now controlled more by Wall Street speculators than the weather, adding wild swings in volatility and trillions in global derivative risks. And once again the usual suspects, the Goldman Conspiracy of Wall Street Banksters, are in the lead.

Elizabeth Warren: My Mission Is to Restore America's Great Middle Class - My grandmother, when she was a teenager, drove a wagon in the land rush that settled Oklahoma. Her mother was dead, and her little brothers and sisters were in the back of the wagon. Her father had ridden ahead and tried to find a piece of land that might be somewhere near water--a hard task in Oklahoma. She grew up in that part of the world, she met my grandfather, they got married, they started building one-room schoolhouses and little modest homes across the prairie. They had kids, they stretched, they scratched, they worked hard, they made a little money, and they put it aside, put it in the bank. It got completely wiped out in 1907 in an economic panic. But like many American families, they came back. They started scratching and stretching again, and having more babies--and then the Depression came. And they got wiped out one more time.

Barr, Bair Tapped As Anti-Warren Forces Make Their Move - The people who don’t want Elizabeth Warren running the Consumer Financial Protection Bureau have consistently sought other options. One of the perennial alternatives has been Treasury Department official Michael Barr, and he gets the profile treatment at the Wall Street Journal, with an emphasis on his preference for tough rules on those who offer financial products. Basically, he’s a god among men, he’d stick it to the banks, etc. And Barr did champion the consumer protection agency inside the negotiations over the financial reform bill. However, on two key points, his advocacy was not enough to influence the final rules: he did not get a “plain vanilla” provision written into the CFPB law, and he could not stop the exemption from CFPB rules for auto dealers. The White House pulled out all the stops on the latter, and according to this account Barr proudly supports the former, but neither happened. So it’s not just intent but competency and follow-through we have to assess. And Barr didn’t get the job done in those cases (not to put all the blame at his feet, of course).

Elizabeth Warren and The Complexity Machine: Its That Straight Forward - Mike Konczal defends E. Warren against my criticisms. Like Mike, I spent a few years in the financial industry before descending into wonkery. Indeed, I was a consultant for a major bank on a project that was at the time called LoanSolutions. At the highest levels, however, it was sold as The Intuitive Mortgage.  The idea was that a consumer should be able to sit down with a loan officer, answer a few simple questions and find the mortgage that was right for her, all with 80% less paperwork, we would say.  One of the challenges was designing such a product in the face of a dizzying array of government regulations. In short, a major firm wanted to provide exactly the type of products Mike is championing but found regulations a barrier to doing so. This is a problem that we can all agree needs to be solved. However, when Warren engages in narratives like the one presented here It doesn’t help bring everyone to the table.

Knives Out for Elizabeth Warren -Yves Smith - It should come as no surprise that a financial services industry powerful enough to water down meaningful reform in the US and internationally would probably have its way in blocking the nomination of Elizabeth Warren as head of the new consumer finance protection agency.  Let’s face it: the plan to deep six the consumer watchdog was set when it was changed from being an independent body as originally proposed and instead moved into the Fed, the most bank friendly and arguably the least industry expert of the US bank regulators. It might have had a hope of being effective had it been housed at the FDIC, which does not like cleaning up bank messes and therefore is less prone to swallow industry BS than the other Federal bank In case you missed it last week, Chris Dodd, Chairman of the Senate Banking Committee, washed his hands as far as Warren’s candidacy was concerned. Note Dodd employs the time-tested formula of bigots out to cover their footprints: “Personally, I’m all in favor of hiring [fill in minority in question, such as blacks, woman, transexuals, former drug addicts, one-eyed midgets]. But I’m not sure [fill in preferred scapegoat, such as "our customers" or "our organization"] is ready to accept them.”

Obama should give Warren a recess appointment -Many of those who originated the toxic loans now poisoning the financial world were outright fraudsters, and many of those who bundled and purveyed those toxic assets in what amounted to a giant Ponzi scheme were no better than fences of stolen goods. Credit card companies for years have buried surprising fees, penalties, and interest rate increases in print so fine and terms so obscure that the borrowers most likely to be caught by them could not possibly understand them. That’s not capitalism; that’s fraud. To be the scourge of theft and fraud is to be the best friend of well-functioning markets.The new legislation promises steps toward restoring faith in the honesty of the system of markets and credit. Warren’s critics call her an ideologue and a zealot, as if she were being considered for a position on a federal court. But this is an agency with a mission, and the legislation will be successful only if those writing the rules and enforcing them believe in its mission and are zealous in its pursuit.

More on Elizabeth Warren - Here my key take away: Is there anyone who disputes that Elizabeth Warren has signaled that she will be a crusader on behalf of consumers; that she views consumers as having gotten a raw deal from the financial system and that she intends to do what she can to change that? I understand that there are those on the left who have no problem with this. What bothers me is that I see relatively little open opposition from the free-market and rule-of-law center. Now perhaps I missing something but it looks to my eyes like Elizabeth Warren is set to assemble an agency with the explicit mission of fighting Wall Street on behalf of consumers. Said another way she is putting together an agency with the express mission of favoring one set of citizens over another.

Bair Said to Rule Out Leading Consumer Agency After Dodd’s Push (Bloomberg) -- Federal Deposit Insurance Corp. Chairman Sheila Bair has taken herself out of the running to lead the new U.S. consumer-protection agency after her name was put forward by Senate Banking Committee Chairman Christopher Dodd, a person with direct knowledge of the matter said.President Barack Obama probably will choose Harvard law professor Elizabeth Warren or Assistant Treasury Secretary Michael Barr to run the Bureau of Consumer Financial Protection, according to a person familiar with the matter who spoke on condition of anonymity because the talks are private. The decision is unlikely to come before Congress goes on recess next week, according to another person familiar with the matter.

Geithner Acting Director of Consumer Bureau During Transition -- Treasury Secretary Timothy F. Geithner is acting director of the Consumer Financial Protection Bureau, the Treasury said in a statement today. Geithner met with heads of agencies with consumer protection duties that will be consolidated into the new agency, which was set up under the financial regulatory overhaul signed into law by President Barack Obama on July 21. Federal Reserve Chairman Ben S. Bernanke and Federal Deposit Insurance Corp. Chairman Sheila Bair were among the officials who met to discuss the transition period, the Treasury said.

The Automatic Earth: America’s Fitful Reverie As new US credit card laws are introduced that should limit the ways in and levels at which consumers are fleeced, card companies simply raise those fees that do not fall under such laws. What, nobody in Washington thought of that when the legislation was written? Right! The system is broken, at least from the point of view of the vast majority of the people. The big boys and girls are fine, they can just grab another few trillion from the public trough whenever they feel like doing so. The country's for sale to the highest bidder. And they're buying. And with your money, not theirs. They're buying politicians and they're buying legislation that's favorable to them.

A Consumer's Guide to the Latest Credit-Card Traps - The Credit Card Accountability Responsibility and Disclosure Act of 2009, known as the Card Act, was intended to reshape the contours of consumer finance. Among other things, it forces card issuers to give customers more notice about interest-rate increases and restricts certain controversial billing practices such as inactivity fees. Yet some of the biggest card issuers in the U.S., including Citigroup Inc., J.P. Morgan Chase & Co. and Discover Financial Services, are already rolling out a slew of fees designed to recapture some of their lost income, in part by skirting the new rules. Some banks may even be violating the law outright, say consumer advocates. "Card companies are figuring out how to replace old fees with new ones" "It's a race between regulators writing ever-more-complex laws and credit-card companies setting up ever-more-complex fees."

Chasing Card Companies  -The New York Times did a nice story a few days ago on the compliance issues swirling around the Credit CARD Act. It details the kinds of new fees that consumers are seeing and explores the legality of these practices. The article provides some ideas of things that the Bureau of Consumer Financial Protection might explore in its early days. Several of these practices seem legal under the new law but perhaps would fare less well under an unfair, deceptive, or abusive practices analysis. If nothing else, the Bureau would presumably be a one-stop repository for collecting and tracking the changing practices of card companies, a task now that the federal government largely delegates to news reporters!

How the poor subsidise the rich - I recently spoke to a high profile bank executive about the new law which forces costumers to opt into overdraft protection (where if you want to make a purchase that costs more than in your account balance you’re charged a fee). The bank executive claimed banks lose money on free-checking accounts. They need fees to cover their costs. He has a point. Banks are businesses; they do not exist to provide banking services for charity. But what’s particularly galling to me about overdraft fees is that they disproportionately are levied on the poor. The billionaire is not typically the one who pays these fees. About 80% of bank fees are paid by 20% of bank customers, and according to the FDIC low income (people who earn less than $30,000) earners are nearly twice as likely to have paid an overdraft fee. Even worse, it is not uncommon for poor people to rack up many fees and owe the bank money they can not pay. Eventually their account is closed by the bank. Once your account is closed it’s extremely difficult to open an account at another bank.

More Lehman Documents - Since people seem to like the bits of information from the Lehman Examiner's Report, I'll keep going. I've got plenty more where that came from! This is probably my favorite document from the Examiner's Report — it's a compilation of the daily reports from the NY Fed's on-site examiners at Lehman. It covers August 15, 2008 through September 11, 2008. It's as close as it gets to an official blow-by-blow account of Lehman's downfall, and it contains all the relevant information — daily updates on Lehman's repo funding, commercial paper, liquidity pool, and CDS spreads, as well as market color from Lehman's treasury and from other primary dealers. This is what Tim Geithner and (I have to imagine) Hank Paulson were seeing every day.

Two economists say in new paper that TARP worked -TARP is horribly unpopular. The stimulus is pretty unpopular. But does that mean they were bad policies? Not according to a new paper by Mark Zandi, Moody's chief economist and a former adviser to both the McCain and Obama campaigns, and Alan Blinder, a Princeton economist who has served as vice chairman of the Federal Reserve's Board of Governors. Zandi and Blinder offer the first comprehensive estimate of our full response to the crisis: Absent the financial rescue and the stimulus, "GDP in 2010 would be about 6 ½ percent lower, payroll employment would be less by some 8 ½ million jobs, and the nation would now be experiencing deflation." I spoke to both men last week about how they got to their estimates, why the economy is so bad if the response was so good, and where we go from here. What follows are edited excerpts from the two interviews.

Jobs in the cards? -All things considered, American big business is doing just fine, thank you. Profits, productivity and exports are up. New hires, rehires and wage increases, as I have written, are nowhere to be seen. They're no longer part of the U.S. corporate business plan, in which higher profits are premised on having fewer employees. Sell abroad, cut costs at home -- the global marketplace that American business has created is paying off big-time. Not so for American small business, which inhabits those less rarefied realms of the economy in which depressed domestic demand and bottled-up credit remain a mortal threat. The great private-sector trickle-down machine has largely stopped working for small businesses. A May report from the Congressional Oversight Panel on the TARP (chaired by consumer advocate Elizabeth Warren) found that bank lending to small businesses has plummeted, particularly among the big banks that taxpayers helped bail out.

BIS: it’s the implicit taxpayer guarantee that drives banks to get bigger – Banks grow into global giants to cash in on implicit taxpayer guarantees rather than capture any economies of scale, the world's financial regulator says in a report today.  The Bank for International Settlements claims in Long-term Issues in International Banking: "There is scant evidence of scale economies in international banking... The data do not indicate that large banks have successfully exploited economies via international expansion. Likewise, there is little evidence international expansion could have contributed to economies across different business lines."  The report cites a series of studies that claim economies of scale only apply for banks with assets of up to $25bn – a fraction of the trillion dollar balance sheets of the global lenders. At larger levels "diseconomoies set in" as banks become too unwieldy to manage. The report argues that "incentives might have been distorted". "Certain banks may have expanded, either domestically or internationally, with the aim of attaining a too-big-to-fail status... This allows the bank to finance its business at lower cost than smaller competitors, which is beneficial to individual banks but impairs systemic stability."

The Committee To Defraud The World - To say now that 'No one knew' or 'I was mistaken' or 'I was just doing as I was told' is another in a series of lies and deceptions that have supported one of the greatest frauds in the history of the world. But this is not history. This episode of fraud is still playing itself out now. Glass-Steagall fell after a decade long campaign involving hundreds of millions in lobbyist money spread lavishly around the Congress, led by Sanford Weil of Citibank, supported by key banking and political figures in the Congress and at the Fed. It involved Senator Phil Gramm, who helped to put a stake in the heart of the financial regulatory process under the Reagan free markets banner, and who recently said the problem is that the middle class were a bunch of whiners.  Like the Mortgage Backed Securities scandal it involved surprisingly few principal players, like Alan Greenspan and Robert Rubin, who used their power and influence to silence and ostracize critics, and promote a climate of reckless disregard for the public trust under the meme of 'efficient markets' and deregulation. This might have been an innocent policy error if it did not involve premeditated theft on a massive scale, followed by cover ups, denials, and a control fraud that exists even today.

Taleb Calls Out Alan Blinder for Questionable Ethics - Yves Smith - Nassim Nicholas Taleb has an intriguing piece at Huffington Post, “The Regulator Franchise, or the Alan Blinder Problem,” with a juicy anecdote at its core. It highlights a critical issue: how we’ve come to accept what other eras would view as corruption as business as usual. Note that Taleb does a particularly artful job of writing in this piece; he highlights the ethics issue with finesse (as well as pointing out his own foibles), so I suggest you read it in full. Here’s the trigger: last year at Davos, Blinder interrupts Taleb’s conversation with a third party to pitch a savings product, one that allows high net worth individuals to arb FDIC insurance regs by allowing them to put funds in a single account, which would then be split up among banks so that the investor would circumvent regulations that limit FDIC insurance (then $100,000 per account).  Now it’s already a bit unseemly for a former Fed vice chairman to be peddling investment products personally, particularly since, per Taleb: ….it would allow the super-rich to scam taxpayers by getting free government sponsored insurance. Yes, scam taxpayers. Legally. With the help of former civil servants who have an insider edge.

The Road to Serfdom Is Lawlessness: Inside Goldman Sachs --The investment banks and brokers are an adolescent culture, high on macho and low on expansiveness in thinking to put it politely. I do not have a problem with that, per se. I enjoyed hanging with most of these guys, their odd sense of irreverent cynicism and gallows humour, and the grab-asstic frat life style. It is fun, if you do not take it too seriously.  The difficulty is that over the past ten years the financial sector, including the once staid commercial banks, has been absolutely overwhelmed by the hedge fund and investment banking mentality, and that power in turn has been influencing serious policy discussions in Washington to the detriment of the nation, because money is power. Most of it had to do with deregulation.

Goldman Details Its Valuations with AIG - Two years after collateral demands from Goldman Sachs Group Inc. helped spark a cash crunch at American International Group Inc. that led to the insurance giant's near collapse, a mystery remains: How did Goldman come up with the mortgage-securities prices it used to extract cash from AIG? Last week, Goldman submitted documents detailing how it established values in 2007 and 2008 for mortgage securities insured by AIG to the Financial Crisis Inquiry Commission. The Wall Street firm is now trying to convince its critics that it used accurate prices amid a congressional inquiry into the causes of the financial crisis.

Citi's SEC Fine - You Should be Perturbed By This - Something has been bugging me today about Citi's recent fine and settlement with the SEC.   What exactly did Citi do?   "According to the S.E.C. complaint, the bank made a series of disclosures to investors during the summer of 2007 suggesting it had roughly $13 billion of exposure to subprime mortgage-related assets that were losing value. But Citigroup excluded roughly $43 billion of exposure to similar assets that bank officials deemed ultrasafe. Instead, they turned out to be among the most problematic investments on Citigroup’s books.  For those out there in the cheap seats, Citi erroneously thought that $43B of subprime related super senior CDO tranches were "money good," as they say, and thus didn't disclose the details of the exposure to shareholders,  and ended up losing more than THIRTY BILLION dollars on the positions. Citi was guilty of ignorance of risk, which led them to mislead their shareholders.   Said differently, stupidity isn't a crime.

67% of Political Class Say U.S. Heading in Right Direction, 84% of Mainstream Disagrees - Recent polling has shown huge gaps between the Political Class and Mainstream Americans on issues ranging from immigration to health care to the virtues of free markets.  The gap is just as big when it comes to the traditional right direction/wrong track polling question. A Rasmussen Reports national telephone survey shows that 67% of Political Class voters believe the United States is generally heading in the right direction. However, things look a lot different to Mainstream Americans. Among these voters, 84% say the country has gotten off on the wrong track. Twenty-four percent (24%) of Mainstream voters consider fiscal policy issues such as taxes and government spending to be the most important issue facing the nation today. Just two percent (2%) of Political Class voters agree.  With a gap that wide, it’s not surprising that 68% of voters believe the Political Class doesn’t care what most Americans think.  Fifty-nine percent (59%) are embarrassed by the behavior of the Political Class

Doing the Math on Obama's Detroit Bailout - President Obama served up red meat for his hard-core supporters in Detroit yesterday, proclaiming that the government’s bailout of General Motors and Chrysler to be a success. Had he not intervened and invested in the two companies, Obama said, they would have fallen into liquidation and 1.1 million jobs would have evaporated. In the past year, the auto industry has regained 55,000 of the 334,000 jobs lost, he went on.  His comments were aimed clearly at the critics on the other side of the political aisle who opposed the bailout 18 months ago and who still criticize government ownership of GM and Chrysler to this day. So far, it is tough to argue that the bailout hasn’t worked. GM is in the black, having reported an $865 million profit in the first quarter with black ink looking likely for the rest of the year. GM’s results are strong enough that the company is preparing for an initial public offering that should start selling stock in November. Chrysler is at least making an operating profit, which puts the company in much better shape than most analysts thought it would be a year ago. With much lower costs, both companies should be able to make money going forward.

Growth of Problem Banks (Unofficial) With the number of institutions on the unofficial problem bank list now over 800, here is a review of the growth of the unofficial list ...We started posting the Unofficial Problem Bank list in early August 2009 (credit: surferdude808). The FDIC's official problem bank list is comprised of banks with a CAMELS rating of 4 or 5, and the list is not made public (just the number of banks and assets every quarter). Note: Bank CAMELS ratings are not made public.CAMELS is the FDIC rating system, and stands for Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk. The scale is from 1 to 5, with 1 being the strongest.As a substitute for the CAMELS ratings, surferdude808 is using publicly announced formal enforcement actions, and also media reports and company announcements that suggest to us an enforcement action is likely, to compile a list of possible problem banks in the public interest.This graph shows the number of banks on the unofficial list. The number of institutions has more than doubled since early August 2009 - even with all the bank failures (failures are removed from the list). The number of assets is up 50 percent.

Corporate profitability: Profits, but no jobs | The Economist - AMERICANS used to love to hear tales of success in business. One of the many oddities of the current joyless economic recovery is that this traditional enthusiasm is strikingly lacking. Corporate America has bounced back impressively. The quarterly results season that is now nearly over has revealed that profits are back within a whisker of the all-time highs achieved before the downturn in late 2008. By some calculations, the rate of recovery of profits from their trough is the strongest since the end of the Great Depression.  Certainly not politicians, who complain that firms are “hoarding” cash and creating hardly any new jobs. As Robert Reich, an economist at Berkeley and former labour secretary under Bill Clinton, puts it: “Bottom line: higher corporate profits no longer lead to higher employment. We’re witnessing a great decoupling of company profits from jobs.”

The Biggest Lie About U.S. Companies - Healthy balance sheets? They owe $7.2 trillion, the most ever. You may have heard recently that U.S. companies have emerged from the financial crisis in robust health, that they've paid down their debts, rebuilt their balance sheets and are sitting on growing piles of cash they are ready to invest in the economy.You could hear this great news pretty much anywhere — maybe from Bloomberg, which this spring hailed the "surprising strength" of corporate balance sheets. Or perhaps in the Washington Post, where Fareed Zakaria reported that top companies "have accumulated an astonishing $1.8 trillion of cash," leaving them in the best shape, by some measures, "in almost half a century."You'd think someone might have noticed something amiss. After all, we were simultaneously being told that companies (a) had more money than they know what to do with; (b) had even more money coming in due to a surge in profits; yet (c) they have been out in the bond market borrowing as fast as they can. Does that sound a little odd to you?

Number of the Week: Cheap Money Isnt Free - 1%: the interest rate on IBM’s most recent three-year bond. This week, IBM set a sort of milestone in the bond market’s recovery from crisis: The iconic computer company borrowed $1.5 billion at the bargain-basement interest rate of only 1%. IBM’s cheap money, though, exemplifies the costly trade-offs involved as the Federal Reserve seeks to nurse the economy back to health. With markets expecting the Fed to keep its target rate somewhere between zero and 1% for at least the next two years, borrowing for short and long periods is extremely cheap. That’s great for big companies and banks, but it’s coming at the expense of savers — a group whom, in the longer term, the U.S. needs to encourage.

The crisis was caused by… nothing? - In attempting to pin down the causes and pre-conditions of the financial crisis, it is important to look at cross-country comparisons. Karl has pointed out that cross-country comparisons do not provide an easy explanation for the housing crisis, and a new paper suggests the same is true for the global financial crisis in general. The authors report:It is natural for economists to generalize from experiences of a few particularly salient countries to make generalizations, though it is often inappropriate.  Our poor regression results are simply telling us that the pre‐conditions for the crisis in the United States (or Iceland, or Latvia, …) often do not describe other countries particularly well.  Credit growth was high before 2008 in Australia, Canada, and South Africa, yet these countries seemed to have weathered the crisis well.  Real housing prices actually fell in Japan, Germany and Portugal, yet these countries were hard hit.  Since it is  difficult to understand the cross-country incidence of the great recession even in retrospect, we are dubious about the potential for comparable “early warning” forecasting model going forward. The paper also includes the following scatter plots which illustrate this lack of obvious relationship between 2008 to 2009 growth and a variety of potential predictors:

Treasury Cuts Backing for Fed Program After Loans Lag Capacity -- The U.S. Treasury Department reduced by 79 percent its support for a Federal Reserve program designed to spur consumer and business lending to reflect the under- capacity use of the plan.The Treasury’s credit protection for the Fed’s Term Asset- Backed Securities Loan Facility, which closed to new loans June 30, will now be $4.3 billion on the $43 billion of loans outstanding, the Fed said in a statement in Washington. That’s down from $20 billion of protection taken from the $700 billion financial-rescue fund for the original $200 billion of authorized loans under the Fed program known as TALF.

The Real Reason Banks Aren’t Lending -As we have argued many times in the past, credit growth follows creditworthiness, which can only be achieved through sustaining job growth and incomes. That means embracing stimulatory fiscal policy, not “credit-enhancing” measures per se, such as quantitative easing, which will not work. QE is based on the erroneous belief that the banks need reserves before they can lend and that this process provides those reserves. But as Professor Scott Fullwiler has pointed out on numerous occasions, that is a major misrepresentation of the way the banking system actually operates:

Q2: Office, Mall and Lodging Investment - This graph shows investment in offices as a percent of GDP. Office investment as a percent of GDP peaked at 0.46% in Q3 2008 and has declined sharply to a new series low as a percent of GDP (data series starts in 1959). Reis reported that the office vacancy rate is at a 17 year high at 17.4% in Q2, up from a revised 17.3% in Q1 and 16.0% in Q2 2009. With the office vacancy rate still rising, office investment will probably decline further - although most of the decline in investment has already happened. The second graph is for investment in malls. Investment in multimerchandise shopping structures (malls) peaked in 2007 and has fallen by over two-thirds Mall investment is also at a series low (as a percent of GDP) and will probably continue to decline through 2010. The third graph is for lodging (hotels). The bubble boom in lodging investment was stunning. Lodging investment peaked at 0.32% of GDP in Q2 2008 and has fallen by over 70% already. And I expect lodging investment to continue to decline through at least 2010. As projects are completed there will be little new investment in these categories for some time.

CoStar: Commercial Real Estate Prices decline sharply in June - From CoStar: CoStar Commercial Repeat-Sales Indices, July 2010 - The commercial real estate market’s pricing has been a tale of two worlds with the largest metro markets attracting significant institutional capital and forcing prices upward over the first two quarters of 2010, while the broader market has continued to soften. This divergence of the two worlds may soon change as we are now witnessing a pause and softening even within the investment or institutional grade primary markets. . From May to June, the overall CCRSI was down 7.78% with the investment grade property declining by 4.83%, reversing previous positive movement.This graph from CoStar shows the indexes for investment grade, general commercial and a composite index. The investment grade index had been increasing - but turned sharply lower in June.

Getting Ugly on the Commercial Real Estate Front - Yves Smith - It wasn’t all that long ago that the media and banking industry commentators would worry about the coming train wreck in commercial real estate. But peculiarly, that topic has more or less receded from view. It appears the public has only so much interest in banking stories, and the frenzied coverage of financial services non-reform plus eurozone sovereign debt woes, which are really eurozone bank woes, took center stage.But as predicted, the decay in the commercial real estate loans continues at an impressive pace. This isn’t quite the disaster in the making that subprime was. CMBS is a smaller market and its defaults, while stunning in relationship to historical norms, are not expected, even in a worse case scenario, to reach the same level. RealPoint’s monthly delinquency report for July  shows how rapidly conditions are deteriorating

FHA's Capital Reserves Fall as Agency Prepares for Higher Claims - The Federal Housing Administration (FHA) has just $3.5 billion in its ‘capital reserve account,’ according to the agency’s quarterly report submitted to Congress this week. That’s lower than the $3.6 billion reserve balance last November when FHA informed officials that its cash cushion had fallen below the lawfully permitted threshold. The decline last quarter, though, is the result of a shuffling of funds. FHA moved $9.8 billion from its capital reserves to its ‘financing account,’ the fund used to cover insurance claim payouts for loan defaults and losses within its portfolio. The transfer bumped this loss reserve account up to $29.6 billion – the largest it’s been in more than two years (perhaps longer, since the historical figures provided in the report to Congress go back only to September 2008).

Caveat Emptor, Continued - A few years ago, the securities markets financed hundreds of billions of dollars in mortgages without any government guarantee. Now, those markets are virtually closed to such financing.  Whether or not they will ever come back is open to question, but Wall Street made clear this week just how intransigent it would be in resisting the kind of changes that might convince investors the waters were safe.  The investment banks that put together mortgage securities told regulators that they should not be required to evaluate the credit quality of the mortgages they package and sell. And then they argued that they had no ability to do that.

N.Y. Fed May Require Banks to Buy Back Faulty Mortgages - The Federal Reserve Bank of New York may seek to require banks to buy back its holdings of faulty mortgages and other assets acquired through the rescues of Bear Stearns Cos. and American International Group Inc., a spokesman said.  “We are involved in multiple efforts related to exercising our rights as investors in non-agency RMBS or CDO securities,” New York Fed spokesman Jack Gutt wrote in an e-mail, referring to residential mortgage-backed securities and collateralized debt obligations.  “These efforts support our primary goal of maximizing the value of these portfolios on behalf of the American taxpayer.” The Federal Reserve, Fannie Mae, Freddie Mac and other mortgage investors are seeking to force buybacks to rid their books of bad assets amid persistent losses from soured housing loans. Debt buyers and insurers, who can rescind their coverage, are combing through loan documents for faulty appraisals, inflated borrower incomes and missing documentation that can trigger contractual agreements to repurchase ineligible assets as insurers seek ways to void coverage or recoup costs.

Foreclosed On—By the U.S. -  The Federal Reserve Bank of New York is facing the prospect of foreclosing on a number of properties in the coming months, from homes to commercial buildings, a result of a souring mortgage portfolio it took over when it helped bail out Bear Stearns in 2008. As it deals with delinquent borrowers, a team of New York Fed officials and outside advisers are trying to avoid having the U.S. government, along with local sheriff's departments, seize commercial properties and homes as it copes with falling real-estate values. In the process, the New York Fed is getting a hard lesson in the challenges of mortgage lending.

Foreclosed On By The Fed - For some homeowners, that wolf at the door is actually the Federal Reserve: James Currell is struggling to prevent his Minnesota home from being foreclosed. But his lender isn’t a bank. It is the U.S. government. The Federal Reserve Bank of New York is facing the prospect of foreclosing on a number of properties in the coming months, from homes to commercial buildings, a result of a souring mortgage portfolio it took over when it helped bail out Bear Stearns in 2008. Wondering what the Fed holds? Here’s a chart of the Bear assets courtesy of the WSJ: If the Fed starts foreclosing, many elements make this situation a hot mess The Fed has obviously been touting the importance of mortgage modifications, working with borrowers, etc… so, foreclosing on homeowners is in some ways an admittance that the programs designed to keep people in their homes are doin it rong - Legislators aren’t going to want anyone in their districts kicked out of their homes by the gov’mint - This was a taxpayer funded bailout. Doesn’t it give you warm fuzzies that despite your tax dollars being put to work, people are still getting kicked out of their homes?

Fed research supports mortgage cram downs - The Cleveland Fed provides new research that supports residential mortgage cram downs: Stripdowns and Bankruptcy: Lessons from Agricultural Bankruptcy Reform . A few excerpts:  [One proposal is] to revise Chapter 13 of the bankruptcy code to allow judges to modify mortgages on primary residences. The type of loan modification under consideration is known as a loan cramdown or loan stripdown because the judge would reduce the balance of the secured claim to the current market value of the house, turning the remaining balance of the mortgage into an unsecured claim (which would receive the same proportionate payout as other unsecured debts included in the bankruptcy petition). And the authors discuss how this worked for farm loans:  The actual negative impact of the farm stripdown legislation was minor. Although the legislation created a special chapter in the Bankruptcy Code for farmers and allowed stripdowns on primary residences, it did not change the cost and availability of farm credit dramatically.

More Debunking of the “Freddie and Fannie Caused the Crisis” Meme -Yves Smith - There are a lot of bad things you can say about Fannie and Freddie: that they were part of the oversubsidization of housing in America, that they’ve had an overlarge side business of funneling cash to friendly politicians, that some of their “innovative” practices, like requiring the use of the electronic mortgage registration system, MERS, have proven to be detrimental (by clouding title and facilitating foreclosure abuses). And it’s pretty easy not to like the use of Fannie and Freddie as pretty much the only game in town now in mortgage-land. But a common charge, “Fannie and Freddie caused the subprime bubble” is plain barmy. As we’ve noted on this blog repeatedly, with the generous help of Tom Adams, and also detail in ECONNED, collateralized debt obligations were a bigger driver of the toxic phase of subprime issuance (third quarter 2005 through 2007) than is commonly realized. And CDOs were created strictly from “private label,” meaning non-Fannie/Freddie mortgage pools.  McClatchy does a nice job of shredding this erroneous line of attack on the GSEs, with simple talking points to use with resistant true believers

Fannie Mae asks for $1.5B in aid after 2Q loss - Fannie Mae is asking for less money from the government, a sign that the cost to taxpayers for bailing out the mortgage giant could be billions lower than once thought. The government-controlled mortgage buyer said Thursday it has now set aside enough money to cover the majority of losses stemming from bad loans made from 2005 through 2008. It requested $1.5 billion in additional taxpayer aid after posting the best quarterly results since the company was put under federal control in September 2008. It was also the smallest quarterly request for assistance since November 2008.

The Fannie Mae-Freddie Mac morass - If I've learned anything in recent weeks, it's that people who make it seem like the answer is obvious or easy to implement are either naive or have an agenda. Government involvement in the housing market is heavy stuff. And we're not just talking about whether folks can get a mortgage at 5% or 5.25%. The very existence of the 30-year fixed-rate mortgage derives from government's presence. Until the 1930s, we all had short-term mortgages that had to be refinanced every few years. That worked out pretty well—at least until property values collapsed and no one could roll over their loan any more. (Sound familiar?) The Roosevelt administration invented  the 30-year fixed rate mortgage, a much more consumer-friendly product, with the creation of the Federal Housing Administration (FHA) in 1934, and increased its reach with the birth of Fannie Mae 1938.

David Oser's take on Fannie and Freddie - The opening paragraph and closing paragraphs of his stimulating piece: Some mistakes are so egregious and yet so uncorrectable that no one is willing to admit them. On Sunday September 7, 2008, US Treasury Secretary, Henry M. Paulson, made just such a mistake. He ordered Fannie Mae and Freddie Mac placed into “conservatorship,” an ambiguous category of quasi-receivership that still defies precise definition. To see why Paulson’ decision was so unwise, we’ll start by deconstructing a financial instrument that most people assume they understand perfectly well: the 30-year home mortgage.... If we were really Big Boys, we’d say, “Sorry. We messed up. We’re going to try to put it back the way it was.” But we aren’t that big and, as someone said to me recently, “Fannie and Freddie have become the third rail of American politics.” Instead, we’re going to let Fannie and Freddie totter along. In the words of Wall Street Journal editorialist Brian M. Carney, Fannie and Freddie are “money-losing zombie financial companies in the bosom of the federal government.”

 Fannie and Freddie’s Foreclosure Barons - It involved something called an "assignment of mortgage," the document that certifies who owns the property and is thus entitled to foreclose on it. Especially these days, the assignment is key evidence in a foreclosure case: With so many loans having been bought, sold, securitized, and traded, establishing who owns the mortgage is hardly a trivial matter. It frequently requires months of sleuthing in order to untangle the web of banks, brokers, and investors, among others. By law, a firm must execute (complete, sign, and notarize) an assignment before attempting to seize somebody's house. A Florida notary's stamp is valid for four years, and its expiration date is visible on the imprint. But here in front of Ice were dozens of assignments notarized with stamps that hadn't even existed until months—in some cases nearly a year—after the foreclosures were filed. Which meant Stern's people were foreclosing first and doing their legal paperwork later. In effect, it also meant they were lying to the court—an act that could get a lawyer disbarred or even prosecuted. "There's no question that it's pervasive," says Tom Ice of the backdated documents—nearly two dozen of which were verified by Mother Jones. "We've found tons of them."

Fannie and Freddie Continue to Rely on Foreclosure Mills Despite Evidence of Fraud - Yves Smith - Mortgage securitizations were very carefully designed to satisfy a number of concerns. One of them was bankruptcy remoteness, that if an originator failed, as Countrywide, New Century, IndyMac and a host of others did, that the creditors in the bankruptcy would not be able to claw mortgages back out of securitizations (assets sold close to the date of a bankruptcy may be deemed to have been conveyed fraudulently, and thus can be seized by the court on behalf of the creditors).To prevent this from occurring, the Pooling and Servicing Agreement (the master document that governs the securitization) would provided for a minimum of two independent legal entities to sit between the originator and the trust that would hold the mortgages being securitized (technically, the note, which is the IOU; the mortgage, which is a lien, follows the note in 45 states). So the prescribed minimum number of steps was A (originator) => B => C => D (trust). Some securitizations (for reasons unrelated to establishing bankruptcy remoteness) would provide for even more steps.

Fannie, Freddie special refinance program extended (Reuters) - An Obama administration program to encourage refinancing of loans on U.S. homes that have fallen in value will be extended by a year, a key housing regulator said on Monday. The Home Affordable Refinance Program, or HARP, a sister program to Obama's loan modification effort, will stay in effect through June 30, 2011, the Federal Housing Finance Agency said in a statement. The program is administered by Fannie Mae FNM.N FNM.P and Freddie Mac FRE.N FRE.P, the two largest providers of U.S. home loan funding.

Chris Hayes, guest hosting the Rachel Maddow Show, covers the failure of HAMP.- Fantastic job and much appreciated thanks to Chris Hayes and the Rachel Maddow Show team for covering the failure of the HAMP program.He opens with MSNBC news clips from 2007 talking about the foreclosure crisis that was coming, and notes how even though the crisis is far worse in 2010 the mainstream media coverage has more or less disappeared. I like his metaphors of the HAMP waterfall of interest adjustments, term modification and principal reduction for underwater people as the equivalent of scuba gear, a snorkel, and actually pulling someone up from being underwater.He is also right that this is at the administration’s feet. There’s no 60th vote with HAMP – the money was appropriated and almost none of it has been spent and the money that has been spent has been in the most bank friendly way possible.

EXTEND AND PRETEND: The Obama Administration's Failed Foreclosure Program - President Barack Obama's signature plan to combat the housing crisis has fallen short of its goals -- rather than significantly and permanently reducing home foreclosures, it is only delaying them. The administration unveiled its Making Home Affordable plan in February 2009. Obama vowed in front of an audience gathered at Dobson High School in Mesa, Ariz., that MHA's signature effort, the Home Affordable Modification Program, would "enable as many as three to four million homeowners to modify the terms of their mortgages to avoid foreclosure." The $75 billion initiative -- $50 billion from the bank bailout, $25 billion from government-owned mortgage giants Fannie Mae and Freddie Mac -- was designed to induce lenders, servicers and investors to modify distressed mortgages through a series of cash incentives. It's not working.

Homes keep falling into foreclosures as programs fail – More than three years into the housing crisis that helped trigger a worldwide recession, the torrid pace of home foreclosures continues to tear at the core of the American dream.  New figures Thursday from Realty-Trac showed that foreclosure activity declined over the first six months of the year in nine of the 10 large metropolitan areas with the highest foreclosure rates. However, most of the 206 metropolitan areas with 200,000-plus residents didn't fare as well. In fact, three out of four posted year-to-year increases in their foreclosure rates. Seventeen of the 20 hardest-hit areas were in Florida and California  In the first half of 2010, more than 1.6 million U.S. properties were hit with foreclosure filings, which include bank repossessions, default notices and auction sale notices. That's up 8 percent from the first six months of 2009 and puts the U.S. on pace to top 3 million filings this year. The numbers reflect the widespread and continued fragility of local housing markets amid what's largely a jobless recovery. They also raise questions about the effectiveness of programs designed to fight foreclosures, such as the Obama administration's Home Affordable Modification Program.

New Push to Prop Up Housing Market via Mass Refis? - Yves Smith - Even though prices showed some improvement in May, there is good reason to think this is a blip in the current trend towards continued declines. Bank analyst Meredith Whitney and economist Robert Shiller, both of whom did a good job of projecting the trajectory of housing prices pre-crisis, call for further declines, Whitney a scary additional 10% by year end. This chart of bank inventory suggests why (hat tip Michael David White): And as Alan Greenspan points out, falling home prices probably means bye bye recovery.The Administration has already thrown a lot of ammo at the housing market, via having the Federal government provide over 96% of housing finance this year (either directly or via guarantees) and through its subsidies to home buyers, first an $8000 first-time home buyer tax credit, then by providing a $6500 tax credit to all home purchasers. Mortgage investors are now concerned that the Treasury will pull a new rabbit out of the hat in its efforts to validate home prices and save banks via widespread refis.

FHA Refinance of Borrowers in Negative Equity Positions - From the FHA: FHA Launches Short Refi Opportunity for Underwater Homeowners In an effort to help responsible homeowners who owe more on their mortgage than the value of their property, the U.S. Department of Housing and Urban Development today provided details on the adjustment to its refinance program which was announced earlier this year that will enable lenders to provide additional refinancing options to homeowners who owe more than their home is worth. Starting September 7, 2010, the Federal Housing Administration (FHA) will offer certain 'underwater' non-FHA borrowers who are current on their existing mortgage and whose lenders agree to write off at least ten percent of the unpaid principal balance of the first mortgage, the opportunity to qualify for a new FHA-insured mortgage.

August surprise? - AUGUST in Washington is a lifeless desert, where journalists are concerned; nothing happens. But the pages still need to be filled, and so any little news item or rumour gets picked up and can take on a life of its own. I don't know whether this is typical August rumour-mill fodder or a real possibility. If it's the latter, it could be huge: Main Street may be about to get its own gigantic bailout. Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth. An estimated 15 million U.S. mortgages – one in five – are underwater with negative equity of some $800 billion. The actual vehicle for the bailout could be the Bush-era Home Affordable Refinance Program, or HARP, a sister program to Obama’s loan modification effort. HARP was just extended through June 30, 2011.

Forget Instarefi: Here Comes Instaloanforgiveness - As if the main rumor of the prior week, that the government was going to automatically push rates on all mortgages down to market rates (which as of today hit a fresh record low of 4.49%) was not enough, today James Pethokoukis reports that the latest iteration in the "let's make Fannie and Freddie broker than ever" rumor mill is that the "Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth." As readers will recall, we highlighted a few days ago that the number of underwater mortgages is at least 14.7 million (and likely far more), and amounts to just about $770 Billion in underwater equity. In other words, if the rumor is true, the US taxpayers are about to subsidze over three quarters of a trillion in underwater equity (and bail out banks on the hook for over $2 trillion in impaired debt).

Don't Bet On It (Mass Forgiveness) - I ain't taking this bet... Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth. An estimated 15 million U.S. mortgages – one in five – are underwater with negative equity of some $800 billion. Uh huh.  Ok, let's do a bit of thought on this. First, 30% of the people in this country own their homes outright - no mortgage at all.  Of the remaining homes, about 30% are underwater. So that's 30% of 70%, or 21% of the total. Now subtract all those who are not paying (maybe half of the underwater loans?) and you get somewhere around 10% - perhaps 15% at best - of the homeowners. The other 85% won't get "helped". Politically, this is suicidal.  It is especially suicidal among older voters (who vote more often!) as they're more likely to have paid-off houses (or houses where they've been paying for a decade or more) than younger people.  This wouldn't help Obama and the Democrats, it would utterly decimate them both come November.  Count on it.

Nonsense Rumor on Fannie and Freddie - Several people have sent me a political blog post on Reuters: An August Surprise from Obama? Main Street may be about to get its own gigantic bailout. Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth. The blog post includes the poorly considered proposal from Morgan Stanley (that Tom Lawler responded to last week), and an excerpt from a July 16th Goldman Sachs research note that suggested "while there are ways in which the GSEs could provide support through policy, the effects on the broader economy would ultimately be fairly modest."  Not exactly foretelling a "gigantic bailout".This nonsense is part of the silly season. Sure, some small changes could be made to Fannie and Freddie, but nothing like this post would suggest. Not. Gonna. Happen.

Federal Officials: No 'August Surprise' Stimulus Package - Obama administration officials knocked down rumors on Thursday about any plan for new programs–dubbed an “August Surprise” –to streamline refinancing or cut mortgage balances for homeowners in a bid to stimulate the economy without asking Congress for money ahead of the midterm elections. Speculation has intensified over the past week as some economists have proposed that the government put cash in more Americans’ pockets by making it easier to refinance. A news report on Thursday suggested that such stimulus might also include a plan to lower mortgage balances for some homeowners. But elements of the so-called surprise programs already exist in far more modest forms and there are no plans expand them, administration officials said.

D.R. Horton conference call comments: No more tax credits! - A few quotes from homebuilder D.R. Horton conference call "Frankly, I don't want the tax credits to be re-enacted or be re-created or extended," CEO Donald Tomnitz said. "We want to get back to a normalized market. It's a lot easier ... designing your business with the current demand as opposed to having any kind of stimuluses or incentives to create abnormal demand."CR Note: As I've noted before, the housing tax credit was a clear and unequivocal failure. Not only did most of the benefit go to people who were going to buy anyway, but the credit didn't reduce the overall supply. The credit just incentivized some people to move - and pulled some sales forward - and to the extent the credit went to new home sales, it was actually counterproductive by increasing the excess supply.On the cancellation rate increase to 28%:  "I was surprised it only increased to 28%. But nevertheless we wanted to give every buyer the opportunity to buy and close on a home. And so if they had a pulse and they were warm, we wrote 'em," Tomnitz said. "And so as a result we did have some cancellations because people couldn't qualify."

Wow, Even The Homebuilders Hate Housing Tax Credits Now - Here's a really fascinating comment from the DR Horton conference call, via Calculated Risk: "Frankly, I don't want the tax credits to be re-enacted or be re-created or extended," CEO Donald Tomnitz said. "We want to get back to a normalized market. It's a lot easier ... designing your business with the current demand as opposed to having any kind of stimuluses or incentives to create abnormal demand."Not only was the tax credit a flop in terms of stimulating real demand, or reducing inventory, but here Tomnitz is giving a succinct, clear message about the damaging effects of such government schemes. They make designing and planning a real sustainable business.It's one thing to make permanent structural changes (such as permanent tax cuts) in order to reduce the costs of doing business. But these temporary swings simply make making a real business impossible.

Fannie Mae: REO Inventory doubles, expected to increase "significantly" - Fannie Mae reported: "a net loss of $1.2 billion in the second quarter of 2010, compared to a net loss of $11.5 billion in the first quarter of the year." and the FHFA requested another $1.5 billion from Treasury. On house prices, Fannie Mae "expects home prices to decline slightly for the balance of 2010 and into 2011 before stabilizing, and that home sales will be basically flat for all of 2010."Fannie Mae reported that their REO inventory more than doubled since Q2 2009, from 62,615 to 129,310 in Q2 2010.REO: Real Estate Owned. See page 11 of the 2010 Second Quarter Credit Supplement. This graph shows the rapid increase in REO.

Fannie Mae: Home Prices To Decline Into Next Year - Home prices will decline into next year, Fannie Mae said Thursday, reversing earlier projections that the housing market would stabilize this year. Former Federal Reserve Chairman Alan Greenspan said Sunday on NBC's "Meet the Press" that a so-called double-dip recession was possible "if home prices go down." Fannie's forecast, disclosed in its latest quarterly report filed with the Securities and Exchange Commission, shows that the government-owned mortgage giant has turned bearish on the housing market. Fannie Mae, the federal mortgage association, along with its sister entity, Freddie Mac, own or guarantee about half of all U.S. mortgages. "We expect that home prices on a national basis will decline slightly in 2010 and into 2011 before stabilizing, and that the peak-to-trough home price decline on a national basis will range between 18 percent and 25 percent," the bailed-out behemoth said in its filing.

For Builders' Profits, Reality Looms - WSJ - Well, reality is here and it is pretty bleak. Several builders have said that traffic from potential buyers fell drastically after the credit's expiration, despite record-low mortgage rates making home ownership more affordable than ever. "If you're looking for a pulse in the U.S. housing market, best of luck," writes Mike Larson, a real-estate and interest-rate analyst with Weiss Research, in a research note. "I can't seem to find one." The number of people who signed contracts to purchase homes in June set a record low, slipping 2.6% from the previous month, according to a report released Tuesday by the National Association of Realtors. The June decline followed a 30% plunge in May. June's new-home results, released last week by the Census Bureau, were even more abysmal, coming in at the second-lowest rate on record. Meanwhile, the usual suspects still dog the industry: Unemployment remains elevated and the foreclosure crisis is flooding the market with bargain-priced inventory. "Buyers continue to lack confidence and motivation," said

The Return of the $1,000 Down Mortgage - “Buy new with $1,000 down,” the advertisement says, the words resting atop a trim green clapboard house offset by a bright blue sky. “The time has come. Stop wasting rent check after rent check and start building equity in your own home. And with only $1,000 down, affordable monthly payments and no private mortgage insurance required, the dream is closer than you think.” It sounds too good to be true. But it is true. This offer does not come from a subprime lender, looking to reel in thousands of unqualified and ill-advised homebuyers, only to slap them with add-ons, fees and variable rates. It is not a teaser or a trick. The advertisement references a program initiated by the National Council of State Housing Agencies and Fannie Mae, the taxpayer-backed, government-sponsored enterprise that buys up mortgages from lending banks.

Housing Insanity - The government has apparently decided, in its infinite wisdom, that what the American economy really needs is more homebuyers with no equity. Now, qualified homebuyers in the three states pioneering Affordable Advantage do not need to put down the 3.5 percent minimum down payment required by the Federal Housing Agency, or much of a down payment at all. They can get 100 percent financing -- a loan as big as the purchase price of the house -- for a 30-year, fixed-rate mortgage -- a vanilla mortgage. The deal includes a program to help homebuyers if they become unemployed, lowered fees and there is no requirement that the homebuyer purchase mortgage insurance

Doomed to repeat history - THERE really is no justifying this: Now, qualified homebuyers in the three states pioneering Affordable Advantage do not need to put down the 3.5 percent minimum down payment required by the Federal Housing Administration, or much of a down payment at all. They can get 100 percent financing — a loan as big as the purchase price of the house — for a 30-year, fixed-rate mortgage — a vanilla mortgage. The deal includes a program to help homebuyers if they become unemployed, lowered fees and there is no requirement that the homebuyer purchase mortgage insurance. Wisconsin started the program first, in March, offering 100 percent loan-to-value mortgages for borrowers with a minimum credit score of 680. “Thus far, Wisconsin’s HFA has offered $52 million in mortgages to 450 buyers. The HFAs are state programmes to encourage homeownership that ran aground during the crisis and which are now being supported by Fannie Mae. There are attempts to defend the return of the 100% loan-to-value loan:

No Such Thing as a Simple Mortgage -I'm pretty good with paperwork, and I understand all the terms being used (not to mention the laws being referenced), and I find it impossible to keep track of it all mentally--especially when you add in the tax returns, the W-2s, the bank statments and sworn certifications that all the money being used was legitimately earned or received as gifts.  In fairness, we're going through our credit union, which is apparently especially bureaucratic, but still--it's very easy to develop a sort of attentional blindness and keep signing things.  I requires heroic effort to read every document.This illustrates, I think, the limits of transparency.  Much of this paperwork is the product of earlier acts designed to help uninformed borrowers deal with the complexity of their loans.  If you read and understand all of it, perhaps you do.  But there's so much of it that it's relatively easier to overlook something.

$770 Billion in negative equity - Mark Zandi and Robert Shiller have released a report detailing the state of the troubled housing sector, and it isn't pretty. Here are the highlights: There is almost $2.4 trillion mortgage debt for homes in negative equity, 19% of all U.S. householdsThe total negative equity is $771 billion, $234 Billion in just CaliforniaThere are 4.1 million homeowners with more than 50% negative equity (they owe 50%+ more than their homes are worth), 672,000 in just California.I was making up the graphs but CR beat me to it and frankly is much better at Excel graphing than I am!Pretty incredible isn't it?

Focus on the negative - IN THE Weekend link exchange I linked to this piece at Calculated Risk, which analyses a bunch of data on negative housing equity presented in Congressional testimony by Mark Zandi. There are several good charts, but I wanted to highlight one in particular: Negative equity of 20% or greater corresponds to a very high rate of default. Negative equity of greater than 50% means default is basically a sure thing. According to the data presented, there are over 9 million homes in the first category and over 4 million in the second. While the pain is clearly concentrated in just a few states (again, pity Nevada), it's interesting to note just how many states have close to a fifth of their borrowers in a 20% or greater negative equity situation.

Pending Home Sales Sink 2.6% In June - The number of buyers who signed contracts to purchase homes dropped in June, as the weak economy and tight lending standards kept consumers away from the housing market.The National Association of Realtors says its seasonally adjusted index of sales agreements for previously occupied homes dipped 2.6 percent to a reading of 75.7. That was the lowest on records dating back to 2001 and down nearly 19 percent from the same month a year earlier. May's reading was revised slightly downward to 77.7. Economists surveyed by Thomson Reuters had expected the index would rise to 78.1.

Pending Home fall to record series low in June - From the NAR: Pending Home Sales Ease in Post-Tax Credit Market The Pending Home Sales Index, a forward-looking indicator, declined 2.6 percent to 75.7 based on contracts signed in June from an upwardly revised level of 77.7 in May [revised from 77.6], and is 18.6 percent below June 2009 when it was 93.0. The data reflects contracts and not closings, which normally occur with a lag time of one or two months.This decline was expected and suggests existing home sales - reported at closing - will fall sharply in July and probably a little further in August. NAR chief economist Lawrence Yun says: “Over the short term, inventory will look high relative to home sales."

Pending and Existing Home Sales - Here is a graph of the NAR's Pending Home Sales index (left axis) and existing home sales (left axis on a seasonally adjusted annual rate basis): A few key points: 1) The Pending Home sales index leads existing home sales by about 45 days. 2) The peaks in the Pending Home sales index are related to the home buyer tax credit. For the 2nd tax credit, the peak for the pending index was much higher than the existing home sales spike. One reason is that short sales sometimes take longer to close - and since the tax credit closing date was extended, these sales will close later. But probably the more important reasons are: a) appraisals are coming in below the agreed upon price, because the asking prices for similar homes have fallen since the end of April, and b) some buyers put in offers on two homes to beat the tax credit deadline, and then decided which house to buy. 3) It is hard to tell from the Pending Home sales index how far existing home sales will fall in July and August. However, with the Pending home sales index below the lows of early 2009, a first guess might be 4.5 million or so

Private Construction Spending declines in June - Overall construction spending increased slightly in June, and private construction spending, both residential and non-residential, decreased in June This graph shows private residential and nonresidential construction spending since 1993. Note: nominal dollars, not inflation adjusted. Residential spending is now 62% below the peak of early 2006.  Private non-residential construction was revised down for both April and May, and spending is now 35% below the peak of late 2008. From the Census Bureau: June 2010 Construction at $836.0 Billion Annual Rate

Fiserv Sees More Pain Ahead in House Prices, Projects 4.9% Decline -Fiserv financial services technology provider, found that national average house prices rose 2% in Q110 from a year before — the first yearly gain since 2006.The overall increase is driven by a few local markets, however, and prices look to continue to fall overall in the year to come.Fiserv projects that single-family house prices are likely to fall another 4.9% over the next 12 months as tight economic circumstances continue. Continued high unemployment and a large number of distressed properties remaining in markets like Florida, Arizona and Nevada are weighing on the housing market.Steep house price declines are anticipated to continue in hardest-hit markets. For example, average prices in Nevada, Arizona and Florida are expected to fall 11.1%, 10.8% and 8.8%, respectively, from Q110 to Q111.

U.S. Housing Market Is in Worse Shape than You Think: Altos Research - Real estate data provider Altos Research is taking a very bearish outlook on the housing market. The California-based company says that ominous shadow inventory of distressed properties hanging over the industry will lock home prices into a downward trajectory for the remainder of this year, with property values starting out 2011 even lower than they were in 2009. Market trends charted by Altos show that inventory levels are indeed moving higher and the influx of shadow inventory is beginning to show in the market. The company’s VP of data analytics, Scott Sambucci, described a noticeable shift in housing supply dynamics in a Webinar earlier this week, in what he called “a sign of market weakness.”

Millions of Mortgage Woes Trump Uptick, Goodman Says: Tom Keene -- The millions of troubled U.S. mortgage loans are overshadowing a reduction in delinquency rates, according to Amherst Securities Group analyst Laurie Goodman. The number of delinquencies, when borrowers miss two mortgage payments for the first time, has decreased each month since March, according to Fannie Mae and Freddie Mac, the mortgage-finance companies under federal conservatorship that own or guarantee more than half of the $11 trillion U.S. home mortgage market. This development provides trading opportunities in mortgage-backed securities, according to the July 30 Amherst Mortgage Insight note. Still, about one in seven homeowners is missing mortgage payments, and about 7 million loans will default, Goodman said today in a radio interview with Tom Keene on “Bloomberg Surveillance.”

Job Losses and Medical Bills Drive PA Foreclosures - A new study by the Pennsylvania of Realtors provides new evidence that job losses and unexpected medical bills, not subprime mortgages, are the two leading causes of foreclosure in that state. Fifty-seven percent said their household had experienced a wage-earner’s job loss in the 12 months prior to their foreclosure, while 47 percent said they had been hit by unexpected medical bills. Thirty-six percent indicated they had other “unexpected bills.” Few Pennsylvanians who lost their homes had subprime mortgages, a leading cause of foreclosure in California, Florida, Nevada and Arizona. Forty-one percent of survey respondents held prime fixed-rate mortgages and 12 percent had prime adjustable-rate loans. Only 14 percent carried a subprime mortgage

Housing limbo: Owners won't pay, banks won't evict - Millions of homeowners are trapped in a bizarre real estate limbo, living in houses but no longer paying for them, waiting and wondering if someone will help them - or throw them out. Some are victims of their own economic circumstances, unable to afford their mortgage and expecting to lose their homes if they can't get a break from their bank. Others are opportunists, choosing not to spend on a house worth less than they owe. Instead, they can live rent-free until their lender makes a move. The limbo phenomenon is a radical departure from previous real estate crashes, when there were far fewer troubled loans and banks moved speedily on those who fell behind on payments. Now many lenders simply can't keep up, and others appear reluctant to flood a weakened market with foreclosed homes, "Nationwide, "roughly 3.5 million loans are in this limbo land, and are not proceeding through very quickly. It could take years,"

The Crisis in Deeply Underwater Mortgages, Unemployment Edition -Make sure to check out the Negative Equity Breakdown by Calculated Risk Blog. I got a hold of the negative equity data by state and decided to plot the percent of owner-occupied households that were more than 50% underwater, so the incredibly deep underwater mortgages, against unemployment. Here is percent of mortgages underwater 50%+ underwater versus June 2010 U3 unemployment by state (click through for larger graph):Now here’s the interesting part. I took the 1 year difference of U3 unemployment by state, so June 2010 minus June 2009, and plotted. A positive number here means unemployment is increasing over the past year: We ran some back-of-the-envelope R modeling here and got an estimate of a homeowner making between 7 to 11 years worth of payments before he or she gets above water: (Thank god FHA is going to penalize so-called strategic defaulters with a 7 year lockout on getting a loan! A real credible threat when they are going to be paying 9 years of worthless debt off by staying in the property at a 150 LTV.)

20m Borrowers Could Be Underwater before 2012: Deutsche Bank –  More than 14m borrowers were underwater as of Q110, owing more on a mortgage than the value of the underlying property. But with a further 10.8% decline in house prices expected relative to Q409 levels, another 6m borrowers are likely fall into negative equity by the end of 2011, according to commentary today by Deutsche Bank.It makes for 20m underwater borrowers total before 2012. The presence of negative equity goes hand-in-hand with an increased likelihood of strategic default, as borrowers sometimes may not be willing to pay when the house has lost substantial amounts of value. Deutsche Bank noted 11 states are considered non-recourse — though not all explicitly forbid deficiency judgments on homes or on purchase loans. Underwater borrowers are more likely to default in non-recourse states. The greater the negative equity, the higher the cumulative default rate.

Affordable Housing in the Recovery Summer - White House - Access to affordable housing is a challenge facing communities across the country. But the Recovery Act is helping our nation meet that challenge head on by providing states with cash to help them finance low-income housing construction at a time when too many projects would otherwise be stalled. These projects are helping revitalize communities through both the creation of new affordable housing developments and the tens of thousands of jobs being created to build them.

No More ‘Slum, Slumming’ for Section 8 Recipients - Today, I wrote about Section 8’s upgrade: Recipients of the government subsidy are renting boom-era showpieces, brimming with McMansion-like features, that once sold for hundreds of thousands of dollars. Now that the housing market has imploded, more of these grandiose homes are trickling down to the rental supply. Section 8 tenants can score swimming pools, backyard barbecue grills and walk-in closets. Some are even requesting features ranging from Jacuzzi tubs to parquet floors. Newly built homes are available.“You can’t go out and buy a property in a bad area and expect to [rent to] a Section 8 tenant anymore,” says Richard Cupelli, president of, where tenants and landlords connect. Section 8 renters, who have some or all of their rent paid by the government, are in such demand, that in the hardest-hit markets, such as Las Vegas, they can negotiate lower rent, demand rental discounts mid-lease and score freebies such as a carpet scrubbing.

Housing boom’s jobs aren’t returning as economy recovers –The housing boom that helped fuel U.S. economic growth and employment from 2000 to 2007 was an unsustainable bubble, and when it burst it not only sent the economy into a tailspin, but also left the U.S. economy struggling to create jobs.  A McClatchy analysis of employment data collected by the Labor Department's Bureau of Labor Statistics has found that the jobs that are being created as the economy recovers often don't replace the ones that were lost when the housing boom collapsed. The analysis suggests, in fact, that the recovery is slow in part because many unemployed workers don't have the skills to fill the jobs that are now available.  "That's an astute observation, and I think it's accurate. How to retool to meet those new skills?" said Martin Regalia, the chief economist of the U.S. Chamber of Commerce. "I think it's a longer-term issue. You are not going to retool someone who was a construction worker to handle motherboards. The skill matchup with the skill need is shifting as the economy recovers."

Consumer Spending and Incomes in U.S. Stagnate - Consumer spending, pending home sales and factory orders were all weaker than projected in June, showing the U.S. recovery lost momentum heading into the second half of the year as employment stagnates.  Household purchases, which account for about 70 percent of the economy, were unchanged from May, according to figures from the Commerce Department issued today in Washington. Contracts to buy existing houses unexpectedly dropped for a second month and factory bookings fell more than twice as much as economists estimated, other reports showed.

Consumers Salting Away More Than Thought - NYTimes - A new government report released on Tuesday showed that consumers saved 6.4 percent of their after-tax income in June, and that this savings rate had shot up as high as 8.2 percent in May 2009. Before the recession, the rate had hovered at 1 to 2 percent for many years.  The questions now are whether America’s newfound love affair with frugality will continue and whether families’ reluctance to spend will hold back economic growth.  In earlier reports, the government had estimated that families had not changed their spending patterns much in the last few years, despite the economic tumult. As a result, many economists had worried that a big shock might be coming soon, when consumers finally faced the music and began the painful process of reducing their debt.

Savings Rate approaching 50 yr average - The June income and spending data just released was included in Friday’s GDP report but the data relative to the estimate will lead to a very, very slight adjustment. Both Income and Spending were flat m/o/m vs expectations of up .2% and .1% respectively. With the headline PCE inflation deflator down .1%, REAL income and spending each rose .1% and the Savings Rate rose to 6.4% from 6.3% in May. The Savings Rate is now approaching the 50 year average of 6.9% and will very likely head above that over the next few years as the pendulum swings in the other direction as it got as low as .8% in Apr ‘05. One hand, higher savings will put a crimp on consumer spending which of course makes up a majority of US GDP but on the other, higher savings is the fuel for investment which helps to finance businesses everywhere that are getting crowded out in their borrowing by the enormous needs of the US gov’t and some European ones

US economic stress heads back up –After easing for four months, the nation's economic stress worsened in June because more bankruptcies in the West and foreclosures outside the Sun Belt outweighed lower unemployment, according to The Associated Press' monthly analysis of conditions around the country.The setback halted a drop in month-to-month stress readings that had begun in February. In May, economic stress had declined from the previous month in 33 states. And in April, stress fell in every state but two.But in June, bankruptcy rates rose in Utah, California, Colorado and Idaho. Higher foreclosures spread to the Midwest, particularly Illinois. This occurred even as foreclosures eased in states that have suffered most from the housing bust, such as Arizona, California, Florida and Nevada.More than two-thirds of the nation's 3,141 counties, and 37 of 50 states, endured more hardship in June than in May, the AP's Economic Stress Index shows.

U.S. Consumer Spending, Incomes Unexpectedly Stagnate (Bloomberg) -- Consumer spending and personal incomes in the U.S. unexpectedly stagnated in June, showing a lack of jobs is hurting the biggest part of the economy.The little changed reading on purchases followed a 0.1 percent gain the prior month that was smaller than previously estimated, Commerce Department figures showed today in Washington. Incomes didn’t increase for the first time since September and the savings rate rose to a one-year high. Demand may take time to improve as the unemployment rate hovers near a 26-year high, shaking confidence in the economic recovery.

Personal Income, Spending flat in June - From the BEA: Personal Income and Outlays, June 2010 - Personal income increased $3.0 billion, or less than 0.1 percent ... Personal consumption expenditures (PCE) decreased $2.9 billion, or less than 0.1 percent....Real PCE -- PCE adjusted to remove price changes -- increased 0.1 percent in June, compared with an increase of 0.2 percent in May....Personal saving as a percentage of disposable personal income was 6.4 percent in June. This graph shows the saving rate starting in 1959 (using a three month trailing average for smoothing) through the June Personal Income report. The saving rate increased to 6.4% in June (increased to 6.2% using a three month average). I expect the saving rate to rise some more over the next year, perhaps to 8% or so - keeping the pace of PCE growth below income growth. But the good news is the saving rate is much higher than orginally estimated, so much of the expected drag from an increase in the saving rate has already happened.

As spending by wealthy weakens, so does economy - – Wealthy Americans aren't spending so freely anymore. And the rest of us are feeling the squeeze.The question is whether the rich will cut back so much as to tip the economy back into recession — or if they will spend at least enough to sustain the recovery.The answer may not be clear for months. But their cutbacks help explain why the rebound could be stalling. The economy grew at just a 2.4 percent rate in the April-June quarter, the government said Friday, much slower than the 3.7 percent rate for the first quarter. Economists say overall consumer spending has slowed mainly because the richest 5 percent of Americans — those earning at least $207,000 — are buying less. They account for about 14 percent of total spending. These shoppers have retrenched as their investment values have sunk and home values have languished.

Consumer Credit Declines in June - The Federal Reserve reports: Consumer credit decreased at an annual rate of 3-1/4 percent in the second quarter. Revolving credit decreased at an annual rate of 9-1/2 percent, and nonrevolving credit was about unchanged. In June, consumer credit decreased at an annual rate of 3/4 percent, revolving credit decreased at an annual rate of 6-1/2 percent, and nonrevolving credit increased at an annual rate of 2-1/2 percent..This graph shows the increase in consumer credit since 1978. The amounts are nominal (not inflation adjusted).Revolving credit (credit card debt) is off 15.3% from the peak. Non-revolving debt (auto, furniture, and other loans) is off 1.0% from the peak. Note: Consumer credit does not include real estate debt.

With Wallets Thin, Consumers Face Zero-Sum Game - You don’t need an economics degree to understand this relationship: No income gain equals no spending gain. That was the message from Tuesday’s personal income and spending report. Personal income was flat in June and, with their paychecks not growing, consumers kept spending unchanged after little movement in either April or May.Consumers’ reluctance to spend is a headwind for second-half growth, not quite scuttling the recovery but not providing a strong boost either. Only a better job picture will lighten the mood. The weak June income and spending numbers are two in a string of downbeat news from the household sector, whose spending still accounts for 70% of total gross domestic product. Interest in home buying has sunk now that the tax credit is over — pending home sales fell 2.6% in June after plunging 30% in May. Confidence is shaky, as workers remain troubled about job prospects.

Debt Loads Deserve Less Blame for Weak Spending - Much has been made of how we U.S. consumers lived beyond our means, borrowing too much during the last expansion. Now, deleveraging is holding back spending. But one economist argues the adjustment may not be as big a brake on spending as many assume and that the reason for consumer caution may lie elsewhere — namely in the jobs market. At the very least, when it comes to debt, we weren’t as bad as the Danish.“In my view, it is an urban myth that U.S. consumers have ‘too many cars and too many flat screen TVs’ and now they have to go through a major adjustment,” says Torsten Slok, director of global economics at Deutsche Bank.Slok backs up this controversial view with data from the Organization for Economic Cooperation and Development, which form the basis of his research.

How Much Debt Should Households Have? - The housing bubble may feel like a long, long time ago, but the excessive consumer debt it spawned still weighs heavily on American households. Paul Ashworth, a senior United States economist at Capital Economics, suggested thinking about consumer debt in terms of the ratio of household liabilities to personal disposable income, shown in the chart below. A value of “100%” means that for every dollar of disposable income, consumers have exactly one dollar of debt; likewise, a value of “150%” means that for every dollar of disposable income, consumers have $1.50 in debt. As you can see, over the decades consumers have taken on more and more debt relative to their disposable incomes. But this trend really took off around 2000. In fact, 2001 was the last year that households carried less debt than they received in disposable income — that is, a value on the chart of less than 100 percent.

25% of Americans Have Bad Credit Scores - Quite fascinating:“Over the past couple years, millions of Americans have reneged on their debts — because they lost their jobs, because they took on more than they could handle, or both. For many, those defaults have brought immediate financial relief, leaving more cash to spend on other things. Now, though, they’ll also have to face the challenge of living with bad credit.As of April, 25% of Americans had fallen into the least-creditworthy category, garnering a rating of less than 600 from FICO, the main arbiter of consumer credit in the U.S. That compares to only 15% before the recession, according to data compiled by Deutsche Bank.” Why does this matter? Now that NINJA loans are verbotten, this pretty much means that “one in four Americans won’t be able to borrow money to make a major purchase in the foreseeable future.

Wells Fargo/Gallup Small Business Index Hits New Low in July - The Wells Fargo/Gallup Small Business Index -- which measures small-business owners' perceptions of six measures of their current operating environment and future expectations -- fell 17 points to -28 in July. This is its lowest level since the index's inception in August 2003.Most of the decline in the overall index came in the Future Expectations Dimension of the index, which measures small-business owners' expectations for their companies' revenues, cash flows, capital spending, number of new jobs, and ease of obtaining credit. The dimension fell 13 points in July to -2 -- the first time in the index's history that future expectations of small-business owners have turned negative, suggesting owners have become slightly pessimistic as a group about their operating environment in the next 12 months.

Recession Costs Small Businesses $2 Trillion: Outlook Remains Gloomy For Many - 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. “One in seven small business owners are estimating their chance of survival by the flip of a coin,”

Embracing Uncertainty Rather than Whining About it - American business leaders have been complaining a lot lately that uncertainty is keeping them from investing and the economy from fully rebounding. Partly this is a political complaint, with the somewhat less-than-politically-neutral U.S. Chamber of Commerce taking the lead. The argument is that the ambitious legislative agenda of the Obama administration and the Democratic Congress are making it hard for businesses to know what sort of environment they'll be operating in a couple years down the road. It is true that a government that is constantly changing the rules makes it harder for businesses and individuals to make investment decisions. But when a party takes control of the White House and both houses of Congress for the first time in 16 years, in the aftermath of an epic financial crisis, you've got to expect a certain amount of rule changing — and what we've gotten so far certainly isn't more ambitious than what an informed observer would have forecast in autumn 2008. Plus, the really big uncertainties facing the economy at the moment — are we about to fall back into recession? will housing prices ever start rising again? — aren't directly the doing of lawmakers.

ISM survey confirms sharp slowdown in US economy - The ISM Survey of the US manufacturing sector (published on Monday) offers the first reliable glimpse of activity in the US economy in the third quarter of the year. It is not encouraging.Although the headline reading was rather better than widely anticipated (an out-turn of 55.5 compared to 56.2 in June), the details of the survey showed that new orders are now slowing markedly, and inventories have started to rise more rapidly than companies may be intending. Taken together with the GDP data for Q2 (discussed in an earlier blog), the ISM survey points to a significant danger that the US economy will continue to slow sharply in the months ahead.The ISM surveys in the US are among the few items of monthly information which are capable of moulding market sentiment in a profound way. This is because they have an excellent track record of picking up changes in trend in US activity, because they are never revised, and because they are published earlier than most other data series on the economy.

U.S. Factory Orders Fall More Than Forecast in Sign Manufacturing to CoolOrders placed with U.S. factories declined more than forecast in June, a sign manufacturing will cool in coming months.  The 1.2 percent decrease in bookings was more than double the 0.5 percent drop projected by the median forecast of economists in a Bloomberg News survey and followed a revised 1.8 percent decline in May, figures from the Commerce Department showed today in Washington.  Manufacturing, which has led the economy’s recovery from the worst recession since the 1930s, will settle into a more sustainable pace as inventory replenishment wanes. DuPont Co. is among companies that are benefiting from rising sales this year even as they project a slower second half.

Unemployment Rate in U.S. Probably Rose, Raising Risk of Slower Spending - Unemployment probably climbed in July, raising the risk American households will keep a lid on spending for the rest of the year, economists said before a government report this week. The jobless rate rose to 9.6 percent last month from 9.5 percent in June, according to the median estimate of 57 economists surveyed by Bloomberg News ahead of a Labor Department report Aug. 6. A drop in federal census workers as the population count wound down depressed payrolls by 60,000, the data may also show. Both manufacturing, which led the U.S. out of the recession, and service industries kept cooling last month, indicating the economic recovery waned at the start of the second half, other reports this week may show. Federal Reserve Chairman Ben S. Bernanke last month said joblessness is “the most important” problem facing the economy.

Economy in U.S. Will Probably Keep Cooling as Lack of Jobs Limits Spending - The world’s largest economy will probably keep cooling in the third quarter as a lack of jobs prompts American consumers to rein in spending. The economy in the U.S. grew at a slower-than-forecast 2.4 percent annual rate from April through June after expanding at a 3.7 percent pace in the previous three months, Commerce Department figures showed yesterday. Household purchases climbed at a 1.6 percent rate following a 1.9 percent first-quarter gain that was smaller than previously estimated.

With Recovery Slowing, the Jobs Outlook Fades - There is no more disputing it: the economic recovery in the United States has indeed slowed. The nation’s economy has been growing for a year, with few new jobs to show for it. Now, with the government reporting a growth rate of just 2.4 percent in the second quarter and federal stimulus measures fading, the jobs outlook appears even more discouraging. "Given how weak the labor market is, how long we’ve been without real growth, the rest of this year is probably still going to feel like a recession," said Prajakta Bhide, a research analyst for the United States economy at Roubini Global Economics. "It’s still positive growth — rather than contraction — but it’s going to be very, very protracted." A Commerce Department report on Friday showed that economic growth slipped sharply in the latest quarter from a much brisker pace earlier, an annual rate of 5 percent at the end of 2009 and 3.7 percent in the first quarter of 2010. Consumer spending, however, was weaker than initially indicated earlier in the recovery.  Additionally, the fiscal stimulus measures that have propped up growth are expiring.

Weekly Initial Unemployment Claims increase to 479,000 - The DOL reports on weekly unemployment insurance claimsIn the week ending July 31, the advance figure for seasonally adjusted initial claims was 479,000, an increase of 19,000 from the previous week's revised figure of 460,000. The 4-week moving average was 458,500, an increase of 5,250 from the previous week's revised average of 453,250. This graph shows the 4-week moving average of weekly claims since January 2000.The dashed line on the graph is the current 4-week average. The 4-week average of initial weekly claims has been at about the same level since December 2009 (eight months) and the 4-week average of 458,500 is high historically, and suggests a weak labor market.  This is the highest number of initial weekly claims since April.

Jobless claims jump to 3-month high -- The number of Americans filing for initial unemployment insurance jumped last week to the highest level in 3 months, the government said Thursday. There were 479,000 initial jobless claims filed in the week ended July 31, up 19,000 from a upwardly revised 460,000 the previous week, the Labor Department said. The weekly figure is the highest since the week ended April 10, when 480,000 initial claims were filed.The number of claims was higher than the 455,000 claims expected in a consensus estimate of economists surveyed by The 4-week moving average of initial claims, which is calculated to smooth out volatility, was 458,500, up 5,250 from the previous week's upwardly revised average of 453,250

U.S. Job Creation Remains Level in July - Gallup's Job Creation Index finds job growth essentially unchanged for the third consecutive month, with a score of +7 in July -- about on par with +8 in June and +7 in May. Job market conditions are better now than they were during the financial crisis at this time a year ago (-2), but remain far below the already-recessionary levels found at this point in 2008 (+20). In July, 28% of U.S. workers reported that their companies were hiring, halting the consistent upward trend found from February to June. From a longer-term perspective, hiring reports are up substantially from the same period in 2009, but still below hiring levels at this time in 2008.

ADP: Private Employment increases 42,000 in July - ADP reports: Nonfarm private employment increased 42,000 from June to July 2010 on a seasonally adjusted basis, according to the ADP National Employment Report®. The estimated change of employment from May to June was revised up slightly, from the previously reported increase of 13,000 to an increase of 19,000.July’s rise in private employment was the sixth consecutive monthly gain. However, over those six months increases have averaged a modest 37,000, with no evidence of acceleration. Unlike the estimate of total establishment employment to be released on Friday by the Bureau of Labor Statistics (BLS), today’s figure does not include the effects of federal hiring — and now firing — for the 2010 Census.Note: ADP is private nonfarm employment only (no government jobs).

Employment Report (w/ 5 graphs) The employment report appears to confirm that the economy has slipped into a stagnation scenario as both payroll and the household survey reported that employment fell. The drop in employment stemmed largely from the layoffs of census workers as private sector employment rose some 71,000 as compared to 31,000 last month. Compared to the historic norm employment employment gains this cycle has been extremely weak, but it is stronger than in the jobless recoveries of the 1990s and 2000s.Hours worked increased 0.4%, but that largely just offset last months decline of 0.3%. Thecompound growth three month growth rate slipped to 3.0% from a 3.5% growth rate last month. Average hourly earnings growth continued to slow as the year over year gain was 1.75%. Because hours worked are expanding the weekly wage gain rose to 3.0%. With zero inflation in the first half of the year this means that real weekly wages are rising moderately. This gain in real weekly earnings has been reflected in the single most important determinant of real consumer spending, real disposable income excluding transfers. The year over year change in this measure just turned positive for the first time this cycle.

July Employment Report: 12K Jobs ex-Census, 9.5% Unemployment Rate - From the BLSTotal nonfarm payroll employment declined by 131,000 in July, and the unemployment rate was unchanged at 9.5 percent, the U.S. Bureau of Labor Statistics reported today. Federal government employment fell, as 143,000 temporary workers hired for the decennial census completed their work. Private-sector payroll employment edged up by 71,000.  Census 2010 hiring decreased 143,000 in July. Non-farm payroll employment increased 12,000 in July ex-Census. Also June was revised down sharply to 267,000 221,000 jobs lost (revised from 125,000 jobs lost). This graph shows the unemployment rate and the year over year change in employment vs. recessions. Nonfarm payrolls decreased by 131 thousand in July. The economy has lost 52 thousand jobs over the last year, and 7.7 million jobs since the recession started in December The second graph shows the job losses from the start of the employment recession, in percentage terms (as opposed to the number of jobs lost). The dotted line is ex-Census hiring. The two lines will rejoin later this year when the Census hiring is unwound.

Economy Loses 131000 Jobs -- Employers shed a disappointing number of workers in July thanks to the continued and expected disappearance of census workers from government payrolls. Even so, private sector employers added a modest number of workers during that period, though less than Wall Street had expected. Nonfarm payrolls fell by 131,000 last month, according to a Labor Department report released Friday morning, marking a second straight month of losses. During that time, the government continued laying off workers tied to the decennial census, as that work ebbed. The government lost 143,000 census positions in July. Investors had expected nonfarm payrolls to lose a total of 87,000 positions last month, according to consensus projections provided by In June, the economy broadly lost 221,000 jobs, which was revised to reflect an even steeper drop than the originally reported loss of 125,000

Employment Report: Why the different payroll numbers? - Once again there is some confusion about which payroll number to report. Basically the media is confusing people. I explained this last month: Employment Report: Which payroll number to use?  The headline payroll number for July was minus 131,000. The number of temporary decennial Census jobs lost was 143,000. To be consistent with previous employment reports (and remove the decennial Census), the headline number should be reported as 12,000 ex-Census. That is consistent with non-Census reports. Instead most media reports have been using the private hiring number of 71,000 apparently because of the complicated math (subtracting -143,000 from -131,000). Private hiring is important too, but leaves out changes in government payroll and is not consistent.

Jobs Decrease by 131,000, Rise by 12,000 Excluding Census; Unemployment Steady at 9.5%; June Revised from -125,000 to -221,000 - Hidden beneath the surface the BLS Black Box - Birth Death Model added 6,000 jobs. This is one of the saner birth/death revisions in recent months. However, January and July always are. The civilian labor force participation rate (64.6 percent) and the employment-population ratio (58.4 percent) were essentially unchanged in July; however, these measures have declined by 0.6 percentage point and 0.4 point, respectively, since April. The drop in participation rate this year is the only reason the unemployment rate is not over 10%. The drop in participation rates is not that surprising because some of the long-term unemployed stopped looking jobs, or opted for retirement. The change in total nonfarm payroll employment for May was revised from +433,000 to +432,000, and the change for June was revised from -125,000 to -221,000.

Ugly Non-Farm Payrolls Revisions - Yves Smith - While the preparation of economic data is always a fraught business, one hopes that errors are more or less symmetrical, particularly in data series that (as is the case for some important metrics in the US, like GDP), are released on an initial basis (almost without exception the only one Mr. Market notices) and tidied up subsequently. It’s troubling when a statistical release shows a marked bias over time in corrections. It suggests at best a need for a change in methodology (something statisticians are reluctant to implement, since it means the series will not be strictly comparable over time) or at worst, political meddling (pressure to interpret legitimate ambiguities in the early findings so as to produce a prettier picture). And employment-related data is particularly important politically. Andrew Horowitz of The Disciplined Investor sent a series of charts by e-mail, and I’ve included the ones I found most interesting below. Employment context comes first, then the pattern of revisions to non-farm payrolls.

Jobs Report Terrible, Again - The economy lost 131,000 jobs in July, all of them in the government.  Private payrolls added north of 70,000 workers--anemic in the face of our current unemployment rate, but hey, at least it's something.  But government jobs fell by 200,000, mostly, as far as I can tell, due to the loss of the census jobs, though we also lost about 50,000 workers from state and local governments (I presume due to the end of the school year).Unemployment is always a lagging indicator.  And it's clear now that the census jobs were pumping up the jobs figures.  But taken together with the new GDP figures, I think we can now dismiss any hopes of a summer recovery. Does this mean we should have been doing more stimulus?  I'm still agnostic on this question.  Government jobs at the state and local level clearly got bloated during the long boom, and we can't just keep pumping money into these economies forever while we wait for a recovery. 

The Continuing Jobs Crisis - The numbers say that 71,000 jobs were gained in the private sector and 202,000 government jobs were lost. Of the latter, 143,000 were laid off census workers. If there is any real news here, it's that 10,000 State jobs were lost in addition to 38,000 local government jobs.  Mike "Mish" Shedlock is very skeptical about the large discrepancy between private-sector jobs added by the BLS versus the number added by the private payroll company ADP. Mish attributes the discrepancy to the use of the Birth/Death model (of businesses, not people) by the BLS. That sounds like the right explanation to me. ADP added 42,000 jobs in July, as opposed to the 71,000 added by the BLS. Although this model may do a reasonable job of guessing how many businesses are born or die during "normal" economic times—whatever that means during the Bubble Era of the last 15 years—it is quite clear that this model has skewed the data during the ongoing recession. There is no excuse for retaining this positive bias in BLS reports.

Broader U-6 Jobless Rate at 16.5%: May Be Headed Higher - The U.S. jobless rate dropped held steady at 9.5% in July, while the government’s broader measure of unemployment was also unchanged at 16.5%. The comprehensive gauge of labor underutilization, known as the “U-6″ for its data classification by the Labor Department, accounts for people who have stopped looking for work or who can’t find full-time jobs. Both rates held steady despite a drop in the number of people who are employed. The number of unemployed people in the work force dropped, but that was more than offset by a decline in the overall size of the work force. Though more people were no longer in the labor force, fewer of those dropouts said they currently want a job. This helped keep the broader rate steady.

Employment-Population Ratio, Part Time Workers, Unemployed over 26 Weeks --- Here are a few more graphs based on the employment report ... Longer. Deeper. And flat at the bottom. Unfortunately that describes the 2007 employment recession.This graph shows the job losses from the start of the employment recession, in percentage terms - this time aligned at the bottom of the recession (Both the 1991 and 2001 recessions were flat at the bottom, so the choice was a little arbitrary). The Employment-Population ratio decreased to 58.4% in July from 58.5% in June. This had been increasing after plunging since the start of the recession, and the recovery in the Employment-Population ratio was considered a good sign - but the ratio has now decreased for three consecutive months. This graph shows the employment-population ratio; this is the ratio of employed Americans to the adult population. From the BLS reportThe number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) was essentially unchanged over the month at 8.5 million but has declined by 623,000 since April. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.

State/Local Job Cuts Accelerate - State and local governments shed 48,000 jobs in July, the biggest drop in a year and almost double last month’s drop, according to today’s employment report. State and local government have cut a combined 169,000 jobs this year, including 102,000 over the past three months. Friday’s report suggests job losses could continue to accelerate as states grapple with weak tax revenues and the loss of federal budget support later this year. July is the first month of most states’ 2011 fiscal year, so the month’s job losses reflect budget decisions that were made months ago but don’t translate to job losses until the fiscal year turns. Local governments shed 38,000 jobs in July. States cut 10,000. Local government — everything from cities to school boards and transportation districts — account for 14.3 million jobs, compared with 5.1 million for states. More people work in local government than in the entire manufacturing sector.

State and Local Government Jobs Take a Beating - Most of the net payroll loss in July can be attributed to the end of temporary federal Census jobs. But state and local government payrolls also took a beating last month. State and local governments eliminated  48,000 jobs in July. This may not be surprising, given the dire fiscal straits so many states are in. But in fact until very recently, state and local governments were among the safest places to work. For example, month after month the job separations rate — which refers to the number of people who depart voluntarily or involuntarily from an industry, relative to all employment in that industry — had been extremely low in state and local government, compared to every other industry.

Average Length of Unemployment Falls - For the first time since February, the average length that the typical jobless worker has been looking for work declined, to 34.2 weeks in July. The previous month it had hit 35.2 weeks, the highest average duration on record since the government began collecting these data in 1948: While the decline in the average duration of unemployment looks like good news on its face, it’s hard to discern how much of the drop may be attributed to some of the long-term unemployed merely giving up and dropping out of the labor force. (People who give up on actively looking for work cease to be officially counted as unemployed.)

A Sputtering Economy? - The employment situation July release indicated a decrease in overall payroll employment. Does this outcome indicate a sputtering* economy Definitely, several indicators are signalling a slowing economy. Two protagonists in the debate over the extent of the deceleration are highlighted in today's NYT. In this post, I want to focus on the labor market indicators. First, it's important to differentiate between the headline number and the one excluding temporary workers associated with the decennial Census.Private sector employment is rising, albeit anemically, given the depth of the recession. More importantly, aggregate weekly hours in the private sector are still trending upward. That indicator is up 2.2% relative to the 2009M10 trough (for an annualized growth rate of 3.8%, in log terms). Hence, the private sector is still creating jobs, which is an important consideration if one is concerned about the self-sustaining nature of the recovery.

Summer of discontent - THERE is no getting around it—today is a bad day for the White House. They lose one of their top economic staffers, have the Senate reject one of their Fed nominees, and suffer a gut-wrenching employment report. Of course, the news is worse for the nation's 14.6 million unemployed workers. In July, payroll employment fell by 131,000, while the unemployment rate held steady at 9.5%. Economists had expected a negative number in July, due to the continued decline in temporary employment associated with the decennial census. The loss of census jobs amounted to a hit to payrolls of 143,000. But the forecast was for other employment categories to perform better.The real bright spot in the report is the increase in private payroll employment, of 71,000 jobs. Private payrolls have risen in every month of 2010, adding over 600,000 workers all told. Growth there undercuts the argument that economic uncertainty is proving an obstacle to private hiring. But that private payroll growth was largely offset by the loss of 48,000 jobs at the state and local government level.

Comparing This Recession to Previous Ones: Job Changes - The economy lost 131,000 jobs in July, driven primarily by the elimination of 143,000 temporary Census positions. In  the private sector, payrolls increased by 71,000, a modest gain over employment in June. The chart above shows job changes in this recession compared with recent ones, with the black line representing the current downturn. The line has ticked upward since last year, but still has a long way to go before the job market fully recovers to its prerecession level. Since the downturn began in December 2007, the economy has shed, on net, about 5.6 percent of its nonfarm payroll jobs. And that doesn’t even account for the fact that the working-age population has continued to grow, meaning that if the economy were healthy we should have more jobs today than we had before the recession.

We're Even Deeper in the Hole - The economy is still in a deep hole, and we’re not climbing out. Remember, we need 125,000 new jobs per month simply to keep up with the growth of the American population seeking jobs. But according to this morning’s job’s report, private-sector employers added just 71,000 jobs in July. (According to the Bureau of Labor Statistics’ revised report for June, private employers added only 31,000 jobs in June.) In other words, the hole keeps getting deeper. (Government Census workers who had been hired in the spring have been let go over the last two months, and shouldn’t really be included in the trend-line calculation. But for the record, 143,000 lost their jobs in July. That leaves about 200,000 Census workers still knocking on doors. Most of them will lose their jobs in August and September.) The only slightly bright news is that manufacturing payrolls increased by 36,000 in July, but those gains are almost surely going to evaporate in August. Manufacturing expanded in July at the slowest pace of the year as orders and production decelerated.

Job Loss Sends Employment Ratio Downward - For the second consecutive month, the economy created virtually no jobs, net of temporary Census jobs. The Labor Department reported that the economy lost 131,000 jobs in July, 12,000 less than the 143,000 drop in the number of temporary Census workers. ... The job loss corresponds to a decline in labor force participation. While the unemployment rate has edged down by 0.2 percentage points to 9.5 percent since May, this is attributable to people who gave up looking for work and left the labor force. The employment to population ratio fell by 0.3 percentage points to 54.4 percent, only slightly above the 54.2 percent low in December. There were substantial declines in all the measures of duration of unemployment. This likely reflects many long-term unemployed dropping out of the workforce after losing benefits. The percent of multiple jobholders dropped by 0.3 percentage points to the lowest on record. This presumably reflects difficulty in getting jobs

Jobs Report Shows Private Sector Still Wary of Hiring - With the departure of thousands of workers from temporary Census jobs and thousands more let go by cash-strapped state and local governments, American businesses were unable to rescue the American recovery.  Over all, the nation lost 131,000 jobs in July, according to the Department of Labor’s monthly statistical snapshot of hiring, down from a revised number in June.  Private employers added 71,000 jobs last month, easily overtaken by the 143,000 cut as the Census winds down, and about half the number that economists say is needed to simply accommodate population growth. The unemployment rate remained unchanged at 9.5 percent.  The Department drastically revised its number for June down to a loss of 221,000 jobs. The agency originally reported that 125,000 jobs were lost in June. Private sector hiring in June, originally reported at 83,000, was revised downward to 31,000.

Companies hire at slow pace for 3rd straight month  Companies showed a lack of confidence about hiring for a third straight month in July, making it likely the economy will grow more slowly the rest of the year. The unemployment rate was unchanged at 9.5 percent.Private employers added a net total of only 71,000 jobs in July, far below the 200,000 or more jobs needed each month to reduce the unemployment rate. The modest gains were even weaker when considering a loss of government jobs at the local, state and federal levels in July that weren't temporary census positions. Factoring those in, the net gains were only 12,000 jobs, according to the Labor Department's July report Friday.The "underemployment" rate was the same as in June, at 16.5 percent. That includes those working part time who would prefer full-time work and unemployed workers who've given up on their job hunts. All told, there were 14.6 million people looking for work in July. That's roughly double the figure in December 2007, when the recession began.

High unemployment puts poor families at risk - Scholars at the Levy Institute have supported the creation of an employer-of-last-resort (ELR) program in the United States for many years. Such a program would provide a government job to any American who needed one and met a few basic requirements. (This readable policy note, along with many other Levy publications, explains the case for ELR programs.) So far, the government has created many jobs since the passage of the stimulus package, but the unemployment rate remains at 9.5 percent. Many forecasters are now predicting that the overall unemployment rates for 2010 and 2011 will both exceed 9 percent Children are among the groups deeply affected by recessions. For example, a government report issued last November found that over one million children sometimes went hungry in 2008, which represented a large increase over the previous year.

Obama & Jobs: Can US Have Bush Back Now?  -I'll be brief and to the point: You know things are getting worse in America when the bad old days have become the good old days. I've been strongly opposed to runaway deficit spending--far exceeding that from the Bush years, it should be added--from the very start. With each passing month, critics like me are being vindicated that the US has taken the wrong turn. Since the US cannot have Bush back even if he may actually be looked kindly upon given the current economic state of America, perhaps it's time we cast our eyes to "President Palin." It doesn't sound promising, surely, but hey, can things get any worse than they are now Stateside?

Have jobs become a leading indicator? (Reuters) - Employment, it turns out, may not be such a laggard after all. The job market, often described as reacting in slow-motion to shifts in the pace of economic growth, may actually be a pretty solid indicator of the United States' prospects.That means a double-dip U.S. recession cannot yet be completely ruled out, particularly since economists believe Friday's payrolls report for July will show a second straight month of net job losses.Granted, the decline of 63,000 projected by a Reuters survey will reflect temporary census workers being let go by the government. Still, the 91,000 increase in private sector jobs forecasters expect is paltry, and not enough to keep up with new entrants into the labor force. "Employment typically lags the business cycle, but that doesn't have to be the case," said Karen Dynan, a former Federal Reserve economist now at the Brookings Institution. "

If They’d Just Stop Making Unemployed People -  I'd say that if they'd just stop making unemployed people, I'd feel a lot more positively about the chances for a sustainable recovery.  But they continue to make unemployed people, look at this morning's initial jobless claims data via Marketwatch: The number of people applying for initial unemployment benefits climbed by 19,000 to 479,000 in the latest week, the Labor Department reported Thursday. The four-week average of initial claims -- a more accurate gauge of employment trends - rose by 5,250 to 453,250. The Jobs Picture is the straw that doesn't stir the drink right now.  And let's dispense with the "employment is a lagging indicator" nonsense from your textbooks.  In a deflationary environment, unemployment is a coincident indicator, not a lagging one.  Look at the data from 1970 to 1982 for your proof of this: Unemployment began to rise as the economy slowed down and peaked at the nadir of economic activity.  The deflationary recessions of that period are more apropos to what we're experiencing now than anything post 1990.  No jobs = no soup for you.

El-Erian on why the payrolls report matters - Today’s employment report was disappointing, writes Mohamed El-Erian. Nonfarm payroll employment declined by 131,000 in July, the rate and duration of unemployment remain stubbornly high, and other structural dimensions of the problem are deteriorating. The disappointment is not limited to July. Friday’s news also included unfavorable revisions to data released in previous months. There is a real worrisome human dimension to all these indicators. More Americans are struggling to earn enough to maintain their standard of living. A significant portion of people who are unemployed have been for so long as to materially reduce the chance of getting a job any time soon. And the “crisis of middle class America,” as detailed by Edward Luce in last Saturday’s FT, will get worse.

The crisis of middle-class America - The slow economic strangulation of the Freemans and millions of other middle-class Americans started long before the Great Recession, which merely exacerbated the “personal recession” that ordinary Americans had been suffering for years. Dubbed “median wage stagnation” by economists, the annual incomes of the bottom 90 per cent of US families have been essentially flat since 1973 – having risen by only 10 per cent in real terms over the past 37 years. That means most Americans have been treading water for more than a generation. Over the same period the incomes of the top 1 per cent have tripled. In 1973, chief executives were on average paid 26 times the median income. Now the ­multiple is above 300.

Education and Wages - From Ed Luce’s excellent article on the crisis of the American middle classConnie Freeman was raised in a “working-class” home in the Iron Range of northern Minnesota near the Canadian border. Her father, who left school aged 14 following the Great Depression of the 1930s, worked in the iron mines all his life. Towards the end of his working life he was earning $15 an hour – more than $40 in today’s prices. Thirty years later, Connie, who is far better qualified than her father, having graduated from high school and done one year of further education, makes $17 an hour. There are a lot of things going on here, but one point to keep in mind is that progress in educational attainment is generally beneficial not just beneficial to the people who get the extra education. Consequently, the great expansion in educational opportunities in the 1870-1970 era helped produce prosperity even for people like Connie Freeman’s dad who didn’t necessarily personally acquire a great deal of education.

The Meek Shall Inherit Nothing - Writing in the Financial Times, Edward Luce explores the crisis of middle-class America. This is a familiar theme here at DOTE, which I last touched on in Wiping Out The Middle Class. Today I want to talk about median household income, which demonstrates the destruction of the Middle Class all too well.  In the last so-called business cycle expansion from 2002-2007, the median U.S. household income actually dropped! That certainly puts the lie to word "expansion," doesn't it? And the trend is indeed growing stronger. University of Chicago economist Richard Posner explains the deal in American Wage StagnationBetween 1997 and 2008, median U.S.household income fell by 4 percent after adjustment for inflation. It presumably did not rise in 2009, and may not in 2010 either. A median is not an average; average income rose because the incomes of high earners rose, and so the effect was to increase the inequality of the income distribution.

Ezra Klein - The Great Stagnation continues - These days, most of my writing is about the graph atop this post. Question 1: How do we get unemployment down? Question 2: How do we get unemployment down faster? But one of the Great Recession's quieter attacks on our economic security has been its ability to distract us from its predecessor, and in some ways, its cause: what Ed Luce calls "the Great Stagnation."  Look at the graph atop this post again. It's about the long road back to early 2007. But early 2007 was terrible. Not compared with late 2007, of course. But though the economy hadn't yet crashed, we'd already lost control. You can pick your statistic: Median incomes weren't rising, but income inequality was. Poverty was doing something we'd never seen before and increasing amid an economic expansion. Debt was up, and income mobility was down. But for my money, I'll stick with this factoid from Luce: "In the last expansion, which started in January 2002 and ended in December 2007, the median U.S. household income dropped by $2,000 – the first ever instance where most Americans were worse off at the end of a cycle than at the start.

Are the American people obsolete? - Have the American people outlived their usefulness to the rich minority in the United States? A number of trends suggest that the answer may be yes. The offshoring of industrial production means that many American investors and corporate managers no longer need an American workforce in order to prosper. They can enjoy their stream of profits from factories in China while shutting down factories in the U.S. And if Chinese workers have the impertinence to demand higher wages, American corporations can find low-wage labor in other countries.

Is Joe Hill finally dead? (The Ballad of Joe Hill) As I browsed through the news today it kind of struck me, not like a lightning bolt but more as an accumulation of blows, that capital was going for the final victory over labor. It was not just the realization that the corporatists and their enablers in both parties were willing to accept 9% plus unemployment long-term but offer no relief at all to the 99ers, but equally willing to accept an investment climate where employers simply will not hire even if they are sitting on piles of cash, because after all who knows and why should any individual employer take the first jump. But this article pushed me over the edge: Employers shrink pay raises, focus increases more on top performers In other cases, employers can afford raises but are holding off to conserve cash in case the economy slips into another recession. They also are recognizing that they don't have to offer pre-downturn-level raises because of an abundance of unemployed job applicants willing to work for less.

Why Can't the Government Resurrect 'Workfare' Programs Like the WPA? - NewsHour - Some of FDR's Great Depression financial recovery and unemployment strategies included the Civilian Conservation Corps and the Works Progress Administration, both of which left important legacies evident still today. There is great dignity in work. Couldn't we resurrect similar workfare programs today to upgrade our deteriorating infrastructure, rather than just continue to issue unemployment checks?

Is the Unemployment Problem Cyclical or Structural? - I don’t think this debate can be answered by moving close to the polar extremes and declaring it’s mainly a structural or cyclical problem. For me, it seems obvious that part of the problem is structural. The real question is how large the structural component is and what can be done about it. But no matter how large it is — take a very liberal estimate of the size — I don’t think there’s any way to deny that there is a substantial cyclical component on top of it that demands government action. It’s true that the size of the government action to offset the the cyclical downturn should be connected to the size of the cyclical unemployment problem, but the problem is big enough that politicians won’t come anywhere near to overdoing it. The most optimistic view of what Congress might do would still leave them short of what is needed. We don’t know the exact structural-cyclical breakdown, but the cyclical problem is certainly larger than any imaginable Congressional response. So the excuse for inaction based upon the “it’s all structural” claim isn’t persuasive.

Time to Stop Worrying About Structural Unemployment - The economic blogosphere has suddenly become very concerned about the possibility that structural unemployment – resulting from a mismatch between the needs of employers and the capabilities of available job-seekers – has increased in the US. Paul Krugman is worried; Brad Delong is convinced; it’s obvious to Tyler Cowen; The Economist presents a variety of opinions; and any number of other bloggers and fora have been discussing the topic.One major source of this newfound concern is a post by Dave Altig of the Atlanta Fed, who has detected a shift in the relationship between job openings and unemployment – the Beveridge curve. While the shift is unmistakable in his chart (see below), I have looked more closely at the data, and I have come to the conclusion that it does not represent a major increase in structural unemployment. Rather, I believe it represents the normal dynamics of the business cycle in the context of an incipient recovery from a historically severe recession that, in some ways, has not quite ended. First, let’s get a clear idea of what’s going on in the chart

Structural Unemployment: The Economists Just Don’t Get It - Lately, there has been a fair amount of buzz in the economics blogosphere about the issue that I’ve been discussing extensively here: Structural Unemployment. Paul Krugman touches on it here.  Brad DeLong says this.  Mark Thoma has a post in a forum focusing on structural unemployment at The Economist. If you read through these posts, however, you won’t see a lot of discussion about the case I’ve been making here, which is that advancing technology is the primary culprit. I’ve been arguing that as machines and software become more capable, they are beginning to match the capabilities of the average worker. In other words, as technology advances, a larger and larger fraction of the population will essentially become unemployable.  While I think advancing information technology is the primary force driving this, globalization is certainly also playing a major role. (But keep in mind that aspects of globalization such as service offshoring—moving a job electronically to a low wage country—are also technology driven).

Yves speaks - Yves speaks simply, forthrightly, and convincingly. What a breath of fresh air. The segment is here on structural unemployment concerns, a coherent industrial and trade policy that might include the welfare of people who work, and Elizabeth Warren.

Industry: Trade Deals Vital to Meet Obama’s Export Goal - U.S. trade and business groups are skeptical the U.S. can double exports without the Obama administration signing a raft of new free trade agreements. Although President Barack Obama’s administration is pushing ahead with a South Korean FTA, officials say their strategy focuses less on bilateral deals and more on boosting exports through promotion and more rigorous enforcement of trade rules. Business and trade groups lauded the president’s goal to double U.S. exports in the next five years.But aside from pursuing the South Korean FTA and vague promises of resurrecting the Doha round of international trade talks — which analysts say wouldn’t deliver practical results by 2014 — the administration isn’t promising any other free trade deals.

New Democratic strategy for creating jobs focuses on a boost in manufacturing - President Obama and congressional Democrats -- out of options for another quick shot of stimulus spending to revive the sluggish economy -- are shifting toward a longer-term strategy that promises to tackle persistently high unemployment by engineering a renaissance in American manufacturing. That approach, heralded by Obama last week in Detroit and sketched out in a memo to House Democrats as they headed home for the August break, is still evolving and so far focuses primarily on raising taxes on multinational corporations that Democrats accuse of shipping jobs overseas. The strategy also repackages policies long pursued by the White House -- such as investing in clean energy, roads, bridges and broadband service -- with more than two dozen legislative proposals aimed at developing a plan for promoting domestic manufacturing.

Smart Philosophy Major Snowed by Rustbelt Governor - Matthew Yglesias has a new argument for encouraging exports of manufactures. I am not at all convinced. He seems to be asserting that employment in wholesaling and transportation follows production not sales and so is increased by manufacturing for export. I really doubt that. Yglesias wrote (click to see his graph). I saw Michigan Governor Jennifer Granholm at CAPAF earlier today and she naturally went on at some length about the importance of preserving manufacturing employment. In the course of doing so she very briefly made the more nuanced point that manufacturing activity supports considerable employment in manufacturing-related services. ... Given the rate of productivity growth in manufacturing, there’s no plausible volume of exports that’s going to sustainably increase manufacturing employment. But that doesn’t mean that exporting more goods won’t boost employment

What Would Roosevelt Do? - Robert J. Shiller -Across the United States, thousands of federally financed stimulus projects are under way, aimed at bolstering the economy and putting people to work. The results so far have not been spectacular.  Why not? There’s nothing wrong with the idea of fiscal stimulus itself. We need more stimulus, not less — but we need to focus much more on actually putting people to work. Two friends of mine, both economists, came upon a stimulus project. Out on the road, there was plenty of equipment, including a gigantic asphalt paver, dump trucks, rollers and service vehicles. But there wasn’t a single laborer. That project employed capital, certainly, but not many human beings. Like many such stimulus projects, it could be justified if you accept the idea that gross domestic product, not jobs, is central. So here’s a proposal: Why not use government policy to directly create jobs — labor-intensive service jobs in fields like education, public health and safety, urban infrastructure maintenance, youth programs, elder care, conservation, arts and letters, and scientific research?

A Simple Proposal for Easing the Unemployment Crisis - Most of America's economic pundits love a good policy brawl. And the current showdown about stimulus spending could scarcely have any more gravity, as far as the debate's participants are concerned. Proponents of further stimulus spending showcase their detailed mathematical models and warn that brutal deflation awaits if the government doesn't dole out more funds. Opponents brandish their comprehensive historical knowledge and claim U.S. creditors could bolt at any minute if budge cuts aren't immediately made. How much of an impact the stimulus has actually had on unemployment so far, though, gets overlooked in the dueling prophecies. But straightforward suggestions that can actually help put the country's record long-term unemployed back to work tend to get far less glory. And one such far-more-levelheaded recommendation comes from Yale economist Robert Shiller: The U.S. government should simply hire workers directly for public services, much as it did during the Great Depression.

A Labor Market Punishing to Mothers - NYTimes -The last three men nominated to the Supreme Court have all been married and, among them, have seven children. The last three women — Elena Kagan, Sonia Sotomayor and Harriet Miers (who withdrew) — have all been single and without children. This little pattern makes the court a good symbol of the American job market. Women and men with similar qualifications — age, education, experience — are much more likely to be treated similarly today than in the past. The pay gap between them, while still not zero, has shrunk to just a few percentage points. Yet once you look beyond the tidy comparisons of supposedly identical men and women, the picture is much less sunny. There are still only 15 Fortune 500 companies with a female chief executive. Men dominate the next rungs of management in most fields, too. Over all, full-time female workers make a whopping 23 percent less on average than full-time male workers.

Protecting Our Grandchildren: The High Price of Motherhood - Maxine Udall - David Leonhardt at the New York Times provides a comprehensive look at the price of motherhood. It appears to be pretty high. Despite advances  over the last several decades in equalizing gender roles and pay, women still make roughly 80 cents to every male dollar. . Our national accounting methods value our national output, often expressed as gross domestic product (GDP), by tabulating through various ways the value of all goods and services produced in markets. GDP has long been used as an indicator of a nation's economic growth and well-being. But what about all that non-market work women are cranking out? The stuff for which they don't get paid? Child care, child birth (production of the future units of economic production for those of you who like to think of children as durable goods) about mother's milk that builds bodies and immune systems 40 different ways? None of that shows up in GDP

Reduced State to State Migration Rates and Persistent High National Unemployment: Regional Evolutions Redux - Most people in the United States live in a metropolitan area. There are over 300 to choose from and over 80% of the population lives in one. Each metro area, whether it is Detroit, Los Angeles, Miami, Boston or NYC, represents a distinct collection of industries. So, New York City has a larger share of finance jobs than the average metro area while Detroit has more car jobs. The fortune of such cities rises and falls with the "health" of these industries. When finance booms, NYC booms. When the domestic car industry suffers, Detroit suffers. If you live in a city that experiences such a "bad local demand shock", you can get up and move to another city. Such migration protects you and your family from protracted unemployment.  Today, the Christian Science Monitor reports that migration has been chilled. People are not leaving declining areas the way that regional economics predicts. Why Not?

99 Weeks Later, Jobless Have Only Desperation - Ms. Jarrin is part of a hard-luck group of jobless Americans whose members have taken to calling themselves “99ers,” because they have exhausted the maximum 99 weeks of unemployment insurance benefits that they can claim. For them, the resolution recently of the lengthy Senate impasse over extending jobless benefits was no balm. The measure renewed two federal programs that extended jobless benefits in this recession beyond the traditional 26 weeks to anywhere from 60 to 99 weeks, depending on the state’s unemployment rate. But many jobless have now exceeded those limits. They are adjusting to a new, harsh reality with no income.  In June, with long-term unemployment at record levels, about 1.4 million people were out of work for 99 weeks or more, according to the Bureau of Labor Statistics. Not all of them received unemployment benefits, but for many of those who did, the modest payments were a lifeline that enabled them to maintain at least a veneer of normalcy, keeping a roof over their heads, putting gas in their cars, paying electric and phone bills.

July Consumer Bankruptcy Filings up 9 Percent from last Month, Year - The 137,698 consumer bankruptcies filed in July represented a 9 percent increase nationwide over the 126,434 filings recorded in July 2009, according to the American Bankruptcy Institute (ABI), relying on data from the National Bankruptcy Research Center (NBKRC). NBKRC’s data also showed that the July consumer filings represented a 9 percent increase from the 126,270 consumer filings recorded in June 2010. Chapter 13 filings constituted 28 percent of all consumer cases in July, a slight increase from June. “Debt burdens, unemployment and an uncertain economic climate continue to weigh on consumers,” said ABI Executive Director Samuel J. Gerdano. “The pace of consumer filings this year remains on track to top 1.6 million filings.”

Food stamp use hit record 40.8m in May – The number of Americans who are receiving food stamps rose to a record 40.8 million in May as the jobless rate hovered near a 27-year high, the government reported yesterday.  Recipients of Supplemental Nutrition Assistance Program subsidies for food purchases jumped 19 percent from a year earlier and increased 0.9 percent from April, the US Department of Agriculture said in a statement on its website. Participation has set records for 18 straight months. An average of 40.5 million people, more than an eighth of the population, will get food stamps each month in the year that began Oct. 1, according to White House estimates. The figure is projected to rise to 43.3 million in 2011.

Ed Schultz: We're 2 Years Away from Bread Lines (video) Ed Schultz talks about how, thanks to the Republicans in Congress blocking the extension of unemployment benefits, we could be heading back to the days of bread lines, mass unemployment, and an ever-increasing homelessness epidemic.

US Consumer Bankruptcies May Exceed 1.6 Million for Year, Institute Says - U.S. consumer bankruptcies, after rising 9 percent last month from June, might exceed 1.6 million this year, according to the American Bankruptcy Institute.  The 137,698 bankruptcy filings in July also represent a 9 percent increase from a year earlier, the institute said yesterday in a statement posted on its website, citing data from the National Bankruptcy Research Center.  “Debt burdens, unemployment and an uncertain economic climate continue to weigh on consumers,” Samuel J. Gerdano, the institute’s executive director, said in the statement. “The pace of consumer filings this year remains on track to top 1.6 million filings.”

America's Incredible Shrinking Safety Net - The first cuts came in May, when Democratic leaders hoping to move a broad domestic aid package in the House of Representatives, bowed to deficit demands and dropped $24 billion in state Medicaid assistance and $7.7 billion in subsidies for laid-off workers to maintain their health insurance via the COBRA program. "It's obscene," said Rep. David Obey (D-Wisc.). House Democrats also shortened the extension of unemployment benefits for the long-term jobless by one month, saving roughly $6 billion.When the scaled-down bill landed in the Senate, Democratic leaders discovered they'd need to make further cuts to win the support of conservative Democrats and moderate Republicans. A handful of senators fought to replace the COBRA subsidy and the state Medicaid assistance (known as FMAP), but the amendment that prevailed instead cut $25 per week from unemployment benefits, saving $5.8 billion. Another program that fell by the wayside was the TANF Emergency Fund, a welfare-to-work program that has subsidized more than 240,000 jobs. Extending the program through next year would have cost $2.4 billion.

Record Number Of Illinois Families On Food Stamps— More Illinois families are receiving food stamps than ever before as a result of the deepest recession in decades, state officials said Monday.  More than 780,000 Illinois families got food stamps in June, up 11.9 percent from a year earlier, the Illinois Department of Human Services reported. Nationally, 40 million Americans -- 18.7 million households -- use food stamps.  In Illinois, the number of people applying for the program has increased even faster than those enrolled, and state and national officials expect demand to keep growing. Illinois applications were up by 27 percent in June, compared to a year ago.

11 Seattle Homeless Shelters May Close Soon - Hundreds more homeless people in Seattle could be sleeping on the streets this week if a nonprofit housing organization closes 11 of its 15 shelters for lack of funds. "As of Thursday or Friday night, we will be sleeping outside," said Sheri Rowe, a shelter resident who serves on the board of directors of Seattle Housing and Resource Effort (SHARE). SHARE, which gets about $300,000 in installments from the city of Seattle each year to shelter the homeless, says it needs $50,000 more right away.

States Borrow Over $39 Billion from Feds for Unemployment Tab - As the national unemployment rate hovers around 9.5% and with state unemployment rates as high as 14.2%, states are hemorrhaging money from their unemployment trust fund accounts - the funds states use to pay unemployment benefits. Every month, more states are forced to borrow from the federal government to keep those trust funds afloat and last week, the tab for states hit just over $39 billion. The fiscal impact of sustained high unemployment rates is painfully clear to all state policymakers. Sustained high unemployment affects unemployment insurance trust funds in two primary ways: decreased supply and increased demand. More people need unemployment benefits for longer, increasing the money going out, while fewer people are paying into the reserves through payroll tax collections, draining the supply of funds coming in. At the end of January, 26 states were borrowing money from the Federal Unemployment Account to help pay increasing claims for unemployment insurance benefits, with outstanding loans then totaling more than $30 billion. By the middle of July, 32 states were borrowing over $39 billion—a 30 percent increase in total borrowing in just under six months

Nearly 153000 in state lose jobless aid - About 1,000 Californians a week are falling off the unemployment rolls with 152,531 having exhausted their benefits as of Monday, Aug. 2, reports the state Employment Development Department. Because of California's high unemployment rate — 12.3% in June — laid-off workers here are eligible for up to 99 weeks of jobless benefits. But the recession started here much earlier than the nation as a whole and many laid-off workers, especially in hard-hit industries like construction and mortgage lending, have been unable to find jobs. Congress last month approved a long-awaited bill to allow extended benefits through November for those more recently unemployed, but did not add any weeks or other aid for the so-called 99ers who have exhausted their payments.

Nevada Panel To Consider Tax To Fund Jobless Claims -The Nevada Employment Security Council is set to consider and recommend how much employers should pay to fund the state's unemployment trust fund. The council, which meets Tuesday, last year decided to leave the rate unchanged as the recession gripped Nevada's economy. But the state's trust fund is broke. Nevada, with the highest unemployment rate in the nation, has been relying on money borrowed from the federal government to pay benefits — money it will eventually have to pay back with interest. So far the state has borrowed $450 million. State officials project that sum could go as high as $1 billion by the end of the year.

Jobless rates no factor for stimulus money - States with the highest jobless rates are getting less money per person under the federal stimulus program than states with below-average unemployment, a USA TODAY analysis finds. Hard-hit Florida ranks last in stimulus benefits per resident despite having the nation's fifth-highest unemployment rate. Nevada has the nation's worst unemployment — 14.2% — but ranks 46th in stimulus benefits.By contrast, North Dakota has the nation's lowest jobless rate — 3.6% — but ranks fourth in stimulus benefits. Alaska ranks No. 1 in stimulus aid — $3,505 per person — and has a jobless rate below the 9.5% national rate.

Will state budget cuts blunt the recovery? - Whatever oomph the federal stimulus gave the US economy, deficit-ridden cities and states are poised to take it away.With two years of depressed tax revenues, a third one expected, and rainy day funds all but exhausted, state and city governments are having to close huge budget gaps. If projections are correct, they could amount to $660 billion from fiscal 2009 through 2012, nearly rivaling the $789 billion stimulus from the federal government. Although these governments are raising some revenues through tax hikes and new fees, mostly they're cutting spending. That threatens to reduce safety net services, push hundreds of thousands of workers onto unemployment rolls, and derail a fragile recovery. "State and local governments are going to be a serious drag on the economy over the next 12 to 18 months," said Mark Zandi, chief economist of Moody's. Their budget woes could trim a half percentage point from the United States' growth rate this year, he estimated.

White House's late push for $26B state aid bill - With a Senate vote slated for Monday evening, the White House shows signs of a late-breaking push behind a $26.1 billion aid package to help state and local governments cope with revenue shortfalls due to the continuing housing crisis and slow economic recovery. Last year’s recovery act helped fill the gap, but as the stimulus funds run out, Democrats fear more state layoffs, beginning with teachers just months before November elections. Cash-strapped governors are promised $16.1 billion to pay Medicaid bills next year and ease their budget situation; another $10 billion in education assistance would go to school boards to help with teacher hiring — a top priority for Education Secretary Arne Duncan. “There is a tremendous amount at stake here,” Duncan told POLITICO. And even with the House gone until mid-September, he insisted that Senate passage would give local school boards “a real sense of hope” that federal dollars will be coming in time to avoid layoffs impacting tens of thousands of teachers.

Missouri expects billion dollar income deficit in 2012  - Missouri can expect a $1 billion income deficit in the 2012 fiscal year according to an assessment of the nonprofit Missouri Budget Project. A billion dollars were cut from the state budget for the financial year that started July first. But the public policy analysis group believes the cuts have gone as far as possible. July tax collections were down 4.2 percent from a year ago. The Budget Project's Director Amy Blouinhe estimates the crisis has been escalating over the last decade. She said the answers lie in collecting revenue, such as multi-state corporations that headquarter in Missouri and pay no income tax

Unemployment borrowing adds to state debt load - As Illinois faces a $13 billion budget deficit, a separate $2.2 billion debt has quietly accumulated during the recession — and because of the recession. Illinois started borrowing from the Federal Unemployment Account last summer to bolster the state's dwindling unemployment trust fund. The federal account serves as a line of credit for states across the nation so that unemployment benefits can continue to be paid to eligible out-of-work residents. "It is continuously something that we monitor on a daily basis," said Greg Rivara, spokesman for the Illinois Department of Employment Security.

Layoffs to gut East St. Louis police force - At a raucous special City Council meeting, East St. Louis Mayor Alvin Parks announced that the city will layoff 37 employees, including 19 of its 62 police officers, 11 firefighters, four public works employees, and three administrators. The layoffs take effect on Sunday. "I want our citizens to know we have some of the bravest police officers and firefighters in the country," Parks said. "But we don’t have the money to pay them. We have to have fiscal responsibility." City officials wanted police and fire unions to accept a furlough program that would have required employees to take two unpaid days in each twice monthly pay period. If accepted, emergency responders would have seen a pay cut of about 20 percent for the rest of the year. Parks said the two sides couldn’t reach an agreement.

East St. Louis grapples with police layoffs -- In downstate East St. Louis, there were fewer police officers and firefighters on the job Monday. Nearly 40 workers were laid off after a city council vote over the weekend, including 19 police officers, 11 firefighters and other city employees.  East St. Louis officials say the layoffs could have been avoided if the city's union workers would have accepted furlough days. The layoffs now leave about 30 police officers to patrol an area that has a high murder rate.  "Now, when we make a phone call, if someone is in another area, we may not get a response, but too long of a time for people to really feel safe,

Property slump adds to US muni woes - The slump in commercial real estate in the US is emerging as another potential headache for local governments already suffering from falling tax revenues in the wake of the recession.The downturn in the property market could mean higher borrowing costs for boom towns such as Las Vegas and the so-called rust belt – cities facing industrial decline, such as Detroit and Cleveland – over the next few years, a report released on Tuesday by Fitch Ratings predicts. If the commercial real estate market worsens, which we think it will, there will be downgrades and financing costs will rise for municipalities with pockets of commercial real estate,” : “This commercial property issue is just starting to bare its teeth. The impact will be drawn out over the next few years.” The market for hotels, retail stores, office buildings and apartment complexes tends to lag behind the overall US economic cycle. In spite of a general recovery, Fitch expects the commercial property market to continue to deteriorate over the next one to two years.

U.S. And Greek Cities Refuse To Service Debt As Next Stage Of Solvency Crisis Shifts From Sovereign To Local Governments - Now that the Greek striking truckers have been placated and the obliterated critical tourist season can attempt to salvage itself with just one month left as gas is finally once again (partially) available, some were hoping for at least a brief return to normal in the ECB/IMF-subsidized country. Alas, no such luck, as Greece has now become an accelerated version of the US' own slow progress to all out insolvency.  In fact, as reported in St. Louis Today, the near bankrupt city of East St. Louis, which just laid off 30% of its police force, has announced it would not make a scheduled $500,000 payment. "On Friday, the city approved a proposal to defer bond payments until next year in order to free up $500,000." In realizing that creditors don't really have a loaded gun pointed at their heads, US cities are finally waking up to what has been all too obvious to Europe for many months now. Look for the domino chain of state and municipal failures to really pick up in earnest over the next several quarters now that the creditor vs debtor battle lines have been openly set.

Chicago's Rating on $6.8 Billion of Debt Lowered One Level to AA by Fitch (Bloomberg) -- Chicago, the third most-populous U.S. city, had its creditworthiness on $6.8 billion of general- obligation debt cut one level by Fitch Ratings because declining tax revenue has weakened its finances.The one-step downgrade to AA, third-highest, from AA+ was also influenced by the city’s accelerated use of reserves to balance its budget, Fitch said in a press release. Fitch maintained a negative outlook on the city’s debt, meaning the rating might be lowered further. Chicago’s tax revenue has been challenged by an unemployment rate of 10.6 percent, higher than the national average of 9.5 percent in June. Foreclosure filings in the first half climbed 23 percent to 78,022, including the Naperville and Joliet areas, according to RealtyTrac Inc. “The city continues to experience large budget gaps, multiple years of structural imbalance and a large and rapidly growing unfunded pension obligation,”

A polemic against New York City - New York’s entire economy is based on monopolies of information. Wall Street banks make a mint trading because they have inside information on the market flows of the products they trade.  Literary agents arbitrage scarce access to book publishers against a mass of hopeful authors. Real estate brokers (and these are brokers on rental properties, not properties for sale) routinely make a 15% commission when you sign a lease, pocketing a good two-months salary (read, upwards of $5000) for the privilege of telling you where there’s an apartment free. In New York, those monopolies go unchallenged.

A continued role for central cities? - Chicago Fed blog-The rapid flight of jobs and people from central cities, such as New York and Chicago, during the 1970s called into question what role, if any, they could play in metropolitan area economies. Today, many central cities of the Northeast and Midwest continue to be significant centers of commerce and employment in their metropolitan areas[1]. Over the past four to five decades, the manufacturing production sector has invariably shifted its activities from central cities to the suburbs (or moved away from metropolitan regions altogether). While doing so, this sector has shed many jobs. Yet certain important service sectors continue to find central cities to be desirable and hospitable locations in which to conduct their business. These include, for example, higher education, specialized medical services, and some types of government services that require face-to-face service delivery[2]. For such businesses, central cities remain accessible destinations for customers drawn from broad surrounding market areas. Customers are still willing to travel to service providers’ places of business located in cities.

As Finances Tighten, Furloughs Give Way to Pay Cuts - Pay cuts are appearing most frequently among state and local governments, which are under extraordinary budget pressures and have often already tried furloughs, i.e., docking pay in exchange for time off. Warning that they will have to lay off people otherwise, many governors and mayors are pressing public employee unions to accept a reduction in salary of a few percentage points, without getting days off in exchange. In a 2010 survey by the National League of Cities, 51 percent of the cities that responded said they had either cut or frozen salaries of city employees, 22 percent said they had revised union contracts to reduce some pay and benefits, and 19 percent said they had instituted furloughs. Some businesses are also cutting workers’ pay, often to help stay afloat or to eliminate their losses, although a few have seized on the slack labor market and workers’ weak bargaining power to cut pay Factory owners sometimes warn that they will close or move jobs to lower-cost locales unless workers agree to a pay cut. In its most recent union contract, General Motors is paying new employees $14 an hour, half the rate it pays its long-term workers.

Texan Tall Tales - Paul Krugman -Apparently there’s a lot of discussion about the sources of the miraculous resilience of Texas in the current slump, with the usual suspects claiming that it proves the virtues of capitalism red in tooth and claw, or something. Except that a quick look at state unemployment rates doesn’t suggest anything especially miraculous going on:  Unemployment in Texas has, in fact, risen sharply; not as much as in Michigan, Nevada, or California, but more or less comparable to New York and Taxachusetts. Strangely, though, we aren’t hearing about how the wonderful policies of the Paterson administration spared New York from harm.

Going to Extremes as the Downturn Wears On - NYTimes - Plenty of businesses and governments furloughed workers this year, but Hawaii went further — it furloughed its schoolchildren. Public schools across the state closed on 17 Fridays during the past school year to save money, giving students the shortest academic year in the nation and sending working parents scrambling to find care for them.  Many transit systems have cut service to make ends meet, but Clayton County, Ga., a suburb of Atlanta, decided to cut all the way, and shut down its entire public bus system. Its last buses ran on March 31, stranding 8,400 daily riders.  Even public safety has not been immune to the budget ax. In Colorado Springs, the downturn will be remembered, quite literally, as a dark age: the city switched off a third of its 24,512 streetlights to save money on electricity, while trimming its police force and auctioning off its police helicopters.

Ga. faces $550M shortfall for lottery programs - Georgia's prekindergarten program and the HOPE scholarship face massive cuts as state officials predict a more than $550 million shortfall in lottery revenue in the next two years. State lawmakers gathered Monday in Atlanta to look at how to cope with the looming deficit, which would almost drain the program's unrestricted reserve fund. The numbers are grim: a projected $1.2 billion tab for lottery programs by 2012 while ticket sales stagnate, said Tim Connell, president of the Georgia Student Finance Commission, which runs the HOPE program.The expected shortfalls are $243 million for the next fiscal year and $317 million the following year, Connell said.House Higher Education Committee Chairman Len Walker said he was stunned by the numbers. "This is not a train wreck that is about to happen -- the train wreck has happened,"

Exotic Deals Put Denver Schools Deeper in Debt - In the spring of 2008, the Denver public school system needed to plug a $400 million hole in its pension fund. Bankers at JPMorgan Chase offered what seemed to be a perfect solution.  The bankers said that the school system could raise $750 million in an exotic transaction that would eliminate the pension gap and save tens of millions of dollars annually in debt costs — money that could be plowed back into Denver’s classrooms, starved in recent years for funds. To members of the Denver Board of Education, it sounded ideal. It was complex, involving several different financial institutions and transactions.  Rather than issue a plain-vanilla bond with a fixed interest rate, Denver followed its bankers’ suggestions and issued so-called pension certificates with a derivative attached; the debt carried a lower rate but it could also fluctuate if economic conditions changed.

States Slash Preschool Programs As Budgets Bleed - States are cutting hundreds of millions from their prekindergarten budgets, undermining years of working to help young children -- particularly poor kids -- get ready for school.  States are slashing nearly $350 million from their pre-K programs by next year and more cuts are likely on the horizon once federal stimulus money dries up, according to the National Institute for Early Education Research at Rutgers University. The reductions mean fewer slots for children, teacher layoffs and even fewer services for needy families who can't afford high-quality private preschool programs.  One state -- Arizona -- has proposed eliminating its 5,500-child program entirely. Illinois cut $32 million from last fiscal year's pre-k budget and plans to slash another $48 million this year.

Schools brace for more funding cuts - The next time lawmakers will formally meet will not be until January, but there is one topic already on the minds of many - the budget. And money for state aid to education could take a hit. This is just another impact of a tough economy and Nebraska schools could feel a major impact. Budget shortfalls, less funding and the possibility for lower state aid to education. In January the 102nd Legislature will meet in Lincoln and discuss the state budget deficit and education. "I would expect that we are going to have to look at state aid to education as well as all of the other agencies of state government as places to make the cuts,"

How Kids Could Help Their Parents Act Like Grownups - Matt Miller has the answer: What this country needs is a movement to lower the voting age to 10. Hear me out. Wherever you look, from debt to schools to climate to pensions, the distinctive feature of American public life today is a shocking disregard for the future. Yes, politicians blather on about “our children and grandchildren” all the time — but when it comes to what they actually do, the future doesn’t have a vote. If you want to change people’s behavior, you need to change their incentives. It’s time to give politicians a reason not simply to praise children, but also to pander to them. About 125 million Americans voted in the 2008 presidential election. There are about 35 million Americans ages 10 to 17. Giving them the vote would transform our political conversation. It would introduce the voice we’re sorely missing — a call to stewardship, of governing for the long run, via the kind of simple, “childlike” questions that never get asked today.

Will The GOP Senators Whose States Face Thousands Of Teacher Layoffs Vote Against Teacher Funding? Today, the Senate will be taking a procedural vote on a bill providing $26 billion in aid to state and local governments, $10 billion of which is dedicated to preventing teacher layoffs. This particular batch of funding has been included in, and then cut from, multiple bills, as each time conservatives have objected. Originally, $23 billion was to go toward saving teaching jobs, but that has been whittled down over the past few months.House Minority Leader John Boehner (R-OH) has derided the funding as a “bailout” for teachers, while Rep. Eric Cantor (R-VA) said that those advocating for the money have misplaced priorities. The bill also includes $16 billion in Medicaid funding for states, and Republicans “argue that the Medicaid funding would have a better chance of passage without the teachers aid included.”

Jobs bill clears a key hurdle in the Senate -An emergency plan to save the jobs of tens of thousands of public school teachers and other government workers overcame a key Senate hurdle Wednesday, and House Speaker Nancy Pelosi said she would summon lawmakers back from their August break to finish work on the measure.  Two Republicans crossed party lines to advance the $26 billion package, handing President Obama a victory in his campaign to bolster the shaky economy. With many governors struggling to close gaping budget deficits, administration officials feared a fresh round of state layoffs or tax increases could knock the nation's wobbly recovery off-course.

$26 billion for states passes key test vote -- The Senate overcame a key procedural hurdle Wednesday to send $26 billion more in federal aid to cash-strapped states.The measure, which passed by a 61-38 vote, contains $16.1 billion in additional Medicaid money and $10 billion to prevent layoffs of teachers and first responders. State officials have been desperately lobbying their representatives, saying they need the money to shore up their budgets. About 30 states had already included the additional Medicaid funds in their fiscal 2011 budgets, which began July 1, and would have to cut further if it doesn't come through. The bill is expected to save 290,000 jobs, according to Senate Democrats"

Speaking of Bailouts... Back to the States! - From the NY Times: The Senate on Wednesday cleared the way for a $26 billion package of aid to states and school districts, and the House speaker, Nancy Pelosi, said she would summon members from their summer recess to grant final approval to the bill. The legislation would provide $10 billion to retain teachers who might otherwise lose jobs to cutbacks, and an additional $16 billion to help states struggling to close budget deficits." “We had a choice,” said Rahm Emanuel, the White House chief of staff. “Either teachers could be in the classroom or they could be on the unemployment lines.”" No Rahm - that wasn't the fucking choice at all - the choice was either the 1) teachers could take a pay cut, 2) the community could suck it up, raise taxes, and pay the teachers what they wanted or 3) there would need to be layoffs if neither side compromised.

Sadness, Suicidality and Grades - This study examines the past year relationship between GPA and experiencing a combination of two primary depression symptoms, feeling sad and losing interest in usual activities for at least two consecutive weeks, among high school students during 2001–2009. The GPA loss associated with sadness, as defined above, falls from slightly less than a plus/minus mark to around 0.1 point when commonly co-occurring behaviors are held constant. Nonetheless, this effect is significantly larger than those of having considered or planned suicide and equivalent to having attempted suicide, which seemingly signify more severe depression. Moreover, sadness lowers the probability of earning A grades, and raises that of receiving grades of C or below, by over 15%. Coefficient sizes are similar when comparison groups are restricted to students engaging in correlated behaviors and in matching and instrumental variable models, suggesting that sadness causally reduces academic performance.

College Loan Debt: A Big Problem for Borrowers, Lenders and Government - MSN Money and The Wall Street Journal have combined to produce an article detailing some of the problems that exist for those with college loans debt. Among the situations cited is a 41-year old MD with $550,000 outstanding college debt. The debt was much less (about $250,000) when this individual graduated from medical school in 2003, but has ballooned to the present amount through mismanagement. Another case mentioned is a laid-off factory worker with $120 a week garnished from her $300 a week unemployment check to apply against her son's college loan debt. The son is also unemployed, having lost his $29,000 a year job 8 months ago. A third case describes a college loan debt that has grown from $28,000 to more than $90,000, with monthly payments that were originally $230 now $816.

Leisure College, USA - New from Professors Philip Babcock and Mindy Marks is an analysis of trends in how college students are spending their time.  The answer is "less studying, more leisure."  The summary provided by the American Enterprise Institute is well worth the read.  Their conclusions:

  • Study time for full-time students at four-year colleges in the United States fell from twenty-four hours per week in 1961 to fourteen hours per week in 2003, and the decline is not explained by changes over time in student work status, parental education, major choice, or the type of institution students attended.
  • Evidence that declines in study time result from improvements in education technology is slim. A more plausible explanation is that achievement standards have fallen.
  • Longitudinal data indicate that students who study more in college earn more in the long run.

Addressing America's Growing Education Deficit - When I was governor of West Virginia in the early 1990s, there was a ranking of developed countries based on the number of young people who had earned college degrees. Among 25 to 34 year-olds, the United States ranked third. I remember thinking that wasn't good enough. We used to be No. 1; we should lead the world in education attainment again.  Today we're ranked 12th. Behind Russia. Behind Japan and Korea. And if the pattern continues, soon to be behind a host of other nations smart enough to match their understanding of the importance of college completion with the investments that make it possible. At the precise time that the importance of a college degree is increasing, the ability of the United States to compete in a global economy is decreasing.  This is a trend we must reverse.

What we can learn from for-profit colleges - Today's Senate hearing about for-profit colleges provides something to think about for anyone who feels privatization is the Great Solution to what ails the U.S. education system. We've already heard the stories about how much more often students at profit-seeking schools default on their loans. Now we have an inside look at the hard sell applied to get students to enroll, thanks to this Government Accountability Office (GAO) report. The video is definitely worth a watch.One college representative tells a prospective student to lie about having kids in order to get more financial aid. Another explains that student loans aren't like car loans—if you don't pay, no one comes after you. A third claims that barbers can easily make $1,000 a day—about $250,000 a year—thus justifying the cost of the program. (Never mind that 90% of barbers in Washington D.C., where this conversation took place, make less than $19,000 a year.) To be fair, some of the college representatives are completely stand-up. When a prospective student asks if a job is guaranteed after graduation, one rep replies, "Any school that says that to you gets the Pinocchio award." Nonetheless, there is obviously much wrong in the world of for-profit college education.

You Mean Colleges Scam Students? - Who would have thought.... Undercover tests at 15 for-profit colleges found that 4 colleges encouraged fraudulent practices and that all 15 made deceptive or otherwise questionable statements to GAO’s undercover applicants. Four undercover applicants were encouraged by college personnel to falsify their financial aid forms to qualify for federal aid—for example, one admissions representative told an applicant to fraudulently remove $250,000 in savings. Other college representatives exaggerated undercover applicants’ potential salary after graduation and failed to provide clear information about the college’s program duration, costs, or graduation rate despite federal regulations requiring them to do so. Why restrain this to for-profit colleges?Doesn't it apply to situations like this too?“It’s a personal thing for a couple of us and a bit prideful, but the idea we just spent five years  — and a hundred thousand dollars for some of us — obtaining two degrees, to go ahead and wipe that right back off our resume in hopes of getting a $12-an-hour job at Starbucks would really be depressing,” he said. Who gave this guy the idea that taking on $100,000 in debt was a good idea?  Exactly where did that idea come from?

Quinn announces more budget cuts - IL -The Department of Healthcare and Family Services, which oversees Medicaid for the poor, will lose $216 million, or about 2.7 percent. Last month, Quinn said the agency would be one of the few getting more money.The Department of Human Services is being cut by $576 million, about 14 percent. Originally, the department was going to lose just $312 million. Education spending, from preschool to high school, will be cut by $311 million, or about 4.3 percent. Quinn announced last month that education would be cut by $241 million. The school cuts include $146 million for student transportation and $68.5 million in reading improvement block grants.

Stressed States Are Forcing Workers to Retire Later -Lawmakers in at least 10 states have voted this year to require many new government employees to work longer before retiring with a full pension, or have increased penalties for early retirement. A similar proposal is pending in California. Mississippi, already among the states requiring more years of service for a pension, is weighing the additional step of increasing its retirement age.The change comes as foreign governments from France to Morocco have either decided to increase or are contemplating a rise in the age at which private and public workers can receive government pensions.

LA council orders new pension cost studies - With pension costs expected to consume nearly a third of the city budget within five years, the Los Angeles City Council on Tuesday ordered new studies of ways to rein in the expense, potentially setting up conflicts with the city's powerful unions. The 15-0 vote followed a report by City Administrative Officer Miguel Santana that noted pension contributions are expected to double from $1.1 billion this year to $2.2 billion in 2015-16. "How can we run the city with a third of the budget in 2015 going to employee benefits?"  "We are in a very tough moment. We cannot sustain and maintain the present pension system as it is. We can no longer postpone pension reform."

Stormy hearing expected today over Cincinnati pension fund future - Who will pay to keep Cincinnati's worker pension fund going? That billion dollar question is expected to bring angry answers Thursday morning to a major city council hearing. It's being held at the Duke Energy Convention Center because there is just not enough room at Cincinnati City Hall for all the city workers and retirees that are expected to attend. The problem facing the city's pension fund is that it is woefully underfunded and has been for years. Some projections say it could take a $1 billion to $1.5 billion to keep the fund solvent after 20 years. Almost 8,000 retirees and more than 6,000 current city workers will be affected. Some of the workers have already started to protest suggestions that workers will pay bigger pension premiums or work more years before qualifying for a pension

Ct. No. 2 in unfunded pension liability - An education think tank says Connecticut has the second-highest unfunded pension liability per capita in the country, which could impair efforts by schools to recruit highly qualifed teachers and administrators.A new report by Education Sector says the deficit in Connecticut's pension fund amounts to more than $4,500 per state resident, second highest behind Alaska's rate of $5,100. Connecticut's unfunded liability, the difference between what the state owes current and future retirees and what it has saved, totals nearly $15.9 billion

Your Money: Battle Looms Over Huge Costs of Public Pensions - The haves are retirees who were once state or municipal workers. Their seemingly guaranteed and ever-escalating monthly pension benefits are breaking budgets nationwide. The have-nots are taxpayers who don’t have generous pensions. Their 401(k)s or individual retirement accounts have taken a real beating in recent years and are not guaranteed. And soon, many of those people will be paying higher taxes or getting fewer state services as their states put more money aside to cover those pension checks.  At stake is at least $1 trillion. That’s trillion, with a “t,” as in titanic and terrifying.  The figure comes from a study by the Pew Center on the States that came out in February. Pew estimated a $1 trillion gap as of fiscal 2008 between what states had promised workers in the way of retiree pension, health care and other benefits and the money they currently had to pay for it all. And some economists say that Pew is too conservative and the problem is two or three times as large.

Hugely profitable companies that won't restore the 401(k) match they ditched in 2008. - But businesses aren't helping matters much. One of the reasons Americans are saving more of their salaries and wages is that in 2008 and 2009, employers stopped doing the things they have historically done to make their employees feel confident about spending—contributing to 401(k)s, paying for benefits, raising salaries in line with inflation. Corporate America's productivity and efficiency gains since the onset of the Great Recession have been impressive and an important contributor to the recovery. Businesses cut costs aggressively largely by cutting jobs, salaries, benefits, and perks.Companies made these cutbacks out of desperation. The problem is that today, a year after the economy began to expand, and after several quarters of profit growth—Bloomberg reported that "profits among S&P 500 companies will rise 35 percent in 2010, the fastest pace in 22 years"—companies aren't restoring any of those cuts.

Access to employer-provided benefits among full- and part-time private industry workers, March 2010 - Employer-provided retirement plans were available to 74 percent of all full-time workers in private industry in March 2010; by contrast, 39 percent of part-time private industry workers had access to a retirement plan.  Among full-time workers in private industry, 86 percent were provided access to medical care benefits and 74 percent were provided paid sick leave benefits. Only 24 percent of part-time private industry workers had access to medical care benefits, and 26 percent had access to paid sick leave benefits. Access to life insurance was provided to 74 percent of full-time private industry workers, compared with just 15 percent of part-time workers who were offered this benefit. These data are from the National Compensation Survey, which provides comprehensive measures of occupation earnings, compensation cost trends, and incidence and provisions of employee benefit plans in the United States.

Dwindling Retirement Savings 'Undiscussed Explosive Bomb' Of Recession - Aside from stagnant wages, soaring unemployment and plummeting home values, the major tragedy of this recession is the havoc it has wreaked on the retirement incomes of millions of Americans who have planned and saved their entire lives, only to watch that money drain out of their accounts much sooner than they anticipated. Retirement statistics are grim. The percentage of American workers who said they have less than $10,000 in savings grew to 43 percent in 2010, according to a recent survey by the Employee Benefit Research Institute. Nearly a quarter of the workforce said they have postponed their planned retirement in the past year and a survey reports that 61 percent of workers say they are now living paycheck to paycheck, as compared to 43 percent in 2007. With rapidly dwindling savings and fewer opportunities for jobs than their younger counterparts, many older Americans are facing a very uncertain economic future.

Social Security Jitters? Better Prepare Now - With the nation’s debt swelling, the pressure on Washington to cut spending will only rise. Social Security may not be the first place lawmakers look. But the program, which has provided a significant financial cushion for retirees and others since the first checks were mailed in 1937, will surely be part of the discussion. The program, which has its own dedicated stream of income, is projected to pay out more this year than it is taking in, but that is a function of the weak economy. Social Security will, according to the last annual report from its trustees, be able to pay full benefits through 2037. Then, if there are no changes in the program in the meantime, the taxes collected will be enough to pay out only about 75 percent of benefits through 2083. So while Social Security’s finances are stable in the short term, most experts agree that the program needs to be bolstered for the long term.

Let the (Social Security) Games Begin! 2010 Report Released - Hot off the press. PDF of the 2010 Social Security Report: News Release:  HTML version: Social Security Board of Trustees: Long-Range Financing Outlook Remains Unchanged The Social Security Board of Trustees today released its annual report on the financial health of the Social Security Trust Funds and the long-range outlook remains unchanged. The combined assets of the Old-Age and Survivors Insurance, and Disability Insurance (OASDI) Trust Funds will be exhausted in 2037, the same as projected last year. The Trustees also project that program costs will exceed tax revenues in 2010 and 2011, be less than tax revenues in 2012 through 2014, and then permanently exceed tax revenues beginning 2015, one year earlier than estimated in last year’s report.  The projected point at which the combined Trust Funds will be exhausted comes in 2037 – the same as the estimate in last year’s report. At that time, there will be sufficient tax revenue coming in to pay about 78 percent of benefits.

What Social Security Report Says vs. What They Tell You It Says -The Social Security and Medicare Boards of Trustees today released their report on the Status of the Social Security and Medicare Programs. Here is what it says: Social Security Just Fine Until At Least 2037The summary of the report says, "The financial outlook for Social Security is little changed from last year. The short term outlook is worsened by a deeper recession than was projected last year, but the overall 75-year outlook is nevertheless somewhat improved..." and is otherwise fine until at least 2037 with no changes. It is just fine forever, in fact, if we do something simple like raise the "cap" on earnings that are taxed to pay for the program. (That's right, when you make more than a certain income level you stop paying the tax!) Compare that to the military budget. We spend more than $1 trillion on military and related programs each year -- more than every other country combined -- and unlike Social Security that is completely "unfunded," and adds to the deficit.

Prognosis guarded for Medicare and Social Security — Medicare and Social Security — the foundation of a secure retirement — are facing strains from an aging population and an economy that can't seem to get out of low gear. And despite assertions to the contrary by the Obama administration, the new health care law doesn't improve Medicare's solvency by much.As the government releases its annual financial checkup Wednesday on the two giant programs that support millions of middle-class retirees, the prognosis is guarded. Demand for services is going up, and income from payroll taxes can't keep pace. Meanwhile, the government has used trust fund surpluses to pay for other needs, leaving Medicare and Social Security with a pile of IOUs. The picture for Social Security isn't encouraging, either. Last year, the trustees projected that Social Security would run out of money by 2037 unless Congress acts. Since then, the poor economy has increased pressure on the program's finances, as payroll taxes fell and the number of people applying for early retirement and disability benefits increased.

Medicare Stronger, Social Security Worse in Short Run, Report Finds  — Medicare will remain financially solvent for 12 additional years, until 2029, because of the cost-cutting measures in President Obama’s recently enacted health care legislation, the program’s trustees projected on Thursday.  The financial outlook for Social Security is “little changed from last year,” the report said. In the short run, it added, the financial condition of the retirement program has worsened because of high unemployment, which has reduced payroll tax revenues. For the first time, money flowing out of the program this year exceeds money flowing in.  The trustees predicted that the Social Security trust fund would be exhausted in 2037, the same date as projected last year. The Social Security commissioner, Michael J. Astrue, said this was “not a cause for panic,” because continuing tax revenue would still be sufficient to pay more than 75 percent of benefits even after exhaustion of the trust fund.

Medicare Gets New Lease On Life; Social Security Remains Healthy The new health care law has significantly improved the prognosis for Medicare, extending the life of its trust fund by 12 years until 2029, and thereby delaying any need for dramatic changes in benefits or revenues, according to a new report.The annual check-up from government actuaries overseeing the nation's two central safety-net programs also found that Social Security continues to be much less of a problem than Medicare, and will remain in strong financial shape at least through 2037. "The financial outlook for the Medicare program is substantially improved as a result of the far-reaching changes in the Patient Protection and Affordable Care Act," concludes the Medicare report -- although the trustees warned that the improvements depend on the successful implementation of the law. Social Security, according to its annual report, is expected to continue to run a surplus until 2024

Uninsured throng free clinic — a symptom of bad economy – With a wounded economy and high unemployment, more than 1,000 people came to a one-day free health clinic in the nation's capital Wednesday to get the basic care they can't afford or are otherwise denied because they have no insurance. More than three-quarters of those attending, don't have insurance because they are recently unemployed, work for small businesses, earn hourly wages, or must work multiple part-time jobs with no insurance, said the event's medical director Dr. Bobby Kapur. According to the National Association of Free Clinics, about 83 percent of the patients who go to free clinics are employed but don't have health insurance. According to the Kaiser Family Foundation, Washington alone has more than 57,200 residents who are uninsured. Patients at the clinic came from Virginia and Maryland as well, and thus represent only a small fraction of those living in the area without insurance.

Rendell: Thousands face layoffs without Medicaid funding-- In a worst-case scenario, about 12,500 public employees in Pennsylvania would face layoffs if the U.S. Senate fails to approve legislation providing $850 million in Medicaid money for the state, Gov. Ed Rendell said Tuesday. But Rendell said he's still confident the Senate would approve legislation giving Pennsylvania and other states about 70 percent of the six-month stimulus extension funding. How a resulting $255 million reduction in what was expected will impact Pennsylvania has not been determined, Rendell said. Pennsylvania and about 30 other states approved budgets relying on the stimulus extension money. Without that money, Pennsylvania would have to meet its obligations for Medicaid patients and make cuts throughout the rest of the budget, Rendell said.

Counties fret over lack of Medicaid funds -- While state leaders fear a $1 billion hole could be blown in the state budget if federal Medicaid money isn't approved, the same worries are trickling down to county governments.The state's 62 counties could be out a combined $800 million in federal funding if Congress doesn't approve a six-month aid extension for Medicaid. While some counties have stitched together budgets that do not bank on receiving the money, others have not. During a time of depleted fund balances, declining sales-tax revenue and increased state mandates, municipal government officials say they need the money more than ever

CBO On Health Reform -I keep being asked whether a careful look at the CBO analysis of health reform would reveal whoppers comparable to the analysis of the Ryan roadmap. The answer is no. Menzie Chinn had a good piece on this. A lot of the complaining involves the “doc fix”, the routine increases in Medicare payments required because the law consistently sets those payments too low. But that’s a fundamental logical fallacy. It’s true that the cost of the doc fix isn’t in the CBO score; that’s because it would have happened whether or not health reform passed. It’s not an incremental cost. What complaints might you make about the scoring? Most of it is completely reasonable — for example, saying that we can save money by eliminating overpayments to Medicare Advantage, and that aid to hospitals that treat a lot of uninsured patients can be reduced once almost everyone is insured. The one thing you might worry about is the projected reduction in fee-for-service payments relative to baseline; achieving that would require that efficiency improvements thanks to evaluation of medical procedures for effectiveness actually materialize.

HEALTH CARE thoughts: The Durable Medical Equipment (DME) mess - Years ago some members of Congress (Stark, Waxman, thought it would be harmful if physicians profited from their prescriptions, but not harmful for others to do so, and thus has flourished a huge DME industry, ranging from hospitals and national chain pharmacies to mom-and-pop operations. (When I ran ortho centers we subbed out DME, too much hassle and compliance risk.) Some DME providers get greedy and there has been a significant amounts of fraud in this area, most recently dealing with the ubiquitous motorized wheelchairs and power chairs of television fame. But the latest DME fraud trend is really disturbing. DME fraud is being committed by phony "providers" who tend to be involved with organized crime, immigrant organized crime, computer hackers and identity thieves. These businesses do not exist, have no customers, provide no merchandise and steal billions from the feds with phony billings. Reading the indictments is enlightening.

Is Health Care Special? - On a recent episode of the television talk show “Raw Nerve,” the host William Shatner, of “Star Trek” fame, had this exchange with Rush Limbaugh: Shatner: “Here’s my premise, and you agree with it or not. If you have money, you are going to get health care. If you don’t have money, it’s more difficult.” Limbaugh: “If you have money you’re going to get a house on the beach. If you don’t have money, you’re going to live in a bungalow somewhere.”  One must wonder whether physicians, nurses and other workers toiling day and night in health care — let alone the medics and helicopter pilots who risk their lives to help the wounded — see their work and its product quite as Mr. Limbaugh casts it. One further wonders whether families with a cancer-stricken member are likely to view going without health care as the moral equivalent of going without a beach house.

Bending The Curve - Paul Krugman - The new Medicare Trustees Report is out. Comparing Table IIIA-2 in this year’s report and last year’s report, we get this:..In other words, the Medicare actuaries believe that the cost-saving provisions in the Obama health reform will make a huge difference to the long-run budget outlook. Yes, it’s just a projection, and debatable like all projections. And it’s still not enough. But anyone who both claims to be worried about the long-run deficit and was opposed to health reform has some explaining to do. All the facts we have suggest that health reform was the biggest move toward fiscal responsibility in a long, long time.

Curve Bent! - Summary of the Social Security and Medicare Trustees' annual report, 2010: The red line represents Medicare (HI: Hospital Insurance and SMI: Supplemental Medical Insurance) and the blue line is Social Security (OASI: Old Age and Survivors Insurance and DI: Disability Insurance). That looks much better than the same chart last year:The difference is due to the health care reform bill passed earlier this year (the Affordable Care Act, or ACA), as this year's report explains: That's what President Obama and other reform advocates meant by "bending the curve." If it holds up over time, it represents a huge step towards improving the government's long-term financial picture - i.e., the health care reform bill was a tremendous act of "fiscal responsibility." The other takeaway from the chart is that, in general, the fiscal situation of the main "entitlement" programs isn't nearly as dire as some would have you believe. Social Security looks to level off at roughly 6% of GDP, which is quite manageable, and now, thanks to the reform, Medicare may do the same.

Back to Prison for Better Health Care - Here’s a pretty remarkable story that was spotted over at the other day. In what is clearly a sign of the times for the U.S. economy, the health care system, and government spending, one ex-con is now about to be incarcerated again in order to get more convenient health care. The details are in this report at Signs on San Diego. On the outside, Lawrence subsisted on about $1,000 from the government in social security and other benefits while dealing with colon cancer, diabetes, Parkinson’s disease, and a number of other ailments. This led him to the conclusion that life in prison was better than as a free man where it became too difficult to get around town to access free health care from Medicare and Medi-Cal … surely there’s a lesson in here about something.

“One in 31 Adults” - are under the control of the correctional system (prison, parole, probation) according to a March 2009 Pew Center Report pdf of the same title. 1 in every one hundred adults are imprisoned in jail, state prisons, or federal facilities. 25 years ago those under the control of the correctional system was one in 77 adults. The population under correctional control is ~ 7.3 million (2007). What does a growing prison and correctional population cost for taxpayers? To support the growing state prison population, costs range from ~$13,000 in Louisiana to ~$45,000 in Rhode Island annually (2005). The average is ~$23,000 annually, “US Imprisons 1 in every 100 Adults”, NYT. The cost of imprisonment compares nicely to a state or private college education (another story). As a whole the US imprisons a higher percentage of its population than any other nation in the world from which the cost burden of housing prisoners has become an issue for states with a decreasing/stagnant economy and decreasing tax revenues. Paradoxically while costing more, jails and prisons for many communities are a stable and growing business employing people, services, and a fast growing part of the rural economies.

Cato expert: There are no "death panels" - One of the strategies for correcting misperceptions that I've proposed is to locate experts from the same side of the aisle who might be especially credible to the misinformed. An August 2009 article by Kate Snow at ABC News, for instance, emphasized that "even those who do not support the version of the health care reform bill now being discussed -- note that [the "death panel"] accusations are shocking, inflammatory and incorrect." However, while a few Republicans in Congress quietly admitted that "death panels" are a myth, the number of conservatives who have done so is relatively small. With this context in mind, I was thrilled to discover that Cato's Michael Tanner had published a pamphlet (PDF) opposing the health care reform law that makes the intellectually honest distinction between future rationing (likely) and "death panels" (fictitious):

Administration Still Double-Counting Medicare Cuts - Last year, the administration grew fond of "double counting" the savings from the Medicare cuts in health care reform--claiming that they'd reduced the deficit, paid for reform, and extended the life of the Medicare trust fund.  Eventually, Republicans got around to asking for an analysis from the CBO, which told us what anyone who ever took first year accounting already knew:  this is not true. As I explained at the time:Basically, Medicare, like Social Security, has a "trust fund" (actually, more than one), which is supposed to fund it until the trust fund is exhausted in 2019.  The "trust fund" does not exist in any meaningful sense, because its "assets" consist of claims on the general fund, i.e. all the rest of the tax money.  As Medicare goes into deficit, it trades in those assets to cover its funding gap, which means the general fund has to find the money to pay off the special bonds by either raising taxes, cutting other spending, or borrowing more money.  After the trust fund is exhausted, the general fund has to find the money to pay for the Medicare deficit by either . . . raising taxes, cutting other spending, or borrowing more money.  The difference to taxpayers is nil.

“The curve will be bent” - Earlier this week the Obama Administration released a report that described savings to the Medicare program that are predicted to follow from changes mandated by the Affordable Care Act. If those savings–$575 billion over the next decade–actually come to pass, they will represent the beginning of what one prominent researcher thinks is the inevitable bending of the health care cost curve. In a recent article in Health Affairs, Harvard health economist Joe Newhouse arrived at that sense of inevitability by process of elimination. [I]t is hard to imagine that reductions in the rate of Medicare spending growth will not be made at some point. One way or another, the steady-state growth rate will fall; the curve will be bent. But it is equally hard to imagine cutting only Medicare spending while spending by the commercially insured under age sixty-five continues to grow at historic rates, which would lead to a marked divergence between what providers are paid for treating the commercially insured relative to what they are paid for Medicare beneficiaries.

Did Health Care Reform Cure Medicare? - The Medicare Trustees issued a report that shows a much lower path for Medicare spending. Mark Thoma has links to two people, including Paul Krugman, who triumphantly say that this shows that health care reform has solved the long-term problems with Medicare. On the other hand, John Goodman notes, Noting that the formal Trustees report assumes Medicare physician fees will be reduced by 30% over the next three years, Chief Actuary Richard Foster says that's "implausible." In addition, the Trustees report assumes Medicare fees will fall below Medicaid rates by 2019 A huge chunk of the financing for health care reform comes from reducing payments to physicians under Medicare. The Trustees' report takes those cuts at face value, because that is what the law says. However, other experts, including the Congressional Budget Office and Medicare's Chief Actuary, have expressed doubts that these cuts will take place, based on past experience.  Moreover, even if the Medicare cuts take place, it is double-counting to suggest that they will both save Medicare and pay for Obamacare's health insurance subsidies. They can do one or the other, but not both.

Don't Bogart That Deduction: Is Medical Marijuana a Medical Expense? - Following up on yesterday's post, which noted, based on an article in yesterday's Wall Street Journal (and an IRS Publication and MSNBC article), that folks living in states that have legalized medical marijuana cannot use their health care flexible spending accounts to purchase the marijuana with pre-tax dollars because marijuana is still illegal under federal law.  But reader Roger E. McEowen (Leonard Dolezal Professor in Agricultural Law and Director of the Center for Agricultural Law and Taxation, Iowa State University) notes that the IRS last month released a letter to Sen. Chuck Schumer (Info. 2010-0080) sanctioning the treatment of an "herb" as a medical expense:

Ready for the Next Trillion-Dollar Bailout? - Obamacare has been rightly blasted as fiscally irresponsible, yet few have noticed what may be Obamacare’s largest ticking entitlement time-bomb: the CLASS Act. My new op-ed on the subject is here, and my new report, co-written with Jim Capretta, is here. CLASS is a new long-term-care insurance program that was inserted into Obamacare so that Congress could raid its $70 billion surplus through 2020 to cover Obamacare’s initial deficits. Like the raided Social Security trust fund, future taxpayers will have to repay that $70 billion with interest when the program falls into deficit later. Thus, even Sen. Kent Conrad (D., N.D.) admits that Congress has enacted “a Ponzi scheme of the first order, the kind of thing that Bernie Madoff would have been proud of.”

Health Overhaul More Than Doubles Medicare's Viability to 2029, US says -  Medicare will gain an extra 12 years of fiscal lfe under the health-care law signed in March by President Barack Obama, confirming the administration’s claims that the overhaul would help extend the program.  Medicare, the U.S. government’s health plan for the elderly and disabled, will now run out of money in 2029 instead of 2017, accounting for the changes in the health-care law, according to a report issued today by U.S. government actuaries.

Health care and revenue competition in Britain - Elite NHS foundation trusts are gearing up to lure private patients from home and abroad as health budgets are squeezed – a decision made possible after health secretary Andrew Lansley said he would abolish the cap limiting the proportion of total income hospitals can earn from the paying sick...With a £20bn black hole opening up in NHS budgets, a group of top performing trusts are seeking to profit from paying patients and use the money to fund public healthcare in Britain.Previously,Labour's cap had meant most hospitals were unable to generate more than 2% from private income.Here is more, although full details are not yet clear, it seems doctors will be much more in charge, in a decentralized manner.  Here's one opinion:"What's to stop US healthcare companies coming over here to poach patients. Or GPs sending patients to India for cheap operations? Or English hospitals raiding Scotland for sick people?" "It could be a real mess."

Paperwork Nightmare: A Struggle To Fix New Law – Tucked into the new health care law is a requirement that could become a paperwork nightmare for nearly 40 million businesses. They must file tax forms for every vendor that sells them more than $600 in goods.The goal is to prevent vendors from underreporting their income to the Internal Revenue Service. The government must think vendors are omitting a lot because the filing requirement is estimated to bring in $19 billion over the next decade.Business groups say it will swamp their members in paperwork, and Congress is listening. Democrats and Republicans want to repeal it, but getting them to work together on the issue is proving difficult in an election year.The House rejected a bill Friday that would have repealed the provision. The two parties disagreed on how to make up the lost revenue.

A many-headed beast - THIS week, we carried a piece about a new cross-country poverty index devised by a group of researchers at the Oxford Poverty and Human Development Initiative, which is designed to capture several dimensions of poverty at once. The idea, as the piece explains, is that some aspects of poverty (say, nutrition) may not always move perfectly with income, so that looking directly at how many people are deprived along several (admittedly subjectively chosen) dimensions at once may give researchers and policymakers a better handle on just what poor people lack, and what could be done to deal with these problems. Sabina Alkire, the director of OPHI does a nice job in an audio interview she did with us of explaining just what she and her team set out to do. Quite apart from the practical aspects, I found the index interesting because it is inspired by Amartya Sen's ideas about capabilities and development as something that enhances people's capabilities, which I've always found intellectually appealing but hard to turn into something concrete.

Let's Talk About Global Food Governance - Like my particular area of research, migration, food security is an issue area whose global governance is overlapping yet tenuous. Alike for migration, food is a domain covered by a multiplicity of regional and international organizations that do not necessarily operate in a coordinated fashion. In plain English, there's a whole bunch of people who don't seem to bother checking how their efforts fit together with those of others. Heck, the United Nations contains a number of bodies alike the Food and Agriculture Organization (FAO), World Food Programme (WFP), and the International Fund for Agricultural Development (IFAD) that not only fail to work together but also engage in turf wars over matters such as obtaining UN funding. Overall, global food governance is something of a mess. Given increasing incidences of hunger that occurred in the wake of the global financial crisis, these concerns are not trivial ones. Yet, the existing infrastructure of international organizations has not acquitted itself well in recent times.

US gets a strategy to meet the Millennium Development Goals – please explain - Although the eight goals that seek to reduce the global burden of hunger, poverty and disease were agreed upon by aid donors almost 10 years ago, and most of the goals come due in 2015, the world’s largest donor has never had a strategy to achieve them. Obama campaigned on the promise of making the MDGs “America’s goals,” but the first year and a half of his administration has not yet delivered on this promise. On Friday, though, the US released a document written by USAID which declares that the US “fully embraces the MDGs” and “will put innovation, sustainability, tracking development outcomes, and mutual accountability at the heart of our approach to development, and, consequently, to the MDGs.” The US strategy is notable in that it is not internally coherent according to ANY of these alternative MDG world-views.

Monsanto: The world’s poster child for corporate manipulation and deceit - At a biotech industry conference in January 1999, a representative from Arthur Anderson, LLP explained how they had helped Monsanto design their strategic plan. First, his team asked Monsanto executives what their ideal future looked like in 15 to 20 years. The executives described a world with 100 percent of all commercial seeds genetically modified and patented. Anderson consultants then worked backwards from that goal, and developed the strategy and tactics to achieve it. They presented Monsanto with the steps and procedures needed to obtain a place of industry dominance in a world in which natural seeds were virtually extinct.This was a bold new direction for Monsanto, which needed a big change to distance them from a controversial past. As a chemical company, they had polluted the landscape with some of the most poisonous substances ever produced, contaminated virtually every human and animal on earth, and got fined and convicted of deception and wrongdoing.So they redefined themselves as a "life sciences" company, and then proceeded to pollute the landscape with toxic herbicide, contaminate the gene pool for all future generations with genetically modified plants, and get fined and convicted of deception and wrongdoing.

Roadside Invader: Engineered Canola - Genetically engineered canola resistant to two common herbicides has been found growing widely along roadsides in North Dakota, one of the first instances of a biotech crop establishing itself in the wild.   This might not even be a problem at all, although critics of biotech crops might conceivably point to it as an example of how hard it is to stop the spread of “gene pollution.’’ If this is a problem, it’s because a canola plant growing outside of a canola field – on a road or in a field of wheat, for example – could be considered a weed.  And if it’s resistant to a widely used herbicide, it would remove one option for killing it, although other herbicides could do the job. “If there’s a problem in North Dakota, it’s that these crop plants are becoming weeds,’’ said Cynthia L. Sagers, an associate professor of biology at the University of Arkansas who led the study.

Is biochar the answer for ag? - Scientists demonstrate that biochar, a type charcoal applied to soils in order to capture and store carbon, can reduce emissions of nitrous oxide, a potent greenhouse gas, and inorganic nitrogen runoff from agriculture settings. The finding will help develop strategies and technologies to reduce soil nitrous oxide emissions and reduce agriculture's influence on climate change.The study revealed for the first time that interactions between biochar and soil that occur over time are important when assessing the influence of biochar on nitrogen losses from soil.

America’s Most Common Bat Headed for Eastern Extinction -By the time today’s toddlers graduate from high school, the most common bat in North America may have vanished altogether from the eastern United States. Researchers combined historical population trends with mortality counts in Myotis lucifugus colonies struck by White-Nose Syndrome, an extraordinarily virulent bat disease first identified in 2006. According to their models, M. lucifugus, better known as the little brown bat, has a 99 percent chance of vanishing from the east, soon. “If mortality and spread continue the way it has in the past four years, that’s where we get the very distressing prediction of a high chance of regional extinction in 16 to 20 years,” said Winifred Frick, a Boston University bat researcher.  In some caves, mortality is almost total. Caves where bats lived since the last Ice Age now stand silent.

The US Electric Grid: Will it be Our Undoing? - Revisited - Below the fold is a post I wrote a little over two years ago--in May 2008--about the deplorable state of the US electrical transmission system. The situation may have improved somewhat since then, inasmuch as the American Society of Civil Engineers now gives it a grade of D+, instead of a grade of D. But Energy Biz (an industry magazine) still is printing articles about the problem. An article called Transmission Strains: A Matter of Keeping the Lights On from the Jan/Feb 2010 issue starts out:The strains to our transmission system have been evident for some time."The U. S. transmission system is under tremendous strain and only marginally stable," Wayne Brunetti, the former chief executive officer of Xcel Energy, observed in 2002. "It was designed as a regional system and has been forced to function as a national system, a function for which it was not designed and does not handle very well," he said. The problem is that, nearly 10 years later, what Brunetti said is still true.

The truth about global warming - IN A DEPRESSING case of irony by juxtaposition, the death of climate change legislation in the Senate has been followed by the appearance of two government reports in the past week that underscore the overwhelming scientific case for global warming -- and go out of the way to repudiate skeptics.  First came a report on global climate from the National Oceanic and Atmospheric Administration, which confirmed that the 2000s were by far the warmest decade in the instrumental record -- as were, in their turns, the 1980s and the 1990s. Unlike year-to-year fluctuations, these 10-year shifts are statistically significant. Further, the report notes that it derived its conclusions from an array of data sources -- not just the land-surface readings that doubters challenge -- from ocean heat uptake to melting land ice to sea level rise.  Second was a strongly worded response from the Environmental Protection Agency to petitions that it revoke its finding that "climate change is real, is occurring due to emissions of greenhouse gases from human activities and threatens human health and environment."

Yes, the World Is Getting Warmer - Another all-time temperature record: Jeff Masters: Weather Underground: At 4pm local time today in Moscow, Russia, the temperature surpassed 100°F for the first time in recorded history. The high temperature of 100.8°F (37.8°C) recorded at the Moscow Observatory, the official weather location for Moscow, beat Moscow's previous record of 99.5°F (37.5°C), set just three days ago, on July 26. Prior to 2010, Moscow's hottest temperature of all-time was 36.6°C (98.2°F), set in August, 1920. Records in Moscow go back to 1879. Baltschug, another official downtown Moscow weather site, hit an astonishing 102.2°F (39.0°C) today. Finland also recorded its hottest temperature in its history today, when the mercury hit 99°F (37.2°C) at Joensuu. The old (undisputed) record was 95°F (35°C) at Jvaskyla on July 9, 1914. Given that the planet as a whole has seen record high temperatures the past four months in a row, it should not be a surprise to see unprecedented heat waves like the Russian heat wave. A record warm planet "loads the dice" in favor of regional heat waves more extreme than anything experienced in recorded history.... Fourteen extreme national high temperature records have been set in 2010.

Figueres Urges Smaller Steps on Climate Change as UN Warming Talks Resume - Costa Rica’s Christiana Figueres took charge of United Nations climate talks, calling on nations to do the “politically possible” and take smaller steps rather than striving for an all-encompassing deal to halt global warming. After the UN climate summit in Copenhagen in December failed to produce a new treaty, about 190 countries are still grappling to agree on more ambitious greenhouse-gas cuts to contain the global average temperature rise to 2 degrees Celsius (3.6 degrees Fahrenheit). The task has a “rapidly rising scale and urgency,” Figueres told delegates today at the start of five days of negotiations in Bonn.  “We cannot cross the ocean on a single gust of wind, but if we don’t raise the sails now, we may never discover a safer world,” said Figueres, who took over from Yvo de Boer on July 8. “Time is not on our side.

Global Climate Talks Stall As Countries Back Down From Prior Commitments To Reduce Emissions - Global climate talks appear to have slipped backward after five days of negotiations in Bonn, the chief U.S. delegate said Friday, adding that some countries were reneging on promises they made last year to cut greenhouse gas emissions.Poor countries agreed with the grim assessment made by U.S. negotiator Jonathan Pershing, saying the latest round of talks on how to fight global warming have been frustrating.The sharp divide between rich and poor nations over how best to fight climate change - a clash that torpedoed a summit in Copenhagen last December - remains, and bodes ill for any deal at the next climate convention in Cancun, Mexico, which begins in November.

George Shultz: There’s a climate problem connected with the burning of fossil fuels - Former U.S. secretary of State George P. Shultz believes it’s crucial to fight global warming to protect national security. Global warming is created by burning fossil fuel, he says, and payments for foreign oil sometimes wind up financing terrorism.  And Shultz, who’s also a former Treasury secretary, thinks the nation suffers an “economic vulnerability” because of its oil addiction…The L.A. Times article notes that “the man who set up the Environmental Protection Agency four decades ago,” also added: There’s a climate problem connected with the burning of fossil fuels.  The basic facts are pretty clear. “So we have a three-pronged set of problems” created by greenhouse gases, he says. “Security, economic and environmental.”

Coal: The cheap, dirty and direct route to irreversible climate change - Sometimes the most important news is what is not happening. This summer has given us one such example: the climate-change bill, for which President Barack Obama had pushed so hard, will not even be presented to the US Senate, because it stands no chance of passage.This means that the US is about to repeat its "Kyoto experience". Twenty years ago, in 1990, the US participated (at least initially) in the first global talks aimed at achieving a global accord to reduce CO2 emissions. At the time, the EU and the US were by far the greatest emitters, so it seemed appropriate to exempt the world's emerging economies from any commitment. Over time, it became apparent that the US would not live up to its commitment, owing, as now, to opposition in the Senate. The EU then went ahead on its own, introducing its path-breaking European Emission Trading System in the hope that Europe could lead by example.Without the American climate-change package, the promises made by the US administration only seven months ago at the Copenhagen summit have become worthless. The European strategy is in tatters – and not only on the transatlantic front.

AP: US top scientists urge coal, oil use penalties - Ditching its past cautious tone, the nation's top scientists urged the government Wednesday to take drastic action to raise the cost of using coal and oil to slow global warming. The National Academy of Sciences specifically called for a carbon tax on fossil fuels or a cap-and-trade system for curbing greenhouse gas emissions, calling global warming an urgent threat. The academy, which advises the government on scientific matters, said the nation needs to cut the pollution that causes global warming by about 57% to 83% by 2050. That's close to President Barack Obama's goal. "We really need to get started right away. It's not opinion, it's what the science tells you," said Robert Fri, who chaired one of the three panels producing separate climate reports.

Climate change could destroy 80 per cent of rainforest by next century:  Fewer than one in five of the plants and animals which currently live in the world’s rainforests will still be here in 90 years time, a study predicts.Rainforests currently hold more than half of all the plant and animal species on Earth.However, scientists say the combined effects of climate change and deforestation may force them to adapt, move, or die.By 2100, this could have altered two-thirds of the rainforests in Central and South America, about 70 per cent in Africa. The Amazon Basin alone could see changes in biodiversity for 80 per cent of the region.

Second lowest July Arctic sea ice extent. Thickest ice begins melt out, so we may see record low volume - Will we see Arctic sea ice records broken this September for both volume and extent? The National Snow and Ice Data Center just issued their full July report, which suggests that, because of “cool, stormy weather” last month, “It would take a very unusual set of conditions in August to create a new record low.” The Study of Environmental Change’s September Sea Ice Outlook: July Report, which surveys forecasters, says “The spread of Outlook contributions suggests about a 29% chance of reaching a new September sea ice minimum in 2010.” You can see what appears to be a change in slope in the last few days, but the Arctic weather is fickle, so the extent of the extent in September remains unclear. As for volume, the NSIDC report spotlights the demise of some of the oldest and thickest ice left: Arctic sea ice extent averaged for July was the second lowest in the satellite record, after 2007. After a slowdown in the rate of ice loss, the old, thick ice that moved into the southern Beaufort Sea last winter is beginning to melt out….

We’re hot as hell and we’re not going to take it any more - Try to fit these facts together:

  • According to the National Oceanic and Atmospheric Administration, the planet has just come through the warmest decade, the warmest 12 months, the warmest six months, and the warmest April, May, and June on record.
  • A “staggering” new study from Canadian researchers has shown that warmer seawater has reduced phytoplankton, the base of the marine food chain, by 40% since 1950.
  • Nine nations have so far set their all-time temperature records in 2010, including Russia (111 degrees), Niger (118), Sudan (121), Saudi Arabia and Iraq (126 apiece), and Pakistan, which also set the new all-time Asia record in May: a hair under 130 degrees. I can turn my oven to 130 degrees.
  • And then, in late July, the U.S. Senate decided to do exactly nothing about climate change. They didn’t do less than they could have -- they did nothing

Travelling by car contributes more to global warming than by plane  -- A new study has found that driving a car increases global temperatures in the long run more than making the same long-distance journey by air, China's Xinhua news agency reported. The researchers uses, for the first time, a suite of climate chemistry models to consider the climate effects of all long and short-lived gases, aerosols and cloud effects, not just carbon dioxide, resulting from transport worldwide. The new findings released by the American Chemical Society on Wednesday, however, said in the short run travelling by air has a larger adverse climate impact because airplanes strongly affect short-lived warming processes at high altitudes.

World's first solar power plant that can work at night -The world's first solar power plant to employ such technology—a thermal power plant that concentrates the sun's rays with mirrors on long, thin tubes filled with the molten salt—opened in Syracuse, Sicily, on July 14. Dubbed Archimede—after the famous Syracusan scientist Archimedes who supposedly coined the term "Eureka" for scientific discovery and reputedly repelled a Roman fleet through the use of mirrors to concentrate the sun's rays and burn the invading ships—the power plant can harvest enough heat to generate five megawatts of electricity, day or night, and can store enough energy to keep producing power even at night or during cloudy daytime hours. Of course, it requires 30,000 square meters of special parabolic mirrors and 5,400 meters of high heat-resistant pipe to collect the sun's rays in the molten salts, even in Syracuse. All that adds up to a building cost of roughly $80 million for just 5 megawatts of electricity.

Is Environmentalism a Luxury Good? - Add environmentalism to the long list of things the Great Recession may have successfully pulverized. That is one implication of a new working paper titled “Environmental Concern and the Business Cycle: The Chilling Effect of Recession,” by Matthew E. Kahn at U.C.L.A and Matthew J. Kotchen at Yale. Using survey data, it finds that high unemployment rates are associated with less concern for the environment and greater  skepticism about global warming.From the study’s abstract: From national surveys, we find that an increase in a state’s unemployment rate is associated with a decrease in the probability that residents think global warming is happening and reduced support for the U.S to target policies intended to mitigate global warming. Finally, in California, we find that an increase in a county’s unemployment rate is associated with a significant decrease in county residents choosing the environment as the most important policy issue.

Russia: Drought Hammers Agriculture - Russia has declared a state of emergency in four more regions - hit by the worst drought in a century – making for 27 regions across central Russia seeing production hit, and economists concerned about inflation. Cracking soil and dead plants – such apocalyptic pictures can be seen in many Russian regions. The heat has burnt out more than 10 million hectares of grain-fields. The wheat harvest may fall by a quarter this year.  Drought has a knock-on effect on almost every agricultural sector. The cost of producing grain, milk, beef and hogs has doubled. Cattle breeders have lost their grass – and now are running out of cheap grain.“Grain production, vegetable production, in essence all crop production that’s open field crop production. And primarily the dairy industry – we are losing a significant volume of milk because of the heat. But as soon as the heat is over we’ll eventually bounce back. The quality won’t be quite the same. The cost of the feed won’t be quite the same.”

Fears Mount On Food Price Impact Of Russian Drought (news video) The UK is warning that Russia’s drought could cause a double-digit percentage rise in food prices before Christmas.Russia is a major food exporter, but record temperatures this summer are expected to halve exports. There are also fears the government could start an export ban to protect domestic supplies. Some experts say the food price inflation – non goods like wheat, dairy and meat – is “scary” and could push the country into another recession.

Britons To Pay More For A Loaf Of Bread As Wheat Prices Jump Britons face paying more for a loaf of bread after wheat prices leapt due to a scorching July in Russia and calamitous flooding in Pakistan.A severe drought destroyed one-fifth of the wheat crop in Russia, one of the world's largest exporters, and now wildfires are sweeping in to finish off some of the fields that remained after the hottest July for 130 years. Heavy rains in Pakistan are said to have destroyed 15pc of the country's wheat crop. "Inflation expectations are high,"

Wheat Hits 23-Month High After Russia Bans Grain Exports - (Reuters) — Benchmark wheat futures rushed to a 23-month high on Thursday after Prime Minister Vladimir Putin of Russia announced a temporary ban on the export of grain and related farm products from the drought-wracked country.  With Russia at the mercy of its worst drought in over a century, Mr. Putin also pledged 10 billion rubles ($335 million) in subsidies and another 25 billion rubles in loans to the agricultural sector, adding that grain from the government intervention fund will be distributed to regions.

Agflation fears as Russia halts all grain exports – Russian premier Vladimir Putin has ordered a halt to all exports of wheat and other grains from August 15, raising the stakes dramatically in the crisis over wheat supplies. "This is very serious," said Abdolreza Abbassanian, chief grain economist at the UN Food and Agriculture Organization. "It's a desperate situation because it has caught everybody off guard. We're not facing the situation of two years ago but there is a risk of destabilising panic." The shortage may trigger a bout of "agflation", posing a quandary for central banks. Professor Charles Goodhart from the London School of Economics fears that rising food prices will add 0.5pc to Britain's sticky inflation, already testing market tolerance.

UN urges calm as wheat hits two-year high - Wheat prices surged more than 7 per cent on Wednesday to a fresh two-year high even as the United Nations attempted to quell growing panic in the markets. CBOT September wheat rose to a fresh peak above $7.30 a bushel, the highest since September 2008, amid rising alarm over the state of the wheat crop in the Black Sea region, which has been ravaged by the worst drought in more than a century. The UN’s Food and Agricultural Organisation said that fears of a repetition of the 2007-08 food crisis were unjustified.

Wheat storm will soon blow itself out -Drought and scorching heat across the Eurasian Steppes have lifted wheat futures by 50pc in a month and ensures a nasty shock for bread lovers, but this is a very different story from the global food crisis two years ago. The US Department of Agriculture says global wheat stocks are 187m tonnes, or 15.4 weeks' consumption. They fell to 124m tonnes in 2008, or 10.5 weeks' cover. Wheat futures have reached a 22-month high of $7.18 a bushel, but this is nowhere near the crisis peak of $13 two years ago. The contexts are radically different.  "What happened in 2008 was literally a perfect storm," said Doug Whitehead, from Rabobank.  That was a broader crisis across the farm complex. The United Nations blamed grain shortages on biofuels used as ethnanol in cars, warning that 100m people in poor countries risked famine. Others blamed investor flows into commodity funds.  The wheat storm is hitting a single niche. Most "ags" are well-behaved. Corn has risen modestly. The Philippines said it is "swimming" in rice.

Climate Change Adaptation: The Case of Moscow - Moscow is not enjoying its heat wave . Up until now, the people of Moscow have said "Nyet" to air conditioning and living and working in buildings that are well ventilated and offer some relief from rare heat waves. This recent heat wave is certainly a "salient event" that should increase demand in Moscow for such basic ways of adapting to our hotter future. Simple economics would predict that air conditioner sales will rise and that real estate prices for "heat wave" friendly buildings will start to reflect this dimension of quality. Fool me once shame on you, fool me twice --- shame on me. I would assume that there are other adjustment margins that I have not listed here but each have the same goal in mind; "to beat the summer heat". Up until now, Moscow has not had to cope with such heat but moving forward people will be more pro-active. There is also the urban heat island effect and urban planners can think about what tangible steps can be taken to battle the heat island effect .

Everglades on Unesco danger list - A UN panel has added Florida's Everglades National Park and Madagascar's tropical rainforest to a list of world heritage sites at risk.Unesco's World Heritage Committee said development in the Everglades had caused water flow to fall 60% in the wetland, a major wildlife sanctuary.The pollution level there was so high it was killing marine life, it added.Illegal logging and poaching following last year's military coup has meanwhile imperilled Madagascar's rainforests.

Greenland Ice Cap Melt Is Accelerating - Dr Alun Hubbard, leading a team from the universities of Swansea and Aberystwyth said the ice sheet in their region had lowered six metres in just a month.The phenomenon is caused by surface melt, a vicious cycle in which melted ice brings about further thawing of the cap beneath it.As the ice turns to liquid, its surface reflectivity decreases, absorbing more of the heat from the sun, and accelerating the melt.Frozen ice has an "albedo", or reflectivity, of around 80%, whereas open water reflects only around 20% of the sun's rays.Sky News flew in with the team to their base on the inland ice, near to the town of Kangerlussuaq.The frozen crevasses of the fracturing ice sheet create an almost lunar landscape - a desolate horizon stretching in every direction as far as the eye could see.

Ice island breaks from Greenland - A giant sheet of ice measuring 260 sq km (100 sq miles) has broken off a glacier in Greenland, according to researchers at a US university.The block of ice separated from the Petermann Glacier, on the north-west coast of Greenland.It is the largest Arctic iceberg to calve since 1962, said Prof Andreas Muenchow of the University of Delaware.The ice could become frozen in place over winter or escape into the waters between Greenland and Canada.  If the iceberg moves south, it could interfere with shipping, Prof Muenchow said.The images showed that Petermann Glacier lost about one-quarter of its 70km-long (43-mile) floating ice shelf. There was enough fresh water locked up in the ice island to "keep all US public tap water flowing for 120 days," said Prof Muenchow.

Hacking Earth against warming, scientists favor fake volcanoes - By physically altering the planet on a global scale, geoengineering projects would theoretically offset warming caused by the buildup of carbon dioxide in the atmosphere. The concept was dismissed as fringe science when it was first introduced in the 1960s. Now, what once seemed like science fiction is not only being deemed feasible, but necessary, said experts at a panel convened here Tuesday by the American Enterprise Institute for Public Policy Research, a conservative think tank.One popular geoengineering scenario is to create an artificial volcano. Thomas Wigley, an expert on climate change based at the National Center for Atmospheric Research in Boulder, Colo., has created computer simulations that replicate the 1991 "Mount Pinatubo effect" -- a temporary cooling period created by the launch of 20 million tons of sulfur dioxide into the stratosphere.

Nasa scientists braced for 'solar tsunami' to hit earth - The earth could be hit by a wave of violent space weather as early as Tuesday after a massive explosion on the sun, scientists have warned. The solar fireworks at the weekend were recorded by several satellites, including Nasa’s new Solar Dynamics Observatory which watched its shock wave rippling outwards.  Astronomers from all over the world witnessed the huge flare above a giant sunspot the size of the Earth, which they linked to an even larger eruption across the surface of Sun.  The explosion, called a coronal mass ejection, was aimed directly towards Earth, which then sent a “solar tsunami” racing 93 million miles across space.  Images from the SDO hint at a shock wave travelling from the flare into space, the New Scientist reported. Scientists have warned that a really big solar eruption could destroy satellites and wreck power and communications grids around the globe if it happened today.

The Other Gulf Stain - To the west of the oil slicks and fleets of vessels working to seal the BP well, another less invisible stain, mainly the result of vast amounts of nitrogen and other nutrients washing down the Mississippi River from agricultural lands upstream, has spread beneath the waters of the Gulf of Mexico. It is the annual blossoming of a zone of low dissolved oxygen levels, anathema to fish, shrimp and other marine life, known colloquially as the “dead zone.” This year’s hypoxic zone, nearly the size of the state of Massachusetts, is right in the range predicted earlier in the year by the Louisiana Universities Marine Consortium, which does a yearly survey of oxygen levels. Here’s a map of the findings:

Coral reefs doomed by climate change - The world's coral reefs are in great danger from dual threats of rising temperatures and ocean acidification, Charlie Veron, Former Chief Scientist of the Australian Institute of Marine Science, told scientists   Tracing the geological history of coral reefs over hundreds of millions of years, Veron said reefs lead a boom-and-bust existence, which appears to be correlated with atmospheric carbon dioxide levels. With CO2 emissions rising sharply from human activities, reefs—which are home to perhaps a quarter of marine species and provide critical protection for coastlines—are poised for a "bust" on a scale unlike anything seen in tens of millions of years. In particular, said Veron, reefs are endangered by ocean acidification, which reduces the availability of free carbonate ions in sea water, making more difficult for marine organisms to extract calcium carbonate to build the aragonite and calcite shells and skeletons they need to survive.

Protected ocean areas can’t save coral reefs from climate change, new research shows - The conventional wisdom that marine reserves can save coral reefs from climate change is wishful thinking, according to Simon Fraser University researchers.In fact, marine reserves, areas of the ocean that are protected from overfishing and pollution, make coral reefs more vulnerable to higher temperatures, said Isabelle Cote, a professor of tropical marine ecology at SFU who has studied coral reefs for 25 years. Experts have long agreed that reducing fishing and pollution would help coral reefs survive climate change, according to a 2008 report by the Global Coral Reef Monitoring Network. But Cote’s research contradicts this. If it held true, higher water temperatures would cause less suffering for protected reefs than for unprotected reefs, she said.

Undersea river discovered flowing on sea bed - Researchers working in the Black Sea have found currents of water 350 times greater than the River Thames flowing along the sea bed, carving out channels much like a river on the land.  The undersea river, which is up to 115ft deep in places, even has rapids and waterfalls much like its terrestrial equivalents.  If found on land, scientists estimate it would be the world's sixth largest river in terms of the amount of water flowing through it.  The discovery could help explain how life manages to survive in the deep ocean far out to sea away from the nutrient rich waters that are found close to land, as the rivers carry sediment and nutrients with them.

New garbage patch discovered in Indian Ocean - Scientists previously mapped huge floating trash patches in the Pacific and Atlantic oceans, but now a husband-wife team researching plastic garbage in the Indian Ocean suggest a new and dire view. "The world's oceans are covered with a thin plastic soup," says Anna Cummins, cofounder of 5 Gyres Institute. Cummins and her husband, Marcus Eriksen, established the 5 Gyres Institute to research plastic pollution in the world's oceans. The team works in collaboration with Algalita Marine Research Foundation and Pangaea Explorations, two nonprofit scientific organizations devoted to marine preservation. They report that all of the 12 water samples collected in the 3,000 miles between Perth, Australia, and Port Louis, Mauritius (an island due East of Madagascar), contain plastic.

Are Our Oceans Dying? - Microscopic marine algae which form the basis of the ocean food chain are dying at a terrifying rate, scientists said today. Phytoplankton, described as the ‘fuel’ on which marine ecosystems run, are experiencing declines of about 1 per cent of the average total a year. According to the researchers from Dalhousie University in Canada the annual falls translate to a 40 per cent drop in phytoplankton since 1950. The research into phytoplankton comes as a separate report today offered evidence that the world has been warming for the past 30 years. If confirmed, the decline of the phytoplankton would be a more dramatic change to nature's delicate balance than the loss of the tropical rainforests, scientist said.

How We Wrecked The Oceans — Part II - The latest issue of Nature contained a paper by Daniel G. Boyce, Marlon R. Lewis & Boris Worm called Global phytoplankton decline over the past century. This research describes a planetary catastrophe which, on a scale of 1 to 10, ranks about 8.5 on the disaster scale. This post should be viewed as a follow-up to How We Wrecked The Oceans Phytoplankton are microscopic photosynthesizers, which means that they use light energy from the sun and take in carbon dioxide (CO2) to produce oxygen. These tiny plants, along with cyanobacteria, do a lot of the work that keeps the biosphere stable. Doing the math, the researchers estimate that an astonishing 40% of ocean's phytoplankton population has disappeared since 1950! The fewer microscopic plants there are living in the ocean surface waters, the less CO2 is drawn down from the atmosphere. Thus, the Earth's carbon cycle is being fundamentally altered, with uncertain but surely deleterious effects.

Eating Gasoline in America - Deep in the consensus-reality shared by post-war economists is the belief that the US economy transformed itself over the past thirty years, and now operates with much less sensitivity to energy costs. Indeed, in the cheap oil era and as the US developed its FIRE economy (finance, insurance, real estate), the energy inputs needed to create GDP certainly declined. But this also served to lull economists into yet another false rulemaking as they converted temporary conditions into permanent ones. The research now establishing economic sensitivity to high oil prices, especially for commuters from America’s suburbs, is myriad. Indeed, depending on how high gasoline prices go, housing affordability itself is now more likely to fall with distance. This was only exacerbated in the past ten years as home buyers, looking to escape housing inflation, migrated further and further from city cores, to the peripheries. More broadly, we now understand that poverty is now a phenomenon of the suburbs, according to a study released this year by The Brookings Institute. And given that trend, I have taken another look at one of my favored indicators: food stamp usage. Below is a chart of food stamp users (the SNAP program) in one of America’s quintessential post-war, car commuting regions: San Bernardino County.

Here we go again: Tax gas or mileage? - For decades, paying for roads has been fairly straightforward. Motorists pay at the pump through gasoline taxes. It's more or less fair, too: The more you drive, the more you pay. But more and more, people involved in transportation planning and construction say that model is breaking down as many vehicles get better gas mileage or don't use gasoline at all.They say state and federal governments eventually should switch to a system that charges a tax based on how many miles you drive, not how many gallons you consume. As gasoline-tax revenue stagnates, the idea is to institute a true user fee tied to miles driven. Cue fuzzy flashback music to May 8, 2007 or July 2, 2009 for my proposal to solve the gas/mileage tax riddle: A Fuel Efficiency Payment

Fossil Fuel Subsidies Dwarf Support for Renewables - Fossil fuels are the backbone of economies worldwide, so governments spend a lot to support them. A new report from Bloomberg New Energy Finance says altogether governments spent between $43 anf $46 billion on renewable energy and biofuels last year, not including indirect support, such as subsidies to corn farmers that help ethanol production. Direct subsidies of fossil fuels came to $557 billion, the report says. This disparity raises the question--if the report is right and fossil fuels require so much backing, can they compete with renewables without government support? After all, some renewables--such as sugarcane based biofuels and some wind farms--can already compete with fossil fuels. Without the huge government subsidies for fossil fuels, wouldn't they be eclipsed by renewables?

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

Breaking: New York Senate passes temporary ban on hydraulic fracturing - In a predawn vote Wednesday, New York State's senate passed a bill that reaches beyond the debate over the environmental safety of drilling for gas in the Marcellus Shale and would effectively ban almost all gas and oil drilling in the state until next spring. The bill circumvents an environmental review by the state's regulatory agency that could be finished this year. The bill prohibits the underground process of hydraulic fracturing [1], which breaks up buried rock and releases gas trapped inside. Its author, State Senator Antoine Thompson, told ProPublica the moratorium is aimed at pausing the kind of high-volume hydraulic fracturing used in horizontally-drilled wells in the Marcellus Shale until legislators can reach an informed decision about its risks. But the language in the final bill as it is posted on the state's website [2] does not differentiate between the different ways hydraulic fracturing can be used. It appears to be a blanket prohibition that would also stop hydraulic fracturing in New York's many vertical oil and gas wells and would apply to drilling in geologic formations outside the Marcellus.

N.Y. Senate Approves Fracking Moratorium - The New York State Senate voted 48 to 9 Tuesday night to issue a temporary moratorium on a type of natural gas exploration that combines hydraulic fracturing with horizontal drilling and the injection of millions of gallons of chemically treated water underground. The aim of the measure is to ensure an adequate review of safety and environmental concerns.The state Department of Environmental Conservation is currently reviewing the environmental impact of drilling in upstate New York, where natural gas companies are buying up leases and applying for permits to tap the Marcellus Shale, one of the largest natural gas fields in North America. The moratorium proposed in the bill would prevent new drilling permits from being issued for the Marcellus Shale until May 15, 2011. While the measure cannot become law before the state Assembly passes a similar bill, and that chamber is not expected to take up the issue until September, environmentalists said the vote was significant in that it gave state officials more time to examine safety issues.

Three lessons of BP oil disaster for climate change: worst-case scenarios happen, you can’t believe oil companies, prevention is a lot cheaper than ‘cure’ - BP’s expected oil disaster fine: $17.6 billion. - Scientists confirm the Deepwater Horizon explosion, which released 5m barrels of oil, was the worst accidental spill ever….At its peak, the BP well was spewing 62,000 barrels a day, according to the federal team, which is higher than the original worst-case scenario of 60,000….In June [Anadarko] chairman and chief executive, Jim Hackett, said BP’s actions probably amounted to “gross negligence or wilful misconduct”. Homo ’sapiens’ sapiens prefer to repeat history than learn from it.  But if we were inclined to learn something about the greatest fossil fuel disaster we face from this current, second greatest of disasters, it might be that one should plan for the plausible worst-case scenario — and plan even harder to prevent it.

La. fishermen wrinkle their noses at ’smell tests’ - Even the people who make their living off the seafood-rich waters of Louisiana's St. Bernard Parish have a hard time swallowing the government's assurances that fish harvested in the shallow, muddy waters just offshore must be safe to eat because they don't smell too bad. Fresh splotches of chocolate-colored crude, probably globules broken apart by toxic chemical dispersants sprayed by BP with government approval, still wash up almost daily on protective boom and in marshes in reopened fishing grounds east of the Mississippi River. Louisiana wildlife regulators on Friday reopened state-controlled waters east of the Mississippi to harvesting of shrimp and "fin fish" such as redfish, mullet and trout. Smell tests on dozens of specimens from the area revealed barely traceable amounts of toxins, the federal Food and Drug Administration said. The tests were done not by chemical analysis, but by scientists trained to detect the smell of oil and dispersant. Chemical tests on fish for oil-related compounds are routine, but no such test exists for detecting levels of dispersant, said Meghan Scott, FDA spokeswoman.

U.S. Puts Oil Spill Total at Nearly 5 Million Barrels - Nearly five million barrels of oil have gushed from the BP’s well since the Deepwater Horizon spill began on April 20, federal scientists said on Monday in announcing the most precise estimates yet of the well’s flow rate. The estimates would make this spill far bigger than the 3.3 million barrels spilled by the Mexican rig Ixtoc I in 1979, previously believed to be the world’s largest accidental release of oil. Federal science and engineering teams estimated that 53,000 barrels of oil per day were pouring from the well just before BP was able to cap it on July 15. They also estimated that the daily flow rate had lessened over time, starting at around 62,000 barrels a day and decreasing as the reservoir of hydrocarbons feeding the gusher was gradually depleted.

New Estimate Puts Gulf Oil Leak at 205 Million Gallons - After weeks of calculating and revising, the group of scientists appointed by the government to estimate the size of the Gulf of Mexico oil leak have released new figures that, if correct, will make the leak the world's largest accidental spill. The move comes as engineers prepare to start a "static kill" procedure that will help permanently fix the underwater gusher. In a statement, the team estimated that immediately before the well was capped on July 15, 53,000 barrels (2.2 million gallons) of oil per day were leaking from BP's broken wellhead. But in the initial period after the spill began, 62,000 barrels of oil (2.6 million gallons) per day were leaking from the well. That's 4.9 million barrels total or 205.8 million gallons. From the release:

BP blowout roundup (all in one article) Good news (Oil in Gulf ...): The government is expected to announce on Wednesday that three-quarters of the oil from the Deepwater Horizon leak has already evaporated, dispersed, been captured or otherwise eliminated — and that much of the rest is so diluted that it does not seem to pose much additional risk of harm. A government report finds that about 26 percent of the oil released from BP’s runaway well is still in the water or onshore in a form that could, in principle, cause new problems. But most is light sheen at the ocean surface or in a dispersed form below the surface, and federal scientists believe that it is breaking down rapidly in both places. ...The government announced early this week that the total oil release, from the time the Deepwater Horizon exploded on April 20 until the well was effectively capped, was 4.9 million barrels, plus or minus 10 percent. That estimate makes the Deepwater Horizon disaster the largest marine spill in history. It is surpassed on land by a 1910 spill in the California desert. ...Testing of fish has shown little cause for worry so far, and fishing grounds in the gulf are being reopened at a brisk clip. At one point the government had closed 36 percent of federal gulf waters to fishing, but that figure is now down to 24 percent and is expected to drop further in coming weeks.

With well shut, next worry is health of cleanup workers - As BP moves to seal the Deepwater Horizon well permanently, more than 31,000 cleanup workers continue to rely on incomplete and at times misleading information about toxic exposure to the spilled oil in the Gulf of Mexico. Public health officials say they face a daunting challenge: how to inform workers about the possible dangers when studies on the toxic effects of such a large spill have never been done. Research has provided enough clues about some of the chemicals, however, that independent scientists and worker health advocates say that BP and the Obama administration should be more aggressive in warning workers about the possible long-term health effects of toxins, especially given complaints of worker illnesses that surfaced after the 1989 Exxon Valdez spill in Alaska.  "It's sort of a legalistic framework that the government has adopted in saying there are not a lot of studies so we don't know a lot,"

Obama says BP Gulf spill near end - President Barack Obama said the “long battle” to combat the Gulf of Mexico disaster had reached a turning point as a new government report showed that the majority of the spilt oil had disappeared. His comments came as the British oil company announced it had reached a “significant milestone” in its attempts to seal the leak in the Macondo well by pumping heavy mud into it from the top.  A new study, led by the National Oceanic and Atmospheric Administration, said the majority of the 4.9m barrels of oil that had spilt from the Macondo well was no longer in the water.About a third of the oil had been burnt, skimmed or dispersed, either naturally or with chemicals, while about a quarter of it – or 1.2m barrels – appeared to be degrading quickly because of the effects of the sun, waves and currents, as well as microbes eating small globules of oil, the report found.

BP's Deepwater Oil Spill - Tests End and the Kill Begins, Well Reaches Static Condition - BP announced today that the MC252 well appears to have reached a static condition -- a significant milestone. The well pressure is now being controlled by the hydrostatic pressure of the drilling mud, which is the desired outcome of the static kill procedure carried out yesterday (US Central time).  Pumping of heavy drilling mud into the well from vessels on the surface began at 1500 CDT (2100 BST) on August 3, 2010 and was stopped after about eight hours of pumping. The well is now being monitored, per the agreed procedure, to ensure it remains static. Further pumping of mud may or may not be required depending on results observed during monitoring."We've pretty much made this well not a threat, but we need to finish this from the bottom," Allen told WWL-TV

‘Static Kill’ Appears to Be Working, BP Says - An operation that pumped heavy drilling mud to plug BP’s runaway oil well in the Gulf of Mexico has been so successful that Obama administration officials said on Wednesday they were convinced the well would never leak again.  BP began the effort, known as a static kill, late Tuesday and then stopped pumping the mud after eight hours to verify that it had not caused the Macondo well to spring any new leaks. Throughout the day, senior government scientists and BP engineers combed through data to evaluate the condition of the well piping and whether it made sense to pour cement for a final plug from a surface ship above the well or to pump the cement through a relief well that is still being drilled. BP and government officials said late Wednesday that they would proceed on Thursday with a permanent cementing of the well, and that there was no doubt that the static kill represented a major step in bringing the well under control

BP has backup plans for oil spill if kills fail (Reuters) - While U.S. officials welcomed the initial success of BP's latest attempt to plug its Gulf of Mexico oil well, the company still has backup options in the event something goes wrong again. Early on Wednesday, BP said its "static kill" involving heavy drilling mud pumped into the stricken well from the top was controlling pressure and keeping oil still, or static. Backup systems to collect leaking oil are on the back burner. "I'm not sure that's going to be required, but we have it out there in case we need it," retired Coast Guard Admiral Thad Allen said at a recent briefing.

U.S. Says 74 Pct of BP Oil Gone From Gulf Waters - About 74 percent of the oil that leaked from BP Plc’s damaged well in the Gulf of Mexico has been eliminated or will soon be eaten by bacteria, according to a U.S. government report. The remaining oil may be on the surface of the water, buried beneath sand and sediment, or was collected from the region’s beaches, according to the report released today by a team led by the Interior Department and National Oceanic and Atmospheric Administration.  An estimated 4.9 million barrels of oil leaked from BP’s Macondo well between April 20 and July 15, according to government scientists. BP was able to capture about 800,000 barrels of crude from the well before it entered the Gulf. The leak began after the Deepwater Horizon drilling rig exploded off the coast of Louisiana, killing 11 workers. “Less oil on the surface does not mean that there isn’t oil still in the water column or that our beaches and marshes aren’t still at risk,” Jane Lubchenco, administrator of NOAA, said in a press release. “Knowing generally what happened to the oil helps us better understand areas of risk and likely impacts.”

Looking for the oil? NOAA says it's mostly gone   – With a startling report that some researchers call more spin than science, the government said Wednesday that the mess made by the BP oil spill in the Gulf of Mexico is mostly gone already.  Out of sight, though, doesn't mean out of danger, nor is the Gulf now clean. The harmful effects of the summer of the spill can continue on for years even with oil at the microscopic level, a top federal scientist warned.

Tracking Gulf’s Fate as Slicks Recede - As BP and its team prepare to seal the wrecked Macondo well with mud and cement early next week, and the extent of oil on the surface of the Gulf of Mexico has receded, biologists and other scientists are mulling the long-term prospects for the ecosystems of the despoiled region and the communities that rely on them. I e-mailed a batch of researchers and other experts tracking the aftermath of the gulf gusher and others who studied previous oil spills to get their sense of where things go from here. Their responses are posted below (along with a musical take on the situation by Pete Seeger). In the long run — as happened in the world’s worst oil spill, in the Persian Gulf during the war — ecosystems will heal and even thrive. But big questions persist for now.While the risk to coasts is likely to quickly recede, biologists have expressed strong concerns about the use of  nearly 2 million gallons of chemical dispersants that don’t destroy surface slicks, but simply cause the oil to disperse and sink (not to mention the dispersants sprayed at the point where oil gushed from the seabed a mile down).

Documents indicate heavy use of dispersants in gulf oil spill – While the BP well was still gushing, the Obama administration issued an order that limited the spreading of controversial dispersant chemicals on the Gulf of Mexico's surface. Their use, officials said, should be restricted to "rare cases."  But in reality, federal documents show, the use of dispersants wasn't rare at all. Despite the order -- and concerns about the environmental effects of the dispersants -- the Coast Guard granted requests to use them 74 times over 54 days, and to use them on the surface and deep underwater at the well site. The Coast Guard approved every request submitted by BP or local Coast Guard commanders in Houma, La., although in some cases it reduced the amount of the chemicals they could use, according to an analysis of the documents prepared by the office of Rep. Edward J. Markey (D-Mass.).

Congressman: too much dispersant used in oil spill - As BP inched closer to permanently sealing the blown-out well in the Gulf of Mexico, congressional investigators railed the company and Coast Guard for part of the cleanup effort, saying too much toxic chemical dispersant was used.The investigators said the U.S. Coast Guard routinely approved BP requests to use thousands of gallons of chemical a day to break up the oil in the Gulf, despite a federal directive to use the dispersant rarely. The Coast Guard approved 74 waivers over a 48-day period after the Environmental Protection Agency order, according to documents reviewed by the investigators. Only in a small number of cases did the government scale back BP's request. Rep. Edward Markey, D-Mass., released a letter Saturday that said instead of complying with the EPA restriction, "BP often carpet bombed the ocean with these chemicals and the Coast Guard allowed them to do it."BP did not immediately return a phone call and a spokesman for the Unified Command Center in New Orleans did not have an immediate comment.

BP's Deepwater Horizon - Oil to Stay Put; Dispersant Questions -Around May 24, a large loop current eddy, called Eddy Franklin, started to “pinch off” and detach, from the loop current. For a number of weeks, Eddy Franklin and the loop current showed varying levels of connectivity. The eddy is now clearly disconnected from the loop current and will likely migrate to the west over the next few months. As of July 25, 2010, Eddy Franklin was more than 100 miles from the nearest surface oil associated with the Deepwater Horizon/BP source. There is no clear way for oil to be transported to Southern Florida, the Florida Keys or along the East Coast of the United States unless the loop current fully reforms with Eddy Franklin, or moves northward, neither of which is likely to happen for several months. At that point, essentially all of the remaining surface oil will have dissipated.

BP's oil now oozing out from Beach sand in Louisiana (News Video)

Many questions hanging over the oil industry - She asserts that Shell that is not taking responsibility for its leaks is making huge profits compared with BP that is now paying a high price for our thirst for oil.  [the article in Swedish]. As in the blog from July 28, she addresses the size of the leak in the Gulf of Mexico and then compares it with the estimated leakage in Nigeria:“According to a report assembled by American, Brittish and Nigerian experts four years ago 40 million liters of oil were spilled annually into the delta. And this had been going on for 50 years. That means that 2 billion liters of oil have leaked into the wetlands.” It is time to begin a global effort to get Shell to take responsibility. If 2 billion liters is the right number that is 12 times more than the leak in the Gulf of Mexico.

BP risks Obama row by hinting it may return to stricken oil well - A struggle between BP and the Obama administration over the future of the cemented well in the Gulf of Mexico erupted in public today when the oil company suggested it may drill in the same reservoir again. In a briefing with reporters meant to symbolise BP's return to business-as-usual in the Gulf, the chief operating officer, Doug Suttles, said the company may not give up all claims on the Macondo well, which leaked five million barrels of oil into the Gulf. "There's lots of oil and gas here," Suttles said. "We're going to have to think about what to do with that at some point." BP's former chief executive, Tony Hayward, told Congress in June that there were 50 million recoverable barrels of oil in the reservoir.

BP faced with $10 billion lawsuit over Texas City toxic release - Just as BP began celebrating a proclaimed success in its Gulf of Mexico catastrophe, the company now finds itself in the woeful position of facing a $10 billion lawsuit over a 40-day toxic chemical release in Texas City, Texas earlier this year.  A $10 billion class action lawsuit was filed Tuesday on behalf of 2,000 claimants against oil behemoth BP after the company engaged in a 40-day upset during April and May that released at least 538,000 pounds of known toxins into the Texas City skies. The event began just two weeks before the company became very well-known over its Deepwater Horizon incident in the Gulf of Mexico.  Tony Buzbee, a Texas attorney who also represents Gulf coast residents impacted by the Deepwater Horizon oil disaster, filed the suit on Tuesday for his clients seeking compensation for “health effects including all symptoms associated with acute benzene exposure,” according to The Telegraph.

Enbridge Oil Disaster: Tar sands piped from Canada through the heart of America -- 1 million gallons threaten Lake Michigan -- do we need the Keystone XL Project?  The EPA reports 1 million gallons have spilled into Michigan's Battle Creek, which feeds the Kalamazoo River and empties into Lake Michigan. Over 24 miles of river are already stained with "impressive slugs of oil," and the flow is now threatening to poison one of the great lakes. This new environmental disaster may be the worst oil spill in U.S. Midwest history, and comes at time when the nation is still feeling the sting of an ongoing tragedy in the Gulf of Mexico. The State Department is in the process of approving a massive expansion of the Canadian crude pipeline network, called the Keystone XL project. This pipeline would carry an additional 900,000 barrels of tar sands crude into the US every day, exposing more American communities and fragile freshwater ecosystems to spills like the Kalamazoo River disaster. The new proposed pipeline will cut directly through the Ogallala aquifer, which supplies water to 27% of the irrigated land in the United States.

Kalamazoo River Oil Spill (slide show)

What the River Dragged In - IT’S strange having your own oil spill. What we have, of course, is a blip compared to the one in the Gulf of Mexico, which this week formally broke all records for offshore spills. But after watching the gulf catastrophe unfold from afar, the news that oil was gushing from a pipeline just three hours south of here into a small creek that flows into the Kalamazoo River and, eventually, into Lake Michigan, came as a surprise. Until last week, I wasn’t aware that a pipeline even existed, though I must have driven over or past it hundreds of times. The leak is now under control, but a good storm could still blow some of the estimated one million gallons of spilled oil into the lake, and maybe even north along its sandy coast, to a place called Clinch Park, where I’ve been swimming most mornings from June to October since I was kid.

Exxon, BP, Imperial Oil Form Exploration Venture for Canada's Beaufort Sea - Imperial Oil Ltd., Exxon Mobil Corp. and BP Plc formed a joint venture to explore for oil and natural gas in Canada’s Beaufort Sea.  Imperial and Exxon will each hold a 25 percent stake in the venture, and BP will own 50 percent, Imperial spokesman Pius Rolheiser said by phone from Calgary today. The two licenses involved are exploration license 446, bought by Imperial and Exxon in 2007, and exploration license 449, awarded to London-based BP in 2008, Rolheiser said.  Exxon Mobil and other producers have discovered more than 10 billion barrels of oil in North American arctic seas. The reserves remain locked beneath the seafloor because of a lack of pipeline capacity to ship them to markets.

Tracing Oil Reserves to Their Tiny Origins - NYTimes - Today, a principal tenet of geology is that a vast majority of the world’s oil arose not from lumbering beasts on land but tiny organisms at sea. It holds that blizzards of microscopic life fell into the sunless depths over the ages, producing thick sediments that the planet’s inner heat eventually cooked into oil. It is estimated that 95 percent or more of global oil traces its genesis to the sea. “It’s the dominant theory,” said David A. Ross, scientist emeritus at the Woods Hole Oceanographic Institution on Cape Cod. The idea, he added, has been verified as geologists have roamed the globe over the decades and repeatedly found that beds of marine sediments are “a good predictor” of where to discover oil.  The theory also explains offshore drilling — why there is oil in many seabeds, why it is more often near shore than in the abyss, and why oil experts say offshore drilling may increase, rather than cease.

Buying gas to fuel Gulf oil sales - Maximising oil exports from the GCC will hinge on the region importing more gas, the Scottish consultancy Wood Mackenzie says.  Wood Mackenzie has belatedly realised what makes Gulf residents hot and bothered: a lack of gas to power air conditioners and electric fans. Calling the situation “ironic” in a region with the world’s biggest concentration of crude oil and natural gas, the firm concludes that leaving the situation as it is would result in 1.5 million barrels per day (bpd) of oil being diverted from the export market by 2030 to meet regional electricity demand.

Arab States Go Nuclear to Close Power Gap, Catch Up With Iran - Historically, it has proven extremely difficult for countries in the Middle East to build nuclear power plants. The idea of commercial reactors secretly processing weapons-grade nuclear material has always alarmed Washington, which for decades has used its clout in the region to keep the Mideast as nuclear-free as possible. The situation is gradually changing, as Arab allies of the U.S. increasingly petition Washington to bless their plans for civilian nuclear programs.  Saudi Arabia and the United Arab Emirates need to satisfy demand for electricity that is growing at a rate approaching 10 percent a year. Their interest in nuclear energy has in part been sparked by a shortage of natural gas, the usual fuel for electric power plants. Without enough gas, the Saudis and the Gulf Arabs have been burning oil to generate power, which is inefficient and polluting. These countries also consider themselves energy specialists and want to prepare for an era when carbon emissions may be penalized.

China Overtakes U.S. as Saudi Arabia of Wind Power - The United States has been called the Saudi Arabia of wind. But for the first time ever, China has exceeded the U.S. in newly installed wind capacity. In a report released Wednesday, the U.S. Department of Energy details how all old records of wind power have been broken. In 2009, the U.S. added roughly 10,000 megawatts of new capacity--that's 40% more than was added the previous year.

Skidding Toward Fall - This economy has a destination for sure, but it's not in the direction where all eyes are trained in moist hopefulness: that glimmering horizon of longed-for growth. You will not get that kind of growth -- the kind that increases the overall wealth of the organism in question. A few people will make more money than they did before, but overall we are in an epic contraction. More people and organizations will go broke than will thrive. It will seem very unfair.  The true destination of the US economy is to get smaller and for two reasons mainly: 1.) Capital ("money") is vanishing out of our system steadily and rapidly due to a massive collective failure to repay money owed on loans, mortgages, debts, and assorted obligations. 2.) Access to the primary resource we depend on for powering the economy (oil) is increasingly beyond our control -- even worse, under the control of people who would like us to eat shit and die.

The Imminent Collapse Of Industrial Society…The collapse of modern industrial society has 14 parts, each with a somewhat causal relationship to the next. (1) Fossil fuels, (2) metals, and (3) electricity are a tightly-knit group, and no industrial civilization can have one without the others. The decline in fossil-fuel production is the most critical aspect of the collapse, and most of the following text will be devoted to that topic. As those three disappear, (4) food and (5) fresh water become scarce; grain and wild fish supplies per capita have been declining for years, water tables are falling everywhere, rivers are not reaching the sea. Matters of infrastructure then follow: (6) transportation and (7) communication ? no paved roads, no telephones, no computers. After that, the social structure begins to fail: (8) government, (9) education, and (10) the large-scale division of labor that makes complex technology possible.

The fallacy of growth in a finite world - In the short term, growth supports families, relieves social pressures that produce conflict and crime, pays for amenities such as the arts, offers opportunities for entrepreneurs and makes some of us exceedingly wealthy.  But growth is also an addiction. And, like most addictions, it threatens to destroy us. Not only does it clog our freeways, but it also paves farmland, wipes out open spaces, saddles taxpayers with ruinous development costs and crushes the quality of life that attracted us to our communities in the first place. Growth sucks irreplaceable resources out of the earth. It dumps poisonous pollution into our environment. It crowds out the planet's other species and utterly fails to deliver the human happiness it promises.

On physics and money - The Modern Era's latest and last phase is corporate globalization. While it has been forged by coal and to a lesser extent natural gas, it has been the movement provided by oil, and most importantly cheap oil, that allowed this brief, dead-end mutation we've seen the last few decades. Before the great global contraction of the last two years, the essential question of remaining global oil supplies was beginning to enter the popular mind, helped in America by plus $4 a gallon gasoline. Despite the contraction, the price of oil has remained stubbornly high and threatens to move much higher at every sign of renewed economic vigor. This is a problem for corporate globalization. The LA Times has a nice piece on how the increased price of oil is literally slowing the acceleration of corporate globalization, in this case, the great container ships plying the seven seas: Eager to cut fuel costs, ocean shipping lines have ordered their sea captains to throttle back the engines for what is quaintly known in the industry as "slow steaming." In some cases, freighters are taking as many as 15 days to make a Pacific crossing that used to take 11 days.

Different takes on peak oil, same result – price spikes predicted - Two must-read interviews with energy market investors both point to a coming demand-driven spike in oil prices, despite professing differing views on peak oil. Rick Rule, founder of Global Resource Investments, Ltd., speaks of “sharply higher world oil prices in the next 5 years,” and Charles Maxwell, senior energy analyst for Weeden & Co. that “oil will reach at least $150 a barrel around 2015.” It’s interesting that, despite professing different takes on the concept of peak oil, they end up at remarkably similar conclusions about demand outstripping supply within the next few years.

The Security Trap - Even as the world becomes more integrated, the word “security” crops up again and again, as in “food security” or “energy security.” Let’s start with ownership of foreign resources. One might think that a country that owns foreign oil can use the profits from sales to insulate its economy from high world oil prices. But this makes no economic sense. The world market prices oil according to its opportunity cost. Rather than subsidizing the price in the domestic oil market (and thus giving domestic manufacturers and consumers an incentive to use too much oil), it would make far better sense to let the domestic price rise to the international price and distribute the windfall profits from foreign oil assets to the population.The key point is that fundamental economic decisions should not be affected by the ownership of additional foreign oil assets. But, because of political pressure exerted by small, powerful interest groups, windfall profits will inevitably be spent at home in unwise subsidies. As a result, the acquiring country will, if anything, make suboptimal economic decisions.

What Should I Do?: The Basics of Resilience (Part I – Getting Started) by cmartenson -This article is part of a series on personal preparation to help you answer the question, "What should I do?"  Our goal is to provide a safe, rational, relatively comfortable experience for those who are just coming to the realization that it would be prudent to take precautionary steps against an uncertain future.  Those who have already taken these basic steps (and more) are invited to help us improve what is offered here by contributing comments, as this content is meant to be dynamic and improve over time. The copy in this series comes from a book chapter I wrote for The Post Carbon Reader: Managing the 21st Century’s Sustainability Crises (Richard Heinberg and Daniel Lerch, eds.)

What Should I Do?: The Basics of Resilience (Part 2 – Water)

What Should I Do?: The Basics of Resilience (Part 3 – Storing Food)

What do we do about unemployment? - If recession goes with peak oil, then unemployment is likely a symptom we will see more and more of. Theoretically, it is only a temporary situation--if the world transitions to another energy source, then there may well be jobs. If renewables somehow generate enough net energy to replace what we have lost from oil and natural gas, then, with the new infrastructure, there may be enough jobs to go around (although with their record so far, this transition looks at best like a long, very rocky one). Or if we go back to life more like it was before fossil fuels, manual labor will be in great demand, especially for growing food, obtaining water, and making clothing. If we build factories that can be operated without fossil fuels, people will also be needed to operate them. But how can we handle the transition, if it leads to more and more unemployment?

China's Growing Energy Demand "Legitimate": IEA Economist (Xinhua) -- During the process of rapid economic development, "China will need energy, and it is very legitimate," Fatih Birol, the chief economist of the International Energy Agency (IEA), said Tuesday. Last week, the Paris-based energy adviser published a report ranking China as the biggest energy user in the world, which sparked international concern over Beijing's influence on global energy markets. However, Birol, the economist who presented the report, said that surprise is not the expected response to the report.

How long will the Chinese put up with coal? - Woodmac's report concludes that China's appetite for LNG will swell for the next decade, requiring the gas equivalent of 380,000 barrels a day of oil imports, but that this demand will be cut in half in the 2020s. Why? Woodmac doesn't say China will give up on gas, but rather that it's going to develop its own domestic resources -- specifically shale gas, using hydro-fracturing technology invented in the United States. In this scenario, China's gas supplants its use of industrial oil, but not too much coal, which will continue to be far and away the fuel of choice for the production of electricity.

Hot political summer as China throttles rare metal supply and claims South China Sea - The United States and Europe have been remarkably insouciant about supplies of rare earth minerals so crucial to frontier technologies, from hybrid engines to mobile phones, superconductors, radar and smart bombs.  Lack of strategic planning by the West has allowed China to acquire a world monopoly on this family of seventeen metals. Assumptions that Beijing would never risk its reputation as a global team player by abruptly strangling supply have proved naive. The Pentagon and the US Energy Department are still scrambling to work out what this means for US security. An interim report from the Government Accounting Office (GAO) has laid bare just how delicate the situation has become.  “The US previously performed all stages of the rare earth material supply chain, but now most rare earth materials processing is performed in China, giving it a dominant position. In 2009, China produced about 97 percent of rare earth oxides. Rebuilding a U.S. rare earth supply chain may take up to 15 years," it said.

Chinese Car News | China now has 65,000km of highway! - The Ministry of Communications recently announced that China now has 65,000km of highways across the nation, making it the second largest highway network in the world after the United States. Xinhua has more details:China reported 65,000 kilometers of highways designed for fast traffic by the end of 2009, second only to the United States, said Li Shenglin, Minister of Communications, on Friday.China opened 4,719 kilometers of expressways in 2009 and launched construction of 16,000 kilometers of expressways last year as a result of increased investment in infrastructure, Li said at a national work meeting in Beijing.According to the strategic plan for highway development in 2005,by 2020, China will establish a national highway network, totaling100,000 kilometers, about the length in the United States today.

China’s Manufacturing Grows at Slower Pace, PMI Shows – (Bloomberg) -- China’s manufacturing grew at the slowest pace in 17 months in July as the government clamped down on property speculation and investment in energy-intensive and polluting factories.A deeper Chinese slowdown could weaken a global recovery already constrained by the debt burdens and unemployment of advanced economies. While growth is cooling, China’s full-year expansion may be as much as 9.5 percent, up from 9.1 percent in 2009, State Council researcher Zhang Liqun said today.“The Chinese economy is slowing down mainly due to the ongoing property tightening measures,” said Lu Ting, a Hong Kong-based economist at Bank of America-Merrill Lynch. “Beijing will surely ramp up spending on public housing and other public works to stabilize growth.”

Chinese Manufacturing Growth Slows - China's manufacturing activity expanded at the slowest pace in 17 months in July, an official gauge showed Sunday, reflecting that tightening measures introduced earlier this year and growing uncertainty over global demand continued to weigh on the country's economic expansion. China's official PMI, issued by the China Federation of Logistics and Purchasing and the National Bureau of Statistics, fell to 51.2 in July from 52.1 in June, the third straight month in which it has declined. The reading was also closer to the expansionary threshold of 50 than it had been in 17 months. A reading below 50 signals contraction.

State-Owned Groups Fuel China’s Real Estate Boom - All around the nation, giant state-owned oil, chemical, military, telecom and highway groups are bidding up prices on sprawling plots of land for big real estate projects unrelated to their core businesses. “These are the ones that have the money to buy the land,” says Prof. Deng Yongheng at the National University in Singapore. “Because in China, it’s the government that controls the money supply and the spending.” By driving up property prices, the state-owned companies, which are ultimately controlled by the national government, are working at cross-purposes with the central government’s effort to keep China’s real estate boom from becoming a debt-driven speculative bubble — like the one that devastated Western financial markets when it burst two years ago. Land records show that 82 percent of land auctions in Beijing this year have been won by big state-owned companies outbidding private developers — up from 59 percent in 2008

Cracks in the Chinese bubble? - We’ve written a fair amount about the Chinese property market on FT Alphaville. We’ve noted some stinky securitisation practices and highlighted some ghost-towns. Then we found some over-bidding on prices. The next thing to rock the Chinese property market – stress-tests, according to Bloomberg: China’s banking regulator told lenders last month to conduct a new round of stress tests to gauge the impact of residential property prices falling as much as 60 percent in the hardest-hit markets, a person with knowledge of the matter said. Banks were instructed to include worst-case scenarios of prices dropping 50 percent to 60 percent in cities where they have risen excessively, the person said, declining to be identified because the regulator’s requirement hasn’t been publicly announced. Previous stress tests carried out in the past year assumed home-price declines of as much as 30 percent.

Andy Xie on China’s Empty Apartments -What especially distinguishes China’s property bubble…is an unprecedented amount of living space. This huge stock of empty flats equals the nation’s quantity bubble. Quantity bubbles are less common than price bubbles, and they don’t last as long…A quantity bubble is sometimes a construction bubble, and it fizzles out when a building cycle turns over, crashing prices as soon as new supply becomes available…. Quantity and price bubbles may grow together. Southeast Asia, for example, experienced a quantity-cum-price bubble that lasted several years in the 1990s. One useful figure for analysts is China’s living space per capita….Based on this limited data, however, we can confidently conclude that China does not have a housing shortage. Moreover, its per-capita living space is higher than in Europe and Japan. Indeed, if we adopt Japan’s standard, China already has sufficient urban housing space for every man, woman and child in the country.

China Said to Test Banks for 60% Home-Price Drop - China’s stress tests of banks will assess the risk that a possible slump in property prices may strain developers’ finances and cause homebuyers to default, a person with knowledge of the matter said.  The banking regulator told lenders to include worst-case scenarios of prices dropping 50 percent to 60 percent in cities where they have risen excessively, the person said, declining to be identified because the regulator’s requirement hasn’t been publicly announced. Previous stress tests carried out in the past year assumed home-price declines of as much as 30 percent.  The China Banking Regulatory Commission reminded lenders that some developers may run out of cash, the person said.  “The stress test highlights the government’s concerns about banks’ exposure to the property market,”

Chinese Banking Stress Test Assumptions Imply Chinese Real Estate May Be Overvalued By As Much As 60% - Now this is what a real stress test should look like. Bloomberg quotes a banking insider that "China’s banking regulator told lenders last month to conduct a new round of stress tests to gauge the impact of residential property prices falling as much as 60 percent in the hardest-hit markets." And just in case it is unclear what the reality of the situation is, because as Europe demonstrated all too well, nobody would test for something which is not already priced in, China is effectively telegraphing to the world that it is bracing itself for a more than 50% plunge in select real estate values. "Banks were instructed to include worst-case scenarios of prices dropping 50 percent to 60 percent in cities where they have risen excessively, the person said, declining to be identified because the regulator’s requirement hasn’t been publicly announced. Previous stress tests carried out in the past year assumed home-price declines of as much as 30 percent."

Does It Sound Like a Worst Case Scenario Now? - Matt Yglesias writes regarding the Chinese government's direction for banking regulators to consider the impact of a 60% reduction in Chinese home prices as part of a stress test, Insofar as prices soared 68 period in one year, 60 percent decline doesn't sound like much of a worst-case scenario.  Let's put that in context, shall we? Year 0: Let's say our Chinese home value is 10,000 Yuan. Year 1: It rises in value by 68% to 16,800 Yuan.  Year 2: It crashes in value by 60%, falling to 6,720 Yuan. To rise back to the level of 16,800 Yuan, our hypothetical home in China must increase in value by 150%. Which coincidentally, would be what it would take to make the bank's balance sheets balance out and be solvent for the loan it might have underwritten on the property.

More hints from China on the renminbi - Ever since China said in late June that it was abandoning its dollar peg, the Chinese central bank has published a blizzard of public statements explaining its position - five from vice governor Hu Xiaolian and another bunch from Safe, the body that manages China’s foreign exchange reserves and regulates the currency market.Why all the announcements from the usually media-shy regulators?The latest statement from Safe today said that it was considering introducing new foreign exchange instruments, as well as containing a pledge to push forward with selective capital account reforms. There was no information about what these new products might be - market participants say that FX options are likely to be the next new development - but the statement follows an interview given last week by Yi Gang, the head of Safe, when he suggested that China was moving gradually towards a freely-floating currency.

China aims to make yuan convertible - The ultimate goal of China's exchange rate reform is to make the yuan a fully convertible currency, Yi Gang, head of the State Administration of Foreign Exchange (SAFE), said Friday. Yi, also deputy governor of the People's Bank of China, the central bank, made the remarks in an interview with Caixin media's China Reform magazine, which is posted on the SAFE website."There is no official timetable for a convertible yuan," he said in the interview with the magazine's executive editor Hu Shuli. The Chinese currency, or the RMB, still shoulders the pressure of appreciation albeit the pressure has eased, as the value of the currency drew close to the equilibrium level after adjustments in the past decade, Yi said.

Rubbish Threatens To Jam World's Largest Dam - Chinese state media reports the garbage is so thick in parts of the river that people can walk on the surface.China Daily says nearly three tonnes of refuse are collected from the dam every day, but operators are struggling with inadequate manpower and equipment as rubbish accumulates more quickly due to rain-triggered floods."The large amount of waste in the dam area could jam the mitre gate of the Three Gorges Dam," China Three Gorges corporation official Chen Lei said in the newspaper.More than 150 million people live upstream from the dam.In several nearby cities, household garbage is dumped directly into the river - China's longest - because municipalities are not equipped for trash disposal.

Garbage islands threaten Three Gorges Dam -— Thousands of tons of garbage washed down by recent torrential rain are threatening to jam the locks of China's massive Three Gorges Dam, and is in places so thick people can stand on it, state media said on Monday. Chen Lei, a senior official at the China Three Gorges Corporation, told the China Daily that more than 3,000 tons of trash was being collected at the dam every day, but there was still not enough manpower to clean it all up."The large amount of waste in the dam area could jam the miter gate of the Three Gorges Dam," Chen said, referring to the gates of the locks which allow shipping to pass through the Yangtze River. The river is a crucial commercial artery for the upstream city of Chongqing and other areas in China's less-developed western interior provinces.

China is too big to fail - Like Japan, South Korea, and others before, China has deployed a hybrid mix of state and market-led forces to globalise its economy over the past 30 years. Like its East Asian predecessors the Chinese miracle has been built on exports to the west. The results have been unprecedented, with a growth rate of approximately 10% that has lifted 566 billion people over the $1.08 "extreme poverty" threshold set by the World Bank.Yet the Chinese model is not sustainable in the long run. It has created severe inequalities and environmental degradation and has contributed to the global imbalances that were at the root of the financial crisis. There is an across the board consensus that China needs to diversify demand toward its domestic market.

Worldwide factory activity by country - Manufacturing activity continued to expand in much of the world in June, though the pace of expansion was again slower in most countries. Greece and South Africa were the only countries registering a contraction, though the rate for both countries was slower.The euro zone, Germany, India, Italy, Russia, Span and Switzerland saw a faster pace of growth in their purchasing manager indexes in May, while Hungary moved into expansion from contraction. The U.S. and China were among the nations that recorded a slower pace of growth last month. TABLE: Click on the top of any column to resort the chart. (See last month’s chart.)

Singapore plans for new wave of immigrants to help economy's growth-With the financial crisis a thing of the past, the authorities in Singapore are looking at ways of letting in a fresh wave of immigrants. This year 100,000 foreign workers should be needed to cope with the powerful surge in the city-state's economy, with 18% growth for the first half of the year.Singapore aims to achieve the world's highest growth rate in 2010: 13% to 15% of GDP. The International Monetary Fund is forecasting 12%.During an official visit to the United States in mid-July, the prime minister, Lee Hsien Loong, started to prepare public opinion for another wave of immigrants. This being a sensitive issue at home, he measured his words: "If we don't allow the foreign workers in, you are going to have overheating," he said. "We have to accept that."

The Siren Song of Capital Controls - Capital controls are back in vogue. Facing sharp currency appreciation and fearing asset-price booms fueled by hot money, countries such as Indonesia, Korea, and Taiwan have recently taken steps to limit inflows.Nervous central bankers in many other emerging markets, including India, facing pressures from exporters hurt by rising exchange rates, are contemplating broader controls on capital inflows as well. Earlier this year, the International Monetary Fund came out in favor of capital controls. So, does the new fascination with capital controls hold up to scrutiny? Capital controls remain a bad idea – an idea that is far more seductive in theory than in practice. Moreover, there is good reason to see inflows into emerging markets as an opportunity to strengthen domestic capital markets, rather than primarily as a threat to financial stability. Unrestricted capital flows could indeed spell disaster for an economy that has dysfunctional financial markets, high levels of corruption, and weak monetary and fiscal policies. So it might seem reasonable that emerging markets halt or even reverse the progress they have made on liberalizing capital flows in order to get their houses in order first.

The Crisis Down Under, by Joseph E. Stiglitz - The Great Recession of 2008 reached the farthest corners of the earth. Here in Australia, they refer to it as the GFC – the global financial crisis.  Kevin Rudd, who was prime minister when the crisis struck, put in place one of the best-designed Keynesian stimulus packages of any country in the world. He realized that it was important to act early, with money that would be spent quickly, but that there was a risk that the crisis would not be over soon. So the first part of the stimulus was cash grants, followed by investments, which would take longer to put into place.  Rudd’s stimulus worked: Australia had the shortest and shallowest of recessions of the advanced industrial countries. But, ironically, attention has focused on the fact that some of the investment money was not spent as well as it might have been, and on the fiscal deficit that the downturn and the government’s response created.

Japan's Economic Stagnation Is Creating a Nation of Lost Youths - What happens to a generation of young people when:

  • They are told to work hard and go to college, yet after graduating they find few permanent job opportunities?
  • Many of the jobs that are available are part-time, temporary or contract labor?
  • These insecure jobs pay one-third of what their fathers earned?
  • The low pay makes living at home the only viable option?
  • Poor economic conditions persist for 10, 15 and 20 years in a row?

For an answer, turn to Japan. The world's second-largest economy has stagnated in just this fashion for almost 20 years, and the consequences for the "lost generations" that have come of age in the "lost decades" have been dire. In many ways, Japan's social conventions are fraying under the relentless pressure of an economy in seemingly permanent decline.

Why Japan Is Doomed (and the U.S. and E.U., too): Demographics, Low Savings, Ballooning Debt - Japan's debt crisis has been building for a decade. Back in 2001 I wrote an essay on Japan's exploding debt and the dire consequences of what I called Japan's Runaway Debt Train (2001): Imagine, if you can, an economic Hell in which the U.S. government was borrowing 40% of its annual budget, creating annual deficits of 900 billion dollars a year; where 65% of all tax revenues were gobbled up by interest payments on a mind-boggling $13 trillion public debt; and where there was no conductor in sight to stop this runaway debt train. Welcome to Japan, where that Hell is reality. Interestingly, a mere nine years after I described the "nightmare scenario" of Japan's ballooning debt, the U.S. is in fact borrowing 43% of its Federal budget and running deranged deficits of $1.5 trillion a year. All that's left for us to "catch up" with Japan's no-exit situation is for Federal debt and interest rates to rise such that 65% of the Federal tax revenue of $2 trillion a year is spent on interest--that would be $1.3 trillion a year.

The government is the last borrower left standing - Remember back last year when the predictions were coming in daily that Japan was heading for insolvency and the thirst for Japanese government bonds would soon disappear as the public debt to GDP ratio headed towards 200 per cent? Remember the likes of David Einhorn – see my earlier blog – On writing fiction – who was predicting that Japan was about to collapse – having probably gone past the point of no return. This has been a common theme wheeled out by the deficit terrorists intent on bullying governments into cutting net spending in the name of fiscal responsibility. Well once again the empirical world is moving against the deficit terrorists as it does with every macroeconomic data release that comes out each day. I haven’t seen one piece of evidence that supports their view that austerity will improve things. I see daily evidence to support the position represented by Modern Monetary Theory (MMT). Anyway, there was more evidence overnight that I thought should be mentioned and relates to the idea that “the government is the last borrower left standing”.

Off the Charts: A Slowdown in Trade, but a Pickup in Services - The rebound in trade that bolstered world growth in late 2009 and early this year appears to have ended, leaving the manufacturing sector in many countries with the prospect of slower growth. Surveys of manufacturing and service companies in countries around the world, released this week, indicated that growth in services, by contrast, had accelerated in many countries, including the United States.  The surveys, created by the Institute for Supply Management in the United States, and recreated in many other countries by Markit, are not intended to show the level of business activity, but whether conditions are improving or worsening.  The accompanying charts focus on one aspect of the monthly surveys, on whether the volume of new orders each company receives is higher or lower than the volume in the previous month. The figures as released have 50 as a break-even level, but they are rebased for the charts so that zero indicates as many companies are reporting order increases as are reporting decreases. The higher the number, the larger the share of companies reporting higher orders

An Age of Diminished Expectations? - As the United States and European economies continue to struggle, there is rising concern that they face a Japanese-style “lost decade.” Unfortunately, far too much discussion has centered on what governments can do to stimulate demand through budget deficits and monetary policy. These are key issues in the short term, but, as every economist knows, long-run economic growth is determined mainly by improving productivity. There is no doubt that Japan’s massive 1992 financial crisis was a hammer blow, from which it has yet to recover, and the parallels with the US and Europe today are worrisome. Both seem set for a long period of slow credit growth, owing both to necessary stricter financial regulation and to the fact that their economies remain significantly over-leveraged. There are no simple shortcuts in the healing process. Yet, in assessing the Japanese experience and its relevance today, it is important to recognize that Japan’s fall to earth was due not only to its financial crisis.

IMF: Greece Likely to Get Aid Payout on Austerity Progress – Greece has shown “great progress” in implementing austerity measures to cut the European Union’s second-biggest budget gap and should qualify for a 9 billion- euro ($11.8 billion) installment of emergency loans, an International Monetary Fund official said. “I’m confident we are definitely going forward with the next payment” of a three-year, 110 billion-euro rescue package for Greece, Poul Thomsen, head of the IMF’s Greece mission, said at a press conference in Athens today. Thomsen was part of an EU-IMF delegation that spent almost two weeks reviewing the government’s implementation of austerity measures worth 14 percent of gross domestic product that Greece agreed to after the country’s near-default. The team also said that Greece still faced “important challenges and risks” and that more work was needed to justify future quarterly aid payments.

Greece: Society Begins to Crack Under Harsh Measures – Every working day, more than a hundred people crowd around the entrance of the merchant and passenger boats’ reconstruction industry, well known as ‘The Zone’, in the southern suburb of Attiki.  Most of them are unemployed steel workers and torch welders, who wait desperately from the early hours of the morning for an announcement of jobs offered on a daily basis on the ships that dock at the port. “This is not the worst of days,” Kistikidis says. “Very often, there are no jobs at all. Many of these people haven’t had more than five or six days of work since the beginning of this year, and no more than 100 working days since 2008.”

Give Me Your Tired, Your Poor, Your Hungary - I’m a little late getting to this report on Hungary’s loss of patience with austerity wrong link — use this one; it should be read in conjunction with this terrific Fistful of Euros piece from a few weeks ago that I meant to link but never got around to, Scenes from an internal devaluation. Basically, Hungary is pursuing a harsh, seemingly endless austerity program, and keeping interest rates relatively high, in an effort to support its currency. This in turn is considered essential because (a) Hungary wants to join the euro (b) there’s great fear that a devaluation of the forint would cause big debt problems, because so much Hungarian private-sector debt is in other currencies — euros, and even Swiss francs. About (a), I guess the question is at what price? About (b): there’s a major logical fallacy in this whole line of argument. I tried to point it out in a post last year about Latvia; And it’s not surprising that Hungary wants out.

Productivity Convergence Is Messy Process - One of the biggest buzzwords in European economics these days is convergence. Euro members — particularly in Southern Europe — with low levels of productivity and competitiveness vis-a-vis the likes of Germany, France and others must find ways to close the gap without being able to resort to currency devaluation.The result, many economists warn, could be years of subpar economic growth, volatility and very low prices as those countries catch up to their larger peers. An ECB paper looks into the convergence issue, and finds that it can be a messy process–the results of which may be misinterpreted as it unfolds, leading to boom-bust cycles.

To spend or not to spend: Is that the main question? - VoxEU -The debate over fiscal policy has reached a fork in the road. One way leads to maintaining or increasing the fiscal stimulus. This column argues that policymakers should take the other path. This would mean phasing out government expenditure while phasing in social protection programmes at the risk of a double-dip recession but potentially resulting in a more vibrant economy.

The nearing end of a buffoon - Silvio Berlusconi is in trouble. A confidence vote against one of his junior justice ministers showed that he no longer commands over an absolute majority. It all happened because members of his own party rebelled against him, led by Gianfranco Fini. After a furious debate in parliament, Berlusconi survived the confidence vote only because the party rebels decided to join three centrist groups in abstaining. Rather than to bow to these 33 rebels, Berlusconi seems to be determined to prefer to call in early elections. But the FT writes that there are indications that the president, Giorgio Napolitano, might not grant him this chance, preferring to establish interim government. For this, two names have been mentioned as prime ministers, Mario Tremonti, finance minister, or Mario Draghi, central bank president. La Repubblica writes that this is effectively the end of Berlusconi’s authoritarian rule.

House Prices Declining from Peaks Around the World - Once and for all, let us nail the lie that the global credit crisis was basically a US sub-prime property bubble that went wrong, and that Europe was merely an innocent bystander hit by shrapnel.This is the property bubble chart on Page 12 of the IMF’s latest report (Article IV) on France. If you read the whole report – (click “Staff Report” here) – note the horrendous decline in French export share. But that is another story. As you can see, France had the most extreme price rises from 1997 to 2009, followed by Spain and Italy some way below. The Anglo-Saxons were more moderate. The US bubble was tame by comparison (measured by price: inventory overhang is another matter) and has largely corrected. This the American way, a short sharp purge. The Club Med bubbles have not corrected, by a long shot.

House Prices: Demographics Giveth and Taketh Away - Over at the Bank for International Settlements, Elod Takats has a new working paper that examines how demographics may affect asset prices (ht Torsten Slok). As he notes, standard economic theories suggest that aging will lead to lower asset prices. In an overlapping generations model, for example:[T]he young save for old age by buying assets, while the old sell assets to finance retirement. This asset transfer can happen directly or through institutions such as pension funds. In this setting, the changes in the relative size of asset buyers (the young) and sellers (the old) have consequences for asset prices. In particular, the asset purchases of a large working age generation, such as the baby boomers in the United States, drives asset prices up. Conversely, if the economy is ageing, ie the subsequent young generation is relatively smaller, then asset prices decline. Takats tests this theory on international data on house prices and finds a significant link with population age.  He uses that relationship to estimate how much demographics affected house prices in recent decades and to project, based on demographic estimates from the UN, how population aging will affect house prices in the future:

Banks Face $122 Billion Bond Tab as Europe Pays Up to Sell (Bloomberg) -- Banks in Europe’s most indebted nations need to refinance $122 billion of bonds this year, likely paying high interest costs even after receiving a clean bill of health from regulators. Italy’s Intesa Sanpaolo SpA has the most debt coming due at $28 billion, followed by UniCredit SpA with $21 billion, according to data compiled by Bloomberg. Italian banks must refinance a total $69 billion of bonds this year and $157 billion in 2011, while Spanish lenders have $28 billion and $73 billion of debt that needs to be paid. Banks in so-called peripheral European countries from Greece to Ireland have been largely shut out of debt markets since April amid concern their governments will struggle to cut budget deficits.

Banking system on verge of new crisis, hedge fund Noster Capital warns - London-based fund Noster Capital is betting against five major European banks, including Barclays in the UK, Spain's BBVA, and Switzerland's UBS. Pedro Noronha, chief executive of Noster Capital, said he thought many people still failed to understand the extent of the problems facing many banks and were "complacent" about the risks the industry faces. "Two months ago everybody was in a panic about the sovereign debt crisis, and now it's like everybody is going on holiday and everything is fine," he said. Talking about the results of last month's stress tests of 91 major European banks, Mr Noronha was scathing, saying the process was flawed. "The point of a stress test is that you stress something until it breaks. These tests included a ridiculous definition of tier-one capital and allowed some banks with... 1.7pc to show levels above 6pc," he said.

How gangsters are saving the eurozone“: Gangsters, drug dealers and money launderers appear to be playing their part in helping shore up the financial stability of the euro zone.That’s thanks to their demand, according to European authorities, for high-denomination euro bank notes, in particular the €200 and €500 bills. The European Central Bank issues these notes for a hefty profit that is welcome at a time when its response to the financial crisis has called its financial strength into question. The high-value bills are increasingly “making the euro the currency of choice for underground and black economies, and for all those who value anonymity in their financial transactions and investments,” wrote Willem Buiter, chief economist at Citigroup, in a recent research report. The business of issuing euro notes, produced at almost zero cost, is “wildly profitable” for the ECB

The next headache: Inflation or deflation? -  Evidence from the past two decades suggests the answer is “neither.” Progress in monetary policy may have rid the world of price instability once and for all; like smallpox, Germany military aggression or the spread of orthodox Marxism, inflation could well turn out to be last century’s problem.  As recently as the 1990s, France, UK and Italy pegged exchange rates. The US and UK targeted money supply in the late 1970s and early 1980s, while the Bundesbank targeted Germany’s money supply right up until monetary union. But in the past 15 years, leading central banks have converged on a common model to:

- set a clear inflation target, ordinarily 2 per cent per annum over the medium term
- establish a monetary policy committee independent from political pressures, meeting on a published schedule
- affirm the singular commitment to price stability at every opportunity
- express credit conditions in terms of a steady short-term money market rate
- provide transparency by issuing press releases and detailed minutes of the monetary policy meetings

Sovereign Debt Part 5C. Some Policy Options, Good and Bad - Financial institutions, governments, and central banks can be creative in a crisis. Policy options fall into three broad groups: options for deeply distressed or defaulted sovereigns; options for creditors; and regulatory policies. In this part, we discuss the first two. Regulatory options will come in a later part.  To some extent, we’ve seen something similar to the Really Bad sovereign default situation before in the 2008 crisis. There have also been several episodes of very bad sovereign default over the past 200 years. In our Really Bad scenario, about half of the sovereign debt is in default, and more would be downgraded so that it isn’t useful as collateral in many circumstances. In 2008, central banks from many countries provided cash and guarantees to help with the crisis. What happens when many of those governments and central banks are themselves in trouble? That too has happened before, coincidentally often shortly after banking crises.

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