# global glass onion

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

## Saturday, September 18, 2010

### week ending Sept 18

Fed Assets Fall to \$2.3 Trillion as Mortgage Debt Declines‎ -The Federal Reserve’s total assets fell 0.4 percent to \$2.3 trillion during the past week on a decline in its holdings of mortgage-backed securities and federal agency debt. The central bank’s balance sheet decreased by \$9.75 billion in the week ended yesterday, according to a weekly release today. The Fed’s holdings of mortgage-backed securities declined by \$10.9 billion to \$1.09 trillion, while its federal agency securities shrank by \$1.98 billion to \$154.5 billion. The Fed said last month that as housing debt matures it will purchase new Treasury securities to maintain its total securities holdings at \$2.05 trillion. The central bank has purchased \$22.9 billion of Treasuries since it began the program on Aug. 17. The Fed’s holdings of Treasury securities increased by \$4.75 billion to \$794.6 billion in the past week.  M2 money supply rose by \$11.1 billion in the week ended Aug. 23, the Fed said. That left M2 growing at an annual rate of 2.3 percent for the past 52 weeks, below the target of 5 percent the Fed once set for maximum growth. The Fed no longer has a formal target.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--September 16, 2010 ..

Foreign central bank US debt holdings fall - Fed (Reuters) - Foreign central banks' holdings of U.S. Treasuries and agency securities at the Federal Reserve fell in the latest week, data from the U.S. central bank showed on Thursday. The Fed said its holdings of Treasury and agency debt kept for overseas central banks fell \$17.81 billion in the week ended Sept. 15, to stand at \$3.196 trillion. The breakdown of custody holdings showed overseas central banks' holdings of Treasury debt rose, however, by \$39.63 billion to stand at \$2.444 trillion. The foreign institutions' holdings of securities issued or guaranteed by the biggest U.S. mortgage financing agencies, including Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB), plunged by \$57.44 billion to stand at \$752.52 billion. Overseas central banks, particularly those in Asia, have been huge buyers of U.S. debt in recent years, and own over a quarter of marketable Treasuries. China and Japan are the biggest two holders of Treasuries.

NY Fed to Buy \$27 Billion in Treasurys Over Next Four Weeks - The Federal Reserve Bank of New York announced Monday that it would buy \$27 billion in Treasurys in nine separate operations. The purchases come as the Fed reinvests proceeds from its mortgage holdings into government bonds, as part of a recent decision to keep steady its over \$2 trillion portfolio size. (w/ maturation date table)

Why the Federal Reserve MUST Print, Print, Print - The law of unintended consequences continues to wreak havoc with the Fed’s ad-hoc dart throwing exercises plans, as only yesterday, the New York Fed confirmed our expectations that it will have to ramp up its Treasury purchases by 50% over the next month to the tune of \$27 billion (our estimate: \$25.5 billion)–all, to keep up with the Jones’ refis, defaults and loan mods. It’s easy to lose sight of just how this latest round of so-called QE Lite came to be. And, as this is but a hint of future printing, upon which a hand-bound Fed will find itself with no choice but to embark, a brief recap is appropriate.

Goldman: Fed May Announce New Asset Buys in November - The U.S. Federal Reserve could announce a new program of asset purchases to support a weak economy as early as November, according to Goldman Sachs Group Inc.“We don’t expect this at the Sept. 21 meeting, but in November or December there’s certainly a possibility that it will be announced,” Jan Hatzius, chief economist at the bank, said Tuesday. He added the Fed is likely to buy U.S. Treasurys worth around \$1.0 trillion to kick-start the economy.

Richmond Fed’s Lacker Wants High Threshold For More Fed Action - Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, sees modest growth in 2011, little change in inflation and little to spur the Fed to take new actions to support the economy. “The economy is facing very real impediments to growth and there is little monetary policy can do about that,” Mr. Lacker said in an interview with The Wall Street Journal late last week. “So I think our expectations for real growth and for the rate at which unemployment comes down ought to be very modest right now.” Fed officials will consider at their next policy meeting on Sept. 21 whether they should do more to spur growth, in particular by purchasing government or mortgage bonds to drive down long-term interest rates. Mr. Lacker set a high threshold for further action by the Fed, saying the central bank should only do more if it was looking at a real threat of consumer price deflation, something he doesn’t see.

Fed Watch: The Fair - A man takes his son to the county fair; the lights and sounds of the amusement rides are like a magnet to the boy. The boy, however, is penniless. His father, seeing the longing in his son's eyes, hands the boy a dollar for the rides, but quizzically adds "if it looks like you are about to have any fun with that dollar, I will take it back from you." The boy is puzzled. First, a dollar only buys three tickets, and the least expensive ride is four tickets.  They are soon joined by the boy's grandfather, who, assessing the situation, says that the father should never have given the son a dollar in the first place. "He will just buy candy, which will cost you more later when you have to take him to the doctor to treat diabetes." The father neither agrees or disagrees. Along comes a trusted uncle, who says to give the boy another dime, but " then if he looks like he will have any fun, take back a quarter."  The grandfather and uncle start bickering, loudly, in public, about what to do with the boy and his dollar. Soon another uncle rushes into the fray, proclaiming it is pointless to give the boy a dollar because all the workers are already busy helping other fairgoers. "He can't buy anything anyway, and if he tries, he will just drive up prices for all his cousins." The lights and noise of the fair fade as lines dwindle and the rides grow silent.

Monetary Policy Issues - A key policy question facing us is: Should the Fed, based either on concerns about the inflation rate, the level of real aggregate economic activity, or both, engage in a more accommodating policy? If the answer to that question is yes, the next question is: Does such a policy exist and, if so, what is it? Two days ago, the Wall Street Journal published a "symposium," titled "What Should the Federal Reserve Do Next," with short pieces by John Taylor, Richard Fisher (Dallas Fed President), Frederic Mishkin, Ronald McKinnon, Vincent Reinhart, and Allan Meltzer. The WSJ picked a group of conservative economists with a considerable amount of accumulated policy experience among them, and including one sitting Federal Reserve Bank President (Fisher). One would think we could get something useful out of these guys. Well, apparently not. Let's start with the low point. Fisher should win the bad analogy contest with this: One might assume that with more than \$1 trillion in excess bank reserves and significant amounts of cash held by businesses, the gas tank of those who have the capacity to hire is reasonably full.

Should the Fed try to depress long-term yields further? - If the Fed were to buy a large enough volume of long-term debt, it might be able to reduce the net risk exposure of the private sector so as to change slightly that average compensation and flatten the slope of the yield curve. Whether that's indeed possible, and how big a change in rates we might expect to see, is an empirical question. What Cynthia and I found, based on what was observed on average over 1990-2007 in response to modest changes in the maturity composition of publicly held Treasury debt, is that replacing \$400 billion in outstanding long-term Treasury debt with short-term debt might lower the 10-year yield by 14 basis points. Our estimates also imply that, in the current environment when short-term rates are essentially zero, if the Fed were to buy about \$400 billion in long-term Treasury debt outright with reserves newly created for that purpose, it might still be able to reduce the 10-year yield by about 14 basis points.

Central bankers and banking supervision: Does independence matter? - In response to the global crisis, many countries are implementing – or at least considering – reforms concerning the role of the central bank in banking supervisory regimes. The global crisis has led policymakers in the EU and the US to broaden their central banks' mandates to include greater banking supervision. This column argues that this new responsibility should be seen as an evolution of the central bank specialisation as a monetary agent rather than a reversal of the specialisation trend.

Fed Awaits New Governors and San Francisco President - Even though Janet Yellen, the current president of the Federal Reserve Bank of San Francisco, is still awaiting Senate confirmation for a seat on the Fed’s Board of Governors, the search for a new president in San Francisco is well underway.  Under the changes to the selection process made by the new financial-regulatory law, the choice will be made by six of the nine San Francisco Fed directors – the ones who aren’t commercial bankers – subject to the approval of the Fed Board in Washington. Among the candidates for the San Francisco post are Christina Romer, who has just left her post as chair of the White House Council of Economic Advisers to return to a teaching post at the University of California at Berkeley and John C. Williams, currently research director at the San Francisco Fed.

Help wanted - TWO weeks ago, a Leader warned that with governments bogging down under the weight of debt and political wrangling, central banks might begin to feel as though they are the last defence against deflation and double dips, and therefore try to achieve more than can reasonably be expected of them. When politics fails, one might say, it falls to the politically independent to save the day. President Obama nominated three new governors in April and they were each handily approved by the Senate Banking Committee over the summer, but the Senate has not held confirmation votes, and doesn't appear poised to anytime soon. That's the Washington Post's Neil Irwin. He continues: There is now a strange situation in that the institution in charge of guiding the U.S. economy has only one PhD economist among its top officials, Chairman Ben S. Bernanke. The other three currently serving governors are not monetary policy specialists (they are Tarullo, a former law professor, Duke, a former banker, and Kevin Warsh, a financial markets expert). Two of Obama's nominees are economists, San Francisco Fed president Janet Yellen and MIT professor Peter Diamond. This is, as it happens, a pretty terrible time for the Fed not to have as many smart economists in its upper ranks as possible; the central bank faces a massively consequential decision over the coming months of whether to undertake new steps to try to boost the economy.

A Scary Thought - Here's a scary thought: Let's say the European sovereign debt crisis flares up again, and one or two Euro banks fail. (Not a bank like UBS or Deutsche Bank, but a medium-sized bank like Bank of Greece or a Landesbank.) That, in turn, causes a U.S. money market fund — many of which have large exposures to Euro banks — to "break the buck," which leads to another run on money market funds. The Fed would be powerless to help. The Fed's emergency lending authority (the famed Section 13(3)) requires that any emergency lending facility to non-banks be approved "by the affirmative vote of not less than five members" of the Fed Board of Governors. Currently, there are only four members of the Fed board: Bernanke, Warsh, Elizabeth Duke, and Dan Tarullo. Donald Kohn retired earlier this month, and the Senate has yet to vote on Obama's three nominees (Janet Yellen, Peter Diamond, and Sarah Bloom Raskin).

High Cost of Fed Vacancies - I’ve been harping on the vacancies on the Federal Reserve Board of Governors for a while now primarily because I think they’re contributing to tight money that’s stifling economic growth. But Economics of Contempt raises a different issue, namely that given the current vacancies it’s actually illegal for the Fed to use its Section 13(3) authority to engage in emergency lending to non-bank entities. The creation of any such facilities requires “the affirmative vote of not less than five members” of the Board of Governors and right now there are only four, plus the three vacancies.  Why does this matter? Well it matters because in the not-so-distant past such emergency lending was used to prevent economy-paralyzing runs in the money market world. Such runs aren’t likely to recur, but as EOC observes one could imagine something like this happening if European sovereign debt problems recur and break a mid-sized European bank or two. It would be a disaster for the Fed to not intervene simply because Richard Shelby is being a pain in the ass and won’t bring Obama’s nominees up for a vote.

Be prepared - IN THE last couple of weeks, a European banking and financial crisis that seemed to have been extinguished before it could lead to conflagration seemed to be sending out new and ominous smoke signals. Yields on the debt of troubled governments crawled upwards, and the Irish government found itself forced to craft new policy reponses to address a lack of faith in the banking system. What if this deterioration were to continue, leading ultimately to a big bank failure or two and a new financial panic? The Fed would be powerless to help. The Fed's emergency lending authority (the famed Section 13(3)) requires that any emergency lending facility to non-banks be approved "by the affirmative vote of not less than five members" of the Fed Board of Governors. Currently, there are only four members of the Fed board. That's from Economics of Contempt. This is inexcusable. Of course, it's also inexcusable that three members would be sidelined by Congress while the Fed weighs significant action to address the fact that the economy is consistently missing its targets.

White House Renominates Peter Diamond to Fed Board - President Barack Obama on Monday nominated Massachusetts Institute of Technology economist Peter Diamond to the Federal Reserve board, according to a White House press release. Diamond, an expert on social security, pensions and taxation, was previously nominated for the board but has come under scrutiny from Republicans who say he isn’t adequately qualified.

Dodd: Limited Will for Senate Vote on Fed Nominees - U.S. Sen. Christopher Dodd (D., Conn.) said Tuesday he didn’t know how much appetite there was among senators to vote on three nominees to the Federal Reserve’s Board of Governors before the November election, including that of the nominee for the vice chairman of the Fed. Dodd, the chairman of the Senate Banking Committee that has jurisdiction over Federal Reserve nominees, said there was limited time before lawmakers break until November. He said the issue of whether to bring the nominations up for a debate and vote hadn’t been discussed when Senate Democrats met Tuesday afternoon to discuss strategy. “We’ve got a limited amount of time here, I don’t know if there’s going to be any appetite to deal with these Fed nominees,” Dodd said.

Recess Appointments for the Fed? - One journalist who doesn’t underrate the importance of Federal Reserve decision-making is Neil Irwin who reports today on how the prospect of additional monetary stimulus is “likely to be the focus of a vigorous debate at a Fed policy meeting next week, setting the stage for a definitive decision in November or December on whether to purchase hundreds of billions of dollars of bonds in an effort to strengthen the economy.”  But who will attend the meeting? As Robin Harding reviews, not Barack Obama’s appointees whose presence would be valuable. On the one hand, their votes would count and “more important than their votes is having their voices at the FOMC to counterbalance more hawkish regional Fed presidents.” This is especially important since Donald Kohn—who, as she observes, is one of the few actual monetary policy specialists on the board—has already stepped down.  Brad DeLong suggests it’s time for recess appointments. If so, I’d like to throw my own hat in the ring, since I think tapping some random blogger is likely to raise short-term inflation expectations and currency depreciation all on its own. Realistically, I think it’s hard to imagine the White House going from zero to sixty on this

The Recognition Window - Hussman -One of the things I'm increasingly dismayed to learn is that no matter how much detail, data, and qualification I might include in these commentaries, my conclusions will often be summed up by writers or bloggers in a single sentence that often bears no relation to my point. For instance, my view that quantitative easing will trigger a "jump depreciation" in the dollar has evidently placed me among analysts warning of hyperinflation and Treasury default (a club whose card is nowhere in my wallet). To clarify once again - I emphatically do not anticipate inflationary pressures until the second half of this decade. As I've repeatedly emphasized, the primary driver of inflation - historically and across countries - has been growth in government spending for purposes that do not expand the productive capacity of the economy. Quantitative easing does not pressure the dollar by fueling inflation. It has a much more subtle effect...

The Deflation vs. Hyperinflation Debate On Steroids, Or Mish vs Gonzalo Lira In The Octagon - A recent guest post by Gonzalo Lira on Zero Hedge, providing a theoretical framework for the arrival of hyperinflation, went viral, generating over 75k views and over 1,000 comments, further confirming that the biggest and most confounding debate in all of finance is what will the final outcome of the Fed's market manipulative actions be: deflation, inflation or, and not really comparable, hyperinflation (which is a distinctly different phenomenon from either of the above). The post infuriated some hard core deflationists who continue to refuse to acknowledge the possibility that in its attempt to inspire inflation at all costs, the Fed may just push beyond the tipping point of monetary imprudence away from mere target 2-3% inflation, and create an outright debasement of the world's reserve currency. One among these was none other than Mish himself, who a week ago recorded a podcast on Global Edge with Eric Townsend and Michael Hampton (link here), in which his conclusion was that Hyperinflation is the endgame, "so it is unlikely."

M2 Surges By \$30 Billion In Past Week To Highest Ever, Even As Monetary Base Declines - Another week in which the M2 jumped to a fresh all time high, increasing by \$30 billion W/W to just under \$8.7 trillion. This was only the fourth largest weekly jump in this broad money aggregate in 2010, with the prior biggest ones clustered just around the time of the Greek "out of court" reorganization and the flash crash in May. This was also the 8th sequential increase in the M2 in a row. Oddly enough this occurred even as the Monetary Base (NSA) declined by \$11 billion to \$1.983 trillion. Currently, the M2-MB ratio stands at 4.4x, close to its all time lows, with the recent decline purely a function of the modest contraction in the Fed's balance sheet as MBS had been rolling off for the past 4 months. With QE Lite in play, expect the Fed's Balance sheet to remain flat, which will likely mean that the ratio of the Fed's asset to the Monetary Base will remain more or less unchanged at its elevated ratio of 1.15x (with a tendency toward declining), compared to the historical average of around 1.00. . Is the recent leakage in M2 higher, coupled with a contraction in MB the critical step that all the inflationists have been dreading (yet at the same time expecting)?

The inflation picture - THE Federal Open Market Committee will meet next week to discuss new policy moves. The developing conventional wisdom seems to be that the FOMC will announce new asset purchases, but will not do it this month. But as Mr Bernanke made clear in his August speech, one of the key factors shaping the policy response will be the behaviour of inflation: [T]he FOMC will strongly resist deviations from price stability in the downward direction.. It is worthwhile to note that, if deflation risks were to increase, the benefit-cost tradeoffs of some of our policy tools could become significantly more favorable. So, what have we observed on this front in the month since Mr Bernanke made that comment? Economic data, broadly speaking, has improved just a bit. Has this been reflected in inflation? The Cleveland Fed has analysed the latest data from the Bureau of Labour Statistics and put together some handy charts. Here is trimmed mean CPI through August:

Hyperinflation Special Report -The U.S. economic and systemic solvency crises of the last two years are just precursors to a Great Collapse: a hyperinflationary great depression. Such will reflect a complete collapse in the purchasing power of the U.S. dollar, a collapse in the normal stream of U.S. commercial and economic activity, a collapse in the U.S. financial system as we know it, and a likely realignment of the U.S. political environment. The current U.S. financial markets, financial system and economy remain highly unstable and vulnerable to unexpected shocks. The Federal Reserve is dedicated to preventing deflation, to debasing the U.S. dollar. The results of those efforts are being seen in tentative selling pressures against the U.S. currency and in the rallying price of gold.

2010, a Year of No Inflation - The lack of inflation this year is a story that deserves more attention than it has received. Over the last two years, inflation has been zero. Over the last year, it has been just 1.3 percent. Over the last six months, it has been below zero — negative 0.7 percent. Since the Labor Department started keeping records in 1947, there have been only six six-month periods when prices have fallen more than that. All of them were in 1950, an unusual time when prices were falling even though the economy was growing.This year’s price declines are clearly a reflection of the economy’s weakness. And yet the Federal Reserve has continued toresist taking aggressive action to lift growth. Remember, the Fed has a dual mission: keep inflation contained and maximize employment. By any measure, inflation is contained, and the economy is millions of job shy of maximum employment. Yet the Fed has taken only minor actions to lift growth and says it stands ready to take more action.

How Can It Be? - Everyone knows that deflation is a horrible thing: the price level declines, profits fall, employment drops, real debt burdens increase, households in turn spend less,  prices fall again, and the cycle repeats.  Folks like Paul Krugman, Greg Ip, and Barry Ritholtz have been reminding us of these dangers as there seems to be a greater chance that deflation could reemerge soon. David Leonhardt weighs in on this issue and notes that the sustained lack of inflation in the last two years is unprecedented in the postwar period, except for that "unusual" 1950s period:  Since the Labor Department started keeping records in 1947, there have been only six six-month periods when prices have fallen more than [the past six months]. All of them were in 1950, an unusual time when prices were falling even though the economy was growing. Gasp. How can it be? Deflation and a growing economy? There must be some mistake because observers like Paul, Greg, and Barry have told us this is impossible. Surely, Leonhardt misread the data.  So what the does the data actually show? Let's see, the Fred database shows....gasp. It worse than Leonhardt reports.  Looking at the year 1950--the first of these unusual six periods--one finds not only deflation but also solid growth in aggregate demand, corporate profits, employment, and financial intermediation.  Oh my, how can this be? Maybe our high priest of central banking, Ben Bernanke, can shed some light on this mystery:

Myths About "What's Economically Important" - Day in and day out I hear it from readers who insist that we are not in deflation and will not be in deflation because prices are rising and continue to rise. Expanding credit (inflation) created an enormous housing bubble, a commercial real estate boom, a rising stock market, and an enormous number of jobs. Contracting credit (deflation), burst the housing bubble, burst the commercial real estate bubble, burst the stock market bubble, resulting in millions of foreclosures and bankruptcies, millions of broken homes, millions on food stamps, 26.2 million unemployed or partially employed, and countless additional millions who are underemployed. In a fiat credit-based economy, where credit dwarfs money supply, changes in credit is what's important, not changes in money supply, not nominal changes in prices.

US CPI August 2010 and real interest rates - These charts are important: <> Commentators I have read seem a little concerned that yearly inflation (chart 2) is still too low for comfort, but the first graph (chart 1) clearly shows that prices for July and August have increased significantly after a three month deflationary period through April to June. The July and August price changes actually represent annualised inflation of 3.70% and 3.05% respectively and are the highest recorded since August 2009. I wouldn't be surprised if US GDP in Q3 was positive now, though there is still room for a decline in Q4. Download the CPI release here. My own charts:

HOW TO REVERSE A DEFLATION: HELICOPTER BEN NEEDS TO DROP SOME MONEY ON MAIN STREET - In 2002, in a speech that earned him the nickname “Helicopter Ben,” then-Fed Governor Bernanke famously said that the government could easily reverse a deflation, just by printing money and dropping it from helicopters. It seems logical enough. If there is insufficient money in the money supply (deflation), the solution is to put more money into it. But if deflation is so easy to fix, then why has the Fed’s massive attempts to date failed to do the job? Chairman Bernanke said he would fight deflation with his whole arsenal, including “quantitative easing” (QE) – purchasing longterm securities with money created on a computer. Yet since 2008, the Fed has added more than \$1.2 trillion to “base money” doing just that, and the economy is still in a serious deflationary spiral. In the first quarter of this year, the money supply actually shrank at a record annual rate of 9.6%. Cullen Roche at The Pragmatic Capitalist has an answer to that puzzle.  He says that as currently practiced, quantitative easing (QE) is not really a money drop.  It is just an asset swap:

The Last Thing Government Will Do - Economist Steve Keen says that the major economies are entering a debt deflationary spiral. The way out of it would be to increase workers' wages which would allow them to pay off their debts and create inflation. But, economic policy makers don't understand this, and therefore, it will be the last thing they do.The entire show is called Global Debt Collapse Dean Baker points out that economists are always quick to blame workers for the economy being depressed rather than the bad judgments of the economic policy makers themselves.

Anticipating the End of a Weak Recovery - By most estimates, the statistical recovery which began in the second half of 2009 in the US has been weak. Many had been talking about a V-shaped recovery early this year. However, given the magnitude of the imbalances in the U.S. leading up to recession, the underperformance of this technical recovery is not surprising. Now, in April 2009 I said this would be a fake recovery even before it began. My issue was that the economy would be ‘ginned up by stimulus’ if you will but that we would get a supply side credit shock nonetheless. The systemic problems in the banking sector would still spell weak credit growth – even as banks recorded record profits. This seems to be what has occurred. And none of the systemic problems have gone away, not least the underwater second mortgages. The household sector is troubled by indebtedness, which created a demand side shock for credit. In 2008 and 2009, consumers were reducing their debt loads in a manner consistent with the fall in nominal GDP, meaning debt to GDP levels were not falling that much.  However, household debt to GDP levels have continued to fall even as the economy has grown over the past year.

America's economy: Are we there yet? - The Economist - “WHITHER goest thou, America?” That question, posed by Jack Kerouac on behalf of the Beat generation half a century ago, is the biggest uncertainty hanging over the world economy. And it reflects the foremost worry for American voters, who go to the polls for the congressional mid-term elections on November 2nd with the country’s unemployment rate stubbornly stuck at nearly one in ten. They should prepare themselves for a long, hard ride. The most wrenching recession since the 1930s ended a year ago. But the recovery—none too powerful to begin with—slowed sharply earlier this year. GDP grew by a feeble 1.6% at an annual pace in the second quarter, and seems to have been stuck somewhere similar since. The housing market slumped after temporary tax incentives to buy a home expired. So few private jobs were being created that unemployment looked likelier to rise than fall. Fears grew over the summer that if this deceleration continued, America’s economy would slip back into recession.

EROI, Insidious Feedbacks, and the End of Economic Growth - The following is a brief portion of a paper of the same title that we wrote and that is currently under peer-review. I will be presenting on this topic at this year’s ASPO conference in Washington, D.C.- Numerous theories attempting to explain business cycles have been posited over the past century, each offering a unique explanation for the causes of--and solutions to--recessions, including: Keynesian Theory, the Monetarist Model, the Rational Expectations Model, Real Business Cycle Models, New (Neo-) Keynesian models, etc…  Yet, for all the differences amongst these theories, they all share one implicit assumption: a return to a growing economy, i.e. growing GDP, is in fact possible. But if you believe as I do that the world is entering a unique period defined by flattening and then declining oil supplies, then for the first time in history we may be asked to grow the economy while simultaneously decreasing oil consumption, something that has yet to occur in the U.S.  In this post I attempt to answer the following question: Is a return to long term economic growth possible?

When Giants Fall: 'America Is Moving "from the Jetsons to the Flintstones"' - Numerous studies have shown that humans don't do a particularly good when it comes to assessing their own capabilities. In fact, psychologists refer to this phenomenon as "illusory superiority," a cognitive bias that causes people to overestimate their positive qualities and abilities and to underestimate their negative qualities, relative to others," according to Wikipedia. That is one reason why those who are entrusted with ensuring that mission critical systems function as planned are vetted beforehand by someone other than themselves. It might also help explain why a Canadian publication, MacLean's, in an article entitled "Third World America," can paint a portrait of today's America that many Americans are unable (or unwilling) to see:

Investment Contributions to GDP: Leading and Lagging Sectors - The following graph shows the rolling 4 quarter contribution to GDP from residential investment, equipment and software, and nonresidential structures. This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy.  For the following graph, red is residential, green is equipment and software, and blue is investment in non-residential structures. The usual pattern - both into and out of recessions is - red, green, blue. Residential Investment (RI) made a positive contribution to GDP in the Q2 2010, but RI will be a drag on GDP again in Q3. RI was positively impacted in Q2 by the housing tax credit in two ways: first, builders rushed to complete homes by the end of June, and, second, real estate agent commissions were boosted in Q2 and will decline sharply in Q3 (just look at existing home sales in July). Equipment and software investment has made a significant positive contribution to GDP for four straight quarters (it is coincident).

Hussman: Watch the lagging indicators - John Hussman is not buying the recent risk-on sentiment that has developed since September began.  In Hussman’s view, recent jobs numbers point to further downside ahead.He says the normal impulse response to the large job destruction of 2008 and 2009 would be further job losses for a time. But we are well past the propagation point for those job losses. Rather, in a normal recovery, 460,000 to 500,000 jobs would be created. So, we are well short of this. Why? Clearly this has something to do with consumer deleveraging and/or industrial recalculation as labour shifts away from depressed sectors of the economy awaiting the pick up in new growth sectors. This is not a V-shaped recovery. And Hussman says we need to watch the lagging indicators to ascertain what sort of impulse response the fresh batch of employment weakness will have on the real economy. The ISM numbers should be of particular note not just here in the US but in Asia where there has been softness.

Update: Regional Fed Surveys and ISM - By request - now that the Empire State and Philly Fed manufacturing surveys for September have been released - here is an update to the graph I posted last month: For this graph I averaged the New York and Philly Fed surveys (dashed green, through September), and averaged five surveys including New York, Philly, Richmond, Dallas and Kansas City (blue, through August).  The Institute for Supply Management (ISM) PMI (red) is through August (right axis). Last month, when the ISM survey came in slightly better than expected, I wrote: "Based on this graph, I'd expect either the Fed surveys to bounce back in September - or the ISM to decline." So far there has been little "bounce back" in the Fed surveys.

From zombie banks to zombie mortgages - Japan's recent demotion to world's third-largest economy, behind China, triggered two distinctly different feelings in the United States.  One was Schadenfreude. At the end of the 1980s Japan was a contender for the No. 1 spot. It was the rich world's fastest growing big country. Its companies dominated electronics, steel, automobiles and even banking. Its political and business leaders were paragons of long-term strategic thinking, while budget and trade surpluses left it rich with cash. Meanwhile, the U.S. was on the brink of recession, its corporate managers obsessed with short-term profits and its politicians incapable of mustering a coherent industrial strategy.What happened next, of course, is history. Japanese property and stock prices cratered, its banking system seized up, and a decade (actually, two now) of economic stagnation followed.  The second feeling Japan's misfortunes evoked is dread. The U.S. has gone through its own spectacular property crash and banking crisis and is now mired in a painfully weak recovery. Does it face a long period of stagnation as Japan did?

US debt surges, leaving nation with difficult choices ahead-- The federal debt almost doubled during the George W. Bush administration, and it has increased more than 25 percent during President Barack Obama's first two years in office. The more than \$13 trillion the nation owes -- about \$43,000 per person -- is casting a long shadow over this year's election, fueling the tea party movement for a smaller government and increasing voter anxiety about the future. Many congressional candidates are talking about the nation's shaky economy but are using it more to score political points than to explain the difficult choices ahead. Republicans assert the nation has a "spending crisis" and the debt should be brought under control by cutting spending, not raising taxes. But most Republicans are not specifying exactly what spending they would cut while reducing taxes. Democrats accuse Republicans of wanting to dismantle safety-net programs such as Social Security and Medicare, but most Democrats aren't saying how they would pay for the large projected growth in those programs.

The Economist: when should we start worrying about the deficit… I’m not of the school that screams for a balanced budget at all costs. There are times in the business cycle when deficit spending is quite appropriate. The government can borrow to help replace private spending when it collapses during a serious recession through increased infrastructure spending as well as expanded unemployment and welfare benefits. Many of the recent actions of the Treasury, the Federal Reserve and Congress were necessary in the face of the impending collapse of the international financial system in 2007 and 2008.But deficit spending – having appropriations exceed tax revenues – during economic booms is not appropriate. Our federal budget has been in deficit for 46 of the last 50 years. Through good times and bad, through the three longest expansions in our nation’s history, we have spent more than we collected in tax revenues, leaving it to later generations to worry about paying off the debt.

The Real Conundrum: Why the Hell Do We Care if China Manipulates Its Currency in Our Favor? - Here's a little editing fun of Harold Meyerson's article in today's Washington Post: "This week, committees on both sides of Capitol Hill will plumb the conundrum of Chinese currency manipulation. The conundrum isn't that -- or why -- China is manipulating its currency: By undervaluing it, China is systematically able to underprice its exports, putting American (and other nations') manufacturing consumers and businesses that purchase China’ cheap imports at a significant disadvantage. The conundrum is why the hell the United States isn't doing thinks it should do anything about it. There are certainly plenty of senators and congressmen -- and Main Street Americans U.S. producers that compete with China -- who'd like to see the White House place some tariffs taxes on American consumers and businesses who purchase the underpriced low-priced Chinese imports. If the administration doesn't act, Congress may just consider mandating some tariffs punitive taxes against American consumers and business on its own."

Fed Watch: Yen Intervention - At the beginning of August, I wrote: suppose Japanese officials believe that intervention is required regardless of the G-20. Presumably, they will give US Treasury Secretary Timothy Geithner a phone call to at least keep him in the loop, if not to receive his implicit consent. One wonders if Geithner will recognize what he would be consenting to: Japanese intervention, if it occurs, means that Chinese authorities managed to get Japan to acquire their Dollar reserves for them. Instead of buying Dollars, China buys Yen, which in turn induce Japan to buy Dollars. This maintains the artificial capital flows to the US while allowing China to escape accusations of being a “currency manipulator.” Since then, Japan’s currency challenge only intensified, culminating in last week’s almost comical complaint from Japanese policymakers: Japan’s government said it will seek discussions with China over the nation’s record purchases of Japanese bonds as an appreciating yen threatens to undermine an economic recovery. Did policymakers recognize the irony of their situation? It is not exactly a secret that Japan has made frequents excursions into the currency markets. But apparently they feel that intervention should be limited to Dollar purchases. Surely another Asian nation wouldn’t play the same game on them?

Beggar, then sneakily enrich, thy neighbour - AMONG today's big news items is the word that Japan is now actively selling yen in order to improve its exchange rate against other major currencies. The yen has risen sharply in recent months, dealing a blow to Japanese exporters and slowing Japanese recovery. The move has led to some fretting that a period of competitive devaluation is nigh. Here's Tim Duy, for instance: There apparently is no motivation for global central banks to stop directing capital inflows at the US in an effort to support mercantilist objectives. If it isn’t China, it will be some other economy. And equally apparent, there is no motivation among US policymakers to address such government directed capital flows. Which will leave politicians falling back on ultimately harmful trade barriers. The absolute inability of US policymakers to seriously address a global financial architecture where a rule of the game is "when in doubt, by Dollars" will ultimately have serious consequences via disruptive adjustment when the system can no longer be maintained, via either external or internal forces.

Why Japan's yen policy is bad for the world - After threatening to intervene for weeks, Japan's economic policymakers finally jumped into the currency markets to depress the value of the surging yen. The intervention was Tokyo's first in six years, and had an immediate impact, softening the yen from under 83 to the dollar to around 85 by the afternoon. The Japanese have been freaking out over the strengthening yen, which hit another 15-year high this week against the dollar, fearing that it makes Japanese exports more expensive and less competitive on world markets, thus undermining Japan's already feeble recovery from the Great Recession. Finance Minister Yoshihiko Noda, explained the government's decision while confirming the intervention to reporters: Deflation is continuing, and we are in severe economic conditions. Under those circumstances, recent movements [in the yen] will have adverse effects on the stability of economic and financial conditions, and we can't overlook them. However, in my opinion, Tokyo's decision is bad, bad, bad – for Japan, and just about everyone else.

Bernanke Shadow of Easing Limits BOJ Success With Yen Weakness -- Bank of Japan Governor Masaaki Shirakawa’s success in weakening the yen may hinge on Ben S. Bernanke.  Japan said two days ago it sold yen for the first time since 2004 because the currency’s surge to a 15-year high versus the dollar imperiled the nation’s export-led recovery. Meantime, pressure is growing on U.S. Federal Reserve Chairman Bernanke to print more dollars to bolster America’s flagging economy, a policy that contributed to a weaker greenback in 2009.  “Because of speculation of further monetary easing by the Fed, it may be impossible for Japan alone to turn around the yen-appreciation trend” through unilateral currency intervention, said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. The firm is a unit of Japan’s third-largest banking group.

China should cut dollars if U.S. too loose: sovereign fund (Reuters) - China should sell dollars and diversify its foreign exchange reserves if the United States sticks to loose monetary policy, the head of the Chinese sovereign wealth fund said in an article published this week. Lou Jiwei, chairman of the \$300 billion China Investment Corp, also offered policy advice to the United States, saying the best course of action would be for it to tighten monetary conditions while ramping up stimulus spending. He said the United States did not have much to gain from monetary easing, because little cash was entering the real economy and a large amount was leaving the country via dollar-funded carry trades. Under such conditions, the dollar would steadily depreciate, and Asian economies and oil exporters might lose faith in it as a global reserve currency, he said. "For China, the chief tools to reduce economic risks are to strengthen regulation of capital flows, control liquidity through cash management, monitor asset markets and divert foreign exchange reserves to non-dollar assets," Lou said.

\$1.26T deficit on pace as second-highest on record - The federal government is on track to record the second-highest deficit of all time with one month left in the budget year. The deficit totaled \$1.26 trillion through August, the Treasury Department said yesterday. That puts it on pace to total \$1.3 trillion when the budget year ends Sept. 30, slightly below last year’s record \$1.4 trillion deficit.  The Obama administration contends the record deficits were necessary to combat the most serious economic crisis since the Great Depression. About one-third of the higher deficits are a result of a drop in government tax revenues. The other two-thirds of the deficit increases reflect higher government spending to stabilize the financial system and boost the economy. Deficits of \$1 trillion in a single year had never happened until two years ago. The \$1.4 trillion deficit in 2009 was more than three times the size of the previous record-holder, a \$454.8 billion deficit recorded in 2008.

Citigroup Says No Developed Government Securities Are `Completely Safe' - Bonds issued by developed countries, including those with the highest credit ratings such as Germany and the U.S., are not “completely safe” as demand for public spending is growing faster than revenue, Citigroup Inc. said. Greece is the country most at risk of default, followed by Ireland, Portugal and Spain, the bank said. The U.S. may also face repayment challenges “at horizons longer than five years. We conclude that no sovereign debt can and should be considered completely safe,” London-based economists Willem Buiter and Ebrahim Rahbari wrote “We still consider it unlikely that there will be a sovereign default during the next five years by more than a couple of advanced economies.”

It's More Than The Deficit - By John Mauldin - We talked earlier about how increasing government debt crowds out the necessary savings for private investment, which is the real factor in increasing productivity. But there is another part of that equation, and that is the percentage of government spending in relationship to the overall economy. Let’s look at some recent analysis by Charles Gave of GaveKal Research. It seems that bigger government leads to slower growth. The chart below is for France, but the general principle holds across countries. It shows the ratio of the private sector to the public sector and relates it to growth. The correlation is high. (In the book we will show the same graph for other countries.)That is not to say that the best environment for growth is a 0% government. There is clearly a role for government, but government does cost and that takes money from the productive private sector.

The hypocrisy of most deficit discussions - Congress seems incapable of setting aside electioneering rhetoric and talking straight about taxes and deficits.  The GOP claims that it thinks deficits are bad things while at the same time it proposes no spending cuts (except to important safety net programs) and does propose further tax cuts. Back in the old days of the Bush regime, the tax cutters tended to claim that tax cuts would create jobs and raise (not lower) government revenues.  They didn't.  The Bush administration had anemic job growth, certainly seeing no boost from the humongous tax cuts enacted in 2001, 2003, and 2004 (and smaller cuts throughout the term).  And we have enough experience with tax cut programs from Reagan to Bush I to Bush II to see that revenues do not miraculously go up when the taxing provisions that are intended to raise revenues are cut back.  Sometimes there are a few localized effects--such as increased selling of capital stocks to take advantage of a new and lower rate because it is expected that higher rates will have to be enacted later.  But tax cuts cut revenues.

The Budgetary Impact of Fannie Mae and Freddie MacCBO Director's Blog - In September 2008, the federal government took control of Fannie Mae and Freddie Mac—two government sponsored enterprises (GSEs) that provide credit guarantees on more than half of the outstanding residential mortgages in the United States. Although they are not legally federal agencies, the government operates them to fulfill the public purpose of supporting the housing and mortgage markets. Therefore, CBO believes that it is appropriate to include the GSEs’ financial transactions in the federal budget. In its August 2010 baseline projections, CBO included an estimated \$53 billion in costs for new mortgage guarantees that Fannie Mae and Freddie Mac will make over the 2011–2020 period. That estimate was made using a so-called “fair-value” basis of accounting, which differs from the way most federal credit programs are reflected in the budget. In a letter sent today to Congressman Barney Frank, CBO discusses that estimate and compares it with the budgetary impact that would be estimated using the procedures specified in the Federal Credit Reform Act of 1990

It's Demand, Stupid - Krugman - I’ve said this before, but Catherine Rampell has a very nice chart making the point: if you ask businesses — as opposed to their lobbyists — what their problem is, you find no hint of the stories the usual suspects are telling you about government interference, political uncertainty, etc.. Businesses aren’t hiring because of poor sales, period, end of story: And the best thing government could do to help business would be to spend more, increasing demand. The fact that it’s not going to happen doesn’t change the fact that it’s the simple truth.

Hey Boomers: Leave a Big Bequest—to the Government -This post is part of our forum on Baby Boomers and what they owe the country. Follow the debate hereI am sympathetic to Michael Kinsley's argument that Baby Boomers like ourselves should leave something more than debts behind to the next generation, even if, as he correctly points out, much of the debt was really left to us by entitlement programs that have benefited the so-called Greatest Generation far more than subsequent generations. Basically, the Greatest Generation paid almost nothing in terms of payroll taxes and got benefits that were vastly greater than their contributions; later generations will be lucky to get back what they put in.The critical point, I think, is that the Boomers also inherited some of the Greatest Generation's sense of entitlement without having paid the dues of going through the Great Depression and World War II that may have justified it. And as Kinsley notes, it's really too late for Boomers to shoulder similar burdens even if the opportunity suddenly presented itself.

Believe It Or Not, There's Serious Talk About A Government Shutdown In 2011 - Even though the common wisdom is that the two government shutdowns in 1995 and 1996 were unmitigated political disasters for congressional Republicans, there is serious increasing talk about it being a prime strategy next year if the GOP is in the majority in the House and Senate.  Former House Speaker Newt Gingrich, who was one of the architects of the failed shut-the-government strategy back in the 1990s, raised the idea back in April in connection with health care.  Rep. Lynn Westmoreland (R-GA), a vice chairman of the National Republican Congressional Committee, spoke about it publicly last week.   I'll have much more to say about this on Tuesday when my Roll Call column is published. For now, just a few vignettes from the last time the GOP thought that closing the government was a good way to win the hearts and minds of voters and force the president to do its bidding.

How would a government shutdown work? - Because I don't get it. The U.S. government operates on a Fiscal Year basis meaning that next year starts on Sept 30th. Which means, far as I know that government operations, including implementation of HCR, are funded right through the next Sept 30th (because I don't think there are important Appropriations bills hanging, nor would R's have control prior). And while I don't see any Constitutional bar to a new Republican majority passing legislation to actively stop some government spending simple inaction wouldn't seem to have any effect. And there would not seem to be enough of a political opening to push anything through in light of the ability of a Democratic Senate filibuster (not that I think the Dems will lose the Senate) or a Presidential veto to block action.  From Republican rhetoric you would think they have the option to change the name plates on the Office of the Speaker one day and then turn out the lights of DC the next. But from where I sit and from what I know it just doesn't work that way. Are these guys just blowing smoke? Or just inhaling deeply on some really great ganja? As I said I don't get this at all. The politics maybe, the mechanics though? Not seeing it.

The Republican Threat to Shut Down the Federal Government - Robert Reich - Newt Gingrich is saying if Republicans win back control of Congress and reach a budget impasse with the President, they should shut down the government again. GOP pollster Dick Morris is echoing those sentiments, as is Rep. Lynn Westmoreland (R. Ga), and Alaska GOP Senate candidate Joe Miller.  I am continuously amazed at the GOP’s ability to snatch defeat out of the jaws of potential victory. It is the gift that keeps giving.  I was there November 14, 1995 when Newt Gingrich pulled the plug on the federal government the first time. It proved to be the stupidest political move in recent history. Not only did it help Bill Clinton win reelection but it was a boon to almost all other Democrats in 1996 (Gingrich’s photo was widely used in negative ads), and the move damaged Republicans for years.

A GOP-Led Shutdown Could Be A Disaster For The GOP - Almost anyone who has been involved with the federal budget for a while has strong memories of House Budget Chairman John Kasich (R-Ohio) saying repeatedly in 1995 that the newly elected Republican majority was prepared to shut down the government to buck the Clinton administration and get its way with the budget. Kasich’s big line — that he doubted anyone would even notice whether federal departments were forced to shut their doors — was a great sound bite; it clearly implied that much of Washington’s work was of so little value that no one would, or should, care if it just stopped. Unfortunately for Kasich and the others most responsible for the shutdown strategy — Speaker Newt Gingrich (R-Ga.) and Majority Leader Dick Armey (R-Texas) — many Americans did notice  People who had made reservations a year or more in advance to camp at the national parks were beyond furious when they couldn’t enter because the gates were closed. Government contractors howled when there was no one to process invoices, write checks or sign contracts, and they warned that layoffs were imminent if the situation didn’t quickly change.

Fiscal Policy Choices in Uncertain Times - CBO Director's Blog - In summary, the economic recovery will probably proceed at a modest pace—leaving total output well below its sustainable level, and the unemployment rate well above its sustainable level, for a number of years. In CBO’s judgment, the available monetary and fiscal tools, if applied at sufficient scale, would improve economic conditions during the next few years—though with costs and risks in the medium and long term. Policymakers need to address those trade-offs.

Uncertainty over New Deals - Lot's of chatter these days about what role the uncertainty over future policy regimes is playing in holding back a complete economic recovery. On the one side, we have the usual suspects claiming that the problem has little, if anything, to do with policy uncertainty. Instead, it is a lack of "aggregate demand." Mark Thoma provides a link to an interesting study here that appears to support this hypothesis.  The study highlights the fact that small businesses are citing a lack of sales volume as their main source of trouble. Well, sure. If I'm a supplier of home furnishings, I'm going to cite a lack of demand for my product. But does this necessarily mean that the macro problem is a lack of aggregate demand? Possibly--but not necessarily. In an earlier post, I entertained the idea of investment demand falling off the cliff in response to fundamentally bad news relating to the future return to capital spending; see here. I still think there is some merit in this idea, though the data I presented here has led me to re-think this position. I could be wrong, but I think this data presents a similar difficulty for standard Keynesian interpretations of investment spending collapse.

The U.S. Needs a New and Improved New Deal - “What the country needs is a “new and improved new deal” that reduces the risks associated with structural change, and does a better job of preventing and easing cyclical downturns. The original New Deal,  shaped by the experience of the Great Depression, was designed to overcome problems associated with large cyclical fluctuations in the economy. The “three Rs”  that served as its guiding principles – relief, recovery and reform – reflected this emphasis. We also see the focus on cyclical problems in the development of monetary and fiscal policy tools as countercyclical stabilization devices, and in the automatic stabilizers that have been built into the economy.  Both monetary and fiscal policy have helped to ease the cyclical downturn we are experiencing, but as our present experience makes all too clear, we can do better. Part of a new and improved new deal should focus on doing more to prevent problems before they occur and limiting the damage when cyclical downturns do occur despite our efforts.

Ezra Klein - Two graphs that should really scare us - Both of these come from the International Monetary Fund's new paper (pdf) on employment, which is graph-tastic. The first looks at the long-term effect unemployment has on the average male's long-term earnings. So a 25-year-old worker whose firm went under in 2008 will still be earning less than the guy in the office park across from him whose firm barely rode out the recession. We tend to think of employment as being binary: You have a job, or you don't. But it's more complicated than that. Losing a job has lingering effects, and not just on income. It also raises your risk of death going forward: This is one reason that jobs-sharing proposals like the one Germany implemented make some real sense: Keeping the maximum number of people in their jobs -- even if you temporarily reduce their hours or wages -- means fewer people losing their jobs altogether. That means their skills don't deteriorate, it means they're less likely to have to take a new job that they're not as good at or where they're paid a lot less, it means they don't have to explain away their unemployment to prospective employers, and so on.

IMF urges stimulus to help "dire" job market  (Reuters) - The world's rich countries need to extend fiscal stimulus and job growth initiatives to fix a "dire" labor market that could threaten entire societies, the International Monetary Fund said on Monday. At a conference co-hosted by the IMF and the International Labor Organization, visiting Spanish Prime Minister Jose Luis Rodriquez Zapatero said high unemployment may trigger a "crisis of confidence" in Europe. The IMF said more and more workers worldwide were unable to find jobs for longer periods, weakening social cohesion and raising risks of unrest and even undermining democracy

The International Monetary Fund Is Not Insane – Krugman - That shouldn’t be startling; but these days it is. Given the way conventional madness has overtaken so many international institutions, the IMF’s reasonable, if much too cautious, new paper on employment (pdf) is actually a welcome surprise. “A recovery in aggregate demand is the single best cure for unemployment” — what a relief to see the Fund actually saying that. Also, note this passage: There is a risk of hysteresis in some countries, particularly in the United States and Spain, given the sharp increase in the duration of unemployment and the persistent nature of the shocks (e.g. to the housing sector) that lie behind the cyclical weakness in the economy and hence the increase in unemployment (see Benes et al., 2010 and Vitek, 2010). Hence to the extent that countries have fiscal space, exploiting it when there is a risk of hysteresis may create jobs in the short run without hurting the medium-run fiscal outlook. That’s written in international organization speak, but it seems like a response to this post; and it even seems as if the IMF may be sorta kinda endorsing the view that austerity in times like these may be self-defeating,

Biden Finds 100 Reasons to Like the Stimulus - The White House hit back today at critics of the stimulus plan with a report on 100 infrastructure and research projects funded by the plan it said “are changing America.” The White House is countering a list of 100 projects funded by the plan that Republican Sens. John McCain and Tom Coburn said “give taxpayers the blues.” Where Coburn and McCain went after spending on silly-sounding scientific research, little-used public infrastructure and leisure facilities, the White House has highlighted funding for research into cancer and autism, troop accommodation and treatment on military bases, and tunnels and roads. Read the White House report in full here. Vice President Joe Biden said in a statement accompanying the report that “with Recovery Act projects like these, we’re starting to turn the page on a decade of failed economic policies and rebuild our economy on a new foundation that creates good middle class jobs for American families.”

Opinion: Time to build a better stimulus - Joseph E.  Stiglitz - A well-designed program would have a portfolio of measures that stimulates investment in the public and private sectors and helps those suffering most, both because of today’s recession and the stagnation of middle-class incomes for the past decade. A combination of help to small businesses, tax breaks for firms that actually invest, increased infrastructure spending, extended unemployment benefits and the continuation of the 2001/2003 middle-class tax cuts — the kind of program that Obama is now putting forward — is the right medicine for the economy today.  Though we can quibble about the details (and details do matter), the president’s program is on target. But extending the tax cuts for America’s wealthiest 2 percent would be a big mistake. Resources are scarce — even in a rich country — and this is not the way to spend the government’s scarce dollars

9/10/10 OBAMA PRESS CONFERENCE TRANSCRIPT

Time for This Big Dog to Bite Back - NO, he can’t. President Obama can’t reverse the unemployment numbers by Election Day. He can’t get even a modest new stimulus bill past the Party of No, and even if he could, there would be few jobs to show for it until (maybe) 2011. Nor can he rewrite the history of his administration. Its signal accomplishments to date are an initial stimulus package that was overrun by the calamity at hand and a marathon health care battle as yet better known for its unseemly orgy of backroom wrangling than its concrete results. While that brawl raged, the White House seemed indifferent to the mounting number of Americans being tossed onto the Great Recession scrapheap.

The political failure of Obama’s stimulus package - When President Obama unveiled an array of new tax-cut and spending proposals last week, one word was noticeably missing from his speeches: “stimulus.” Republicans, meanwhile, energetically set about decrying the plan as “more of the same failed ‘stimulus’ ” and as simply a “second stimulus”—as if the word itself were a damning indictment. The idea of using countercyclical fiscal policy to help get a weak economy moving is hardly radical. But in Washington stimulus has become the policy that dare not speak its name. This wouldn’t be surprising if we were talking about a failed program. But, by any reasonable measure, the \$800-billion stimulus package that Congress passed in the winter of 2009 was a clear, if limited, success. The Congressional Budget Office estimates that it reduced unemployment by somewhere between 0.8 and 1.7 per cent in recent months. Economists at various Wall Street houses suggest that it boosted G.D.P. by more than two per cent. And a recent study by Mark Zandi and Alan Blinder, economists from, respectively, Moody’s and Princeton, argues that, in the absence of the stimulus, unemployment would have risen above eleven per cent and that G.D.P. would have been almost half a trillion dollars lower.

Q&A: Geithner on the Economy, Tax Cuts and China - Treasury Secretary Timothy Geithner sat down with The Wall Street Journal to talk about the administration’s plans to help a sluggish economy. Here are some excerpts of the interview, which took place in his office at the U.S. Treasury Department Friday.

Geithner: "Important to avoid premature policy restraint" - A few excerpts from a WSJ interview with Treasury Secretary Timothy Geithner: Geithner Urges Action on Economy "[The] typical error most countries make coming out of a financial crisis is they shift too quickly to premature restraint. ... It is very important for us to avoid that mistake. If the government does nothing going forward, then the impact of policy in Washington will shift from supporting economic growth to hurting economic growth." And on tax cuts for high income earners: "We just don't think it would be responsible for this country, given the size of our future deficits, and given the substantial burden the middle class has been bearing over the past decade in particular, to go out and borrow \$700 billion from our children so we can sustain those Bush tax cuts that only go to the wealthiest 2% of Americans." I agree with Geithner on both points.

The Optimal Level of Government Investment in the High-Tech World of 2010, not 1810  - In response to Stephen Williamson's opus magnum last week, I left a series of comments that actually exceeded his word count. I encourage you to read them and the whole discussion. I think there are a lot of important points and insights. But I especially think this part is important, and so will reprint it here with modifications and expansions to my original comment.

Fun With George Will - The Washington Post likes to run columns that are chock full of mistakes so that readers can have fun picking them apart. That is why George Will's columns appear twice a week. Let's have a little fun with the latest, which is an attack on President Obama's economic agenda. First, Will is anxious to tell readers that Democrats are telling the public that stimulus did not work because many think we need more stimulus. Actually, people who think we need more stimulus simply note that the stimulus was helpful, but not large enough for the task. According to the Congressional Budget Office, the stimulus added between 1.7 and 4.5 percent to GDP since its enactment (that's between \$240 billion and \$740 billion in additional output). It also lowered the unemployment rate by between 0.7 and 1.8 percentage points.

Economics: Bad economists - The Economist - Mr Mulligan thinks that fiscal stimulus can't boost the private sector, and he wants to find some support for this belief. He therefore considers this year's temporary census hiring, which added over half a million workers to the federal payroll for a few months in the spring in summer. If stimulus worked, Mr Mulligan says, this hiring should have had a multiplier effect on private hiring.Did it? To find out, Mr Mulligan charts total employment and employment ex-census. He says the census-driven spike in the former should produce an echo of a spike in the latter. He eyeballs it, and concludes:  In fact, the spike..., if any, is pretty subtle. Science! Obviously, if one were actually interested in seeing what impact census hiring had on demand, one would probably make an effort to control for lots of other variables that might obscure monthly shifts (actually, if one were really interested in this question, one would probably stick with published research involving careful statistical analyses of larger samples of events)

Casey at the Blog: Joy in Recession Land - Professor Mulligan thinks that he can show that stimulus does not work by examining the job impact of the workers temporarily employed to carry through the 2010 Census. Mulligan notes the assumption of stimulus proponents that the there would be a multiplier effect of 1.6 for each job directly created by the stimulus. This means that for every person directly employed as a result of stimulus spending there would be 0.6 jobs created as a result of the spending out of this worker’s wages. Mulligan applies this arithmetic to the hiring of temporary Census employees earlier this year. Census employment peaked at just under this 600,000. The 0.6 multiplier would imply a jump in 360,000 non-Census related jobs. Mulligan looks at the data and cannot find any evidence of this sort of jump and believes that he has an important piece of evidence against the stimulus. Let’s think about this a bit more closely. The Census jobs were very temporary and part-time jobs. There was a short spike in Census employment that then fell off very rapidly. Employment peaked at 586,000 in the first week in May, but the peak four-week average employment was just 571,000. The average for the prior four weeks was 156,000, and in the subsequent four weeks employment was 376,000, falling to 188,000 in the next four week period. So the vast majority of Census workers were employed for less than two months.

Greenspan calls for tax hike -Greenspan advocated that U.S. officials drop their bias for stimulus and move toward the stance seen in recent months in Europe, where governments have focused on cutting spending in a bid to put their finances on a more sustainable footing. He said delaying so-called fiscal consolidation for two years to allow the economy to recover, and the deficit to deepen, risks a debilitating shift in psychology. He said this happened in 1979, when Treasury rates spiked as inflation fears took off. and he warned that policymakers must take steps now to prevent a recurrence. "I don't think we have time to wait," Greenspan said. "Our choice is not between good and bad, it's between terrible and worse."

Orszag Takes Another Swipe at Obama - For the second time in a week, Peter Orszag has zinged his former boss. Orszag, who just left his job as President Barack Obamas budget chief, said Sunday the presidents policy of making the Bush-era tax cuts permanent for middle-income families would jeopardize the nation's finances. Last week, he made the same argument in a New York Times column that took the White House by surprise. “We, unfortunately, can’t afford the tax cuts over the medium and long term,” Orszag said on CNN’s “Fareed Zakaria GPS.” “We face too large a deficit out in 2015, 2018, 2020.” Orszag called for extending all of the Bush-era cuts for two more years and then letting all of them expire. He emphasized that the temporary extension should apply to all income earners, even the wealthy – another point on which the White House disagrees. Obama has said he wants the tax cuts to lapse for families with incomes above \$250,000.

Fate of tax cuts is key issue as Congress returns - Congress is returning for a final pre-election legislative session on Monday to confront the thorny issue of potentially raising taxes during an economic downturn, with neither party showing clear consensus on a solution.  The main order of business in the coming weeks will be debating the fate of income tax cuts approved under the George W. Bush administration in 2001 and 2003 that are scheduled to expire at the end of this year. House Minority Leader John A. Boehner (R-Ohio) surprised Democrats on Sunday when he said he might not oppose President Obama's plan to extend the cuts for all but the wealthiest households, although he reiterated his preference for keeping the lower rates in place for all income groups.  Boehner's comments, made on the CBS program "Face the Nation," altered the landscape of the tax debate by suggesting that Republicans might not obstruct Democratic efforts to raise taxes on the top earners.

Boehner Agrees with Keynesians, Signals He’s Open to Obama Tax Cut - Is Boehner backing off his position that the tax cuts for the wealthy must be extended?: House G.O.P. Leader Signals He’s Open to Obama Tax Cut, NY Times: The House Republican leader, Representative John A. Boehner of Ohio, said on Sunday that he was prepared to vote in favor of legislation that would let the Bush-era tax cuts expire for the wealthiest Americans if Democrats insisted on continuing the lower rates only for families earning less than \$250,000 a year.  Mr. Boehner ... said... “I think raising taxes in a very weak economy is a really, really bad idea,” ... That's very Keynesian of him to have the concern that "raising taxes in a very weak economy is a really, really bad idea," and there's an easy response for Democrats, one I discuss here. The Democrats say okay, if that's your concern, why not transfer the tax cuts, temporarily, to lower income groups who are much more likely to spend the money, or use it to backfill state and local budgets to stop further job losses?

House’s Boehner Says He Would Vote for Middle-Class Tax Cuts… -- U.S. House Republican Leader John Boehner said he would vote for middle-class tax cuts sought by the Democratic Obama administration even if it means eliminating reductions for wealthier Americans.  Boehner would support extending tax cuts for those making less than \$250,000 a year “if that’s what we can get done, but I think that’s bad policy,” he said yesterday on CBS’s “Face the Nation” program. “If the only option I have is to vote for some of those tax reductions, I’ll vote for it.”  “I’m going to do everything I can to fight to make sure that we extend the current tax rates for all Americans,” Taxes are expected to dominate the agenda when Congress returns this week. Boehner’s remarks came after House Democrat Chris Van Hollen said he would consider extending the Bush-era tax cuts for wealthier Americans for a year if Republicans would agree to make the reductions permanent for the middle class.

Those “Best-for-Nothing” Bush/Obama Tax Cuts -First, isn’t it “special” that House Minority Leader John Boehner and President Obama might be ready to “compromise” on what to do about the Bush tax cuts?  From a story by Shailagh Murray and Lori Montgomery in today’s Washington Post: House Minority Leader John A. Boehner (R-Ohio) surprised Democrats on Sunday when he said he might not oppose President Obama’s plan to extend the cuts for all but the wealthiest households, although he reiterated his preference for keeping the lower rates in place for all income groups. But read on in the same Washington Post story.  Boehner didn’t say he would support letting the top-end cuts expire.  He said he wouldn’t oppose extending all the rest of the tax cuts President Obama is already proposing to extend:

Zandi: Keep Tax Cuts Until Economy Mends - “High unemployment has cast a shadow on Americans’ collective psyche that will only darken with higher tax­es, raising the already-uncomfortable odds that the economy will suffer a double-dip recession,” says the new analysis by Mark Zandi of Moody’s Economy.com, who has been an adviser to House Democrats and to 2008 GOP presidential nominee John McCain. By contrast, “allowing the tax cuts for high-income households to expire over, say, a three-year period would not harm the economy,” the analysis says. Wednesday’s analysis concludes that the plan by Democratic leaders to end current tax levels for families making more than \$250,000 could do serious harm, reducing real gross domestic product by 0.4 of a percentage point in 2011, cutting payroll employment by 770,000 and raising the unemployment rate by almost 0.4 of a percentage point by mid-2012, the peak of the impact. And the real-world response by higher earners could make the impact somewhat worse, the analysis concludes, particularly in consumer spending, where higher-income earners account for about one-fourth of all U.S. personal outlays.

The Tax-Cut Racket, by Paul Krugman -“Nice middle class you got here,” said Mitch McConnell, the Senate minority leader. “It would be a shame if something happened to it.”  O.K., he didn’t actually say that. But he might as well have, because that’s what the current confrontation over taxes amounts to. Mr. McConnell, who was self-righteously denouncing the budget deficit just the other day, now wants to blow that deficit up with big tax cuts for the rich. But he doesn’t have the votes. So he’s trying to get what he wants by pointing a gun at the heads of middle-class families, threatening to force a jump in their taxes unless he gets paid off with hugely expensive tax breaks for the wealthy. How did we get to this point? The Bush administration bundled huge tax cuts for wealthy Americans with much smaller tax cuts for the middle class, then pretended that it was mainly offering tax breaks to ordinary families. Meanwhile, it circumvented Senate rules intended to prevent irresponsible fiscal actions by putting an expiration date of Dec. 31, 2010, on the whole bill. And the witching hour is now upon us.

Take a Walk on the Supply Side: Tax Cuts on Profits, Savings, and the Wealthy Fail to Spur Economic Growth - The first supply-side era in modern economic history began in earnest in 1981 with huge tax cuts for the wealthy and corporations. Although there were modest steps back from these tax cuts in the ensuing years in response to fiscal deficits and tax-sheltering, this first supply-side era didn’t end until the tax hikes of 1993. This respite from supply-side policies ended in 2001, however, when a new set of supply-side tax measures were enacted. Today, as budget shortfalls mount and the economy weakens, the supply-side approach to economic policy is once again up for debate. This paper reviews the theory underlying supply-side tax cuts and examines their results. Read the full report (pdf)

Those Who Fail to Plan, Plan to Fail - Interesting Gallup poll: Only 1 in 3 Americans actually favor keeping tax cuts for the top 2% (people making over \$250,000 a year).  As Barry Ritholtz says, that may come as a shocker to anyone who watches CNBC or reads the Journal or Fox or other conservative information sources.  Caroline Baum goes as far as to blame Bush for "the biggest tax increase in history," saying  "Everyone knew or should have known that this was a temporary tax cut (wink, wink) designed to put pressure on future Congresses. After all, no lawmaker wants to run on a platform of: “Vote for me, I raised your taxes.”"  The Bush tax cut was "the equivalent of taking out a variable-rate mortgage that is scheduled to increase after five years,” says Veronique de Rugy, a senior research fellow at the Mercatus Center at George Mason University in Arlington, Virginia. “You know the rate is going to go up.”  That’s how the law was written, de Rugy says. “By spending like drunken sailors, they almost guaranteed that tax cuts would be in jeopardy in the name of the deficit.”  The IMF also plays on the theme of "thinking ahead" by pointing out that we pretty much have a crisis once every decade so, next time - why not plan for it?

Where Have All the Deficit Hawks Gone? - I noticed that earlier this year we were overwhelmed by a wave of anti-deficit grandstanding throughout the Democratic Party while the Catfood Commission was sending up trial balloons about cutting Social Security benefits, raising the retirement age (which is just a sleight-of-hand way of cutting benefits) or cutting the health care benefits for military service personnel. Interestingly, since we have started the public debate about whether or not to extend Bush’s massive, deficit-ballooning tax cuts to millionaires, those same deficit hawks have been very quiet. That, or they have been very noisy about pushing to greatly increase the deficit by demanding Bush’s tax cut for millionaires be allowed to continue. Senators such as Ben Nelson (D-NE), Kent Conrad (D-ND), Evan Bayh (D-IN), and Joe Lieberman (I-CT), and 31 House Democrats have squawked about letting those tax cuts for the rich expire as Bush’s law had originally intended. Almost all of those 31 Representatives are self-proclaimed “fiscal conservatives” who pretend to be worried about the deficit even as they fight to greatly increase it.

Cutting Tax Rates, Average versus Marginal - I was wondering why I hadn't seen this point made before.  It makes a very sensible point: if marginal tax rates on low incomes are reduced, then everyone who earns at least that amount of income has a reduction in total taxes paid.  So this discussion about whose tax cuts are being extended is a bit misguided -- if the reductions in the lowest marginal tax rates are extended, then every taxpayer's total tax payments are extended, at least in part.  Even those at the highest income levels will pay lower taxes (compared to the pre-2001 income tax schedule) than they would if all of the tax rate reductions above those on the lowest income levels were extended

Tax Debate Concerns Small Businesses - As Congress and President Obama wrestle over whether to let the Bush tax cuts expire for the wealthiest Americans, one of the most heated aspects of the debate, in Washington and in neighborhoods across the country, is how a tax increase would affect small businesses. Mr. Obama wants to extend the cuts for most taxpayers. But he proposes eliminating them for the top 2 percent of wage earners, whose taxes would rise. Opponents of the plan warn that a tax increase would batter hundreds of thousands of small businesses — from Silicon Valley start-ups to mom-and-pop convenience stores — and prevent them from creating the jobs that might lift the sagging economy. Despite that emotional appeal, Internal Revenue Service statistics indicate that only 3 percent of small businesses would be subject to the higher tax, and many studies of previous tax increases suggest that it would have minimal impact on hiring

New Studies Debunk Idea that Ending Tax Cuts on Wealthy Hurts Small Businesses - Yves Smith - A New York Times report tonight sheds some light on the debate on whether ending tax cuts for the top 2%, which is how Obama proposes to deal with the pending expiration of Bush tax cuts, will, as low tax stalwarts contend, hurt small businesses. Although my sample is anecdotal, it strongly says not, and more systematic analyses supports that view. Most small businesses are not profitable enough to provide enough income to put owners in high enough brackets for the tax increases to make a difference; per the Joint Committee on Taxation, 97% of business owners would not be touched by the proposed tax increases. And I would bet a pretty high proportion of those who would be are high end professionals (think doctors, attorneys, larger accounting firms) who might not like a tax increase, but are not going to make changes in how they operate their firm based on it. The Times provides some corroboration for this belief:

Who Would the Tax Increases Hurt? - It’s not clear, however, that the rich spend the money they keep under lower income tax rates. There is economic evidence that the rich tend to spend tax rebates — checks that come in the mail, rather than incremental changes on a pay stub. Federal Reserve economists Julia Lynn Coronado, Joseph Lupton and Louise Sheiner, for instance, found that the rich spent more of their child-care tax credits in 2003 than poorer Americans did. But the same is generally not true for income taxes. In this particular case, economists say that the wealthy probably would not spend the money, were the Bush cuts extended. “Policies that temporarily increased the after-tax income of people who are relatively well off would probably have little effect on their spending because they generally would be able finance their consumption out of their income or assets without such a change,” Douglas Elmendorf, the head of the Congressional Budget Office, said this year, finding tax cuts the least stimulative of 11 policy options. He argued that tax cuts would increase spending for lower-income workers, who have less in savings and tend to spend more of their paychecks anyway.

People who make \$250,000 or more a year can afford a tax hike...Here we go again. Whenever the subject of taxes comes up—and it's come up in the debate over the Obama administration's decision to let many of the Bush-era tax cuts expire this year—we're treated to a chorus of complaints that people who make \$250,000 a year aren't really rich. Raising taxes on these people, we're told, would be raising taxes on the middle class. Media Matters has assembled a few choice quotes on the topic. As I argued in an article in August 2008, now reprised and updated, I have two pieces of bad news for the over-\$250,000 crowd. First, the reversal of some of the temporary Bush tax cuts is probably inevitable, given the appalling mismanagement of fiscal affairs between 2001 and 2008. (It's rich when Bush-era economic officials, like Edward Lazear, Greg Mankiw, and Keith Hennessey, carp about the fiscal situation.) Second, for those of you making more than \$250,000, I regret to inform you yet again: Yes, you are indeed rich—any way you slice it.

Lieberman Favors Extension of Bush-Era Tax Rates for the Wealthy - Senator Joseph I. Lieberman, the Connecticut independent who is aligned with the Democrats, said on Monday that he favored maintaining the lower rates for everyone, including the wealthiest Americans, for at least one more year.  “I don’t think it makes sense to raise any federal taxes during the uncertain economy we are struggling through,” Mr. Lieberman said... “The more money we leave in private hands, the quicker our economic recovery will be. And that means I will do everything I can to make sure Congress extends the so-called Bush tax cuts for another year, and takes action to prevent the estate tax from rising back to where it was.” Senate Republicans control enough votes to use the threat of a filibuster to block any legislation on the tax cuts that they do not support. Without the support of all 59 members of the Democratic caucus, it would be all but impossible for Democratic leaders to overcome such a block.

New Studies Debunk Idea that Ending Tax Cuts on Wealthy Hurts Small Businesses - Yves Smith - A New York Times report tonight sheds some light on the debate on whether ending tax cuts for the top 2%, which is how Obama proposes to deal with the pending expiration of Bush tax cuts, will, as low tax stalwarts contend, hurt small businesses. Although my sample is anecdotal, it strongly says not, and more systematic analyses supports that view. Most small businesses are not profitable enough to provide enough income to put owners in high enough brackets for the tax increases to make a difference; per the Joint Committee on Taxation, 97% of business owners would not be touched by the proposed tax increases. And I would bet a pretty high proportion of those who would be are high end professionals (think doctors, attorneys, larger accounting firms) who might not like a tax increase, but are not going to make changes in how they operate their firm based on it. The Times provides some corroboration for this belief:

Ezra Klein - Democrats turn to meaningless word games - Greg Sargent reports that House Democrats want to rebrand the extension of Bush's middle-class tax cuts as "the Obama tax cuts for the middle class." Whether you think this is a good idea, a bad idea or a totally meaningless waste of time -- and you can guess which view I hold -- it's worth remembering that Democrats have known about the expiration of these cuts for 10 years now. If they wanted to create their own middle-class tax cut to replace Bush's expiring program and make sure they got the credit from the voters, they could've done that. If they wanted to begin calling them something different, they could have started the process last year. Instead, we've now been talking about the Bush tax cuts for months and the big plan is to suddenly change how Democrats refer to them in press releases?. And putting the lack of planning aside, it won't stick because it's not true. Democrats are talking about extending the Bush tax cuts. They are not talking about expanding Obama's Make Work Pay tax cut, or putting something new in their place. Bush is getting the credit because it's actually his plan.

The Economics Of High-End Tax Cuts - Paul Krugman - I’ve thought of one way to explain why extending tax cuts for the top end is such a bad idea; let’s make two not-quite-right but not too far off assumptions. The first is that the economy will be in a liquidity trap, badly needing fiscal stimulus, for two more years. Yes, it could be more than that. But policy making for now operates on the assumption that it will be a limited period. Second, let’s assume that rich people make spending decisions based on a 10-year horizon. Now, consider first what would happen if we extend the tax cuts for the next 10 years. This would add \$700 billion to the debt (pdf). If the rich spread their windfall evenly across the decade, that’s \$70 billion a year in additional consumer spending — or \$140 billion during the period when we need it. So, \$700 billion in deficits for \$140 billion in stimulus; not a good bargain! Alternatively, suppose we extend the tax cuts for only 2 years. That’s only \$140 billion on the deficit. But the rich, knowing that it’s temporary, won’t spend much of it — if they really operate on a 10-year horizon, they’ll spend only \$14 billion a year more, so \$28 billion of stimulus when we need it, in return for \$140 billion of debt; still a lousy bargain!

The tax debate: Someone will pay - The Economist - AMERICA’S mid-term elections are turning into a referendum on the role of the state, and George Bush junior’s tax cuts are the litmus test. Barack Obama has attacked Republicans for wanting the cuts for the richest 2% of families to be made permanent, robbing the government of the means to invest in the economy. Harry Reid, the Democratic leader in the Senate, is mulling a vote on making only the middle-class tax cuts permanent, virtually daring the Republicans to vote no.  Republicans, for their part, portray the elections as the occasion for choosing between free enterprise and a suffocating welfare state of the European sort. Mitch McConnell, their leader in the Senate, has introduced a “Tax Hike Prevention Act” to make all Mr Bush’s cuts permanent. This has the makings of a disaster. If the two sides can’t agree, everyone’s taxes will rise sharply on January 1st, dealing a body-blow to the feeble economy.

Bush Tax Cuts Had Little Positive Impact on Economy , by Bruce Bartlett - Republicans are heavily invested in permanently extending the tax cuts enacted during the George W. Bush administration, all of which expire at the end of this year exactly as the legislation was written in the first place. To hear Republicans, one would think that the Bush tax cuts were the most powerful stimulus to growth ever enacted and only a madman would even think of allowing any of them to expire. The truth is that there is virtually no evidence in support of the Bush tax cuts as an economic elixir. To the extent that they had any positive effect on growth, it was very, very modest. Their main effect was simply to reduce the government’s revenue, thereby increasing the budget deficit, which all Republicans claim to abhor.

Gee, Maybe They ARE “Good for Nothing” - Over on the Fiscal Times, check out two recent columns on the Bush tax cuts written by experts considered to be fiscal conservatives. Today Bruce Bartlett says the Bush tax cuts “had little positive impact” on the economy: To the extent that they had any positive effect on growth, it was very, very modest. Their main effect was simply to reduce the government’s revenue, thereby increasing the budget deficit, which all Republicans claim to abhor. And a couple days ago (also from the Fiscal Times), the Tax Foundation’s Gerald Prante and Bill Ahern wrote about “five myths about the Bush tax cuts” (a slightly different set of “five myths” from Bill Gale’s Washington Post piece–so that makes at least ten now!), pointing out that the myths abound from both parties and even on a bipartisan basis in terms of the worst ones!  This is yet another reason why the Bush tax cuts, and continuing them as the new (but really just “reheated”) Obama tax cuts would be bad for our country: these myths and misinformation would be perpetuated along with these far-from-wonderful tax cuts.

A Millionaire’s Bracket is a Bad Idea, Particularly for the left… Annie Lowrey of The Washington Independent is one of my favorite economics reporters. Her work on youth unemployment alone merits praise. But I’m definitely not a fan of her call for a new top income tax bracket, a stance that will surprise almost no one. Annie writes: Democrats could, for instance, offer to create a new tax bracket for the top one percent of earners (those making more than about \$410,000) or for any earners making more than \$1 million. That tax bracket could pay the top marginal rate before the tax cuts, 39.6 percent, or some rate between the current 35 percent and 39.6 percent in 2011 and 2012. She goes on to cite the Tax Foundation: That same article from the Tax Foundation also notes the following: In 2007, the top 1 percent of tax returns paid 40.4 percent of all federal individual income taxes and earned 22.8 percent of adjusted gross income. Both of those figures—share of income and share of taxes paid—are significantly higher than they were in 2004 when the top 1 percent earned 19 percent of adjusted gross income (AGI) and paid 36.9 percent of federal individual income taxes. This strikes me as fairly important. If the top 1 percent is responsible for 40.4 percent of revenue from federal individual income taxes, a new top rate will presumably increase revenue volatility, as income at the top of the distribution tends to fluctuate with the business cycle.

Temporary Tax Cuts For The Rich? No. – Krugman - Greg Sargent notes the growing number of Republicans suggesting a “compromise” in the form of temporary extension of high-end tax breaks, and urges Democrats not to take the bait. His argument is essentially political: Republicans are obviously aware that they’re in a fix, and Democrats shouldn’t help them out. But there are reasons beyond partisan maneuvering to reject any deal here. First, temporary tax breaks for the rich are stunningly bad economic policy. As I tried to explain, basic economic theoryMilton Friedman’s theory! — tells us that affluent taxpayers are likely to save the great bulk of a transitory tax break. Second, this is obviously — obviously — a setup. The whole point is to avoid a vote on the middle-class tax cuts while Democrats control the House; when and if Republicans regain control, they can refuse to let anything but a full extension reach the floor. So the goal is actually permanent extension; what they’re offering isn’t a compromise, it’s a trap.

Estate tax and extension of Bush cuts generally - According to an interview with Treasury's Michael Mundaca reported in the Wall St. J. today (Sept. 13, 2010), Congress and the Obama administration are discussing a possible bill to allow estates that pass in 2010 to have the 2009 or the 2010 law apply. See Martin Vaughn, Estate Tax Choice May Be In Works For 2010 -- Treasury Official, Wall St. J.. Does that make sense? Probably not. The problem exists because the gimmick was adopted by the GOP to pretend that the cost of all their tax changes wasn't as big as it actually would be if the changes were permanent reforms rather than temporary. Obama at least knows that passing a new tax cut for the wealthiest 2% makes very little sense--they will save it or invest it overseas; they are unlikely to spend it on consumer goods that create new production demand in the economy or use it to create new, entrepreneurial businesses that hire people. But Obama wants to create billions in new tax breaks for businesses that make no sense at all--such as making the R&D credit permanent (just a tax break for R&D that businesses have to do to stay viable) or providing 100% expensing (just a tax break, and likely to result in purchases of equipment from overseas, thus shipping jobs out of the country rather than helping jobs domestically).

What America needs is a payroll tax cut - Nouriel Roubini - The administration knows that it needs to fashion a revenue-neutral fiscal stimulus that increases labor demand and consumption. Its proposal to make permanent a research and development tax credit that dates to the 1980s, and then to enact a temporary investment tax credit allowing firms to write down capital investments at 100 percent of cost, are welcome -- but too modest a cure for what ails the economy. A much better option is for the administration to reduce the payroll tax for two years. The reduced labor costs would lead employers to hire more; for employees, the increased take-home pay would boost much-needed economic consumption and advance the still-crucial process of deleveraging households (paying down credit card debt and other legacies of the easy-credit years).

Against the Research and Development Tax Credit - Amar Bhide (WSJ, subscription) makes a good case that it is just corporate welfare. Big companies with large R&D budgets, unsurprisingly, favor the proposal. But it's a bad idea. Tax credits for R&D don't encourage the broad-based innovation that is crucial for widespread prosperity.  At this blog, I have been arguing that we are in a Garett Jones economy, in which employees are hired to build long-term capabilities. In some sense, the vast majority of employees are doing R&D. The best way to get more R&D would be to cut the corporate income tax rate. The corporate income tax has been described as a swiss cheese where the holes are more important that the cheese.  As Megan McArdle has argued, the economy would be better off if there no corporate income tax altogether. Instead, the combination of high rates and lots of holes yields relatively little revenue. It does, however, maximize the value of K street lobbyists.

Corporate Tax Rates and Unemployment - I thought I'd do a quick and dirty post today about a hot topic - the effect that taxes on businesses have on unemployment. The usual argument is that the lower the taxes on businesses, the more money they keep and pump back into, well, doing business, and thus, the more people they end up hiring. But is it true? Now, since the talk right now is about cutting payroll taxes in particular, ideally I'd use that data. However, in a quick perusal at the IRS' site, all I found was the corporate marginal tax rate. However, the folks who suggest tax cuts as a way to boost hiring aren't particular - most of them feel any tax cuts will lead to more hiring. So let's check that, at least, shall we? Figure 1 below shows the data used in this post; the top corporate marginal tax rate (obtained from the IRS) is on one axis and the unemployment rate for individuals sixteen years and over (from the Bureau of Labor Statistics) is on the other axis. The latter series begins in 1947, but I decided to start with 1948 just to be far enough off from WW2 to avoid that effect as much as possible.

Cutting State Corporate Income Taxes Is Unlikely to Create Many Jobs - CBPP - Corporate income taxes are important sources of revenue that states use to fund public services, including services essential to long-term economic growth like education, infrastructure, health care, and public safety. Nonetheless, a number of 2010 gubernatorial candidates have made corporate tax cuts key planks of their campaign platforms. This continues a trend of the past couple of years, during which policymakers in several states have proposed cutting corporate income tax rates — or even eliminating the tax completely — as a strategy for stimulating economic growth and creating jobs. These proposals, however, offer false hope. Corporate income tax cuts are unlikely to have a positive impact on a state’s rate of economic growth or the pace at which it generates private-sector jobs. PDF of this report (15pp.)

A New Handout for Small Business - Meanwhile, the \$50 billion bill to promote small business lending and investment passed Congress today.  As I tried to say in my most recent article, this is completely unnecessary--a bit of fine-sounding pork with which to placate small business lobbies in advance of the election.  While it's absolutely true that small businesses are having a harder time getting credit right now, there's not so much evidence that this is because credit is not available to good projects.  The guy I profiled, who owns a wire factory, has gotten four different loans for equipment since the recession started--one for 100% financing in December 2008. People who have good cash flow and good projects seem to be able to get them financed, which is why so few business owners cite the availability of credit as one of their chief concerns. The people who can't get financing are more likely to be the folks who need that financing to paper over a cash crunch.  Propping up failing businesses is not the proper role of government

What’s Inside the Small Business Bill? - The Senate has passed the Small Business Jobs Act, a small business bill aimed at increasing lending. The measure would invest \$30 billion in small community banks to spur business lending. The New York Times has a good detailed look at what’s inside the bill. Here’s the quick and dirty of it, from the bill itself and this Reuters Factbox: Forcing banks to lend to small businesses The Treasury would have one year to send money to those banks. The banks would pay a 5% dividend on the government money. If banks lend enough money to make up the 2009 base level of lending, their dividends would decrease, with 1% being the lowest payment. If banks take the money, but do not increase small business lending in two years, they’ll have to pay a 7% dividend.  The government will provide an additional \$1.5 billion to state small business credit program. All Small Business Administration (SBA) loan limits will go up, with the highest limit (from a 504 loan) now at \$5.5 million. Loan fees will also be eliminated.

This Chart Destroys The Logic Behind Obama's Business Tax Cuts… Last week Obama announced his plan to give tax breaks to businesses making investments in new plants and property.But as we argued, that's not going to work. The problem is the lack of end demand, not the cost of investing in new capital. And even if you can write off the cost of a new machine, what's the point if what that machine produces isn't needed. Indeed, that's exactly the message from the latest NFIB small business survey. The big problem in the economy, say small business: SALES. Without a return of demand, small businesses aren't going anywhere.

Don't defend this deduction - I JUST got an email from Nancy Pelosi’s press office lambasting John Boehner for wanting to eliminate "tax relief benefiting millions of middle-class families" by scrapping the mortgage interest deduction. Please. If you must defend a tax break, find a different one. The mortgage interest deduction (MID) is truly one of the worst, most pernicious features of our income tax code. Not only does it encourage excessive investment in homes, it encourages doing it with debt. The MID didn’t cause our crisis—after all, it’s been around since 1986 when the deductibility of almost all other types of interest was eliminated. But it is symptomatic of our fondness for endless subsidies and distortions to promote home ownership, which did ultimately produce our crisis. The MID is almost impossible to defend on distributional grounds. It only goes to people whose income is high enough to merit itemising deductions, and its value rises with their tax bracket.

Gallup: Bush Still Takes Brunt of Blame for Economy vs. Obama -- Nearly two years into his presidency, 51% of Americans say President Barack Obama bears little to no blame for U.S. economic problems, while 48% assign him a great deal or moderate amount of blame. More Americans now blame Obama than did so a year ago, but a substantially higher percentage, 71%, blame former President George W. Bush. More specifically, the Aug. 27-30 USA Today/Gallup poll finds 24% of Americans blaming Obama a great deal for the current economic problems, 24% a moderate amount, 25% not much, and 26% not at all. By contrast, 37% blame Bush a great deal, compared with 10% assigning him no blame. Bush fares poorly on this measure partly because a relatively high proportion of Republicans -- 48% -- blame him a great deal or moderate amount, as do most Democrats (89%) and independents (73%). By contrast, relatively few Democrats, 19%, blame Obama. These patterns are consistent with Gallup's findings on the same question in April.

The “I Dare You To Be Fiscally Responsible” Election - The Washington Post’s Ruth Marcus is “despondent” about the victory of the Tea Party candidate (Christine O’Donnell) over the more moderate Republican candidate (incumbent congressman Mike Castle) in the primary for Delaware’s open U.S. Senate seat.  I agree that it’s bad news.  As Ruth explains: First, I had thought the silver lining of this election year might be to produce a Senate with a more robust cadre of moderate Republicans. That caucus has pretty much dwindled to the two senators from Maine, with very occasional company from colleagues such as Massachusetts Sen. Scott Brown and departing Ohio Sen. George Voinovich. It’s awfully hard for a caucus of two to break with the party…But not as scary as reason number two: the ripple effect of victories such as O’Donnell’s on other Republican lawmakers. Republican members of Congress look at races such as those in Utah, Alaska and now Delaware and think: There but for the grace of the Tea Party go I. They will be that much more watchful of protecting their right flank against a primary challenge. They will be that much less likely to take a political risk in the direction of bipartisanship.

Fed’s Pianalto: Rule-Making Process Next Leg of Financial Reform - Federal Reserve Bank of Cleveland President Sandra Pianalto warned in a speech released Tuesday that much of the business of financial oversight reform remains unfinished, despite the passage of legislation mandating what will be done. “Much work remains to craft the specific aspects of the regulations called for by the law,” Pianalto said. Most notably, the agencies that will implement the legislation have to determine what they will do, the official said. “The effectiveness of the regulations will, in large part, be determined by the effectiveness of supervision,” the central banker said. “A key lesson learned from the financial crisis is that supervision must be strong enough to ensure financial stability.”

William White: Getting Tough on Banks May Not Hurt Economy -- Yves Smith - White, the former chief economist of the Bank of International Settlements, is best known for his warnings in 2003 that many advanced economies were in the grip of housing bubbles, which Greenspan pointedly ignored. Although he is now celebrated for that call, his latest, admittedly less dramatic, observations again seem to be falling on deaf ears. White’s presentation at the Jackson Hole conference has gotten little attention, and that’s a pity, because it contains some useful observations. It focuses on an analysis by Carmen and Vincent Reinhart of economic performance in the wake of severe financial crises. One of White’s astute comments is that weak credit growth may not be due as much to bank reluctance to lend as overextended borrowers getting religion and paying down debt. If lack of loan demand is indeed the main culprit, it says that regulators need not fear imposing tougher bank regulations:

Some Unsolicited Advice for Regulators - As the Dodd-Frank rule-making process begins in earnest, I’d like to offer some unsolicited advice to regulators, and specifically the Fed. I spent many years at a large dealer, so I have some thoughts on how an effective supervisory regime for large dealer banks needs to be structured.Put simply: You need to get in the banks’ face. I’m deadly serious about this. First, significantly expand the dedicated supervisory teams for the dealer banks that qualify as Tier 1 FHCs. It’s not enough to have a 5-10 person supervisory team for dealer banks like JPMorgan, BofA-Merrill Lynch, Morgan Stanley, etc. The capital markets side of each of these banks has tens of thousands of employees, and hundreds of people in senior risk-taking positions. The supervisory team for each Tier 1 FHC needs to have at least 50 people. Again, I am deadly serious. Second, and most importantly, at least half of the supervisory team needs to be on-site full-time. The CPC (“central point of contact,” who heads the supervisory team) also needs to be on-site, and should have broad information-gathering authority. In other words, the Fed should be a major presence at each dealer bank.

Obama Strongly Hints At Warren Nomination To Head Consumer Bureau - President Obama hailed his long friendship with Harvard Professor Elizabeth Warren on Friday, crediting her at his new conference with the idea for what has since become the Consumer Financial Protection Bureau, when asked whether she was still the leading candidate to run it. After calling her a "dear friend" and adding that he's known her since he was in law school, he strongly hinted that she would be the eventual nominee by qualifying that he was "not going to make an official announcement until it's ready." Obama's clear emphasis on "official" left little room for doubt that the matter is all but decided. Speculation has swirled that Obama would name Warren to head the agency during the summer recess to avoid a confirmation battle. His opportunity to do so expires early next week, when Congress returns. But he could also recess appoint Warren in October, after Congress recesses to campaign for reelection.

Consumer Candidate May Avoid a Vote - The Obama administration is considering appointing the legal scholar Elizabeth Warren to run a new consumer bureau on a temporary basis to avoid a potentially bruising confirmation battle in the Senate, according to people who have been briefed on the search.  Two people who have been briefed on the appointment process, who spoke on condition of anonymity because they feared reprisal, said the White House was exploring ways to have Ms. Warren effectively run the bureau without having to endure a confirmation battle and, potentially, the threat of a Republican filibuster.  Mr. Obama could name Ms. Warren using a recess appointment, though such an appointment would last only until the end of next year. In addition, the law appears to permit Ms. Warren to run the bureau’s day-to-day affairs while it is nominally under the supervision of the Treasury Department, to which Congress has delegated the powers of the bureau until it is fully established as a freestanding agency.

Elizabeth Warren Is Obama's Pick to Head Consumer Agency… President Obama will select Elizabeth Warren to join the administration in a special advisory role to help form the new Consumer Financial Protection Bureau, a watchdog agency she first proposed back in 2007.  The move, first reported by ABC News' Jake Tapper, gives Warren an important role in creation of the bureau, but avoids, for now, a confirmation fight in the Senate. Her selection will appease a slew of prominent lawmakers, progressives, and labor unions who in recent months have clamored for her nomination to the post.  After all, the new agency -- part of the sweeping Wall Street reform bill that passed Congress earlier this summer -- was Warren's brainchild. In 2007 Warren, the Harvard Law professor and bailout watchdog, proposed the creation of "a new regulatory body to protect consumers who use credit cards, home mortgages, car loans, and a host of other products.

What's the Hold-up on Elizabeth Warren? - Nobody seriously disputes whether Elizabeth Warren is the best-qualified candidate to head the Consumer Financial Protection Bureau. Everybody recognizes the bipartisan political appeal that Warren has with voters, and Democratic strategists know that no action in their power would play better to the party's base than a Warren nomination—a vital maneuver ahead of the November elections. President Barack Obama has no less than three procedural options to get Warren on the job. So: What's the hold-up? The bank lobby has been doing everything it can to block Warren's nomination, but there are simply no good reasons to bypass her. In the field of finance, there is simply no consumer advocate more accomplished than Warren. She's quite possibly the finest bankruptcy scholar in the country, she came up with the idea for a Consumer Financial Protection Bureau in the first place, and as Chair of the Oversight Panel for the Wall Street bailout, she has proven that she is willing to ask tough questions and hold powerful people accountable for their actions

Dodd: Congress Could Defund Consumer Bureau Over Warren Interim Appointment - Outgoing Senator Chris Dodd (D-Conn.) warned Tuesday that an interim appointment of Elizabeth Warren to head the Consumer Financial Protection Bureau "jeopardizes the existence" of the nascent agency.  The White House is considering naming Warren interim head, as the law establishing the CFPB allows, in order to get her into place immediately and head off a Senate filibuster of her nomination. Once she's in place, Obama could nominate her for the permanent position.  "I'm not enthusiastic about that and I think it'll be met with a lot of opposition," Dodd told reporters after coming off the Senate floor. Dodd said that an interim appointment would deprive the director of the legitimacy that comes with Senate confirmation. He added that such an appointment could create a backlash that would lead Congress to defund the bureau.

Elizabeth Warren: The Right Appointment At The Right Time - by Simon Johnson - The case for appointing Elizabeth Warren to set up the new Consumer Financial Protection Bureau (CFPB) was, at the end of the day, overwhelming.  She had the original idea, she helped build political support, and her own credentials have been only strengthened by her work as head of the Congressional Oversight Panel for TARP.  On Friday, the president will reportedly appoint Professor Warren as an assistant to the president and special adviser to the Treasury Secretary, with the task of setting up and initially running the CFPB. Some of Ms. Warren’s supporters think this move is something of a half-measure – they would have preferred a conventional nomination, with all the fanfare of a classic confirmation battle in the Senate.  There is something to be said for that, but the interim appointment route is by far the best way forward for three reasons.

Warren to Unofficially Lead Consumer Agency - Ms. Warren will be named an assistant to the president, a designation that is held by senior White House staff members, including Rahm Emanuel, the chief of staff. She will also be a special adviser to the Treasury secretary, Timothy F. Geithner, and report jointly to Mr. Obama and Mr. Geithner. The financial regulation law delegated to the Treasury Department the powers of the bureau until a permanent director was appointed and confirmed by the Senate to a five-year term.  The decision does not preclude the possibility that Ms. Warren could eventually be named director, and at the least, she would play a pivotal role in deciding whom to appoint to the job, according to the official, who spoke on the condition of anonymity so as not to pre-empt the formal announcement. Several organizations, including ABC, reported the news of Ms. Warren’s impending appointment on Wednesday.

Will Warren Have Power? -Huffington Post and other outlets are reporting that Obama will appoint Elizabeth Warren to...something at least: The White House will tap Elizabeth Warren to be a special adviser to both the president and Treasury Department. The move allows her to act as an interim head of the CFPB and will enable her to begin setting up the agency immediately and prevent the GOP from filibustering her nomination. Warren could serve until Obama nominates a permanent director -- a nomination he's not required to make. Obama could also nominate her as the permanent director in the near future...So it's clear Warren will have a seat at the table that makes economic policy in the White House, giving the middle class a voice where it's been sorely lacking. That's a victory. And it also seems clear Warren will have at least some hand in setting up and/or running the new Consumer Financial Protection Bureau to protect Main Street from Wall Street's greed. That's also good. But the details matter. Will she serve as the "interim head" and will Obama potentially "nominate her as the permanent director" -- or is she really just "setting up" the agency with an understanding that Obama will not fight for her to lead it.

Did Obama just fumble a Warren touchdown? - So what in the world does this mean? ABC News' Jake Tapper has the Elizabeth Warren scoop of the year. President Obama will announce this week that Elizabeth Warren, the Harvard Law School professor who first proposed the Consumer Financial Protection Bureau, will be named to a special position reporting to both him and to the Treasury Department and tasked with heading the effort to get the new federal agency standing, a knowledgeable Democrat told ABC News... Naming Warren as an assistant or counselor to both the president and Treasury Secretary Tim Geithner would allow the president to bypass a Senate confirmation process that could prove lengthy and contentious. At first glance, the news seems sure to disappoint progressives who want Warren named as the first director of the CFPB, and are spoiling for a fight with the opposition over what would surely be a contested confirmation. Indeed, if Obama was looking for a way to define exactly what's wrong with his presidency, he may have done it with this back-door, not-quite-an-appointment. Neither Obama's supporters nor opponents will be satisfied with this move -- just as neither were happy with the healthcare bill or bank reform. It feels weak.

Elizabeth Warren To Lead Search For New Consumer Chief, Could ‘Pull A Dick Cheney’ - In addition to being charged with forming the newly-created agency dedicated to protecting consumers from abusive financial products, Elizabeth Warren will lead the administration's effort to find the first director of the nascent unit, the Huffington Post has learned. President Barack Obama will name Warren, a famed consumer advocate and passionate defender of the middle class, as one of his top advisers on Friday, creating a role inside the White House for the Harvard Law professor and bailout watchdog to lead the effort in forming the Bureau of Consumer Financial Protection. Warren, though, will not be named as his nominee for the Senate-confirmed, five-year post to lead the new entity -- at least not yet. She will, however, lead the search to find the right person.

Elizabeth Warren on Way to Being Sidelined as Head of Consumer Protection Agency, Relegated to “Advisor” Role -- Yves Smith - The body language of the Administration has been clear from the outset on the question of whether Elizabeth Warren would get its nomination to head of the new financial services consumer protection agency. Despite the occasional public remark regarding her undeniable competence, which really amounted to damning her with faint praise, Team Obama has never been on board with the idea. Michael Barr, assistant treasury secretary, was noised up early on as a possible candidate, but the PR push halted abruptly when her many supporters pointed out the obvious, that she was clearly the better choice. Then we had the no doubt authorized Chris Dodd kiss of death, that he thought she was qualified but doubted she could be confirmed by the Senate. The reality is that the Administration was never going to appoint her; the only question is whether she can be kept in their orbit and not be a net negative as far as their dubious priorities are concerned. Timothy Geithner has become a central actor on all Adminstration economic policy matters, giving him more reach, and thus more face time with the White House than is normal for a Treasury secretary. Given how Warren has successfully, and correctly, roughed Geithner up before Congress in her role as head of the Congressional Oversight Panel for various TARP administrative shortcomings, he was guaranteed to be at best a non-supporter.

Elizabeth Warren Tossed a Bone and Appointed Geithner's Lapdog - Under guise of being handed an important role, Elizabeth Warren was shoved aside and tossed a bone by President Obama. One might not know it from the New York Times headline Warren to Unofficially Lead Consumer Agency.  Calculated Risk offered a one line comment on his blog "I think Ms. Warren is an excellent choice." I certainly agree. Unfortunately, no matter how much Obama tries to spin it, this has nothing to do with a "potentially contentious confirmation" but rather everything to do with Geithner winning the battle to marginalize her.

Warren: ‘Time to Get to Work’ on Consumer Protection - Harvard law professor Elizabeth Warren, as expected, said she has agreed to serve as a special adviser on the new consumer protection agency in the Obama administration. Here is her statement.

Elizabeth Warren in Her Own Words - This is the first installment of “The Influencers,” a six-part interview series that ND20 Editor Lynn Parramore is conducting in partnership with Salon.com. In July, she sat down with Elizabeth Warren, pegged to help launch the new Consumer Financial Protection Bureau. **If you haven’t seen it, also be sure to read Warren’s folksy post on the White House blog about the appointment.

Elizabeth Warren’s new job - Elizabeth Warren had a conference call with left-wing bloggers this afternoon, just after being introduced to the public by Barack Obama in the White House Rose Garden. She said that she first started talking to Barack Obama about a consumer financial protection agency in December 2006 — before even her Democracy article came out. As of Monday, when she moves in to her new office and already has lunch scheduled with Tim Geithner, Warren is going to be a fully-fledged member of the White House economic team, meeting with the president and the rest of his economic advisors on a regular basis. Yes, her portfolio will specifically be consumer protection, but she’ll be able to advise in any area where she feels she can add value. She was also clear that she has the authority to get the Consumer Financial Protection Bureau up and running as quickly as she can — to hire people, set the budget, and so forth. She wouldn’t be drawn on the question of appointing a director, or whether she has any desire to return to Harvard. But she was clear that she was excited “to make this shift from being on the outside to being on the inside”.

Appointing Warren - It’s weirdly depressing watching everybody scramble around trying to work out what on earth the kindasorta appointment of Elizabeth Warren to create the Consumer Financial Protection Bureau actually means. As Ryan Chittum notes, the WSJ certainly can’t make up its mind: David Weidner says that Warren is being sidelined and that “someone else will make the final decisions”; the paper’s news story, by contrast, says that she will have broad powers.She will recruit staff for the agency, set the policy mission and serve as the recognizable public face for a new agency the administration wants to promote. The big outstanding question is whether the White House intends to nominate Warren to lead the CFPB at some point in the future, before Obama’s first term is out. Jim Pethokoukis explains today that she’s probably here to stay: There is an old management rule: Never hire someone you can’t fire. Obama violated this rule by picking Hillary Clinton for secretary of state. And he just did it again

Housing Agenda for the new Consumer Czar - The White House announced early this morning via a blog post that Elizabeth Warren will be appointed Assistant to the President and adviser to Treasury Secretary Geithner to begin implementation of the Consumer Financial Protection Bureau.  This intriguing move leaves open the question of who the President will nominate as Director.  Dodd-Frank requires Secretary Geithner to announce a transfer date for the CFPB to begin its work, some time between January and July of next year, and authorizes him to serve essentially as acting director of the Bureau until the Senate confirms a permanent Director.   As far as I can tell, there is no time limit for the nomination or confirmation of the permanent Director.  Obama could wait until after the fall elections, for example. The Bureau's authority to write regulations and enforce laws does not begin until the transfer date next year.  In the meantime, however, the Warren/Geithner acting director team can take action immediately on several urgent issues.

Regulators agree to reforms on bank capital - FT - Global banking regulators on Sunday sealed a deal to effectively triple the size of the capital reserves that the world’s banks must hold against losses, in one of the most important reforms to emerge from the financial crisis. The package, known as Basel III, sets a new key capital ratio of 4.5 per cent, more than double the current 2 per cent level, plus a new buffer of a further 2.5 per cent. Banks whose capital falls within the buffer zone will face restrictions on paying dividends and discretionary bonuses, so the rule sets an effective floor of 7 per cent.  A majority of countries, including the US and UK, wanted tougher standards than those that finally emerged, but they agreed to a lower total ratio and an extended implementation period after resistance from Germany, among others. The new rules will be phased in from January 2013 through to January 2019.   Tougher capital standards are considered critical for preventing another financial crisis, but bankers had warned that if the new standards were too harsh or the implementation deadlines too short, lending could be curtailed, cutting economic growth and costing jobs. In addition to the 4.5 per cent so-called core tier one ratio, and the 2.5 per cent buffer, the reform package also endorses the idea of an additional buffer of up to 2.5 per cent of core tier one capital to counter the economic cycle, although the details on this remain sketchy.

Basel III arrives - Basel III has arrived! The official BIS press release is here, with a wealth of information inside it. But they conveniently also supply this table, which gets to the core of the matter: There’s a lot to unpack and explain here. But the first thing to note is that we’ve moved from a simple “Tier 1 has to be 4%, Tier 2 has to be 8%” to a 3×3 matrix with all manner of different minima. It’s a bit more complicated, but it’s also more intelligent, and should be much more effective as well. Possibly the most important thing here is the existence of the first column, setting minimum standards for common equity — which is also known as core Tier 1 capital. Such standards did exist in the past, but they were set extremely low, at just 2%, and so were generally ignored. As of now, common equity is the main thing that matters. No more throwing any old garbage into the Tier 1 bucket and calling it capital: the new standards for common equity are significantly tougher than the old standards for Tier 1 capital in total.

Job of Rewriting Bank Regulation Has Only Started - Stock markets cheered new regulations announced this weekend that were intended to prevent a recurrence of the financial crisis, but central bankers cautioned Monday that officials still must forge agreements to limit short-term bank risk and deal with institutions considered too big too fail.  “We have hard work to do still,” Jean-Claude Trichet, president of the European Central Bank, said during a news conference in Basel, where central bankers and bank regulators from 27 countries agreed Sunday to require banks to more than triple the amount of capital they held in reserve.  “It’s a work in progress on a large front,” said Mr. Trichet, who was chairman of the Basel group.

Meet Basel III - AFTER a few additional tweaks, the compromise proposal for new international reserve ratio standards has been agreed upon and made public. The Bank for International Settlements has provided a helpful chart: The minimum common equity requirement has been increased from 2% to 4.5%. Common equilty is what is called "core" Tier 1 capital. Regulators have agreed on an additional 2.5% "conservation buffer". Most large banks will likely maintain such a buffer, as falling below it will lead to additional regulatory scrutiny. The likely impact, then, is a pretty substantial increase in the common equity reserves banks need to hold. And then there is the additional countercyclical buffer that may apply in boom periods. Based on the BIS' own research, these increases should lead to a substantial reduction in the frequency of financial panics, at a minimal cost to growth. Just to be on the safe side, however, the rules are to be phased in over an extended period.

What will Basel III do? - Felix Salmon has one good summary, here a bit on community banks, overall emerging markets get off lightly, and Germany is unhappy (in this case probably a good thing).  A few points:

• 1. This agreement is probably good news.
• 2. It is difficult to divine the net future effects of such changes upon announcement.  There is also the question of how binding this ends up being and whether the implementation lags will matter.
• 3. One key question is how much current systems prevent regulatory arbitrage, namely driving more intermediation into less regulated, less reliable and less easily monitored institutions.

Basel III: Third time's the charm? | The Economist - GIVEN the global nature of banking, there really was no alternative to relying on the Bank for International Settlements as the primary regulatory body addressing the problem of over-leverage. And the agreement announced yesterday does indeed address an important part of the problem, specifically the use of preferred stock and more exotic debt-equity hybrids to boost "Tier 1" bank capital. Going forward, banks are going to be obliged to maintain a much healthier amount of true common equity. Simplicity and transparency on how much equity banks actually have is welcome. But the instant enthusiasm for the agreement does seem a bit overdone. Most obviously, talking about a new regulatory scheme reducing bank profitability reflects a fundamental misunderstanding of how a competitive economy works.  Individual banks will still need to attract investors—more common-equity investors than ever, in fact—and those investors will demand a competitive rate of return. No bank regulation can change that.

5 Ways Basel III Will Build Better Banks - The biggest news story of the day is also the hardest to understand: the new banking rules established by top bankers and regulators in Basel, known as the Basel III Accords. These new international rules designed to make banks safer could be more important than the U.S. financial regulation law passed this summer. The standards are complicated, but they should build better banks. How? Basel III is all about capital. Capital is the amount of high quality assets a bank must hold to cushion against losses. Very simply, new rules will force banks to have more capital, higher quality capital, and more "liquid" capital. Here are five important features:

Basel III - Here are a few thoughts on Basel III. First, and foremost, bank regulation must proceed on an international basis. Country by country approaches are unlikely to be successful given how easy it is to move funds to unregulated jurisdictions. Second, is it a success? Yes, but not completely. The change from a requirement that banks hold 2% of equity in reserve, as under the old rules, to the current requirement of 7% was a necessary change. The additional reserves (i.e. reduced leverage) ought to reduce the fallout from a negative shock to the banking sector. Third, what I don’t have a good sense of is whether 7% is enough. I would have been tempted to go with the 10% requirement that was proposed by some countries out of an abundance of caution. Fourth, while the new rules are needed, there’s some question about the pace at which the capital adequacy ratios are being implemented. They won’t be fully in place until 2018, which may not be fast enough to avoid trouble in the interim.

The other bits of Basel III - All the headlines about Basel III have concentrated on the new core Tier 1 capital requirements — the amount of pure equity and retained earnings that banks are going to have to have going forward. It was banks’ core equity which proved woefully insufficient during the crisis — hardly a surprise, when the Basel II requirement for it was just 2% — and it’s core equity which has seen the biggest beefing up under Basel III, all the way to 7%. But Melvyn Westlake reckons that there might be a bigger story here in the total capital requirements under Basel III, including not only core Tier 1 capital but everything, up to and including Tier 2. Westlake knows what he’s talking about: he works for Global Risk Regulator magazine, the trade journal which covers all these issues in enormous detail on a permanent basis. Here’s what he just sent me via email: I would suggest that the Basel Committee intends that Tier 2 capital will have a much more significant role than in the past. It is not absolutely clear what instruments will qualify for Tier 2 in the future, but they will certainly have to be loss absorbing, possibly in a “going concern” situation as well as a “gone concern” situation. He also notes what the Basel Committee itself has said:

The Meaning of Basel: Cohen, Spillenkothen, Stiglitz Speak Out (Bloomberg) -- The Basel financial regulators’ decision to more than double bank capital requirements worldwide -- while allowing eight years to comply -- triggered conflicting responses among experts ranging from Nobel laureate Joseph E. Stiglitz to Wall Street lawyer H. Rodgin Cohen.  Stiglitz, 67, said the “unconscionable” delay will expose the public to risk, while Cohen, 66, predicted the market may “penalize immediately” lenders that currently fall short. Paul Miller, 49, a former bank examiner who is now an analyst at FBR Capital Markets Corp., called the new rules “easy” and predicted they won’t prompt capital-raising by any big U.S. firms.  Following are comments from Stiglitz, a professor at Columbia University in New York; Cohen, the senior chairman of Sullivan & Cromwell LLP, also in New York; Miller, in Arlington, Virginia; Simon Johnson, 47, a former International Monetary Fund chief economist and now a professor at the Massachusetts Institute of Technology’s Sloan School of Management, in Cambridge; and Richard Spillenkothen, a former head of banking and supervision at the Federal Reserve Board and ex-member of the Basel panel, now a director at Deloitte & Touche in New York.

The Big Bang Leads to the Big Whimper (aka: Basel III) - Basel II was rolled out with all kinds of bright promises. One might expect that the financial press, chastened by the abject failures of the Basel process would react with great caution to the claims made by Basel III's proponents. Instead, the New York Times entitled its story: “Regulators Back New Bank Rules to Avert Crises” and began with this line: The world's top bank regulators agreed Sunday on far-reaching new rules intended to make the global banking industry safer and protect international economies from future financial disasters. The Washington Post was even more gushing: <>The Wall Street Journal enthused: <>Bank stocks promptly surged precisely because the markets viewed Basel III as so weak.

Basel III: the main points - The new rules, known as Basel III, will require banks to hold top-quality capital totalling 7% of their risk-bearing assets. Banks will have to raise hundreds of billions of euros in fresh capital under new regulations designed to prevent the repeat of another financial crisis. The new rules, known as Basel III, will require banks to hold top-quality capital totalling 7% of their risk-bearing assets, a big increase from 2%, but banks are being given more time than expected to comply with the rules - in some cases until 2019. Basel III: Banks will have to increase their core tier-one capital ratio to 4.5% by 2015. In addition, they will have to carry a further "counter-cyclical" capital conservation buffer of 2.5% by 2019. Any bank that fails to meet the new requirements is expected to be banned from paying dividends to shareholders until it has improved its balance sheet.

Is Capital a Cushion for Bad Times? - Recent capital regulation has moved various capital ratios up from about 5% to 8%--depending how you calculate capital. I think raising the capital ratios is probably a good idea, given the 'too big to fail' implicit guarantee on bank debt implies huge option value to the equity owners, and no default risk for the debt owners, this is better than doing only 'too big to fail'.  Yet, it is important point to remember is that equity is not a cushion for unexpected losses in some Merton and Perold (1993) type model of financial institutions. In the Merton and Perold model, both credit and market risk are completely understood by insiders and outsiders of the firm. Their measure of capital implies an increase in return on capital simply by bringing all firms under one big legal entity, as in this case profits would be strictly additive while capital would benefit from the diversification benefits. The empirical contrast, in the form of many firms in equilibrium, implies that they are missing something big.

A Baby Step Toward Rules On Bank Risk - Two years later, the banks hope we have forgotten. It should be well known how we got into the financial crisis that brought on a worldwide recession and financial crisis. The banks acted horribly irresponsibly and had far too little capital and liquidity to survive without bailouts.  This past weekend, the Basel committee of banking regulators put out their new capital standards. The best that can be said about the new standards is that they are better than the old ones. But opposition from many European countries, as well as Japan, assured that the rules were not nearly as tough as they could be. A worldwide consensus that new rules were needed to assure that banks had sufficient liquidity — resources they could convert to cash, even in a panic — came to little. The Basel group still promises to come up with something, but don’t hold your breath.

Basel III – promises to be virtuous, but not just yet - Basel committee reaches agreement, close to what is expected, but with long implementation periods; core tier 1 to rise from 2 to 4.5% by 2015; tier 1 up from 4 to 6%; introduction of conservation capital buffer, and a counter-cyclical capital buffer; and a new leverage ratio to limit overall exposure; Simon Johnson says implementation time too long; Joe Stiglitz says long implementation time will continue to expose the public to financial instability; Sharon Bowles is concerned about the strong element of discretion; in other news: European banks have increase borrowing significantly, after the dry-up of capital markets in the spring; Germany’s Hypo Real Estate needs state guarantees of €40bn, a shock to the political system; Wolfgang Munchau writes that the eurozone’s principal ommission has been the failure to resolve the banking system; FT Deutschland, meanwhile, says that the von Rompuy task force has failed to agree on a single substantive issue.[more]

Should we worry about the Basel delay? - Two of the smartest people I’ve met are coming out this morning with an unexpected (to me, at least) criticism of the Basel III rules. Mohamed El-Erian:“The phasing-in period for the new capital requirements is surprisingly long, which will add to the skepticism about the robustness of the bank capital enhancement efforts.” Joe Stiglitz: “While it’s understandable, given the weaknesses and the failings of the banking system, that one would want to be slow in introducing these increased capital requirements, delay is exposing the public to continued risk.” I haven’t been particularly worried about the timetable up until now, mainly because I haven’t seen much evidence that any systemically-important banks are going to take advantage of the long phase-in period to get away with having capital levels lower than the eventual minimum. Of course, systemically-important banks are going to have an extra too-big-to-fail capital requirement slapped onto them, over and above the minimum requirements laid out yesterday. So it’s just as well that all of them are currently in compliance with the vision that the BIS technocrats have for smaller banks around the world. (Deutsche Bank might not be there today, but it will be once it’s done raising \$12 billion in new capital.)

This is Basel III?? - Arriving at the rush, with extra impetus doubtless imparted by the recent and ongoing Eurobanking panic, we have the Basel III capital and liquidity reforms (there’s a one pager, a full press release and, oh, not wholly unexpectedly, a somewhat anticlimactic phase-in timetable). In fact, the liquidity reforms here are just timetable entries – the relatively demanding funding ratio proposals from December last year got shunted into a siding, back in July. So, errm, for the moment, what we have are just some capital ratios, actually. Enough to get DB moving: they are raising another EUR10Bn, at the front of the queue. So I suppose the Germans are once again first to put their beach towels on the prime sunbathing spots. If you are terribly enthusiastic about the detail of Basel III bank regulation, I suppose I should add that the other bits and pieces of regulatory apparatus will be the December stuff, plus changes as summarized by Deus Ex Macchiato, or officially, here. But why be all that enthusiastic about Basel III? It’s still the mixed bag I wrote up here. I see that the end-2012 implementation “with appropriate transition and grandfathering arrangements” now translates to something that won’t be fully elaborated until 2020. All together: quelle surprise!

Basel: the mouse that did not roar - To celebrate the second anniversary of the fall of Lehman, the mountain of Basel has laboured mightily and brought forth a mouse. Needless to say, the banking industry will insist the mouse is a tiger about to gobble up the world economy. Such special pleading – of which this pampered industry is a master – should be ignored: withdrawing incentives for reckless behaviour is not a cost to society; it is costly to the beneficiaries. The latter must not be confused with the former. The world needs a smaller and safer banking industry. The defect of the new rules is that they will fail to deliver this.  Am I being too harsh? “Global banking regulators ... sealed a deal to ... triple the size of the capital reserves that the world’s banks must hold against losses,” says the FT. This sounds tough, but only if one fails to realise that tripling almost nothing does not give one very much.  The new package sets a risk-weighted capital ratio of 4.5 per cent, more than double the current 2 per cent level, plus a new buffer of 2.5 per cent. Banks whose capital falls within the buffer zone will face restrictions on paying dividends and discretionary bonuses. So the rule sets an effective floor of 7 per cent. But the new standards are also to be implemented fully by 2019, by when the world will probably have seen another financial crisis or two

Basel III: The Fatal Flaw - by Simon Johnson - The international discussion among government officials regarding bank reform is, at an informal level, going better than you might think.  Top people in the “official sector” are increasingly willing to confront the banking lobby and even refute its more egregious claims, particularly the completely erroneous notion that making banks safer – by requiring them to hold more capital – would actually hurt the broader economy and undermine growth. Unfortunately, the structured intergovernmental process that actually changes the rules around banks – known as Basel III (or “Basel 3”) – was rushed to an unsatisfactory conclusion last weekend.  The US and other countries with major financial centers will need to add substantial additional capital requirements at national levels if these new rules are to be at all effective.

Risk and Regulation - I thought I’d elaborate a bit on my post from yesterday about Basel III. I’m not sure I got across just how fundamentally problematic I think the Basel approach is. The overall trend in the financial industry for a couple of decades now has been towards a “scientific” approach to risk-management. The idea is, rather than relying on old-fashioned rules of thumb, you actually try to measure the risk one is taking by holding a certain portfolio. Then, once you know what your risk is, you know how far wrong things can plausibly go, and you know how much you can borrow (or someone else can lend) against your position. Of course, measuring risk is a tricky thing, because you’re trying to predict future events and all you have is historical performance data. And, as the old saying goes, past performance is no guarantee of future results. Nonetheless, the risk-managers have tried to do their best with the tools they have: historic price data, default rates, and correlations. And they’ve developed a collection of tools like value-at-risk and stress-tests designed to probe both likely outcomes and 2- or 3-sigma possible events.

New Global Banking Rules: How Will the US Make It Stick? - ProPublica - When Basel III [1], an international agreement between the world’s financial regulators, was announced over the weekend, initial reactions to the new capital ratio requirements — not as tough as banks had feared [2], but tougher than the previous accord [3]— gave way to questions about how the agreement will be implemented. U.S. federal banking agencies, in a press release, announced their support and endorsement [4] of the agreement, which requires banks to more than triple [5] the amount of high-quality capital they were previously required to set aside. The rules don’t take full effect until January 2019 [6] (PDF), and that extended timetable has concerned some [7]. And as Mike Konczal of the Roosevelt Institute noted, implementation of the agreement “is not a done deal [8].”

Trapped in the Spiral of Basel III. Tightening the Noose on Credit Spells Disaster -  Credit (or debt) is issued by banks and is the source of virtually all money today. When credit is not available, there is insufficient money to buy goods or pay salaries, so workers get laid off and businesses shut down, in a vicious spiral of debt and depression. We are still trapped in that spiral today, despite massive “quantitative easing” (essentially money-printing) by the Federal Reserve. The money supply has continued to shrink in 2010 at an alarming rate. In an article in The Financial Times titled “US Money Supply Plunges at 1930s Pace as Obama Eyes Fresh Stimulus,” Ambrose Evans-Pritchard quoted Professor Tim Congdon from International Monetary Research, who warned: “The plunge in M3 [the largest measure of the money supply] has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly.”

New Bank Regulations Would Bless Lehman's Risk-Taking - International bank regulators have finally agreed to a new set of rules to rein in financial excess, and the reviews thus far are cautiously positive. But the new capital requirements announced today by the Basel III accord are not actually as sturdy as they seem. By relying on definitions that can be manipulated by Wall Street, regulators have agreed to standards that place an international seal of approval on Lehman Brothers-style risk-taking. In every financial crisis in history, banks have ruined themselves by overleveraging. "Leveraging" means "borrowing money," and "overleveraging" means "borrowing too much money." The basic process has been repeated hundreds of times: banks borrow tons of money and use it to place bets in the capital markets. When those bets are good, high leverage dramatically amplifies bank profits—and bank bonuses. But when those bets are bad, high leverage creates enormous losses—and enormous bailouts.

Fees For Lehman Bankruptcy: \$2 Billion - Everything about investment banks is expensive. Even shutting them down when they go bust. It'll cost about \$2 billion to unwind Lehman Brothers, the FT reports. There are 1,000 people still working on untangling the legal mess in the U.S., and another 300 in London. The ghost of Lehman is still a big business: about \$60 billion in commercial loans, real estate, derivatives and private equity investments in the U.S. alone, according to the FT.  Lehman, of course, didn't get a bailout, and its bankruptcy two years ago this week sparked the most acute phase of the crisis

Janet Tavakoli: Goldman Sachs: Bullies on the Block - For most Americans, the Great Recession never ended, and for many of the 14.9 million unemployed Americans, it's a 21st century Depression. Yet in December 2009, Larry Summers, director of the White House National Economic Council, told ABC news: "Today, everybody agrees that the recession is over, and the question is what the pace of the expansion is going to be."  The recession was over for bailed-out banks paying billions in bonuses. Taxpayers fund Wall Street with nearly zero-cost loans, and Congress changed accounting rules in April 2009 so that Wall Street firms could hide losses to create the illusion of "big profits," as they try to fill the gaping holes in their balance sheets.  The money cartel is as dangerous as the Mexican drug cartel. Its weapons of choice are taxpayer subsidized funds for swarms of Washington lobbyists, "money jobs" for politically connected yes men, and lucrative positions for former regulators and the law firms that hire them. Wall Street is winning the class war, and taxpayers supplied the arms.

Geithner Calendar: Met Goldman's Blankfein More Often Than Pelosi, Reid, McConnell, Boehner (EXCLUSIVE) - interactive calender - Goldman CEO Lloyd Blankfein has shown up on Geithner's calendar at least 38 times through March 2010 since the Treasury Secretary took office in January 2009, three more entries than Senate Majority Leader Harry Reid, 13 more than House Speaker Nancy Pelosi, and nearly four times as many as Senate Minority Leader Mitch McConnell and House Minority Leader John Boehner combined, according to a copy of Geithner's daily log recently published online by the Treasury Department. The imbalance is striking, considering that Geithner was heavily involved in financial regulatory reform legislation, which Congress was grappling with during the period covered by the calendar.  All told, Geithner met with, spoke to, or attempted to secure conversations with Wall Street chieftains at least 49 times during the five-month period ending in March 2010, a slight increase from the 37 entries on his calendar during the previous five-month period. But it's still far below his first five months in office, when Geithner met with chief executives from firms like Citigroup, JPMorgan Chase, Morgan Stanley and BlackRock at least 76 times -- more calendar entries than for the heads of the regional Federal Reserve banks, who are the top overseers of systemically-important banks like JPMorgan, Citi, Bank of America and Wells Fargo -- or for top members of Congress like Reid, Pelosi, their Republican counterparts, and the heads of the Senate and House committees overseeing financial institutions and economic policy.

Report Blames Big Banks for Payday Loan Growth - The weak economic recovery might be making it harder for small businesses and families to get loans. But there’s at least one unlikely group that isn’t having problems securing financing: payday lenders. That’s the conclusion of a new study backed by a community group that blames the nation’s largest banks for the growth of the payday loan industry.The study notes that payday loan companies depend heavily on credit agreements and other financing vehicles from banks such as Wells Fargo & Co. and Bank of America Corp. It singles out Wells Fargo, in particular, saying the San Francisco-based bank finances more payday lenders than any other big bank, providing credit to payday lenders such as Advance America, Cash Advance Centers, Inc. and fueling the growth of the industry. Meanwhile, the study finds that banks are starting to offer high-cost loans on their own, which suggests that the payday loan business is ripe for growth, says the report. It adds that new “checking advance” short-term loans being offered by banks can carry extremely high interest rates of up to 120%..

Follow the Dirty Money - LAST month, a federal district judge approved a deal to allow Barclays, the British bank, to pay a \$298 million fine for conducting transactions with Cuba, Iran, Libya, Myanmar and Sudan in violation of United States trade sanctions. Barclays was discovered to have systematically disguised the movement of hundreds of millions of dollars through wire transfers that were stripped of the critical information required by law that would have enabled the world to know that for more than 10 years the bank was moving huge sums of money for enemy governments. Yet all federal prosecutors wanted to settle the problem was a small piece of the action.  When Judge Emmet Sullivan of federal district court in Washington, who ultimately approved the deal with Barclays, asked the obvious question, “Why isn’t the government getting rough with these banks?” the remarkable response was that the government had investigated but couldn’t find anyone responsible. The Barclays deal was just one in a long line of wrist slaps that big banks have recently received from the United States.

Why Do We Keep Indulging the Fiction That Banks Are Private Enterprises? -- Yves Smith - It may seem perverse to use a particularly strong piece by Martin Wolf of the Financial Times, who even on his intermittent less than stellar days is at reasoned and readable, to illustrate a deep rooted problem that even critical thinkers in the mainstream media have in dealing with the financial crisis, namely, that certain ways of framing issues are simply off limits. But those forbidden vantages are sometimes the most descriptive and potentially the most effective in galvanizing public opinion. Wolf’s article today is a wonderful bit of high dudgeon, a shredding of Basel III, the latest incarnation of BIS rules on bank capital (our Richard Smith was similarly less than impressed and provided more detail on the shortcomings). Treasury Secretary Geithner, who tacitly admits that the so-called Dodd Frank bill fell short of the level of intervention needed to prevent another financial crisis, has taken to touting the idea that getting enough capital into the banking system will do the trick., which means he is effectively fobbing the problem off on Basel III.

September Oversight Report: Assessing the TARP on the Eve of Its Expiration - 153 pp pdf - Congressional Oversight Panel

Our Finest Hour: The Troubled Asset Relief Program - So I got a call from Ben Smith prior to this article coming out. What I delivered into the phone was likely a barely intelligible rant, which explains why none of my brilliant insights show up as quotes in Ben’s piece. However let me say this: A) Read Ben’s piece its pretty good B) If no one else will defend TARP, I will defend it. I will defend it through any medium, at anytime, under any circumstances. I will be the lone voice in a town hall full of Ron Paul supporters. I will say it at a Code Pink Regional Conference.  I will not let this go. There are few moments when I have shed a tear over policy. Despite initial missteps what I saw was lawmakers coming together in the face of overwhelming public opposition to protect the future of our society. It made me more confident in our government than any other single event I have ever experienced.

Auerback: TARP Was Not a Success – It Simply Institutionalized Fraud - There’s a good reason why the Troubled Asset Relief Program (aka “TARP”) is “a success none dare mention”, to use the title of Ben Smith’s latest post at Politico. Put simply, it’s not a success. Calling the TARP a success is like claiming your wastrel son is getting his life together because he’s settled his gambling debts, while omitting that you are paying for his apartment, got him an overpaid job at your company, and handing him \$100 bills more than occasionally. Indeed, the only way to call TARP a winner is by defining government sanctioned financial fraud as the main metric of results. The finance leaders who are guilty of wrecking much of the global economy remain in power – while growing extraordinarily wealthy in the process. They know that their primary means of destruction was accounting “control fraud”, a term coined by Professor Bill Black, who argued that “Control frauds occur when those that control a seemingly legitimate entity use it as a ‘weapon’ to defraud.” TARP did nothing to address this abuse; indeed, it perpetuates it. Are we now using lying and fraud as the measure of success for financial reform?

TARP Deadbeat list grows to more than 120 banks - From the WaPo: More banks missing TARP dividend payments The latest report ... shows that more than 120 institutions ... have missed their scheduled quarterly dividend payments ... a record six banks each missed six dividend payments. Saigon National Bank in Southern California has missed seven. In addition, five banks that received capital injections from the controversial \$700 billion Troubled Assets Relief Program have failed altogether, making it highly unlikely that taxpayers will recover the nearly \$3 billion poured into those institutions.

Why does everyone hate Tarp? --This is not a trivial issue. The legacy Tarp leaves behind could influence the constraints on the government to act similarly in the next financial crisis. Depending on your preferences, that might be good or bad, but it does matter. The Congressional Oversight Panel addresses this in its September Oversight Report, released ahead of Tarp’s expiration on October 3. But first, it has been obvious for some time now that Tarp won’t cost taxpayers nearly as much as was once feared. Estimates of its ultimate expense have steadily declined, and the CBO’s latest (in August) put the total amount at \$66bn. Not nothing, but far better than expected and a relatively small price tag for having defended the stability of the financial sector at such a perilous time.

Small Business Can’t Get Loans From Bailed-Out Banks in U.S. – Chip Besse figured he could hire a dozen people once he got a \$1.1 million small-business loan.  Wells Fargo & Co. turned him down.  U.S. taxpayers helped the San Francisco-based bank weather the 2008 financial crisis with a \$25 billion loan and \$9.5 billion of debt guarantees. By July 2009, when Besse wanted to buy and expand a Colorado snowmobile-rental business, Wells Fargo wasn’t sharing the wealth, he said. Besse, 29, had little success with 16 other lenders in 2008 and 2009. His list included New York-based JPMorgan Chase & Co., which agreed to provide less than 70 percent of what he wanted, and Charlotte, North Carolina-based Bank of America Corp., which Besse said kept him hopeful for a month before rejecting his application.  “I was furious,” he said. “A lot of bankers are trying to justify their jobs and they waste everyone’s time.”

Tirole On Toxic Assets - Jean Tirole has written the best theoretical analysis I have seen of the role of government intervention to revitalize frozen asset markets.  The key idea in this paper is that investors need to finance their next project and are unable to do this by selling their “legacy” assets because adverse selection has frozen the market. A government buyback of these toxic assets attracts the bottom tail.  The government of course is losing money on all of the assets it buys.  But the payoff is that it rejuvinates the market:  private financiers will now step in and buy the assets of those who refused the government offer.  It’s a surprising result but ex post its pretty easy to understand. If the government is offering a price $p$ for the legacy assets, then the value of the marginal asset sold is equal to $p + S$ where $S$ is the value of going forward with the newly funded project.  Investors with legacy assets worth just more than that refuse the government’s deal.  Now private financiers can get them to accept an offer them a price a bit higher than $p$.   And this is profitable for the financiers because the assets have value $p + S$.  This proves that the market for private finance will become unstuck.

Compensation and Risk Incentives in Banking and Finance - FRB Cleveland - We review why executive compensation contracts are often structured the way they are, analyze risk incentives stemming from various pay schemes, and examine the tendency of the banking and finance industry toward excessive risk-taking. Studying the typical executive pay structures in banking and finance before the financial crisis reveals some potentially problematic practices. These practices may have encouraged “short-termism” and excessive risk-taking, which are two behaviors bank regulators aim to prevent with their recently issued guidance on incentive compensation.

Unofficial Problem Bank List increases to 854 institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for September 17, 2010. Changes and comments from surferdude808:  The FDIC got back to work closing banks in earnest this Friday after taking about a month hiatus. Also, as anticipated the OCC released its actions for July/August. Activities by the FDIC and OCC contributed to many changes in the Unofficial Problem Bank List this week as the six failures were removed and there were 11 additions.  After these changes, the Unofficial Problem Bank List stands at 854 institutions with assets of \$416 billion, up from 849 institutions with assets of \$415.3 billion last week.

Companies Still Hoarding Tons of Cash - American companies are still sitting on mountains of cash, according to a new report from the Federal Reserve. The Fed’s quarterly Flow of Funds report, released today with data for the second quarter of 2010, found that total credit grew for the first time in over a year, mainly because the federal government increased its borrowing. Consumers, however, continue to deleverage: Net household sector borrowing has fallen for eight consecutive quarters. Perhaps because of the uncertain economic climate, companies are especially reluctant to spend money. Here’s a chart, from the director of Credit Suisse’s economics group, Dana Saporta, showing the ratio of cash assets to total assets at American businesses:

Portrait of HAMP Failure: How HAMP Went from the Bank’s Counter Offer to the Whole Enchilada = Before I release the latest Portrait of HAMP Failure, I thought it would be worth taking a look back at how we got here, how we ended up with a federal loan modification that operates entirely at the discretion of banks, which they have used to extend and pretend, and to trap borrowers into accepting unfavorable terms or lose their homes. This history wasn’t well-known to me until some conversations and interviews I conducted over the past several days, but I think it’s crucial to understanding the failures of HAMP, and the next steps

CMBS delinquencies pass 8% despite record loan mods - Special servicers modified a record \$2.1 billion in loans backing commercial mortgage-backed securities (CMBS) in August, but delinquencies continue to grow, according to the credit-rating agency Fitch Ratings. The delinquency rate on CMBS loans reached 8.48%, a 23 basis point increase from July. There were \$3.1 billion in new delinquencies, driven mostly by five loans recent defaults of loans worth more than \$100 million. Another credit-rating agency Moody's reported the CMBS delinquency rate increased 21 bps to 8.1% in August. "Delinquency rate increases have moderated over the past three months, but the overall rate itself is expected to continue rising over the near term, with the potential for an occasional spike given the large reservoir of troubled loans in special servicing," said Moody's. An analytics firm Trepp also reported the delinquency rate on CMBS at 8.92%.

Losses in US commercial property debt increase - MONTHLY losses on commercial property debt bundled into bonds have doubled since April as loan specialists gave up trying to restructure smaller mortgages, data from Deutsche Bank showed on Friday. Average losses on loans packaged into US commercial mortgage-backed securities totalled \$501m last month compared with 245m in April, according to Harris Trifon, a Deutsche Bank analyst. In August last year , the number was \$41bn. “It’s the beginning of a trend,” Mr Trifon said. “Given the sheer volume of loans in special servicing, there are going to be many loans that are liquidated.”

GSEs' Short Sales and Deeds-in-Lieu up 27% in Q2 - Nearly 31,000 borrowers with Fannie Mae and Freddie Mac loans forfeited their homes through a short sale or deed-in-lieu during the second quarter of this year. The figure represents a 27 percent increase over the 24,000 short sale and deed-in-lieu transactions completed by the GSEs during the previous three-month period. Short sales grabbed the lion’s share of the Q2 home forfeiture activity. Fannie and Freddie servicers completed 29,000 short sales last quarter. During the same period last year, the GSEs’ short sale tally was just 11,700. Two years ago, it was 3,000. According to a report released Friday by the two mortgage giants’ regulator, the Federal Housing Finance Agency (FHFA), the GSEs’ are continuing to utilize these foreclosure alternatives “to reduce foreclosure-related costs and to minimize the impact of foreclosures on borrowers, communities, and neighborhoods

Losses from Fannie Mae, Freddie Mac seizures may near \$400 billion - Taxpayer losses from the government seizure of failed housing finance giants Fannie Mae and Freddie Mac could reach nearly \$400 billion, but likely won't top that level as some had feared, the firms' federal regulator said Wednesday. To offset some losses, the Federal Housing Finance Agency is seeking billions of dollars in repayment from banks that sold bad loans to the firms, acting director Edward J. DeMarco said. Some banks are balking, and the agency is considering tougher action, DeMarco said. But he did not specify what steps might be taken. The bailouts of the two former government-sponsored enterprises, which continue to keep the mortgage financing market afloat almost single-handedly, already have reached \$148.2 billion as bad loans they purchased during the real estate boom continue to fail.

Freddie/Fannie Friday - Fat Foreclosure Folios Forecasts Further Falls - Our zombie GSE’s have now become the Nation’s biggest home sellers. This could not come at a worse time as winter is always a poor time to sell homes, rates seem to have bottomed and there is no new stimulus(or new jobs, or immigration, or population growth) to spur demand.  Yet, Freddie Mac and Fannie Mae now own more than 191,000  homes (as of June 30th), which is double where they were last year and they are still taking back homes faster than they can sell them as we move into the peak (we hope!) of the foreclosure cycle.  Once they take homes back, Fannie and Freddie must not only cover the utility bills and property taxes, but they are also relying on thousands of real-estate agents and contractors to rehabilitate homes, mow lawns and clean pools. Fannie took a \$13 billion charge during the second quarter just on carrying costs for its properties. If demand remains weak, Fannie and Freddie could face pressure to take more aggressive steps to hold homes off the market.

Congress Seeks Fannie, Freddie Exit as Banks Eat Soured Loans - U.S. lawmakers will grapple today with how to end the bailout of Fannie Mae and Freddie Mac after two years and almost \$150 billion, and who pays the bill for bad loans made during the housing boom. Regulators who seized control of the two mortgage lenders in 2008 are under pressure to stem losses for taxpayers and recoup money from banks that sold faulty loans to Fannie Mae and Freddie Mac -- all without hindering the housing market’s recovery

Zero Down Mortgages Restarted by the Biggest Subprime Lender in Town - Fannie - Good news folks... the "no skin in the game" mortgage is back.  You know the game right?  It's a one sided bet where the buyer can only win.  If the house goes up, you pocket that and hopefully get that granite countertop you so deserve with the home equity.  If it doesn't go up.... you walk - but only after living in the home rent free for at least 18-22 months as you strategically default your way to a mountain of savings while waiting for the sheriff to show up.  If you are smart you can save at least \$30K during this time.  There are no losers here (except the U.S. taxpayer).

Home Ownership: Do You Really Need Skin in the Game? - Earlier this week the Federal Housing Authority implemented a new program called the Short Refi, which I discussed on the Realty Check.  It's a plan designed to give borrowers still current on their mortgages equity back in their homes, thereby reducing the chance that they will default intentionally.  It requires lenders to forgive principal, a minimum 10 percent, in return for a refi to an FHA insured loan.  At around the same time this program went into effect, the New York Times did a piece on a small program Fannie Mae is implementing through state housing finance agencies, which have been crippled by the recession. It's called Affordable Advantage, and it allows first-time home buyers in four states (Massachusetts, Minnesota, Idaho and Wisconsin) to get essentially no-money-down loans that are then sold to Fannie Mae. It requires \$1000.00 down, but the couple profiled in the piece received a grant, and ended up paying just 67 cents for a \$115,000 home.  The Fannie Mae program requires a minimum credit score of 680 (720 in Massachusetts) and the buyer must live in the home. All loans are 30-year fixed.

Home mortgage modification snags spark lawsuits - Whether the Lake Stevens, Wash., couple keep their home may hinge on the outcome of a legal strategy that aims to join struggling homeowners with similar experiences in the HAMP program in a class-action lawsuit against the nation's largest bank. On Sept. 30 in Nashville, a federal court hearing is scheduled to consider consolidating the Sopers' case with more than a dozen others against Bank of America. Similar lawsuits, also seeking class-action status, are pending against other major servicers such as JPMorgan Chase and Wells Fargo. Taken together, the cases threaten to amplify a growing public frustration with mortgage servicers' treatment of HAMP borrowers and HAMP's modest results. Permanent modifications, which lower mortgage payments to 31% of a borrower's pretax monthly income for five years, have been given to only about a third of the 1.3 million borrowers in trial plans since the program's launch in April 2009.

What "The 25 Most Expensive Homes" Reveal About the U.S. Economy - What might surprise anyone who still clings to the quaint belief that America's great wealth is generated from actually producing goods or services of global value is who owns the vast majority of these villas: investment bankers and hedge fund managers. A grand total of three of the 25 made their wealth in technology--software, computers, etc. There was one artistic outlier, and the rest were all financial parasites: investment bankers, hedge fund managers or other denizens of the speculative FIRE (finance, real estate, insurance) economy which has come to dominate profits and wealth accumulation in the U.S. In years past, the list would probably have been dominated by people who made fortunes in energy, technology or some innovative business with global reach.

Paper: Housing and the Business Cycle - This is something I've been writing about since I started the blog in 2005, but it is worth repeating ... even though Residential Investment usually only accounts for around 5% GDP, it isn't the size of the sector, but the contribution during the recovery that matters - and housing is usually the largest contributor to economic and employment growth early in a recovery. But not this time because of the large number of excess housing units. Here is the paper from Steven Gjerstad and Vernon Smith: Household expenditure cycles and economic cycles, 1920 – 2010. This has key implications for policy. As an example, a policy (like the housing tax credit) that encourages adding to the housing stock (new home construction) is a clear mistake, whereas policies that are aimed at household creation (jobs) or at least household preservation (like extended unemployment benefits) make more sense. Also policies aimed at supporting house prices - keeping the price above the market clearing price - are counterproductive and also a mistake.

Foreclosures Hit Record High in August - August saw more Americans lose their homes to foreclosure than any other month on record, RealtyTrac reported today. Banks repossessed a total of 95,364 properties in August, a 25 percent increase from the same period in 2009 and a 2 percent increase over this May's previous record. Foreclosure filings of all types, including default notices, scheduled auctions and bank repossessions (the three major stages of the foreclosure process), increased to 338,836 in the month, a 4 percent jump from July. At the same time, though, the number of default notices that lenders issued to homeowners to initiate the foreclosure process actually went down. The August total of 96,469 was a 1 percent decline from July and a 30 percent drop from August of last year. It's significantly lower than the April 2009 peak of 142,064 default notices issued. That the numbers of repossessed homes and default notices (respectively the last and first stages of the process) are converging demonstrates that banks are trying to mitigate the flow of new homes to the market. As Bloomberg reported Wednesday, the glut of housing inventory means home prices could decline for at least three years.

US Home Seizures Reach Record for Third Time in Five Months -U.S. home seizures reached a record for the third time in five months in August as lenders completed the foreclosure process for thousands of delinquent owners, according to RealtyTrac Inc. Bank repossessions climbed 25 percent from a year earlier to 95,364, the most since the Irvine, California-based data provider began keeping records in 2005. Foreclosure filings, including default and auction notices, fell 5 percent to 338,836. One out of every 381 U.S. households received a filing, RealtyTrac said today in a statement. “We’re on track for a record year for homes in foreclosure and repossessions,” Rick Sharga, RealtyTrac’s senior vice president, said in a telephone interview. “There is no improvement in the underlying economic conditions.”

Foreclosure Rate Likely to Drive Housing Prices- Yves Smith  - With the fullness of time, housing prices are due to revert to something approximating the mean of their historical relationship to rental prices and incomes, albeit with an overshoot probable. But how quickly we reach that level will be very much a function of how quickly foreclosures take place and real estate is disposed of.  A Wall Street Journal story. “Banks’ Plans for Foreclosed Homes Will Drive Market,” is framed in a somewhat misleading fashion, since the government has been influencing the pace of resolution. For instance, Treasury has been selling the idea that the unsuccessful HAMP program nevertheless was useful, in that it served to delay foreclosures when the housing market was fragile. Analysts are repeating this idea. So the Administration has been able to sell a bug as a feature.  The story acknowledges extensive efforts to boost demand for housing... In addition, the story oddly misses a bit of an elephant in the room, namely, that Freddie and Fannie are pressuring servicers to pick up the pace on foreclosures, which will lead to faster real estate disposals. It nevertheless otherwise gives a decent overview

CoreLogic: House Prices decline 0.6% in July - CoreLogic reports the year-over-year change. The headline for this post is for the change from June 2010 to July 2010. The CoreLogic HPI is a three month weighted average of May, June and July and is NSA. From CoreLogic (formerly First American LoanPerformance): CoreLogic Home Price Index Remained Flat in July CoreLogic ... today released its Home Price Index (HPI) that showed that home prices in the U.S. remained flat in July as transaction volumes continue to decline. This was the first time in five months that no year-over-year gains were reported. According to the CoreLogic HPI, national home prices, including distressed sales showed no change in July 2010 compared to July 2009. June 2010 HPI showed a 2.4 percent year-over-year gain compared to June 2009. ... Home prices fell in 36 states in July, nearly twice the number in May and the highest since last November when national home prices were declining,"

Home Price Double Dip Begins (CNBC) Two new reports out today prove the consequences of oversupply of organic inventory (12.5 months on existing homes in July according to the National Association of Realtors) and the shadow inventory of foreclosed properties (estimates vary widely and wildly). CoreLogic's Home Price Index shows home prices "flat" in July as transaction volume continues to decline. "This was the first time in five months that no year-over-year gains were reported," according to the release. In June, prices were up 2.4 percent year over year. In addition, "36 states experienced price declines in July, twice the number in May and the highest number since last November when prices nationally were still declining."

Home Prices Set To Fall Further: Richard Fairbank, Capital One CEO - Fairbank, in remarks that were broadcast on the web, was asked by an audience member whether there will be a double-dip in the housing market. He chose his words carefully. "I think we feel very cautious about the housing market," Fairbank said. "I think that even despite some of the recent months where home prices have gone up, I think it's a very plausible case for home prices to go back down again." His dim view of the U.S. housing market, he said, is based on the current "logjam" of defaulted mortgages and foreclosures being dealt with at Capital One, which added a retail banking arm to its lending and credit card businesses in 2005. "Unsold inventory is really at just about an all-time high."Although he claimed not to be predicting a "double-dip recession," Fairbank was not at all optimistic about the housing market. "We are managing to a view that home prices are more likely to be headed down rather than up," he said.

US Home Prices Face Three-Year Drop as Inventory Surge Looms - The slide in U.S. home prices may have another three years to go as sellers add as many as 12 million more properties to the market. Shadow inventory -- the supply of homes in default or foreclosure that may be offered for sale -- is preventing prices from bottoming after a 28 percent plunge from 2006, according to analysts from Moody’s Analytics Inc., Fannie Mae, Morgan Stanley and Barclays Plc. Those properties are in addition to houses that are vacant or that may soon be put on the market by owners. “Whether it’s the sidelined, shadow or current inventory, the issue is there’s more supply than demand,” said Oliver Chang, a U.S. housing strategist with Morgan Stanley in San Francisco. “Once you reach a bottom, it will take three or four years for prices to begin to rise 1 or 2 percent a year.” Rising supply threatens to undermine government efforts to boost the housing market as homebuyers wait for better deals. Further price declines are necessary for a sustainable rebound as a stimulus-driven recovery falters, said Joshua Shapiro, chief U.S. economist of Maria Fiorini Ramirez Inc., a New York economic forecasting firm.

The two key housing problems - I think there are two key problems for the housing market: 1) the excess supply of existing housing units, and 2) negative equity. The excess supply is keeping pressure on residential investment, and therefore on employment and economic growth. As new households are formed, the excess supply will be absorbed - but this is happening very slowly. Hence the quote of the day:  Time Warner Cable ... CFO Robert Marcus said "subscriber environment very, very weak," thanks to high unemployment, high ... vacancies and "really anemic new home formation." It takes jobs to create households, and usually housing is the key driver for employment growth in the early stages of a recovery. So this is a trap: the excess supply means weak employment growth, leading to few new households, so the excess supply is absorbed slowly - putting off more robust employment growth. The excess supply is also pushing down house prices (prices are just starting to fall again). Lower prices will eventually help clear the market, however lower prices will push more homeowners into negative equity.

Latest Real Estate Time Bomb: Title of Foreclosed Properties Clouded; Wells Fargo Dumping Risk on Hapless Buyers - Yves Smith - Most analysts have argued that it would be preferable to accelerate the process of clearing the overhang of housing inventory, since prices need ultimately to return to price level in relationship to incomes and rent rates more in line with long standing historical norms. And the officialdom seems to accept this view, since Fannie and Freddie are pressuring servicers to move faster on foreclosures. But what if this resolution process has new land mines planted in it? What if there are not widely understood impediement to foreclosed properties ending up with new owners? If there are good reasons buyers will have reason to be leery of buying houses out of foreclosure, we could have a lot of homes sitting vacant, a blight on neighborhoods and a source of even greater losses to banks and investors.  Yet it appears that the very same sort of corners-cutting that led financial firms to shovel money to weak borrowers could impede working through the inventory of seized residential real estate. An article discusses an analysis by AFX Title, a title search company, that shows problems with title on foreclosed properties to be widespread:

Real Estate Time Bomb? - One more problem with securitization.This morning, Yves Smith over at Naked Capitalism has a sobering article about a not-very-well-known time bomb in real estate. Here's a relevant section: Given how many sales will be done out of REO, and the rising number of problems surfacing with making sure that mortgage securitizations took all the steps to become the real party of interest in a particular property, it is only a matter of time before we see some blowups of the sort the attorney was worried about, of a buyer shelling out hard dollars for a house, or taking a big mortgage, and winding up with nothing. And a few incidents like that getting the press they deserve will put a pall on REO sales.  Think the risk isn't real? Then why has Wells bothered to insist that REO buyers sign a new type of addendum, when it has been selling REO for decades? This effort to shift all title risks on to the buyer is a tacit admission of problems. And look at the document itself. The buyer has to initial it in eight places as well as sign it. That's a clear statement of Wells' intent to shift the risk to the buyer. "REO", by the way, means "real-estate owned."

They would do anything for mobility, but they wouldn't do that - One story I've been telling about a potential structural source of unemployment is that negative equity is preventing households from moving to more promising job markets. To sell, these households would have to write a big cheque at closing, which they obviously can't afford to do. So they stay put. I discussed this hypothesis at a talk I gave at my alma mater on Monday, and one of my old professors pushed back. He suggested that when negative equity was a serious problem, households had little to lose and should default right away. If anything, extreme negative equity cases should lead to more defaults (and therefore more mobility) than mild negative equity cases.  But there is another factor leaning against default: the stigma of walking away. Today, Catherine Rampell writes up a new Pew study on attitudes toward mortgage default, and the results are striking. Nearly 60% of respondents say that walking away is unacceptable, regardless of the circumstances. Fully 60% of owners hold that view, but surprisingly, so do 57% of renters.

California home sales down 14% from last year: DataQuick - There were 34,239 new and existing homes and condos sold in California in August, down 14% from last year, according to MDA DataQuick, a San Diego-based real estate data provider. Home sales were 2.7% from July as well. The median price paid for a California home in August reached \$260,000, up 4.4% from last year but down 3% from the previous month. It was the tenth month in a row of increases from the previous year. Before that upward trend, prices in California experienced year-over-year declines for 27 months in a row, more than two years.

Housing Doesn’t Need a Crash. It Needs Bold Ideas - Unfortunately, it’s taken the ugly specter of a free fall or deep freeze in many real estate markets to get people talking about bolder alternatives.  One reason the Treasury’s housing programs have caused so much frustration among borrowers — and yielded so few results — is that they seemed intended to safeguard the financial viability of big banks and big lenders at homeowners’ expense.  For example, the government — in order, it believed, to protect the financial system from crumbling — has never forced banks to put a realistic valuation on some of the sketchy mortgage loans they still have on their books (like the \$400 billion in second mortgages they hold).  All those loans have been accounted for at artificially lofty levels, and have thereby provided bogus padding on balance sheets of banks that own them. Banks’ refusal to write down these loans has made it harder for average borrowers to reduce their mortgage obligations, leaving them in financial distress or limbo and dinging their ability to be the reliable consumers everyone wants them to be.

Underwater Mortgages Putting Many Americans in a Bind - The prime attention of the housing crisis has been on home owners who are losing their homes but on the other hand, millions of American homeowners are sacrificing in all walks of life. They are also trying hard to prevent themselves from defaulting on mortgages which are greater than the value of their homes. Last week, a new program was initiated by Obama Administration whereby the lenders are required to offer these “underwater” mortgage holders refinanced loans with the support of the government. This rescheduling will exempt the 10 percent of their original loan. The program is expected to comfort around 500,000 to 1.5million distressed Americans. But the problem isn’t only the above. According to Moody’s Economy.com, around 15 million homeowners were underwater on their mortgage after the first quarter. These figures are expected to get worse since home prices still need to return to a normal level.

Allure of Home Ownership Dims, Fannie Mae Survey Shows - The American dream of owning a home has lost some of its allure after years of falling home prices and owners facing financial ruin. A new survey by Fannie Mae shows the number of people who say they consider housing a safe investment continues to decline, falling to 67% in July from 70% in January and 83% in 2003.  More Americans believe home prices are nearing a bottom—70% said it's a good time to buy, up from 64% in January—but the number of households that say they are more likely to rent than to buy a home rose to 33%, from 30% in January. Renting may be growing in popularity despite falling home prices and mortgage rates near 50-year lows, because growing numbers of households "are paying down debt and putting their financial house in order," said Douglas Duncan, chief economist at Fannie Mae.

Let’s not bail out more subprime lenders - Gretchen Morgenson is absolutely right, in the words of her headline, that “Housing Doesn’t Need a Crash. It Needs Bold Ideas.” The problem is that the bold idea she’s pushing is not the kind of bold idea that housing needs. ... So, the first, easy thing to do is to get rid of the blunt restrictions on lending to people with a short sale in their recent past: the housing market needs all the potential buyers it can get, right now. Once upon a time, it might have made sense to think that people with recent short sales would be such bad credits that no bank should think about selling them a mortgage. But not now, when the presence of a short sale on your credit report is likely to say much more about the broader housing market in your region than it does about you.

Homeowners who bought in 2003 would break even - Homeowners are finding bittersweet news in their mailboxes as they receive property tax estimates. Home values are down – way down – in most cases falling back to 2003 levels. The good news: taxes, which jumped along with home prices, also are down. Some are paying just a fraction of what they paid a few years ago. But that's little consolation for the growing number of folks who are "underwater" – stuck owing more on their mortgage than their homes are worth. "We get a mixed bag," said Tim Wilmath, of the Hillsborough County Property Appraisers Office. "Some think our just market values are too low now, and some think they're still too high."

The Truth: Housing Bottom has Arrived... Yep, housing is finally beginning to bottom out... Well... for the dimwitted. More than 70% of Americans think now is a good time to buy a home, according to a Fannie Mae survey. And 78% believe home prices have either bottomed or will rise next year. What are they thinking? Better yet, what are they drinking? Sure, prices recovered a little over the last year. But that was because of an artificial stimulus of the home buyer tax credit. And home prices were also benefiting from a bump in confidence thanks for a drop in foreclosure numbers – another artificial, short-lived event. But come on. Foreclosure numbers were only dropping because banks and states were and still are delaying the foreclosure process. Sure, the talking head boobs on TV will have you believe that notice of defaults are down 30% from a year ago. These are the first stage of the foreclosure process.

Resale Fees That Only Developers Could Love - A growing number of developers and builders have been quietly slipping “resale fee” covenants into sales agreements of newly built homes in some subdivisions. In the Dupaix contract, the clause was in a separate 13-page document — called the declaration of covenants, conditions and restrictions — that wasn’t even included in the closing papers and did not require a signature.  The fee, sometimes called a capital recovery fee or private transfer fee, has been gaining popularity among companies that have been frantically searching for new ways to gain access to cash in the depressed housing market. Dupaixs discovered that their sales contract included a “resale fee” that allows the developer to collect 1 percent of the sales price from the seller every time the property changes hands — for the next 99 years.  “Developers are desperate,” “They’re facing projects that are upside down” because the property value has fallen below the loan balance and lenders are refusing to refinance. “It’s a ticking time bomb,” he adds.

U.S. Economic Confidence More Negative Than a Year Ago -- Despite the recent upturn in the nation's equity markets, Gallup's Economic Confidence Index, at -34 during the week ending Sept. 12, confirms a downward trend in consumer confidence that started in mid-August.  Although economic confidence in the U.S. appeared to be improving at this time last year, just the opposite is the case in 2010. Consumer perceptions of the U.S. economy are now substantially below the depressed levels of a year ago. During each of the first two weeks of this month, 47% of Americans rated current economic conditions as "poor." While in September of last year, fewer Americans were giving the economy "poor" ratings than was true earlier in the year, that is not the case in 2010. In fact, consumer ratings of current economic conditions are worse now than they were a year ago.

A Recovery’s Long Odds - We can keep wishing and hoping for a powerful economic recovery to pull the U.S. out of its doldrums, but I wouldn’t count on it. Ordinary American families no longer have the purchasing power to build a strong recovery and keep it going.  Americans are not being honest with themselves about the structural changes in the economy that have bestowed fabulous wealth on a tiny sliver at the top, while undermining the living standards of the middle class and absolutely crushing the poor. Neither the Democrats nor the Republicans have a viable strategy for reversing this dreadful state of affairs. The middle class is finally on its knees. Jobs are scarce and good jobs even scarcer. Government and corporate policies have been whacking working Americans every which way for the past three or four decades. While globalization and technological wizardry were wreaking employment havoc, the movers and shakers in government and in the board rooms of the great corporations were embracing privatization and deregulation with the fervor of fanatics. The safety net was shredded, unions were brutally attacked and demonized, employment training and jobs programs were eliminated, higher education costs skyrocketed, and the nation’s infrastructure, a key to long-term industrial and economic health, deteriorated.

Industrial Production, Capacity Utilization increase in August - From the Fed: Industrial production and Capacity Utilization -Industrial production rose 0.2 percent in August after a downwardly revised increase of 0.6 percent in July [revised down from 1.0 percent]. ... The index for manufacturing output rose 0.2 percent in August after having advanced 0.7 percent in July; the step-down in the rate of increase reflected a fallback in the production of motor vehicles and parts, which had jumped sharply in July. Excluding motor vehicles and parts, manufacturing output increased 0.5 percent in August after having gained 0.2 percent in July. ... At 93.2 percent of its 2007 average, total industrial production in August was 6.2 percent above its year-earlier level. The capacity utilization rate for total industry rose to 74.7 percent, a rate 4.7 percentage points above the rate from a year earlier and 5.9 percentage points below its average from 1972 to 2009. This graph shows Capacity Utilization. This series is up 9.6% from the record low set in June 2009 (the series starts in 1967).  Capacity utilization at 74.7% is still far below normal - and well below the the pre-recession levels of 81.2% in November 2007. (Note: this is actual a decrease before the revision to July)

Wholesale Inventories in U.S. Rose More Than Forecast - Inventories at U.S. wholesalers rose in July by the most in two years as a rebound in demand prompted companies to add to stockpiles.  The 1.3 percent increase in the value of inventories was three times the median estimate in a Bloomberg News survey and followed a 0.3 percent gain the prior month, Commerce Department figures showed today in Washington. Sales at distributors climbed 0.6 percent, the most since April, after falling 0.5 percent.  The amount of goods on hand compared with sales suggests manufacturing gains will be sustained in coming months. Inventory rebuilding, after helping the economy recover from the worst recession since the 1930s, may cool unless consumers pick up the pace of spending.

Soaring Corporate Profits As US Worker Pay for Productivity Hits Record Lows - Two sets of charts tell the story.  The problem is that when workers are pressed to the wall on pay they lose the ability to consume without taking on debt. And at some point the debt leverage mechanism for consumption breaks down. Perhaps the problem is related to the one Wall Street is now confronting. How do you continue on in business after having impoverished, alienated, or driven away most of your clientele in the heat of a short term greed enabled by a corrupted political and regulatory system? ' Skinning each other when you have run out of greater fools is truly a zero sum game.

What's Holding Back Small Businesses? - The biggest single problem facing America’s small businesses isn’t taxes or overregulation. It’s low demand, according to a new report released by the National Federation of Independent Business. Thirty-one percent of small businesses surveyed by the N.F.I.B. said that “poor sales” are their company’s “single most important problem.” The other options included were competition from large businesses, insurance costs and availability, financing and interest rates, government requirements and red tape, inflation, quality of labor, cost of labor and “other.” Here’s a chart breaking down what percent of small businesses cited each of these problems as their biggest challenge, going back to 1986:

U.S. Economy: Retail Sales Climbed in August for a Second Month… (Bloomberg) -- Sales at U.S. retailers climbed in August for a second consecutive month, allaying concern the economy will stumble in the second half of the year.  Purchases increased 0.4 percent following a 0.3 percent gain in July, Commerce Department figures showed today in Washington. Sales excluding automobiles advanced 0.6 percent, twice as much as the median forecast of economists surveyed by Bloomberg News.  Bigger back-to-school discounts, an increase in the number of states offering tax-free holidays and the restoration of extended jobless benefits may have helped boost demand at chains like Kohl’s Corp. and Ross Stores Inc. Consumers’ reliance on incentives is testament to the harm caused by the lack of jobs, one reason why spending may be slow to recover.

The Great Debt Drag - Since the recovery began, the economy has grown at a rate of less than 3%. That is faster than its long-term potential, of about 2.5%, but America has woken from past deep recessions at rates of 6-8%. Job creation has thus been too feeble to bring down the unemployment rate, which at 9.6% is much as it was at the start of the recovery. “Progress has been painfully slow,” acknowledged Barack Obama on September 8th—not what a president likes saying less than two months before an election. What makes this recovery different is that it follows a recession brought on by a financial crisis. A growing body of research has found that such recoveries tend to be slower than those after “normal” recessions. Prakash Kannan, an economist at the IMF, examined 83 recessions in 21 rich countries since 1970. In the first two years after normal recessions growth averaged 3.7%. After the 13 caused by crises, growth averaged 2.4%. America has been doing slightly better than this (see chart 1).

Number of the Week: Defaults Account for Most of Pared Down Debt - 0.08% — The annual rate at which U.S. consumers have pared down their debts since mid-2008, not counting defaults. U.S. consumers might not be quite as virtuous as they seem. The sharp decline in U.S. household debt over the past couple years has conjured up images of people across the country tightening their belts in order to pay down their mortgages and credit-card balances. A closer look, though, suggests a different picture: Some are defaulting, while the rest aren’t making much of a dent in their debts at all. First, consider household debt. Over the two years ending June 2010, the total value of home-mortgage debt and consumer credit outstanding has fallen by about \$610 billion, to \$12.6 trillion, according to the Federal Reserve. That’s an annualized decline of about 2.3%, which is pretty impressive. There are two ways, though, that the debts can decline: People can pay off existing loans, or they can renege on the loans, forcing the lender to charge them off. As it happens, the latter accounted for almost all the decline. Over the two years ending June 2010, banks and other lenders charged off a total of about \$588 billion in mortgage and consumer loans.

U.S. Michigan Consumer Sentiment Index Unexpectedly Declines (Bloomberg) -- Confidence among U.S. consumers unexpectedly dropped to a one-year low in September, indicating the biggest part of the economy is being handcuffed by a struggling labor market.  The Thomson Reuters/University of Michigan preliminary index of consumer sentiment fell to 66.6 from 68.9 in August, the group said today. This month’s reading was less than the most pessimistic forecast in a Bloomberg News survey.  Flagging optimism with unemployment close to a 26-year high may increase the risk consumers will cut back on their purchases, which account for 70 percent of the economy. Staff reductions at companies such as FedEx Corp. indicate it will take years to recover the 8.4 million jobs lost in the recession.

Consumer Sentiment declines in September, lowest level in a year From MarketWatch: U.S. Sept. consumer sentiment falls to 66.6  (see graph) The UMich index declined to 66.6 in September - the lowest level since August 2009 -- from 68.9 in August. Consumer sentiment is a coincident indicator - and this is further evidence of a sluggish economy.  This was a big story in July when consumer sentiment collapsed to the lowest level since late 2009. Now it is even lower ...

Unemployment after the recession - Cleveland Fed - The past recession has hit the labor market especially hard, and economists are wondering whether some fundamentals of the market have changed because of that blow. Many are suggesting that the natural rate of long-term unemployment—the level of unemployment an economy can’t go below—has shifted permanently higher. We use a new measure that is based on the rates at which workers are finding and losing jobs and which provides a more accurate assessment of the natural rate. We find that the natural rate of unemployment has indeed shifted higher—but much less so than has been suggested. Surprising trends in both the job-finding and job-separation rates explain much about the current state of the unemployment rate.

U.S. Unemployment at Highest Level Since May  - Unemployment, as measured by Gallup without seasonal adjustment, increased to 9.4% in mid-September from 9.3% in August and 8.9% at the end of July. This finding makes it far more unlikely that there will be a significant decline in the U.S. unemployment rate prior to the midterm elections. Underemployment thus remains unchanged at 18.6% so far in September compared with late August, though up from 18.4% at the end of July. Underemployment peaked at 20.4% in April and has yet to fall below 18.3% this year.Gallup classifies American workers as underemployed if they are either unemployed or working part time but wanting full-time work. The findings reflect more than 18,000 phone interviews with U.S. adults aged 18 and older in the workforce, collected over a 30-day period. Gallup's results are not seasonally adjusted and tend to be a precursor of government reports by approximately two weeks.

Who Chooses to Work? Who Doesn’t? Who Can’t? - A new paper from the Federal Reserve Bank of San Francisco plumbs the difficultly of getting a handle on the fundamentals of the labor market, namely the labor force participation rate. The extent to which Americans want to work, and can find work, has a lot to do with where the unemployment rate rests. The paper finds that the tumult of the last few years has significantly upended traditional understandings of who chooses to work, and who doesn’t, or can’t. “Movements of the labor force participation rate have been relatively large since the beginning of the recession that began in December 2007″ and “they have departed from regular cyclical patterns, making them hard to predict,” the researchers wrote. They noted that as of August, the labor force participation rate had fallen to 64.7% from its pre-recession mark of 66%. What happens next will be hard to handicap because the recovery releases positive cyclical forces. Labor force participation should naturally rise as a recovering economy makes more jobs available. But there are structural problems at play. Some lost jobs are unlikely to come back. Manufacturing suffers from an ongoing erosion of jobs. Then there’s the volatility of the financial sector and the very strong likelihood that a highly troubled real estate sector will put a brake on construction hiring for many years to come.]

Importing job growth - THE combination of a slow news cycle and an interminable recession has produced lots of commentary about whether America’s days of glory are over. There exists concern that becoming more service oriented and not making things will lead to America’s decline, a phenomenon sometimes known as British disease. According to David Brooks: If you look at America from this perspective, you do see something akin to the “British disease.” After decades of affluence, the U.S. has drifted away from the hardheaded practical mentality that built the nation’s wealth in the first place. The shift is evident at all levels of society. First, the elites. America’s brightest minds have been abandoning industry and technical enterprise in favor of more prestigious but less productive fields like law, finance, consulting and nonprofit activism. Many of America’s best and brightest now work on Wall Street, and that seems to suggest we’re on the same path Britain took last century. But is that really so terrible? Britain is not the world’s largest economy, but it’s no schlub either. Living standards there have risen considerably in the last century.

Job Tenures Lengthen as Newcomers Get Laid Off - While stories about loyal, long-term employees getting laid off may be omnipresent and heart-wrenching, the people disproportionately getting the axe appear to be workers with less seniority. That is the implication of a new report from the Labor Department on employee tenure. The report, released every two years, showed that in January 2010, the median length of time that wage and salary workers had been with their current employer was 4.4 years. That is higher than the median tenure in January 2008, when it was 4.1 years.

How Obama is attacking businesses… no, not in the way you’re thinking - Imagine if there were some productive input, say for example a source of energy, that was cheaper than all of the other alternatives and allowed many businesses to operate with lower costs. Say this productive input was also illegal, but did not cause any externalities. Would right now, in the midst of a terrible recession, be a good time to crack down on this illegal input that many businesses depended on? This is what the Obama administration is doing with their crackdown on illegal immigration, and it is hurting businesses. A recent story from the New York Times highlights how economically damaging this can be to successful businesses. Michel Malecot, a restaurant owner, faces 30 years in prison, \$4 million in fines, and the seizure of his assets for hiring illegal immigrants at his restaurant. The governments indictment is causing him serious economic distress: In an industry with that employs an estimated 500,000 illegal immigrants, Mr. Malecot is not alone:

Foreign Stimulus - NYTimes - THE debate over Arizona’s controversial immigration law and Congress’s passage last month of another border security bill gives the impression that the only problem with our immigration policy is its inability to keep people from entering the country illegally. Not so. The country has an antiquated, jerry-built immigration system that fails on almost every count. The good news is that there is a way to replace it that will promote economic growth while reducing the flow of illegal workers.  First, work-based visas should become the norm in immigration, not the exception. The United States issues about 1.1 million green cards a year and allocates roughly 85 percent to family members of American citizens or legal residents, people seeking humanitarian refuge and “diversity immigrants,” who come from countries with low rates of immigration to the United States. The remaining 15 percent go to people who are immigrating for work reasons — but half of these are for workers’ spouses and children, leaving a mere 7 percent for so-called principal workers, most of whom are highly skilled. No other major Western economy gives such a low priority to employment-based immigration, and for good reason: these immigrants are the most skilled and least likely to be a burden on taxpayers.

The US economy: why it matters what sort of crisis we're in -   If economists can't see an \$8tn housing bubble, what can they see? This is bit like the firehouse where everyone sits around calmly sipping their coffee as the school across the street burns down. Completely missing the largest financial bubble in the history of the world is pretty inexcusable, even if economists continue to make excuses. Having failed to prevent disaster, economists are now anxious to tell us that there is nothing that they can do to remedy the situation. The story they are pushing is that unemployment is structural, not cyclical – a refrain now echoed by op-ed columnists. This means that people are not unemployed because of a lack of demand in the economy, but rather they are unemployed because there is a mismatch between the available jobs and the skills and location of the available workers. Before examining the argument here more closely, it is worth noting that arguments about rising structural unemployment come around during every recession. When the economy fails to produce jobs fast enough to bring down the unemployment rate economists quickly turn to blaming the workers.

Which workers will need jobs? - THE unemployment rate is computed from two pieces of data: the number of unemployed workers in the economy, and the size of the labour force. A deterioration in the unemployment rate can occur when unemployment grows due to job loss, but it can also occur when unemployment rises due to growth in the labour force. Workers without jobs who begin looking for work are suddenly counted as labour force members.The outlook for the American unemployment rate will therefore depend on how many of the workers who have dropped out of the labour force through the recession decide to come back in. In a new economic paper for the San Francisco Fed Joyce Kwok, Mary Daly, and Bart Hobijn investigate recent patterns in participation for a few different labour market groups in order to evaluate just how many jobs the economy will need to create to rapidly bring down unemployment.

How Many Jobs Do We Need? -  People who have secure jobs may not be too worried about employment levels. Some may even anticipate a comfortable ride over the next few months, whether it leads to another dip in economic growth or to “jobless recovery.” In an increasingly global economy, some big businesses may look to exports as a source of demand for their goods and services. Others may be able to just sit tight until conditions improve. Corporate profits have rebounded, partly as a result of high unemployment, which makes it easier to cut labor costs. Do those unemployed really need jobs? Some economists suggest that many are just free-riding on the rest of us by taking extended unemployment benefits. In last week’s post, I argued that a focus on the decline in wage and salary jobs is useful, because it sidesteps the assertion that the unemployed are just pretending to want work. The problem is not just fewer jobs, but more potential job applicants.

Imagine If NYT Columnists Like Thomas Friedman Had to Know About the Great Recession? - Then they wouldn't write ridiculous things like: "our generation’s leaders never dare utter the word 'sacrifice.' All solutions must be painless." If someone told Friedman about the recession, that nearly 15 million people are unemployed, that nearly 9 million are underemployed, and millions more have given up working all together, then he would not be saying nonsense about how baby boomers are looking for painless solutions. On this planet, the vast majority of baby boomers, who have to work for a living, are already experiencing vast amounts of pain. What planet does Mr. Friedman live on and why on earth is he given space in the NYT to spew utter nonsense?

The 10 American Industries That May Never Recover - It has become clear that jobs in some industries may never come back, or if they do it will take years or decades for a recovery. 24/7 Wall St. examined the Bureau of Labor Statistics' "Employment Situation Summary," and a number of sources that show layoffs by company and sector. The weakness in these sectors will make it harder for the private industry, even aided by the government, to bring down total unemployment from 9.6% and replace the 8.3 million jobs lost during the recession. The losses in these industries have to be offset by growth in others before there can be any net increase in American employment. Here is the list of the 10 job categories that will not recover, based on 24/7 Wall St. research:

Are There Jobs That Can't Be Outsourced? - Room for Debate Forum - NYTimes - With the unemployment rate stuck above 9 percent for 16 months, and likely to remain that way into next year, new college graduates and those laid-off in the recession will not have good news for a while. What's left of manufacturing is moving overseas, including green industries. Construction jobs have dried up. And even in sectors that require highly skilled labor like technology and lawyering, jobs are increasingly outsourced to China or India. If so many kinds of jobs are being moved or cut, what skills should American workers develop that will have staying power? Is there any sector that can't easily be outsourced? Or is this less a question of skills development but rather a question of labor policies and employment structure in the U.S.?

Undoing the Old GM - I wrote the other day about the GM stamping plant in Indianapolis which is scheduled for shutdown in September of next year unless a buyer can be found.  That plant is part of the liquidation company, which was created during GM's bankruptcy process to contain the less productive assets that the company doesn't want.  Today's New York Times has a look at what's happening to the plants in that company:  very little.   Among the issues raised by the new corporate structure:  who's responsible for carting debris away from plants that were demolished before the bankruptcy?  What happens to plants that no one wants at all? (There are industrial sites all over the rust belt which are essentially abandoned eyesores; some of them have been in this condition, blighting the local communities, for decades).  One way to think about our current economic woes is that we have a lot of "fake assets" like this--things that we invested money in expecting a good return, but which in many cases are now more trouble than they are worth.  Working through that asset base is going to be slow and painful.

Obama and the Unions - Andrew Sullivan defends Obama from charges that, among other things, he used the economic crisis to get “more protections for unions”: …[About] protection for unions. Again, there is no card-check legislation. It was not a priority. It was not snuck into the stimulus package. I agree with Sullivan that Obama has not done everything he could to help unions, and he’s accomplished some thing despite strong union opposition, including parts of Race To The Top. Surely, at the very least President John Edwards would have been many times worse.  However, I do think that the stimulus did suffer as a result of handouts to unions in the form of the prevailing wage provision. This is the part of the Recovery Act that requires that any construction project funded by stimulus must comply with Davis-Bacon. This law prevents companies from areas where labor costs are low from bidding on contracts based on wages they would be willing to pay. This distortion gives an unfair advantage to local companies, creates less jobs, and means money will be spent more inefficiently.

Labor Tries to Organize Carwashes in Los Angeles - The carwashes of Los Angeles would appear to be an unlikely target for a unionization drive. Many of the estimated 10,000 workers in the business here are illegal immigrants, who are too scared to speak out or give their bosses any excuse to fire them. Many carwash companies have just two or three outlets, not 20 or 30, requiring scores of separate organizing efforts. And carwash owners, who invest a million dollars or more in each facility, are fiercely resisting the prospect of being tied down by collective bargaining and union rules. Nonetheless, labor organizers have set out to unionize this city’s carwash workers, hoping to improve their paltry pay and end widespread abuses. California officials have estimated that two-thirds of the 500 carwashes in Los Angeles violate workplace laws. Many workers say they are paid just \$35 for a 10-hour workday — less than half the minimum wage — and some say they are not paid for time during which no cars go through the wash. Others complain that they are not given gloves or goggles even though they often use stinging acids to clean tire rims.

Life on the Economic Edge (slideshow) It might seem like eons ago, but it was only mid-June when the White House declared that the following three months would be 2010’s “Recovery Summer.” Instead, the economic scene is, if anything, bleaker now than it was back then: what appeared to be a nascent bounceback has matured into a dismal slog, and while GDP growth and employment are still slowly improving, fears of a double-dip recession are looming more than ever. Below those top-line numbers things are even worse. The unemployed comprise nearly 15 million Americans, but it’s not just people who have been out of work for a while: an increasingly large number of them are “99ers,” people who have been out of work so long that they’ve exhausted the 99 weeks of unemployment insurance guaranteed to out-of-work Americans. And with an average of five applicants for every job opening, it’s unlikely that the situation will change soon. The poverty rate is expected to have been 15 percent in 2009, up from 13.2 percent—the largest one-year increase since the government began keeping records. While things are improving for the wealthiest Americans, here’s a look at those who are still reeling from the financial blows they’ve been dealt.

Let the Screaming Begin -- Soon - We really have, as a nation, seen our train completely fall off the fairness track. The unprecedented income inequality in the nation today is such a blight that I thought it would stand on its own as an indictment of the actions and decisions since 1980 of certain of our political and business leaders which wrought this nightmare. I also hoped that by now the American people would be standing up and saying en masse that "enough is enough". In fact, not only is the inequality persisting, but it has become so embedded that it's now dictating our nation's finance industry practices, tax policies, and sense of corporate social responsibility.

Tier 5: Long Odds For Legislation To Help The 99ers There are no plans in the Senate to take up legislation anytime soon to help the "99ers," people who have been unable to find work after exhausting the 99 weeks of federally-funded extended unemployment insurance available in some states. "I think that's going to be a real challenge in the next three weeks," said Sen. Debbie Stabenow (D-Mich.) when asked about her bill to provide an additional 20 weeks of benefits to the long-term jobless in states with unemployment above 7.5 percent. "We're going to continue to look for a way to get bipartisan support so we can get through a filibuster and be able to get that done." Stabenow introduced her bill in early August, On Wednesday, Stabenow emphasized the part of her bill that would give businesses a \$2,000 tax cut for hiring people who have exhausted all their unemployment benefits, an expansion of legislation enacted earlier this year that gives businesses a \$1,000 tax break for hiring unemployed workers. Stabenow  "It would give extra incentive to hire someone who's been out of work the longest."

Inequality and Growth, Revisited -As politicians debate on whether to extend the Bush tax cuts and, if yes, to who, income inequality has been brought to the spotlight not just as a social plight but also as a structural impediment to growth that should be tackled—not least by repealing the tax cuts. Inequality is all the more topical in light of data showing that the gap between America’s richest and its poorest has kept widening, and that the US is *the* most unequal country among the advanced economies. I therefore thought of revisiting the theoretical and empirical findings on the link between inequality and growth and see what policy implications might come out of this exercise.

Ezra Klein - What if growth had been equal? - I talked earlier about "the Conehead economy," the idea that if the economy were a person, its growth over the past few decades would've turned it from a normal-looking individual into a conehead. Jacob Hacker and Paul Pierson get at this idea slightly differently. They've got a table showing how incomes would look if growth had been equally shared from 1979 to 2006 -- much as it was in the decades before 1979. My first thought was to turn their table into a graph. Tables are always better than graphs, right? Well, here's what happened: You can't even see what's going on with the middle class. For the record, there are real changes in that graph: If growth had been equally shared, the middle quintile would be making \$64,395 today. Instead, they're making \$52,100. That's a 23 percent raise those folks didn't get -- and that I'm sure they would've noticed.

The supply of inequality - EZRA KLEIN has been writing about income inequality, and while I think we agree that it doesn't make sense to pin growth in inequality one just one factor, we disagree about the impact of skills-biased technological change. Mr Klein says: As Tom Noah's series on inequality suggests, there are lots of questions when it comes to inequality. But what's confusing people here is one particular question: skills-biased technological change. That's where technology changes (we now have computers) and those who know how to use the new technology pull away from those who don't. That explanation is intuitively appealing, but it doesn't fit the facts. For one thing, Europe had the same technological revolution, but without the attendant increase in inequality. But Mr Klein is only paying attention to half of the story. If Europe had the same technological shift and but didn't see a similar rise in inequality, then that could be because the technological shift didn't lead to a rise in demand for skilled workers—skills-biased technological change is a red herring. But there is another possibility—that both Europe and America had a technological shift, and that both Europe and America saw an increase in demand for skills, but that Europe was better at meeting this demand.

The Associated Press: US poverty on track to post record… The number of people in the U.S. who are in poverty is on track for a record increase on President Barack Obama's watch, with the ranks of working-age poor approaching 1960s levels that led to the national war on poverty. Census figures for 2009 — the recession-ravaged first year of the Democrat's presidency — are to be released in the coming week, and demographers expect grim findings. The anticipated poverty rate increase — from 13.2 percent to about 15 percent — would be another blow to Democrats struggling to persuade voters to keep them in power. "The most important anti-poverty effort is growing the economy and making sure there are enough jobs out there," Obama said Friday at a White House news conference. He stressed his commitment to helping the poor achieve middle-class status and said, "If we can grow the economy faster and create more jobs, then everybody is swept up into that virtuous cycle."

Poverty rate highest since 1994: Census  -- The poverty rate rose to 14.3% in 2009, the highest since 1994, up from 13.2% in 2008, the Census Bureau reported Thursday. Last year there were a record 43.6 million people in poverty. Meanwhile, real median household income in 2009 was \$49,777, not statistically different from the prior year. Real median income fell 1.8% for family households, and rose 1.6% for nonfamily households. Also, the number of people with health insurance fell to 253.6 million in 2009 from 255.1 million in 2008, the first year that the number of people with health insurance has decreased since 1987, when the government started collecting comparable data. The number of uninsured rose to 50.7 million from 46.3 million."

Recession Raises Poverty Rate to a 15-Year High - The percentage of Americans struggling below the poverty line in 2009 was the highest it has been in 15 years, the Census Bureau reported Thursday, and interviews with poverty experts and aid groups said the increase appeared to be continuing this year.  With the country in its worst economic crisis since the Great Depression, four million additional Americans found themselves in poverty in 2009, with the total reaching 44 million, or one in seven residents. Millions more were surviving only because of expanded unemployment insurance and other assistance.  And the numbers could have climbed higher: One way embattled Americans have gotten by is sharing homes with siblings, parents or even nonrelatives, sometimes resulting in overused couches and frayed nerves but holding down the rise in the national poverty rate, according to the report.

A lost decade: Poverty and income trends paint a bleak picture for working families - This morning’s release by the U.S. Census Bureau of the 2009 poverty and income data was yet another reminder of the severity of the Great Recession that began in December 2007. The data show that the poverty rate increased from 13.2% in 2008 to 14.3% in 2009, the highest rate since 1994. Furthermore, for the first time on record, the nominal (non-inflation adjusted) income of the median, or typical, household actually fell, from \$50,303 in 2008 to \$49,777 in 2009. Inflation was negative from 2008 to 2009, dropping by 0.4%, so real (inflation-adjusted) income did slightly better, dropping \$335, or -0.7%, from \$50,112 in 2008 to \$49,777 in 2009. When unemployment skyrockets and job seekers cannot find work, incomes fall and poverty rises. The fact that the deterioration in both poverty and income from 2008 to 2009 were so dramatic is unsurprising given the deterioration in the labor market. .

Poverty Explodes To Record Highs Under Obama - 1-in-7 Americans are now considered to be in poverty, according to a report from the AP, based on upcoming census figures.  2009, Obama's first year in office, saw a record jump in the poverty level from 13.2% to 15%. The poverty level is defined as living at \$22,025 or below for a family of four. Also under Obama, Child poverty has jumped from 19% to 20% and among the 18-64 demographic, the level jumped from 11.7% to 12.4%. The problem for Obama is that the best argument he can make regarding the economy is that things might have been worse had he not done what he did. The reality though is that things are actually bad, as these numbers show.

US workers’ poverty reaches 50-year high - Poverty among the working-age population of the US rose to the highest level for almost 50 years in 2009, as the human cost of the deepest economic downturn since the Great Depression was laid bare in new census data. Poverty among those aged 18 to 64 rose by 1.3 percentage points to 12.9 per cent – the highest level since the early 1960s, prior to then-president Lyndon Johnson’s “War on Poverty”. The overall poverty rate rose by 1.1 percentage points to 14.3 per cent, the highest since 1994. The rise in working age poverty was driven by the jump in the unemployment rate to 10 per cent during 2009. The Census Bureau said that 43.6m people were living below the poverty line in 2009, the highest number in 51 years of data, although the overall poverty rate is still 8.1 percentage points lower than it was in 1959. By race, the poverty rate rose above 25 per cent for black and Hispanic people, more than double the 12.3 per cent rate among white people. The Census Bureau uses an absolute measure of poverty that compares a household’s income to the cost of a basket of goods such as food and clothing. A family of two adults and two children is defined as poor if its income is less than \$21,756.That definition is often criticised because it does not reflect the cost of goods with higher than average inflation, such as education, healthcare and housing

One in Seven Americans Lived in Poverty Last Year « Today, the Census Bureau announced that one in seven Americans lived in poverty last year. Reporting income and poverty statistics for 2009, the Bureau said median income did not change substantially, remaining around \$49,800. But the poverty rate climbed to 14.3 from 13.2 percent. That means that during 2009, 43.6 million people lived on less than the equivalent of \$21,756 for a family with two adults and two children. The statistics contained within the report are striking. The proportion of Americans living in “deep poverty,” with incomes less than half of the poverty line, hit a record high of 6.3 percent — meaning nearly 20 million Americans live on less than \$11,000 a year for a family of four. One third of black children live in poverty, and more than 20 percent of all children live in poverty. The number of people without health insurance increased for the first time ever, to 50.7 million, up more than 4 million since 2008.

All Time Record Level of Severe Poverty - The Census Bureau has released estimates of poverty in 2009. Coverage focused on the headline poverty rate which is horrible enough. Much worse, 6.3% of people in the USA suffered severe poverty, that is lived in households with income less than half the poverty line. This is the highest severe poverty rate on record (the series only goes back to 1975).  Look at Table Five. That means that over 19 million people in the USA live in households with income less than half the poverty line (severe poverty implies income significantly less than \$ 11,000 yr for a family of four)  I blame welfare reform.Like the poverty rate, the severe poverty rate goes up in recessions, goes up when inequality increases and goes down when per capita income grows. However, the pattern is very different with a long term trend of increasing

The Downside of Families Doubling-Up - More people are living with family in an effort to deal with the recession, but while the phenomenon is keeping the poverty rate lower, it has wider negative economic consequences. In a presentation as part of its wider report on income, poverty and health insure, the Census Bureau noted a big jump in the number of individuals and families doubling up. (See slide 18) The number of multifamily households jumped 11.6% from 2008 to 2010 compared to an increase of just 0.6% in the number of households. “If the poverty status of related subfamilies were determined by only their own income, their poverty rate would be 44.2%,” David Johnson chief of the Housing and Household Economic Statistics Division at the U.S. Census Bureau said. “When their poverty status is determined based on the resources of all related household members, it is about 17%.”

A More Nuanced Look at Poverty Numbers - Despite a steady rise in unemployment throughout 2009, America’s poverty rate didn’t rise as much as some analysts had feared. Still, at 14.3 percent, up from 13.2 percent in 2008, it represented 43.6 million people, the highest number of people in poverty since the Census Bureau began publishing estimates in 1959. The government statistics showed that unemployment insurance helped stave off poverty for millions. Another 2.3 million people would have been in poverty had they not been able to collect unemployment, the report said. As always, the demographic breakdowns provide a more nuanced portrait of how poverty is affecting Americans. Race continues to play a huge factor in poverty and income inequality. Median per capita income for non-Hispanic whites was \$30,941, down 0.8 percent from a year earlier. Among blacks, median per capita income was two-thirds less, at \$18,135.

Poverty — A Long Slog Ahead - Today's title comes from the PBS NewsHour report on the Census Bureau's new survey of poverty in America.That says it all. Here's the video . I will be discussing the new Census results in greater detail next week. A true aficionado of America's economic history over the last 30 years will note that we have returned to 1994 poverty levels, which neatly coincides with what I call the Bubble Era (1995-2007). In so far as there are no more bubbles to blow, nothing is going to "save" us now from persistent, high poverty rates in the future. Indeed, that view was put forth by Isabel Sawhill in the PBS report— Here are the key numbers as reported by PBS

1. 14.3% — 1 in 7 Americans were living at or below the poverty line in 2009
2. That is 4,000,000 more than in 2008 and the most since 1994
3. The ranks of the working age poor reached its highest level since the 1960's

More on Poverty - More importantly, the poverty rate is a very poor measure of total suffering due to poverty. to use the poverty rate as a welfare measure you must assum that someone just slightly below the poverty line suffers just as much as someone below half the poverty line. Obviously you don't think anything that silly. Instead, you must be assuming that similar patterns are found in counts of sever poverty (below half the poverty line) near poverty (poverty line to 1.5 poverty line) etc. I think you are assuming this. This assumption is totally utterly false. No one who wishes to consider poverty in the USA can stop after looking at the poverty rate and the poverty rate by demographic group as you did. The time series of the severe poverty rate is completely different from the time series of the poverty rate. It has increased enormously since 1975 (the trough of a recession). You can't possible see the direct benefits of welfare looking the poverty rate as AFDC and TANF benefits were and are below the poverty line.

Steep rise in unemployment hurts children too - When workers lose their jobs, their children suffer. The steep rise in unemployment since 2007 has served to double the share of children with at least one unemployed parent, from 5% in 2007 to 10.3% in 2009. The total number of children with an unemployed parent rose from 3.5 million in 2007 to 7.2 million in 2009. Over the same period, the portion of children with at least one underemployed parent – who is not finding the amount of work he or she wants or needs --has also nearly doubled, from 9.1% to 18.1%. The nationwide unemployment rate rose from 4.6% in 2007 to 9.3% in 2009.These data are particularly relevant this week, as the U.S. Census Bureau reports new data on poverty for 2009, which is expected to show a large increase over already high 2008 levels. Last year’s report showed a child poverty rate of 19% in 2008, with children comprising more than a third of all the people living in poverty in the United States.

Number of Families in Homeless Shelters Rises - NYTimes - For millions who have lost jobs or faced eviction in the economic downturn, homelessness is perhaps the darkest fear of all. In the end, though, for all the devastation wrought by the recession, a vast majority of people who have faced the possibility have somehow managed to avoid it. Nevertheless, from 2007 through 2009, the number of families in homeless shelters — households with at least one adult and one minor child — leapt to 170,000 from 131,000, according to the Department of Housing and Urban Development.  With long-term unemployment ballooning, those numbers could easily climb this year. Late in 2009, however, states began distributing \$1.5 billion that has been made available over three years by the federal government as part of the stimulus package for the Homeless Prevention and Rapid Re-Housing Program, which provides financial assistance to keep people in their homes or get them back in one quickly if they lose them.

Thousands of elderly in Fresno county qualify as poor - Basic living expenses cost Fresno County seniors almost twice as much as the federal government claims, according to a study released Tuesday.  On average, a Fresno County senior needed \$19,407 for necessities in 2009, according to the Elder Economic Security Standard Index. But the federal government says the poverty level for a single adult in the county was \$10,830. As many as 36,000 seniors in the county who don't meet the federal standard would qualify as poor under the index. "Statewide, the federal poverty level just isn't capturing what it truly costs to live in California," The federal poverty level -- which is based on the cost of food alone -- is used nationwide to determine income eligibility for many public programs and to allocate funding for programs. The elder index was introduced two years ago as an alternative.

We Should Strengthen the Safety Net as the Recession Swells the Ranks of the Poor - This week the Census Bureau released new data showing a poverty rate of 14.3 percent in 2009. This adds 6.3 million new people to the ranks of the poor since 2007 before the recession began. The problem will get much worse long before it gets better. Analysis by Emily Monea and myself shows that the poverty rate is likely to approach 16 percent before we are out of the woods and to remain high through most of this decade. We estimate that the recession will likely add 10 million people and 6 million children to the poverty rolls by mid-decade.  What does it mean to be poor in America? According to the government, poverty means having an income of less than \$22,025 for a family of four (2008 numbers). This number does not include noncash benefits, such as Food Stamps or the value of the EITC, nor does it take into account work-related expenses, such as child care and commuting costs, or the fact that the amount spent on basic necessities (food, shelter, clothing, and utilities) have increased for most families since the measure was first adopted in the 1960s.

Lifelines for the needy disappearing - With more people than ever living in poverty, the government's unprecedented effort to strengthen the safety net for needy Americans is running out.  Washington has spent tens of billions of dollars since the start of 2009 on programs to help feed the poor, house the homeless and support the unemployed. But much of this money has been used up or is about to expire in coming weeks and months. A record 43.6 million people were in poverty in 2009, according to Census Bureau figures released Thursday. That's the most in 51 years of record keeping and equals 1 in 7 Americans. And the situation has likely become even worse this year, with the faltering economy and stubbornly high unemployment rate.  One major stimulus program for the needy has only two more weeks left. The \$5 billion boost to Temporary Assistance for Needy Families expires on Sept. 30.

Poverty rate paradox: Poverty rises, but FBI crime rate falls ...The much-studied links between poverty and crime rates – which helped give rise to many Great Society programs – have not materialized so far in the Great Recession. Even with 15 percent of Americans now officially poor, both violent crime and property crime continued to drop in the United States in 2009, the FBI reported Monday. The housing crash's backwash of foreclosures and high unemployment has pushed some in the middle class and the working poor to the brink of despair and insolvency. Yet crimes reports ranging from murder to carjackings, from graft to purse-snatching, all declined during the same period, forcing social scientists to reexamine long-held assumptions about the causes of crime and how society can best battle back. "What we're seeing now represents a real break in pattern from past relationships between economic downturns and crime increases,"

183000 in state lose jobless aid - Part of the reason the number is so large and growing  is that Orange County and other parts of California started losing jobs well before the U.S. recession officially began in December 2007. In addition, hard-hit industries like construction and real estate, where thousands were once employed, have yet to bounce back.  Orange County alone lost 10,300 construction, finance and other real estate-related jobs from July 2009 to this July. The new numbers for Californians losing their benefits comes as Congress returns from recess today to consider a bill that would give those who exhaust their aid, the so-called 99ers, up to 20 more weeks of unemployment payments. If approved, jobless workers in high-unemployment states like California would be eligible for up to 119 weeks of benefits. California's unemployment rate in July was 12.3%, third highest in the country.  The August numbers will be released Friday, Sept. 17.

Audit of Federal Stimulus Funds in Los Angeles Shows \$111 Million in ARRA Grants Has Only Created 55 Jobs - city controller - I released two very disappointing audits today of how the City of Los Angeles has used American Recovery and Reinvestment Act (ARRA) funds. The audits looked at the how the two departments that have received the largest amount of ARRA funding so far - the Department of Transportation (LADOT) and the Department of Public Works (DPW) - have used those funds and how many jobs were created. Los Angeles has become the largest City in America to conduct an audit of how ARRA funds have been expended. DPW has received \$70.65 million and created or retained 45.46 jobs, though they are expected to create 238 jobs overall (the fraction of a job created or retained correlates to the number of actual hours works). LADOT has been awarded \$40.8 million and created or retained 9 jobs, though they are expected to create 26 jobs overall. Overall, the Departments have received \$111 million in federal stimulus funds out of the \$594 million the City has been awarded so far and created or retained 54.46 jobs. I'm disappointed that we've only created or retained 55 jobs after receiving \$111 million in ARRA funds. With our local unemployment rate over 12% we need to do a better job cutting the red tape and putting Angelenos back to work.

State and local public employees undercompensated, EPI study finds: State and local public employees are undercompensated, according to a new Economic Policy Institute analysis. The report, Debunking the Myth of the Overcompensated Public Employee: The Evidence by Labor and Employment Relations Professor Jeffrey Keefe of Rutgers University, finds that, on average, state and local government workers are compensated 3.75% less than workers in the private sector.  The study analyzes workers with similar human capital. It controls for education, experience, hours of work, organizational size, gender, race, ethnicity and disability and finds that, compared to workers in the private sector, state government employees are undercompensated by 7.55% and local government employees are undercompensated by 1.84%. The study also finds that the benefits that state and local government workers receive do not offset the lower wages they are paid.  The public/private earnings differential is greatest for doctors, lawyers and professional employees, the study finds. High school-educated public workers, on the other hand, are more highly compensated than private sector employees, because the public sector sets a floor on compensation. The earnings floor has collapsed in the private sector.

Gov: ‘No Choice’ But To Lay Off State Workers Early - Going back on a pledge not to layoff state workers before Jan. 1, Gov. David Paterson said Thursday a round of layoffs will begin before the end of 2010 to close New York’s massive budget gap. It’s always that last question that produces the bombshell: “Why aren’t you calling a spade a spade and talking about the unions in this state?” And Paterson did not hesitate. “They have left us no choice. We will probably, in fact, we will lay off workers before the end of the year,” Paterson said.

NY state cash balance negative since Sept 3: report  (Reuters) - New York state's general fund has had a negative cash balance every day since September 3, a problem that "underscores the tremendous amount of risk" in the state's budget, Comptroller Thomas DiNapoli said on Thursday. Though New York ended August with a nearly \$528 million of cash in the general fund, which counts state tax and fee revenue but excludes federal dollars, it was forced to delay paying billions of dollars of bills that were due last month. "Restoring the General Fund to a positive balance will depend on whether the state brings in enough revenue in the second half of the month," said DiNapoli in a statement

Washington State budget deficit hits \$520 million, 6.3 pct cut next - Low tax collections are driving a new state budget deficit of about \$520 million through mid-2011, leading to spending cuts of about 6.3 percent from Gov. Chris Gregoire. Thursday's state revenue forecast showed continuing weakness in the national and state economies following the Great Recession. Arun Raha, the state's chief economist, said the economic picture is still in "uncharted territory." Tax collections for the following two-year budget period are projected at about \$670 million lower than previously expected. That makes the total drop in expected revenues about \$1.4 billion, and the projected deficit for the upcoming 2011-2013 budget around \$4.5 billion.

Wash. budget deficit \$520M, spending cuts coming - A fresh round of state budget cuts could mean another prison closure, less money to help school districts and thousands fewer spots for community college students, Gov. Chris Gregoire said Thursday. Those steps and more - including big cuts in social services - are being driven by a major drop in state tax collections that punched a roughly \$520 million hole in the recession-walloped state budget.The new deficit is a small slice of the roughly \$28.5 billion state budget, which covers government operating costs for the two years ending in July 2011. But since there are only a few months left in the current budget cycle, balancing the books is more difficult.

Next Wisconsin governor faces big deficit - The state faces a looming \$2.7 billion budget shortfall, but that hasn't kept candidates for governor from piling on with what are likely to be hundreds of millions of dollars in new commitments to cut taxes or increase spending. All the major candidates have put forward plans to rein in spending, but by making added pledges like tax cuts, the candidates are adding to the challenge they'll face as the state's top executive. The most aggressive are the two Republican candidates, former U.S. Rep. Mark Neumann and Milwaukee County Executive Scott Walker who, without specific figures, are promising hefty tax cuts in their first budget as governor and some possible increases in spending on roads and bridges.

Bankrupt, USA: Why our cities aren't too big to fail -The Keystone State's cash-strapped capital was scheduled to default on a \$3.3 million bond payment on Wednesday. It avoided that debilitating fate when Pennsylvania's governor, Ed Rendell, pledged to resolve the problem with \$4.4 million from the state's own challenged coffers. This gives Harrisburg a chance to fight again another day. But its problems are far from over, and that's bad news for investors in the \$2.8 trillion muni-bond market. States from California to Illinois have been in deep crisis since the recession began, hammered by drastic cuts in tax revenue and inflexible spending demands for things like health care, debt service and pension plans. Forty-eight states grappled with fiscal shortfalls in their 2010 fiscal budgets. Totaling \$200 billion, or 30% of state budgets, this fiscal shortfall is the largest gap on record, according to the DC-based Center on Budget and Policy Priorities, which sees at least 46 states facing shortfalls this fiscal year

Illinois' Billions in Unpaid Bills: Deciding Who Gets Paid When - Unpaid bills keep stacking up at the Office of the Illinois Comptroller. Not enough tax revenue is coming in to cover what the state is spending, so the backlog grows. Non-profits and social service agencies sometimes wait many months before getting what's owed to them. And so do small businesses that - in a tough economy - are in no position to turn down work, even from a deadbeat state. We look at the problem, and the not-so-scientific way the state decides which bills get paid when.  Right now, there are at least \$4.6 billion dollars in bills owed by the state of Illinois just waiting to be paid. As some checks get written, new bills arrive and the backlog remains. Revenues coming in are not adding up to the money state agencies promised their vendors.

Wall Street Strikes Again: Sewer Hikes in Alabama - Matt Taibbi - Earlier this year I wrote about the Jefferson County story in a piece called “Looting Main Street” in Rolling Stone. In this tale employees of a group of high-powered Wall Street banks, led in particular by JP Morgan Chase, funneled money to local politicians in Alabama, who in turn signed off on toxic interest-rate swap deals that left the county saddled with monstrous debt for a generation.  Jefferson County is essentially the world’s worst credit card story. The local pols ran up massive bills to build a “Taj Mahal of sewer-treatment plants,” then saddled future voters with a blizzard-worth of rate hikes, punitive fees and late charges. Alabamans who should have paid \$250 million for their new sewer system now owe over \$3 billion, thanks to their corrupt politicians and the greedy carpetbagger banks who dragged these local hicks into deadly derivative deals. What basically happened here is that when some of the monoline insurance companies who were insuring Jefferson County’s bonds saw their credit ratings downgraded in 2008, that triggered language in the count’s bond deals that accelerated their debt payments. Specifically, thanks to those downgrades, Jefferson County was suddenly legally obligated to retire \$800 million in bonds in four years.

NJ halts new work on \$8.7B NY-NJ tunnel project due to budget issues - New Jersey is temporarily shutting down all new work and suspending additional contract bids on an \$8.7 billion railway tunnel to New York because federal officials say the project may go as much as a billion dollars over budget — money New Jersey doesn’t have. The federal government and the Port Authority of New York and New Jersey already each are putting in \$3 billion for the massive public works project, with New Jersey’s share at \$2.7 billion. The month-long suspension of all new activity — imposed by NJ Transit Executive Director James Weinstein in the wake of concerns by the Federal Transit Administration — will be used to re-examine the budget numbers.

New Jersey Considers Privatizing Roadwork as Transport Funding Dries Up-- New Jersey will have to consider turning to private companies to finance transportation projects as the fund financing roadwork runs short of money, the head of a panel studying the issue told lawmakers.  New Jersey’s Transportation Trust Fund Authority, which is supported by the state’s 10.5-cent-a-gallon gasoline tax, will be hard pressed July 1 when payments on \$12 billion in outstanding debt consume its \$895 million in annual revenue, said former U.S. Representative Richard Zimmer, who leads the panel. The highway account is scheduled to issue as much as \$1.75 billion in bonds later this month.Projected state budget shortfall reaches \$21 billion - The working estimate of the looming state budget shortfall has grown to about \$21 billion in the face of smaller-than-expected tax revenues and projected higher costs for education and health care, legislative staff said Monday. Previous estimates topped out at about \$18 billion for the upcoming two-year budget period. "There are a lot of moving parts to the budget, and unfortunately, a lot of them are moving in the wrong direction," budget expert Dale Craymer, president of the Texas Taxpayers and Research Association, said of the new estimate. The latest estimate from legislative budget writers' staff comes after the state closed the books on the 2010 fiscal year Aug. 31. Tax collections dampened by the recession are about \$1 billion worse than anticipated.

Prison cutbacks cutting into public safety - The Texas Department of Criminal Justice has been ordered to cutback on 10% of their funding, as part of a plan to make up for the state's \$18 billion deficit. This means state prisons could be laying off more than 7,000 workers, a bulk of which include prison guards and parole officers. In addition to the personnel layoffs, some rehab and treatment programs could also be on the chopping block, which could lead to higher probation and parole caseloads. Sylvia Anderson, who lives down the street from a state prison, is afraid fewer staff to handle more prisoners would ultimately put her family at risk. A few months ago, a prisoner escaped from the facility, launching a manhunt near his Canyon Crossing subdivision on Cagnon Road. He worries fewer staff at the prison could put his neighborhood at risk. "This is a family neighborhood, there's a lot of kids running around here even late at night, early in the morning," Baley explains.

New York's \$133 Million in School Bonds May Face Rising Yields - State of New York Dormitory Authority, last year’s second-largest issuer of municipal debt, is selling \$133.5 million in qualified school construction bonds as a six-month high in overall supply may raise yields. States and municipalities are set to bring to market about \$9.2 billion this week, the most since June 25, according to data compiled by Bloomberg. The Bond Buyer’s visible-supply index of new municipal offerings for the next 30 days reached \$13.2 billion yesterday, the most since March 23. After six weeks of issuance below \$7 billion, the jump in supply may push borrowing costs higher. “This will be the first real test of the market in some time,” Rourke said. “The market is hungry for bonds, but as supply rises you may have to pay some concessions.”

Humanity’s Defining Moment–join us Mish - Embedded in a recent Mish article is an unspoken assumption that the lower classes need to take pay cuts and layoffs so global bondholders and Chase bankers can be paid in full. That’s so…uh…20th century. If astute bloggers don’t start educating politicians by injecting into the political debate what they clearly know when they engage in market debate, the coming downward mobility for everyone but the bondholders is going to be galactic. Mish agrees with NJ Governor Christie that the reason teachers are facing layoffs is because of teacher unions. Of course that’s true within the constraints of our current monetary system where lower class pay cuts are “good for the economy” while at the same time increased rent extraction by the financial class is “good for the economy.” One is the flip-side of the other. Manufacturing workers have learned this in spades, especially since their communities and way of life have been completely destroyed and moved to China. It’s a predator-prey economic relationship, precisely the reason unions exist in the first place. So what’s the real problem: the unions or the nature of the monetary system itself?

\$170,000 Student Loan Debt Ends Engagement - Ms. Eastman said she had told him early on in their relationship that she had over \$100,000 of debt. But, she said, even she didn’t know what the true balance was; like a car buyer who focuses on only the monthly payment, she wrote 12 checks a year for about \$1,100 each, the minimum possible. She didn’t focus on the bottom line, she said, because it was so profoundly depressing.  But as the couple got closer to their wedding day, she took out all the paperwork and it became clear that her total debt was actually about \$170,000. “He accused me of lying,” said Ms. Eastman, 31, a San Francisco X-ray technician and part-time photographer who had run up much of the balance studying for a bachelor’s degree in photography. “But if I was lying, I was lying to myself, not to him. I didn’t really want to know the full amount.”  At a time when even people with no graduate degrees, like Ms. Eastman, often end up six figures in the hole and people getting married for the second time have loads of debt from their earlier lives, it should come as no surprise that debt can bust up engagements. Even when couples disclose their debt in detail, it poses a series of challenges.

Student Loan Default Rates Increase - U.S. Secretary of Education Arne Duncan today announced that the FY 2008 national cohort default rate is 7.0 percent, up from the FY 2007 rate of 6.7 percent. The default rates increased from 5.9 to 6 percent for public institutions, from 3.7 to 4 percent for private institutions, and from 11 to 11.6 percent for for-profit schools.  The default rate announced today -- the most recent data available -- is a snapshot in time, representing the cohort of borrowers whose first loan repayment came due between October 1, 2007 and September 30, 2008, and who defaulted before September 30, 2009. During this time, almost 3.4 million borrowers entered repayment, and more than 238,000 defaulted on their loans. They attended 5,860 participating institutions. Borrowers who default after their first two years of repayment are not measured as defaulters in today's data.

Private Student Loan Bankruptcy Fairness Act of 2010 - The Project on student debt updates on student loans: Yesterday the House Judiciary Committee's Subcommittee on Commercial and Administrative Law took a stand for students and consumers by passing the Private Student Loan Bankruptcy Fairness Act of 2010 (H.R. 5043). The bill reverses the unfair and unjustified special protections for lenders of private student loans enacted in 2005. There have been two hearings on the topic in the past year, but this was the first time this bill came up for a vote, and it passed 6-3 with no amendments. Under the new legislation private student loans would once again be treated like other consumer debt in bankruptcy.  and The U.S. Department of Education released new data this week showing that the national "cohort default rate" on federal student loans is 7.0 percent. The default rate at for-profit colleges is highest at 11.6 percent - almost double the average rate for public colleges. Nearly half of all defaulters (43 percent) attended for-profit schools, even though these schools enrolled only about ten percent of all college students during the relevant time period.

The Inflation of Higher Education - How far does a university degree get you? If you think you’ll automatically earn a better job, status, and higher pay, congratulations. You’ve bought into the myth.  Higher education in America is a bubble. There are exceptions, of course. What Big 3 consulting firm can argue with a Harvard MBA? But by and large, the trend is clear. This bubble, according to Agora Financial’s Eric Fry, is rooted in a belief: Once upon a time, a college education in America was a one-way ticket to a high-paying job and a lofty socio-economic status. Part of its value derived from the fact that a college education was relatively rare. In 1950, only about 5% of all Americans held a bachelor’s degree. Since this 5% tended to fare so much better than the rest of the American population, lots of folks began to ask themselves, “Why not send as many kids as possible to college?”

CEOs with top college degrees not better - Whether or not a company's CEO holds a college degree from a top school has no bearing on the firm's long-term performance. And when it comes to getting canned for poor performance, CEOs with degrees from the nation's most prestigious schools are no safer than the average CEO, according to new research from the University of New Hampshire. Conducted by Brian Bolton, assistant professor of finance at the Whittemore School of Business and Economics at the University of New Hampshire, the new research is presented in the working paper "CEO Education, CEO Turnover, and Firm Performance." The paper is co-authored by Sanjai Bhagat of the Leeds School of Business at University of Colorado at Boulder, and Ajay Subramanian of the J. Mack Robinson College of Business at Georgia State University. "These findings suggest that both boards and researchers should use caution in placing too much emphasis on an individual's education when trying to assess their ability to lead the company and maximize shareholder value,"

UC Pension Plan Lacks Funding - During yesterday’s meeting at UC San Francisco, the UC Board of Regents discussed restructuring pension and health care policies in order to cope with a \$21 billion shortfall in the UC retirement budget. In addition to reducing health benefits, the new policy could potentially raise the retirement age of new workers and increase employee and university contributions to pensions. If the retirement policy is left unchanged, the budget deficit could reach \$40 billion — twice the size of the UC system-wide budget — within five years

State pension commission gets underway while unions express fears - The newly appointed commission to review the long-term sustainability of the state pension system will hold its first meeting sometime in the next few weeks. But union officials are already warning of dire consequences should the commission recommend cuts. Maryland currently has about \$32 billion combined in several pension funds. That’s less than two thirds of the money needed to pay promised retirement benefits. There are \$18 billion in unfunded liabilities. There is another \$15 billion in unfunded promises for retiree health benefits, and the state has been putting away no money recently to pay for them.

Calpers in Talks With Schwarzenegger on \$2 Billion Loan for State Budget-- The California Public Employees’ Retirement System said it is in talks with Governor Arnold Schwarzenegger’s administration on a proposal to borrow \$2 billion from the fund to help the state balance its budget.  Anne Stausboll, the fund’s chief executive officer, said her staff has been holding informal discussions with Schwarzenegger’s department of finance on a proposal that office has floated to credit the state with \$2 billion this year as an advance on the roughly \$74 billion the governor estimates the state would save during the next 30 years from his proposals to roll back pension benefits for government workers.  California has been without a spending plan since the July 1 start of its fiscal year as Schwarzenegger and Democrats who lead the Legislature remain deadlocked over how to fill a \$19 billion deficit. The Republican governor has vowed not to sign any final budget unless it’s accompanied by legislation to permanently cut the state’s cost to finance workers’ retirement benefits.

New Jersey Governor Proposes More Pension Reforms - New Jersey Gov. Chris Christie wants to make public employees pay more for their health and pension benefits. Christie on Tuesday proposed rolling back a 9 percent benefit increase granted a decade ago. He also would require public workers to contribute 8.5 percent of their salaries toward retirement and would raise the retirement age to 65 for teachers and state workers with less than 25 years in the system. He proposed reducing pension payments by 5 percent for police and firefighters who retire after 25 years, and would make public safety employees work five additional years to get 65 percent of their salaries as pension. Police and firefighters can now retire after 25 years regardless of age for 65 percent of their salary. He also proposed making workers pay more for health benefits; the higher contributions would be phased in over four years. Christie also would eliminate cost-of-living adjustments to retirees' pensions.

`Death Spiral' Awaits State-Worker Pensions as Illinois Leads Underfunding - U.S. state pensions such as Illinois, Kansas and New Jersey are in a “death spiral,” with assets at many insufficient to cover benefits, payouts consuming a growing portion of resources and costs rising twice as fast as investment gains. Less than half the 50 state retirement systems had assets to pay for 80 percent of promised benefits in their 2009 fiscal years, according to data compiled for the Bloomberg Cities and Debt Briefing in New York today. Two years earlier, only 19 missed the mark. Illinois covered just 50.6 percent of benefits last year, the lowest so-called funded ratio, which actuaries say shouldn’t be less than 80 percent. Benefits paid by funds in at least 14 states equaled more than 10 percent of assets in the fiscal year, the figures show. In 2007, none exceeded the threshold. The growing burden prompted Colorado, Minnesota, Michigan and other states to trim benefits for millions of teachers and government workers. It also forced fund managers to keep money in short-term low-return investments to pay benefits, reducing chances pensions can earn their way back to financial health “Once you get into that dynamic, you’re in a death spiral,”

Pension Fund Woes Detailed In Milliman Study - Last month, the 100 largest defined-benefit pension plans in the U.S. lost \$17 billion in assets and saw liability increases of \$91 billion, resulting in a \$108 billion decline in pension funded status. According to a Milliman Inc. study, that decline brought the funded ratio down to 70.1 percent, which is the lowest in the 10 years that the Seattle actuarial firm has been doing the study.Milliman officials blame interest rates. “For months we’ve been tracking how corporate bond interest rates are contributing to a ballooning projected benefit obligation. Combine this kind of interest rate activity with lackluster asset performance and what you have is the worst funded status in a decade,”

Pension Gaps Loom Larger - Many of America's largest pension funds are sticking to expectations of fat returns on their investments even after a decade of paltry gains, which could leave U.S. retirement plans facing an even deeper funding hole and taxpayers on the hook for huge additional contributions. The median expected investment return for more than 100 U.S. public pension plans surveyed by the National Association of State Retirement Administrators remains 8%, the same level as in 2001, the association says.The country's 15 biggest public pension systems have an average expected return of 7.8%, and only a handful recently have changed or are reconsidering those return assumptions, according to a survey of those funds by The Wall Street Journal. Return assumptions can affect the size of so-called funding gaps—the amounts by which future liabilities to retirees exceed current pension assets. The concern is that the reluctance to plan for smaller gains will understate the scale of the potential time bomb facing America's government and corporate pension plans.

How Pensions Can Get Out of the Red - Public pensions at the state and local level are underfunded by more than \$1 trillion; in many cities, pension obligations will soon consume a quarter or more of the annual budget — money that will be unavailable for parks, libraries, street maintenance and public safety.  Part of the problem is that pension funds need significant new financing to cover the growing number of retirees. But the real issue is the lack of incentive to improve pension performance. The pension-fund crisis is rooted in the intersection of excessive optimism by fund managers and the funds’ influence on the political process. Funds regularly overestimate their future performance: Calpers, California’s giant state pension fund, assumed, and still assumes, it will earn 7.75 percent annually on its investments; in fact, its returns over the last decade were, on average, less than half of that.  But Calpers wasn’t left holding the bag. Instead, it was able to force the state to increase its contribution to the fund; indeed, the state’s 2010 share will be about five times what it was forecast to be in 1999

Retiring Later Is Hard Road for Laborers - NYTimes - A new analysis by the Center for Economic and Policy Research found that one in three workers over age 58 does a physically demanding job like Mr. Hartley’s — including hammering nails, bending under sinks, lifting baggage — that can be radically different at age 69 than at age 62. Still others work under difficult conditions, like exposure to heat or cold, exposure to contaminants or weather, cramped workplaces or standing for long stretches.  In all, the researchers found that 45 percent of older workers, or 8.5 million, held such difficult jobs. For janitors, nurses’ aides, plumbers, cashiers, waiters, cooks, carpenters, maintenance workers and others, raising the retirement age may mean squeezing more out of a declining body.

The \$6 Trillion 401K Grab - In 2008 I came across a disturbing article about 401k and IRA confiscation. The article appeared in the Carolina Journal Online. I’ve been following this closely. In fact as recently as February 1, 2010 I became the 93rd person to provide “Informational Comments” on the Department of Labor’s website. My comment was beyond scathing and is therefore posted without a link to it. Let’s not mince words: The Social Security “Trust Fund” that FDR started 75 years ago is now a 14 trillion dollar black hole. We trusted Congress to manage the fund and the morons (fiscally responsible Ron Paul, Paul Ryan and a handful of other good eggs excluded) looted it. The “Trust Fund” now consists of a bunch of IOU’s that will be passed onto our children. It was spent on the day to day operations of a bloated government. If you or I managed a pension fund and we stole from it - we’d do time. If we used the money we stole to buy votes - we’d do more time.

U.S. retirement income deficit: \$6.6 trillion -The gap between what Americans need for retirement and the amount they have saved is a staggering \$6.6 trillion, Retirement USA, a coalition of workers’ groups, said in a study published Wednesday.  “The retirement income deficit is the gap between the pensions and retirement savings that American households have today and what they should have today to be on track to maintain their living standard in retirement,” “The retirement income deficit shows just how bad the crisis has become,” she said. The Pension Rights Center, a nonprofit consumer advocacy group, is working with the AFL-CIO, Economic Policy Institute, Service Employees International Union and National Committee to Preserve Social Security and Medicare to promote, among other things, a new retirement security system for all workers. See their 12 principles for a retirement system.  Only about half of full-time workers in the private sector have access to a retirement plan at work, and that drops to 44% when you include part-time workers, Friedman said.

Retirement on Hold: American Workers \$6 Trillion Short - A new study obtained by CNBC says Americans are \$6.6 trillion short of what they need to retire.  The study, conducted by Boston College's Center for Retirement Research, says savings have been squeezed by declines in stock and housing values.  The study was commissioned by Retirement USA, a coalition of organized labor and pension rights advocates that hopes to use the study to push for a more stable retirement system. The group plans to unveil the study at a news conference in Washington on Wednesday.  The \$6.6 trillion figure is based on projections of retirement and income for American workers ages 32-64. The study's authors say they arrived at the amount using conservative assumptions, including a 3 percent rate of return on assets and no further cuts in pension coverage or increases in the Social Security retirement age.

No increase to Social Security Benefits for 2011 (unofficial) It won't be official until the BLS releases the September CPI-W report, but we can already say there will be no increase in Social Security benefits or the Maximum Contribution Base in 2011 (assuming no new legislation). The BLS reported this morning that the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) was at 214.205 in August (CPI-W was at 213.898 in July).  Here is an explanation of why there will be no change (some repeated from a post last month):

Another Year Without a Social Security COLA - It looks like 2011 will be another year without a cost-of-living adjustment (COLA) for Social Security recipients. Why? Because consumer prices haven’t yet returned to the peak they reached in the third quarter of 2008, when the 2009 COLA was set.Beneficiaries received a healthy 5.8% boost in their payments in 2009, which made sense after the sharp run-up in energy prices in 2008. But then energy prices collapsed. The inflation rate used to calculate the COLA was negative from 2008 to 2009. The cold logic of cost-of-living adjustments would thus have implied a reduction in Social Security benefits in 2010. For understandable reasons, however, Social Security doesn’t allow negative COLAs. So benefits remained flat, and 2010 went into the record books as the year without a COLA.The same thing will happen in 2011. Consumer prices have increased since the third quarter of 2009, but as of the August CPI report, they still fell far short of the peak reached back in 2008. Barring a miraculous surge in inflation in September, that means that 2011 will be the second year without a COLA.

Jobless are straining Social Security's disability benefits program - The number of former workers seeking Social Security disability benefits has spiked with the nation's economic problems, heightening concern that the jobless are expanding the program beyond its intended purpose of aiding the disabled.  Applications to the program soared by 21 percent, to 2.8 million, from 2008 to 2009, as the economy was seriously faltering.  The growth is the sharpest in the 54-year history of the program. It threatens the program's fiscal stability and adds to an administrative backlog that is slowing the flow of benefits to those who need them most. Moreover, about 8 million workers were receiving disability benefits in June, an increase of 12.6 percent since the recession began in 2007, according to Social Security Administration statistics.

Social Security's disability insurance is expensive, destructive, and out of control. Throughout the year, economists and both houses of Congress have debated whether to extend unemployment insurance for another 13 weeks, or 26 weeks, worried that the payments would bloat the deficit or, worse, actually cause people to stay jobless. All along, however, millions of Americans without work have quietly continued to cash a federal check every month. They don't show up in the unemployment statistics—not even as "discouraged" workers—and their benefits won't stop after 99 weeks.  They are the recipients of Social Security's Disability Insurance, a somewhat obscure federal program that nonetheless eats up nearly \$200 billion a year. SSDI began in 1956 and was intended to provide benefits for people between 50 and 64 who'd been in the workforce but had developed "any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration."  As Congress serially widened the eligibility criteria—by age, by type and duration of impairment—that number began to grow. Enrollment hit 1 million adults in 1966; by the end of 1977 it was 2.8 million; and today it's more than 8 million ex-workers, plus another million adult disabled children and disabled widows and widowers.

Gingrich Endorses Social Security Privatization Part of Ryan’s Roadmap -Rep. Paul Ryan (R-WI), ranking member of the Budget Committee and incoming chairman if Republicans capture the House in November, has a budget plan called “America’s Roadmap,” which slashes Medicare and Social Security in an ostensible effort to end the budget deficit. While right-wing pundits have been quick to applaud the plan, elected Republicans and those hoping to be elected are much more hesitant to endorse deep cuts to popular social programs. Many have shied away from endorsing the plan. One such politician was former Speaker of the House Newt Gingrich (R), who dubbed Rep. Ryan “extraordinarily formidable” but had not explicitly endorsed his plan. But yesterday at an event in Iowa that was widely seen as laying the groundwork for a 2012 presidential run, Gingrich explicitly endorsed Ryan’s plans for Social Security, while voicing disapproval for the taxes contained in the roadmap

Aging Population, Spending On Health Costs Boost Debt - It's not difficult to find someone getting a boost from the federal government. They might be sitting across from you at breakfast. Almost half the country lived in households in which at least one person benefited from a federal social welfare or social insurance program in 2008. Some were helped by programs such as food stamps, for which demand increases when the economy sinks. But the Census Bureau said the programs benefiting the most households were Social Security and Medicare, the retirement and health programs for the elderly. Those programs, along with Medicaid, have grown in 40 years from 19 percent of the budget to 39 percent in 2009, more than doubling their share. Costs are going to keep increasing as more baby boomers retire and health care costs continue to increase. Those who maintain the nation's fiscal imbalance shouldn't result in higher taxes say lawmakers should target the part of the budget that's ballooning.

The Census, Uninsurance, And Health Reform - Today’s new 2009 census numbers quantify the consequences of a downturn economy and eroding health care system. The cycle goes something like this: job loss leads to loss of employer-based coverage leads to enrollment in a public plan, an individual policy, or uninsurance. The public health infrastructure isn’t funded well enough to catch all those who need insurance and the existing individual health care market is too expensive and unregulated to offer insurance to anyone who actually needs it. Consequently, millions join the ranks of the uninsured. In 2009, “the number of people without health insurance coverage rose from 46.3 million in 2008 to 50.7 million in 2009, while the percentage increased from 15.4 percent to 16.7 percent over the same period.” And as a growing number lost coverage, they turned to existing public programs:

Decline in employer-sponsored health coverage accelerated three times as fast in 2009 -  According to a report released today by the U.S. Census Bureau, the number of uninsured Americans under age 65 rose from 45.7 million in 2008 to 50.0 million in 2009. The overall rates for the entire population reached 50.7 million in 2009. While this country was already in a recession in 2008, the economy sharply deteriorated in 2009.  The unemployment rate increased from 5.8% to 9.3% between 2008 and 2009, the largest one-year increase on record.  As most Americans, particularly those under 65 years old, rely on health insurance through the workplace, it is no surprise that employer-sponsored health insurance fell precipitously from 2008 to 2009.  Employment-based coverage for the under 65 continued to erode for the ninth year in a row, falling 3.0 percentage points from 61.9% in 2008 to 58.9% in 2009.

System changes in healthcare - One of the largest and most interesting processes of change going on in the United States today is the rapid redesign and adjustment of the American healthcare system. A key driver is this spring's passage of the Patient Protection and Accountable Care Act (PPACA), but the more fundamental causes are the twin crises we face for access and rising cost for health coverage. Somehow the country needs to find a way of including the whole population within the insured population, and we need to find ways of reducing the rate of growth of aggregate and per capita healthcare expenditures. PPACA is aimed at addressing both crises, and they are urgent.

Consider The Curve Bent - Krugman - Wow — a lot of misinformation about the new estimates on health care costs. Read Ezra Klein, who concludes: So, the nickel version: Spending goes up in 2014 because we’re covering 30 million new people and then down after that because we’re controlling costs in the system. So yes, there’s a bump when 35 million people who would otherwise have been uninsured get coverage; but growth is slower after that, which will mean big savings in the long run. It really doesn’t matter at all whether your estimate says that overall health spending will be slightly higher or slightly lower in 2019 as a result of the law; aside from the fact that covering all those people with at most a minimal rise in costs is itself a policy triumph, it’s spending in the decades that follow that matters for cost. And let’s be clear: you could not have gotten the cost savings without the move to near-universal coverage, for both political and technical reasons. This thing really is a package — a package that, with all its flaws, both makes our society more decent and improves our long-run budget outlook.

Jimmy Carter: Ted Kennedy killed health reform - Ted Kennedy, the iconic senator from Massachusetts who passed away last year, was responsible for the failure of then-President Jimmy Carter's health reform plan in the 1970s, the result of a personal rivalry between the two politicians, Carter says. In an interview with 60 Minutes, to be broadcast Sunday and previewed at the CBS News site, Carter asserted that Kennedy was determined to see Carter fail as president, apparently in an effort to boost his own chances of taking the White House in 1980. "The fact is that we would have had comprehensive health care now, had it not been for Ted Kennedy's deliberately blocking the legislation that I proposed," he told CBS' Leslie Stahl. "It was his fault. Ted Kennedy killed the bill." Carter also lamented his successor Ronald Reagan's partial dismantling of his energy policy, saying if the policy had stayed in place, the US would be less dependent on foreign oil today.

Editorial - Are Newer Medical Treatments Better? Not Always - The Congressional Budget Office estimates that an astonishing half or more of the increased spending for health care in recent decades is due to technological, surgical and clinical advances.   But an expensive new drug is not always better than an older, cheaper drug, and sometimes a new technology or treatment that is highly effective for some patients is unnecessary or even dangerous for others.  The system almost seems designed to keep driving up costs.  To win approval, drugs and many devices must undergo tests for safety and effectiveness. For drugs, there is usually no comparison to products already approved. For both, there is no consideration of cost. Once drugs or devices are approved to treat one class of patients or illnesses, doctors can use them for virtually any ailment they please. Manufacturers eagerly promote their most expensive products to doctors and patients.  Patients have few ways to judge what is best for improving health or saving money. They must rely on doctors who may have insufficient information — or economic incentives to pick the costliest treatment.

Insurance Coverage in the United State: 2009,” which was widely covered in the press, included a table showing an “estimate” of the number of US households in the US as of March 2010 --- 117,538,000, up just 357,000 from March 2009. The report also shows historical data on this estimated number of households, which is derived from a special Current Population Survey. The table with that data has tons of footnotes, which note that there have been multiple revisions in this so-called “time series.” This ‘household estimate,” which is not subject to rigorous population or housing unit “controls,” is one of at least five household series one can “pick up” from various Census sources. And, of course, they are all unbelievably inconsistent, both in terms of levels and changes. Below are various household (“occupied housing units") estimates from different reports/sources. Note that the Housing Vacancy Survey has quarterly average “estimates,” but I am just showing its annual data. I am also only showing data back to 2000.

Aetna gets OK to hike rates on individual health policies in California - More than 1 million Californians will see their health insurance premiums rise Oct. 1 now that regulators have wrapped up their review of a plan by Aetna Inc.to raise rates an average of 19% for 65,000 individual policyholders. Aetna was cleared Friday by the state Department of Insurance to proceed with its new plan. It was the last of four major insurers to be reviewed by the department, which has OKd double-digit rate increases by Anthem Blue Cross, Blue Shield of California and Health Net Inc. in the last month. Regulators stepped up their scrutiny of the insurers after Anthem announced plans earlier this year to raise premiums by as much as 39%, triggering a backlash among policyholders, lawmakers and the White House. The insurer canceled the hikes and sought smaller increases that were allowed.

HEALTH CARE thoughts: Obama Administration Gets Tough With Insurers - DHHS Secretary Sebelius has lambasted the private health insurance industry in a letter to the industry's trade association (I'm not a big friend of health insurance companies, FWIW). From the letter:"There will be zero tolerance for this type of misinformation and unjustified rate increases."  The issue is premium increases and the cause of the premium increases. PPACA (Obamacare) requires more lives on some policies and more coverage broadly, so no wonder premiums will be going up in the short and near term (some of us predicted this). There is little likelihood of bending the cost curve for at least five years, as the various and numerous programs in Obamacare phase in and ramp up. And then, who knows. Understanding that politicians must by nature take care of politics, this seems a little shrill and over the top.Having spent the summer going through the deep dark details of PPACA, I'm working on a theory or two on how this will play out.

Is The High Cost of US Medical Care Due To An Oversupply of Services? - The notion that excessive supply can result in overly high costs no doubt contradicts most reader’s understanding of how markets work, but the market for medical services in the US bears no resemblance to an efficient market, in which buyers and sellers possess an equally good understanding of the merits of the goods and services being offered. Patients rarely reject a doctor’s recommendation for a course of action; the vast majority accept whatever tests or procedures he recommends. At most, patients might get a second opinion for a high risk or high cost procedure. Thus medical services is not a well functioning market; most customers are price insensitive, even accepting charges that will put them into bankruptcy, and their inability to evaluate service quality makes them the perfect stuffees (seriously: are you in any position to evaluate your doctor’s competence? Unless you are a medical professional yourself, you rely only on crude proxies, namely his bedside manner and how he describes his decision process in recommending a course of investigation and treatment).

The Real Health Care Problem: Spending Other People's Money; From 50% to 90% in 60 Years - The graph above (Census data here) highlights the #1 reason why medical costs have risen, and will continue to rise: Out-of-pocket payments for medical costs have been falling for the last fifty years, and are projected to continue to decline, and will  fall below 10% by 2017.  By way of comparison, out-of-pocket payments accounted for almost half (46.78%) of total medical costs in 1960.  When we're spending less than 10 percent of our own money on health care costs, one outcome is almost 100% inevitable: health care costs will continue to rise, and there's nothing about Obamacare that will change that.

Effects of Using Generic Drugs on Medicare’s Prescription Drug Spending - CBO Director's Blog Four years ago, Medicare began providing outpatient prescription drug benefits for senior citizens and people with disabilities. Known as Part D, the program uses private plans to provide coverage for prescription drugs to enrollees. Those plans negotiate payment rates with pharmacies and rebates from drug manufacturers while competing for enrollees. Such competition provides incentives for plans to control their costs; one important way in which plans seek to control costs is by encouraging the use of generic drugs. A CBO study released today assesses how successful plans have been in encouraging the use of generic drugs and the potential for savings from the additional use of such drugs.

Pharmaceutical Industry Funded Study Shows that Unauthorized Drug Copies Save Tens of Millions - This is the clear implication of a new industry funded study, even if USA Today essentially ran an ad for the pharmaceutical industry by headlining its piece: "growing problem of fake drugs endangers consumers' health." The article highlighted the fact that unauthorized copies of drugs sometimes do not meet the same standards as the official version, but also notes that: "counterfeiters are now able to fake drugs so well that even experts find it hard to distinguish the copies from the real deal." This implies that often the unauthorized versions will be every bit as good as the brand drugs. According to the article, the study finds that the unauthorized drug market is between \$75 billion and \$200 billion a year, but adds: "the market is likely much bigger because many cases are hard to detect." If we assume an average prescription price of \$2 then this implies that the unauthorized market involves sales of 37 billion to 100 billion prescriptions year. If 1 in 1000 of these prescriptions save a life, then unauthorized drugs save between 37 million and 100 people a year.

Pharmaceutical Lemons - Maxine Udall - Yves Smith sends us to Howard Brody who describes a paper by his colleague,  Donald Light, a medical sociologist. I only wish that Light had looked a bit farther afield than the recent Toyota accelerator problem before asserting that "The institutional practices differ profoundly from car manufacturers working tirelessly to produce safe cars but inadvertently discovering a serious problem." Specifically, I wish he had considered the 1970's Ford Pinto case. It is a classic example of the abuse of cost benefit analysis unfettered by ethical considerations since the "fix" for the problem of fiery death/injury from rear-end collisions was estimated at only \$11/car. I concede that car safety is probably different from drugs safety, but I don't share Light's opinion that the "institutional practices" of the two industries differ that much. And that's the problem. Our legal, moral, and governmental institutions aren't really designed to deal with the causal and scientific uncertainty that characterizes the drugs industry.

Dr. Frances Kelsey and Another Pharma "Lemon" -  Maxine Udall - The NY Times runs this article which is related to my last post about pharmaceutical research and the "lemon-like" market in which pharmaceuticals trade. It is also related to an earlier post in which I described how elixir of sulfinilamide helped lead to tougher FDA rules.  Dr. Frances Kelsey played an important role in the latter episode and in the thalidomide episode that left many European children with serious birth defects (but not US children thanks to Dr. Kelsey). Please read the entire article and meditate as I often do on how often large and largely unfettered private interests pose a much greater threat to we the people than a government that is constituted to be of, by, and for the people.

Most common ‘moderate’ activity in US? Preparing a meal - Those are two key findings of a study published Wednesday in the American Journal of Preventive Medicine. For the study, researchers from Pennington Biomedical Research Center in Louisiana analyzed data collected between 2003 and 2008 from nearly 80,000 respondents for a nationwide survey in which Americans were asked what activities they did in the preceding 24 hours.Only 5.07 percent of Americans reported doing any vigorous-intensity activity like running, while at the other end of the scale, more than 95 percent said they had engaged in the highly sedentary activity of eating and drinking.The next most common activity was another sedentary one -- watching television or a movie, which eight in 10 Americans did. The "most frequently reported moderate activities were food and drink preparation (25.7 percent), followed by lawn, garden, and houseplant care (10.6 percent)," the study said.

HFCS Rebranding As "Corn Sugar" - The Consumerist - Much-maligned high fructose corn syrup is getting a makeover. The Corn Refiner's Association is vying to get the stuff officially renamed as "corn sugar." The process will take years, but the propaganda has already begun. The ads feature a parent wandering through a field of corn. They talk to the camera about how they're concerned about what their children eat and were confused by the information out there about HFCS. So they consulted info by "medical and nutrition experts" and discovered that "Whether it's corn sugar or cane sugar, your body can't tell the difference. Sugar is sugar."

U.S. Meat Farmers Brace for Limits on Antibiotics - Dispensing antibiotics to healthy animals is routine on the large, concentrated farms that now dominate American agriculture. But the practice is increasingly condemned by medical experts who say it contributes to a growing scourge of modern medicine: the emergence of antibiotic-resistant bacteria, including dangerous E. coli strains that account for millions of bladder infections each year, as well as resistant types of salmonella and other microbes.Now, after decades of debate, the Food and Drug Administration appears poised to issue its strongest guidelines on animal antibiotics yet, intended to reduce what it calls a clear risk to human health. They would end farm uses of the drugs simply to promote faster animal growth and call for tighter oversight by veterinarians.

كونا : By 2025 one in two people will not has fresh water: Swiss experts -Swiss Agency for Development and Cooperation (SDC) said on Thursday that by 2025, one in two people will suffer from a lack of fresh water. "Population growth, uncontrolled urbanisation, migration, and climate change will place greater demands on the planet's water resources, making water security one of the most pressing challenges of the 21st century" said the SDC experts. "Today, one billion people have no access to drinking water, 2.6 billion are deprived of basic sanitation. Every day 5,000 children die as a direct result of a lack of clean water and adequate hygiene facilities," According to the available Data from the UN organisations and NGO's concerned with this problem. "Society in general also suffers from the knock-on effects of this situation, which further perpetuate the vicious circle of poverty. Improved water access will lead to a better quality of life and better health, mitigate the risk of conflict, facilitate the access of women to education, raise disposable income, reduce the time households spend fetching water, and shore up food security," assured the Swiss experts. "Water is key to ending poverty",

Food And Soil - "Ninety percent of the world's food is derived from just 15 plant and 8 animal species." 2 "Biodiversity - and especially the maintenance of wild relatives of domesticated species - is essential to sustainable agriculture."1 75% of the genetic diversity of crop plants has been lost in the past century. 1 "In 1960, when the world population numbered only 3 billion, approximately 0.5 hectare of cropland per capita was available, the minimum area considered essential for the production of a diverse, healthy, nutritious diet of plant and animal products like that enjoyed widely in the United States and Europe."3 Increases in grain production brought about by irrigation and synthetic fertilizer-pesticide inputs have peaked and begun declining. As consumption surpasses production, the world's stocks of stored grain have been falling relative to each year's use. When supply can no longer meet demand, free market price competition may starve the poor.

Spot the made-up world hunger numbers - Leading newspapers today report on FAO’s new world hunger numbers (see FT and NYT). The FAO reports that the number of hungry people fell from 1.02 billion in 2008 to 925 million in 2009. That’s very good news, unless it didn’t happen. Inquiring minds want to know:

• (1) how did the FAO come up with a number for 2009, when the World Development Indicators (WDI) of the World Bank are only reporting malnutrition numbers up through 2008?
• (2) how did the the FAO even come up with a number for 2008, when the current WDI reports malnutriton indicators  for only 4 countries?
• (3) the FAO says that two-thirds of the hungry are concentrated in seven countries: (in order of number, with WDI latest year of data between 2005 and 2008 reported in parentheses): China (none), India (2006), the Democratic Republic of Congo (2007), Bangladesh (2007), Indonesia (2007), Ethiopia (2005), and Pakistan (none). So how did they arrive at numbers for these countries for both 2008 and 2009?
• (4)  is there any possibility that political pressure surrounding the hunger Millennium Development Goal (MDG) led to the creation of numbers based on the alternative methodology known as “wild guesses”?

The Backlash Begins Against The World Landgrab - Last week's long-delayed report by the World Bank suggests that purchases in developing countries rose to 45m hectares in 2009, a ten-fold jump from levels of the last decade. Two thirds have been in Africa, where institutions offer weak defence.  As is by now well-known, sovereign wealth funds from the Mid-East, as well as state-entities from China, the Pacific Rim, and even India are trying to lock up chunks of the world's future food supply. Western agribusiness is trying to beat them to it. Western funds - many listed on London's AIM exchange - are in turn trying to beat them. The NGO GRAIN, and farmlandgrab.com, have both documented the stampede in detail. Hedge funds that struck rich 'shorting' US sub-prime have rotated into the next great play of our era: 'long’ soil. "Productive agricultural land with water on site, will be very valuable in the future. And I've put a good amount of money into that," said Michael Burry, star of 'The Big Short'.

New Perspectives on the EROI of Corn Ethanol - Over the past decade there has been considerable debate on corn ethanol, most focused on whether it is a net energy yielder. The argument is generally that “if the Energy Return on Investment (EROI) of corn ethanol is positive then it should be pursued. On one side are Pimentel (2003) and Patzek (2004) who claim that corn ethanol has an EROI below one energy unit returned per energy unit invested, and on the other side are a number of studies claiming that the EROI is positive, reported variously as between 1.08 and 1.45 (Wang et al. 1997; Wang 2001; Shapouri et al. 2002; Graboski 2004; Shapouri 2004; Oliveira et al. 2005; Farrell et al. 2006; Wang et al. 2007). Even with numerous publications on this issue, disagreement remains as to whether corn ethanol is a net energy yielder.

How Much Corn Ethanol is the U.S. Exporting and Why? - Kalpa - The latest numbers on U.S. exports of corn ethanol and DDGS's (distillers dried grains with solubles) have been reported by the Renewable Fuels Association, a lobbying group for the ethanol industry. U.S. ethanol production and demand reached an all time high in June of 2010. The total U.S. corn ethanol production for 2010 is expected to be 12.87 billion gallons.  The ethanol exports this year total 182.7 million gallons so far, on pace to easily break the ethanol export record set in 1995. The latest numbers from the USDA show that 36% of corn produced in the U.S. in 2010/2011 will go to produce ethanol. Back in May, I did a rant on the subject of the U.S. exporting government-subsidized corn ethanol. This is an Agri-business and politically driven model which makes no sense. This whole biofuel story might even be compared to grain destroying programs which were used to increase the price of agricultural commodities during the Great Depression. We get much of our liquid transportation fuel supply from Canadian tar sands. So, why is Canada our largest importer of ethanol, importing 42% of our July exports?

A Republican Takeover Of Congress Would Threaten The EPA and the Planet… It's been a good year for climate skeptics. Not, mind you, because they've been vindicated at all on the merits. Quite the opposite: 2010 is shaping up to be the hottest year on record, Arctic sea ice continues to thin out, heat waves have been torching Russia, and nearly one-fifth of Pakistan has been submerged underwater. Consider: During the sweatiest U.S. summer in recorded history, and in the midst of a major oil catastrophe in the Gulf, the Senate didn't even bother to take a vote on a bill to limit carbon emissions. Skeptics managed to inflate the Climategate non-scandal into a breathless media event and launched a high-profile attack on the IPCC over—what was it again?—a minor misstatement about Himalayan glaciers. Republicans and coal-state Democrats are now trying to chip away at the EPA's authority to regulate greenhouse gases, and in California, coal and gas companies are making a major push to repeal the state's sweeping climate law, AB32. And here's the punch line. Next year, opponents of doing anything about global warming are likely to have a stronger hand still. The GOP will likely take the House and make substantial gains in the Senate, and these aren't green, cuddly Republicans.

Senate approps Dems prepare to kill EPA climate rules - “Facing a likely test vote to delay Environmental Protection Agency greenhouse gas regulations, Senate Democrats Tuesday abruptly canceled plans to draft the agency’s 2011 appropriations measure this week.” This Thursday, the Senate Appropriations Committee may vote to block the Obama administration from moving forward with global warming pollution rules.  Brad Johnson has the story. While the Senate dithered and let Republicans kill climate legislation passed last year by the House of Representatives, the U.S. Environmental Protection Agency has begun rolling out rules to limit greenhouse gas pollution in the coming years. Sen. Lisa Murkowski’s (R-AK) attempt to kill the finding that greenhouse gases are pollution died by a narrow vote of 47-53, but Sen. Jay Rockefeller (D-WV) is promoting a two-year moratorium on EPA climate action. Speaking to E&E News, climate peacocks Sen. Byron Dorgan (D-ND) and Sen. Ben Nelson (D-NE) have announced they would potentially support killing EPA rules in the agency’s appropriations bill, to be marked up on Thursday:

Scary People, Scary Times -  In that order. The scary people have already started coming out of the woodwork. The times lately have been mostly uncertain, but soon they'll turn scary, too, as it becomes clearer that the people running things in the USA have no idea what's going on or what they're going to do about it -- and what's going on is an involuntary permanent re-set of the terms of everyday life, from a wet-dream robotic "consumer" techtopia to something more like the first chapter of Tobacco Road, with a family of half-wits reduced by hard times to fighting over a sack of turnips in a roadside ditch. That's the story-arc anyway, and lots of people won't like it. But the theme of dwindling resources is not a pretty one. The most striking feature of the current scene is the absence of a coherent vision of our multiple related predicaments and how they add up to a valid picture of reality. To be precise, I mean our predicaments of 1.) energy resources, 2.) vanishing capital, and 3.) ecocide. This inability to decode the clear and present dangers to civilized life is a failure of leadership and authority without precedent in the American story.

NASA reports hottest January to August on record - August tied for hottest in UAH satellite record* -Last month, NASA reported it was the hottest January-July on record, along with a terrific analysis, “July 2010 — What Global Warming Looks Like,” which noted that 2010 is “likely” to be warmest year on record. This month continues the trend of 2010 outpacing previous years, according to NASA. It seems all but certain we will outpace 1998, which currently ties for fourth hottest year in the NASA dataset (though it is technically described by NASA folks as tied for the second hottest year with 2005 and 2007). Outpacing 2005, the hottest year on record, will be closer.  In NASA’s surface-based dataset, we are unlikely to set the record monthly temperatures for the rest of this year; last month wasn’t close to the hottest August for NASA.  We  have entered a moderate La Niña, which NOAA says is “expected to last at least through the Northern Hemisphere winter 2010-11.”

NOAA reports 2010 hottest year on record so far - Summer 2010 the second warmest on record; hottest August in RSS satellite record* - Following fast on the heels of NASA reporting the hottest January to August on record, NOAA’s National Climatic Data Center  has released its State of the Climate: Global Analysis for August.  The first eight months of 2010 tied the same period in 1998 for the warmest combined land and ocean surface temperature on record worldwide. Meanwhile, the June–August summer was the second warmest on record globally after 1998, and last month was the third warmest August on record. Separately, last month’s global average land surface temperature was the second warmest on record for August, while the global ocean surface temperature tied with 1997 as the sixth warmest for August…. For January–August 2010, the global combined land and ocean surface temperature of 58.5 F (14.7 C) tied with 1998 as the warmest January–August period on record. This value is 1.21 F (0.67 C) above the 20th century average.

Scientists investigate massive walrus haul-out in Alaska - Scientists in the Arctic are reporting a rare mass migration of thousands of walrus from the ice floes to dry land along Alaska's coast. Researchers from the US Geological Survey (USGS), who have been tracking walrus movements using satellite radio tags, say 10,000 to 20,000 of the animals, mainly mothers and calves, are now congregating in tightly packed herds on the Alaskan side of the Chukchi Sea, in the first such exodus of its kind. "It's something that we have never seen before in this area," said Geoff York, of the WWF's global Arctic programme. "As the ice decreases, the walrus are abandoning it earlier and earlier. They are having to swim ashore, or to linger on less suitable drift ice for long periods of time." The flight of the walrus, first reported by the Alaska Dispatch, has reinforced warnings from scientists that the lumbering animal may be headed for extinction because of climate change. The rare onshore mass sightings have raised fears of a grisly repeat of last summer when some 130 of the beasts, mainly calves, were trampled to death as the herd foraged for food.

Canada's muskoxen down 80% due to starvation caused by climate change - The Arctic is warming at a rate almost twice the global average, triggering mass starvation of wildlife and a doubling of coastal erosion in some areas, a new report says. An estimated 20,000 muskoxen starved to death in one year in northern Greenland and Canada as a result of a 50% increase in ''rain-on-snow events," according to a study by the Washington-based Centre for Biological Diversity and Care for the Wild International. Because of warming temperatures, snowfalls are replaced by freezing rains that fall on snow, creating a hard ice crust that prevents the muskoxen breaking through to forage on moss and lichen below the snow. Canada has had an 80% decline in muskoxen in its high Arctic regions as a result of starvation.

Sharp drop in oldest, thickest Arctic sea ice. 2010 melt season ends, likely setting the record for lowest volume - Last week, National Snow and Ice Data Center (NSIDC) director Mark Serreze said, “Every bit of evidence we have says the ice is thinning.”  Monday, NSIDC scientist Julienne Stroeve sent me this figure from a forthcoming article using data provided by J. Maslanik and C. Fowler (click to enlarge):This is the end-of-winter sea ice extent in the Arctic Basin, broken down by age.  Stroeve explains:This figure would support thinning of the icepack over the last couple of decades since older ice tends to be thicker than younger ice.  You can see in this figure how little of the really old, and thick ice there is left in the Arctic Basin.In fact, the figure shows ice 5 years or older dropping from 800,000 sq-km in 2008 to 400,000 in 2009 to only 320,000 sq-km.  Spring 2010 also saw a record low in the amount of ice 4 years or older. Now you can see that we just about hit the same Arctic sea ice area that we did in 2008:

Video: 2010 Arctic sea ice update - Our favorite climate de-crocker, Peter Sinclair has a new video on the Arctic:::Here is a discussion of Barber’s peer-reviewed research:  Where on Earth is it unusually warm? Greenland and the Arctic Ocean, which is full of rotten ice:  New study supports finding that “the amount of [multi-year] sea ice in the northern hemisphere was the lowest on record in 2009″

Stop the presses! Arctic melt ain’t over ’til it’s over.So the fat lady sang, but I guess she hit just the right note and  shattered some more ice.  Or it could be those pesky greenhouse gases, which  always seem to be causing trouble…That plot is from the Japan Aerospace Exploration Agency (click to enlarge), whose latest value for sea ice extent (yesterday) is 4,832,813 km2.  There  appears to be a real chance JAXA’s extent will drop below the 2008 level. Their data for the last ten days shows how sharp this new downturn is: You may have  noticed that  the National Snow and Ice Data Center, which called a minimum a few days ago,  doesn’t show a full double dip (yet):

Arctic Sea ice extent not ready to call its melting quits yet -- looks like we have a double dip - It is little discussed, but in general the planetary water vapor streams eventually carry the energy from hurricanes and typhoons up to the Arctic Sea. Typhoon energy goes up through the Bering Strait. Naturally, if they make landfall, a lot of energy is dissipated, but if they do not make landfall, then it usually ends up in the far North.This link shows the entry to the Bering Strait better, but nothing of note is occurring today — if you look at it regularly like I do, then you begin to get a sense of how the energy is transported.  http://weather.unisys.com/satellite/sat_wv_hem_loop-12.html If the energy were not continuously transported away from the Equator and toward the poles, the temperature at the Equator would be much higher and that of the poles much lower.However, what is really more important is the sea ice volume, not the extent.  The Polar Ice Center's graph of Arctic ice volume shows that this summer there was a precipitous decline (well out of the 2 SD lower limit) and then some recovery -- we need to watch that graph to see if there is going to be a further dip in volume this year (please click on the graph to enlarge it):

UN scientists say ozone layer depletion has stopped - The protective ozone layer in the earth’s upper atmosphere has stopped thinning and should largely be restored by mid century thanks to a ban on harmful chemicals, UN scientists said on Thursday. The “Scientific Assessment of Ozone Depletion 2010″ report said a 1987 international treaty that phased out chlorofluorocarbons (CFC) — substances used in refrigerators, aerosol sprays and some packing foams — had been successful. Ozone provides a natural protective filter against harmful ultra-violet rays from the sun, which can cause sunburn, cataracts and skin cancer as well as damage vegetation.

Masters: “It appears that this year’s record [sea surface temperatures] have significantly expanded the area over which major hurricanes can exist over the Atlantic.” - 2010 hurricane season has already set multiple records - Uber-meteorologist and former NOAA Hurricane Hunter (!) discussed some of the remarkable records the 2010 season has already set, on his WunderBlog yesterday: The Atlantic hurricane season of 2010 kicked into high gear this morning, with the landfall of Tropical Storm Karl in Mexico, and the simultaneous presence of two Category 4 hurricanes in the Atlantic, Igor and Julia. Tropical Storm Karl’s formation yesterday marked the fifth earliest date that an eleventh named storm of the season has formed. The only years more active this early in the season were 2005, 1995, 1936 and 1933. This morning’s unexpected intensification of Hurricane Julia into a Category 4 storm with 135 mph winds has set a new record–Julia is now the strongest hurricane on record so far east. When one considers that earlier this year, Hurricane Earl became the fourth strongest hurricane so far north, it appears that this year’s record SSTs [sea surface temperatures] have significantly expanded the area over which major hurricanes can exist over the Atlantic. This morning is just the second time in recorded history that two simultaneous Category 4 or stronger storms have occurred in the Atlantic.

Aral Sea 90% gone!  The multiple lakes and ponds in the upper half of this image used to be one large body of water: the Aral Sea. Once one of the largest bodies of water on the planet, it is now at less than 10% of its original size. The inland sea first divided into northern and southern sections; the latter further divided into eastern and western basins in 2003. All three of these sections are visible here. The lake in the lower left quadrant is the Sarygamysh Lake. To its east, and south of the Aral Sea, is the Amu Darya River, whose banks are flanked by irrigated green land, in contrast with the surrounding desert. As the Aral Sea shrinks, the nearby lands experience more and more desertification.

In Defense of Markets - Cap-and-trade has been vilified as a national energy tax, an elaborate Ponzi scheme, and a giveaway to corporate polluters.  The fact that none of these attacks are factually correct has not seemed to reduce their political effectiveness.  This is one element of the poisonous atmosphere which has come to dominate so much of national political discourse, at least in this election year. When Senate leaders decided they could not assemble the sixty votes necessary to cut-off debate on meaningful climate legislation, they pulled nationwide, economy-wide cap-and-trade off the table, quite possibly until after a new Congress is seated in January of 2013.  But when serious attention is again given to meaningful national climate policy, as it surely will be, consideration will inevitably include carbon-pricing, whether in the form of carbon taxes or cap-and-trade. Therefore, it is important to set the record straight, and respond to at least some of the attacks that have been made on cap-and-trade specifically and carbon-pricing broadly.  That is the fundamental purpose of an Issue Brief Dr. Janet Peace and I have written., “In Brief:  Meaningful and Cost Effective Climate Policy:  The Case for Cap and Trade,” In today’s blog post, I will highlight just a few of our findings.

NASA: Does heating from black carbon increase cooling from clouds? - Black carbon particles, commonly called soot, are dark and light-absorbing and therefore warm the climate. Soot comes from combustion of fossil and biofuels, especially burning of diesel, coal and wood. Due to its warming effects, reduction of soot could help cool climate. However, soot absorption also affects cloud distributions and the verdict on how the clouds change is unclear. Because clouds mostly cool the climate, the possibility that soot absorption could increase cloud cover needs to be considered. Turns out the net warming effect from absorbing aerosols (AAs) such as black carbon (BC) or dust is more complicated than previously realized.  That’s the conclusion of a major review of the literature on the “semi-direct effects of absorbing aerosols,” in Atmospheric Chemistry and Physics, “Black carbon absorption effects on cloud cover: Review and synthesis,” by two NASA Goddard Institute for Space Studies. And that means reducing BC may not be the silver bullet solution many thought.  The study concludes that in some climate model studies, “the cooling effect of BC due to cloud changes is strong enough to essentially cancel the warming direct effects.”

Energy Dream Team Asks for Help -US Secretary of Energy Steve Chu (right) lived up to his reputation for candour when he appealed for help to a newly-revived advisory panel at its inaugural meeting at DOE headquarters in Washington DC today. “I don’t think we have a coherent national energy policy at the moment,” he told them bluntly. Chu had triggered press speculation as to his motives in August when he resurrected the Secretary of Energy’s Advisory Board (SEAB), a scientific advisory panel that was abolished under George W. Bush. All became clear at the meeting today: he wants advice on how to ensure DOE’s various initiatives and departments can better work together, and with the private sector, to produce economic change. “The future of the United States in large part rests on how we modernize the energy economy,” he said.

WSJ: Turning Away From Coal. Utilities are increasingly looking to natural gas to generate electricity - Power companies are increasingly switching to natural gas to fuel their electricity plants, driven by low prices and forecasts of vast supplies for years to come. While the trend started in the late 1990s, the momentum is accelerating and comes at the expense of coal. Some utilities are closing coal-fired plants; others are converting them to run on gas.The switch is occurring globally and is getting a push from regulators who want to limit emissions that contribute to climate change, haze and health problems such as respiratory illness. Though efforts in Congress to pass legislation attaching a price to carbon emissions appear stalled for now, utilities still anticipate eventual carbon restrictions. The Tennessee Valley Authority, for example, recently announced a 20-year development plan that emphasizes nuclear and gas, and includes fewer coal units.

Natural Gas — The ‘American Idol’ Of Energy - General Electric Co. CEO Jeff Immelt and Microsoft Corp. co-founder Bill Gates are among the business leaders calling for the U.S. government to triple its spending on clean energy research and development to \$16 billion in the wake of the BP disaster in the Gulf of Mexico. Energy companies, though, cannot afford to wait for these green projects to come to fruition — if they ever do.   Demand for electricity, which increased by 2.4% in the 1990s, rose on average by 0.9 percent between 2000 and 2008, according to the Energy Information Administration.  Power use  likely did not change much since then as economic growth slowed because of the Great Recession while devices and appliances became more energy efficient.  That means that energy companies are more interested than ever in using the lowest cost fuel which causes the least amount of hassles.  Natural gas fits the bill.

How Dangerous is Natural Gas Reliance in Earthquake Zones? - Environmentalists have mixed feelings about natural gas. It is a fossil fuel but its greenhouse gas emissions are 50% lower than coal and this is why California's electric utilities are relatively "green". But, this horrible explosion in PGE's territory in the outskirts of San Francisco has everyone here wondering whether this is a fluke or a sign of something bigger? My concern relates to earthquake caused depreciation of the natural gas lines. My family uses natural gas to heat our home and to cook. Do small earthquakes (that occur a lot) weaken the natural gas infrastructure network? As discussed here , to avoid terrorism risk -- the utilities are not eager to share information with the public concerning whether our homes are close to major natural gas lines. This asymmetric information is not useful. In a well functioning housing market, people are alerted if they live in an earthquake zone or near toxic waste sites and the price of real estate adjusts to reflect compensation for this "bad news".

State tracks anti-Marcellus Shale drilling groups, notifies law enforcement - Big Driller may be watching you. According to recently leaked documents, the Pennsylvania Office of Homeland Security has been tracking anti-gas drilling groups and their meetings — including a public screening of the film “Gasland,” a documentary about the environmental hazards of natural gas drilling. The office has included the information in its weekly intelligence bulletins sent to law enforcement agencies.  The bulletins are also sent to gas companies drilling in the Marcellus Shale. Activists and environmental groups have responded with outrage and some alarm. “There’s something dead-fishy here. ... Something is rotten,” activist Gene Stilp said. He has called for a formal House and Senate inquiry into the activities of the Homeland Security office.

MIT researchers rethink the nuclear fuel cycle, Yucca Mountain - The Massachusetts Institute of Technology is issuing a new analysis of nuclear energy issues today, this time focusing on fuel cycles and what to do about that pesky issue of radioactive waste. The United States would do well to take a step back, reorganize and then proceed with a more open-ended technology-neutral nuclear energy policy, the report suggests, knowing that spent reactor fuel can be safely stored until a viable long-term solution is identified. (Update: the report is now available here) Building on an earlier analysis, released in 2003 and updated last year, the report starts out with a simple assessment: uranium supplies are sufficient to power the industry for much of the century without recycling or reprocessing. This holds true even with a potential expansion of nuclear power, which would be based on the same once-through fuel cycle deployed in current reactors.

SC radioactive waste program runs \$1.5B over plan - It will cost almost \$1.5 billion more than expected to empty and seal 22 underground liquid radioactive waste tanks at South Carolina's Savannah River Site, according to a federal audit released Tuesday. A December 2008 contract between the site and the U.S. Energy Department estimated costs at \$3.2 billion. But in its report, the Government Accountability Office said those initial estimates were "not accurate or comprehensive," and that the project's actual cost had risen more than \$1.4 billion, or some 44 percent, to about \$4.6 billion. "DOE's difficulties planning for and mitigating risks in the Savannah River Site's tank closure project appear to be a continuation of the department's history of difficulties in contract and project management," auditors wrote.

Fusion funding slammed in European Parliament - A proposal to fund a multi-billion-euro fusion experiment through cuts in Europe’s research budget has met with a frosty reception in the European Parliament, which must ultimately give its imprimatur to the deal. ITER is a planned giant, superconducting reactor that will squeeze hydrogen isotopes together until they fuse into helium. The process, which is analogous to reactions that power the sun, will release more energy than it produces.  But to get there, ITER will have to absorb more money than expected. The project was previously budgeted at about €5 billion (US\$6.5 billion) to build. The latest estimates put it at somewhere around €16 billion. As host of the seven-party project, Europe will have to pony up some €7.2 billion between now and 2019, over twice what it budgeted for. The budget gap is especially nasty in the 2012-2013 timeframe, when the European Commission estimates it will have to come up with €1.4 billion in extra funding. The Commission initially proposed a loan, or that member states suck it up and pay. The member states, in their European manifestation as the Council of Ministers said “Nuh-uh”.

Pipelines and Anxiety: What Next? - As anyone living in the Midwest can tell you, gasoline prices have been mighty high in recent days. Since a pipeline operated by the Canadian company Enbridge ruptured last week outside of Chicago, the second such incident concerning an Enbridge pipeline in the Midwest this summer, prices at the pump have spurted up as much as 30 cents a gallon around much of the region. In all likelihood, the pain at the gas pump will not be long-lasting. Line 6A has been patched up, the price spike is easing, and the company hopes it can be back servicing several refineries in the next couple of weeks if not sooner. But there may be a lasting political impact, especially these days, when memories of the BP spill accident in the gulf are still fresh. And then there was last week’s natural gas pipeline explosion outside San Francisco, which destroyed much of a community. That was a utility line, and thus completely different from the ruptured Enbridge pipelines connecting oil fields with refineries. But in the public’s mind, they all fit into an uneasy realization that perhaps the pipes we depend on for our energy are not safe.

Gulf Coast Residents in Financial Dire Straits, Waiting for BP Claims - For Watson and the thousands of other people who have suffered significant financial losses because of the Gulf oil spill, help isn’t coming fast enough. Watson filed a claim with the Gulf Coast Claims Facility (GCCF) on Aug. 23, the first day control of the claims process was transferred from BP to Kenneth Feinberg, an independent administrator chosen by President Obama. Now, three weeks later, Watson says she still has not been given a clear indication of when she’ll receive an emergency payment to help her pay the bills. In a series of interviews with The Washington Independent, victims of the Gulf spill say they are frustrated by slow progress at the GCCF. Their stories show the severe toll the the losses have taken on the daily lives of Gulf residents, many of whom were just beginning to recover from the country’s sharpest economic downturn since the Great Depression.

NOAA - "No Dead Zones Observed or Expected as Part of BP Deepwater Horizon Oil Spill" - From NOAA's Fishnews:  The National Oceanic and Atmospheric Administration (NOAA), the U.S. Environmental Protection Agency (EPA) and the Office of Science and Technology Policy (OSTP) released a report today that showed dissolved oxygen levels have dropped by about 20 percent from their long-term average in the Gulf of Mexico in areas where federal and independent scientists previously reported the presence of subsurface oil. Scientists from agencies involved in the report attribute the lower dissolved oxygen levels to microbes using oxygen to consume the oil from the BP Deepwater Horizon oil spill.  These dissolved oxygen levels, measured within 60 miles of the wellhead, have stabilized and are not low enough to become “dead zones.” A dead zone is an area of very low dissolved oxygen that cannot support most life. Dead zones are commonly observed in the nearshore waters of the western and northern Gulf of Mexico in summer, but not normally in the deep water layer (3,300 – 4,300 feet) where the lowered oxygen areas in this study occurred.

Oil From the BP Spill Found at Bottom of Gulf - ABC - Studies conducted by the University of Georgia and the University of South Florida caused controversy back in August when they found that almost 80 percent of the oil that leaked from BP's well is still out in the waters of the Gulf. Their report stood in stark contrast to that of the federal government, which on Aug. 4 declared that 74 percent of the oil was gone, having broken down or been cleaned up.  "A report out today by our scientists shows that the vast majority of the spilled oil has been dispersed or removed from the water," President Obama said in August.  The studies by Joye and other scientists found that what the government had reported to the public only meant that the oil still lurked, invisible in the water.  "Nobody should be surprised," Joye said. "When you apply large scale dispersants, it goes to the bottom -- it sediments out. It gets sticky."

Scientists Find Thick Layer Of Oil On Seafloor - Scientists on a research vessel in the Gulf of Mexico are finding a substantial layer of oily sediment stretching for dozens of miles in all directions. Their discovery suggests that a lot of oil from the Deepwater Horizon didn't simply evaporate or dissipate into the water — it has settled to the seafloor. The Research Vessel Oceanus sailed on Aug. 21 on a mission to figure out what happened to the more than 4 million barrels of oil that gushed into the water. Onboard, Samantha Joye, a professor in the Department of Marine Sciences at the University of Georgia, says she suddenly has a pretty good idea about where a lot of it ended up. It's showing up in samples of the seafloor, between the well site and the coast. "I've collected literally hundreds of sediment cores from the Gulf of Mexico, including around this area. And I've never seen anything like this," she said in an interview via satellite phone from the boat. Joye describes seeing layers of oily material — in some places more than 2 inches thick — covering the bottom of the seafloor.It's very clearly a fresh layer. Right below it she finds much more typical seafloor mud. And in that layer, she finds recently dead shrimp, worms and other invertebrates.

Oil spill science: A Month Searching for Oil - After 27 days at sea and 80-plus data collection stops, the Cape Hatteras pulled into Gulfport , Mississippi yesterday. Her complement of scientists from the University of Texas Marine Science Institute and the University of Georgia, Athens, broke down the on-board lab, carting instruments and equipment off the ship and into waiting U-Hauls.  Their research contributed to an aggregate picture that the National Oceanic and Atmospheric Administration (NOAA) is creating of a hydrocarbon signature southwest of the blown well. The data also indicated that waters to the southeast of the well near the Florida shelf remain relatively oil-free, and it created a preliminary picture of hydrocarbon features around the well site. The boxes and cartons carried from the ship contain water samples (right) from across hundreds of kilometers of the Gulf, ready for further testing and analysis.

Why the Gulf Oil Spill Isn't Going Away - Nearly five months after the Deepwater Horizon oil rig exploded in the Gulf of Mexico (map), causing the worst oil spill in U.S. waters, BP is set to permanently cap the damaged well as soon as this week.  But the discovery of widespread oil on the seafloor and studies of remnant undersea oil plumes suggests that the debate over the ecological impact and ultimate fate of the Gulf oil spill—which released an estimated 4.9 million barrels of crude—is just warming up. (One barrel equals 42 gallons, or 159 liters.)In early August, a high-level U.S. government official asserted that more than three-quarters of the oil from the Gulf spill was "gone"—based on preliminary National Oceanic and Atmospheric Administration (NOAA) estimates. Since then a fiery backlash has erupted from independent scientists who have been tracking and studying the spill."The oil budget NOAA came out with was just a joke, a fairy tale scenario," said Samantha Joye, a marine biogeochemist from the University of Georgia and one of the first researchers to detect and measure the deep plumes of oil. "I understand why people want it to disappear, but who in their right mind would believe that? It makes absolutely no sense."

Huge Fish Kill Reported In Plaquemines Parish Plaquemines Parish officials have asked state wildlife officials to investigate what they said is a massive fish kill at Bayou Chaland on the west side of the Mississippi River late Friday.Photographs the parish distributed of the area shows an enormous amount of dead fish floating atop the water. The fish kill was reported to the Louisiana Department of Wildlife & Fisheries and the cause has not yet been determined, the parish said. The fish were found in an area that has been impacted by the oil from the BP oil spill, the parish said.

Massive fish kill reported in Louisiana What you see above isn't a rural gravel road. It's a Louisiana waterway, its surface completely covered with dead sea life -- a mishmash of species of fish, crabs, stingray and eel. New Orleans CBS affiliate WWL-TV reports that even a whale was found dead in the area, a stretch of coastal Louisiana hit hard this summer by oil from BP's busted Gulf well. Fish kills are fairly common along the Gulf Coast, particularly during the summer in the area near the mouth of the Mississippi, the site of this kill. The area is rife with dead zones -- stretches where sudden oxygen depletion can cause widespread death. But those kills tend to be limited to a single species of fish, rather than the broad sort of die-off involved in this kill. And therein lies the concern of Gulf residents, who suspect this may be yet another side effect of the catastrophic BP oil spill.

What's Going On In The Gulf? - (videos)  BP and the government decided that millions of gallons of dispersants should be dumped into the Gulf to sink and hide the oil. They succeeded in sinking it. As ABC, CBS and NPR note, huge quantities of oil are blanketing the ocean floor, killing virtually all of the sealife which lives there. And giant new underwater plumes have been found in the water column itself. But officials don't want to hear about them. And the oil is not staying underwater.  Oil is suddenly emerging in many parts of the Gulf. Oil "patties", 1 to 3 inches across, have been discovered floating along the seawall in Alabama. 16 miles of beaches in Louisiana have been hit. And scientists say that the oil will arise and wash ashore in pulses, and will hit sensitive areas like coastal marshes. As the Christian Science Monitor notes, oil can remain hidden under sand for decades: Yet it takes only minutes of digging into the sand [at Louisiana's Grand Isle State Park] to reveal a menace that experts say permanently threatens this picturesque landscape: pools of crude oil lurking less than a foot below the surface.

Romeoville spill causes hiccup in the global oil market ...Chicago-area motorists learned when they drove to the gas pump Tuesday that, in the wake of the mighty BP oil spill, a small hiccup such as the recent one in Romeoville can trigger profound changes in the global oil market. Gasoline prices have jumped nearly 16 cents in Chicago and more than 10 cents across the Midwest since last week, a reaction to Enbridge Energy Partners temporarily shutting down a three-mile section of oil pipeline near Romeoville that ruptured six days ago. Though the cause of the burst is unknown, work crews excavating the damaged pipe on Monday found a 2-inch hole they believe is the culprit. Estimates vary wildly about how much oil was lost since the spill was discovered Thursday morning and capped Sunday night. The Illinois Environmental Protection Agency has received reports ranging from 256,000 gallons to more than 670,000 gallons, ranking it among the worst oil spills in Chicagoland in the last 20 years.

Oil Fundamentals, Price Decoupling, IEA’s Birol Says - Oil supply and demand are disconnecting from price signals amid a shift in consumption toward transportation fuels and emerging markets, according to the International Energy Agency’s chief economist.  High prices are more likely than low to spur consumers to adjust fuel usage and prompt investors to make decisions affecting supply, Fatih Birol said in a speech today at the World Energy Congress in Montreal.  “This is crucial to understanding oil markets in the years to come,” he said. “You need higher prices to slow down the oil demand growth when you compare the past couple of decades.”  Birol cited a shift in the past five years in which almost 90 percent of global crude demand growth has come from the transportation sector, including cars, trucks and jets. This contrasts with previous years when oil-based fuels were used for industry, home heating and electricity generation, he said.  “Even though the prices go up, you do not have readily available alternatives to switch” fuels for vehicles, Birol said. “In terms of electricity generation, if the oil prices go up, one would go to gas, nuclear or coal in the past. In the transportation sector, it’s fairly rigid.”

Global Oil Supplies as Reported by EIA's International Petroleum Monthly for September 2010 - My post is mainly an update to OPEC's Spare Crude Oil Capacity - Will it Disappear by the End of 2011?, based on data which the EIA reported in the past few days. I will also briefly present updates to recent developments in OECD and Non OECD oil supplies/consumption. The stacked columns shows crude oil and condensates supplies split on OPEC, Russia and ROW (Rest Of World) which also includes OECD, from January 2001 through June 2010. The development in the average monthly oil price is plotted on the left hand y-axis.  Note that world oil production has been on a plateau, from late 2004 to the present, with a small dip when prices dropped in late late 2008 to early 2009. This graph considers crude and condensate only, excluding natural gas liquids and other forms of liquid energy, such as biofuels.

Where is Oil Consumption Stagnating/Declining? - I have been tracking for several months the fact that global oil production seems to have stopped recovering, most recently analyzing the stagnation since February here.  Recall this graph: showing that, following the decline associated with the Great Recession (July 2008 to spring 2009) there was a recovery through about February of this year, after which production has been flat. This obviously raises questions about which countries are consuming less oil.  I initially looked at the EIA data (Table 1.7 of the International Petroleum Monthly), which currently has monthly data for the OECD through May (y-axis is thousands of barrels/day)This shows that since the spring there has been several million barrels/day of lost demand split between Europe and "Other OECD" - comprising Japan, Korea, Australia, Canada, New Zealand.  This is more than enough to explain the flattening of the global production curve.  Meanwhile, US demand has been flattish - neither growing much nor shrinking much.

Mexican Oil Production - Just to finish out the little series of last week, when we were looking at the "peak oil poster-children" - countries and regions famous for declining oil production.  We saw that the United States had had a minor reprieve in recent years with a price-driven uptick in drilling and production, while the North Sea had pretty much continued in rapid decline.  Above is the graph for Mexican production, which was in dramatic decline from about 2004 to mid 2009 as the famous Cantarell field started to be exhausted.  Mexico has always had a somewhat unique set of problems in managing it's oil supply, so it's not clear how much the experience would generalize elsewhere. The arrest in decline in 2009/2010 is probably due to increased production from Ku-Maloop-Zaab, which is also expected to peak and decline shortly.  There's also been a big surge in rigs working in the country, at least until this year:

An inconvenient truth about OPEC - OPEC will not be able to meet the world's energy needs. The three major organisations that forecast long-term oil demand and supply – the International Energy Agency (IEA), the Organisation of Petroleum Exporting Countries (OPEC), and the United States Energy Information Administration (EIA) – along with oil companies and consulting firms, believe that OPEC will reconcile predicted global demand and non-OPEC supply. But they are wrong: OPEC output will not meet such projections, because they are based on flawed and outdated forecasting models. In forecasts that carry forward to the 2030s, the three organisations share the view that world energy demand will increase, that developing countries will account for most of the increase, and that fossil fuel will remain dominant. They also agree that dependence on oil from OPEC members will increase as non-OPEC oil resources dwindle and become more expensive to extract. But a major flaw in modelling world oil markets makes these forecasts as unrealistic as a projection that humans will land on Mars tomorrow.

Energy Concerns Are Mounting - Executive Summary:

• Many interlocking factors have caused current economic woes.
• Most of the issues are still almost strictly economically driven; energy's role is still to come.
• World energy consumption, at current rates of growth, will double in 35 years.
• Alternative fuels cannot displace oil use, but they can be helpful in electricity production and other areas.
• We should be using our highly-concentrated energy sources to capture less-dense alternative energy sources.
• The next energy shock is closer than most people realize.
• The perception of scarcity will create scarcity.
• Now is the time for prudent preparations.

Battle Of The Think Tanks In Peak Oil Reports - Two think tanks, on different sides of the world, published peak oil reports earlier this month – generating very different levels of media and web coverage. A draft study prepared for the German military was leaked at the same time Australia’s “most influential progressive think tank” published its own findings. Needless to say, when words like leaked, military and peak oil are put into a headlines, you can guarantee a degree of interest  Both were published on September 1, but it’s only the German report that seems to have received global attention (it actually came out in German-language media the on August 31, but translation apparently took a day). It would be a pity if the Australian version is overlooked, as it provides a remarkably balanced overview of the whole peak oil debate. The German report comes from the Future Analysis department of the Bundeswehr Transformation Center, a “think tank tasked with fixing a direction for the German military,” according to the account in Der Speigel.

‘Peak Oil’ : Jimmy Carter’s Secretary of Energy sounds the alarm (Interview with Robert L. Hirsch)  James Schlesinger, President Carter’s Energy Secretary, wrote the foreword to a book written by Dr Robert Hirsch, a former US official who predicts a fall of the oil production within 5 years. Never before has a high-ranking political figure like Schlesinger gave his support to such a prognosis. The book will be published in the US on October the 1st. Here is an exclusive interview with its author.What happened after you published your 2005 report on ‘peak oil’ for the US Department of Energy (DoE) ? The people that I was dealing with said : « No more work on peak oil, no more talk about it. »

Peak Everything: An Interactive Look At How Much Of Everything Is Left - Scientific American has done a great summary of peak commodity levels as well as depletion projections for some of the most critical resources in the world including oil, gold, silver copper, not to mention renewable water, as well as estimating general food prices over the next half century. Generally speaking, regardless of whether one believes in peak oil or not, the facts are that stores of natural resources are disappearing at an increasingly alarming pace. And instead of the world's (formerly) richest country sponsoring R&D and basic science to find alternatives, the US government continues to focus on funding a lost Keynesian cause, debasing the dollar and perpetuating a system that will do nothing to resolve any of these ever more pressing concerns. Furthermore, as by 2020, the US will have around \$23 trillion in debt (per CBO estimates), the government will be far too focused on using anywhere between 50-100% of tax revenues to cover just interest expense, than funding science and research.

Economic SuperCycles - It seems plausible that certain forces—new technologies or discoveries, demography, changes in climate—will have an effect over an extended period. But the idea that these cycles are preordained to run for a set number of years or months is much more difficult to accept. It is an odd kind of historical determinism, in which individuals are all just extras in a massive film production, doomed to stand on the sidelines as the script plays out. The recent rebound in global food prices has revived talk of a “commodity supercycle” in which raw-materials prices will be high for a prolonged period. Low prices in the 1980s and 1990s led to a lack of investment and the abandonment of marginal sites. Eventually this caused a shortage and rising prices. Such prices will eventually encourage greater production and efforts to find new sources of supply. This cycle will surely be variable in length: you would expect agriculture to adjust more quickly than mining.

The Theory Of Exponentials (39pp pdf) us “Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist.”

China overtake US in energy consumption -  The bulk of China’s energy demand comes from industry and infrastructure, but individual consumption is also rising, albeit from a low base.  The worrying aspect of this is that it will have to consume a lot more energy to provide its 1.3bn citizens with a lifestyle comparable to those in the US or Europe. Last year China sold more cars than in the US. “There are contradictory attitudes about China’s rise in international society. On one hand, people want China to boost the global economy. On the other, they hope China will not emit too much greenhouse gas. Decision-makers here have a clear idea that they want to pioneer a new path away from the current dangerous model of development. But it is unprecedented in human history for a nation to deal with this challenge, while coping with a huge population and relatively little land and resources.” The Climate Group. The graphic below comes from the Guardian Newspaper.

China’s Rise Complicates Goal of Using Less Energy - Despite huge investment in new technologies, China is finding it difficult to make its economy more energy-efficient, a senior official said Thursday. The acknowledgment of difficulties by Zhang Laiwu, deputy minister for science and technology, comes as China has become the world’s largest auto market and is spending heavily on high-speed rail and other infrastructure projects that require a lot of steel and cement, which are energy-intensive to make. A top Chinese auto executive predicted Thursday at a conference in Chengdu that annual auto sales in China would reach 40 million vehicles by 2020, more than twice the peak of the American market before the recent economic downturn. That could add to China’s energy-efficiency challenges, as more people drive cars rather than use mass transit.

China and Russia Drive Mineral-Rich Mongolia To Join The Mining Elite - China's imports surged in August, up no less than 32pc on the same month last year. When I heard this news last week, via my mobile-phone, I was standing on a hilltop in Mongolia, watching as massive hydraulic excavators worked what is said to be the world's largest surface-mine coal seam. Mongolia is in the early stages of an unprecedented boom. The economy of this former Soviet satellite is a mere \$5bn (£3.2bn) – less than Jersey. In the next decade, though, Mongolia's GDP could very easily triple. That's because this vast central Asian state is the scene of an astonishing resources "land grab". Beneath Mongolia's surface – from its mountainous north to the Gobi desert in the south – lies untold mineral wealth. The country's reserves of coal, copper, gold and uranium have lately become the talk of the world's mining industry.

Russia Debates Its Future -The first fortnight in September saw successive meetings of two major Russian political groups, the Valdai Discussion Club and the Global Policy Forum. The first was on a boat and ended with dinner with Prime Minister Vladimir Putin at Sochi on the Black Sea. The second, in Yaroslavl, culminated in a symposium with President Dmitri Medvedev. Scholars, think-tankers, and journalists (both Russian and foreign) joined political and business leaders to discuss Russia’s future. Three things made these events unusual in a typically Russian way. The first was the intense media interest. Indeed, even the most camera-shy academic can suddenly find himself a TV star in Russia. Second was the willingness of both Putin and Medvedev to engage publicly with experts on the experts’ own intellectual turf. The only recent Western political leader I can think of who had the confidence to do this was Bill Clinton.

Dear Russia: You’re Doing It Wrong, Sin Taxes Edition…In the U.S., you pay sin taxes. In Russia, sin taxes pay you…hmmmmm, that doesn’t work at all. Anyway… In general, there are a number of reasons that a government might want to place a tax on a particular good or service. One of the main reasons is, not surprisingly, to collect revenue. Another reason is to “internalize” negative externalities that the production and consumption of some goods and services impose on society. In a lot of ways, these two versions of a tax look almost exactly the same. In terms of the desired effect of the tax on market behavior, however, the two types of taxes are very different.

Union Accuses China of Illegal Clean Energy Subsidies - A broad trade case filed on Thursday by an American labor union, accusing China of unfairly subsidizing its clean energy industry, pressed a hot-button jobs issue in the United States during a Congressional election season.  But even if the Obama administration agrees to pursue the case, it could prove hard to resolve, as both countries consider their industries crucial to energy security and future economic growth.  The filing, by the 850,000-member United Steelworkers union, accuses China of violating the World Trade Organization’s free-trade rules by subsidizing exports of clean energy equipment like solar panels and wind turbines. Through its policies, fair or otherwise, China has helped turn its makers of that equipment into the global leaders, while manufacturers in the United States and Europe have struggled financially, cut jobs and in some cases moved operations to China.

China Is Set to Lose 2% of GDP Cleaning Up Decades of Pollution -  “We are surrounded by black and smelly waterways, breathing the foul air every day and paying the price at the cost of our health,” said Li, 79, a former researcher at the Guangzhou Institute of Geography. “If we can’t breathe clean air or drink clean water, high economic growth is meaningless.”  China, the world’s worst polluter, needs to spend at least 2 percent of gross domestic product a year -- 680 billion yuan at 2009 figures -- to clean up 30 years of industrial waste, said He Ping, chairman of the Washington-based International Fund for China’s Environment. Mun Sing Ho, a senior economist at Dale W. Jorgenson Associates and a visiting scholar at Harvard University in Cambridge, Massachusetts, put the range at 2 percent to 4 percent of GDP.  Failure to spend that much -- equivalent to the annual GDP of Vietnam -- may cost the Chinese economy half as much again in blighted crops, health costs and pollution-related expenses, He said: “The cleanup can’t catch up with the speed of pollution” if spending is less.

China Explores a Frontier 2 Miles Deep - When three Chinese scientists plunged to the bottom of the South China Sea in a tiny submarine early this summer, they did more than simply plant their nation’s flag on the dark seabed.  The men, who descended more than two miles in a craft the size of a small truck, also signaled Beijing’s intention to take the lead in exploring remote and inaccessible parts of the ocean floor, which are rich in oil, minerals and other resources that the Chinese would like to mine. And many of those resources happen to lie in areas where China has clashed repeatedly with its neighbors over territorial claims.  After the flag planting, which was done in secret but recorded in a video, Beijing quickly turned the feat of technology into a show of bravado.

China is back on a growth path -  It is not that easy to track the momentum in the Chinese economy. To some extent, this is inevitable, because the economy is so vast, and in such an early stage of development. But the way the official data are presented doesn’t help much. Most of the key numbers are presented as year-on-year percentage changes, with the underlying monthly levels being extremely hard to find, or not published at all. Consequently, it is difficult to pick up recent changes in the growth of the economy.For example, the August data which have just been published show the annual growth rate in industrial production rising to 13.9 per cent from 13.4 per cent the previous month. Encouraging, you might think, but not dramatic. However, if we look at the month-on-month changes (expressed as an annual rate) - helpfully published by the Goldman Sachs research group - we see that the growth rate has risen to 14.2 per cent in August, after a succession of monthly returns in the region of 2-5 per cent. Meanwhile, retail sales growth, which never slipped very much during the summer lull in industrial output, came in at 20.8 per cent in August, which is high even by Chinese standards.

Inflation in China Is Rising at a Fast Pace - NYTimes - From street markets to corporate offices, consumers and executives alike in China are trying to cope with rising prices. The National Bureau of Statistics announced on Saturday that consumer prices in China were 3.5 percent higher compared with a year earlier, the largest increase in nearly two years.  To make matters worse, inflation over the short term also seems to be accelerating. A seasonally adjusted comparison of August prices to July prices showed that inflation was running at an annualized pace closer to 4.8 percent.  Prices are rising in China for reasons that many Americans or Europeans might envy. The economy is growing, stores are full and banks are lending lots of money, according to other statistics released by the government on Saturday. Compared with August of last year, industrial production rose 13.9 percent last month, retail sales increased 18.4 percent, bank lending climbed 18.6 percent and fixed-asset investment surged 24 percent.

What do the “good” trade numbers tell us? - In all of my meetings I think people were pretty surprised to hear about my misgivings over Chinese growth and the banking system, and shocked to hear that there is a worried and sometimes acrimonious debate taking place in China among policymakers and their advisors about the urgency of a (perhaps radical) adjustment in the growth model.  It seems to me that foreign reports about China mainly fall either into the easily-dismissible China-is-about-to-crash-and-burn camp or, more likely, into the everything-is-going-wonderfully-well camp.  Most people I spoke to assumed that China had emerged from the crisis largely unscathed and was about to embark on a new growth surge that would pull the world behind it.  There was a hopeful sense that for all the mess in Japan, Europe and the US, there might be a ray of economic light emanating from China.

China shifts from emphasis on low-cost factories— Companies here in China’s industrial heartland are toiling to reinvent their businesses, fearing that the low-cost manufacturing that helped propel the nation’s economic ascent is fast becoming obsolete.  The TAL Group, which operates an immense garment-making plant in this coastal boom town, is moving beyond piecework by helping J. C. Penney electronically manage its inventory of dress shirts, from factory floor to retail shelves as far away as Connecticut.  Chicony, maker of a power device used in the Xbox from Microsoft and a major supplier of computer keyboards to Dell, is diversifying by opening department stores, with three so far around China and seven more planned.  And after years of assembling vacuum cleaners and rechargeable toothbrushes for Philips and other Western companies, Kwonnie Electrical Products is planning its own line of home appliances.

China to Allow Credit-Default Swaps With Restrictions -- China will introduce credit-default swaps by year-end, allowing banks to hedge risk while restricting the contracts to avoid pitfalls the U.S. credit markets experienced over the last several years, according to an official with a state-backed Chinese financial association. China will limit the amount of leverage used in credit swaps and won’t permit the contracts to be written on high-risk assets such as subprime mortgages, Shi Wenchao, secretary general of the National Association of Financial Market Institutional Investors, told reporters at a briefing in New York. Investors in the derivatives will also be required to own the underlying security, Shi said.  “It’s too bad that we in America and in Europe did not have those kinds of limitations two or three years ago,”

China Has Done “Very, Very Little” on Exchange Rate: Geithner - Treasury Secretary Timothy Geithner said China has not done enough to allow its currency, the yuan, to rise. “China took the very important step in June of signaling that they’re going to let the exchange rate start to reflect market forces. But they’ve done very, very little, they’ve let it move very, very little in the interim,” Mr. Geithner said in an interview with The Wall Street Journal on Friday. Mr. Geithner opted earlier this year not to brand China a currency “manipulator” and instead worked through diplomatic channels to get the Asian giant to move to a more flexible exchange rate. The yuan has begun to rise a bit but not enough to satisfy Mr. Geithner or many lawmakers in Washington. “It’s very important to us, and I think it’s important to China, I think they recognize this, that you need to let it move up over a sustained period of time,”

Tell me what you yuan, what you really, really yuan - NOT long after Barack Obama took office, his new Treasury secretary, Tim Geithner, committed a gaffe that wet-behind-the-ears government officials have been committing for ages—he said that the dollar needed to fall. Markets swung into a tizzy and pundits fainted on their fainting couches until Mr Geithner publicly retracted his remarks, saying that of course the dollar was the greatest currency ever and whatever its present value it should probably be higher, forever and ever amen. This is one reason I find this story amusing:The Obama administration is moving to take a harder stance on the Chinese government’s trade and currency policies, with anger toward China rising in both political parties ahead of midterm elections.“We are concerned, as are many of China’s trading partners, that the pace of appreciation has been too slow and the extent of appreciation too limited,” Mr. Geithner plans to say, Pundits have been demanding that Mr Geithner pressure China to allow its currency to appreciate against the dollar, and Mr Geithner (reluctantly, one imagines) is rising to heed the call.

Geithner Wary of Burning Bridges With China - U.S. Treasury Secretary Timothy Geithner may have revealed one of the reasons the Administration has been so reluctant to get tough with China on its currency policy: he doesn’t want to burn bridges for future business opportunities. Testifying before an irate Senate Banking Committee that will soon consider legislation penalizing imports from nations that manipulate their currency, Geithner noted that a major driver of U.S. growth is fueled by the rapid development of the world’s most populous nation. Geithner has indicated that punitive legislation or labeling China a currency manipulator in its biannual currency report may exacerbate trade tensions and complicate efforts to expand those business opportunities.

Beijing currency saga returns - FT - Here we go again. After a brief hiatus over the summer, the Chinese currency saga is returning for its fall season. This week, the House of Representatives’ ways and means committee will convene two hearings, one of which will question Tim Geithner, Treasury secretary.Congress is deeply unhappy with the progress made since Beijing unpegged the renminbi from the dollar in June. At the time, the concession was enough to damp down congressional ire. An almost visibly relieved US Treasury was able to publish its delayed twice-yearly currency report, which once again held back from naming China as an exchange rate manipulator, without sustaining too much fire from Capitol Hill.Since then, though, the renminbi has been allowed to rise less than 1 per cent against the dollar, a small fraction of most estimates of its undervaluation. True, Beijing did appear to acknowledge these concerns by allowing a moderate upward jump last week to coincide with the visit of Larry Summers, Barack Obama’s chief economic adviser, to Beijing. But unless the White House embarks on a strategy of sending Mr Summers to China every week, it needs to find ways of controlling the anger in Congress.

U.S. Adopts Tougher Stance on China - NYTimes - The Obama administration is moving to take a harder stance on the Chinese government’s trade and currency policies, with anger toward China rising in both political parties ahead of midterm elections. Treasury Secretary Timothy F. Geithner, in separate hearings before House and Senate panels, plans to acknowledge on Thursday that China has kept the value of its currency, the renminbi, artificially low to help its exports and has largely failed to improve the situation as it promised to do in June. “We are concerned, as are many of China’s trading partners, that the pace of appreciation has been too slow and the extent of appreciation too limited,” Mr. Geithner plans to say, according to excerpts of his statement released on Wednesday night by the Treasury Department. The United States brought two cases to the World Trade Organization on Wednesday, accusing China of improperly blocking imports of a specialty steel product and denying credit card companies access to its markets. The move came just hours before House lawmakers demanded action on the currency issue.

Administration Steps Up Saber Rattling with China - Yves Smith - Let’s see….early in the days of this Administration, Treasury Secretary Geithner said some pretty critical things about China. The Chinese threw a big temper tantrum and Geithner backed down. He had tended to try to play down tensions with China over its mercantilist policies (the most important being pegging its currency at an artificially low rate) until last April, when it seemed as if the Treasury might do the heretofore unthinkable and certify China a currency manipulator. But then, China blindsided the US by announcing that it was going to move towards a more market oriented currency policy, with no timetable announced. Pretty much everyone took this to be a big deal; we called it to be a headfake, which it has proven to be. The reminbi has barely budged versus the dollar, which means it has actually fallen on a trade-weighted basis, the opposite of what you’d see if it was actually liberalizing its currency policies. Geithner is actually sounding serious, but in this game of chicken, he really, really wants China to blink. However, the Chinese do not seem to be reverting to their usual displays of pique, and they were so obliging as to bump up the value of the renminbi a tad.

Paul Krugman eviscerates straw arguments - PAUL KRUGMAN wrote a blog post on Saturday in which he touted his successful string of predictions on financial and economic matters and attributed them to his reliance on a consistent, reliable model. He has a framework that's performed well, and he sticks with it, rather than making arguments on the fly. I thought about that post this morning as I read his latest opinion column on China's currency. For the life of me, I can't understand what model of political economy he's relying on here to support an aggressive approach against China—it certainly doesn't seem like the same model he was using when he wisely fought against the Bush administration's efforts to lead the country into war in Iraq. And my sense is that the weakness of his arguments in favour of a get-tough approach—and especially his choice to repeatedly fight strawmen—reflect the fact that he's opining without the ballast of a sensible framework. Let's start from the beginning.

Populist internationalism - Paul Krugman skillfully dissected many arguments for protectionism and industrial policies in the book Pop Internationalism.  Now he seems to have fallen prey to many of these misconceptions.  I seem to recall him explicitly making this point in earlier posts.  But with each new column, the arguments seem cruder and more simplistic: And in a depressed world economy, any country running an artificial trade surplus is depriving other nations of much-needed sales and jobs. Again, anyone who asserts otherwise is claiming that China is somehow exempt from the economic logic that has always applied to everyone else. Here he seems to have shifted his ground.  No longer is a liquidity trap required, now merely a “depressed economy” is required for Chinese trade surpluses to depress aggregate demand in the rest of the world.   I know of no respected macro model that supports this claim.  And I’m guessing that for most of the rest of my life Krugman will consider our economy to be “depressed,” whether interest rates are zero or not.

Fiscal policy and global imbalances -Today, as in the 1980s, government deficits and trade deficits are growing in tandem in some nations while government surpluses and trade surpluses are growing in others. This has put the relationship between fiscal policy and the current account back on centre stage – especially as many observers believe that the post-crisis world will be heavily influenced by the path of trade and fiscal imbalances. What impact will fiscal policy have on current-account imbalances in the years to come? Using data from a large and diverse panel of countries, this column finds that a strengthening in the fiscal balance by 1 percentage point of GDP is, on average, associated with a current-account improvement of 0.2-0.3 percentage points of GDP.

Competitive devaluation to the rescue - Every day it seems more likely that we are destined – or should one say doomed? – to replay the disastrous economic history of the 1930s. We have had a stock market crash to rival 1929. We have had a banking crisis comparable to 1931. With the economic meltdown in eastern Europe we have the prospect of a financial crisis in Vienna, exactly as in 1931. We have squabbling among the major economies over the design of rescue loans, just as when the Bank for International Settlements was hamstrung in its efforts to contain the crisis in Austria. We have the prospect of a failed world economic conference in London to dash remaining hopes for a co-operative response, just as in 1933. And if all this wasn't enough, now we have the dreaded spectre of competitive devaluation. In the 1930s, one country after another pushed down its exchange rate in a desperate effort to export its way out of depression. But each country's depreciation only aggravated the problems of its trading partners, who saw their own depressions deepen. Eventually even countries that valued currency stability were forced to respond in kind.

Buttonwood up your mouth - Matty Yglesias has an amazing catch. He says that competitive devaluations achieved via unsterilized interventions would be a good thing, because they would cause inflation. He notes that someone disagrees. The Economist’s Buttonwood: "The result is like a game of deflationary pass the parcel..." Of course, Mr or Ms Buttonwood should have written . "The result is like a game of inflationary pass the parcel..." which is Yglesias's point.  The dark ages of macro. I think what is happening is that Buttonwood is sure that selfish begger thy neighbor policies are bad and that allegedly painless remedies based on printing money and buying stuff are unwise, that he or she has noticed that these days deflation is even more feared than inflation and thus decided that printing currency and buying stuff must be deflationary. Bagehot is turning over in his grave.

Beware starting trade war, China economist tells US - The United States would be the loser if it touched off a trade war by labeling China a currency manipulator or imposed import duties to offset perceived undervaluation of the yuan, a government researcher said on Tuesday. Any punitive measures against Beijing risked backfiring because China is the fastest-growing market for American exports, Ding Yifan, an economist with the Development Research Center, told a seminar on Sino-American trade ties. A total of 93 U.S. lawmakers have signed a letter urging Democratic leaders in the House of Representatives to schedule a vote on a bill to get tough with China over its exchange rate. The bill would let the U.S. Commerce Department slap countervailing and anti-dumping duties on "injurious imports from any country that persistently undervalues its currency. Ding said Beijing could also make the point to Washington that the dollar and the U.S. economy would suffer if China were to sell down its vast holdings of U.S. Treasuries.

Chinese think tank warns US it will emerge as loser in trade war - Ding Yifan, a policy guru at the Development Research Centre, said China could respond by selling holdings of US debt, estimated at over \$1.5 trillion (£963bn). This would trigger a rise in US interest rates. His comments at a forum in Beijing follow a string of remarks by Chinese officials questioning US credit-worthiness and the reliability of the dollar.  China's authorities seem split over how to respond to moves on Capitol Hill for legislation to punish Beijing for holding down the yuan. The central bank has ruled out use of its "nuclear weapon", insisting that it would not exploit its \$2.45 trillion of foreign reserves for political purposes. "The US Treasury market is a very important market for China," it said.

US-China clash over yuan escalates, risking superpower stand-off - US Treasury Secretary Tim Geithner has issued his harshest attack to date on China’s currency policy, the latest move in an escalating superpower clash across the gamut of commercial and strategic relations.  “We are very concerned about the negative impact of (China’s) policies on our economic interests,” he told a Congressional hearing on Beijing’s use of exchange intervention for trade advantage.  “The pace of appreciation has been to slow. The undervalued renminbi helps China’s export sector. It encourages out-sourcing of production and jobs from the United States. By continuing a rigid exchange rate, China is impeding the adjustments needed to secure sustainable global growth,” he said

Why Getting Tough With China Won't Solve Our Jobs Problem - Robert Reich -With unemployment in the stratosphere and the midterm elections weeks away, politicians naturally want to show voters they’re committed to getting jobs back. So now they’re getting tough on China. But it’s a dangerous ploy based on wishful thinking. Treasury Secretary Tim Geithner told the Senate Banking Committee Thursday the Administration is “examining the important question of what mix of tools, those available to the United States and multilateral approaches, might help encourage the Chinese authorities to move more quickly.” Translated: We’re on the verge of threatening them with trade sanctions. Even this didn’t satisfy the Senators. On Wednesday the U.S. filed a pair of complaints against China with the World Trade Organization, alleging China was unfairly denying American companies access to its market. Meanwhile, several Democrats facing elections in November are introducing measures that would allow companies to pursue sanctions against China for manipulating its currency.

The Yuan's Course - The debate over the yuan's value is heating up again. [Free Exchange/RA] [WSJ RTE/Talley] [WSJ RTE] Here is a plot of two relevant time series.Two quick observations. First, the Chinese trade weighted real exchange rate is the relevant one for the world economy; the USD/CNY nominal exchange rate has some importance for the US-China trade balance, but less so for the US overall trade balance -- which is the relevant aggregate. Second, the trade weighted CNY was appreciating before the crisis, and the CNY has largely reverted to that trend over the past few months, after a detour associated with the dollar appreciation during the financial crisis and flight to safety. This observation, however, does not speak to whether the level of the rate is appropriate for moving the Chinese current account to a sustainable level. Additional (relevant) graphs in this post.

The real victims of China's yuan policy - A stronger yuan might thus change the American trade relationship with China, but not necessarily change the face of American manufacturing. That's because there are too many cheaper places than the U.S. where multinational companies can open factories. Rather than setting up shop in Ohio or South Carolina, a manufacturer can tap into the low wages of India, Indonesia, Bangladesh, and a host of others. But it is here where we can truly find the damage done by China's currency policy. By controlling the value of the yuan, Beijing is likely depriving the poorest nations of the world of their chance at a China-style economic miracle. That's because the cheap yuan is stunting the progress of export sectors in other developing economies, in two key ways. First, it keeps Chinese manufactured exports relatively more competitive versus rival products from other emerging economies. That blunts export growth from those poor nations. Secondly, it makes other developing economies relatively less attractive as investment destinations for exporters. In both cases, China's policy is curtailing job creation in poor countries.

What China can learn from Japan - GILLIAN TETT tells a story about the Japanese experience with currency appreciation: When [Taggart] Murphy wrote his book, what was worrying many American policymakers – and some Japanese – was the weakness of the yen; most notably, during the 1970s and early 1980s the yen had been kept artificially low by government controls, running at around Y250-Y300 to the dollar. As a result, the Japanese export machine boomed, undercutting American industry; and Japanese investors gobbled up American debt, keeping US Treasury yields artificially low.: “The causes of the imbalances were twofold: first the US Federal Deficit, which the Reagan Revolution had structurally embedded into the US body politic; and second the Japanese ‘development state’ system of national leverage, centralised credit allocation and credit risk socialisation.” This should obviously look familiar to current observers of the Sino-American relationship. Leading economies attempted to deal with the yen in the early 1980s by putting together the Plaza accord, which aimed to bring down the value of the dollar against the yen. Ms Tett explains what happened next:

The Two Categories of American Corporation -- And Their Politics - Some giant American corporations depend on a buoyant American economy and a world-class industrial base in the United States. Others are far less dependent. What comes out of Washington in the next few years will reflect which group has most political clout — especially if Republicans take over the House and capture more of the Senate this November. Wall Street gets this. Viewing the 30 giants that make up the Dow Jones Industrial Average, analysts are predicting that the 10 with the largest portion of sales inside the U.S. will show average revenue gains of just 1.6 percent over the next year, while the 10 with the largest portion of their sales abroad will grow by an average of 8.3 percent.

Ex-Im Bonkers - Krugman - Via Jon Chait, a stark demonstration of the madness that has overtaken the American right. It seems that Newt Gingrich is approvingly citing an article in Forbes by Dinesh D’Souza, alleging that Obama is a radical pursuing a “Kenyan, anti-colonial” agenda. His prime example is that the Export-Import Bank has made a loan to Brazil’s offshore oil project, which D’Souza finds incomprehensible except as a plan to shift power away from the West. Except, you know, the Ex-Im bank’s job is to promote US exports — and this was a loan for the specific purpose of buying US-made oilfield equipment. And the board approving the loan was … a board appointed by George W. Bush. In other words, aside from being ignorant, this is complete the-Commies-are-putting flouride in the water to steal our vital bodily fluids stuff. Yet there it is in Forbes, being cited by the former Speaker of the House, who is a regular guest on Sunday TV. Scary.

Real Exchange Rates In Emerging Markets (Wonkish) - Paul Krugman - I’m doing some homework on various issues, and one of the things I’ve been doing is trying to work through what we should be seeing in the emerging economies now that the advanced economies seem set — thanks to bad policy and bad ideas — to experience a prolonged period, maybe a lost decade, of weak growth, high unemployment, and low interest rates. Emerging economies have been doing much better, in part because they inherently offer bigger investment opportunities, in part because they don’t have the balance sheet problems of the richer nations. And by building up reserves while avoiding foreign-currency debt, they’ve removed many of the vulnerabilities of the past. So what should you expect? There are low returns to investment in the North, better returns in the South. So there should be capital inflows to emerging markets, real appreciation, and a move toward current account deficits — that is, if the countries allow it. And here’s a picture of real effective exchange rates for two countries, starting from January 2007 China has, of course, gone nowhere. Brazil had a brief period of sharp depreciation, But beyond that, it’s a big appreciation.

Is Real Appreciation In Emerging Markets A Problem? (Wonkish) - Paul Krugman - A followup on this post: should countries like Brazil worry about the real appreciation now occurring? . So is this a problem? As I see it, there are two ways it could be. First, real appreciation leads, other things equal, to a larger current account deficit, which has a contractionary effect on demand. Up to a point, this can be offset by cutting domestic interest rates. But if it’s big enough, it can push the emerging markets into their own liquidity traps. In effect, the OECD can export its liquidity trap to the developing world via capital flows.This doesn’t seem to be happening now, but it’s something to watch for. Second, we can have the global savings glut II: the revenge of the North. Robin Wells and I have argued that the original GSG, driven largely by developing country surpluses, was probably the main initial driver of the North Atlantic housing bubble; might the new version, driven by depressed demand in the North, produce comparable trouble in developing countries?

Do free-trade agreements increase protectionism towards non-members? -Two of the most popular changes in trade policy in recent years are free-trade agreements and using antidumping duties to restrict trade from low-wage countries. While countries rush to enact more and more free-trade agreements, not enough is known about their impact. This column presents evidence suggesting that free-trade agreements are more discriminatory than their preferential tariffs suggest. It finds a stark increase in contingent protection as free-trade agreements cause a 10%-30% increase in the number of antidumping disputes against non-member countries.

Overseas Investors & the Commonwealth Bank - On Thursday September 9th 2010, the Commonwealth Bank released a document on the Australian housing market, to support a tour that its senior executives are making to meet overseas investors.  The press release for the document was as follows

The Asian Way - Stephen Roach - After three years living in Asia, I returned to the United States a couple of months ago, with enormous respect for how Asia has pulled itself together after its own devastating crisis in the late 1990s. Bouncing back and forth only deepened my conviction that an important shift in the gravity of global economic power from the West to the East could well be at hand.  It’s not just the Asian miracle that reinforces my belief in such a possibility. America has lost its way. In the years I was away, it has become a very different place. The despair of chronically high joblessness is sapping the nation’s sense of self and poisoning the political debate.  Back in mid-2007, when I moved to Hong Kong, the U.S. unemployment rate stood at just 4.6 percent. Today, it is more than double that at 9.6 percent. Nor is there much hope of a spontaneous resurgence of hiring that will temper the angst of this jobless recovery.  How could Asia get it so right, and the United States get it so wrong?

China, Japan, America, by Paul Krugman, Commentary, NY Times: Last week Japan’s minister of finance declared that he and his colleagues wanted a discussion with China about the latter’s purchases of Japanese bonds, to “examine its intention” — diplomat-speak for “Stop it right now.” The news made me want to bang my head against the wall in frustration.  You see, senior American policy figures have repeatedly balked at doing anything about Chinese currency manipulation, at least in part out of fear that the Chinese would stop buying our bonds. Yet in the current environment, Chinese purchases of our bonds don’t help us — they hurt us. The Japanese understand that. Why don’t we? So what should we be doing? U.S. officials have tried to reason with their Chinese counterparts, arguing that a stronger currency would be in China’s own interest. They’re right about that: an undervalued currency promotes inflation, erodes the real wages of Chinese workers and squanders Chinese resources. But while currency manipulation is bad for China as a whole, it’s good for politically influential Chinese companies — many of them state-owned. ... Time and again, U.S. officials have announced progress on the currency issue; each time, it turns out that they’ve been had. ... Clearly, nothing will happen until or unless the United States shows that it’s willing to do what it normally does when another country subsidizes its exports: impose a temporary tariff that offsets the subsidy. So why has such action never been on the table?

Hurrah, Japanese ¥ Intervention at Last! - So it's finally happened over the last few days: Japan has jumped into the foreign exchange market to intervene as its currency possibly threatened to fall below 83 yen to the dollar. Certainly, Japan has, over the years, done much to shield itself from the effects of currency appreciation. Not only are there several Japanese MNCs which have offshored their plants across the globe ever since the Plaza Accord of 1985 that called for weakening the dollar vis-a-vis the yen and other major currencies, but bellyaching has been relatively little despite an incredibly strong yen in nominal exchange rate terms. (As many would point out, the deflationary pressures in Japan for sometime now mean the real effective exchange rate of the yen is not nearly as dramatic as its nominal exchange rate would suggest.) No matter. Earlier this year, I even despaired that the Swiss had gotten into the forex intervention game ahead of the Japanese who hadn't done so since 2004--or that was until recently. It turns out that recent actions may have surpassed the single day record:

Why Japan’s FX intervention might actually work - Has a central bank ever intervened successfully in the foreign exchange market when the momentum trade was against it? The yen has been rising alarmingly of late, and now the Bank of Japan is trying to push it down.At first glance, the action looks like a something-must-be-done-this-is-something -therefore-this-must-be-done move: a new prime minister and a “bold action” doomed to be proved ineffectual. The FX markets are so enormous (dollar/yen alone trades some \$750 billion per day) that it’s hard to believe a single sale of less than \$20 billion in yen could even have the short-term effect we saw last night, let alone have any lasting consequences.But this isn’t just about FX-market intervention. This is also about monetary policy, and that could make a real difference: Unlike in previous forays, the Bank of Japan will not drain the money flowing into the economy as a result of the yen selling, sources familiar with the matter said. That indicated the central bank plans to use the sold yen as a monetary tool to boost liquidity and support the economy.

Japan May Sell Yen for Second Day to Protect Economy From Gains… -- Japan may intervene in the foreign- exchange market for a second day to stem the yen’s gain to a 15- year high against the dollar and protect its exporters.  Japan yesterday unilaterally sold the yen against the dollar for the first time since 2004. Chief Cabinet Secretary Yoshito Sengoku said the finance ministry “seems to think” 82 yen per dollar to be the line of defense, after it reached 82.88 yesterday. Government officials speaking on condition of anonymity have previously said volatility was a bigger concern than the level. Officials said Japan may continue selling the yen in the U.S. and into today’s Tokyo trading if needed. Prime Minister Naoto Kan was under pressure from business leaders to stop the yen’s gains from undermining the exports propelling Japan’s growth. It may do little for the economy because Japan alone won’t be able to keep the yen from rising, said analyst Tohru Sasaki.

Devalue Away (But Keep it Coordinated) - Given all the chatter  and consternation today about Japan's attempts to keep its currency cheap, it was nice to be reminded by  Barry Eichengreen (via Mark Thoma) that we have seen this competitive devaluation story before and it actually turned out okay. Specifically, he points us to the 1930s (my emphasis): In the 1930s, it is true, with one country after another depreciating its currency, no one ended up gaining competitiveness relative to anyone else. And no country succeeded in exporting its way out of the depression, since there was no one to sell additional exports to. But this was not what mattered. What mattered was that one country after another moved to loosen monetary policy because it no longer had to worry about defending the exchange rate. And this monetary stimulus, felt worldwide, was probably the single most important factor initiating and sustaining economic recovery. Eichengreen goes on to say that coordinated devaluations would be better since they would minimize volatility in exchange rates and thus in global trade.  Whether or not this coordination happens, the key insight here is that  some currency devaluation may be exactly what the world economy needs right now.

Japan’s Move on Yen Lacks Global SupportJapan’s decision to intervene in currency markets to weaken the yen and shore up its export-driven economy could be only the first step in a long battle — one made more difficult because Japan, unable to find support among its trading partners, must go it alone.  Japan moved Wednesday to prop up the United States dollar and weaken the yen, directly manipulating its currency for the first time since 2004. Japanese monetary authorities appeared to have bought dollars and sold yen. That move started a wider market rally that sent the dollar up by about 2.55 percent for the day, to 85.62 yen.  The maneuver by Japan’s finance ministry came after the yen had reached 15-year highs in recent weeks, elevated by its status as a haven among risk-averse global investors. The strong yen has hampered Japan’s recovery from last year’s severe recession by weighing on the competitiveness of its exports, which account for a bulk of the nation’s economic growth.

When Japan Collapses - Only a partisan two-bit hack economist/liberal rag columnist from an Ivy League University with a Nobel Prize could look at the following two charts and conclude that the Japanese Government failed to revive the Japanese economy over the last twenty years because they spent far too little on fiscal stimulus. Japanese government debt as a percentage of GDP was 52% in 1989, prior to their real estate and stock market crash. Today it stands at 200% of GDP. Current budget projections show the debt reaching 250% of GDP by 2015. Meanwhile, Japanese consumers and corporations have been reducing their debt for the last 16 years. The net result has essentially been a 20 year recession. The pundits who never see a crisis on the horizon point to the fact that Japan has not collapsed under the weight of this debt as proof that the U.S. debt level of 90% of GDP has plenty of room to grow without negative repercussions. This is the same reasoning “experts” used in 2005 when they proclaimed that home prices in the U.S. had NEVER fallen on a national basis, so therefore there was no reason to worry about home prices. A basic economic law is that an unsustainable trend will not be sustained. When the 3rd largest economy in the world implodes, the reverberations will be felt across the globe.

Automatic stabilisers and the global crisis The big difference between the "great recession" and the "Great Depression" was government policy – especially stabilisation policy (Eichengreen and O'Rourke 2010). This time governments realised that they had to provide Keynesian stimulus while ensuring that the financial system did not collapse. While debate rages over the appropriate size and timing of fiscal expansions, this column points out that much less attention is devoted to role of the automatic stabilisers in the tax and transfer system. It compares these stabilisers in Europe and the US, finding that social transfers play a key role in the stabilisation of disposable incomes and consumer demand.

Why the Eurozone Bomb Has Not Been Disarmed Yet - Yves Smith - Wolfgang Munchau in the Financial Times gives a good recap as to why the recent spell of good cheer regarding the Eurozone is overdone.  His central observation is that the Eurozone, like the US, patched things up with duct tape and bailing wire, and the hope was that the resumption of peppy growth would reduce sovereign debt burdens. But as studies by Reihnart and Rogoff, both Reinharts, and the IMF have shown, serious financial crises produce protracted periods of high unemployment and subpar growth. As Munchau notes:After Lehman’s collapse, Europe’s establishment adopted a dual strategy – if you want to call it that. In the short term, it threw money at the problem, through loan guarantees and generous liquidity provisions, culminating in a huge bailout facility for sovereign states. The long-term strategy was a prayer for a strong V-shaped recovery. Yves here. Recall also that earlier this year, European leaders were visibly at loggerheads, and managed to stitch together deals onlyafter nervous-making wrangling. We are likely to see continued less than stellar management of the process as the Eurozone faces continued stresses, particularly on the bank front.

ECB is buying bonds again - The European Central Bank has stepped up its purchases of Irish, Portuguese and Greek bonds, reverting a downward shift since June; the FT has identified a change in the ECB exit strategy: interest rates might go up while the banks are still on life support; European Commission produces upbeat growth outlook for the eurozone; Le Monde says Sarkozy illegally used secret services to spy on its journalists; lots of – mostly negative – reactions on Basel III: Germany’s Sparkassen are granted a ridiculously long transition period – until 2023 (or what is 3023?); Credit Suisse makes the point that innovations in the banking sector are likely to be so substantial that regulation is likely to lag behind; other critics point out that the result is uneven implementation, as some countries clearly want to go further than others; Goldman Sachs predicts an emerging market capital inflow bubble, and fears a regulatory backlash in the form of capital controls; Gideon Rachman, meanwhile, argues that of the two big anniversaries this week – Lehman and 9/11 – the financial crisis is by far the more important. [more]

Greek finance minister says Greek default will break the eurozone - Papaconstantinou says restructuring is not an option because its consequences would be catastrophic for the eurozone; Liikanen says we should prepare for lower growth and higher unemployment; Barnier proposes the EU’s short-sale regulation – a more intelligent version of Germany’s unilateral law; Alexandre Counis argues that a break-up of Belgium is unlikely; a majority of eurozone citizens is unhappy about the euro; subprime lending is resuming at robust levels, for car loans; Barry Eichengreen, meanwhile, says the post-crisis response is marked by serial policy failures.[more]

Greece: The Lady Really Doth Protest Too Much -- Yves Smith - We have the specter of Greece’s finance minister insisting really, no really, it will never never default, or default via restructuring. Now given the unfortunate accident of timing, these protests sound awfully Dick Fuld like, although the better parallel is probably Mexico, which kept insisting in 1994, no way, no how would it need to restructure, despite having a lot of dollar denominated obligations and an untenable currency peg. And it was OK, until it wasn’t.  From the Financial Times:Greece’s finance minister has strongly rejected the idea that Athens will be forced to restructure its debts, saying that a default would break the eurozone. On a two-day visit to London, Paris and Frankfurt to convince investors that Athens has turned a corner in its year-long economic crisis, George Papaconstantinou told the Financial Times that a Greek default would spark selling in other so-called peripheral bond markets of Portugal and Ireland. “Restructuring is not going to happen. There are much broader implications for the eurozone should Greece have to restructure its debt,” he said.

Young Greeks Seek Options Elsewhere –Like Ms. Mallosi, an increasing number of young college graduates are leaving Greece as a deepening recession chokes a job market already constrained by an entrenched culture of cronyism. And the outlook for a turnaround is not good.  The national debt, estimated at 300 billion euros (nearly \$400 billion), is larger than Greece’s gross domestic product, suggesting that years of austerity budgets lie ahead. On top of that, a string of political corruption scandals has left many young Greeks disillusioned about the future.  According to a survey published last month, seven out of 10 Greek college graduates want to work abroad. Four in 10 are actively seeking jobs abroad or are pursuing further education to gain a foothold in the foreign job market. The survey, conducted by the polling firm Kapa Research for To Vima, a center-left newspaper, questioned 5,442 Greeks ages 22 to 35.

IMF does not rule out more Greece aid: report - The IMF does not rule out giving Greece more credit if the country cannot raise the money itself on commercial markets, the Wall Street Journal reported Friday, citing an anonymous source. The credit support already given to Greece "does not of itself preclude a future follow-up or additional arrangement with the IMF after its expiration in three years," the source familiar with the matter was quoted as saying. The report comes a day after Greek Finance Minister George Papaconstantinou visited London, Paris and Frankfurt in a bid to convince investors to buy long-term Greek bonds and outline the government's steps in reducing debt.

The Eurozone’s Autumn Hangover - Roubini - After a summer of Europeans forgetting their woes and tanning themselves at the beach, the time for a reality check has come. For the fundamental problems of the eurozone remain unresolved. First, a trillion-dollar bailout package in May prevented an immediate default by Greece and a break-up of the eurozone. But now sovereign spreads in the peripheral eurozone countries have returned to the levels seen at the peak of the crisis in May. Second, a fudged set of financial “stress tests” sought to persuade markets that European banks’ needed only €3.5 billion in fresh capital. But now Anglo-Irish alone may have a capital hole as high as €70 billion, raising serious concerns about the true health of other Irish, Spanish, Greek, and German banks. Finally, a temporary acceleration of growth in the eurozone in the second quarter boosted financial markets and the euro, but it is now clear that the improvement was transitory. All of the eurozone’s peripheral countries’ GDP is still either contracting (Spain, Ireland, and Greece) or barely growing (Italy and Portugal). Even Germany’s temporary success is riddled with caveats.

It's Back...  Just when we begin to see some positive economic news we are reminded by Nouriel Roubini that the Eurozone mess is back. In fact, it never left but was simply ignored over the summer following the trillion dollar palliative in May. Now that summer is over and folks are beginning to realize nothing fundamentally changed over this period sovereign credit spreads are back up to where they were at the height of the crisis.  Here is Roubini's conclusion: So a eurozone that needs fiscal austerity, structural reforms, and appropriate macroeconomic and financial policies is weakened politically at both the EU and national levels. That is why my best-case scenario is that the eurozone somehow muddles through in the next few years; at worst (and with a probability of more than one-third), the eurozone will break up, owing to a combination of sovereign debt restructurings and exits by some weaker economies. So I guess this means we can once again look forward to a further drop in Treasury yields and lengthy blog discussions on optimal currency areas.  I am also guessing this will reinforce the downward march of inflation expectations which left unchecked will mean a further passive tightening of U.S.monetary policy. What a great way to head into the holiday season.  At least I know what I want for Christmas.

Brady Bonds For The Eurozone, Starting With Ireland by Simon Johnson -  Irish and EU politicians should take the lead in making these tough decisions, but the current leadership will not. Instead, the EU, the ECB, and Ireland have reached a Faustian bargain that keeps Ireland liquid (i.e., it gets euros), but does nothing to halt the growing likelihood of insolvency (i.e., its increasing inability to pay back those euros in the future). The IMF, which should be standing up to this dangerous bargain, instead plans to open the spigots (with Chinese, American, and other countries’ funds) even more widely to insolvent nations. On August 30, the Fund abolished ceilings on its “Flexible Credit Line” facility, which was introduced in 2009 to provide rapid funds to countries in temporary crisis. Moreover, the IMF announced a new financing program called a “Precautionary Credit Line,” which will provide funds more quickly and with even fewer conditions – even to countries without “sound public finance” and “effective financial supervision.” There is a better solution, pioneered after commercial banks in the United States loaned too much to Latin America in the 1970’s. Sovereign debt was eventually restructured through the creation of “Brady bonds.” The trick was to offer banks the opportunity to swap their claims on (insolvent) Latin American countries into long-maturity, low-coupon bonds that were collateralized with US Treasuries.

Ireland/Spain Update – Krugman - Regular readers may remember that I’ve written a few posts — here and here — about bond yields in Ireland and Spain. Both had big housing bubbles and busts; but their post-bust politics have been very different, with Ireland quickly adopting austerity, Spain being much more grudging. And for a while you saw many news stories asserting that Ireland’s virtue had been rewarded by the markets.  But it was never true: virtuous Ireland never did better than malingering Spain. And now, Ireland’s risk premium has exploded, here; Spain’s not so much, here. Of course, it’s not at all a clean experiment; Ireland’s banks were arguably second only to Iceland’s in their irresponsibility, and the Irish government’s blanket guarantee has exposed it to huge losses. But bear in mind that when Ireland seemed, briefly, to have regained the trust of the markets, this was touted as proof that austerity will be rewarded. Funny about that.

France Makes Crucial Move to Raise Age of Retirement - The vote in the lower house of parliament was 329-233. The opposition was boisterous, with Socialists shouting ''Resign!'' as the Assembly president cut short debate and thousands of protesters marched outside.  Riot police guarded a crowd that police estimated at 6,500 and protesters at 20,000. Last week, opposition to the bill drew at least 1.1 million protesters into the streets of 220 cities and a strike disrupted trains, planes, hospitals and mail delivery across France.  The vote puts France on track to become the latest country to require workers to stay on the job longer. Germany is set to raise its retirement age over the coming years from 65 to 67 to offset a shrinking, aging population, and the United States is gradually doing the same.

Schauble wants to speed up Landesbanken mergers - German finance minister wants to use Basel III as a lever to force German states to merger their Landesbanken; Wolfgang Munchau says Basel III transition period is far too long, and that government immediate to implement the changes ahead of deadline; Martin Wolf does the math on Basel and finds that a 20/30% equity ratio would be far more appropriate; Germany proposes a reduction in the European voting weight at the IMF, but demands that the US gives up its veto; Italy sees 3.4% fall in government revenues during the first seven months of this year; Greece needs to raise €4.7bn via treasury bills until end of October; Irish government contemplates savings of more than €3bn in 2011 budget; S&P downgraded Bank of Ireland’s outlook to negative; Spanish banks, meanwhile, have reduced their dependence on the ECB, but the statistics may not tell us the whole story. [more]

The eurozone's banking crisis goes on and on and on - Two years after the fall of Lehman Brothers, and a massive bank bail-out agreed by European governments, the eurozone’s financial sector is still fragile. As we have seen in recent weeks, the Irish banking sector is insolvent, and there are questions about the capacity of the Irish state to absorb those losses. Jürgen Stark, in charge of the monetary policy section of the European Central Bank, last week raised questions about the solvency of the German banking sector. Wherever you look, two years have passed and nothing has been resolved. There has been lots of activity – bail-outs, bad banks – but no resolution. It was always clear that this wait-and-see approach would eventually backfire. It may be happening already.

Number of the Week: Hiding Europe’s Unpleasant Details - 1.9 trillion euros: European banks’ exposure to EU government debt.  With each passing day, it’s getting harder to believe Europe’s banks are in as good shape as their regulators say. That could be a problem for a global economy still struggling to recover from a deep recession.Less than two months ago, an outfit called the Committee of European Banking Supervisors published stress tests aimed at easing investor concerns that the financial troubles of Greece and other countries would spread to Europe’s banking system. The reassuring result: Only seven out of the 91 banks tested would need to raise added capital in the event of a modest double-dip recession and a sharp drop in the value of Greek, Irish, Portuguese, Spanish and Italian government bonds.)

Sarkozy versus Baroso - A useful diversion - Summit degenerates into a dog fight between Sarkozy and Barroso over the French policy towards the Roma; the important issue of eurozone governance reforms is pushed to the sidelines, quite usefully so, as there is no agreement anyway; Juncker condemns Japan’s unilateral intervention to weaken the yen, and says yen is still undervalued; a study by Barclays Capital shows that Ireland’s success or failure to get through this crisis will depend critically on assumption about economic growth; Basel III may be tougher than the headline figures suggest, as some of the hidden rules will reduce significantly what can be counted as tier one capital; economists, however, believe that the agreement is far too weak to have any systemic effect; so does Mario Draghi, who argues that Basel III will need to be complemented with further rules to increase the loss absorbing capacity of large financial institutions.  [more]

OECD Paper: "The EU Stress Test and Sovereign Debt Exposures" - From Blundell-Wignall, A. and P. Slovik (2010), “The EU Stress Test and Sovereign Debt Exposures”  The EU-wide stress test did not include haircuts for sovereign debt held in the banking books of banks on the grounds that over the 2 years considered default is virtually impossible in the presence of the EFSF [European Financial Stability Facility Special Purpose Vehicle], which is certainly large enough to meet funding needs of the main countries of concern over that period. The haircuts applied to the trading book in the stress test are shown in the first block of Table 1. The trading book exposures (not reported in the stress test paper) are also shown. The EU wide loss from the haircut is around €26. bn. The contribution of the 5 countries where most of the market focus has been (Greece, Portugal, Ireland, Italy and Spain) is only €14.4bn. Click on table for larger image What happens in less than 2 years when the European Financial Stability Facility Special Purpose Vehicle is no longer providing funding?

Extraordinary Elite Delusions and the Madness of Committees - Krugman - Future historians will marvel at the austerity madness that gripped policy elites in the spring of 2010. In a combination of blind panic and irrational exuberance, organizations from the ECB to the OECD suddenly abandoned everything we’ve learned, at bitter cost, about the economics of recessions, and raced to the conclusion that fiscal austerity was the way to go in the depths of a slump — indeed, that it would actually be expansionary.  And not just fiscal austerity: there were also widespread demands that interest rates rise in the face of falling inflation and high unemployment. The May OECD Economic Outlook exemplified the madness. Now the OECD is coming as close as such organizations ever do to admitting that it was wrong. What a strange trip it has been.

Harmonised unemployment rates: a tad scary - Rebecca Wilder - Across the OECD, the unemployment rate was unchanged at 8.5% in July 2010. The chart illustrates the harmonised unemployment rates for 28 economies in July spanning 2008-2010 (based on data availability, the comparison month is June for Chile, Netherlands, Norway, and Turkey, and May for the UK). The countries are ranked by the percentage change in the unemployment rate from 2008 to 2010, where Denmark is the highest, 115% increase, and Germany is the lowest, -4.2%. The story in this chart is obvious: the slack in global economic activity remains extreme in much of the developed world. More growth it needed; but apparently, we're not going to get it. The OECD released its index of composite leading indicators (CLI, where you can view the components of the index for each country here) for July. The pace of economic expansion is waning. (Click on chart to enlarge.)

Income distributions in the OECD - MARK THOMA reproduces several charts from the OECD, illustrating the distribution of average disposable income across the developed world: As you can see, America's median income is among the highest in the rich world, on a par with that in Switzerland and the Netherlands, a shade above the median in Britain and Canada. The average income of the top decile, by contrast, is easily the highest in the OECD, and nearly twice the OECD average. The bottom ten percent, on the other hand, have incomes comparable to the poorest residents of Greece and the Czech Republic—below the OCED average. All the other of the richest rich countries do far better. I'll just note that from these figures, at least, it seems difficult to justify the claim that prosperity requires an unequal income distribution. Further discussion and analysis I'll leave to you all.

More on firing costs and unemployment during the crisis - My previous post has apparently produced some incomprehension. I thought it was a rather simple point, but I guess I should have been less telescopic.  Here is the point.  Spain’s unemployment has doubled since 2008, going from 10 percent to 20 percent. That is a hell of a shock to labor demand. Let’s assume, quite reasonably, that this shock to labor demand was unanticipated. Now, if the hiring costs were at all binding during this time, firms must have laid off fewer workers than they would have liked absent those costs. In other words, the unemployment rate would have risen even higher without firing costs.  If we now remove those firing costs, we make it easier for firms to shed the extra workers they have on their payroll. So unemployment has to increase.

I.M.F. Calls for Countries to Focus on Creating Jobs - Rising long-term unemployment, especially among young people, poses the next big threat to the global economic recovery, the International Monetary Fund warned on Monday.  Slower growth is forcing governments to expand social safety nets and stimulate job creation even as they rein in finances. But with hundreds of millions of people unemployed worldwide, Dominique Strauss-Kahn, the managing director of the I.M.F., said the financial crisis “won’t be over until unemployment significantly decreases.”  Mr. Strauss-Kahn urged governments to start factoring back-to-work policies into their overall equation for stoking growth. He added, in remarks at an employment forum with the International Labor Organization, that a failure to halt persistent high joblessness could fan social tensions in several countries and restrain growth over time.  Youth unemployment in the 33 countries that belong to the Organization for Economic Cooperation and Development has risen 18.8 percent from 2007 to 2009, or by about four million people, with the sharpest hits in Spain and Ireland, according to agency calculations.

IMF Meetings Face Double-Dip Risk: Mohamed El-Erian (Bloomberg) -- Many topics are being teed up for next month’s annual meetings of the International Monetary Fund and World Bank in Washington, a gathering that will draw about 190 country representatives. There is a substantial risk of disappointment, one that would be detrimental to the welfare of billions around the world over time.  This risk can and should be minimized. To do so, the natural inclination for complexity must urgently be replaced by focused simplicity. This can be achieved by placing just one question on the agenda:  Why are economic policies in industrial countries proving so frustratingly ineffective?  Already, there are too many examples of policy outcomes that have fallen well short of expectations.  .

IMF Chief Calls For Centralised Fiscal Control Of Euro Zone - THE HEAD of the International Monetary Fund (IMF), Dominique Strauss-Kahn, has called for the creation of a fiscal federation in the euro zone which would have much greater control over tax and spending issues in member states. Speaking at a conference in Brussels, Mr Strauss-Kahn, a leading figure in France’s opposition Socialist Party, said “a more integrated and centralised fiscal framework could deliver higher and more stable growth for Europe” . He warned that without “fiscal federalism”, Europe’s single currency may not survive.

The IMF and Global Coordination -The IMF is needed for several key purposes. One involves crisis response. In a global financial upheaval like our most recent one, capital flows shift abruptly and dramatically, causing credit, financing, and balance-of-payments problems, as well as volatile exchange rates. Left unattended, these problems can cause widespread damage in a wide range of countries, many of which are innocent bystanders. The system needs circuit-breakers in the form of loans and capital flows that dampen the volatility and maintain access to financing across the system. A well capitalized IMF, much better capitalized than pre-crisis, should be able to fill this backstop – similar to what central banks doThe new IMF Flexible Credit Line performs this function for what amount to AAA-rated countries. A program that meets the needs of the more vulnerable countries is under construction. The challenge is to find the right mix of pre-approval, limited conditionality, and speed. At the same time, while getting the crisis-response mechanisms right is important, it is not the whole story.

The risks of premature tightening - Mervyn King, the governor of the Bank of England, is among the world’s most influential central bankers and leading policy economists.  Mr King has also played a big part in persuading the UK’s coalition government of the urgency of what he calls “a clear and credible plan for reducing the deficit”. But is he right to think as he does? I have doubts.That will come as little surprise to those who read my endorsement of points made by Ed Balls , former adviser to Gordon Brown and current Labour leadership candidate, two weeks ago. I am more fiscally hawkish than Mr Balls, as I said at that time. But I am not as hawkish as Mr King. Yes, I agree that there are risks to cutting the fiscal deficit too slowly. However there are also risks in cutting it too fast. Similarly, while there are risks in not having a credible plan, there are also huge risks in having an inflexible one. The UK needs an adaptable plan for fiscal cuts, one that takes account of the huge uncertainties that result from the fragility of the private sector.

The decade after the fall: Diminished expectations, double dips, and external shocks - VoxEU - In our recent paper (Reinhart and Reinhart 2010), we examine the behaviour of real GDP (levels and growth rates), unemployment, inflation, bank credit, and real estate prices in a twenty-one-year window surrounding selected adverse global and country-specific shocks or events. This note summarises some of our main findings.This column provides evidence on economic performance in the decade after a macroeconomic crisis. It finds that growth is much slower and as well as several episodes of “double dips”. It adds that many of these economies experience plain “bad luck” that strikes at a time when the economy remains highly vulnerable.

America's Dominance of Global Wealth Is Slipping - For once, the poor are getting richer faster than the rich are getting richer. While most of the world’s stocks and other assets still belong to Americans and Europeans, the gap is narrowing as emerging markets grow faster and people in the advanced countries focus on paying down debt, according to a report on global wealth by the German insurer Allianz. The United States remains by far the nation with the most wealth, with 101,762 euros (\$130,764) per person in stocks, bank accounts and insurance, Allianz researchers said Tuesday. Some 39 percent of the world’s wealth belongs to Americans, while Western Europe accounts for another 31 percent. But American dominance of the world’s financial assets is slipping. United States wealth has plunged 12 percent since 2007, as Americans’ stock portfolios lost value and people diverted assets to pay off mortgages.

US Ranks Fourth In Global Competitiveness - I think the biggest surprise for US readers might be how high the US ranks in global competitiveness, and the countries that rank the highest. And of course there is the absence of China in the top ten. Shocking when viewed through the lens of an artificially managed-to-the-dollar currency pair.
Obviously having low paid and poorly treated workers is not the primary qualification for global competitiveness, at least in this national scaling. But it does seem to be a preoccupation of a significant portion of the Anglo-american crony capitalist elements which have never quite reconciled themselves to the laws against indentured servitude.

No sovereign is safe - Some consolatory reading for the GreekIrish… and Portuguese finance ministers on Friday. Citigroup chief economist Willem Buiter has taken a long hard look at other developed sovereigns — and has used the opportunity to remind that no sovereign is safe. It’s billed as a response to a recent IMF paper arguing that default (in the eurozone in particular) would be ‘unnecessary, undesirable and unlikely’. However — the problem with an appreciation for nuance is that it makes even the previously certain, well, uncertain. As Buiter writes (emphasis ours): …even the fiscally best-positioned G7 countries, Germany and Canada, face major fiscal challenges. Germany would not be able to join the Euro Area today if it were not a member already, because it fails to meet the deficit criterion (no more than 3% of GDP) and the debt criterion (no more than 60% of GDP) – in the case of the public debt to GDP ratio, by a significant and growing margin. Indeed, the aggregate Euro Area fails both criteria by wide margins, and of the 16 individual member states, only Luxembourg and Finland qualify on both criteria…