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

Saturday, October 16, 2010

week ending Oct 16

Fed balance sheet grows a bit on Treasuries (Reuters) - The Federal Reserve's balance sheet grew slightly in the latest week as the central bank accumulated more Treasuries in a bid to stimulate spending and investment, Fed data released on Thursday showed. The balance sheet edged up to $2.291 trillion in the week ended October 13 from $2.290 trillion a week ago. In August, the Fed reinstated purchases of U.S. government debt using funds from maturing mortgage securities on its book. The move is intended to maintain the size of its balance sheet and to support liquidity in the banking system. The central bank's holding of U.S. government securities totaled $821.2 billion on Wednesday, up from $819.07 billion last week. Since mid-August, it has purchased $44.1 billion in Treasury securities.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--October 14 2010...

Fed Minutes Hint It Is Favoring New Stimulus Actions - The Federal Reserve provided more evidence on Tuesday that a critical mass of officials at the central bank favored additional actions to reinvigorate the lagging recovery. Most Wall Street analysts expect the Fed to decide, at its meeting in early November, to resume the debt-buying strategy known as quantitative easing, in which the Federal Reserve would purchase Treasury securities to make borrowing cheaper. But while that outcome is possible, it is not certain, according to minutes of the Fed’s last policy meeting, which the central bank released Tuesday.  In essence, the debate was between those who said they believed that the Fed should act “unless the pace of economic recovery strengthened,” and those who thought action was merited “only if the outlook worsened and the odds of deflation increased materially.”  The minutes of the Sept. 21 meeting of the Federal Open Market Committee indicated that several officials “consider it appropriate to take action soon,” given persistently high unemployment and uncomfortably low inflation.

A Look Inside the Fed’s Balance Sheet -(Oct 7) See a full-size version. Click on chart in large version to sort by asset class.  Assets on the Fed’s balance sheet have remained relatively stable around $2.29 trillion since mid-August when the central bank announced that it would reinvest the proceeds from its mortgage-backed securities and agency debt portfolios into Treasurys. The MBS and agency debt holdings have steadily declined as loans are paid off or mature. Since the Fed announced the program the MBS and agency portfolios have fallen by $44.5 billion, while Treasurys holdings have increased by $42.1 billion. The Fed still holds more assets in MBS — over $1 trillion — than any other portfolio. Outside of debt holdings, other assets were also declining. The Term Asset-Backed Securities Loan Facility, or TALF, ended in March, and is falling as the last loans made through the program mature. Liquidity swaps with foreign central banks have fallen back to the millions of dollars after jumping in the spring in response to European sovereign debt concerns. Direct-bank lending was essentially flat, remaining at precrisis levels.

To QE or Not To QE, That Is The Question - Wouldn’t it marvellous if the Fed could get the positive effects of quantitative easing on asset prices without actually having to ease? This whole debate about QE in the United States has been driving asset markets higher (both bonds and stocks). Gold is higher and the dollar is lower.  Yet the Fed hasn’t actually done anything. Is this a case of buy the rumour and sell the news?  I think so – especially because, despite all the jawboning about QE and inflation targets, the Fed still seems resistant to go down this path. For instance, James Bullard of the St. Louis Fed, the man who started us on this journey with his Seven Faces of the Peril bit, recently came out saying in effect hold the phone, we haven’t even decided to do QE, folks.

Fed Minutes Add Mystery to What's Next - - It's the $500 billion question: will the Federal Reserve's Open Market Committee order another round of quantitative easing ("QE2") when it meets in November? The detailed minutes were released today from the FOMC's September 21st meeting today. Ever since its brief statement was released last month, the market has been speculating that QE2 is imminent, with many people arguing that the Fed showed its hand by expressing its readiness to act. But the minutes provide additional uncertainty on whether we'll see more monetary expansion in November.  One reason why it seemed more plausible that the Fed would expand monetary policy was that it expressed new concern over the price level. If inflation is lower than its target, then additional money supply could help to raise it. Yet, the minutes say that inflation hasn't declined much in recent months. Moreover, committee members hadn't changed their inflation expectations significantly in September.

Fed More Dovish Than Expected, Points To Asset Purchases "Before Long" - FOMC minutes from September 21 meeting was surprisingly dovish.  FOMC members thought that additional accommodation may be “appropriate before long” and seemed to lower the bar for further action.  During his Jackson Hole speech, Bernanke implied that the Fed stood ready to act again but that significant deterioration in the economic outlook was needed before further measures would be seen.  At the September meeting, though, “many” FOMC members felt that if growth remained too slow to reduce unemployment or if inflation continued to come in below target, then the Fed had grounds to take action again. “Some” felt that action would be warranted only if the outlook worsened and the odds of deflation increased materially, but they appear to be in the minority as other members lowered the bar for such action.  FOMC focused on asset purchases as the most likely tool to use, though it also discussed the possibility of targeting nominal GDP as well.  We note that FOMC did question the efficacy of another round of asset purchases, but in our view, this has turned into a non-issue as the Fed probably sees little downside to taking that extra step in trying to boost the growth trajectory.

Prepping for action - YESTERDAY, the Federal Reserve released the minutes from the September meeting of the Federal Open Market Committee, and it looks very likely that the Fed will take additional action before the end of the year. Forecasts prepared for the meeting showed weaker than expected activity in the American economy: In the economic forecast prepared for the September FOMC meeting, the staff lowered its projection for the increase in real economic activity over the second half of 2010. The staff also reduced slightly its forecast of growth next year but continued to anticipate a moderate strengthening of the expansion in 2011 as well as a further pickup in economic growth in 2012. The softer tone of incoming economic data suggested that the underlying level of demand was weaker than projected at the time of the August meeting. Moreover, the outlook for foreign economic activity also appeared a bit weaker. There was some discussion of the structural unemployment issue:

FOMC September Meeting Minutes: "focused on further purchases of longer-term Treasury securities" - From the Fed: Minutes of the Federal Open Market Committee - Participants discussed the medium-term outlook for monetary policy and issues related to monetary policy implementation. Many participants noted that if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate or if inflation continued to come in below levels consistent with the FOMC's dual mandate, it would be appropriate to provide additional monetary policy accommodation. However, others thought that additional accommodation would be warranted only if the outlook worsened and the odds of deflation increased materially. Meeting participants discussed several possible approaches to providing additional accommodation but focused primarily on further purchases of longer-term Treasury securities and on possible steps to affect inflation expectations. Participants reviewed the likely benefits and costs associated with a program of purchasing additional longer-term assets--with some noting that the economic benefits could be small in current circumstances--as well as the best means to calibrate and implement such purchases.

September minutes show Fed close to easing — There was a general sense among many Federal Reserve officials that additional monetary-policy easing may be appropriate “before long,” according to a summary released Tuesday of the Sept. 21 discussions.  Members of the rate-setting Federal Open Market Committee viewed recent growth and inflation trends as unsatisfactory. “Several members noted that unless the pace of economic recovery strengthened or underlying inflation moved back toward a level consistent with the FOMC’s mandate, they would consider it appropriate to take action soon,” the summary said.

A Bombshell in the FOMC Minutes - Contrary to what some observers are saying, the FOMC minutes today reveal a big change in terms of policy options being discussed for the Fed.  For the first time the FOMC has discussed the possibility of targeting the level of NGDP.  Here is the key excerpt (my bold): With short-term nominal interest rates constrained by the zero bound, a decline in short-term inflation expectations increases short term real interest rates (that is, the difference between nominal interest rates and expected inflation), thereby damping aggregate demand. Conversely, in such circumstances, an increase in inflation expectations lowers short-term real interest rates, stimulating the economy.Participants noted a number of possible strategies for affecting short-term inflation expectations, including providing more detailed information about the rates of inflation the Committee considered consistent with its dual mandate, targeting a path for the price level rather than the rate of inflation, and targeting a path for the level of nominal GDP. This is huge.  The FOMC is now discussing a NGDP level target, a topic that has has been promoted in the economic blogosphere.

NY Fed Conducts 1st Reverse Repo Test With Expanded Counterparties--The Federal Reserve Bank of New York conducted its first small-scale test of its reserve draining reverse repurchase agreement with expanded repo counterparties Wednesday afternoon.  In the operation, the Fed accepted $260 million in five-day reverse repos, out of $260 million that were submitted.  Tuesday, the Fed announced that it was planning more reverse repo tests. It cautioned that the operations, which take bank reserves out of the system and will eventually be used to tighten financial conditions, "is a matter of prudent advance planning." The bank also said in its press release that "the operations have been designed to have no material impact on the availability of reserves or on market rates."  The Fed's expanded reverse repo counterparty list was revealed in mid-August. Because of the size of the transactions the Fed will eventually have to carry out to pull the massive amounts of cash from the system, many believed primary dealer banks alone would not be able to trade in the size required to get the job done.

The Fed feels compelled to experiment - Mohamed El-Erian - This week’s release of the minutes of the September 21 meeting of the Federal Open Market Committee points to an activist Federal Reserve that is in policy experimentation mode – an institution that feels compelled to take additional measures to energise the American economy yet is uncertain about the potency of its interventions. This mix, of a highly engaged institution having to operate with imperfect instruments, has implications that are felt well beyond the US.Judging from the minutes, it is virtually a foregone conclusion now that the Fed will announce on November 3 that it is re-engaging in “unconventional policies” – a new programme of quantitative easing, nicknamed QE2. By buying securities, the Fed will be looking to “push” others into taking more risk – to push investors to move out on the risk spectrum and buy corporate bonds and stocks; to push banks to use their large excess reserves to make loans; and to push large companies to deploy their record cash balances to purchase equipment and hire people.

Fed Undaunted by Uncertain Prospects for Money Printing - Minutes due Tuesday from the Fed's most recent policy-setting meeting may reflect some divisions among officials over whether to launch another round of asset purchases, known as quantitative easing.Investors, however, assume the Fed will pull the trigger, likely at its next policy-setting meeting in November. A Reuters poll of 16 primary dealers—investment firms that deal directly with the Fed—showed all expected the central bank to return to buying bonds.All but one predicted the announcement would come at the Nov. 2-3 meeting.

Bernanke sets the world on fire - United States Federal Reserve chairman Ben Bernanke recently announced he would be again mounting a full-court monetary press. His announcement of another round of quantitative easing (QE2) - that is, a massive purchase of bonds to drive down the already low interest rates, and to force inflation above the level that would make real interest rates largely negative, has jolted markets and heightened uncertainties.  His announcement sent gold prices racing to a fresh nominal record of $1,364 per ounce, leaping by about 15% in only one week, and the US dollar went into free-fall. The rapid increase in gold prices is an indication of strong inflationary expectations and a loss of confidence in key currencies. During this year, gold has appreciated by over 34%. The flight to gold has been largely a flight to safety and a hedge against expected inflation. As leading central banks have embarked on what has been the most unorthodox monetary policy of all time, investors and holders of foreign currency reserves could not wait until the fire burned their wealth to paper ashes.

IS BERNANKE WORRIED ABOUT THE CONSEQUENCES OF QE2 ALREADY? - The Fed performed a $260MM reverse repo test this morning in order to “ensure that this tool will be ready if the Federal Open Market Committee decides it should be used.”  Of course, this is the Fed’s way of saying that they want to be on the ready when tighter monetary policy is necessary.  These little tests are just small scale ways of making sure that the QB’s arm is loose before he needs to go into the game.  The NY Fed explained clearly that these are merely tests and do not reflect any change in monetary policy: “Like the earlier operational readiness exercises, this work is a matter of prudent advance planning by the Federal Reserve. The operations have been designed to have no material impact on the availability of reserves or on market rates. Specifically, the aggregate amount of outstanding transactions will be very small relative to the level of excess reserves, and the transactions will be conducted at current market rates. These operations do not represent a change in the stance of monetary policy, and no inference should be drawn about the timing of any change in the stance of monetary policy in the future.”

Parsing Bernanke: Takeaways From Boston Speech - Laying the groundwork for an early November decision to embark on another round of bond-buying, Fed Chairman Ben Bernanke this morning delivered a 15-page attempt to explain what he is thinking about the economy and the efficacy of monetary policy.The takeaways:

    • 1. Unemployment is way too high, and unlikely to fall much without some help from the government.
    • 2. Inflation is too low and unlikely to return to the Fed’s target of a bit below 2% without some help from the Fed.
    • 3. The first round of bond buying — aka Quantitative Easing — worked. There are risks to doing more, but they aren’t going to stop him from doing more
    • 4. The Fed is thinking about publicly pledging to keep short term rates near zero for a REALLY long time.

Bernanke makes case for further cautious easing -- Federal Reserve Board Chairman Ben Bernanke on Friday said he thought the current high unemployment and low inflation environment would linger into 2011 and as a result there is a "case for further action" on the monetary policy front. Bernanke did not provide many details on the nonconventional policies that the Fed might take beyond saying the Fed might expand its holdings of longer-term securities. He backed a cautious approach, saying that the Fed has little experience in judging the economic effects of more asset purchases. Bernanke said another step the Fed might consider is to strengthen its pledge to keep rates low for an extended period. The Fed may stress that it expects to keep rates "low for longer than markets expect," Bernanke said

Bernanke outlines case for easing (FT)The Federal Reserve has taken a large step towards a formal inflation target after chairman Ben Bernanke said that most of its officials think the rate of price rises should be “2 per cent or a bit below”.Noting that current measures of core inflation are around 1 per cent, Mr Bernanke said that “inflation is running at rates that are too low” relative to what the Fed judges is most compatible with its mandate.Mr Bernanke’s speech sends a clear signal that the Fed intends to anchor a new round of quantitative easing – the policy of expanding its balance sheet through asset purchases – on driving inflation up to its target level. This is the first time that Mr Bernanke has explicitly linked the long-term inflation forecasts of members of the Fed’s Open Market Committee – which have been published for some time – with the central bank’s inflation objective.

Bernanke Sees Case for `Further Action' With Too-Low Inflation - Federal Reserve Chairman Ben S. Bernanke said additional monetary stimulus may be warranted because inflation is too low and unemployment is too high.  “There would appear -- all else being equal -- to be a case for further action,” Bernanke said today in the text of remarks given at a Boston Fed conference. He said the central bank could expand asset purchases or change the language in its statement, while saying “nonconventional policies have costs and limitations that must be taken into account in judging whether and how aggressively they should be used.”  He didn’t offer new details on how the Fed would undertake those strategies or give assurances the central bank will act at its Nov. 2-3 meeting.

In Fed Shift, Bernanke Says He Wants More Inflation - Ever since the 1970s, one of the key jobs of the US Federal Reserve has been to fight inflation. Now, it seems the Fed is embarking on a path to resurrect its old foe. On Friday morning, at a conference on Fed policy in Boston, Fed chairman Ben Bernanke made the case that the US central bank needs to do more to boost the economy. For Fed watchers this was expected. Unemployment remains high and the US recovery seems to be slowing. Bernanke's plan is to use central bank funds to buy up long-term Treasuries and other bonds in an effort to drive interest rates down, and lower borrowing costs for consumers and companies. And Bernanke is indicating, as expected, that the Fed will most likely act on that plan when it meets again in early November. The real surprise in Friday's speech was how much the Fed chairman talked about inflation, and why it may be too low. No one likes rising prices. But he Fed's move to boost inflation may make a lot of sense right now.

Time to go to work - WITH a new round of monetary easing probably, maybe, almost certainly likely before the end of the year, every little utterance out of the leaders of the Fed's Open Market Committee is heavily scrutinised. Today it was the Chairman, Ben Bernanke's turn to set tongues wagging. At a speech to a monetary policy conference (on, appropriately, monetary policy in a low-inflation environment) in Boston, he updated observers on his view of the American economy. Of inflation, he points out that:PCE price inflation (which is based on the broad-based price index for personal consumption expenditures and excludes the volatile food and energy components of the overall index) has declined from approximately 2.5 percent at an annual rate in the early stages of the recession to an annual rate of about 1.1 percent over the first eight months of this year...the so-called trimmed mean consumer price index (CPI) has risen by only 0.9 percent over the past 12 months, and a related measure, the median CPI, has increased by only 0.5 percent over the same period.

Bernanke Weighs Risks of New Fed Action -The Federal Reserve chairman, Ben S. Bernanke, went further on Friday in outlining the risks the central bank was prepared to take by pumping more money into the flagging recovery. In formal remarks here, Mr. Bernanke explained a viewpoint that had taken shape gradually over several months. The Fed hoped to calm debate over its next move and prepare markets for the likelihood that it would pour money into the economy by resuming purchases of government, and possibly private, debt. The new action would be aimed at lowering long-term interest rates and spurring growth, but it would also have effects far beyond American shores. It could contribute to the weakening of the dollar and complicate a festering currency dispute that threatens to disrupt global trade relations. For Americans, additional Fed activity is likely to mean that already low 30-year mortgage rates would fall even further. The moves would not help many savers, however, as yields on certificates of deposit and savings bonds would probably fall as well.

My theory on Ben Bernanke -  On one level, what's striking about Bernanke's speech at a conference of the Boston Fed is how textured, detailed and unambiguous it is in trying to explain a decision the Fed won't officially make until at least Nov. 3.   Bernanke acknowledges that consumer spending has been inhibited by a "painfully slow'' recovery, that job growth is too slow to make any real dent in unemployment through the end of next year and that inflation is actually running unemployment is coming down too slowly and that inflation is "too low" for the Fed's comfort. Then Bernanke spells out the implications for monetary policy, with the bottom line being that the time is right for QE2.That said, one has to ask: what took Bernanke so long to reach this decision.  At the end of the day, his rationale boils down to something that critics -- even laymen like me -- have been saying and writing for months: unemployment is higher than the Fed wants and inflation is lower than the Fed wants, so there is no good reason for not easing policy further

Ben Bernanke's Speech Was... Disappointing, by Brad DeLong: I am still surprised at the Fed Chair we have. Where is the Fed Chair who was willing to try to get ahead of the problems in late 2008? Or the "Helicopter Ben" of 2003? Or the student of big downturns in Japan in the 1990s and the U.S. in the 1930s. It's a very different animal we have today. And this speech didn't do much to convince me that he is going to do what ought to be done. Bernanke forecasts that growth next year "seems unlikely to be much above its longer-term trend"--that is, that unemployment is likely to rise in the near term and then stay essentially stable through the end of 2011 before it even starts to think about heading down. In this environment, now is not the time for Bernanke to talk about the costs and risks of expanding the Federal Reserve balance sheet. And it is also not the time to talk about how monetary policy can be carried out via the Federal Reserve's communications strategy.

Krugman: We Need $8-10 Trillion Worth of Quantitative Easing - The interesting thing about this clip is that Paul Krugman is probably right: you need trillions of printed dollars to get the stimulative effect the Federal Reserve is looking for. Ambrose Evans Pritchard was talking about taking the Fed’s balance sheet to $5 trillion in June. Fed watchers say Mr Bernanke and his close allies at the Board in Washington are worried by signs that the US recovery is running out of steam. The ECRI leading indicator published by the Economic Cycle Research Institute has collapsed to a 45-week low of -5.7 in the most precipitous slide for half a century. Such a reading typically portends contraction within three months or so.Key members of the five-man Board are quietly mulling a fresh burst of asset purchases, if necessary by pushing the Fed’s balance sheet from $2.4 trillion (£1.6 trillion) to uncharted levels of $5 trillion. But they are certain to face intense scepticism from regional hardliners. The dispute has echoes of the early 1930s when the Chicago Fed stymied rescue efforts. In the video below, Paul Krugman talks about $8 – $10 trillion of Treasury buying. I think the sum needed to provide the stimulus the Fed wants could be higher still. Krugman doesn’t think this will happen.

The Ride of the Keynesian Cowboys - The Fed is basically down to one bullet in its policy gun. It cannot lower rates beyond zero, although it can pull down longer-term rates if it so chooses. But lower rates so far have not been the answer to creating jobs and inflation. All less-subtle instruments of monetary policy have been tried. The final option is massive quantitative easing, the monetization of US government debt. As the saying goes, if all you have is a hammer, all the world looks like a nail. And after the last FOMC meeting, the markets have openly embraced quantitative easing. And for good reason: that is the talk coming from the leadership of the Fed. Since my friend Greg Weldon has so thoughtfully collected some of the more salient parts of some recent Fed speeches, let’s turn the next few paragraphs over to him. “We note the following quotes, starting with the would-be-hero, maybe-headed-for-monetary-hell, Fed Chairman, Ben Boom-Boom Bernanke himself …

Auerback: You Can Thank Ben Bernanke for Higher Food Prices - Although I have consistently taken the line that QE is totally useless, in effect an accounting trick which does little for real economic activity, I should have at least acknowledged its powers in terms of fomenting casino-like speculation in the financial markets. Mind you, that’s nothing for the Federal Reserve to be proud about, and it is certainly inconsistent with its stated mandate of controlling inflation and promoting employment.  That said, you can lay a lot of the current gyrations in the commodities complex, bonds, equities and currencies at the doorstep of the Federal Reserve. My friend, Michael Hudson of UMKC, has made the same point: “What is to stop U.S. banks and their customers from creating $1 trillion, $10 trillion or even $50 trillion on their computer keyboards to buy up all the bonds and stocks in the world, along with all the land and other assets for sale in the hope of making capital gains and pocketing the arbitrage spreads by debt leveraging at less than 1% interest cost?”  This is the game that is being played today as a consequence of the Fed’s embrace of “QE2”. So when the Financial Times warns of a global food crisis, one can put 2 + 2 together and begin to understand the damage the Fed and its perversely Wall Street centric approach to economic policy is doing to our economy.

The Fed's Magic Money-Printing Machine, Act 2 - Matt Taibbi - It’s amazing, given the attention the Tea Party allegedly is paying to government waste and government spending, that there hasn’t been more controversy about the now-seemingly-inevitable arrival of “QE2” – a second massive round of money-printing cooked up by the Fed to prop up both the government and certain sectors of the economy. A more overtly anticapitalist and oligarchical pattern of behavior than the Fed’s “Quantitative Easing” program could not possibly be imagined, but the country is strangely silent on the issue.  What is “QE”? The first round of “quantitative easing” was a program announced by Ben Bernanke last March in response to the financial crisis, ending in March of this year. In what will soon be known as “QE1”(i.e. once QE2 is announced), Bernanke printed over a trillion dollars out of thin air, then used that money to buy, among other things, mortgage-backed securities (MBS) and Treasury Bonds. There has long been speculation that another trillion-plus money-printing program called QE2 is coming, but only recently have there been concrete hints from the Fed along those lines.

The harm of hyperactive monetary policy - The US Fed’s policy-setting committee (FOMC) undertook large asset purchases last year, buying $1.7 trillion of mortgage-related and Treasury bonds. Last month, the Fed reaffirmed the easing bias and indicated that it could start buying vast quantities of government debt if unemployment did not improve.Yet unemployment has not improved, according to data released last week. As a result, the Fed is likely to embark on more big purchases of assets. How will the FOMC will articulate its new programme of large scale asset purchases at its meeting next month? The presidents of the Federal Reserve Banks of New York and Chicago have called for the Fed to do more to boost the economy, including a new programme of US Treasury bond purchases and possibly an indication that the inflation target will rise beyond the informal 2 per cent target.While the decisions on zero interest rate policy and quantitative easing might be inevitable, we should recognize that, even for the Fed, there is no such thing as “a free lunch” and that there are adverse long-term consequences. Andrew Sheng and I argued last year that ZIRP might be as expensive as the crisis.

More Fed easing likely won't help economy: Hoenig (Reuters) - Kansas City Federal Reserve President Thomas Hoenig, who all year has steadfastly opposed the Fed's super-easy monetary policy, fleshed out his stance against further easing on Tuesday, saying it would do little to aid recovery and could spark inflation. "We have to recognize that QE2, while a possibility, is not necessarily what we want to do given the benefits versus the risks," Hoenig told the National Association of Business Economics. "At this point, with a modest recovery under way and inflation low and stable, I believe the economy would be better served by beginning to normalize monetary policy."

Fed’s Hoenig Again Attacks Asset Buying -The Federal Reserve’s leading dissident policymaker mounted another attack Tuesday on those who favor the central bank restarting its asset buying program. “Dumping another trillion dollars into the system now will most likely mean they will follow the same path into excess reserves, or government securities, or “safe” asset purchases,” with a “minor” impact on stock prices, Federal Reserve Bank of Kansas City President Thomas Hoenig said. “There simply is no strong evidence the additional liquidity would be particularly effective in spurring new investment, accelerating consumption, or cushioning or accelerating the deleveraging that is hopefully winding down,” the official said. Hoenig is a voting member of the interest rate setting Federal Open Market Committee. His comments came from the text of a speech to be delivered in Denver

Atlanta’s Lockhart: Fed Should Provide ‘Certainty’ - Atlanta Federal Reserve President Dennis Lockhart said Friday a high level of uncertainty among businesses was casting “a pall” over the economy as employers hold off on decisions and hiring. “The whole theme of uncertainty is really very prominent in the minds” of Fed officials and quantitative easing could help alleviate the problem, said Lockhart. The Fed “has a responsibility to try and do what it can to provide some certainty,” he added. Lockhart said inflation, at slightly above 1%, is “too close” to a potential tipping point toward deflation. “I am concerned,” he said, adding that the economy is in “a soft spot.”

The Fed's QE2 — Speeding Our Demise - Given the abject failure of MP1 (the first round of money printing, aka. quantitative easing, QE1) to get credit flowing again, create jobs, and generally spur economic activity, it is reasonable to ask why we would expect MP2 QE2 to have any discernable, lasting effect on the Real Economy. The Federal Reserve has a dual mandate to keep prices stable and maximize employment. Despite buying $1.3 trillion worth of agency debt (Fannie & Freddie MBS), house prices are falling again. As for the jobless rate, no comment is necessary. Various Fed officials have been talking up MP2 QE2, which by all reports is scheduled to begin shortly after the November elections. As Reuters' James Saft reports, the talk is scary, not to mention crazy

Why is the Fed doing this? - Most observers now seem convinced that the Federal Reserve will shortly implement QE2, a second round of quantitative easing. It's worth taking a look at what QE2 is and is not expected to accomplish. The ability of the Federal Reserve to influence what happens in the economy is fundamentally limited. The ultimate power of the Federal Reserve is the ability to create money, and how much money the Fed creates is a key determinant of the purchasing power of an individual dollar bill. A very minimalist position on what the Fed should be doing is that it should aim for a rate of inflation that does not disrupt the economy's ability to use real resources in the most efficient manner possible.

Why printing money makes sense - Right now, even a counterfeiter issuing dud dollars would be better for the economy than our deficit-fixated policymakers.  It is worth noting that all the policymakers who don't think we should worry about 9.6% unemployment have jobs. This simple fact cannot be repeated enough times because it explains a huge amount about current economic policy. For the tens of millions of people who are unemployed, underemployed or have given up looking for work altogether, we are in a crisis. The economy is an absolute disaster, ruining their lives and also jeopardising the futures of their children and grandchildren.  But that is not the way that the people paid to contemplate economic policy in Washington see things. This gang is busy congratulating themselves because things could have been worse. They point out that if they had been even more incompetent that we could be in a second Great Depression with unemployment staying in the double digits for a decade.

Quantitative Easing, Oil Prices And Recessions - Yesterday's post The Fed's QE2 — Speeding Our Demise described the longer term effects of a new round of money printing by the Federal Reserve. A weaker dollar will be a direct outcome, but a weaker doallar has consequences which policymakers have either not taken into account or simply don't care about. One consequence will be to drive speculative money into commodities trading.  Even without a formal announcement of QE2, the markets have got the ball rolling in anticipation of another round of money printing. In The Real Meaning Of The Oil Price, I described how oil prices have been driven by two factors unrelated to supply & demand—

  • The oil price is positively correlated with the S & P 500
  • The oil price is negatively correlated with the dollar

QE1 Failed, Why Will QE2 Work? - Most market participants are fixated with the potential for QE2 to boost asset prices and generate organic economic growth, however, without a subsequent rise in aggregate demand and productivity the program will ultimately be deemed a failure as prices readjust over time to reflect the real underlying fundamentals.  Mr. Bernanke is making the same blunder that we made with the past bubbles busts – if we can create paper profits and convince consumers that they should spend those paper profits then we’ll be on our way to economic prosperity.  The problems arise when asset prices readjust lower to meet their true fundamentals. It’s ponzi finance and nothing more. As I have previously explained, the goal of QE is to increase aggregate demand by creating a fictitious wealth effect and by increasing bank loans.  The market appears to think that QE1 was some sort of success, but as I have argued, QE1 was only successful because it altered bank balance sheets and alleviated the credit strains.  After all, this was Ben Bernanke’s goal at the time – to alleviate the credit pressures.  What QE1 did not do (and what we need now) is increase lending supported by a boost in real aggregate demand.

Myron Scholes on Whether QE2 Will Work - Some possibilities: (1) Maybe in short run, QE reduces the risk premium and encourages investment. Encouraging investment is good. The problem is that this isn’t a rational argument. (2) If Fed purchases of safe assets move investors into risky assets, then the risk premium falls, encouraging investment. Wealth increases and so does consumption and employment. The problem: The Fed isn’t an independent, exogenous entity. U.S. persons own the Fed. If the Fed takes on more risk, society still has the risk. (3) QE reduces uncertainty about government commitment to stimulating the economy and continues to provide liquidity. The problem: Uncertainty increases as to how the Fed is going to get out of QE and what effect the Fed might have on economy going forward when it stops QE. A fundamental question: Can the Fed affect risk premiums at all? In the short run? In the long run? (4) Is QE a little like Laffer curve of taxation? Increasing money massively might lead to the hyperinflation of Zimbabwe, Weimar Germany, Argentina, etc. (5) Capital flows out of U.S., reduces the value of the dollar, stimulates exports, growth, etc. If QE scares foreigners who don’t understand (4) and are worried about crazy experiments and low rates, they repatriate money to home country; that depresses the dollar. If the European Central Bank is conservative and won’t play the game, the euro appreciates against the dollar (as would the currencies of Australia, Canada, Japan, Korea, China, etc.) Then, we must worry about responses, if any, of these other countries. (6) A weaker dollar stimulates investment in the U.S. and gives time for domestic recovery to take hold.

Stephen Roach: Quantitative Easing Won’t Work - That’s how Morgan Stanley’s Stephen Roach began his interview with CNBC Asia. I agree 100% with these sentiments as I discussed in my post on My thoughts on the ‘currency war’.  Nor is it about Japan alone or the U.S. alone, Roach says. Collective action is necessary. He also says the U.S. has "the lowest savings rate in the history world for a leading economy." It is now the world’s largest debtor nation. No amount of quantitative easing is going to fix this. Roach agrees, saying an economy that is actively deleveraging doesn’t need the government to continuously throw liquidity at it because this will only increase debt levels and "squander our savings." I was discussing U.S. policy in an e-mail thread just moments ago and mentioned comments by Fed official Brian Sack on this issue. His quote is below [emphasis added]:

Beware of Central Bankers in Helicopters - Apologies if you find it contrived, banal, or cliché, but the fact is this: When you talk about central bankers nowadays, and Fed Chairman Ben Bernanke in particular, in my mind it's really hard not to use footage from Apocalypse Now for its imagery. The chairman, armed with his research economists, New York Fed Open Market Operations staff, and bags of money, is riding in low over the horizon, blaring Wagner's “Ride of the Valkyries” and trying to shoot down savers and risk-averse investors. But I don't see anyone in the Fed's Blackhawks (the modern-day equivalent to the Vietnam-era Huey) having the combination of panache, bravado, or sheer insanity of Lt. Col. Bill Kilgore.  It's like Bernanke is yelling “You can spend, or you can chase risk!” but there's no je ne sais quoi to that, sorry. To clearly see what the Fed is doing, we need to juxtapose its policy actions against the current landscape to see if it makes any sense. Frankly, from my perch, it doesn't. I thought I needed to say that just in case folks thought my last piece was an endorsement of QE2. (See Why QE2 Won't Be Enough).

QE2 May Not Be Lifeboat for Economy or Jobs - Investors have been euphoric about the prospect of the Federal Reserve buying government securities to pump money into the markets and stimulate the economy. But the moves, while better than nothing, may not help the U.S. economy or lackluster job markets as much as some hope. Fed officials have indicated that the decision to pursue further quantitative easing — as the stimulus, nicknamed QE2, is called — will depend on what the data say about the economy. So far, the news has painted an anemic recovery. Manufacturing growth has slowed since the spring, and businesses are barely adding to their payrolls: Private-sector jobs rose only 64,000 in September. Fed-watchers think central bankers will finalize their QE2 plans at a two-day policy meeting ending Nov. 3 Expectations are that the Fed will purchase between $500 billion and $1 trillion in Treasury debt with an eye toward lowering long-term rates and spurring more borrowing by consumers and businesses. The first round of QE brought down Treasury rates, which in turn cut other rates, enabling corporations to borrow cheaply and giving some support to housing demand as well as triggering mortgage refinancings that are putting more money into homeowners’ pockets.

Rethinking That Round-Earth Idea - What if the World is flat? It sure looks flat, even in an airplane it looks pretty flat, doesn't it?  Well, fiat currencies are like that too.  We talk about Quantitative Easing as if the World is flat because Americans (who are trained to be self-centered to the point of Xenophobia from birth) don't think of their connections to other counties on this planet.  To understand the American investor is to look at this map and understand that it is not a joke... So investors in the US discuss Quantitative Easing as if we can simply devalue the dollar and every other country on Earth has no choice but to bend over and accept our worthless currency because they are lucky we even bother to trade with them.  To most Americans, it's still 1950 and we just won the war and Europe better kiss our ass and the rest of the World better fear us or they're NEXT.  That pretty much sums up our next 50 years of diplomacy, doesn't it? 

The Nipponization of Ben Bernanke -Krugman -  I’m with Brad DeLong on Bernanke’s speech: given Bernanke’s diagnosis of our problems, what he said about the policy response was astonishingly diffident: … the FOMC is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation over time to levels consistent with our mandate. Of course, in considering possible further actions, the FOMC will take account of the potential costs and risks of nonconventional policies … True, it’s a stronger statement than we’ve seen in the past. But with unemployment near 10 percent and headed up, core inflation below 1 percent by most measures and headed down, the Fed is edging toward modest action, while worrying about the risks? What I have always suspected is that the real risk the Fed fears is that it will do unconventional stuff but fail to move the economy, and hence lose face — which was the primary reason the Bank of Japan was so unwilling to act back when Professor Bernanke used to criticize it. .

Nobel Award in Darwin Economics - Named in honor of Charles Darwin, the Darwin Awards commemorate those who improve our gene pool by accidentally removing themselves from it. I therefore propose the ‘Nobel Award in Darwin Economics’. The recipient of the award would graciously be asked to remove (just) their ‘economic genes’ from our economic gene pool. If they teach economics, they’d be asked to cease and desist, if they were the Secretary of the Treasury, the Chairman of the Federal Reserve, or the President of the United States they’d be asked to resign. I’ll let you the reader decide who should be nominated to receive this years ‘Nobel Award in Darwin Economics’. For me, it is an easy decision, at least right now anyway. Of course if Turbo-Tax-Cheating Timmy Geithner or President Obama adhere to the advice offered in this FT article America should open its vaults and sell gold” - then I’ll advocate that the award be shared.

Quantitative Easing without the Fed - Alternative title: Stimulus without Congress. Many argue that the Fed should buy long maturity and/or risky assets in order to reduce interest rate differentials. The Federal Funds rate is essentially zero, but interest rates which matter are still significantly positive so more could be done by some huge player in the bond market. But why the Fed ? The Treasury is a huge player in the bond market. They are still selling long term bonds. Why ? What if the Treasury decided to finance the deficit with 1 and 3 month T-bills alone ? A now deceased parrot said that this would reduce the slope of the yield curve.  But so long as the Fed keeps the target federal funds rate roughly zero, that means lower medium and long term interest rates.There must be something wrong with this proposal. What ? What is the profound difference between the Fed buying more and the Treasury selling less which outweighs the fact that Obama can fire Geithner and can't fire Bernanke ?

The quick and dirty way of putting money into macro -This post is really about maths, dark ages, and understanding macro.There are two ways of putting monetary exchange into a macroeconomic model: the proper way; and the quick and dirty way. Keynesians generally use the quick and dirty way. That's OK. But there may be problems if people don't understand what you are doing. There's a lot to be said for the quick and dirty way. It's quick, even if it is dirty. It's a perfectly defensible short-cut that does the job quickly and simply, even if it's not perfect. The biggest problem is not that it's not perfect; it's that people may not realise you have introduced monetary exchange. Precisely because it's so quick and easy, they might not realise you've done it. Sometimes even the model-builders themselves might not realise they've done it. The biggest danger is that people will think it's a model of a barter economy, when it isn't.

More Fed Easing: A Help or Hurt To Markets? - World markets are practically giddy in their expectation for a new round of easing by the US Federal Reserve. As the Financial Times noted this morning, "the FTSE All-World index is up 0.8 percent to its best level since September 2008. The benchmark has climbed 14% in six weeks--a period in which traders' risk appetite has risen with every hint that the US Federal Reserve stands ready to inject further liquidity into the economy." Yes, it's a whooped-up world market hoping for holiday cheer from the Fed. But when it happens, will the markets still be cheering? Specifically,  the November FOMC meeting is when, by all indications, the Fed will launch a new round of quantitative easing (QE2) to address the economy's continued weakness. It's not just GDP the Fed wants to goose, but also inflation--a message the Fed floated in the September FOMC minutes:

Yellen Says It’s Possible Low Rates Feed Financial Bubbles - Federal Reserve officials “have no choice” but to try to “contain future bubbles and credit binges” and limit their damage to the economy, the central bank’s vice chairwoman said on Monday, detailing the Fed’s newly broadened mandate to promote financial stability.  In her first speech since she was sworn in Oct. 4 as the Fed’s second-highest ranking official, Janet L. Yellen acknowledged that expansionary monetary policy — holding interest rates low to stimulate the economy, as the Fed has been doing for more than two years — “could provide tinder for a buildup of leverage and excessive risk-taking in the financial system.”  But Ms. Yellen did not say that such risks should deter the Fed from resuming purchases of government debt to prop up the flagging recovery, an action most Wall Street analysts expect the Fed to take as early as next month.  She is associated with the camp of so-called inflation doves at the Fed, who tend to emphasize the persistently high unemployment rate rather than the risks of setting off inflation.

Know Your Fed Heads: Here’s the Hawk-O-Meter – The speechifying of Federal Reserve presidents and governors are usually only of middling interest even to the most ardent Fed geeks. But in recent weeks the markets have tuned in to FedSpeakers, as they blared a pretty clear message: QE2 is on the way. Our predecessor here at MarketBeat, the illustrious and prolific David Gaffen, made a semi-regular habit of refreshing readers minds on exactly who’s who at the Fed.  In that spirit, we figured we’d share this handy Hawk-O-Meter, that was punched up by David Ader over at CRT Capital: (Fed officials are often categorized as “hawks,” who are most concerned about inflation getting out of control and “doves,” who are less worried about inflation and more worried about economic growth.) We offer an updated version of our Fed Hawk-O-Meter to give you a sense of where we think the members stack-up, who votes and so who to pay attention to. .

Why Is the Senate Blocking Nobel-Winning Economist? - The Nobel committee has awarded its coveted economics prize to one British Cypriot and two American economists, one of whom, Peter Diamond, has spent the last two months blocked by Senate Republicans from joining the Federal Reserve. President Barack Obama nominated Diamond in August, but Republicans, particularly Senator Richard Shelby, have argued that Diamond is not sufficiently qualified. Diamond and his two colleagues won the Nobel for their work on unemployment, the conclusions of which suggest that further economic stimulus may be needed in today's U.S. economy. So Diamond's Nobel may have real policy implications. Here's how.

Axel Weber Preaches to the Converted - Bundesbank President Axel Weber may be far away from his native Germany, but his speech Tuesday to the Shadow Open Market Committee in New York was as close to a home-field crowd as you can get. Weber delivered the goods for the SOMC, a group of Wall Street and academic economists known for adhering to the monetarist view that central banks should strictly focus on fighting inflation. “Maintaining the accommodative policy stance for too long may risk a de-anchoring of inflation expectations, which is costly to rein in,” Weber said. He also stressed that the European Central Bank has to maintain its price-stability focus, and that if a central bank does want higher inflation “they usually get it. That’s a concern, not a reassurance.” The ECB’s ability to boost growth with more monetary stimulus? “Rather limited,” Weber said. It probably won’t matter much to the European government leaders who will pick the next ECB president next year, but for what it’s worth Weber has fans at the SOMC.             

Macroeconomic Madness - Krugman - Via Yglesias, an interview with Laurence Meyer, in which he says So I think we have two kinds of modeling traditions. First there is the classic tradition. I was educated at MIT. I was a research assistant to Franco Modigliani, Nobel laureate, and the director of the project on the large-scale model that was used at the time at the Federal Reserve Board. That’s the kind of models that I would use, the kind of models that folks at the Board use. There’s also another tradition that began to build up in the late seventies to early eighties—the real business cycle or neoclassical models. It’s what’s taught in graduate schools. It’s the only kind of paper that can be published in journals. It is called “modern macroeconomics.” Models are always a caricature—but is this a caricature that’s so silly that you wouldn’t want to get close to it if you were a policymaker.  My first reaction, on reading this, was to say that Meyer overstates the case.  But fundamentally Meyer is right. And it has been going on a long time. By the early 1980s it was already common knowledge among people I hung out with that the only way to get non-crazy macroeconomics published was to wrap sensible assumptions about output and employment in something else, something that involved rational expectations and intertemporal stuff and made the paper respectable. And yes, that was conscious knowledge, which shaped the kinds of papers we wrote.

Fed's Rosengren: Important to "insure against the risk of deflation" - From Boston Fed President Eric Rosengren: Revisiting Monetary Policy in a Low Inflation Environment. Rosengren reviewed the Japanese experience and the 1999 Boston Fed conference on monetary policy in a low inflation environment. He noted: From a policy perspective I take several lessons from the Japanese experience. First, should deflation occur, it can be quite difficult to overcome. Second, insuring against the risk of deflation may be much cheaper than waiting until it has occurred and then trying to address it. Finally, financially fragile economies may be particularly vulnerable to negative impacts from premature austerity measures. He also said A policy of gradually adjusting monetary and fiscal policy, as conducted in Japan after deflation first occurred, may not be as effective as an active policy response taken before deflation has become embedded in the economy.

Inflation to Fall Short of Fed's Goal Through 2012, Survey Says - Inflation in the U.S. through 2012 will fall short of the Federal Reserve’s long-term goal as growth and employment are slow to rebound, according to economists surveyed by Bloomberg News.  The Fed’s preferred price gauge, which is tied to consumer spending and excludes food and fuel costs, will climb 1.2 percent next year and 1.5 percent in 2012 on average, according to the median forecast of economists polled from Oct. 4 to Oct. 12. Most policy makers project those prices will increase 1.7 percent to 2 percent in the long run.  Economists cut gross domestic product forecasts for the next two years as a lack of jobs limits consumer spending, the biggest part of the economy. Stocks and Treasury securities have rallied since the Fed met last month as investors bet central bankers will pursue large-scale asset purchases to lower borrowing costs, spur the recovery and prevent prices for slowing further.

Inflation and Monetary Policy - Bernanke's speech at the Boston Fed today provides a useful summary of current attitudes on the FOMC, and essentially encompasses what was in the last published FOMC minutes. The interesting parts have to do with Bernanke's views on the forces propelling inflation, the current policy choices facing the FOMC, and the tools that are available to the Fed currently. Bernanke's view of policy choices is framed here in Phillips-curve language. According to him there is a natural rate of unemployment, which he calls the "long-run sustainable rate of unemployment" and, much in the way Friedman thought about the Phillips curve in 1968, there is "upward or downward pressure on inflation," depending on whether the actual rate of unemployment is, respectively, lower or higher than the natural rate. Now, as Bernanke recognizes, this natural rate of unemployment is very hard to measure. Further, as Richard Rogerson has argued in this blog piece it would be a good idea to eliminate the terms "natural rate of unemployment," "structural unemployment," "demand-deficient unemployment," etc., from our vocabulary entirely. What does Bernanke mean by "long-run sustainable unemployment" anyway?

Bernanke needs inflation for QE2 to set sail - Debate is raging within the Federal Reserve about whether to do more to stimulate the US economy. It seems many of its leading figures would like to, and the minutes of their last Federal Open Market Committee meeting, released Tuesday, will be read carefully for hints. Yet Ben Bernanke, Fed chairman, knows that a cut in rates, his usual tool, is currently infeasible. Therefore, speculation has turned to a return to quantitative easing (QE2), or large purchases of long-term Treasury bonds.This would be a dramatic move. But we must not kid ourselves. It would have at best a modest effect in a large, liquid market such as Treasury bonds and, therefore, is unlikely to dig the US economy out of its current hole. There is, however, another option: for the Fed to clarify its “exit strategy” from its current, unconventional monetary stance. This would mean making clear that the Fed has no plans to tighten policy through increases in the federal funds rate, even if inflation temporarily exceeds the rate regarded as consistent with the Fed’s mandate. In short, the Fed should allow a one-time-only inflation increase, with a plan to control it once the target level of prices has been reached.

Multi-Trillionaires & Commodity Bubbles - The boy from Zimbabwe is a multi-Trillionaire and those Trillions should be just enough to buy him a loaf of bread if he hurries to the store before they change the prices this morning.  This is what is happening to our own economy, only on a smaller scale (so far).  Our government, like Zimbabwe, has gotten into so much debt that they can never hope to repay it but new bills keep coming in every day so - What is a government to do?   Why print more money of course!  Now, when a bill comes in, they just crank up the presses and drop the fresh bills in an envelope.  Unfortunately, after a while, the people who provide goods and services paid for by you and your government, begin to catch on that those bills are suddenly very easy to come by, and they begin to demand more and more of them as exchange.  It’s a little hard to picture unless you run it into the abstract but think of it like an auction, where 5 people have $5 each to bid on 5 items.  Well those items (commodities) will get somewhere between $0 and $5 from the bidders, right?  Now, what happens if one of the bidders prints himself up $45 additional dollars?  Now he can bid $10 on each item and the other bidders will get nothing.

Ben Bernanke's war - Ben Bernanke declared war today - not on China, but on the possibility of deflation. he knows that a vicious cycle of slow growth, stagnant or falling prices and high unemployment poses a much greater threat to America's way of life than China's silly exchange rate. But like it or not, the exchange rate will be caught up in the Fed's response. In the 1930s, the deflationary trap was the gold standard. Britain left it first, and was vilified for doing so - but it was also the first major economy to recover. The verdict of economic historians has been that it would have been better for the world if other countries had followed Britain sooner.

Fed Considers Raising Inflation Expectations to Boost Economy - Federal Reserve policy makers may want Americans to expect inflation to accelerate in the future so they spend more of their money now. Central bankers, seeking ways to boost flagging growth after lowering interest rates almost to zero and buying $1.7 trillion of securities, are weighing strategies for raising inflation expectations as well as expanding the balance sheet by purchasing Treasuries, according to minutes of the Fed’s Sept. 21 meeting released yesterday. Some Fed officials are concerned that expectations of lower inflation will become self-fulfilling, damping demand by increasing borrowing costs in real terms, the minutes said. By encouraging Americans to believe prices will start rising at a faster pace, the Fed would reduce inflation-adjusted interest rates and stimulate the economy. Chairman Ben S. Bernanke said in 2003 that Japan could beat deflation by using a “publicly announced, gradually rising price-level target.” “The Fed is on the verge of actively targeting a higher inflation rate,”

Bernanke, Japan, and the Possibility of Stagflation - Kalpa - The WSJ had an interesting article by Jon Hilsenrath titled "Fed Chief Gets Set to Apply Lessons of Japan's History." This is definitely worth reading as it gives us insight into Bernanke's thinking, based upon what he advised Japan while he was a Princeton professor in the 1990's. These were the two paragraphs that particularly got my attention: Mr. Bernanke was particularly troubled by Japan's emerging deflation. He argued that Bank of Japan officials had to aggressively manage the public's expectations, because convincing households and businesses that deflation wouldn't persist would help to spur economic activity.Mr. Bernanke felt that Japan's central bank needed to make a commitment to get inflation higher and keep policy accommodative until it increased. Among his proposals was a suggestion that the bank publicly adopt an inflation target of 3% to 4%. Is this where we are today? Fiat currency is a confidence game, but never so much as when a central bank is faced with the threat of deflation.

U.S., Europe at Risk of Contacting `Japanese Disease,' Stephen Roach Says - The global economy could suffer a “Japanese disease,” heralding a prolonged period of stagnation if policy makers don’t work harder to prevent bubbles, according to a Morgan Stanley executive.  “I am increasingly worried that the world economy is at risk of falling into a Japanese-like quagmire,” led by the U.S. and Europe, Stephen Roach, Morgan Stanley’s non- executive Asia chairman, wrote in a note published today. “If we’re not careful, the Japanese disease could continue to mutate, infecting other major economies, including those in developing Asia.”  The lessons to learn from Japan’s experiences include that while asset and credit bubbles can’t be prevented, they must be viewed as “potentially serious threats” to financial stability, Roach wrote. “Monetary policy must play the key role in leading a pre-emptive assault on bubbles.”

Pimco’s El-Erian Says Industrial Economies Risk ‘Lost Decade’ –-- Advanced economies risk a “lost decade” unless policy makers recognize the severity of the wounds left by the financial crisis, said Mohamed El-Erian, chief executive officer of Pacific Investment Management Co. El-Erian, who popularized the phrase “new normal” to describe how growth will be depressed by consumer retrenchment and financial regulation, said governments and central banks haven’t detected the “ongoing paradigm shift” in their economies that will require remedies beyond stimulus programs. Among the fault lines he spots are strained balanced sheets, persistently high unemployment and a misunderstanding of financial markets. “Having won the war, industrial-country societies are in the process of losing the peace,” El-Erian said in a speech yesterday in Washington during the annual meetings of the International Monetary Fund and World Bank. “If they are not careful, they risk slipping into a lost decade of low growth, high unemployment and welfare destruction.”

The bumpy New Normal - Mohamed El-Erian delivered this year’s Per Jacobsson lecture at the IMF annual meetings, and was very clear that the international community has failed in its job over the past year or so: The impressive degree of global coordination highlighted by the April 2009 G-20 meeting did not last long. It only took a few months for that moment of extraordinary collaboration to give way to solely domestic agendas. The result of that, he says, is going to be ugly indeed: Having won the war, industrial country societies are in the process of losing the peace. Indeed, absent some important mid-course corrections, industrial countries confront the prospects of low growth; high unemployment that is increasingly structural in nature; welfare losses, including a growing number of citizens falling through the large gaps created by overly stretched safety nets; and a rising risk of protectionism.

Our Economy Is A Bad Joke  - I've been talking this week about the Fed's much-anticipated QE2 stimulus and its effect on the dollar, commodities, stocks and other markets. If you want the details, I urge you to read all of this week's posts if you haven't already done so.  Let's step back and look at where we stand. If we examine the evidence, we are forced to conclude that the American economy is a bad joke. Let's look at the stuff I ran across just this morning. Economist Dave Rosenberg summarizes the situation“Brian Sack at the New York Fed stressed the need for the Fed’s actions to bolster asset inflation as to boost the wealth effect on spending (QE “adds to household wealth by keeping asset prices higher than they otherwise would be…”).  We just can’t seem to wean ourselves off this asset-dependent economy — and how directed by a Fed official that the attempt here is to bring asset values above their intrinsic value. Amazing way to run an economy.  Whatever happened to skills, productivity, education, job creation, innovation?  Or thrift — when did that virtue become a dirty six-letter word?”

A radical pessimist's guide to the next 10 years - The iconic writer reveals the shape of things to come, with 45 tips for survival and a matching glossary of the new words you'll need to talk about your messed-up future.

  • 1) It's going to get worse -No silver linings and no lemonade. The elevator only goes down. The bright note is that the elevator will, at some point, stop.
  • 2) The future isn't going to feel futuristic - It's simply going to feel weird and out-of-control-ish, the way it does now, because too many things are changing too quickly. The reason the future feels odd is because of its unpredictability. If the future didn't feel weirdly unexpected, then something would be wrong.
  • 3) The future is going to happen no matter what we do. The future will feel even faster than it does now - The next sets of triumphing technologies are going to happen, no matter who invents them or where or how. Not that technology alone dictates the future, but in the end it always leaves its mark. The only unknown factor is the pace at which new technologies will appear. This technological determinism, with its sense of constantly awaiting a new era-changing technology every day, is one of the hallmarks of the next decade.

The PermaBear to English Translation Guide - These days, the spectrum of market commentary is broad, ranging from permabulls to recessionistas to gold bugs to dollar bears. More recently, a special group of folks have been out in full force — the PermaBears — and their jargon can be a bit . . . confusing . . . to the uninitiated. For those you who have been having difficulty understanding their idiosyncratic language, The Big Picture, in conjunction with Google Translate, offers you this handy service. Enjoy:

America's Currency Crisis is Now Underway - According to minutes that were just released this week from the Federal Reserve's meeting on September 21st, the Federal Reserve is now trying to figure out ways to boost inflation expectations. The mainstream media is reporting that the Federal Reserve wants to publicly declare their intention to seek a higher inflation rate so that Americans are encouraged to spend more before their money is worth less. Unfortunately, what the mainstream media fails to realize is, not only will their money soon be worth less but it will literally become worthless. If the Federal Reserve doesn't immediately raise interest rates dramatically, there is serious risk of the current "meltup" turning into hyperinflation before the end of 2012. The Federal Reserve's words can no longer control the present situation. They are saying they want inflation so that when massive inflation does arrive, it appears as though they still have control.

Industrialized nations pursue currency compromise - The U.S. and other industrialized countries are pushing to create a broad set of economic targets that would hold key countries - notably China - more directly accountable for their currency and other policies.  The idea, under discussion as financial leaders try to resolve a stubborn dispute over China's closely managed currency policy, is to expand the discussion beyond exchange rates - an acknowledgment of the political sensitivities around an issue that touches on sovereign power.  Instead, countries would commit to meet other, related targets and guidelines - such as avoiding excessive accumulation of foreign reserves or running an outsize current account surplus. The current account is a basic measure of the goods, services and capital moving into and out of a country; the accumulation of reserves can signal that a country's economy or exchange rate is out of balance with its trading partners.

Finance Chiefs Fail to Resolve Currency Spat as G-20 Splits - Leaders of the world economy failed to narrow differences over currencies as they turned to the International Monetary Fund to calm frictions that are already sparking protectionism. Exchange rates dominated the IMF’s annual meeting in Washington on concern that officials are relying on cheaper currencies to aid growth, risking retaliatory devaluations and trade barriers. China was accused of undervaluing the yuan, while low interest rates in the U.S. and other rich nations were blamed for flooding emerging markets with capital.  Finance ministers and central bankers pledged to improve cooperation, yet did little to show how they would alter their ways beyond agreeing to let the IMF study the matter. With the dollar down 11 percent against the yen since mid-June, compared with less than 3 percent versus the Chinese yuan, the focus turns to Group of 20 talks in South Korea in coming weeks to prove international policymaking isn’t in tatters.

Currency Tensions Rising - Yves Smith - The fact that an IMF meeting ended with the participants unable to feign a narrowing of differences on the currency front is further evidence that positions are hardening. And let us put none too fine a point on this: the currency row is simply an acceptable way to fight over imbalanced trade patterns. As we pointed out in a 2007 post, “The Dangers of Overselling, and Overdoing, Global Trade“: Dani Rodrik…makes the point that globalization fans may be their own worst enemy by taking the simpleminded point of view that if globalization is good, more globalization is of course better. Rodrik reminds us that globalization needs to be balanced against national interests, and some of the nations touted as big beneficiaries of more open trade markets, such as India and China, in fact did not open their markets to imports until their growth rates were increasing handily.Yves here. The threat to a system with a high level of international trade is the existence of large players who run persistent surpluses. That requires that someone, perhaps lots of someones, are in the position of running large trade deficits, which also entail rising domestic debt levels. When the debtor nation gets tired of playing this role, its new found religion forces adjustments on its trade partners.

How to prevent a currency war - Today, the United States is in the position of the gold-standard countries in the 1930’s. It can’t unilaterally adjust the level of the dollar against the Chinese renminbi. Employment growth continues to disappoint, and fears of deflation will not go away. Lacking other instruments with which to address these problems, the pressure for a protectionist response is growing.  So what can be done to address the situation without getting into a beggar-thy-neighbor, retaliatory free-for-all? In the deflationary 1930’s, the most important way that countries could subdue protectionist pressure was to use monetary policy actively to push up the price level and stimulate economic recovery. The same is true today. If fears of deflation were to recede, and if output and employment were to grow more vigorously, the pressure for a protectionist response would dissipate. The villain of the piece, then, is not China, but the US Federal Reserve Board, which has been reluctant to use all the tools at its disposal to vanquish deflation and jump-start employment growth. Doing so would help to relieve the pressure in Congress to blame someone, anyone – in this case China – for America’s jobless recovery. Where the Bank of Japan has now led, the Fed should follow.

Helicopter Ben and his QE II having an effect on Japan and the yen - Here is something interesting.  The Chinese have reversed policy on diversification into the yen. It was my assumption that the Japanese government’s objections would be acknowledged by the Chinese and that they were not the most recent source of yen strength — at least as of three weeks ago.  When I saw that the Japanese intervention had no follow through, I feared the Chinese had continued to buy yen.  This article below suggests something to the contrary.  China sold a record amount of Japanese debt in August, snapping a seventh-straight month of purchases. So then who is buying yen?  My guess now is specs big time.  The new simple story governing markets is ‘Helicopter Ben and his QE II.’  It is amazing to me how all the hedge funds and prop desks who were so wildly bearish on Europe a few months ago are now acting like they never were concerned about Europe and all that matters is Fed QE — which isn’t here yet, and which might not have any impact as a recent Richard Alford article suggested.  It is sheer casino herding.

Why Ben Bernanke Is Smoking A Big Fat Cigar Tonight - Last Sunday night I wrote about the coming week: If next Friday the Buck is lower across the board and the BoJ is a bit bloodied Ben Bernanke will light a cigar. Okay, so our boy Ben is smoking a big fat cigar tonight. He could not be happier. Everything is going his way.-On the week the dollar got crushed against the majors. -The Japanese central bank did get its nose bloodied. As of the close in NY they are down about $700mm on the 9/15 intervention of $25b. It’s not just the money (actually it is the money). They lost a battle. The USD/JPY has to go lower. The BOJ has tipped their hand. They are playing defense. And that is losing strategy. Their internal effort at QE just got trumped by Ben’s weak dollar policy. They must be pissed. -Euro group chairman Junker (ZH article) said the weak dollar will hurt EU growth. Sure it will. That is what Ben wants. He wants to export our deflation to our “friends”. They also must be pissed that Ben is dishing this out to them.

Fed Watch: The Final End of Bretton Woods 2? - The inability of global leaders to address global current account imbalances now truly threatens global financial stability. Perhaps this was inevitable - the dollar has not depreciated to a degree commensurate with the financial crisis. Moreover, as the global economy stabilized the old imbalances made a comeback, sucking stimulus from the US economy and leaving US labor markets crippled. The latter prompts the US Federal Reserve to initiate a policy stance that will undoubtedly resonate throughout the globe. As a result we could now be standing witness to the final end of Bretton Woods 2. And a bloody end it may be.  Of course, the end of Bretton Woods 2 has been long prophesied. Back in October 2008, Brad Setser foresaw its imminent demise:But Bretton Woods 2 was soon reborn, as the steady improvement to the US current account deficit was soon reversed:

Bretton Woods 2 vs. QE 2: Smackdown of the Decade? - My thinking on QE 2 has always been from a cyclical perspective. Thus, in my view calls for the Fed to do more to shore up aggregate spending and stabilize nominal expectations occur because these things had fallen off their long-term trend during the past recession.  I had not been envisioning QE 2 as ushering in a structural shift in the U.S. economy, let alone the global economy.  But according to both Ambrose Evans-Pritchard and Tim Duy I may be missing something here.  These two observers are making the case that QE 2 will turn out to be nothing less than a crude but effective assault on the Bretton Woods 2 system.  Here is Evans-Pritchard: It should be no surprise that Washington has begun to retaliate in earnest...The atomic bomb, of course, is quantitative easing by the Federal Reserve. America has in effect issued an ultimatum to China and G20: either you stop this predatory behaviour and agree to some formula for global rebalancing, or we will deploy QE2 `a l’outrance’ to flood your economies with excess liquidity. We will cause you to overheat and drive up your wage costs. We will impose a de facto currency revaluation by more brutal and disruptive means, and there is little you can do to stop it. Pick your poison.  Wow, QE 2 will be the atomic bomb that ends Bretton Woods 2.  Evans-Pritchard has always had a way with words. Tim Duy agrees and is concerned that international tensions could escalate:

Currency wars and forced dissaving - The Fed is the loan placement officer for the world's central banks. The US government is the Fed's borrower of last resort. The forced loans can be called in at any time the lender wishes. People are different; that's why they trade. Sometimes that trade will take place between people who live in the same country, and sometimes it won't. There is intranational trade and international trade. Some of that trade is intertemporal. Some people will want to lend and others will want to borrow. Again, sometimes the borrowers and lenders will live in the same country, and sometimes they won't. Why is international intertemporal trade ("global financial imbalances") seen as a special problem? So what if people in one country are net borrowers and people in another country are net lenders? It would be a total fluke if it didn't turn out that way. Countries are not identical. We don't expect imports of apples to exactly balance exports of apples. We don't see it as a problem if net imports of apples are balanced by net exports of bananas. Why should we expect imports of all goods today to exactly balance exports of all goods today? Why is it a problem if net imports of goods today are balanced by net exports of goods in the future? What's the policy problem of global financial "imbalances"?

QE is working: gold up, euro up, EU politicians up in arms - The dollar falls to new lows against major currencies, as financial markets digest the implications of further quantitative easing; Ben Bernanke will outline the details today; EU and Russian policy makers are beginning to criticise the US moves as irresponsible; Weber demands that the EFSF be phased out; also demands automatic sanctions on deficit sinners; France wants to veto a Eurostar purchase of a German train on trumped-up safety grounds; eurozone bonds spreads have narrowed a little, as markets are more optimistic about Ireland; Spanish inflation has risen above the ECB’s target, demand for ECB funds from Spanish banks has been easing; the new Attali Commission has recommendations for how to cut the French deficit; the ECB, meanwhile, publish a 500-page tome about its monetary analysis. [more]

Why America is going to win the global currency battle - Currencies dominated this year’s annual meetings of the International Monetary Fund. More precisely, two currencies did: the dollar and the renminbi, the former because it was deemed too weak and the latter because it was deemed too inflexible. But, behind the squabbles, lies a huge challenge: how best to manage the global economic adjustment.We can consider this rebalancing on two dimensions. First, the erstwhile high-spending, high-deficit advanced countries need to de-leverage their private sectors on the journey to what Mohamed El-Erian of Pimco, the investment company, called “the new normal”, in his Per Jacobsson lecture. Second, the real exchange rates of economies with robust external positions, strong investment opportunities, or both, need to appreciate, while expansion of domestic demand offsets the consequent drag from net exports. To put it crudely, the US wants to inflate the rest of the world, while the latter is trying to deflate the US. The US must win, since it has infinite ammunition: there is no limit to the dollars the Federal Reserve can create. What needs to be discussed is the terms of the world’s surrender: the needed changes in nominal exchange rates and domestic policies around the world.

About That Bretton Woods 2 vs. QE 2 Showdown... Apparently it was the topic de jour at the IMF annual meetings this past weekend.  Though framed as a "currency war" by some IMF participants, Martin Wolf explains it is really about two rebalancing acts in the global economy: The first is internal rebalancing – a return to reliance on private demand in advanced countries and retrenchment of the fiscal deficits that opened in the crisis. The second is external rebalancing – greater reliance on net exports by the US and some other advanced countries and on domestic demand by some emerging countries, notably China. As noted by Wolf, it just so happens that both of these rebalancing acts can be addressed by one policy response: aggressive monetary easing by the Fed.  That now seems to be happening in the form of QE 2.   The Fed, though, is not purposely trying to tackle both  rebalancing acts.  Rather, it is simply trying to shore up aggregate demand (AD) in the U.S. economy and spur an economic recovery.  Doing so would solve the first rebalancing act.  Now because the Fed is a monetary superpower, its attempts to shore up U.S. AD will get exported to many other countries in the world, particularly those those dollar bloc countries that pegged in some form to the U.S. dollar

Global Currency War: What It Means, And What To Do About It - Movements in the currency markets and their effects on different economies are complicated, like a three-dimensional chess game. And because the U.S. and its dollar have been the world’s leading economy and currency for so long, few of us have needed a working knowledge of foreign exchange. Today it’s different: as the Federal Reserve and central banks of other developed economies have lowered interest rates in its fight to save the U.S. economy, the world’s currency markets have become distorted. The result is a many-sided battle of the emerging economies against the U.S., one that without some sort of cooperation will wind up with most everyone losing, in terms of a slow global economy. So far, the winner seems to be China. Some currency basics: as the Federal Reserve has fought to save the economy by pushing interest rates to near zero, the U.S. has become a less interesting place for the world to invest. Fewer investors, less demand for dollars, lower exchange rate.

G-20 Should Mull Currencies Agreement, Niall Ferguson Says - Group of 20 leaders meeting next month ought to discuss a plan to strengthen undervalued currencies, similar to the Plaza Accord in 1985, Harvard University historian Niall Ferguson said.  “The real currency war is actually between Chimerica -- China plus America -- and the rest of the world,” “It would be much better to have some kind of Plaza-like international agreement and I very much hope that at the G-20 summit in Seoul next month this will be No.1 on the agenda.”  Brazilian Finance Minister Guido Mantega said last month that a “currency war” was under way, in which economies are weakening currencies to support exports. At an International Monetary Fund meeting this month in Washington, finance chiefs failed to narrow differences over currencies, with China accused of undervaluing the yuan and low U.S. interest rates criticized for flooding emerging markets with cash.  “Currency appreciation is necessary,” Ferguson said in the interview late yesterday. “If you insist on building up a vast horde or dollar-denominated reserves you will create distortions in the world economy that will ultimately come back and bite you.”

The Last Thing We Need Is a Global Agreement on Currencies – INTERNATIONAL PACTS THAT take their names from the grand surroundings in which they were negotiated and signed have a less than stellar history. This was brought to mind as talk of a "new Plaza Accord" buzzed in the markets and officialdom ahead of the annual gathering of the International Monetary Fund in Washington over the weekend. The notion of a Plaza 2.0 came from Guido Mantega, Brazil's finance minister, and of more moment, the first high government official to utter the phrase "currency war" in public if not in entirely polite company (he was talking to reporters, after all).The topic of a currency war has dominated financial-market news and commentary for the past couple of weeks—including the weekday version of this column on, which began writing about it 10 days before Mantega uttered those words ("Central Banks Embrace Risky Currency Gambit,"

Would a Currency War be Helpful? - What effect would a currency war have on the U.S. and other economies? As discussed below, some people argue that the currency war of the 1930s actually helped economies around the world. Is there any chance it could be helpful once again? Let me start with the currency policy of an individual country, and then move to the more general topic of currency wars. When an individual country such as China lowers its exchange rate, the price of its goods become cheaper on international markets. This gives its exports a boost. However, while the policy may be good for the individual country, at least in the short-run, it comes at the expense of other countries who are placed at a competitive disadvantage. In China’s case, the main impact is probably on workers in other developing countries where labor is also relatively cheap. That’s not to say that there’s no impact at all on the U.S. economy, only that we shouldn’t expect too much if China revalues its currency.

Who Caused the Currency Wars? - Simon Johnson – The world is on the brink of a nasty confrontation over exchange rates – now spilling over to affect trade policy (America’s flirtation with protectionism), attitudes towards capital flows (new restrictions in Brazil, Thailand, and South Korea), and public support for economic globalization (rising anti-foreigner sentiment almost everywhere). Who is to blame for this situation getting so out of control, and what is likely to happen next? The issue is usually framed in terms of whether some countries are “cheating” by holding their exchange rates at an undervalued rate, thus boosting their exports and limiting imports relative to what would happen if their central banks floated the local currency freely. China certainly bears some responsibility. But a great deal of responsibility for today’s global economic dangers rests with the US, for three reasons.

Currency row simmers as US delays long-awaited China report - A long-awaited report from the US Treasury on whether China manipulates its currency has been delayed in a move that will do little to ease foreign-exchange market tensions.  The Treasury said that the report will be issued sometime after the summit of G20 leaders on November 11 in South Korea. A delay will allow countries to "take advantage of the opportunity provided by these important meetings," the Treasury claimed.  Three years on from the start of the financial crisis, currency policy is increasingly being used as a weapon by countries eager to ensure share of the uneven global recovery. The long-simmering tension between the US and China has flared aggressively over the past month. China warned the US on Friday not to use the dispute over the value of the yuan as a "scapegoat" for America's high unemployment and flagging growth prospects.  "It is entirely wrong for the US to make an issue of China's trade surplus and hence put pressure on the yuan exchange rate," commerce ministry spokesman Yao Jian said, after the US this week unveiled a record trade deficit with China.

Who would win a currency war? - The coming “war” will be an outgrowth of changes in Federal Reserve policy. There is widespread consensus that the Fed will undertake a new round of “quantitative easing,” nicknamed QE2, in which the Fed will buy up Treasury bills to flood the economy with even more liquidity. The goal is to prevent deflation and boost the sagging recovery by pushing banks to lend and companies to invest and hire. But there is a side effect that directly impacts China's yuan policy. By increasing the amount of dollars available in the world, the Fed would depress the value of the dollar. Mere anticipation of the Fed's new strategy has already weakened the dollar on world markets. That, in turn, places more strain on the yuan, making Beijing work extra hard to stop the yuan from appreciating against the dollar. In other words, there's something of a contest of wills coming up – can the U.S. flood the world with enough dollars to force China to loosen its grip on the yuan?

Why the U.S. Has Launched a New Financial World War — and How the Rest of the World Will Fight Back  - Finance is the new form of warfare - without the expense of a military overhead and an occupation against unwilling hosts. It is a competition in credit creation to buy foreign resources, real estate, public and privatized infrastructure, bonds and corporate stock ownership. Who needs an army when you can obtain the usual objective (monetary wealth and asset appropriation) simply by financial means? All that is required is for central banks to accept dollar credit of depreciating international value in payment for local assets. Victory promises to go to whatever economy's banking system can create the most credit, using an army of computer keyboards to appropriate the world's resources. The key is to persuade foreign central banks to accept this electronic credit.

Of course you realize this is nothing like war - AS THE world gropes toward an understanding on the issue of currency intervention, rebalancing, and recovery, the language being used to describe the state of affairs is increasingly martial, and increasingly overdone. Here's Tim Duy: So perhaps Bretton Woods does not end because foreign governments are unwilling to bear ever increasing levels of currency and interest rate risk or due to the collapse of private intermediaries in the US, but because it has delivered the threat of deflation to the US, and that provokes a substantial response from the Federal Reserve. A side effect of the next round of quantitative easing is an attack on the strong dollar policy... And Martin Wolf: To put it crudely, the US wants to inflate the rest of the world, while the latter is trying to deflate the US. The US must win, since it has infinite ammunition: there is no limit to the dollars the Federal Reserve can create. What needs to be discussed is the terms of the world’s surrender: the needed changes in nominal exchange rates and domestic policies around the world. The language of war is attractive because it is dramatic and evocative, and because it seems appropriate to the issue of international imbalances. But it risks injecting unnecessary belligerence into the discussion, and it obscures critical aspects of the currency dynamic.

The US dollar decline is symptomatic of China’s investment bubble - There hasn’t actually been any "QE".   You’ve simply had the promise of QE2 and some attempts within the market to front run the actual implementation of the policy.  In reality, QE per se has nothing to do with the dollar move, which has two components.  One is traders and money managers and trend followers piling on thinking QE is money printing that weakens the dollar (in fact, no new net financial assets have been created).  Second, the other is a flight back to euros after it got over sold during the crisis when there was a real risk it could completely vanish and was rescued by direct ECB check writing, along with highly deflationary terms and conditions imposed by the ECB on euro member nations.  The euro turned north on the ECB intervention and not on US QE.  It’s been going on for months, ever since the ECB began buying the debt in the secondary markets.

Fed to Buy $32 Billion in Treasury Debt in Next Month - The Federal Reserve will buy about $32 billion of Treasuries and Treasury inflation-protected securities in nine operations from Oct. 15 through Nov. 8, the New York Fed said on Wednesday. The purchases will be made under a program announced by the Fed at its Aug. 10 meeting, under which it is buying Treasuries and TIPS using funds from maturing agency bonds and mortgage-backed securities in an effort to keep steady its holdings of domestic securities. To date, the Fed has bought about $44 billion, primarily made up of Treasuries, under the program. 

Rising Federal Revenues—But Only from Firms and the Fed - Federal revenues rose nearly 3 percent from fiscal year 2009 to FY2010. But virtually the whole increase came from higher corporate income taxes and a more than doubling of Federal Reserve earnings. Preliminary data in the Congressional Budget Office’s October Monthly Budget Review reveal that revenue climbed $57 billion to $2.16 trillion in the fiscal year that ended last month (see graph). Combined with a $67 billion fall in outlays, that revenue gain cut the federal deficit by $125 billion to a still astronomical $1.3 trillion, or 8.9 percent of GDP. Bad as that is, it’s well below 2009’s deficit of 10 percent of GDP.

Is America On A Burning Platform? -The US government is on a “burning platform” of unsustainable policies and practices with fiscal deficits, chronic healthcare underfunding, immigration and overseas military commitments threatening a crisis if action is not taken soon. There are striking similarities between America’s current situation and the factors that brought down Rome, including declining moral values and political civility at home, an over-confident and over-extended military in foreign lands and fiscal irresponsibility by the central government. The fiscal imbalance meant the US was on a path toward an explosion of debt. With the looming retirement of baby boomers, spiraling healthcare costs, plummeting savings rates and increasing reliance on foreign lenders, we face unprecedented fiscal risks. Current US policy on education, energy, the environment, immigration and Iraq also was on an unsustainable path. Our very prosperity is placing greater demands on our physical infrastructure. Billions of dollars will be needed to modernize everything from highways and airports to water and sewage systems.Three years have passed since former Comptroller Walker sounded the alarm and issued his dire warning.

America should open its vaults and sell gold - FT -  Gold is back in the news. Its price is soaring in what some analysts say is a reflection of a weak economy and a lack of confidence in government policies. Naturally, investors are looking at a new sure thing in the expectation that prices will continue upward. My advice to the US government, however, is that this may be the best time – to sell. Doing so would help President Barack Obama and Congress reduce indebtedness, at little cost. US Treasury holds 261.5m fine troy ounces of gold. The government has been sitting on it since the Great Depression, receiving no return. At the current market price of $1,300 per ounce, the US gold stock is worth $340bn. The Treasury secretary, with the approval of the president, has the power to sell (and buy) gold on terms that the secretary considers most beneficial to the public interest. Revenues from sales must be used to reduce the national debt.  If the US were to sell its entire gold stock at the current market price, it would reduce the gross government debt by 2¼ per cent of gross domestic product. (US net government debt would decline by essentially the same amount because the US gold stock, listed as an asset on the balance sheet, is valued at only $42.22 an ounce.) Based on the average interest cost from 2005 to 2008, this reduction in debt would trim the budget deficit by $15bn annually. Thus, the Obama administration would be doing something about the US fiscal debt and deficit without reducing near-term support for the ailing economy.

Cost Of Servicing Government Debt Lowest Since 1980 - Although much has been made about short term deficits, and longer term ‘structural’ deficits, the most important statistic to consider is not these top line numbers, but the more important statistic showing the share of Gross Domestic Product (GDP) needed to service debt.  That statistic is now the lowest since 1980, adjusted for inflation. How can this be?  Easy, interest rates are at the lowest levels since the 1950s.  Twenty year Treasury bonds are below 2%.    Consider a long term purchase such as a home.   From a New York Times article by Richard Voith. “How can this be? Surely, increased debt can’t be good. But think about a family buying a home. If the family borrowed $200,000 at 7 percent interest on a 30-year fixed-rate mortgage, monthly payments would be $1,331, but the same amount at 3.5 percent results in payments of only $889. It’s no different for the government or its taxpayers. If debt increases, but interest rates drop sharply, the cost to taxpayers will fall, not rise. Despite the rapid growth in total debt from 1977 to 2009, the fraction of the economy devoted to interest payments fell in the past two years.”

Number of the Week: Slow Growth Adds to Deficit - 32%: The increase in U.S. government debt over the next five years if US economic growth stays as slow as it is now. It can be tough to get excited when economists warn that the U.S. could face a long period of substandard growth. Slow growth, after all, sounds a lot better than no growth at all. A mere percentage point a year, though, can make a big difference. In an annex to its latest Global Financial Stability Report, the International Monetary Fund drives the point home as it applies to government finances.The IMF forecasts how much various governments’ debts would rise if annual economic growth proved one percentage point slower than expected over the next five years. If, for example, the U.S. economy grows at an inflation-adjusted annual rate of 1.7% — about the rate it’s currently growing — government debt will reach 122% of annual economic output as of 2015, up from 93% now. Annual growth of 2.7% would cut that estimate to 110%. The difference equates to about $2.2 trillion, or close to $7,000 a person.

Politico Uses News Stories to Push Its Deficit Agenda - Politico wrongly told readers that: "voters tells pollsters they’re worried about all the red ink in the federal budget, and Democratic centrists have grown more urgent in telling Obama it’s time to rein in federal spending." This is not true. A recent NYT-CBS poll found that just 9 percent of respondents said that the deficit was something that they were angry about. It is also inaccurate to identify Democrats who raise concerns about the deficit as "centrist." They can more accurately be identified as Democrats with close ties to corporate interests. Their financing base is a far more obvious way to distinguish them their ideological leanings.The article also includes the bizarre assertion that: "liberals argue that it’s OK for the federal government to run up big deficits at a time of economic slowdown — $1.3 trillion this year — because it’s much more important to use government spending to inject some life into the economy, to help struggling families stay afloat."  This is like saying that: "liberals argue that the earth is round." While it is true, so do the vast majority of conservatives.

Balance – Esquire - Five men, one room, and a national crisis. The Esquire Commission to Balance the Federal Budget will now report its findings. A few months ago, we announced the formation and mandate of the Esquire Commission to Balance the Federal Budget. The plan was simple: A group of former legislators from across the political spectrum would convene, make the hard choices that our current leaders refuse to make, and erase the annual budget deficit by 2020. Below, how they came to their decisions (also available in the November issue — now on sale). You can also read the authors' introduction here and the full results (with statistics!) here on our politics blog..

Means Testing Entitlements as a Path Forward for Solving Long-Term Budget Challenges - Josh Barro, now with the Manhattan Institute, had a piece in Real Clear Markets last month on how best to solve both the short-term and long-term problems U.S. fiscal policy is facing. Barro argues that given the size of the fiscal gap, both spending and revenue solutions have to be on the table and that the best solution may generally be spending reductions that move our spending policy in a more progressive direction (e.g., means-testing some spending programs more than they currently are) along with higher taxes from less progressive sources (e.g., relying more on broad taxes to raise revenue as opposed to having a skewed distribution of the tax burden that sometimes comes at the expense of efficiency). Under a world of perfect competition in all markets and rational expectations, there would be little efficiency improvement from such a move that makes the tax system more efficient by cutting high marginal tax rates and replacing them with implicit taxes in the form of means-testing of retirement programs.

Cost of War Since 2001; Federal outlays and revenues, 1940-2015 - The National Priorities Project has some interesting charts and graphics on the US budget. The following chart shows federal outlays and revenues from 1940 to the proposed levels in 2015. The difference between the two equals the federal deficit or surplus.Aside from specific policy initiatives, spending grows over time in order to accomodate a larger economy and population. Though many federal programs were cut during the 1990s, the outlays continued to increase as more people retired and Social Security payments grew. Recent growth in spending is due in large part due to increases in military spending. The following chart shows federal outlays and revenues from 1930 to the proposed levels in 2015 as a percentage of gross domestic product (GDP).Viewing federal spending and revenues as a percentage of GDP indicates how large or small government is in relation to the economy.

Something Impossible Is Going to Happen

Raise the social security retirement age and start scaling back benefits for high-income recipients. That’s impossible.
Put a lid on Medicare and Medicaid spending that is growing faster than anything in the economy. That’s impossible.
Scale back the size of the military and end the U.S. role as policeman to the world. That’s impossible.
Impose a broad-based carbon tax that will raise much needed revenue and increase our energy security. That’s impossible.
Eliminate the Departments of Energy, Education, and Commerce. Cut employment of all other departments by at least 20 percent. Cut all farm subsidies by at least 50 percent. That’s impossible.
Save revenue and help cap the growth in medical spending by limiting the exclusion for employer-provided health care. That’s impossible.
Stop nurturing the unproductive and bubble-prone housing sector and limit the deduction for mortgage interest. That’s impossible.
Impose a national consumption tax like a value-added tax. Use some of the revenue to get rid of some of the worst parts of our current system. Use the rest to reduce the deficit. That’s impossible.
Prepare for the U.S. government to lose its AAA credit rating. That’s impossible.
Prepare for the U.S. to become a second-rate economic power. That’s impossible.
Know that by not taking relatively small steps now you have contributed to the massive decline in the well-being of your children and grandchildren who have too little education, too little productive capital, and too much debt. That’s impossible.

In the U.S., No True Fiscal Conservatives - Simon Johnson - In most industrialized countries, attention is now shifting to some form of fiscal austerity — meaning the need to bring budget deficits under control. In Britain, for example, an active debate is under way between those on the right of the political spectrum (who want more cuts sooner) and those to the left (who would rather delay cuts as much as possible). There is a similar discussion across the European continent, with the precise terms of the debate depending on which party was most profligate during the long boom of the 2000s. The United States stands out as quite different. No one is yet seriously proposing to address our underlying budget problems. Certainly, some people consider themselves fiscal conservatives — some of the right and some of the left — but none can yet be taken seriously. The implications for our fiscal future are dire.

The Boehnerization of Barack Obama - Krugman - Why has stimulus become a dirty word? Many reasons, I guess: an inadequate plan combined with a wildly overoptimistic forecast was more or less guaranteed to create the impression of a failed program. But it’s also true that the president himself has had a deeply self-destructive tendency to echo his opponents’ arguments. My original invisible bond vigilantes post was inspired, in part, by Obama’s decision to go on Fox News and declare that we needed to cut the deficit to avoid a double dip. Then, in July, he repeated almost verbatim John Boehner’s justly mocked claim that since the private sector is tightening its belt, the government should do the same. And he’s done it again: Nonetheless, Obama said that just as people and companies have had to be cautious about spending, “government should have to tighten its belt as well. We need to do it in an intelligent way. We need to make sure we do things smarter, rather than just lopping something off arbitrarily without having thought it through.”

Unanticipating The Great Depression and the Great Recession - Last week I noted that Bryan Caplan, like many libertarians (and conservative economists as well), operates under the assumption that the data doesn't support the Keynesian view of the economy. I put up a few graphs showing he is in error, and that growth rates are, in fact, lower when libertarian and conservative economic prescriptions are followed. But the problem is worse than one of slightly slower growth - that would simply mean we're all just a little poorer than we otherwise would be. The problem is that every so often, bad policies leads to an outcome worse than just slightly slower growth.

Hey, Small Spender, by Paul Krugman - Here’s the narrative you hear everywhere: President Obama has presided over a huge expansion of government, but unemployment has remained high. And this proves that government spending can’t create jobs. Here’s what you need to know: The whole story is a myth. There never was a big expansion of government spending. In fact, that has been the key problem with economic policy in the Obama years: we never had the kind of fiscal expansion that might have created the millions of jobs we need. To be fair, spending on safety-net programs, mainly unemployment insurance and Medicaid, has risen — because, in case you haven’t noticed, there has been a surge in the number of Americans without jobs and badly in need of help. And there were also substantial outlays to rescue troubled financial institutions, although it appears that the government will get most of its money back. But when people denounce big government, they usually have in mind the creation of big bureaucracies and major new programs. And that just hasn’t taken place. This fact, however, raises two questions. First, we know that Congress enacted a stimulus bill in early 2009; why didn’t that translate into a big rise in government spending? Second, if the expansion never happened, why does everyone think it did?

 The "Ever-Expanding" Government Sector, Illustrated (Part II) - I've been lecturing on the government sector in my macro course. In updating my lecture notes, I plotted out some interesting graphs, which link up nicely with this previous post. The following four figures highlight: (1) normalized Federal outlays are not much higher than in 1986; (2) government consumption to GDP is back up to 1991 levels (and not yet back to 1987 levels; (3) the cyclically adjusted budget deficit is only 2 ppts larger than that recorded in 1987; and (4) Federal consumption remains far below the previous peak in 2007.

Special Bulletin: Fractions Have Denominators - Krugman - I’ve been getting some mail over yesterday’s column, with angry correspondents posting charts like this, showing government spending as a percentage of GDP, to claim that government spending has too surged: What’s going on? Yes, that’s right: it’s what happens when you divide by GDP in a time of terrible economic performance. Spending hasn’t surged; in fact, it grew more slowly in the two years after Lehman collapsed than in the two previous years, despite a sharp rise in spending on safety-net programs. Instead, GDP growth has plunged.

Obama to Press for Infrastructure -The Obama administration said Monday that it would ask the lame-duck Congress next month to approve a $50 billion down payment on his long-range initiative to improve the nation’s roads, railways and air systems and to find savings to offset that cost, suggesting a new urgency to create jobs after last week’s disappointing unemployment report.  President Obama met at the White House with mayors, governors and current and former transportation secretaries of both parties to promote the infrastructure initiative, which he first proposed in September. Afterward, Ray LaHood, his transportation secretary and a former Republican congressman, told reporters that the lame-duck session would present an “upfront opportunity” to pass the $50 billion measure.

Generation of Termites - When American politicians talk about the legacy we are leaving to the next generation, their usual theme is financial deficits, as if there were no other kind. Figured on a per-capita basis, the real and imputed debt that today's children will assume someday as taxpayers can seem daunting. But what our political leaders rarely even attempt to calculate is the other debt that we are leaving to our heirs -- a decayed and inadequate infrastructure that doesn't deserve to be compared with what earlier generations bequeathed to us. The best recent estimates by civil engineers and government experts indicate that we would have to spend well over $2 trillion during the next five years on roads, bridges, airports, railways, transit, sewers, waterways, ports, dams, parks and schools simply to maintain them in decent condition. Such estimates do not include the kind of modernizing improvements that the United States requires to remain competitive with other nations or to protect the global environment from disaster. But the political momentum appears to favor politicians who have no will to preserve -- let alone better -- the national inheritance that we have allowed to fall into sorry disrepair.

Now is a good time for government to borrow and invest - Amtrak recently rolled out a $117 billion vision of true high-speed rail in the Northeast Corridor. Travel times would fall to 38 minutes from Philadelphia to New York and to only 3 1/2 hours from Washington, D.C., to Boston. These investments in the nation's densest region would spur economic growth, cut highway congestion and conserve gates and landing slots at our airports.  But can we afford it? Total U.S. government debt exceeded 84 percent of gross domestic product (GDP) in 2009, and most observers expect that percentage to keep growing. Yes, the national debt as a percentage of GDP is historically high, but that may not be the most valid measure. The actual cost of servicing the national debt as a percentage of GDP is lower than it has been since 1980. That's because interest rates are at levels not seen since the mid-1950s. Low interest rates mean the benefits of debt-funded public investments in education, transportation and other infrastructure are more likely to exceed their costs.

America Needs an Intervention - The United States has been living a lie. As a nation, we have been kidding ourselves, repeating myths, hoping that if we say something enough times, it will become reality — no matter how untrue. The credit crisis and now foreclosure debacle has revealed to anyone who cares to look what we have sought to ignore: That the past decade has been based on a set of fundamental beliefs that are intrinsically false. Its time for an intervention. We need someone to force us to stop hitting the bottle, lose the bimbo, skip the dessert cart, visit the gym. Its time to stop bullshitting ourselves about Financial Engineering, and face both the Truth & Consequences of our legacy financial system. It is past time we recognize these hard truths:

Rivlin Sees Tax Compromise at $500,000 Income Level - Democratic lawmakers could seek a compromise on extending the Bush administration’s tax cuts by exempting more people to the higher tax thresholds than the White House has proposed, said Alice Rivlin, a member of the White House’s National Commission on Fiscal Responsibility and Reform.The White House and Congress haven’t been able to reach a consensus on how to handle tax cuts created during the George W. Bush administration, which are set to expire at the end of December. If a bill extending all or part of the tax cuts isn’t passed by the end of 2010 year, tax rates would reset higher for almost every income group. Ms. Rivlin said in an interview that lawmakers and administration officials should consider temporarily exempting everyone who makes less than $500,000-a-year from a higher tax threshold. This is higher than the $250,000 level the White House has proposed but less than the $1 million some lawmakers on Capitol Hill have recently proposed. There is also a large group of lawmakers who have said the tax cuts should be extended for all income levels for at least two more years.

5 Myths about Federal Taxes - My colleague Bob Stoker walked into my office yesterday and, apropos of Andy's post about Greg Mankiw, noted that there sure was a lot of misinformation about taxation. I suggest he write a corrective, and here it is.

"No new taxes" for GOP -- except a national sales tax -Can you guess which tax is bad, bad, bad when suggested by Democrats but perfectly acceptable when proposed by Republicans? Listening to Rand Paul and Paul Ryan, among others, the answer is a national sales tax or value-added tax, known in Europe as a VAT. While Republicans argue ferociously to preserve the Bush tax cuts for America’s wealthiest families, the notion of a new federal tax on goods and services -- which would disproportionately penalize working consumers -- is becoming fashionable among their party’s most prominent figures. The Kentucky Republican Senate candidate made headlines yesterday when he proposed a national sales tax to replace the income tax, but Paul is scarcely alone in preferring a tax that falls most heavily on the middle class, workers and the poor. Rep. Ryan’s budget "roadmap," released earlier this year to much fanfare in the conservative and mainstream media, relies on an 8.5 percent "business consumption" tax -- yet another name for what Europeans call a VAT.

The current U.S. tax system is tilted toward the haves -IF YOU WERE spending $400 billion a year on social programs, would you give half of that to the wealthiest 5 percent of Americans? We didn't think so. But that is the perverse result of the stealthy spending conducted through the federal tax code. The code is salted with "tax expenditures" -- programs, many worthy, designed to promote policies from homeownership to education to retirement savings. There are two problems with this approach.  First, it lacks transparency and accountability. Once embedded in the code, the preference tends to be in place until dislodged.  Second, accomplishing social policy through tax expenditures tends to award the most help to those who need it least. As a new report by the Corporation for Enterprise Development and the Annie E. Casey Foundation demonstrates, the $400 billion federal asset-building budget -- subsidies to buy homes, save for education or plan for retirement -- is upside down. Rather than ameliorate rising income inequality, it reinforces it. Low-income households who do not earn enough to itemize deductions don't get the benefit.

Studying the Elite, Whether They Like It or Not -THE rich are sitting firmly in the public cross hairs, especially as the economy continues to stumble. Reports that Wall Street bonuses will again be high, and the debate in Congress over tax increases for the wealthy, just add to the outrage. So it was a serendipitous time for Columbia University to convene the first Elites Research Network conference last week. The conference drew in scholars focused on inequality across academic disciplines, like economics, political science, sociology and history. In the academic world, this was remarkable. As several of the scholars acknowledged, there has traditionally been some unease in talking about the elite, let alone researching them.

Greg Mankiw's anti-tax arguments - When academics write about our own experiences in op-eds and blog posts, we risk making a common error--assuming that we can view ourselves objectively and that we can rationally dissect the pros and cons of our own situations as illustrative of humanity in general or at least of "typical" people in our circumstances.  What we all tend to do is overlook obvious counterarguments to the position we espouse based on our own proclivities.  Talking about the potential lapse of the Bush tax cuts that were overly generous for the wealthy seems to be one of those areas where the trap lurks.  Todd Henderson, a Chicago prof with an apparent income of upwards of $350,000 a year, whined about not being "rich" because he was barely able to afford luxuries that wealthy citizens enjoy (a landscaper to tend his lawn, a housekeeper to tend his house, etc.) and would have less discretionary funds to spend if he were to have to pay taxes at the pre-Bush rates.  Mankiw, I think, has fallen into that trap, too.  See Mankiw, I can afford higher taxes, but they'll make me work less, New York Times, Oct. 9, 2010.  He notes that "Republicans say raising taxes on those who already face the highest marginal tax rates will hurt the economy" and proposes a case study--himself.  He acknowledges up fron that he "can afford to pay more in taxes" and doesn't "have trouble making ends meet."

Three-card Mankiw - There is so much that is troubling and wrong with Harvard economist Greg Mankiw’s op-ed in Sunday’s New York Times that it is hard to know where to start. His piece warns that if the Bush tax cuts for those who earn more than $250,000 a year –as he does– are allowed to expire later this year, then he will work less. Mankiw’s motivating example contrasts (a) a world with no taxes to (b) a world with the full 2011 tax system in place, including –almost incidentally– the incremental increase in taxes related to the scheduled sunsetting of the Bush tax cuts. Could there be a less instructive counterfactual than a world with no taxes? No public schools, no Social Security, no Medicare, no Food and Drug Administration, no Environmental Protection Agency, no banking regulation, no Securities and Exchange Commission, no police, no courts. Mankiw’s zero-tax example absurdly assumes that in such a world, he would somehow be able to earn an 8 percent annual rate of return, keep the proceeds, and safely pass them on to his children.

Some of the Reason Why I am disliked! - I do not want to sound like Sour Grapes here, but Greg Mankiw breaks my heart over his oppression as a Taxpayer. He states that Taxes destroy his incentive to make more money. I say that if my desires were fulfilled, and the Tax Cuts of 2001-03 were completely withdrawn, then he would be working much harder. I will go on to ask him How Much he saves from these Tax Cuts before he hits the big $250k? While I feel terrible for his kids, how level is the Playing Field if they get through College without debt, when the rest of the Student Body had to borrow a quarter-million apiece to get the same degree? I should suggest that he also remonstrate with his kids not to purchase their housing based upon the level of mortgage they can get, or their inheritance will disappear without substantive gain. I will finish with the Comment that he may one day appreciate that increased Medicare taxation.

Ego or Money? - Greg Mankiw complains that if taxes go up for people with incomes as high as his, he won't work as hard and that means he won't be able to leave as much for his kids. Incentives matter he says. If that's the case, I wonder why someone who is trying to take away the incentive for his kids to work hard and be successful on their own doesn't leave academia and become a high paid consultant. I'm sure Greg Mankiw could clean up as a consultant. The same effort he puts into academics would be much more highly compensated somewhere else. The fact that he decided to become an academic in the first place indicates that it's not all about the money.  As Greg Mankiw makes clear every chance he gets, he's at Harvard. That tells me that the return to his ego is every bit as important as the financial return. I'd further guess that even if the New York Times stopped paying him for his column, he'd write it anyway. It's a boost to his ego and reputation that he'd want even without whatever small payment he gets for each column, But, I suppose we will see. If taxes do go up, I expect Greg Mankiw to give up his NY Times column -- he's implied it just won't be worth it -- so we shall see if he really means what he says

Greg Mankiw forgets about the income effect - Professor Mankiw says he can afford higher taxes.  For that I give him credit.  But he also says that higher income taxes might keep him from writing his New York Times column.   He then implies that higher taxes will generally keep people from working. This is the substitution effect--because leisure becomes relatively cheaper, people consumer more of it.  But higher taxes also reduce after-tax income (obviously), so in order to maintain living standards, one might decide to work more in the face of higher taxes.  This is called the income effect.  I can speak for my household--our after-tax income is more than sufficient for our "needs," but if we were taxed more, we might have to work more to satisfy these "needs."

Discouraging Greg Mankiw From Working Would be Good for the Economy - A few days ago Greg Mankiw had an op ed piece in the NY Times talking about how even small increases in the marginal tax rate would keep him (and by extension, other talented folks like him) from working.  For a laugh, I pulled data on the top marginal tax rate from the IRS and real GDP per capita from the BEA's NIPA tables. Data on the latter goes back to 1929, and the tax rate info goes back further. It turns out that the correlation between the tax rate in any given year and the growth rate in real GDP per capita from that year to the next is small but positive. That is, higher top marginal tax rates don't seem to reduce real economic growth. Look at the tax rate and the annualized growth rate in real GDP per capita for two years, or three, or four, or five, or six (which is as far as I went) and ditto - the higher the marginal tax rate, the faster the economic growth over the next X years. The correlation is positive, if small.

Misleading tax and spend rhetoric--public worker "overcompensation" and "too-high pensions" - In my earlier ataxingmatter post on how tax rhetoric is used in political campaigning and think tank propaganda, I noted that our nation is threatened by an epidemic of misleading tax rhetoric. The GOP for four decades has made tax cuts its primary (if not only) answer to every problem, as well as its first-choice tool to achieve their proclaimed goal of decreasing the size of government. (I say "proclaimed" since they are notorious, when in office, of actually increasing the size of government)  But one of the most noxious forms in which the anti-government, anti-tax screed has thrived is the anti-public servant rhetoric, which suggests that taxes are wasted when they pay decent wages to government employees, which seem to be uniformly assumed to be corrupt and lazy bums who do nothing to deserve their pay, and that pensions for public employees are just another form of welfare entitlements that should be cut in half so that taxes don't need to be raised on wealthy constituents--whether in the form of the graduated income tax much needed in Michigan or allowing the Bush cuts for the rich to expire as the GOP scheduled them to do without enacting a new tax cut to duplicate them.

Runaway Feedback Loops, Wealth Concentration and Gaming-The-System - Positive feedback loops lead to runaway scenarios. The classic example is global warming and the Arctic ice cap. As temperatures rise, the the ice melts, exposing more land or seawater. Ice reflects solar radiation, and so as it shrinks then more solar radiation is absorbed, raising temperatures more, which melts the ice faster, which then leads to more solar radiation being absorbed, and so on.  We can see runaway feedback loops in the economy and society, not just in Nature. One of the key runaway feedbacks in the U.S. is the concentration of wealth and political power.  As wealth has become concentrated in the top 1/10th of 1%, then the political power that can be purchased with that wealth also rises, which then enables the wealthy to increase their wealth via "Federal entrepreneurship" and other means.  The political process--once potentially a force resisting or moderating wealth--has been completely captured by an ever-expanding army of lobbyists, the fast-spinning revolving door between the Central State and corporations and unprecedented levels of corporate/Elites campaign contributions.

United In Our Delusion -Americans are in a fury about taxes, or so the headlines tell us, with Tea Partiers convinced our president is a socialist wealth redistributor who plots to take from the productive to give to the indolent, tax-eating, illegally resident, and nonwhite. Angry voters are eager to throw out incumbents wholesale in favor of new leaders who promise to slash their taxes, we are told on the broadcast news shows every day. At the same time, numerous polls that did not make the headlines show that large majorities favor the president's proposal to retain the Bush-era tax cuts on the first $200,000 or $250,000 of taxable income. When it comes to how wealth is distributed in America, we probably hold radically different views depending on our political affiliation, age, income, and gender, right?  Wrong. We don't think differently. In fact, Americans think very much alike on wealth distribution. Amazingly alike.  Americans are united in what they believe is the ideal distribution of wealth. And they are just as united about what they imagine to be the distribution of wealth in America. The problem is that neither the ideals we broadly share, nor our estimated distributions of wealth today, bear much relationship to reality.

A VAT Slammed By Retailers - Today, the National Retail Federation released a study by Ernst & Young and Tax Policy Advisers that analyzes a 10.3% narrowly based "add-on" value added tax to reduce the deficit by 2% of GDP. It estimated a $2.5 trillion reduction in retail spending over the next decade and an initial loss of 850,000 of which 700,000 would be lost permanently. That's the kind of scary analysis you want if you want to kill a proposal. I would note that any federal tax increase of 2% of GDP would have similar results, although with less impact on the retail sector. The study is very well done, and two of its authors are good professional friends from when they worked at Treasury and CBO. Unlike many authors, they discuss the shortcomings of their model and they build in a lot of real world experience, particularly in their examination of VATs around the world. They show how compliance is a big problem, how much a VAT would hit the poor and the middle class, and how VAT rates rise over time

The Biggest Tax Policy Mistake of the Year - The fine folks over at the New York Times Freakonomics blog recently asked me to identify the “biggest potential tax policy mistake that might be made this year.” Here’s my answer:  With little time left on the legislative clock, policymakers will be hard-pressed to top the tax policy blunders they’ve already made this year. Most notable is their failure to decide what this year’s tax law should be. While politicians, analysts and the media endlessly debate how expiring tax cuts might affect taxpayers in 2011, the real disgrace is that we still don’t know what the tax law is in 2010.  Will our leaders really allow the alternative minimum tax to hit 27 million taxpayers this year, a whopping 23 million more than in 2009? Did the estate tax really expire back in January, making 2010 the year without an estate tax? Will companies really receive no tax credits for their investments in research and development?  Under existing law, the answer to each of these questions is yes. Unless Congress acts, the AMT will expand its reach almost 500 percent, George Steinbrenner’s estate will pay no estate tax, and America’s most innovative companies will go without the R&E tax credit.

Dodd Backs Warren for Consumer Bureau, but... Senator Christopher J. Dodd, Democrat of Connecticut and one of the architects of the Dodd-Frank financial regulatory law, said Tuesday that the White House was likely to nominate a director for the new Consumer Financial Protection Bureau in the coming days, but he was doubtful that a nominee would be confirmed before the new Congress takes over in January. Mr. Dodd, speaking at New York University Law School’s fourth annual Global Economic Policy Forum, said he would support Elizabeth Warren, above, the Harvard law professor who is setting up the new consumer bureau, if the White House nominates her to be its director. But he reiterated his view that Ms. Warren, a strong consumer advocate, would have trouble being confirmed because of opposition from Republicans and the financial industry. 

The Foreign Exchange Mystery - Why would such a large swaps market be a possible exemption from FinReg? The traded foreign exchange market is the big enchilada. It is the largest financial market in the world. The Bank for International Settlements estimates that the daily turnover in this market, including swaps, futures and spot purchases, is $4 trillion as of April 2010. This turnover increased more than 20% in the last 3 years. Trading is concentrated in London, accounting for 36.7%, while the New York share of the market is around 18%. Since FX swaps and forwards are based on currency values, it is very easy to embed other financial transactions in a dealtransaction that involves exchange rates on its face. For instance, a loan can be the primary purpose for a swap of currency values. The danger in such obfuscation is illustrated by the foreign exchange transactions between the Greek government and Goldman Sachs, which disguised the debt burden of Greece and triggered a crisis. In the Dodd-Frank Act, clearing (if available) is mandated for most derivatives, with “end user” hedging transactions carved out. But a second carve out, for FX swaps and forwards, is permitted if the Treasury orders it. There is significant concern among progressives monitoring the implementation of Dodd-Frank that the Secretary will soon exempt FX instruments from the clearing mandate.

Markets and Liquidity, Part 1 of Many - But this is too good to pass up, and I'm late to the game as is. On 15 September, the CFTC and the SEC held a joint "public roundtable discussion" on Swap Execution Facilities (SEFs). Part 1 is here, Part 2 here. What is most amazing, if you didn't pay attention to the markets, is how few actual transactions occur in the "derivatives market"—at least according to people who work in the Industry and are discussants. Take, for example, the Credit Swaps Market. According to ISDA, the Credit Default Swaps Market in 2009 declined to $38.6 trillion; that's $38,600,000,000,000, give or take forty or fifty billion. Sounds like a lot, no? Strangely, there's virtually no liquidity associated with that $38.6T. According to the testimony in Part 1, the most frequently traded CDS—GE, presumably because they bring good things to life (or at least have DoD contracts)—trades around 15 times a day. That might be impressive for a penny stock, but it's not exactly the type of thing that makes you think "Wow, that's a market!"

The Latest Basel III Controversy -In my post on Basel III's liquidity requirements, one thing I didn't cover was the controversy over "committed credit and liquidity facilities." And since I know how disappointed you all were about that, here's my take on the issue. As a refresher, Basel III's Liquidity Coverage Ratio (LCR) requires banks to maintain a stock of "high-quality liquid assets" that is sufficient to cover net cash outflows for a 30-day period under a stress scenario. "Net cash outflows" is calculated by applying different run-off rates to each source of funding (e.g., repos, unsecured wholesale, etc.). A run-off rate reflects the amount of funding maturing in the 30-day window that won't roll over, and is designed to simulate a severe stress scenario.The LCR assigns a 100% run-off rate to "draw downs on committed credit and liquidity facilities" to financial institutions (such as banks, insurance companies, and asset managers). It also assigns a 100% run-off rate to draw downs on committed liquidity facilities to non-financial corporates. Essentially, this assumes that every single financial institution that has a lending facility (whether credit or liquidity) with the bank, and every single non-financial corporate that has a liquidity facility with the bank, will draw down 100% of the facility. The banks are crying bloody murder over this. A 100% run-off rate, they argue, is way too high.

Fed’s Dudley Confident Banks Will Adapt To New Rules - New York Federal Reserve Bank President William Dudley on Monday downplayed the potential impact that banks face from new capital standards, saying it will be easier for them to adapt than many observers think. Speaking to a group of bankers, Dudley said the U.S. regulatory regime is unlikely to curtail lending activity as much as some fear. Banks will change their business models to adapt and will have lots of earning power to help them meet the new standards, the central banker said. Dudley was referring to the recent passage of international Basel III regulations and the U.S. overhaul of financial regulations. The former requires banks to hold higher levels of capital to protect against potential losses. Many in the banking industry have argued the higher capital standards, which phase in over several years, impose too high a cost on financial institutions, which in turn curtails credit availability and holds back economic growth.

Fed's Dudley: Costs of higher capital requirements under Basel III are "exaggerated" - From NY Fed President William Dudley: Basel and the Wider Financial Stability Agenda - The new capital rules are intended to provide strong incentives for banks to change their business models in ways that make the system more stable and reduce the negative impact their actions have on others—for instance, by providing incentives to standardize OTC derivatives contracts and clear such standardized trades through central counterparties. To understand what these new requirements mean for the amount of capital banks will ultimately have to hold, it is important to note that one of the intended consequences of these changes is for banks to adjust their business models in ways that reduce the risks their activities generate. Note that the word "intended" is highlighted in the speech. The requirement are intended to encourage banks to change thier business models and reduce risk.

Basel and the Wider Financial Stability Agenda - Dudley - New York Fed - Over the past year, important new regulatory initiatives have been advanced both at the national and international level. These include the recent agreement in Basel on stronger capital and liquidity standards for internationally active banks and the considerable regulatory changes embodied in the Dodd-Frank Act (DFA). Today I want to discuss some of these initiatives, with a special focus on the recent agreement in Basel on capital and liquidity for large, internationally active banks. I will give my perspective on how these efforts have been informed by the lessons of the financial crisis and discuss what some of the likely consequences may be as these measures are put in place. Given the breadth of the changes, my remarks will be by no means complete. As always, my remarks reflect my own views and not necessarily those of the Federal Reserve System.

If Not Now, When? - There was a strange debate about financial regulation in connection with various annual meetings of the international finance bodies in Washington, D.C. this weekend. The nominal debate was between the supposed hawks and doves on regulatory capital requirements. The most vocal doves spoke at the Institute of International Financial (IIF) meeting. Joseph Ackermann, Deutsche Bank's CEO, is the IIF chairman. Germany, of course, at the behest of its banks, led the opposition within the Basel III process to raising capital requirements. Germany prevailed in the Basel III process, leading to a lengthy delay (until 2019) in returning nominal capital requirements to pre-Basel II levels.  Ackermann decried proposals to require systemically dangerous institutions (SDIs) to hold additional capital and proposals to speed up Basel III's proposed increases in nominal capital levels. He argued that Lehman's failure proved that interconnectedness, not simply size, contributed to causing global systemic risk. That is true, but his argument strongly supports requiring the SDIs to shrink to a level at which they would no longer pose systemic risks.

Issa Cracks the Whip on SEC -  Rep. Darrell Issa is frustrated that the SEC won’t hand over its inspector general’s report on whether the agency timed a fraud lawsuit against Goldman Sachs to bolster congressional negotiations over the financial regulation bill. In a letter dated today, the California Republican jawbones SEC Chairman Mary Schapiro over her staff’s decision against giving him a copy of the original report. Issa writes that he wants to “hold the Commission accountable for any improper redactions.” The SEC has been reviewing the IG’s 77-page report since Sept. 30, Issa says, and has been redacting portions of it from public dissemination. The hotly anticipated document is expected to be released very soon.

F.D.I.C. Presents Rules to Dismantle Failed Banks - Federal bank regulators took a first step on Tuesday to spell out how they would use a new law to seize and dismantle large, failing financial institutions so that taxpayers are not on the hook, as they were in the 2008 financial crisis.  The Dodd-Frank overhaul of Wall Street regulations that President Obama signed in July allows for the Federal Deposit Insurance Corporation to be appointed as a receiver to bring about the “orderly liquidation” of huge financial companies as an alternative to bankruptcy court. The new power, known as resolution authority, is intended to avoid a recurrence of an event like the September 2008 bankruptcy of Lehman Brothers, which plunged financial markets around the world into turmoil and quickly led to several government-financed bailouts. Considerable doubt remains among legal specialists about whether the new mechanism is feasible, particularly because international regulators have yet to agree on “cross-border resolution” of failing institutions that have global reach.

Treasury Secretary Timothy Geithner tackles five myths about TARP - Born at the peak of the financial crisis in 2008, the Troubled Asset Relief Program expired last week, ending what was perhaps the most maligned yet most effective government program in recent memory. Despite new evidence about the low ultimate cost and positive impact of the TARP, there is still a chasm between the perceptions of the program and its overwhelmingly favorable effect on the U.S. economy.  The TARP was doomed to be unpopular from inception, because Americans were rightfully angry that the same firms that helped create the economic crisis got taxpayer support to keep their doors open. But the program was essential to averting a second Great Depression, stabilizing a collapsing financial system, protecting the savings of Americans and restoring the flow of credit that is the oxygen of the economy. And it helped achieve all that at a lower cost than anyone expected.  As we put the TARP to rest, let's also put to rest some of the myths about the TARP.

 Why TARP was wrong - Timothy Geithner defends TARP. Financial crises matter not because they hurt banks and bankers. They matter because they kill jobs, businesses and the value of retirement savings. To protect Main Street from the damage caused by a financial crisis, you must first put out the financial fire. That is precisely what the government did.  Except that it didn't. It restored confidence in the nation's largest financial institutions, by declaring them too big to fail. But it in no way restored confidence in the biggest financial market, the market for mortgage-related securities. That market is still in agony. The latest problem is the "foreclosure scandal." Mike Konczal breaks it down. It seems to have nothing to do with borrowers not deserving to lose their homes and everything to do with problems in determining who exactly has the right to foreclose on them, given the complex chain of ownership created by securitization.  The process known as "shadow banking" is still in a state of paralysis, as far as I can tell. I am not saying that government could have fixed it, or that fixing it would have been a good idea. But I do not agree that TARP fixed the financial system. The operation was a success, but the patient died.

Tim Geithner’s Magical Mystery Tour Of TARP Propaganda Has Little Use For Truth - In “5 Myths About TARP,” Tim Geithner joins Steve Rattner and Herb Allison in the parade of Washington insiders who have gone out of their way to tout the great success of TARP, calling it the “most effective government program in recent memory.” If you think the Timmy doth protest too much, methinks you’re exactly right. Geithner starts by rehearsing the same, tiresome narrative we’ve heard a thousand times: [TARP] was essential to averting a second Great Depression, stabilizing a collapsing financial system, protecting the savings of Americans and restoring the flow of credit that is the oxygen of the economy. And it helped achieve all that at a lower cost than anyone expected. Then Geithner proceeds to debunk some “myths” about TARP.

How Hank Paulson’s inaction helped Goldman Sachs - During Paulson's first 15 months as the treasury secretary and chief presidential economic adviser, Goldman unloaded more than $30 billion in dicey residential mortgage securities to pension funds, foreign banks and other investors and became the only major Wall Street firm to dramatically cut its losses and exit the housing market safely. Goldman also racked up billions of dollars in profits by secretly betting on a downturn in home mortgage securities. "No one was better positioned . . . than Mr. Paulson to understand exactly what the implications of his moving against the (housing) bubble would have been for Goldman Sachs, because he knew what the Goldman Sachs positions were," said William Black, a former senior thrift regulator who delivered the harshest criticism of the former secretary. Paulson "knew that if he acted the way he should, that would have burst the bubble. Then Goldman Sachs would have been left with a very substantial loss, and that would have been the end of bonuses at Goldman Sachs.

US bankers set for record pay and bonuses for second year - Pay and bonuses at US banks and hedge funds are set to rise 4% this year – outpacing the growth in revenues – study finds. US bankers are set for record compensation for a second consecutive year, shattering both the illusion of pay-reform and the expectation that bank bonuses would be tempered while the US economy remains weak. With third-quarter figures from JP Morgan expected to begin a bumper profit reporting season today, a study of more than three dozen banks, hedge funds, money-management and securities firms estimates they will pay $144bn (£90bn) in salary and benefits this year, a 4% increase on 2009. The research, by the Wall Street Journal, found pay was rising faster than revenue, which gained 3% to $433bn, despite a slowdown in stock trading.

Wall Street Pay Heads Toward New High - WSJ - Pay on Wall Street is on pace to break a record high for a second consecutive year, according to a study conducted by The Wall Street Journal. About three dozen of the top publicly held securities and investment-services firms—which include banks, investment banks, hedge funds, money-management firms and securities exchanges—are set to pay $144 billion in compensation and benefits this year, a 4% increase from the $139 billion paid out in 2009, according to the survey. Compensation was expected to rise at 26 of the 35 firms

Wall Street Déjà Vu: Lackluster Profits Equal . . . . Record Bonuses? - When it comes to bonuses, Wall Street is stuck in the hot tub time machine. Apparently, it takes more than the fall of two storied investment firms, a financial crisis, a bailout, Andrew Cuomo, a pay czar, the Great Recession and regulatory reform to bring down bank pay. Investment banks and financial firms are reportedly planning on handing out fatter paychecks and bonuses this year than in 2009. Top Wall Street pay consultant Alan Johnson says he expects compensation by Wall Street firms to rise 5% in 2010. An analysis in today's Wall Street Journal predicts a similar 4% rise. (The article comes complete with a very cool interactive graphic worth checking out.) That's not a big jump, but at a time when earnings appear to be faltering on Wall Street, higher year-end bonuses are raising eyebrows all over again. Here's why: Wall Street reforms were supposed to force financial firms to better align pay with performance. That doesn't seem to be happening this year. Profit-wise the second quarter was a disappointing one for many of the large banks.

Junk Bonds Are Back on Top - The market for high-yield securities, as junk bonds are more politely known in the business, is booming as never before. And Mr. Casey, one of today’s junk-bond kings, is in the midst of a run unlike anything Mr. Milken saw from his X-shaped trading desk in Beverly Hills.  Like many blue-chip corporations, companies with less-than-sterling credit are rushing to sell bonds and take advantage of low interest rates. In the first nine months of this year, a record-breaking $275 billion of junk bonds have been issued worldwide, up from $163 billion during the period last year, according to the financial data provider Dealogic, a research company.  “Other than 1988 at Drexel, this is the best time I’ve ever seen, and it’s getting better,” said Mr. Casey, who worked at Drexel Burnham Lambert with Mr. Milken and now runs the junk-bond business at JPMorgan Chase. “In high-yield, it’s undeniable that these are the best years that anyone has seen in their career.”

Who's bringing home the dough? – Rebecca Wilder -Since earnings season is now well underway, I decided to look at the breakdown of aggregate domestic income (gross domestic income). Corporate profits are up 44.7% since the outset of the US recovery, while wages and salary accruals are up just 0.9%. The chart above illustrates the peak-trough losses (total loss), trough-Q2 2010 gains (total gain), and peak-Q2 (relative to peak) deviations of nominal gross domestic income, disaggregated by income type.  First up, wages and salaries (employer contributions for employee pension and insurance funds and of employer contributions for government social insurance) and private enterprises net of corporate profit incomes grew in sum spanning the recession (private enterprises net of corporate profits includes proprietor's income, which did fall). Furthermore, the drop in wage and salary accruals, -3.6%, was small compared to the drop in corporate profits, -18.1%. Second, the corporate profit gains during the recovery massively outweigh the wage and salary gains over the same period, 44.7% versus 0.9%. Corporate profits are now 18.5% above the peak in 2007 IV, while wages and salaries hover 2.8% below.

$1.1 Trillion of Loans to Come Due Over Three Years, Fitch Says-- U.S. companies have almost $1.1 trillion of leveraged loans coming due from 2012 through 2014 after pushing out debt maturities past next year, according to a Fitch Ratings report. Borrowers have paid back or extended about $175 billion of loans during the first three quarters of the year, creating a higher volume of debt that will need to be addressed several years from now, according to the report published yesterday. “There is still a significant amount of work to be done in reducing maturities in the 2012-2104 time frame,” the report’s authors wrote. “Near-term pressure has been eased by a slowly improving U.S. economy and a strong rebound in the credit markets after the sovereign debt scare in May and June.”

The Broken Cash Register - Opinion seems nearly universal that what we are currently experiencing is not the typical business cycle with which we are familiar. Besides being the end of a long speculative bubble, and the magnitudes involved, the significance of what is happening is difficult to fathom.   To the extent that some have thought about the bigger picture — the discussion has tended to focus on things like the decline of America, Anglo-American capitalism, and the rise of China and emerging markets.The tensions that are emphasized in such a conceptualization have a certain apocalyptic appeal, but really shed little light on the current challenges.  However, it does seem as if the financial crisis has ended a historical period, leaving great anxiety and uncertainty over what is next.  This short essay attempts to sketch out a different big picture view. 

Unofficial Problem Bank List at 875 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Oct 15, 2010. Changes and comments from surferdude808:  The Unofficial Problem Bank List shrank this week in both the number of institutions and assets. There were eight removals and six additions leaving the list at 875 institutions, down from 877 last week.  The removal of mid-size regional contributed to the decline in aggregate assets to $401.6 billion from $417.3 billion.

Moody's: Sept. CMBS delinquency rate hit 8.24 pct The delinquency rate on U.S. commercial mortgage loans backing securities rose in September by the smallest margin in two years, Moody's Investors Service said Thursday. The rate increased 0.14 percentage points to 8.24 percent, the smallest monthly increase since October 2008, the firm said. While encouraging, the trend doesn't necessarily point to an improving commercial mortgage-backed securities market, said Nick Levidy, Moody's managing director

Lawler: "Early read" on September Existing Home Sales - While as always results vary by area, on balance most local realtors/MLS are reporting significant YOY home sales declines for September sales. However, it’s important to remember that last September home sales were “goosed” a bit by the federal home buyer tax credit, which was set to expire at the end of November. Existing home sales ran at an estimated seasonally adjusted annual rate of 5.6 million last September, compared to 5.1 million in August 2009.  While I only have data on a relatively small part of the country, right now I estimate that existing home sales ran at a seasonally adjusted annual rate of about 4.50 million, up almost 9% from the August [2010] pace [of 4.13 million SAAR]. CR Note: This would put the months of supply around 10.3 months in September based on an estimate of 3.85 million for inventory.  Note: It is too soon for any impact on sales from "Foreclosure-Gate".

The foreclosure mess aside, making states recognize each one another's documents is a good idea - The housing industry has sunk into a morass of paperwork problems and missing documents. Some banks won't even foreclose houses anymore. Into this chaos comes President's Obama's pocket veto of a bill that might have sped up foreclosures by making it easier to verify mortgage documents in court. Called the Interstate Recognition of Notarizations Act of 2009, the bill would have forced state courts to give equal treatment to notarized documents—including mortgage documents—that were notarized out of state.  Apparently, that prospect was scary enough for the president to use his second veto ever to stop it from becoming law. And yet shoddy out-of-state documents have bedeviled America since the time of the Constitution—which tried to solve the problem, even if it didn't succeed.

Foreclosure logjam threatens Fannie, Freddie - A breakdown in the nation's foreclosure process threatens to create billions of dollars in losses for federally controlled mortgage finance companies Fannie Mae and Freddie Mac, highlighting how improper actions by banks could impose new costs on taxpayers, said government officials and industry sources.  To protect themselves from those losses, Fannie and Freddie have threatened to penalize thousands of lenders if they fail to rapidly fix the way they seize the homes of borrowers who missed their payments, according to letters sent by the firms to lenders.  Fannie and Freddie, the recipients of a $160 billion federal rescue, have been virtually the only companies willing to buy mortgages from lenders since the financial crisis broke out. The two firms can impose penalties on the industry based on the agreements they fashioned with lenders who collect payments from borrowers on their behalves.

Fannie and Freddie in a Mess - The foreclosure mess is now spreading to Fannie and Freddie, as our government-owned mortgage machines starts looking into what, exactly, its servicers have been doing with their loans.  Meanwhile, I detect some overblown expectations on the part of various people; last night, after I gave a talk on a mostly unrelated subject, two different people asked me if this meant that they could simply walk away from their mortgages; it wasn't clear if they were hoping, or horrified.  Might happen in a few rare cases, but I'm dubious.  I don't want to minimize the scope of this problem:  it's clear that overwhelmed servicers decided the fastest way to move through their vast backlog of foreclosures was to muster a sort of heroic insouciance about the legal niceties surrounding the paperwork.  Courts (and banks) are right to say that the process needs to slow down until that's straightened out.

Freddie Mac: 30 year Mortgage Rates fall to 4.19 percent, lowest since 1951 - From Freddie Mac: 30-Year FRM Under 5 Percent for 23 Consecutive Weeks Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), which found that the 30-year fixed-rate mortgage rate fell again to break the survey’s all-time low; the 30-year FRM has been under 5 percent for 23 weeks in a row. The last time 30-year FRM rates were this low was April 1951 (based on a data series of FHA rates going back to 1948). The 5-year ARM tied the all-time survey low set last week. 30-year fixed-rate mortgage (FRM) averaged 4.19 percent with an average 0.8 point for the week ending October 14, 2010, down from last week when it averaged 4.27 percent. Last year at this time, the 30-year FRM averaged 4.92 percent.

Refinance Activity and Mortgage Rates - Report the MBA reported on the increase in refinance activity:  The Refinance Index increased 21.0 percent from the previous week.This graph shows the MBA's refinance index (monthly average) and the the 30 year fixed rate mortgage interest rate and one year ARM rate, from the Freddie Mac Primary Mortgage Market Survey®.  As mortgage rates have fallen, there has been an increase in refinance activity. The peak this year was in late August, although the most recent week was close. However the level of activity is still well below the previous refinance booms in 2009 or in 2002/2003. It takes lower and lower rates to get people to refi - and many borrowers have insufficient equity (or negative equity) or inadequate income to refi.

Government had been warned for months about troubles in mortgage servicer industry - Consumer advocates and lawyers warned federal officials in recent years that the U.S. foreclosure system was designed to seize people's homes as fast as possible, often without regard to the rights of homeowners. In recent days, amid reports that major lenders have used improper procedures and fraudulent paperwork to seize properties, some Obama administration officials have acknowledged they had been aware of flaws in how the mortgage industry pursues foreclosures.  But the officials said they could take only limited action to address the danger. In part, this was because they wanted lenders' help carrying out federal programs to modify mortgages that had fallen into default or were poised to do so.  New concerns about improper practices - such as those involving faked documents or "robo-signers" who signed tens of thousands of documents without reviewing them - have prompted the mortgage servicing arms of the country's largest banks to freeze millions of foreclosures. As momentum builds for a national moratorium, the administration has begun assessing the potential impact, examining the threat it could pose for the ailing housing market and the wider financial system.

FORECLOSUREGATE AND OBAMA’S ‘POCKET VETO’ -  By most reports, it would appear that the voluntary suspension of foreclosures is underway to review simple, careless procedural errors. Errors which the conscientious banks are hastening to correct. Even Gretchen Morgenson in the New York Times characterizes the problem as “flawed paperwork.” But those errors go far deeper than mere sloppiness. They are concealing a massive fraud.  They cannot be corrected with legitimate paperwork, and that was the reason the servicers had to hire “foreclosure mills” to fabricate the documents. These errors involve perjury and forgery -- fabricating documents that never existed and swearing to the accuracy of facts not known.  Karl Denninger at MarketTicker is calling it “Foreclosuregate.”  Diana Ollick of CNBC calls it “the RoboSigning Scandal.” On Monday, Ollick reported rumors that the government is planning a 90-day foreclosure moratorium to deal with the problem.  Three large mortgage issuers – JPMorgan Chase, Bank of America and GMAC -- have voluntarily suspended thousands of foreclosures, and a number of calls have been made for investigations

To sort this mess, both banks and borrowers must do the right thing - Listening to the fiery rhetoric about the mortgage mess emanating from politicians this week, you'd think that big bad banks were trying to foreclose on hundreds of thousands of homeowners who were current on their payments but had become victims of sloppy business practices.  But if, as appears to be the case, the overwhelming majority of homeowners facing foreclosure have fallen far behind on their payments, then it is a good deal harder to summon up the same moral outrage over reports that the banks and loan service companies cut corners, failed to keep the right documents and engaged in shoddy and even fraudulent practices. Just because the banks and servicers have screwed up doesn't mean they and their investors are no longer entitled to get their money back.  Certainly banks and servicers should, at their own expense, be sent back to do things right. Those who engaged in fraud should be punished. And if there are legitimate questions about who owns a loan, those will need to be resolved before the proceeds of any foreclosure are distributed. But none of that changes the basic reality that there are millions of Americans who took out mortgages they could not support on houses they could not afford.

Bank Disinformation I: PR Machine in Overdrive on Foreclosure Fraud Front - Yves Smith - A DC contact warned me last week that the banks were readying a massive pushback on the foreclosure crisis. It went into full swing over the weekend. Obama, admittedly through his proxy, David Axelrod, threw his weight in behind the banks on Face The Nation: Yves here. The sense of priorities is astonishing. Axelrod repeatedly stresses the need to get “this” resolved quickly. Notice the refusal to use accurate and honest language: at best, these are improprieties, but the more accurate word is fraud.  The emphasis is NOT on doing things correctly but on the need for haste. Yes, there is what amounts to an aside on the need to have “proper” paperwork, but that is more an assertion that some foreclosures aren’t afflicted by doubts over the securitization trust that supposedly owns the note, the borrower IOU, actually having taken the steps to prefect its rights.  And this is simply a variant of the spin the banks have tried since the affidavit mess surfaced: that this is a mere “paperwork” problem. As we commented earlier in the weekend, that’s utter bunk.

Bank Disinformation II: Banks Attacking Rule of Law Frontally - Yves Smith - Readers may argue I’m reading more of a bank PR role in a page one Wall Street Journal story than is warranted. However, even the Columbia Journalism Review took notice of the Journal’s scanty reporting on the foreclosure crisis, a mounting series of problems that is deservedly damaging to the banking industry’s image and bottom line. Now we have the Murdoch paper feature a remarkably one sided story on foreclosures. That looks to be no accident.  The story, “Courts Add To Foreclosure Delay” is utterly one sided. Having a judicial process for making foreclosures, as is required in 23 states, is bad for you….because it is preventing the housing market from bottoming. This argument is the polar opposite, by the way, of the Administration’s lame defense of its HAMP mod program.  Readers may recall that HAMP for the most part merely delayed foreclosures of participating homeowners for a few months, allowing banks to extract a few more payments from stressed borrowers and extract some incentive fees. Team Obama contended that was really a good thing, a feature, not a bug. The housing market was weak; better to have foreclosure properties dribble out on the market to prevent overshoot on the downside. So it seems that bank defenders will spin the delay issue whatever way they need at any point in time to flatter the banks.

Bank Disinformation III: Obama Throws Weight Behind Banks, Housing “Market” Over Borrowers - Yves Smith - I should have expected this, Team Obama is so predictably bank friendly that it was inconceivable that the Administration would ever decide against them on anything other than the occasional sop to maintain plausible deniability. But this morning’s news stories reveal the officialdom isn’t even bothering to keep up appearances.  So we are back to Wall Street calling the shots, the very same Wall Street that invokes the “give us what we demand or we’ll shoot the economy” demand whenever its pet interests are threatened. Here the securitization industry was colossally irresponsible in its conduct, and has created a mess that will be monstrously difficult to remedy….and we’re supposed to plow onward in business as usual mode?

Foreclosure crisis much deeper than robo-signers - I want to flag  three posts I wrote about this time last year on the mortgage and securitization market because they are relevant to this burgeoning foreclosure documentation crisis. The robo-signer problem is just a flashpoint in what will later be seen as a market rife with fraud. -Misbehavior and Mistake in Bankruptcy Mortgage Claims – A majority of mortgage claims are missing one or more of the required pieces of documentation for a bankruptcy claims. Fees and charges on claims often are poorly identified and do not appear to be reasonable. The bankruptcy data reinforce concerns about the overall reliability of the mortgage service industry to charge homeowners only the correct and legal amount of the debt and to comply with applicable consumer protection laws. You have seen the posts at Naked Capitalism chronicling the latest salvos in the robo-signer debacle (see here for example). There are a few more in the links post this morning. The crisis in foreclosure documentation is much deeper than the specific issue of robo-signers which has precipitated the halt in foreclosures by major banks. The fact is the mortgage process in the US is broken because securitization has created a byzantine mess that is wholly unsuited for the large number of foreclosures now on-going.

Who Are the Winners and Losers in the Foreclosure Fraud Crisis? - The unfolding foreclosure fraud crisis isn’t easy to understand, but here it is boiled down. Banks need proper documentation to repossess a home from a family. They need documents about everything from the family’s financial situation to its history of missed payments to its assets. And they need to verify that the information in those documents is correct. But they didn’t. They hired individuals to sign thousands of mortgage papers — legal affidavits, swearing to a judge that they had personal knowledge of the information within — without checking a thing. Only 23 states require a judge to sign off on a foreclosure, but some banks are now stopping foreclosures in all 50 states. Moreover, they are halting the sale of foreclosed properties to new homeowners. So who stands to gain? And who stands to lose? Let’s go through the possible impacts on major players and markets, one by one.

Ezra Klein – ‘This is the biggest fraud in the history of the capital markets’ - Janet Tavakoli is the founder and president of Tavakoli Structured Finance Inc. She sounded some of the earliest warnings on the structured finance market, leading the University of Chicago to profile her as a "Structured Success," and Business Week to call her "The Cassandra of Credit Derivatives." We spoke this afternoon about the turmoil in the housing market, and an edited transcript of our conversation follows.Ezra Klein: What’s happening here? Why are we suddenly faced with a crisis that wasn’t apparent two weeks ago? Janet Tavakoli: This is the biggest fraud in the history of the capital markets. And it’s not something that happened last week. It happened when these loans were originated, in some cases years ago. Loans have representations and warranties that have to be met. In the past, you had a certain period of time, 60 to 90 days, where you sort through these loans and, if they’re bad, you kick them back. If the documentation wasn’t correct, you’d kick it back. If you found the incomes of the buyers had been overstated, or the houses had been appraised at twice their worth, you’d kick it back. But that didn’t happen here. And it turned out there were loan files that were missing required documentation. Part of putting the deal together is that the securitization professional, and in this case that’s banks like Goldman Sachs and JP Morgan, has to watch for this stuff. It’s called perfecting the security interest, and it’s not optional.

The Subprime Swindle and the Foreclosure Fraud Cover-Up…PWA - Clearly, we’re dealing with a lot of different frauds here. Tomorrow, I’ll detail one of the smaller-bore problems with foreclosure fraud: providing cover for illegal fees that lenders charge to troubled borrowers. But today I’ll discuss a much different and much bigger scandal. During the housing bubble, banks falsified documents on a massive scale in order to issue as many toxic subprime loans as possible. This was straightforward mortgage fraud, and the current wave of fraud in the foreclosure process is covering it up. In 2004, the FBI sounded the alarm about an “epidemic” in mortgage fraud. This was right at the beginning of the real subprime explosion—things got much worse as the housing bubble inflated. What’s more, according to the FBI, 80 percent of mortgage fraud is committed by lenders. Bankers and mortgage brokers didn’t just make reckless loans to borrowers who couldn’t afford them. They also illegally falsified documentation in order to push borrowers into loans they could not afford. This was not a con perpetrated by irrational poor people attempting to live beyond their means—it was committed by perfectly rational lenders, who knew they could make a handsome profit by selling these garbage mortgages off to investors.

Up to 40 States Plan Inquiry Into Foreclosure Data - The attorneys general of up to 40 states plan to announce soon a joint investigation into banks' use of flawed foreclosure paperwork.  A person briefed on the investigation said Saturday night that an announcement could come as early as Tuesday. The person spoke on condition of anonymity because the investigation was not yet public.  Iowa Attorney General Tom Miller will lead the investigation. Miller already has been leading multistate reviews of questionable foreclosure documents.  A joint investigation by 40 states would further escalate pressure on banks to widen their suspensions of foreclosures. On Friday, Bank of America became the first bank to halt foreclosures in all 50 states.

Statement by CEO of Mortgage Electronic Registration Systems Kansas City Register. Mortgage Electronic Registration Systems (MERS) Chief Executive Officer R.K. Arnold today issued the following statement regarding the organization and clarifying certain aspects of its operations: comment by Yves Smith:Wow, this is an almost perfect statement from the Ministry of Truth. Virtually every statement is a lie or very disingenuous. I’m seeing if I can get a lawyer with recognized credentials to shred it; that will be more effective than if I do.

Foreclosure Fraud For Dummies, 1: The Chains and the Stakes - The current wave of foreclosure fraud and the consequences for the economy are difficult to follow. As such, I’m going to write a few posts to simplify what is going on so you can follow stories as they unfold.  This is very 101 level, and will include a reading list of blog posts and articles at each stage to help provide depth.   (Special thanks to Yves Smith and Tom Adams for walking me through much of this.)  Let’s make three charts of the chains involved in the process. The first is what is currently going on with foreclosure fraud (click through for larger).

Foreclosure Fraud For Dummies, 2: What is a Note, and Why is it So Important? - There’s going to be a campaign to convince you that having the note correctly filed and produced isn’t that important (see, to start, this WSJ editorial from the weekend). This is like some sort of useless cover sheet for a TPS form that someone forgot to fill out. That is profoundly incorrect. Independent of the fraud that was committed on our courts, the current crisis is important because the note is a crucial document for every party to a mortgage. But first, let’s define what a mortgage is. A mortgage consists of two documents, a note and a lien:The note is the IOU, it’s the borrower’s promise to pay. The mortgage, or the lien, is just the enforcement right to take the property if the note goes unpaid. The note is crucial. Why does this matter? Three reasons, reasons that even the Wall Street Journal op-ed page needs to take into account. The first is that the note is the evidence of the debt. If it isn’t properly in the trust then there isn’t clear evidence of the debt existing.

Foreclosure Fraud For Dummies, 3: Why Are Servicers So Bad At Their Job? - Because the first rule of mortgage lending is that you don’t foreclose.  And the second rule of mortgage lending is that you don’t foreclose.  I’ll let Lewis Ranieri, who created the mortgage-backed security in the 1980s, tell you: “The cardinal principle in the mortgage crisis is a very old one. You are almost always better off restructuring a loan in a crisis with a borrower than going to a foreclosure. In the past that was never at issue because the loan was always in the hands of someone acting as a fudiciary. The bank, or someone like a bank owned them, and they always exercised their best judgement and their interest. The problem now with the size of securitization and so many loans are not in the hands of a portfolio lender but in a security where structurally nobody is acting as the fiduciary.”

Foreclosure Fraud For Dummies, 4: How Could This Explode into a Systemic Crisis? - Right now the foreclosure system has shut down as a result of banks’ own voluntary actions. There is currently a debate on whether or not the current foreclosure fraud crisis could explode into a systemic risk problem that perils the larger financial sector and economy, and if so what that would look like. No matter what happens, the uncertainty about notes and what is currently going on with the foreclosure crisis is terrible for the economy. Getting to the heart of this problem so that negotiations can be worked out is important for getting the economy going again. There is little reason to trust what comes out of the servicers and the banks in whatever they conclude at the end of the month, and the market will know that. Only the government can credible clear the air here as to what the legal situation is with the notes and the securitizations.

Foreclosure Fraud For Dummies, 5: The Necessity of Government Action and Ways Out of The Crisis - Here’s a guess:  In one month, the large banks will conclude that there are no problems with its foreclosure processes.  The massive fraud that was committed on the courts was the result of a few bad apples, but those are now gone and it’s back to business as normal. At this point, either as a citizen or as a financial market participant, would there be any reason to believe them?   Is there any reason to believe that the servicer and foreclosure mill fraud is over?  That securitizations actually have the proper legal documentation necessary?   That borrowers and lenders are actually getting a chance to come to mutually beneficials situations?    Is there any reason to believe they aren’t lying? Because servicers aren’t currently regulated.  They have a patchwork of state regulators and the OCC may regulate their parent company if it is a bank or thrift, but there’s no current government agent to provide any accountability here.   So without action, there’s going to be no one to confirm or deny that anything has actually changed in the housing market.

Automated Fraudclosure Processes For Dummies - Artist Comment: Should it be any surprise to us that the entire subprime apple is rotten to the core given what we already know? Of course not. We have seen that there is blatant fraud occurring at all three primary phases of the subprime mortgage securitization process:

  • 1. Mortgage Origination: Think about sleazy mortgage brokers, application fraud and fly by night mortgage origination factories;
  • 2. Securitization: Think about defective note assignments, Abacus type toxic trades, pay to play brokers/middlemen steering toxic garbage to sophisticated numb nuts for a fat fee, inadequate disclosure documents, and now
  • 3. Toxic mortgage pool servicing: blatant lawlessness in processing foreclosure documents is just the tip of the iceberg.

Boiler Rooms and Foreclosure Mills: A Brief History of America's Mortgage Industry -The news about the nation's foreclosure scandal has been coming fast and furious, fueled by tales of backdated documents, false affidavits and "rocket dockets" that push families into the street.  A former employee with one of the nation's largest lenders testifies that he signed off on 400 foreclosure documents a day without reading them or verifying the information in them was correct.  Ex-employees of a law firm that serves as a "foreclosure mill" for major lenders describe a workplace where speed -- not accuracy or justice -- trumps all. "Somebody would get a 76-day foreclosure," one recalled, "and then someone else would say, 'Oh, I can beat that!'"  Shocking stuff. But surprising? Not for anyone who's been tracking the recent history of the mortgage machine. Just about every corner of America's mortgage industry has been blemished by significant levels of fraud over the past decade.

Mortgage Foreclosure Fiasco - Then there is a larger issue of who really owns these homes. If the paper work is for all intents and purposes lost, then what? Frankly I don’t know. One aspect of a market economy is that there are strong property rights. But in this case it appears that property rights have been seriously undermined. Again not a good thing for promoting a healthy growing economy. Also there is the issue of increased uncertainty which is often not a good thing when it comes to economic growth. If a prospective buyer is worried about the legitimacy of foreclosures he might delay buying. A lack of foreclosures in a neighborhood might no longer signal a stable market, but one with quite a few foreclosed homes just waiting to hit the market. So buyers might leave the market till things settle down leaving sellers only one real option: lowering the price. Arnold Kling and Megan McArdle on the issue. A Washington Post article on the topic. This part from the Washington Post is a just a wee bit disconcerting, But if courts increasingly begin to nullify the MERS model – different judges have issued differing rulings – this could call into question the legitimacy of millions of mortgages, wreak havoc on the real estate market, spur costly litigation against Wall Street banks and ultimately harm the broader financial system.

The tangled web they wove - IF YOU want to give yourself a headache and/or become both very confused and very concerned about the state of the financial world, I recommend you attempt to figure out the developing foreclosure mess. It's like a mutant, 20-tentacled octopus of fail squirting poisonous ink at those trying to pin it down. Those interested in a relatively detailed account of the issues involved are encouraged to read through Mike Konczal's work on the subject. I'll give a ludicrously short version of the story here.

Disputes May Affect 9 Million Foreclosures, Morgan Stanley Says - As many as 9 million U.S. mortgages in the foreclosure pipeline or already through the process may face legal challenges because of questions about the validity of documents, according to Morgan Stanley.  About 2.5 million homes have been repossessed since 2005 and another 6.5 million mortgages are in foreclosure or may be soon, Morgan Stanley’s Oliver Chang, Vishwanath Tirupattur and James Egan wrote in a note today. The validity of documents used to verify ownership and payment obligations may be in question for each of those loans, Chang said.  “We are talking about some pretty big numbers,” Chang, a San Francisco-based housing strategist, said in a telephone interview today. “There’s a lot of developing aspects” to determine the actual impact, he said.

Title Insurers in Talks With Lenders on Foreclosure Warranties - Title insurers are in talks with banks and regulators to obtain warranties from lenders assuring they followed proper procedures before selling foreclosed homes, said Kurt Pfotenhauer, head of the insurers’ trade group.  “Everyone sort of sees the same risks, and that’s the good part,” Pfotenhauer, chief executive officer of the American Land Title Association, said today in a telephone interview. “You just have to craft a solution that’s acceptable to all the parties, and we’re making progress.”  Bank of America Corp., the biggest U.S. lender, on Oct. 8 extended a freeze on foreclosures to all 50 states amid concern by federal and state officials that homes are being seized based on faulty information. The Charlotte, North Carolina-based bank agreed that day to issue warranties for Fidelity National Financial Inc., the largest title insurer, said Peter Sadowski, executive vice president and chief legal officer for Fidelity.

Foreclosure Fraud: It's Worse Than You Think (CNBC) There has been plenty of pontificating over the ramifications of foreclosure freezes on troubled borrowers, foreclosure buyers and the larger housing market, not to mention lawsuits, investor losses and bank write downs. There has been precious little talk of what the real legal issues are behind the robosigning scandal. Yes, you can't/shouldn't sign documents you never read, but that's just the tip of the iceberg. The real issue is ownership of these loans and who has the right to foreclose. By the way, despite various comments from the Obama administration, foreclosures are governed by state law. There is no real federal jurisdiction.A source of mine pointed me to a recent conference call Citigroup had with investors/clients.  It featured Adam Levitin, a Georgetown University Law professor who specializes in, among many other financial regulatory issues, mortgage finance. Levitin says the documentation problems involved in the mortgage mess have the potential "to cloud title on not just foreclosed mortgages but on performing mortgages." The issues are securitization, modernization and a whole lot of cut corners. Real estate law requires real paper transfer of documents and titles, and a lot of the system went electronic without much regard to that persnickety rule.

A Primer On The Foreclosure Crisis - CNBC - Every time a mortgages changes hands, the new owners are supposed to receive an “assignment” of the mortgage notes from the buyers. The assignment is typically a short little document signed by both the seller and buyer of the mortgage acknowledging the sale, which is then attached to the mortgage documents themselves and delivered to the new owner.  When a mortgage is securitized it is typically sold to a Wall Street firm, which pools the mortgage with thousands of others. Investors buy slices of the pool, entitling them to cash-flows from the mortgage payments. The actual mortgages are assigned to a newly created investment vehicle. A servicer is tasked with ensuring the payments to borrowers get divided up properly and that delinquent borrowers get foreclosed upon. Here’s where things get tricky. When a mortgage is securitized, the investors in the mortgage bonds don’t get assignments or notes. The investment vehicle doesn’t get the assignments or notes either. Instead, the physical notes are typically sent to a document repository company. The transfer of interests is noted in an electronic database. But during the height of the housing bubble, investment banks were churning out mortgage bonds in such a frenzy, sometimes the assignments never got executed and mortgage notes never got delivered.

Why Foreclosure Fraud Is So Dangerous to Property Rights - There seems to be a misunderstanding as to why the rampant and systemic foreclosure fraud is so dangerous to American system of property rights and contract law. Some of this is being done by people who are naked corporatists (i.e., the WSJ Editorial Board) excusing horrific conduct by the banks. Others are excusing endemic property right destruction out of genuine ignorance. This morning, I want to explain exactly why this RE fraud is so dangerous, and explain the significance of the rights that are currently being trampling. I also want to demonstrate that the only way the nation could have the quantity and magnitude of errors we see is by willful, systemic fraud.Perhaps this commentary will allow for a more intelligent debate of this issue, and focus on what can be done to fix the problems, rather than the blind parroting of talking points

Bank Shot - The banking authorities were shocked - shocked - to discover last week that an awful lot of mortgage paper in this country is not quite in order... appears to contain, er, irregularities... seems less than kosher... frankly, exudes an odor like unto dead carp or, shall we say, a heap of dead carp the size of the building at 3900 Wisconsin Avenue, N.W., Washington, D.C. Any day now we will hear that... mistakes... were... made.   Is it indelicate to say that the USA as an enterprise has its head so deeply and firmly up its ass that the all the proctologists alive on planet Earth could not extract the collective cranium from the collective cloacal chamber even with the aid of a Bucyrus-Erie 1060-WX bucket-wheel excavator? Like, where were we the past ten years? Surely not everybody in the nation was doing bong hits while playing Grand Theft Auto, or watching The Real Housewives of New Jersey, or downing tequila shots and Percocets in the parking lot of the Talladega Superspeedway, or cooking meth in the family room, or whacking it to Internet porn, or searching for "excitement" in one of America's 450 commercial gambling casinos.

A Few More Thoughts on the Foreclosure Scandal - When you obtain a mortgage on a home, two documents get recorded. One is a mortgage, which as I understand it is just a piece of paper that says (if I am the homeowner), "Arnold Kling cannot sell this house until he pays off his loan!" Another document, which we will call the mortgage note, gives the terms and conditions of the loan. The lender, who we will call the noteholder, has the right to foreclose if I do not meet the terms and conditions of the loan. The "foreclosure scandal," as I understand it, is that with securitization, the actual noteholder has changed in ways that may not have been recorded properly at the county records office. However, the identity of the noteholder is well defined in the trading systems used by mortgage securities traders. Morally (as opposed to legally), the borrower is not really a party to this controversy. That is, the borrower did not abide by the terms of the note. The borrower has no moral claim to anything at this point.  The potential dispute is over whether the party demanding foreclosure is the rightful noteholder or not. That dispute should morally (again, not necessarily legally) be resolved among the parties that might claim ownership of the note.

States to Probe Mortgage-Service Firms - A coalition of as many as 40 state attorneys general is expected Wednesday to announce an investigation into the mortgage-servicing industry, an effort some of them hope will pressure financial institutions to rewrite large numbers of troubled loans. The move comes amid recent allegations that mortgage-servicers, which include units of major banks such as Bank of America Corp., submitted fraudulent documents in thousands of foreclosure proceedings nationwide. The banks say the document problems are technical—largely the result of papers approved by so-called robo-signers with little review—and don't reflect substantive problems with foreclosures. Still, they have drawn criticism from consumer advocates and state and federal lawmakers.

Ohio, Hit Hard by Foreclosure, Now at Epicenter of Fraud Crisis: Ohio — and especially Cleveland — was hit earlier and worse by the foreclosure crisis than other states, due to widespread problems with predatory lending, an early economic downturn stemming from the loss of manufacturing jobs, and weak consumer-protection laws. Officials in Ohio were among the first and the most aggressive in going after the banks making fraudulent foreclosures. On Sept. 30, Ohio’s secretary of state, Jennifer Brunner, told the state’s boards of elections not to use foreclosures to disqualify voters, under the premise that hundreds or even thousands of foreclosures in the state might be illegitimate. Then, last week, Richard Cordray, Ohio’s attorney general, filed a lawsuit against GMAC, seeking $25,000 for every violation of the state’s consumer-protection laws. It was the biggest and boldest legal action taken against mortgage companies since the crisis started unfolding.In an interview with TWI, Cordray stressed that the problems were systemic and the violations serious. “What we’re talking about here is not just sloppy paperwork,” he said. “We’re talking about fraud in a court of law. The [foreclosure document signers] were lying under oath, to a judge. And there is evidence that this company has illegally ousted people from their private property, violating their property rights.”

Anger Over Foreclosures Exposes Political Divisions…The swelling outcry over fast-and-loose foreclosures has thrust the Obama administration back into the uncomfortable position of sheltering the banking industry from the demands of an angry public. While senior Congressional Democrats join the calls for a national moratorium on foreclosures, the White House once again is arguing against punishing the industry, just as it did in 2009 amid the outcry over the unbreakable habit of paying large bonuses.  “Irresponsible banks need to be held accountable, but if we have not found a problem with a bank’s process we do not believe that we should impose a moratorium where that can hurt the market and hurt individual buyers,” said Shaun Donovan, secretary of Housing and Urban Development.

Did GMAC Try to Bury Its Foreclosure Smoking Gun?-  Is GMAC Mortgage, the company under siege by numerous state attorneys general and members of Congress for its use of dubious foreclosure legal filings, trying to silence the lawyer who exposed the bank's practices? So says Thomas Cox, the Maine attorney whose case is at the center of GMAC's ongoing debacle. Cox is one of the primary reasons for GMAC's current headaches. In June, as part of ongoing foreclosure case, Cox flew down to Philadelphia to depose (pdf) 41-year-old Jeffrey Stephan, who oversaw more than a dozen employees on GMAC's "document execution" team. Cox questioned Stephan on GMAC's foreclosure practices, especially whether the employees mass-signing foreclosure documents personally knew what those documents said—a requirement in all foreclosure cases, according to federal rules of civil procedure. Stephan admitted under oath that, to the contrary, he had little knowledge of the contents of the filings he'd signed, and couldn't attest to whether those documents were even true or not. Cox knew he'd found the opening that could turn the tide in his case, and soon after filed to throw out an earlier summary judgment, the court ruling that all but but spells the end of a case.

Citigroup Call On Implications On Foreclosure Crisis: "Just The Tip Of The Iceberg" - Yesterday, Citigroup's homebuilding team hosted a call with investors in which the guest speaker was Adam Levitin, an associate professor of law at Georgetown University. Far from providing the "all green" call participants had desired, Levitin said that what we have recently seen and heard in the news is “just the tip of the iceberg” and that the foreclosure halt may well cause a "systemic problem", as was suggested on Zero Hedge when the news of the Florida's court involvement was first made public (here and here) a month ago. And since by now everyone knows what the key tension points in this potentially massive development are, we will cut straight to Levitin's somewhat unpleasant conclusions: "Our speaker predicted that more and more lenders are likely to stop their foreclosure processes in both judicial and non-judicial states. He also expects more states’ attorney generals to get involved. At the federal level, it is possible than banking regulators might step in as there is legal and reputational risk for the banks involved. Ultimately, if these issues do in fact escalate, the Administration may try to broker some sort of settlement. If such deal brokering does take place, Levitin believes that “some payment” will be exacted from the lenders and servicers. The Administration could bargain for more mortgage principal write downs."

JPM conference call comments on Foreclosure-Gate  - From the JPM conference call this morning JPM: We've identified issues relating to the mortgage foreclosure affidavits and those include signers not having personally reviewed the underlying loan files but instead having relied upon the work of others. Those others, Chase employees, did conduct reviews of the underlying loan files. And there are circumstances where affidavits have not been properly notarized. So I want to just step back and have you understand what the nature of some of the information in this affidavit relates to. They obviously differ by jurisdiction but in general the types of content that we're attesting to includes the name of the borrower, property address, the date, whether or not the borrower was actually defaulted and if they've cured the default and the total amount of indebtedness. As a result of these actions, we're reviewing 115,000, plus or minus, loan files that are currently in the foreclosure process.

JPMorgan reviews 115,000 foreclosures for problems - JPMorgan Chase and Co (NYSE:JPM - News) has identified "some issues" in its ongoing review of foreclosure affidavits, but remains confident that the repossessions were proper, senior executives said on Wednesday.The second-largest U.S. bank by assets is reviewing 115,000 mortgage affidavits, Chief Financial Officer Doug Braunstein said during JPMorgan's third-quarter earnings call with analysts. The bank has so far found that some affidavits were not properly notarized.U.S. banks -- including JPMorgan -- have suspended foreclosures in some states in recent weeks amid accusations from congressional leaders and consumer advocates that lenders cut corners foreclosing on thousands of homeowners.

Bank Of America On Foreclosuregate: "Heightened Risk Of More Dismal Scenario" = Before we get into the latest bank assessment of fauxclosure, this time from BofA's Michelle Meyer, we wanted to highlight one point from today's JPM financial supplement which appears to have evaded pretty much everyone (perhaps due to its appearance on the last page, and only lawyers go that far). In today's earning call, Jamie Dimon stated that the average length a mortgage is delinquent before it is finally foreclosed upon is 14 months, or 448 days. However, it seems that average and median in this metric are quite different. To wit, on page 21 of the supplement we read that the average delinquency at foreclosure for Florida is 678 days, while for New York, it is, get ready, 792 days! That's right, a house is delinquent on its payments, which usually means not paying anything, for over two years in New York before it is foreclosed upon. Which also means that only now are those who stopped paying their mortgage around the days when Lehman filed being foreclosed upon.

Banks Ignored Signs of Trouble in Foreclosures - At JPMorgan Chase & Company, they were derided as “Burger King kids” — walk-in hires who were so inexperienced they barely knew what a mortgage was. At Citigroup and GMAC, dotting the i’s and crossing the t’s on home foreclosures was outsourced to frazzled workers who sometimes tossed the paperwork into the garbage. And at Litton Loan Servicing, an arm of Goldman Sachs, employees processed foreclosure documents so quickly that they barely had time to see what they were signing. As the furor grows over lenders’ efforts to sidestep legal rules in their zeal to reclaim homes from delinquent borrowers, these and other banks insist that they have been overwhelmed by the housing collapse. But interviews with bank employees, executives and federal regulators suggest that this mess was years in the making and came as little surprise to industry insiders and government officials. The issue gained new urgency on Wednesday, when all 50 state attorneys general announced that they would investigate foreclosure practices. That news came on the same day that JPMorgan Chase acknowledged that it had not used the nation’s largest electronic mortgage tracking system, MERS, since 2008.

Wells Fargo Outed as Member of Robo Signer Club - Yves Smith - There’s nothing like a bank being shown to be a liar. I was told yesterday that Wells Fargo has been making the rounds among policy types in DC this week to tell its story that (of course) the foreclosure crisis is overblown. Moreover, Wells reportedly said that it was not like the other major servicers, that it ran a tight shop and hadn’t engaged in the bad practices of other firms, particularly the use of improper affidavits, aka robo signers. This was a particularly stupid claim to make, since there are depositions which attest to the Wells’ use of robo signers. And in an interesting bit of synchronicity, the Financial Times got hold of one and made it the subject of its lead article today.  The FT story confirms the account we got, that Wells has been maintaining that it didn’t have serious procedural lapses. Note also that Wells’ robo signer reports to have signed up to 500 documents a day. This level is coming to look like an industry norm.

Understanding Lost Note Affidavits (LNAs) First, "Foreclosure-Gate" is primarily about "robo-signers". These are individuals who signed affidavits stating that they had "personal knowledge" of the facts in the case when in fact they did not. As JPM admitted this morning: "We've identified issues relating to the mortgage foreclosure affidavits and those include signers not having personally reviewed the underlying loan files but instead having relied upon the work of others." There are also situations of questionable notarization of the affidavits. Questions reporters might consider asking is what constitutes "personal knowledge" and why can't the affiant sign with "information and belief". Also what are the typical remedies for a false affidavit? But I digress ... Unfortunately I've seen a number of articles conflating the "robo-signer" scandal with MERS issues and LNAs (Lost Note Affidavits). How many servicers have put a moratorium on foreclosures for these issues? None. But I do hope they are reviewing the entire process.

What’s Behind the Foreclosure Crisis - Terms like “technicalities” and “document flaws” are meant to sound innocent and minor, when the truth is that the foreclosure problem is just one part of a much bigger crisis that is still out of sight for the media, and apparently being downplayed by the industry and its political apologists. This crisis at its core revolves around an attempt by banks, mortgage brokers and other financial institutions to privatize and usurp the government-run county record system that for over 200 years has guaranteed the property rights of American citizens. The long term question is whether this private usurpation, which was implemented without review or approval from any elected representatives of the people, should be allowed to stand. The short term question is whether use of this private records system has irrevocably corrupted the unbroken chain of title to property that existed in government records, and in so doing fatally undermined American confidence in private property rights (rights which are guaranteed to Americans under the Fifth Amendment to the Constitution). The following series of initiatives by the banking industry will explain what transpired, and it will be seen that these initiatives from the start were plagued by false legal assumptions, misrepresentations, shoddy record keeping, and loss or deliberate destruction of critical original real estate documents such as deeds, titles, and notes.

FT Alphaville » JPM on foreclosures, MERS - Calculated Risk beat us to it, but we think it’s worth highlighting the parts of this morning’s JP Morgan conference call where CEO Jamie Dimon and CFO Douglas Braunstein answered questions from analysts about the foreclosure scandal. The bank had just announced that it would now be reviewing 115,000 foreclosure cases in 41 states, and the executives tried to sound mostly unconcerned about the eventual financial impact of resolving the process. Guy Mozkowski of Merrill Lynch started by asking about the timing of resolving these cases and the extent to which they will affect the bank’s litigation reserves....Jeff Hart of Sandler O’Neal then asked about the expected impact on the overall housing market...

Is ForeclosureGate About To Become The Banking Industry's Stalingrad? - Will the High Frequency Signing scandal be the proverbial straw on the camel's back? Perhaps. In the meantime, here is a soon to be viral, and all too real, parody of foreclosure gate. At this point the guilty parties are irrelevant. All that matters is that America's terminal collapse into a banana republic status is now obvious for all to see.  And as for Cramer saying foreclosure gate will only force home prices to go higher, pray tell dear Jim, just which buyers will put their own money into a home when they have no idea at what time the real title holder shows up with a restraining and eviction order, and demands immediate access.  Of course, there is a loophole: the Fed will simply henceforth pay for all home purchases. And should the government drop mortgage rates to zero, and subsidize tax and insurance payments into infinity, that may well happen. Of course, it will also bankrupt the country, but since when was America's insolvency news to anyone...

Not to be outdone, FDIC joins the robo-signing club, too - It keeps getting better. From  Bloomberg, we have this tired-looking plaint: What were banking regulators doing while some of the biggest U.S. lenders routinely filed false foreclosure documents in local courthouses around the country? …but, since that is Jonathan Weil speaking, there’s a twist: In the case of IndyMac Federal Bank, it turns out the Federal Deposit Insurance Corp. was running the joint. That’s right – while IndyMac was under FDIC “control”, bank officers were robo-signing affidavits: The facts are there for anyone to see in the records of a circuit-court lawsuit against Israel and Neena Machado, a West Palm Beach, Florida, couple who last year beat back IndyMac’s attempts to foreclose on their home mortgage. They even won a judgment ordering IndyMac to pay $38,117 in legal fees. Do go and read the whole thing; it’s good for a hollow laugh or two, if your sense of humour runs that way.

Why Are Distressed Homeowners Still Paying Their Mortgage? - The big question from the mortgage meltdown isn't why so many distressed homeowners are defaulting on their loans. It's why any of them are still making payments. In the worst-hit areas millions have no equity left, and little hope of seeing any anytime soon. The market value of their homes is far below the size of the mortgage. If they just stop paying, what is going to happen to them? In many cases they may get to live in the home rent-free for months, even years, until the bank gets around to seizing it. If Frank Abagnale—the con man played by Leonardo DiCaprio in the film "Catch Me If You Can"—were operating today, he'd probably be living rent-free in a super-luxury high-rise in Miami. Consider the latest revelations. The big banks are so backed up with foreclosures that some of them resorted to hustling through repossessions without the proper paperwork. Some of them—including Bank of America, J.P. Morgan Chase and Ally Financial's GMAC Home Mortgage—have announced a temporary freeze in some states on further foreclosures while they sort through the mess.

All your neighbors are zombies - See, this always happens: I was carefully leading up to this big “you're all zombies" theme over the past week, a theme that I felt needs some space and introduction (see An 800-Pound Gorilla On A Serious Diet and Wile E.'s Suspended Reality) and then I read someone over the weekend who has thought of the same thing, in this case Brett Arends at the Wall Street Journal: Why Are Distressed Homeowners Still Paying Their Mortgage? Japan struggled for 20 years with "zombie banks"—so called because their debts, if properly recognized, made them insolvent. Here in America, we have millions of zombie homeowners. Why is this any better?

The MBS mess from the beginning – the deal docs - Mike Konczal at Rortybomb, has a quick rebuff for anyone who thinks the foreclosure scandal is creating a mountain out of a molehill (of mortgage paperwork). It’s this pooling and servicing agreement for GSAMP Trust 2006-FM1. GSAMP Trust is a Residential Mortgage Backed Security (RMBS) deal created in 2006 out of subprime fixed- and adjustable-rate mortgages, worth almost $1bn. The creation of an MBS deal like GSAMP basically goes like this: The originators or mortgage lenders, sell their mortgage notes to the sponsor (Goldman Sachs) to be turned into an MBS bond. Between Goldman and the trustee (Deutsche Bank) stands the depositor, in this case a subsidiary of Goldman.Mortgage notes feature pretty prominently in the documentation — they have to be transferred (or “assignment of mortgages” have to be made) all the way though the securitisation process. That is, assignments have to be recorded in county records.The agreement even goes so far as to state that if more than 0.01 per cent of mortgage notes aren’t properly transferred — with proper documentation — the trustee can make the sponsor (Goldman) repurchase the mortgages. It’s a similar clawback clause to the the one(s) that governs loan underwriting standards.

Florida Resident: Foreclosure-Gate Is An Absolutely Massive Problem -- No One Knows Who Owns Any Of These Houses! Let's be perfectly honest, many of the title documents are irretrievably lost.  They may have been destroyed or they may in packing cases of garbage cleaned out of offices as loan brokers folded, but they have gone to television land. And in the haste of the securitization process, many deeds changed hands repeatedly with ever being duly recorded in the town hall. That means that it will be all but impossible to obtain clear title for many houses or condo units. But if clear title can't be obtained, how can these places be sold - ever ?  No lender will grant a mortgage against a quit claim deed. The banks themselves aren't sure who owns what, which led to the absurd spectacle of several banks foreclosing on the same property.  Down here in Florida the problem has become almost comical.  B of A tried to foreclose on a man in Port St. Lucie who had NO mortgage of any sort. They damn near got away with it too.  A few weeks ago, the police evicted a family that wasn't in foreclosure after B of A gave them the wrong address.  Some title insurers are refusing to write title insurance on foreclosures at all, while others have raised their rates sky high. In short, it is a circus.  How they will untangle this mess is beyond me.

Florida’s 30-Second Foreclosure Dash Hits Wall of Fraud Claims - Home to more foreclosures than 47 U.S. states, Florida sought to clear out its backlog with a system of special court hearings that dispensed with cases quickly, sometimes in less than a minute.  Florida has the third-highest foreclosure rate in the U.S. behind Nevada and Arizona. One in every 34 housing units -- double the U.S. average -- was in the foreclosure process or bank-owned as of Sept. 1, data vendor RealtyTrac Inc. said.  Florida’s legislature appropriated $9.6 million this year to pay semi-retired judges and case managers to clear the backlog of foreclosures. Some judges have been churning through cases at a rapid clip, such as those last week in Tampa who considered dozens of foreclosures per day, sometimes in as little as 30 seconds.

TheDC OP-ED: One nation, under fraud - In 2007, Deutsche Bank sued Jeffs for his home, which is a necessary step in the process of foreclosing on a homeowner in the state of Florida. Curiously, despite the fact that he immediately hired a law firm to defend his property when he found out about the foreclosure, neither Jeffs nor his attorneys were at the trial. That’s because it had already happened. Deutsche won by default because Jeffs wasn’t able to travel backwards in time to attend, even though the trial featured a signed affidavit indicating that he had been served his court summons. The only problem with the summons Jeffs supposedly received was that it had been conjured out of thin air. In June of this year, a Florida court ruled that the document was fraudulent, as the person who was supposed to make sure Jeffs was served had mysteriously received a copy of the summons before the lawsuit had even been filed, and Jeffs never even saw the copy.  The lawyers that Jeffs hired to defend his case say that fraud such as this is not uncommon.“I think it’s safe to say that 95% of the foreclosure cases in Florida involve some form of fraud on the part of the bank,” David Goldman of Apple Law Firm, PLLC told The Daily Caller in a phone interview. “It’s probably closer to 99%. And the court system is helping them get away with it.”

Evicted Family Breaks Into Foreclosed Home - "The bank used the usual fabricated and forged documents to foreclose," the Earls wrote in their court petition, in which they describe signatures by bank personnel that do not match, from document to document -- an indication to them that documents were not properly reviewed and were fabricated. The Earls question who owns the loan, as the foreclosure documents list GRP Financial Services, but there have been several lenders listed in the past few years. The original lender was Washington Mutual Bank, which became JPMorgan Chase after the banks merged. The loan went to Bank of America on the same day that Chase sent the homeowners a notice of default. The Earls argue that Chase never properly assumed the loan and thus did not have the right to sell it off. And in turn, the investors, Conejo Capital Partners, did not properly purchase the property either.

Explaining the Mechanics of the Foreclosure Mess on BNN - Yves Smith - You can view the segment here.

Title Insurance Woes Illustrate Liabilities of Foreclosue Mess Concentrated in TBTF Banks -- Yves Smith - There are so many fronts to the foreclosure crisis that it’s now becoming difficult to stay on top of all of them. One development Monday that didn’t get the attention it deserved is the fact that Bank of America is now eating title insurance liability on foreclosed properties sold by its servicer. Per BloombergBank of America’s agreement with Jacksonville, Florida- based Fidelity National calls for the lender to cover the title insurer’s costs in the event of an error in the company’s processing of foreclosure documents, Sadowski said. The bank will notify the insurer in each case that the foreclosure complies with state laws and regulations. Bank of America is in talks with other title insurers for similar agreements, said Richard Bramhall, the bank’s chief title officer. He declined to name the other companies. This is a big deal for several reasons:  The liability in case of a wrongful foreclosure is large. There is no way for the wronged borrower to get his house back, so title insurance is the only recourse.  Bob Lawless explained in Credit Slips:

Josh Rosner: “Could Violations of PSA’s Dwarf Lehman Weekend?” -Josh Rosner, a well respected bank analyst (he describes himself as “a recovering GSE analyst”) is circulating a client note and it takes the foreclosure crisis very seriously. The critical part is his discussion of the conveyance chain. As we indicated before, the minimum chain for a recent mortgage securitization is is A (originator) => B (sponsor) => C (custodian) => D (trust). Older deals might only have three parties, but recent vintage typically had at least four, and some as many as seven or eight. The reason for doing this is bankruptcy remoteness. You as the buyer of a mortgage backed security want certainty in what you purchased. If an originator goes bust (as ironically many did), you don’t want the creditors to say, “They were already toast by the time they set up that MBS, so the sale of the loans was a fraudulent conveyance, we are gonna take the loans back.” The way to prevent that was to introduce intermediary parties between the originator and the trust. Each party had to be independent (which meant fit the legal definition of independence; the intermediary parties and even many originators were dependent on financing called warehouse lines from the investment bank packager/distributors). The note (the borrower IOU) had to be endorsed (like a check) to the next party in the chain, who then endorsed it over to the party after that, with the last party being the trust. We have a larger and more significant concern, which, if proved out, could call into question the validity of nearly all securitizations and raise material questions about whether “true sale” was achieved.

Emptywheel on the Stress Tests, Servicing Fraud as a Counter-Cyclical Diversification Strategy - Marcy Wheeler at Emptywheel asks Remember the Stress Tests?, and writes: First, remember that the top servicers also happen to be the biggest banks. Here is Reuters’ list of the top loan servicers. So all of the top mortgage servicers–Bank of America, Wells, JP Morgan Chase, Citi, and even GMAC–had to undergo a stress test last year to prove their viability before the government would allow them to repay TARP funds and therefore operate without that government leverage–which was threatened to include limits on executive pay, lobbying, and government oversight of major actions–over their business…. But in letters between Liz Warren (as head of the TARP oversight board) and Tim Geithner in January and February 2009 discussed foreclosure modification, stress tests, and accountability for the use of TARP funds (Geithner made very specific promises about foreclosure modifications and refinancing which Treasury has failed to meet). And those discussions–and the stress tests–took place as COP reported on the problems with servicer incentives, servicer staffing and oversight, and the lack of regulation of servicers more generally

A Look at How Unregulated Servicers Are, and the Consequences for Leaving this Crisis - The mortgage servicers (who we introduced here), the group of financial workers who have been involved with the wave of fraud and the reason foreclosures have shut down, aren’t really regulated. I want to continue to emphasize this, and I want to quote from Andy Kroll’s January 2010 Mother Jones piece Can Anyone Stop the Predatory Lenders? Oversight of this troubled industry is spotty. “This is a very underregulated part of the system,”“It shouldn’t be, because it’s the part where the consumer has no place to protect themselves.” Federal law allows servicers to send borrowers only one account statement a year—even if there are scheduled interest rate increases or new fees added during that time. If a borrower has a problem, HUD encourages her to first file a complaint with the servicer, and if there’s no resolution after nearly three months, she can then appeal to the agency—assuming she hasn’t been evicted in the meantime. While HUD can step in to fix the problem, it lacks the power to impose tough sanctions on servicers An OTS spokesman could name only one formal action the agency has taken against a servicer—Ocwen, in 2004. An OCC spokesman said his agency has never taken action against servicers.

Mortgage-Title Fraud: A National Catastrophe —It is impossible to overstate the severity of the real estate crisis in the United States which has been caused entirely by the reckless fraud of the nation’s largest banks – the Wall Street Oligarchs. We now have mortgage-fraud being openly acknowledged by the banksters, and on a scale never before seen in human history. We have a single individual with JP Morgan (JPM) openly admitting that she and her team committed more than 18,000 acts of fraud per MONTH, while one Bank of America official admitted that she personally committed 7,000 to 8,000 acts of fraud monthly. Regular readers will recall that in a recent commentary I reported on two, separate anecdotes where the Bank of America attempted to foreclose on properties which did not even have mortgages. In that same commentary, there was also an anecdotal report from a Florida lawyer who specializes in foreclosure proceedings, who stated that he regularly encountered (so-called) judges who were rubber-stamping these foreclosures without even looking at the documents. The lawyer also reported that one particular judge had already written her judgments (confirming foreclosure) before the foreclosure trial started. We thus have the following chain of events, a Wall Street bank pushes a stack of 18,000 foreclosures in front of a small group of clerks (who make convenient patsies), and tells them they have to clear this many documents every month – knowing that it is impossible to process that volume and still follow mandatory legal procedures.

What’s Behind the Foreclosure Crisis - Terms like “technicalities” and “document flaws” are meant to sound innocent and minor, when the truth is that the foreclosure problem is just one part of a much bigger crisis that is still out of sight for the media, and apparently being downplayed by the industry and its political apologists. This crisis at its core revolves around an attempt by banks, mortgage brokers and other financial institutions to privatize and usurp the government-run county record system that for over 200 years has guaranteed the property rights of American citizens. The long term question is whether this private usurpation, which was implemented without review or approval from any elected representatives of the people, should be allowed to stand. The short term question is whether use of this private records system has irrevocably corrupted the unbroken chain of title to property that existed in government records, and in so doing fatally undermined American confidence in private property rights (rights which are guaranteed to Americans under the Fifth Amendment to the Constitution). The following series of initiatives by the banking industry will explain what transpired, and it will be seen that these initiatives from the start were plagued by false legal assumptions, misrepresentations, shoddy record keeping, and loss or deliberate destruction of critical original real estate documents such as deeds, titles, and notes.

The Real Foreclosure Crisis: Who Owns the Mortgages? - For all the headlines given to foreclosure affidavits and robo-signing virtually no one has mentioned the real point, the idea that the affidavits themselves may not prove loan ownership regardless of how they were signed.  For several years foreclosure defense attorneys have been telling anyone who would listen that the entire foreclosure process is flawed because you have to own a mortgage note before there can be a foreclose -- and several courts have found that the affidavits used in foreclosures do not prove ownership.  Go back to 2007. Federal judge Christopher Boyko of the U.S. District Court in Ohio was asked to foreclose on 14 homeowners.  In a lot of courts the borrowers and their families would instantly be on the street but Judge Boyko said before there could be a foreclosure the lenders would first have to show that they owned the delinquent loans and therefore had the right to appear in court.  The problem was that public records showed the loans were owned by the local banks that originated the mortgages, not the big banks before the court. So, to foreclose, the big banks would first have to show ownership of the notes. How? By providing evidence of ownership such as a sworn affidavit.

Missing Foreclosure Docs a “Small Sub-Issue” of Banks’ $2.7T “Paper Problem,” Dan Alpert Says (Tech Ticker Video) - The banks' inability to prove they own the mortgages they're trying to foreclose on is not a new story, notes Dan Alpert, managing principal at Westwood Capital. In 2007, a federal judge ruled Deutsche Bank couldn't proceed with 14 foreclosures because the firm lacked proof of ownership of those mortgages. That landmark case helped spur a "show me the note" movement among American homeowners facing foreclosure. But the banks' "paper problem," is a "small sub-issue," relative to the fact there are still $2.7 trillion of home mortgage paper, i.e. non-securitized home mortgage paper, on the banks' balance sheets, Alpert says. "Banks are not exactly rushing to foreclose on anyone given the fact they stand to suffer major losses. Until the quality of those loans become known, we can't be sure the banks are safe."

Gonzalo Lira On The Second Leg Down Of America's Death Spiral - I swear to God Almighty: Mortgage Backed Securities are America’s Herpes—the gift that keeps on oozing.  So what the hell is going on with the God forsaken mortgage mess in the United States?  It’s got a lot of bells and whistles, but it’s basically quite simple: It’s all about the fucking Mortgage Backed Securities (MBS). Again.  So this is what happened, more or less—the short version:  In the crazed frenzy to get as many mortgages securitized during the Oughts, banks took shortcuts with the paperwork necessary for the Mortgage Backed Securities. The reason was because everyone in the chain of this securitization mania got a little piece of the action—a little slice of the MBS pie in the shape of commissions. So in the name of “improved efficiencies” (and how many horror stories are we finding out, carried out in the name of “improved efficiencies”), banks digitized the mortgage notes—they didn’t physically endorse them, like they were supposed to by the various state and Federal laws.

Portrait of HAMP Failure: How HAMP Connects to Foreclosure Fraud - Part I of this series, Part II, Part III, Part IV, Part V, Part VI, Part VII, Part VIII. Now that the foreclosure fraud scandal has deepened, I wanted to show how it connected to the problems with HAMP, using some reader stories as an illustration. While I’ve put this project into the background in recent weeks, I still receive personal stories about struggles with the servicers almost every day, and the problems they’re having are consistent whether you’re talking about modifying a loan or preventing foreclosures. They still feature document flim-flammery, double-talk and a clear violations of established rules, whether in the legal foreclosure process or the rules set up by Treasury for HAMP.

Foreclosure Moratorium - What Does it Mean for the Housing Market? - About 30% of home sales are distressed properties. Closings and future purchase contracts on distressed properties may not take place while a foreclosure moratorium is in effect to sort out title and foreclosure issues with recent vintage mortgages. In fact, any resale of a property with a mortgage that has been securitized may not go forward because of title questions. This could happen even if the sale is not distressed. Since securitization was widespread over the past decade, the only houses that may be transferable with cleared and insured titles are those with old fashioned mortgages, perhaps only sales before 2005. Yves Smith of Naked Capitalism has suggested that the shortcuts in documentation started to become widespread in 2005. If that is the case, then mortgages more than six years old may be sorted out and those properties could become saleable sooner than newer mortgages. However, with all the mortgage refinancing that has occurred in the past two years, many of those who have owned their homes much longer than the six years may still have very recent mortgages because of refinancing. Refinancing may have created a saleability trap for many people.

Foreclosure freeze could undermine housing market - Allegations of possible mortgage fraud against financial giants GMAC, JPMorgan Chase and Bank of America read like a corporate thriller: forged documents, faked Social Security numbers, phantom titles, disappearing paper trails, "robo-signers" and mortgages sliced and diced so many times that nobody really knows who owns them. On Friday, PNC and mortgage servicer Litton Loan Servicing joined those three financial institutions in suspending some foreclosures while they review how documents were handled. Bank of America, which had already announced a halt for 23 states, expanded the suspension to cover the whole nation. If other banks follow suit, it raises the specter of a national foreclosure moratorium. In all, the banks will have to review the paperwork for hundreds of thousands of mortgages. On top of that, class action lawyers and state attorneys general have filed lawsuits and called for foreclosure moratoriums.

Foreclosure Freeze May Sideline U.S. Homebuyers on Legal Concern - Revelations of mistakes in foreclosure proceedings are causing buyers to have misgivings about property titles, the right of home possession, said Richard DeKaser, chief economist at Woodley Park Research in Washington. Confidence in the legality of repossessions will cut foreclosure sales more than a reduction of available properties because the market already is flooded with repossessed homes, he said. “The legal problems we’re seeing will hit sales as people worry about the legitimacy of the process,” DeKaser said. “The implications are that there’s been shoddy work.” Bank of America Corp., the largest U.S. lender, extended a freeze on foreclosures to all 50 states Oct. 8 as concern spread among federal and state officials that homes are being seized based on faulty data. Foreclosure sales accounted for 24 percent of all home transactions during the second quarter, according to a Sept. 30 report by RealtyTrac Inc., an Irvine, California-based data seller. They made up a greater share in the states hardest-hit by the housing crisis, accounting for 56 percent of purchases in Nevada, 47 percent in Arizona and 43 percent in California.

Foreclosure Freeze Ties Up Title Companies - As banks face allegations of possible mortgage fraud, title companies are making it harder to write policies for those properties. Houston-based Stewart Title is setting new rules for sales of some foreclosed homes. The company is issuing guidelines to its agents making it difficult to write policies on property foreclosed upon by four banks whose process is in question: JP Morgan Chase, Bank of America, OneWest Bank or Ally Financial's GMAC Mortgage unit. The move comes one week after Texas Attorney General Greg Abbott asked several loan companies to suspend all foreclosure activities over concerns about the accuracy of documents. Michael Weaster has been selling foreclosures for thirty years. "The problem with the current issues with Bank of America, with what's going on with the moratorium, all its going to do in my opinion is create a larger inventory of vacant foreclosed homes," said Weaster.

Unclear Titles Will Sideline Buyers of Foreclosed Properties for Many Months - Would you buy a foreclosed home now, knowing full well the title may be clouded by mortgage fraud? I wouldn't. Anyone who would without title insurance is asking for a huge legal mess. Moreover, because of fraudulent procedures, bank of America and other companies have halted all foreclosures. See 40 State Attorneys General to Investigate Mortgage Fraud; Bank of America Halts Evictions Nationwide; Senator Reid Calls for More Suspensions, A nationwide halt in foreclosures for details. Halting of foreclosures cut home sales of distressed as well as add to already enormous shadow inventory of homes. In an ironic twist, median home prices may temporarily rise because of decreased sales of distressed properties.

Crisis Freezes Foreclosures as REO Inventories Rise - As investigations and multi-month delays in the foreclosure process begin, those who will suffer most are JP Morgan Chase, Bank of America and Wells Fargo, according to a new survey of foreclosure exposure, and foreclosure suspensions are coming at a bad time, just as sales are down and REO inventories are rising. Leading the list of banks holding the bag is JP Morgan Chase.  One out of every 13 1- to 4-family home loans it holds are in foreclosure today, worth some $19.5 billion, Bank of America is next $18.7 billion, or 4.39 of its 1- to 4-family home loans, and Wells Fargo has $17.5 billion, or 4.74 percent, according to a survey by SNL Financial. As far as exposure goes, SNL ranked Barclays, New York Private Bank & Trust Corp. and Ally (GMAC) as the lenders with the highest percentage of their 1- to 4-family home loans in foreclosure. According to its data, Barclays has $495 million, or 17.7 percent of its 1- to 4-family loans in foreclosure proceedings, New York Private Bank has $378 million, or 12.05 percent, and Ally has $2.1 billion, or 10.16 percent.

Foreclosure Halt May Shift Bondholder Pain – For mortgage investors, the recent suspension of foreclosures could potentially cause further losses in the already-battered $2.8 trillion market for residential mortgage-backed securities. In the past two weeks, three major loan-servicing companies put thousands of foreclosure sales and evictions on hold in the 23 U.S. states where foreclosures are handled by the courts. On Tuesday, House Speaker Nancy Pelosi called for a federal investigation into the issue.  The stoppage is but the latest frustration for bond investors, who have wrestled for more than three years with a market in disarray.  "It's symptomatic of sloppy servicing and a lack of adherence to contract and property law, which we've seen examples of over and over again in the last two years," said Scott Simon, a managing director at Pacific Investment Management Co., or Pimco.

Are the Bank Foreclosure “Moratoriums” More PR than Real? -- Yves Smith - GMAC announced a foreclosure halt in all 50 states; JP Morgan and Bank of America have stopped in 23 judicial foreclosure states.  Or have they? Florida is a judicial foreclosure state, and local reports suggest the banks are still moving forward with foreclosures. Note the inconsistencies between the statements of the bank employees versus the action on the ground. From the Fort Myers News Press:. JPMorgan Chase & Co. and Bank of America Corp., along with some smaller lenders, have announced that they were holding off on court-based foreclosures…But in Lee County, court records show both of those banks have continued to get court judgments allowing the sale of mortgages on foreclosed houses at public auction. That’s despite statements from both banks that they stopped doing that about two weeks ago. April Charney, a Jacksonville-area legal aid attorney who’s an expert on foreclosure issues, said she’s hearing similar reports from around the country. She scoffed at the banks’ protests that they didn’t intend for the judgments to be issued. “It’s a farce,” she said. “We’re all being played.”

Do we need a foreclosure moratorium? And other dilemmas. The Bank of America has halted foreclosures nationwide, and three other banks—GMAC Mortgage (a unit of Ally Financial), JPMorgan Chase, and PNC Financial Services—have halted foreclosures in certain states. The reason is that the banks were using faulty paperwork to process foreclosures, leaving them open to legal challenge and creating at least the theoretical risk that the wrong borrowers were getting thrown out of their houses. President Obama pocket-vetoed a seemingly unrelated bill that would have loosened notarization procedures across state lines. But he's resisting pressure to declare a national moratorium on foreclosures for fear it will wreck the fragile recovery.If you're having trouble understanding all this, join the club. For answers, Slate turns to George Bailey Jr., chairman of a building and loan founded by his father that has lent money to many families of lesser means in the little town of Bedford Falls so they might purchase their own homes and secure a little piece of the American dream. When the subprime market took off, Mr. Bailey's bank stayed prudently on the sidelines. (His rival, Mr. Potter, on the other hand, went long on subprime mortgage securities and eventually received a $10 billion bailout under the Troubled Assets Recovery Program.)

Bankster Mortgage Fraud: "More Mainstream Media Coverage..."  "Ok, ok, it's an online publication.  But it's a fairly good one... “I think it’s safe to say that 95% of the foreclosure cases in Florida involve some form of fraud on the part of the bank,” David Goldman of Apple Law Firm, PLLC told The Daily Caller in a phone interview. “It’s probably closer to 99%. And the court system is helping them get away with it.” Hoh hoh hoh... Now let's go further... For financial institutions, the problem isn’t the “missing” documents. It’s the missing documents—the real ones, which say much different things than the “missing” ones, and which the banks can’t seem to get their hands on. Everyone in the financial industry has been looking for them in more places than kids look for Carmen Sandiego, and they still can’t seem to find the X that marks the spot. There’s good reason for that—the industry destroyed the papers a long time ago. On purpose.

Moody's Downgrades Most Of $16.2B In Alt-A RMBS Tranches - Moody's Investors Service downgraded the lion's share of $16.2 billion of residential mortgage-backed securities made up of Alt-A mortgages.  The ratings agency has downgraded hundreds of billions of dollars worth of RMBS the past year as loss expectations steadily increased due to home prices remaining low and unemployment staying high in the midst of a shaky economic recovery.....Alt-A loans, falling between prime and subprime, were typically given to prime-rated borrowers who didn't document assets and/or income.

Foreclosure Delays May Cost U.S. Banks Up to $6 Billion, FBR's Miller Says - Faulty foreclosures may cost U.S. lenders $2 billion for every month that home seizures are delayed and the tab could reach $6 billion, according to Paul Miller, the bank analyst at FBR Capital Markets.  Investigations of how banks are seizing homes may prolong foreclosures by as much as three months, at a rough cost of $1,000 per month for each property in the pipeline, Miller, a former bank examiner, said in an interview today. The biggest firms likely need to add staff to comb through the files, costing them each $1 million a year, he said.  “The real true cost is not the expenses, it’s the drag in the foreclosure system,” Miller said.

Robo-signers: Mortgage experience not necessary -  In an effort to rush through thousands of home foreclosures since 2007, financial institutions and their mortgage servicing departments hired hair stylists, Walmart floor workers and people who had worked on assembly lines and installed them in "foreclosure expert" jobs with no formal training, a Florida lawyer says. In depositions released Tuesday, many of those workers testified that they barely knew what a mortgage was. Some couldn't define the word "affidavit." Others didn't know what a complaint was, or even what was meant by personal property. Most troubling, several said they knew they were lying when they signed the foreclosure affidavits and that they agreed with the defense lawyers' accusations about document fraud. "The mortgage servicers hired people who would never question authority," said Peter Ticktin, a Deerfield Beach, Fla., lawyer who is defending 3,000 homeowners in foreclosure cases. As part of his work, Ticktin gathered 150 depositions from bank employees who say they signed foreclosure affidavits without reviewing the documents or ever laying eyes on them — earning them the name "robo-signers."

Banks Looking Further Than Robo Signers; “Lost Note” Affidavits a Point of Failure - Yves Smith - As readers no doubt know, we’ve indicated from early on in the foreclosure crisis that problems with foreclosures of mortgages held by securitizations went well beyond the now well known “robo signer” issue. The most difficult to resolve and apparently widespread problem is the failure to convey the note (the borrower IOU) properly to the trust (the legal entity that holds the notes on behalf of the investors) as specified in the pooling and servicing agreement. Kate Berry of American Banker reports that the banks that are reviewing their internal processes are looking beyond the robo signers’ verification (or more accurately, failure to verify) borrowers’ indebtedness. One area of vulnerability being highlighted is the use of “lost note” affidavits. We had flagged this earlier as a possible way the banks could be finessing their failure to convey the notes correctly to the trust. In particular, the Florida Bankers’ Association made a very odd, indeed implausible claim, suggesting that borrower notes were routinely destroyed because they had been scanned electronically. Tom Adams, a securitization expert, and I both found that farfetched; it would be like burning down a warehouse full of cash (although we have learned that one defunct subprime originator did appear to have destroyed some notes, but the lawyers we have spoken to about this are of the view that this is not a common activity).

Where’s the Note? Did the Big Banks Lose Your Mortgage? - When Wall Street banks securitized, packaged, sold, and resold our mortgages, they created a system where it is often impossible to figure out who actually owns mortgage notes and therefore has the authority to foreclose on properties. But the big banks are getting tangled up in their own web. Recent events have exposed a handful of banks that are throwing families out of their homes even though they don’t have the mortgage note that proves they actually have a legal right to do so. There have been instances of two banks trying to foreclose on the same home, and in at least one case, of a bank trying to foreclose on a house where the homeowner had never even taken out a mortgage with anyone in the first place.We can’t rely on Wall Street banks to follow basic rules. We have to hold them accountable. At very least, they must provide the mortgage notes. Whether you are facing foreclosure, have an underwater mortgage, or are just a concerned homeowner, it’s important that you contact your bank and demand to see the original note on your mortgage. It only takes a few minutes using our free online tool.

50 state attorneys general announce foreclosure probe - The attorneys general of all 50 U.S. states announced Wednesday that they are joining to probe mortgage loan servicers who are accused of submitting false affidavits, but they stopped short of calling for a national moratorium.  The multistate investigation will initially focus on whether Bank of America, J.P. Morgan Chase, Ally Financial and other large mortgage companies made misleading or fraudulent statements to evict struggling borrowers from their homes.  Indiana Attorney General Greg Zoellersaid investigators initially will focus on whether industry employees - so-called "robo-signers" - signed off on thousands of foreclosures every month without reviewing the files as legally required. Homeowner attorneys also allege that lenders forged signatures and improperly notarized documents.

All 50 States Start Inquiry Into Foreclosures - As the nation’s attorneys general announced a joint investigation into flawed paperwork filed to support home foreclosures, federal housing regulators urged lenders Wednesday to vet their foreclosure procedures and fix them.  The regulatory body, the Federal Housing Finance Agency, made it clear that the foreclosure process should “proceed without delay” if no problems were found, even though some Democratic lawmakers have called for a nationwide moratorium.  “The country’s housing finance system remains fragile, and I intend to maintain our focus on addressing this issue in a manner that is fair to delinquent households, but also fair to servicers, mortgage investors, neighborhoods and most of all, is in the best interest of taxpayers,” Edward J. DeMarco, the agency’s acting director, said.  The agency is the regulator for Fannie Mae and Freddie Mac, the mortgage holding companies that were taken over by the government after they collapsed in the financial crisis. Big banks sell their mortgages to Fannie and Freddie and then service them.

The Wheels Are Coming Off in MBS Land: All 50 State AGs Join Probe; Banks Abandoning MERS Foreclosures - Yves Smith - Even though the headline item is the fact that the attorneys general in all 50 states are joining the mortgage fraud investigation, the real indicator that the banks are stressed is that they have started abandoning MERS, the electronic database that passes itself off as a registry for mortgages. JP Morgan has quit using it as an agent on foreclosures; it clearly can’t withdraw from it fully, given that it has become a central information service.  Despite this being treated as a pretty routine event in the JP Morgan earnings call, trust me, it isn’t. The withdrawal of JP Morgan from the use of MERS as the face in foreclosures is a tacit admission that the past practice of using MERS as the stand -in for the trust is problematic. I’ve heard lawyers discuss the possibility of class action litigation to invalidate all MERS-initiated foreclosures in states with strong anti-MERS rulings; this idea no doubt will get more traction given JP Morgan’s move. (An attorney who is in the thick of this situation told me another major bank has made the same move as JPM, but I see no confirmation in the news as of this writing).

Robert Scheer: Invasion of the Robot Home Snatchers - How do you foreclose on a home when you can’t figure out who owns it because the original mortgage is part of a derivatives package that has been sliced and diced so many ways that its legal ownership is often unrecognizable? You cannot get much help from those who signed off on the process because they turn out to be robot signers acting on automatic pilot. Fully 65 million homes in question are tied to a computerized program, the national Mortgage Electronic Registration Systems (MERS), that is often identified in foreclosure proceedings as the owner of record.   MERS was the result of a partnership formed back during the Clinton years between Fannie Mae, an ostensibly government-sponsored agency that morphed into a very much for-profit mega-Wall Street hustler, and Countrywide, the largest and most rapacious of the private mortgage marketers. The scam of computerized credit approval and mortgage certification they came up with was subsequently embraced by Freddie Mac, the other huge housing agency, and the leading Wall Street banks joined in the feeding frenzy. MERS owners now include Wells Fargo, AIG, GMAC, Citigroup, HSBC, the two housing agencies and Bank of America. But the courts are increasingly challenging MERS claims to the right of foreclosure since this whole racket, which bypasses the power of counties to register property ownership, was never authorized in the law.

Bankruptcy attorney on robo-signing fraud and mortgage mod litigation - This bankruptcy attorney in the video below says he has been fighting the robo-signing issue since 2007. He also shows how the signature of certain robo-signers is "comically" different from one document to the next, indicating fraud. (Hat tip Glen).The interesting bit for me comes at about the 3:15 mark when he is asked whether he was able to keep home owners in their homes as a result of uncovering the fraud. This is the question everyone is grappling with: are we just delaying the inevitable? Are these homeowners squatters – deadbeats, if you will? Mr. Shaev says he has been able to get banks to modify loans as a result of this (expensive) process and the home owners did stay in their homes. My conclusion is that if homeowners had the financial wherewithal to get counsel from people like Shaev, they would more often be able to stay in their homes via a mortgage modification. Take a look at the video.  I have some more comments below.

Time for a Moratorium on Mortgage Fraud - We have long known that lender fraud was rampant during the real estate boom. The FBI began warning of an “epidemic” of mortgage fraud as early as 2004. We know that mortgage originators invented “low doc” and “no doc” loans, encouraged borrowers to take out “liar loans”, and promoted “NINJA loans” (no income, no job, no assets, no problem!). All of these schemes were fraudulent from the get-go. Property appraisers were involved, paid to overvalue real estate. That is fraud. Indeed, the largest financial institutions were run by their management as what my colleague Bill Black calls “control frauds”. That is, the banks used accounting fraud to manufacture fake profits so that they could pay huge bonuses to top management. The latest data out on Wall Street bonuses show that these institutions are still run as control frauds, with another record year of bonuses paid by cooking the books. The fraud continues unabated. This is the biggest scandal in human history. Indeed, all previous scandals from around the globe combined cannot even touch this one in terms of scale and scope and stench. This is the mother of all frauds and it will be etched into the history books for all time.

Foreclosure Fiasco’s Trail Leads to Washington - What were banking regulators doing while some of the biggest U.S. lenders routinely filed false foreclosure documents in local courthouses around the country? In the case of IndyMac Federal Bank, it turns out the Federal Deposit Insurance Corp. was running the joint.  This may help explain why the mortgage-servicing industry got away with such misbehavior for so long. The government, in one form or another, was doing it, too.  The facts are there for anyone to see in the records of a circuit-court lawsuit against Israel and Neena Machado, a West Palm Beach, Florida, couple who last year beat back IndyMac’s attempts to foreclose on their home mortgage. They even won a judgment ordering IndyMac to pay $38,117 in legal fees.  Among the sworn statements IndyMac filed with the court was a December 2008 affidavit by an IndyMac vice president, Erica Johnson-Seck, who said she had personal knowledge of the amount of money the Machados owed on the mortgage. That wasn’t true, she later testified in a deposition. To be fair, there’s every reason to believe the old IndyMac was engaged in this sort of conduct already, before it was shut down.

Mortgage datapoints of the day - Mike Konczal finds an Andy Kroll piece from January which shows just how unregulated mortgage servicing has been: the OCC, for instance, has never taken action against mortgage servicers. And it’s far from clear that it’s inclined to now: The point here is that the decision to go after banks and loan servicers is ultimately a political one, and there doesn’t seem to be a huge amount of appetite in Washington to have another huge fight with the banks, so soon after the last one. Meanwhile, the incredibly low rate of existing home sales looks like it’s going to plunge still further: New buyers have stepped back from the market for distressed property, which now accounts for more than 30% of new transactions, according to RealtyTrac. New owners are worried they don’t have a legal right to their homes. Title insurers are worried about their exposure to faulty documents and unwilling to stand behind new purchases. Since title insurance is required for most mortgages, the market is essentially at a standstill. In other words, the housing market, which was broken before, is even more broken now.

Foreclosure Crisis Finally Hitting Banks Where it Hurts: Their Stock Prices - Yves Smith - I’m surprised it has taken this long for Mr. Market to wake up and smell the coffee.  We’ve been poking at this story since early in the year, more intensively since May, and even with persistent effort and good contacts to people in a position to give good readings on the legal and procedural issues, there are still a lot of unknowns, simply because the real estate market is fragmented and practices varied. But what has been striking the deeper we have dug into this morass is that on almost every matter of fact (as in how exactly did the banks handle the notes, which is the borrower IOU), the answers are coming in consistent with worse case scenarios. I continue to be gobsmacked at the flagrant disregard by large numbers of securitization industry participants for adherence to their own contracts and legal procedures necessary to protect their clients and ultimately, their organizations.

The Foreclosure Fiasco and Wall Street’s Shrug - "The first thing that needs to happen, I think, is to get these people out of their homes," a man wearing a bespoke blue-striped shirt, a Hermés tie patterned with elephants and Ferragamo loafers said recently. "Correct! I'll explain," the veteran member of a bank restructuring and advisory team said. Amid evidence of sham documents and widespread paperwork gaffes, if not systemic fraud that increasingly looks like it may be terrifically deep, Bank of America recently halted all foreclosure proceedings around the country. That followed similar announcements from the home-loan giants JPMorgan Chase and GMAC. But Wall Street does not sympathize. "You had people putting zero down to get massive houses they couldn't afford to be in," he said Monday morning, "but now they want to stay. And the government wants to let them stay, because they're voters." A few hours later, the Goldman Sachs arm Litton Loan Servicing said it had suspended certain foreclosure proceedings, too. "Talk about a financial scandal," a Wall Street Journal editorial this weekend joked. "A consumer borrows money to buy a house, doesn't make the mortgage payments and then loses the house in foreclosure—only to learn that the wrong guy at the bank signed the foreclosure paperwork. Can you imagine?"

The Trouble with MERS - As a homeowner begins research into the lending and foreclosure crisis, there will be many unfamiliar terms, names and companies that come to their attention. Chief among these will be MERS. MERS is the acronym for Mortgage Electronic Registration Systems. It is a national electronic registration and tracking system that tracks the beneficial ownership interests and servicing rights in mortgage loans. MERS was conceived in the early 1990’s by numerous lenders and other entities. Chief among the entities were Bank of America, , Fannie Mae, Freddie Mac, and a host of other such entities. The stated purpose was that the creation of MERS would lead to “consumers paying less” for mortgage loans. Obviously, that did not happen. The creation of MERS changed the process. Instead of the lender being the Beneficiary on the Deed of Trust, MERS was now named as either the “Beneficiary” or the “Nominee for the Beneficiary” on the Deed of Trust. This meant that MERS was simply acting as an Agent for the true beneficiary. The concept was that with MERS assuming this role, there would be no need for Assignments of the Deed of Trust, since MERS would be given the “power of sale” through the Deed of Trust.

For Halloween, I’m going as a MERS Vice-President -Christopher Peterson is a law professor at the University of Utah. In a pair of papers, one published last summer and one not yet published, he makes a compelling case that the Mortgage Electronic Registration System (MERS) ought to be illegal — and arguably is already.These papers are getting some play right now because they anticipate the foreclosure documentation mess currently in the news. But, briefly…  In the 1990s, mortgage lenders and servicers decided to bypass centuries of established precedent for tracking ownership of physical land and the related loans, because they did not want to pay fees to county registries that have tracked that ownership for legal purposes since before the nation was founded. As a result, 60% of all mortgages in the U.S. today are legally “owned” by MERS, a Delaware corporation with approximately zero employees. Now, in order for the owner of a mortgage to perform certain legal actions — like “conveying an interest” in the land — some states require the signature of a “Vice President”.

Guess who’s going to pay the bill for the foreclosure crisis? - Both in the MSM and the blogosphere--these days, as far as the now-quite-institutionalized support for, behavior by, and societal control of our ruling class is concerned--we're continually reminded who's really calling the shots in our faux democracy. Yes, as today's NY Times lede du jour and Naked Capitalism's Yves Smith remind us, yet again, it's all about facilitating Wall Street's ongoing efforts to privatize their profits and socialize their losses. In the wake of these (inconvenient, to some, even in this reality-based community) events, the news of the latest devastation of the day, the foreclosure fraud crisis, continues to hammer away at the collective psyche of the voting public. And, of course, it bodes poorly for the mid-term election results, come late November 2nd, as far as the Party theoretically in control of both arms of the legislative branch of our government is concerned. (Then again, even that last sentence is inaccurate, because it's become rather obvious to anyone with an I.Q. higher than the outdoor temperature on a cold winter day that "a party" doesn't control our government; the status quo controls both major parties; therefore, the status quo controls our government.)

MSM Distancing Itself From Bank Party Line on Foreclosure Crisis - Yves Smith - We’ll see next week whether two articles, one in the Wall Street Journal, the other in the New York Times, are a sign of a sea change in the media posture towards the banking industry’s spin efforts, at least as far as the securitization mess is concerned. Let’s face it, the banks have lied so often, so badly, that journalists might finally be prepared to take their remarks with a fistful of salt. Or these articles may merely be a weekend outburst of “objectivity” which will be beaten back when the financial services industry flack crank up their efforts next week. The most interesting change in posture was at the Wall Street Journal, which heretofore has been staunchly falling in with the industry party line. Apparently two days of battering of bank stock prices have persuaded the Journal’s writers that the critics’ case might have some validity. The article, “Mortgage Damage Spreads” focuses clearly on the main issue, as its subtitle telegraphs: “Big Bank Stocks Hit Again as Modern Finance Collides With the Legal System.”

Home remedies worth trying - Although the potential for chaos in the housing market and on bank balance sheets is rightly feared, there's an opportunity here, too. Foreclosures have paused. There's renewed recognition that the business practices behind the housing bubble were a mixture of insane and fraudulent. The banks will probably need some government help again, even if it's just regulatory forbearance. The market is preparing for the possibility of new policies - and we should have some, but not just for the banks. For the homeowners, too. Our response to the financial crisis had three parts: The bank and auto bailouts, the stimulus, and the efforts to help homeowners facing foreclosure. The bailouts worked pretty well. The stimulus was much too small, but at least did what it said it was going to do. The help for homeowners, however, has been a disaster.

The Mortgage Morass, by Paul Krugman - NY Times: American officials used to lecture other countries about their economic failings and tell them that they needed to emulate the U.S. model. The Asian financial crisis of the late 1990s, in particular, led to a lot of self-satisfied moralizing. Thus, in 2000, Lawrence Summers, then the Treasury secretary, declared that the keys to avoiding financial crisis were “well-capitalized and supervised banks, effective corporate governance and bankruptcy codes, and credible means of contract enforcement.” By implication, these were things the Asians lacked but we had. We didn’t.The accounting scandals at Enron and WorldCom dispelled the myth of effective corporate governance. These days, the idea that our banks were well capitalized and supervised sounds like a sick joke. And now the mortgage mess is making nonsense of claims that we have effective contract enforcement — in fact, the question is whether our economy is governed by any kind of rule of law.

The Impact of Error From Securitization to Foreclosure -  Barry Ritholtz - There are quite a few misunderstandings, denials, and exaggerations floating around as to what the final outcome might be of “Fraudclosure.” At the current stage, we really do not know how extensive the problems are. We could make wild and unsubstantiated conclusions, but we prefer reason and logic. So let’s break this down as to the primary concerns. As I see this, what facts are revealed and how these errors get resolved will determine the resolution of the current fiasco, as well as the costs.

SAR #10289 - There is no Plan B. - Chris Martenson - There is no rational way to discuss one aspect or another of the hydra facing us. Yes, fraudulent affidavits were used to keep foreclosure mills running. Why not? The mortgages were frauds at inception – deceitful loans made to deceitful buyers. The fraudulent mortgages were quickly passed on to the slice and dice middle-men who knew what they were cutting up was fraudulent but didn't care as long as they could pass it on – nudge, nudge, wink, wink – as MBS given fraudulently high ratings by firms that were no better than houses of prostitution. A “service” industry grew up that was designed to keep all the players fat, dumb and happy until they were starved, very unhappy, but still greedy, still dumb. Readers ask why I've not written about the 'foreclosure fraud', this is why: It is too big to grasp. We are living in a world made by fraud and it cannot but all fall down. Anyone who thinks this is all trivial technicalities is wrong.  I truly thought our doom would flow from the increasing decline in petroleum production, years from now. I was wrong.

KLING: Foreclose on our antiquated title system -What has emerged in recent weeks as "the foreclosure scandal" represents the collision of this 21st-century computerized, global financial system with an 18th-century legal process for obtaining ownership rights to buildings and land. Indeed, the United States has one of the most backward land-title systems in the industrial world. If we wanted, we could apply modern technology to the land-title process. We could base property boundaries on satellite photography rather than on surveyor's sketches. We could use precise coordinates for latitude and longitude instead of references to topographical features. We could maintain records in digital format, where they could be accessed on the Internet.I am not saying that we can make property records easy and foolproof. I know someone who lives in a condominium where two owners share the same storage locker. That creates a property right that strikes me as rather unclear. What if a new owner of the second condo claims that the first condo owner is taking up too much space, or the wrong space, in the locker? No amount of computerization can remove all ambiguity.

Foreclosure Mess Draws in the Lawyers Who Handled Them - With the rash of foreclosures across the country in recent years, many lawyers have specialized in the lucrative business of handling cases for banks and loan servicers. And now that flaws are being acknowledged by big lenders in the processing of foreclosures, some of these lawyers are finding themselves in the cross hairs of investigators — and scorned by their former clients.  Consider the case of David J. Stern, a lawyer in Plantation, Fla., whose firm handled an estimated 20 percent of foreclosure-related proceedings in Florida, one of the states hit hardest by the housing crisis.  Mr. Stern is under investigation by the Florida attorney general and is a defendant in several lawsuits brought by homeowners. And in recent days, lenders and mortgage holding companies that had used Mr. Stern’s services, including Citigroup and GMAC Mortgage, said they would no longer do so.

Time for Criminal Charges To Be Filed . . . Ritholtz - The absurdity of illegal activity, criminal conduct, rampant fraud has reached a point where the nation much declare “No More.” We must begin the process of identifying criminal actors — and prosecuting them. The latest twist on the criminality/foreclosure fraud: The hiring of untrained, incompetent burger flippers to act as lawyers or paralegals in the processing of foreclosures: “At JPMorgan Chase & Company, they were derided as “Burger King kids” — walk-in hires who were so inexperienced they barely knew what a mortgage was. At Citigroup and GMAC, dotting the i’s and crossing the t’s on home foreclosures was outsourced to frazzled workers who sometimes tossed the paperwork into the garbage.This is a degree of recklessness previously unseen in American jurisprudence. My advice: If you have been in any way personally harmed by the illegal actions of any bank, law firm, process server, or loan servicing agency, you MUST file criminal charges.

Foreclosure Fraud: We Need to Fix the Banks Again -It’s time to put the perps of this scandal in jail. Yves Smith, Bill Black, and Mike Konczal have already done yeoman’s work in seeking to explain the lender fraud scandal in the securitized mortgage market and its possible legal ramifications. Here, I’d like to restrict my discussion to the optimal government response. President Obama recently used a pocket veto on a bill that would allow foreclosure and other documents to be accepted among multiple states (and therefore make it difficult for homeowners to challenge foreclosure documents prepared in other states). But I worried that this action was not sincere. My concern was that, following the midterm elections, the Administration would eventually come up with some grand “compromise” solution, which would in effect give the banks everything they wanted. In retrospect, it appears that even that was too favorable an assessment. Per the Washington Post:The Obama administration does not support a nationwide moratorium on foreclosures at this time, Federal Housing Administration Commissioner David Stevens said Sunday in an e-mail response to questions.“We believe freezing foreclosures for all banks in all states, whether we have reason to believe them to be in error or not, is simply not the prudent step to take in this fragile housing market,” he said.

US Government Steps Lightly Into Foreclosure Controversy [..] several people familiar with the matter have said banks are facing growing pressure from Fannie Mae and Freddie Mac to address deficiencies in their mortgage servicing operations. Fannie Mae and Freddie Mac [..] were taken over by the government in 2008 and have been run under a conservatorship by the Federal Housing Finance Agency since that time. FHFA acting director Edward DeMarco [..] said his agency was working with Fannie Mae and Freddie Mac to determine the scope of the documentation issue and come up with targeted ways to address the matter. Banks and regulators are facing growing political pressure to act quickly, with multiple politicians and state attorneys general insisting in recent days on a broad freeze of foreclosures until the matter is resolved. "I understand there's a lot of concern," Mr. DeMarco said. "Concern is understandable. We're not diminishing the concern. We are trying to be quick but measured in the approach and the response taken. We're concerned about the whole housing market and we're concerned about what this means for taxpayers and other market participants." He said he didn't want to "rush into things that create further unintended consequences."

White House: No Need For National Foreclosure Moratorium - A top White House adviser questioned the need Sunday for a blanket stoppage of all home foreclosures, even as pressure grows on the Obama administration to do something about mounting evidence that banks have used inaccurate documents to evict homeowners. "It is a serious problem," said David Axelrod, who contended that the flawed paperwork is hurting the nation's housing market as well as lending institutions. But he added, "I'm not sure about a national moratorium because there are in fact valid foreclosures that probably should go forward" because their documents are accurate. Axelrod said the administration is pressing lenders to accelerate their reviews of foreclosures to determine which ones have flawed documentation. "Our hope is this moves rapidly and that this gets unwound very, very quickly," he said.

5 Things David Axelrod Must Have Missed About The Foreclosure Thing. 2. Banks do not just walk away from a cash cow like “mortgage servicing” without a good reason. Mortgage servicing is a $200 billion a year business, and that is not because of the flat 0.25% fee mortgage servicers receive to process the timely payments of responsible homeowners. In the boom years, mortgage servicers raked in fees every time they convinced a homeowner to refinance—the more “adjustable” the better!—and in the bust years, late fees and foreclosures are the cash cows. Like all things banks do, it is truly recession-proof! The catch is that because foreclosures sort of necessarily involve, you know, “laws” governing “property rights” and “trespassing” and whatever, they require someone acting on behalf of the theoretical new “owner” of the property (whoever that is) to sign an affadavit saying something along the lines of, “yes, I’ve thought about it and reviewed the documents and whoever the local sheriff is should know that definitely these people deserve to have their locks abruptly changed and all their shit ransacked by some contract team of meatheads, and whoever shows up on this property after that they should feel free to harass, arrest, and what the hell waterboard.”

Geithner: Foreclosure Freeze Would Be 'Very Damaging' - As doubts about the legality of foreclosure proceedings continue to grow, Treasury secretary Timothy Geithner said a nationwide foreclosure freeze would do more harm than good, Bloomberg reports. Speaking to PBS's Charlie Rose, Geithner, who called the foreclosure crisis "a national tragedy," said a moratorium could further depress housing prices and said it would be "very damaging to exactly the kind of people we're trying to protect," according to the transcript of his remarks (hat tip to Politico). A nationwide freeze could prevent foreclosed properties from being sold, and, as Geithner noted, unoccupied houses tend to hurt the value of their neighbors. President Obama's top adviserr David Axelrod has also said he was "not sure" about a national moratorium. Both Axelrod and Geithner warn that such a move could cause collateral damage to valid foreclosure processes. Geithner told Rose "we're not going to make the problem worse." In an editorial last week, the Wall Street Journal expressed a similar opinion.

Geithner’s bizarre foreclosure logic - Politico has the transcript of Tim Geithner’s appearance on Charlie Rose last night: I think it’s important to recognize, Charlie, that if you — a national moratorium would be very damaging to exactly the kind of people we’re trying to protect, because the consequence of that would be in neighborhoods that have been most affected by the foreclosure crisis, where you see lots of houses on the block empty, unoccupied, what it means is those communities will be living longer with houses unoccupied, with more pressure on their house price with the people still in their houses. That would be very damaging. I don’t follow this logic at all. Geithner is absolutely right that empty houses are a Bad Thing. But he seems to think that a foreclosure moratorium would cause empty houses. Isn’t it foreclosures which cause empty houses?

U.S. outlines process for "orderly and expeditious resolution of foreclosure process issues" -  From the FHFA: Statement By FHFA Acting Director Edward J. DeMarco On Servicer Financial Affidavit Issues FHFA announced that Fannie Mae and Freddie Mac are working with their respective servicers to identify foreclosure process deficiencies and that where deficiencies are identified, will work together with FHFA to develop a consistent approach to address the problems. Since then, additional mortgage servicers have disclosed shortcomings in their processes and public concern has increased. Today, I am directing the Enterprises to implement a four-point policy framework detailing FHFA’s plan, including guidance for consistent remediation of identified foreclosure process deficiencies. This framework envisions an orderly and expeditious resolution of foreclosure process issues that will provide greater certainty to homeowners, lenders, investors, and communities alike. ..."

The Land Scandal and Blurring Legal/Political Terrain - Although on its surface the Land Scandal is a legal scandal, it’s really a manifestation of the political war now raging in America. MERS, faulty or neglected transmission of title, fraudulent trusts and securitizations, perjured affidavits, forged documents, illegal claimants, fraudulent conveyances from bankruptcies, kangaroo courts……sum these up and locate them in the overall context of normalized organized crime, and we have not the use and abuse of the law, but the complete overthrow of law. And now that these crimes are coming to light, the criminals will attempt a “political” solution (which is really anti-political; kleptocratic pseudo-democracy is actually the death of politics). The government will try to accomplish this political fix. Any attempt to fight back, to impose the rule of law, must itself be a political struggle. This is a hybrid legal/political terrain, and therefore calls for hybrid tactics and a hybrid moral sense. It has no clear boundaries and no predictable strong points. We see how the system wants to legalize and/or politically normalize all fraud and ownership uncertainties, and beyond that all the obscenities of an economy, a “society”, a (dis)order founded on monopolies of crime. 

The enormous mortgage-bond scandal - You thought the foreclosure mess was bad? You’re right about that. But it gets so much worse once you start adding in a whole bunch of parallel messes in the world of mortgage bonds. For instance, as Tracy Alloway says, mortgage-bond documentation generally says that if more than a minuscule proportion of notes in a mortgage pool weren’t properly transferred, then the trustee for the bondholders can force the investment bank who put the deal together to repurchase the mortgages. And it’s looking very much as though none of the notes were properly transferred. But that’s not even the biggest potential problem facing the investment banks who put these deals together. It also turns out that there’s a pretty strong case that they lied to the investors in many if not most of these deals.

RealtyTrac: Record Repossessions reported in September From RealtyTrac: Foreclosure Activity Increases 4 Percent in Third Quarter  Foreclosure filings were reported on 347,420 U.S. properties in September, an increase of nearly 3 percent from the previous month and an increase of 1 percent from September 2009. A record total of 102,134 bank repossessions were reported in September, the first time bank repossessions have surpassed the 100,000 mark in a single month.  “Lenders foreclosed on a record number of properties in September and in the third quarter, taking a bite out of the backlog of distressed properties where the foreclosure process was delayed by foreclosure prevention efforts over the past 20 months,”  “We expect to see a dip in those bank repossessions — and possibly earlier stages of the foreclosure process — in the fourth quarter as several major lenders have halted foreclosure sales in some states while they review irregularities in foreclosure-processing documentation that has been called into question in recent weeks. This will slow down in Q4, but will pick up again soon.

Banks seize 288K homes in Q3, but challenges await - Lenders seized more U.S. homes this summer than in any three-month stretch since the housing market began to bust in 2006. But many of the foreclosures may be challenged in court later because of allegations that banks evicted people without reading the documents. A total of 288,345 properties were lost to foreclosure in the July-September quarter, according to data released Thursday by RealtyTrac Inc., a foreclosure listing service. That's up from nearly 270,000 in the second quarter, the previous high point in the firm's records dating back to 2005. Banks have seized more than 816,000 homes through the first nine months of the year and had been on pace to seize 1.2 million by the end of 2010. But fewer are expected now that several major lenders have suspended foreclosures and sales of repossessed homes until they can sort out the foreclosure-documents mess.

RealtyTrac Reports Q3 Foreclosures Hit All Time Record... Just In Time For The Plunge - Looks like someone may have had a little advance notice on October's foreclosure semi-moratorium festivities. According to RealtyTrac, September foreclosures marked a 5 month high of 347,420, jumping 3% from the previous month and 1% from September 2009, even as the 3rd quarters marked the highest foreclosure activity on record. For the first time in history, bank repossessions (REOs) surpassed 100K, hitting 102,134. Providing some much needed color on what is actually happening in the foreclosure market, James Saccio, CEO of RealtyTrac said: "Lenders foreclosed on a record number of properties in September and in the third quarter, taking a bite out of the backlog of distressed properties where the foreclosure process was delayed by foreclosure prevention efforts over the past 20 months. We expect to see a dip in those bank repossessions — and possibly earlier stages of the foreclosure process — in the fourth quarter as several major lenders have halted foreclosure sales in some states while they review irregularities in foreclosure-processing documentation that has been called into question in recent weeks."

U.S. Home Seizures Climb to Record as Banks Review Foreclosure Practices - Lenders took over 102,134 properties last month, RealtyTrac Inc. said in a report today. That was the highest monthly tally since the company began tracking the data in 2005, surpassing the August record of 95,364. Foreclosure filings, including default and auction notices, rose 3 percent from the prior month to 347,420. One out of every 371 households received a notice.  Sales of properties in the foreclosure process accounted for almost a third of all U.S. transactions in the month, a sign that a prolonged delay in repossessions may hurt the housing market, RealtyTrac said. Bank of America Corp., the largest U.S. lender, said Oct. 8 it would curtail foreclosures across the country, while JPMorgan Chase & Co. and Ally Financial Inc. stopped seizures in 23 states where court approval is required.

S&P Chimes In On Foreclosure Fraud, Expects 6-8% Home Price Decline Through November 2011 - S&P finally chimes in on fraudclosure, and in combination with other recent weak data out of the home segment, now sees an additional 6-8% decline in prices through November 2011. "U.S. home sales and home prices aren't likely to improve as we move into the seasonally sluggish fall and winter months. A range of other key factors are also weakening the housing market: An elevated level of short sales and distressed asset sales; a large backlog of shadow inventory that have yet to be brought to market; and a high national unemployment rate. The recent news that several major banks will delay foreclosures due to documentation issues may postpone the arrival of the backlog of distressed inventory to the market anytime soon. The foreclosure delay also supports our expectation that the housing recovery will be a slow one. Additionally, the latest U.S. housing futures suggest that home prices will decline another 6% through November 2011. Standard & Poor's economists expect similar price declines over the same period."

Trying to Chart the Long Road Back - Perhaps it should come as no surprise that after enduring the most brutal recession since the Great Depression, the United States economy has emerged with a pronounced limp. In an article today we take a look at this recession, and the recovery, and found little reason to cheer. Many indicators, from home prices and sales to commercial vacancies to jobs, jobs and more jobs, point to years rather than months before the economy recovers its old vigor. In analyzing 30 years of real estate data, for instance, Steve Murray, editor of Real Trends, an industry newsletter in Denver, found that the average number of homes sold in a given year works out to about 5 percent of all households. Given the current number of households in the United States — about 119 million — that means homeowners or developers should sell a total of about 5.9 million houses this year. At the current rate of sales, Mr. Murray figures the nation is on track to sell closer to 4.85 million this year. As a measure of how out of whack things got during the boom, owners and home builders sold 8.3 million homes in 2005.

This can’t go on: house prices must drop or wages must rise. Which seems more likely? | Jeremy Grantham is the veteran fund manager who founded the US investment firm GMO. He is also a specialist in defining and identifying bubbles, which he rightly regards a crucial task in the investment game. He claims to have identified 34 of them over the years and says only two have failed to burst or deflate. One is today's UK housing market. Grantham's findings are worth exploring in light of last week's news from the housing market. The Halifax reported that average house prices fell by more than £6,000 in September to £162,096, a drop of 3.6% from August and the biggest monthly fall on record.

Fed's Reflation Bet Could Hit Consumers Before It Helps - Fed huffs, stock market puffs. If only the story ended there.  Since Federal Reserve Chairman Ben Bernanke hinted at a whatever-it-takes approach to keeping the U.S. economy afloat in late August, the market has behaved almost exactly according to plan. The S&P 500 is up about 11%. The yield on the benchmark 10-year Treasury note, which sets borrowing rates for things  like mortgages, has sunk to 2.382%. That is precisely how the Fed is hoping to reflate the U.S. economy. Make mortgages cheaper, and demand will help keep home prices from dropping. Get a rally going in stocks, and the accompanying "wealth effect" will lift consumer spending. Push down interest rates on cash, and people and companies will be less inclined to save and more likely to spend or invest.  It sounds almost too good to be true. Sadly, it probably is. Policy makers can unleash a flood of liquidity into the U.S. economy, but they have little control over where it washes up. And lately there are some troubling signs that the Fed's pursuit of inflation risks leaving the U.S. with something like stagflation instead.

Google Plans Alternative Inflation Index Using Web Data - The work by Google’s chief economist, Hal Varian, highlights how economic data can be gathered far more rapidly using online sources. The official Consumer Price Index data are collected by hand from shops, and only published monthly with a time lag of several weeks.  At the National Association of Business Economists conference in Denver, Colorado, Mr Varian said that the GPI was a work in progress and Google had not yet decided whether to publish it. While the Federal Reserve is unlikely to panic just yet, Mr Varian said that the GPI shows a “very clear deflationary trend” for web-traded goods in the US since Christmas.  Although the data are not seasonally adjusted, Mr Varian said that prices rose during the same period a year ago. The ‘core’ CPI in the US, which excludes food and energy, rose 0.9 percent on a year ago in August.

Lower- and Middle-Income Spending Lowest Since January '08 -  Gallup - Lower- and middle-income Americans' self-reported average daily spending in stores, restaurants, gas stations, and online averaged $48 per day during September -- down $6 from August and $16 from July. Consumer discretionary spending by these Americans making less than $90,000 a year is now at its lowest level since Gallup began daily tracking in January 2008, as the recession was just getting underway.Upper-income Americans reported spending an average of $118 per day in September -- up $9 from August but virtually the same as they spent in June and July. Spending among this group making $90,000 or more annually is not much different from the $114 they spent in September 2009. Only once -- in May -- has 2010 upper-income spending exceeded the 2009 "new normal" upper-income spending range of $107 to $121 per day.

Trifecta Of Economic Horror: Trade Deficit Explodes To $46.3 Billion, PPI Rises Above Expectations As New Jobless Claims Surge - Today's economic data avalance is a trifecta of horror: the August trade balance came at - $46.3 billion (deficit, duh), on expectations of $-44.0 billion, with the previous revised to ($42.6) billion. This is the second highest trade deficit on record. This also means the Q3 GDP will be revised lower again. Oh yes, and Schumer is currently frothing in the mouth as the trade deficit with China was at a record $28 billion, as expected based on the reverse lookup from yesterday's China trade surplus (which dropped). Elsewhere, PPI came in at 0.4%, on expectations of 0.1%: congratulation Ben, you have your inflation, as the bulk of the increase was in food and gas. PPI ex Food and Energy was 0.1%, in line with expectations. Lastly, jobless claims surge from 445K to 462K, with the prior number revised higher for the 24 out of 25 times. And speaking of revisions, the prior week Continuing Claims number was revised from 4,462K to 4,511K: yes stunning, we know.

Misc: Consumer Sentiment dips, CPI-W, and NY Fed Manufacturing Survey - So much data ... COLA: It is now official - CPI-W averaged 214.126 in Q3 2010, below the previous Q3 peak of 215.495 in 2008 - so there will be no increase in Social Security benefits or the maximum contribution base for 2011. For an explanation, see my post last month: No increase to Social Security Benefits for 2011 (unofficial) Consumer Sentiment - From MarketWatch: Consumer sentiment edges lower in October  The preliminary Reuters-University of Michigan consumer sentiment index edged lower in October, falling to 67.9 ... from 68.2 last month. This was a big story in July when consumer sentiment collapsed to the lowest level since late 2009. It has moved sideways since then ... From the NY Fed: Empire State Manufacturing Survey The Empire State Manufacturing Survey indicates that conditions improved in October for New York State manufacturers. The general business conditions index rose 12 points, to 15.7. The new orders and shipments indexes were also positive and well above their September levels.

0.01%  - That's the annualized month-over-month change in the CPI-U ex food and energy (for the just released September number over August).  The above graph is the month-over-month changes (annualized) since the beginning of 2008.

Inflation: Core CPI, Median CPI, 16% trimmed-mean CPI all very low - The Cleveland Fed released the measures of inflation that Bernanke mentioned for September this morning:  According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index was virtually unchanged at 0.0% (0.6% annualized rate) in September. The 16% trimmed-mean Consumer Price Index increased 0.1% (0.9% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics' (BLS) monthly CPI report.  Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers rose 0.1% (1.2% annualized rate) in September. The CPI less food and energy was unchanged at 0.0% (0.0% annualized rate) on a seasonally adjusted basis.  Over the last 12 months, the median CPI rose 0.5%, the trimmed-mean CPI rose 0.8%, the CPI rose 1.1%, and the CPI less food and energy rose 0.8% This graph shows these three measure of inflation on a year-over-year basis.  They all show that inflation has been falling, and that measured inflation is up less than 1% year-over-year. Core CPI and median CPI were flat in September, and the 16% trimmed mean CPI was up 0.1%.

Recession Still Stinging as Recovery Gains - Less than a month before November elections, the United States is mired in a grim New Normal that could last for years. That has policy makers, particularly the Federal Reserve, considering a range of ever more extreme measures, as noted in the minutes of its last meeting, released Tuesday. Call it recession or recovery, for tens of millions of Americans, there’s little difference.  Born of a record financial collapse, this recession has been more severe than any since the Great Depression and has left an enormous oversupply of houses and office buildings and crippling debt. The decision last week by leading mortgage lenders to freeze foreclosures, and calls for a national moratorium, could cast a long shadow of uncertainty over banks and the housing market. Put simply, the national economy has fallen so far that it could take years to climb back.  The math yields somber conclusions, with implications not just for this autumn’s elections but also — barring a policy surprise or economic upturn — for 2012 as well:

LA Port Traffic in September: Imports Strong, Exports Stalled - Notes: this data is not seasonally adjusted. There is a very distinct seasonal pattern for imports, but not for exports. LA area ports handle about 40% of the nation's container port traffic. The following graph shows the loaded inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container). Although containers tell us nothing about value, container traffic does give us an idea of the volume of goods being exported and imported. Loaded inbound traffic was up 24% compared to September 2009.  Loaded outbound traffic was up 5% from September 2009.  For imports, there is a clear seasonal pattern and frequently a double peak - first in late summer, and then in October as retailers build inventory for the holiday season - so part of this decrease in September imports is just the normal seasonal pattern. And imports will probably increase in October.

US Drops From First To Seventh In Average Wealth Per Adult, Behind Singapore, Sweden, And... France - As if we needed more warnings that the US is rapidly losing its position as the world's superpower and wealth aggregator, is the following chart from Credit Suisse, which ranks the top 10 countries in the world in terms of average wealth per adult. While the US was #1 10 years ago, due to an abysmal growth rate of only 23%, by far the lowest of all the ranked countries, the US has now dropped from first to seventh, falling behind such countries as Sweden and France. At the top - such perennially voted "top places to live" as Switzerland and Norway. Hopefully the US can fix its ever-expanding black hole of problems soon, as once the wealthiest decide they have had it here and move away, look for this number to drop ever faster until the US drops out of the ranking altogether.

Americans See Children's Future Dim in Poll as 50% Pessimistic - Americans say they have weathered the worst of the longest recession in seven decades, even as they are pessimistic about prospects for their retirement years, according to a Bloomberg National Poll.  Three in five respondents to the Oct. 7-10 poll say their economic condition has improved recently or they are confident it will get better. One in three say things have gotten worse or aren’t likely to improve anytime soon.  “I see some hope, but not a lot,” says poll respondent Brian Ridlon, 34, an out-of-work resident of Green Mountain, Arkansas, who wants to learn how to become a barber. “There are some avenues to improve yourself, but we need more.”

America's Third World Economy - For a number of years I reported on the monthly nonfarm payroll jobs data. The data did not support the praises economists were singing to the “New Economy.” The “New Economy” consisted, allegedly, of financial services, innovation, and high-tech services. This economy was taking the place of the old “dirty fingernail” economy of industry and manufacturing. Education would retrain the workforce, and we would move on to a higher level of prosperity. Time after time I reported that there was no sign of the “New Economy” jobs, but that the old economy jobs were disappearing. The only net new jobs were in lowly paid domestic services such as waitresses and bartenders, retail clerks, health care and social assistance (mainly ambulatory health care services), and, before the bubble burst, construction. The facts, issued monthly by the US Bureau of Labor Statistics, had no impact on the ”New Economy” propaganda. Economists continued to wax eloquently about how globalism was a boon for our future.

Gonzalo Lira On The Coming Middle-Class Anarchy - They’ve never missed a mortgage payment—Brian and Ilsa are the kind upright, not to say uptight 60-ish white semi-upper-middle-class couple who follow every rule, fill out every form, comply with every norm. In short, they are the backbone of America.Even after the Global Financial Crisis had seriously hurt their retirement nest egg—and therefore their monthly income—and even fully aware that they would probably not live to see their house regain the value it has lost since they bought it, they kept up the mortgage payments. The idea of them strategically defaulting is as absurd as them sprouting wings.  When HAMP—the Home Affordable Modification Program—was unveiled, they applied, because they qualified: Every single one of the conditions applied to them, so there was no question that they would be approved—at least in theory. Applying for HAMP was quite a struggle: Go here, go there, talk to this person, that person, et cetera, et cetera, et cetera. “It’s like they didn’t want us to qualify,” Ilsa told me, as she recounted their mind-numbing travails.

SAR #10284 - Rage is not a plan -This blog was started back in the good old days when predicting doom was not a mainstream activity.  I've had a week off, visiting the non-blog based world and have come back convinced that there has been no improvement in housing, employment, politics, the economy, oil supply, or global warming. Population remains unmentionable in polite circles. So here's my current view for the next few years:  Housing – prices continue to spiral downward and foreclosure increase, although glacially due to the complexity of the various frauds committed along the way,  the immense and growing overhang of houses and the paperwork morass. Eventually 1 out of 5 mortgages (and 1 out of 10 houses) will be foreclosed, for sale, and forsaken. House prices will continue downward, eventually overshooting, but not for many years. Employment – real unemployment of 17% will trend into the low 20's, the long term unemployed will become a chronic dole-dependent underclass. These people will not be customers any time in the next 4-5-6 years. There is a relatively straight-forward inverse relationship between house sales and unemployment.

Graphs: Small Business Optimism, Hiring and "Biggest Problem" - a few graphs based on the NFIB press release: Small Business Optimism Index Remains at Recessionary Level. The first graph shows the small business optimism index since 1986. Although the index increased slightly in September, it is still at recessionary level according to NFIB Chief Economist Bill Dunkelberg who said: "The downturn may be officially over, but small business owners have for the most part seen no evidence of it." The second graph shows the net hiring plans over the next three months. Hiring plans have turned negative again. According to NFIB: "Over the next three months, eight percent plan to increase employment (unchanged), and 16 percent plan to reduce their workforce (up three points), yielding a seasonally adjusted net negative three percent of owners planning to create new jobs, down four points from August." And the third graph shows the percent of small businesses saying "poor sales" is their biggest problem. Usually small business owners complain about taxes and regulations (that usually means business is good!), but now their self reported biggest problem is lack of demand.

QE2 May Not Be Lifeboat for Economy or Jobs - Investors have been euphoric about the prospect of the Federal Reserve buying government securities to pump money into the markets and stimulate the economy. But the moves, while better than nothing, may not help the U.S. economy or lackluster job markets as much as some hope. Fed officials have indicated that the decision to pursue further quantitative easing — as the stimulus, nicknamed QE2, is called — will depend on what the data say about the economy. So far, the news has painted an anemic recovery. Manufacturing growth has slowed since the spring, and businesses are barely adding to their payrolls: Private-sector jobs rose only 64,000 in September. Fed-watchers think central bankers will finalize their QE2 plans at a two-day policy meeting ending Nov. 3 Expectations are that the Fed will purchase between $500 billion and $1 trillion in Treasury debt with an eye toward lowering long-term rates and spurring more borrowing by consumers and businesses. The first round of QE brought down Treasury rates, which in turn cut other rates, enabling corporations to borrow cheaply and giving some support to housing demand as well as triggering mortgage refinancings that are putting more money into homeowners’ pockets.

Unemployment Claim Numbers: What Do They Mean? - Weekly unemployment claims jumped by 13,000 to 462,000 last week. The 4-week moving average is at 459,000. This suggests that the economy is still not generating jobs. It is also worth noting that the unemployment insurance filings may be lower relative to the number of layoffs each week than was true in the past. The reason is simple: because of prolonged high unemployment, many workers who are newly laid off are not eligible for benefits.Requirements vary by state, but most look back at a workers history over either the prior 4 quarters or the 4 quarters prior to the most recent quarter.To qualify, workers need some minimum number of work hours (e.g. 500 to 600 hours) or minimum earnings (e.g. $2,500 to $3,000) over the relevant 4 quarters. Many of the people who got laid off last week may have just recently been hired after an extended spell of unemployment. This means that they would not qualify for benefits. This is always true for some number of the newly unemployed, but that share would be much larger today than it had been in 2007 when the unemployment rate had been under 5.0 percent over much of the prior 12 months.

U.S. Economy Is 11.5 Million Jobs Short, EPI Says (CHART) - Even though the unemployment rate remained flat at 9.6 percent in September, the labor market would now need to add a total of about 11.5 million jobs to restore the pre-recession rate, according to analysis from Heidi Shierholz, an economist with the Economic Policy Institute. The economy lost about 95,000 jobs last month, including temporary Census workers. Not including Census positions, roughly 18,000 jobs were lost, as the private sector addition of 64,000 jobs couldn't offset the 83,000 jobs cut by state and local governments, whose unusually severe deficits have lead analyst Meredith Whitney to predict that the next major financial crisis will come from municipal debt defaults. The state and local cuts included 58,000 teaching jobs.The true numbers could be even worse. As HuffPost's Shahien Nasiripour notes, the reported numbers of jobs lost in July and August were revised up after the initial reports.

Thoughts on Unemployment - Alex Tabarrok writes, The first puzzle about unemployment when thought about from within the search-matching framework is that unemployment rates are highest among the least skilled, i.e. among those worker/jobs with the easiest matches. It's hard to believe that it takes a year to match a construction worker to a job.  the second puzzle is that uncertainty should matter most when hiring and firing costs are high and once again these costs are lowest for those workers with the greatest unemployment rates. Read the whole post. The overall puzzle is why the unemployment rate is highest for low-skilled workers. I will get to that puzzle shortly. I recommend looking at employment from a ten-year perspective. In December of 1999, total nonfarm payroll employment was 130.5 million. To keep up with population growth, employment should have increased by about 15 percent from then until now, to about 149 million. Instead, total payroll employment today is a tiny bit lower than it was in December of 1999. So there is an "employment shortfall" of 18 or 19 million.

Those Jobs Numbers Were Horrible, And The Fed’s Next Move Won’t Really Help Anything - To ease or not to ease? That is the question we will take up this week. And if we do get another round of quantitative easing (QE2), will it make any difference? As I asked last week, what if they threw an inflation party and no one came? We will take as our launching pad today's unemployment numbers, which serve to demonstrate just why the Fed may in fact be ready for some monetary shock and awe.As the jobs report came out a number of headlines trumpeted the "strong" private-sector job growth of 64,000 jobs, trying to soften the overall loss of 95,000 jobs. If you exclude the loss of census workers, the job losses were "only" 18,000. However, for the first time since December of last year, we lost jobs in a month. That is not the right direction."Moreover, when you adjust for the slide in the participation rate this cycle, the byproduct of a record number of discouraged workers withdrawing from their job search, the unemployment rate is actually closer to 12% than the 9.6% official posted rate in September, which masks the massive degree of labour market slack in the system.

'Hysteresis': An ugly word for an ugly situation - You may not know the term "hysteresis." It's the "lagging of an effect behind its cause," and it's an ugly word that sounds like a foot fungus. It's also an ugly thing to have happen to your economy. And it may be what's happening to ours. We understand that our economy is growing too slowly and that our labor market is taking too long to recover. We lost 95,000 jobs in September, and though the Obama administration tried Friday to focus attention on the 64,000 jobs the private sector created - it was the ninth straight month of private-sector gains - that's still well below the 100,000 jobs we need to add just to keep up with population growth. What gets less attention is the way that slow job growth begets slow job growth. What gets less attention, in other words, is hysteresis.  Adam Posen, a member of the Bank of England's Monetary Policy Committee, an adviser to the Congressional Budget Office, a senior economist at the Peterson Institute for International Economics and a leading expert on Japan's lost decade, doesn't think we're taking the threat of an extended period of crummy growth nearly seriously enough.

Employers Slow to Fill Job Openings - Job openings aren't what they used to be. Among the explanations for the stubbornly high U.S. unemployment rate, factors such as housing troubles and extended unemployment benefits have played a leading role. Increasingly, though, economists and job seekers are identifying another problem: Employers are being pickier, or not trying as hard as they usually do to fill the openings they have. The reasons for the foot-dragging are closely related to the reasons employers aren't creating many openings in the first place. Companies lack confidence about the outlook for consumer demand, they're not sure what the government will do with taxes and regulation, and they want to keep squeezing as much output from their current workers as they can. They also feel they have plenty of time to pick the best candidates.

Does Higher Minimum Wage Reduce Jobs?: (video) In an interview with The Real News, Arindrajit Dube, labor economist and Assistant Professor of Economics at University of Massachusetts, said that increasing the minimum wage in some areas has not reduced jobs as expected by the conventional theory.  Dube’s research looks at the effects of minimum wage differentials across state borders where the minimum wage is higher on one side of the border than the other. His research looks at the service industry, which he said employs the majority of minimum wage workers. According to his findings, both the short and long term effects of the increased wage on unemployment were negligible.  Dube said the conventional wisdom surrounding minimum wage comes from research done before the early ‘90s.  Dube told TRNN that around the early to mid ‘90s some economists realized these studies were badly flawed, and began looking at local evidence instead of just national evidence. The famous work of labor economists David Card and Alan Kruger looked at the border of New Jersey and Pennsylvania when New Jersey raised its minimum wage.

The Employment Report and Displaced Workers - FRB Cleveland: Every two years, the Bureau of Labor Statistics surveys individuals about displacement from the workforce as part of the Current Population Survey. The Displaced Workers Survey asks workers, 20 years of age and older, about the nature and cause of any job displacement they have experienced in the last three years. For example, the January 2010 survey asks workers about job losses that occurred between January 2007 and December 2009, so the survey covers the most recent recession in its entirety. We compare the latest results to those of the 2002 survey, which included the 2001 recession, and the 2008 survey, which covers the three years prior to the current recession. The survey reports focus on long-tenured workers—individuals who held their positions for three or more years prior to displacement. There were roughly 4 million long-tenured displaced workers in the 2002 survey, 3.6 million in the 2008 survey, and 6.9 million in the 2010 survey, reflecting the relative severity of the last recession. The long-tenured workers represent about 40 percent to 45 percent of all displaced workers in the three survey years. In the January 2010 survey, re-employment rates averaged 48.8 percent, meaning that a little less than half of all long-tenured workers who experienced displacement over the 2007–2009 period are currently employed.

The New Normal: 7%-8% Unemployment? - Not so long ago, the economy was thought to be doing fine if the unemployment rate hovered around 4%. The new normal may be more like 7% to 8%, a situation that worsens the outlook not only for job seekers but also the forecasts for public finances. Those dire thoughts come from Joseph Stiglitz, Nobel laureate and economics professor at Columbia University. His book “Freefall,” now out in paperback, chronicles the events that led up to the financial collapse and global recession of the past few years and what lies ahead. And while the National Bureau of Economic Research officially marked the end of the recession at July 2009, Stiglitz is not sure the economy is out of the woods. “The NBER focuses on GDP, but everyone else looks at jobs,” Stiglitz says. By that measure, he adds, “this is not a recovery.” Stiglitz acknowledges some job losses are structural in nature. Long-term changes in economic activity have permanently destroyed those positions and the unemployed lack the skills to shift into new careers. “But the discussion of ’structural’ is a distraction,”

Infrastructure: The right jobs for the right people doing the right things at the right time - The Council of Economic Advisers has a report (pdf) out today making the case for more infrastructure investment. Most of the arguments will be familiar to folks who read last week's column on the subject, but the CEA presses one button that I wish I'd had the space to emphasize more: Jobs. Lots of stimulus programs can create jobs. But infrastructure investment creates the right jobs, for the right people, doing the right things -- and at the right time. Or, to say it more clearly, infrastructure investment creates middle-class jobs for workers in a sector with high unemployment and it puts them to work doing something that we actually need done at a moment when doing it is cheaper than it ever will be again.  Remember that the Great Recession was driven by a collapse in real estate -- which meant a collapse in the construction industry. Repairing the nation's infrastructure is a lot more like building a house than writing a book. As such, the people it employs are, well, people who build things, and folks from related industries. The CEA predicts that the unemployment rate among those who would get work from infrastructure spending is currently 15 percent...

Industrial policy goes mainstream - Brookings and AEI will jointly release a proposal today that advocates as much as $25 billion spending by the U.S. federal government on clean energies.  The motivation, as described in the NYT story, is that cap-and-trade provides inadequate incentives for firms to invest in new technologies, and that more substantial carrots are needed.   But wouldn’t this be industrial policy. Yes, of course, and so what?  As David Leonhardt writeshistory shows that government-directed research can work. The Defense Department created the Internet, as part of a project to build a communications system safe from nuclear attack. The military helped make possible radar, microchips and modern aviation, too. The National Institutes of Health spawned the biotechnology industry. All those investments have turned into engines of job creation, even without any new tax on the technologies they replaced. But of course industrial policy can fail too, and much depends in practice on the institutional arrangements in place.  See this debate between Josh Lerner and me.

How exactly do you create a job? - Raising and Training Omadiki - In human societies each person is a highly complicated Lego block, and each employed person is someone who has found a spot in a structure and helps animate it. This creation of powerful “living” structures out of many participants is a skill like no other species on our planet. To reify this sort of structure is difficult in English, since the words “team,” “crew,” “corporation,” and others all have precise meanings that don’t embrace the whole set. So, when in doubt, go check the Greek. And there we find the word omadiki, “group,” all handy to be stolen, ahem "adopted" for the purpose.  To create a job, it appears, will almost always mean to create or augment an omadik -a structure animated by people. Simple examples of these structures include a football team, a university, a bakery or an army. The payoff to participating in, supporting or at least tolerating such structures is HUGE.

Immigration, offshoring and American jobs - How many "American jobs" have U.S.-born workers lost due to immigration and offshoring? Or, alternatively, is it possible that immigration and offshoring, by promoting cost-savings and enhanced efficiency in firms, have spurred the creation of jobs for U.S. natives? We consider a multi-sector version of the Grossman and Rossi-Hansberg (2008) model with a continuum of tasks in each sector and we augment it to include immigrants with heterogeneous productivity in tasks. We use this model to jointly analyze the impact of a reduction in the costs of offshoring and of the costs of immigrating to the U.S. The model predicts that while cheaper offshoring reduces the share of natives among less skilled workers, cheaper immigration does not, but rather reduces the share of offshored jobs instead. Moreover, since both phenomena have a positive "cost-savings" effect they may leave unaffected, or even increase, total native employment of less skilled workers. Our model also predicts that offshoring will push natives toward jobs that are more intensive in communication-interactive skills and away from those that are manual and routine intensive. We test the predictions of the model on data for 58 U.S. manufacturing industries over the period 2000-2007 and find evidence in favor of a positive productivity effect such that immigration has a positive net effect on native employment while offshoring has no effect on it.

Four in 10 U.S. Workers Say Their Company Is Understaffed - Even as millions of Americans are searching for work, 38% of those who do have a job say their company is understaffed, while 52% say their company has about the right number of employees. Few American workers believe their company has too many employees. The relatively high percentage of workers who say their company is understaffed may partly reflect the residual impact of the economic recession, which sharply changed the employment picture in the United States in recent years. Many companies laid workers off, did not hire new workers to replace those who left, or did both. Gallup's Job Creation Index -- based on workers' reports of employment at their companies -- was in negative territory for most of 2009 and the first part of 2010, with workers reporting more firing than hiring. The Index is now back in positive territory, but nowhere near as positive as it was throughout the first half of 2008, before the recession's impact was fully felt. Given these trends, it may not be surprising that a sizable percentage of workers who still have jobs at this point feel their company is understaffed.

Languishing Labor Force - The headline Establishment Survey number came in at negative 95,000 jobs for the month of September. The “new” headline number that everyone watches, private jobs, grew by 64,000. This number became more popular during the Census hiring distortions, which are gradually coming to an end. However, it’s tough to get excited about private sector hiring when the government is more than offsetting its gains. There were 77,000 Census jobs shed during the month, which were temporary to begin with, but this was actually eclipsed by losses in state and local governments, which cut 83,000 jobs. Presumably, these jobs were permanent. The ex-Census job losses come to a negative 18,000 jobs. The number of people unemployed for 27 weeks or longer fell for the 4th straight month and is now at the same level at which it began the year. However, the number of people newly unemployed (for 5 weeks or less) seems to have stopped its decline and has been on an upward trajectory for most of the year. Much like initial jobless claims, this number is much lower than its previous peak, but still above levels considered “normal.”

Teen Jobs Plummet, Hit New All-Time Low - The household survey portion of the BLS' September 2010 employment situation report delivered news we were surprised to see: the number of teens counted as being employed plunged by 112,000. Meanwhile, young adults saw their employed ranks increase by 3,000 while the number of individuals Age 25 or older counted as having jobs surged by 250,000. For teens, the decrease in the number of employed teens in September 2010 brings the percentage share of teens within the entire U.S. workforce to a new all-time low of 3.06%: To put this new record low in teen employment in perspective, since their employment numbers peaked at 6,241,000 in November 2006, the number of teens (Age 16-19) in the U.S. workforce has fallen by 1,980,000, or 31.7% of that peak figure:

The National Disaster That Is Black Teenage Unemployment - At more than 40 percent unemployment, black teenagers are facing a catastrophically bad job market, and as Schoen points out, this is a disaster for the future workforce; black teens who can't find jobs become black teens without the skills to enter and succeed in the adult job market. This problem is most acute for black male teenagers. In a 2004 study commissioned by Northwestern University, researchers analyzed employment rates among black male teens (aged 16-19) and black male young adults (aged 20-24) over a 50-year time period. They found that rates of black male teen and young adult employment were “quite cyclically sensitive,” with employment rising at a steady average pace during periods of national job growth and falling at an above-average rate during periods of economic recession. During the 1981-1982 recession, for instance, employment among 16- to 19-year-old black men fell to 24.6 percent down from 28.5 percent in 1978.

Real GDP Growth and the Unemployment Rate - At the November FOMC meeting, the Fed will update their economic forecasts.  In June, the Fed forecast was for GDP growth of between 3.5% and 4.2% in 2011, with the unemployment rate falling to 8.3% to 8.7%. However since their forecasts were too optimistic for 2010, the unemployment rate would even be higher next year with the same growth forecast in 2011. Here is an update on a version of Okun's Law. This graph shows the annual change in real GDP (x-axis) vs. the annual change in the unemployment rate (y-axis).  Note: For this graph I used a rolling four quarter change - so all the data points are not independent. However - remember - this "law" is really just a guide. Using this graph and the previous Fed forecasts for 2011 (3.5% to 4.2% GDP growth), we can estimate that the unemployment rate will be in the 9.0% to 9.4% range in a year (although the spread is pretty wide). The following table summarizes several scenarios over the next year (starting from the current 9.6% unemployment rate):

Unemployment and poor health - It seems like such a straightforward question: Does losing your job make you sick? And extrapolating from that: Does poor economic health - recessions and jobless recoveries - lead to poor personal health?  Pretty much everyone agrees that unemployed people are, in the aggregate, less healthy than the rest of the population, both physically and mentally, and especially over prolonged jobless periods. Common sense suggests many reasons why: Unemployed people tend to have less money to spend on health care; they are subject to social and psychological stress, which takes its toll on the body and spirit; and, in a country where health-care benefits are usually tied to a job, the jobless are less likely to have access to heath care.  The complication comes in trying to sort out cause from effect. While there are clearly some people who become sick because they lose their jobs, it may well be that many more people lose their jobs because they are sick.Some people become too sick to continue working; sick people are likely to miss work more often, and therefore more likely to rise to the top of layoff lists; some people become sick or injured because of their work.

How much does murder cost? -The average cost of a murder tops $17.2 million, according to a new study that calculated the monetary costs of criminal careers using a sample of 654 convicted and incarcerated murderers. Researchers assessed the total costs — from the cost of incarceration to lost productivity — stemming from murder, rape, armed robbery, aggravated assault and burglary in the study Murder by Numbers. The actual costs of the crime are derived from work by a scholar named Mark Cohen. The Murder by Numbers study is kind of a validation study using his methods and applying it to a different data set. The original work in this area looks at victim cost, the cost of arrest and adjudication, the cost of incarceration, the opportunity costs of offenders’ time, productivity.

New research shows precisely how the prison-to-poverty cycle does its damage. – It's well-known that the United States imprisons drastically more people than other Western countries. Here are the specifics: We now imprison more people in absolute numbers and per capita than any other country on earth. With 5 percent of the world population, the U.S. hosts upward of 20 percent of its prisoners. This is because the country's incarceration rate has roughly quintupled since the early 1970s. About 2 million Americans currently live behind bars in jails, state prisons, and federal penitentiaries, and many millions more are on parole or probation or have been in the recent past. In 2008, as a part of an "American Exception" series exploring the U.S. criminal-justice system, New York Times reporter Adam Liptak pointed out that overseas criminologists were "mystified and appalled" by the scale of American incarceration. States like California now spend more on locking people up than on funding higher education.

Deep Poverty Reaches Record High Nationwide - CBPP - Today, we’re taking a closer look at what the data tell us about “deep poverty.” Can you explain what that is?  Sure. The poverty line is the income level below which a family is considered poor.  Last year it was roughly $22,000 for a family of four. When we say “deep poverty” here, we mean annual income below half the poverty line.  For example, an individual who brings home less than about $5,500 per year is living in deep poverty.  And a family of four is living in deep poverty if they are earning less than $11,000 a year. It costs about that much on average just to rent a modest two-bedroom apartment, let alone put food on the table, and pay health care costs. So, clearly these are folks who really are struggling just to meet basic needs. Since the start of the recession began three years ago, the number of people in deep poverty has risen 22 percent.

State tab for jobless borrowing: $500 million - California has borrowed $8.4 billion from the federal government to pay unemployment insurance benefits and, just like any charge account, a big interest payment will be due next year, possibly as high as $500 million. It could be a major challenge for the state's stretched fiscal coffers because the money cannot be repaid from the unemployment insurance trust fund. Under federal law, the money will have to come from the general fund or some other source. California's unemployment insurance trust fund plunged into the red in January 2009. California is among 32 states and the Virgin Islands that have borrowed from the federal government to pay unemployment benefits. Collectively, as of August, they owed Uncle Sam $40.4 billion. The top 10 states, led by California, accounted for three-quarters of the total.

Texas lawmaker says state budget deficit will likely swell further -- A top lawmaker predicted Thursday that the state's projected budget shortfall will likely be significantly higher than $21.5 billion and warned that the Legislature may be forced to take a "meat cleaver" approach when it meets next year to write a new spending blueprint for the next two years. Rep. Rene Oliveira, D-Brownsville, chairman of the House Ways and Means Committee, issued the bleak assessment at a two-day meeting of the Texas Taxpayers and Research Association. Projections of the shortfall -- the result of a steep decline in state sales tax revenue because of the economic downturn -- were originally pegged at $11 billion and have worsened the past several months."

The Paralysis of the State - Sometimes a local issue perfectly illuminates a larger national problem. Such is the case with the opposition of the New Jersey governor, Chris Christie, to construction of a new tunnel between his state and New York.  Christie argues that a state that is currently facing multibillion-dollar annual deficits cannot afford a huge new spending project that is already looking to be $5 billion overbudget. His critics argue that this tunnel is exactly the sort of infrastructure project that New Jersey needs if it’s to prosper in the decades ahead.  Both sides are right. But what nobody seems to be asking is: Why are important projects now unaffordable? Decades ago, when the federal and state governments were much smaller, they had the means to undertake gigantic new projects, like the Interstate Highway System and the space program. But now, when governments are bigger, they don’t.  New Jersey can’t afford to build its tunnel, but benefits packages for the state’s employees are 41 percent more expensive than those offered by the average Fortune 500 company. These benefits costs are rising by 16 percent a year.

Where has all the money gone? - Over the past few decades, governments have become entwined in a series of arrangements that drain money from productive uses and direct it toward unproductive ones. New Jersey can’t afford to build its tunnel, but benefits packages for the state’s employees are 41 percent more expensive than those offered by the average Fortune 500 company. These benefits costs are rising by 16 percent a year. New York City has to strain to finance its schools but must support 10,000 former cops who have retired before age 50. California can’t afford new water projects, but state cops often receive 90 percent of their salaries when they retire at 50. The average corrections officer there makes $70,000 a year in base salary and $100,000 with overtime (California spends more on its prison system than on its schools). States across the nation will be paralyzed for the rest of our lives because they face unfunded pension obligations that, if counted accurately, amount to $2 trillion — or $87,000 per plan participant.

Why do unions oppose merit pay? - Bryan Caplan asks: I don't doubt that unions tend to oppose merit pay, but the reasons are unclear.  Profit-maximizing monopolists still suffer financially if they cut quality; the same should hold for unionized workers.  Why not simply jack average wages 15% above the competitive level, and leave relative wages unchanged?Or to put the puzzle another way: Once you've secured a raise for all the workers in your union, why prevent employers from offering additional compensation for exceptionally good workers?Earlier, Megan McArdle considered the topic.  One simple model is to invoke the median voter as either ruling the union or constraining it.  The implication is that most union members fear they will lose from greater accountability, even if the total size of the pie goes up.  As Megan noted, unions are set up to favor the bottom 55 percent of the workers; furthermore productivity can be very unevenly distributed.

Hardest-Hit Areas Could Lag for Decades - Those communities hardest-hit during the recession and slow recovery could continue to fall behind the rest of the country for decades. Nearly three decades after the 1980s recession, those areas most damaged are still lagging behind. A similar fate could be in store for those localities that faced the deepest housing and employment shocks in the latest downturn. In regions that suffered disproportionately in the 1980s recession, average earnings have risen at a quarter of the rate of the rest of the U.S. Employment grew more slowly, young people left the region, the population grew more slowly and, as a result, demand for housing weakened. To avoid repeating that scenario, a series of targeted revitalization efforts should be used to help the most distressed communities, according to a set of papers released Wednesday at an event by the Brookings Institution’s Hamilton Project. The proposals focus on attracting new business, helping displaced workers and matching workers to new jobs in those areas where the economy won’t simply snap back.

Report shows Mich.'s concern over Detroit finances-- The dire financial situation faced by the city of Detroit could impact the cost of borrowing and access to credit by Michigan's government, according to a newly released report by the nonpartisan Senate Fiscal Agency. Of pressing concern to the state is a bankruptcy by the city, or other fiscal or cash crisis, the report said. The report referred to the financial problem as "contagion," where a default or near default by one borrower "has a negative spillover effect on other government borrowers." The 13-page report used information from past audits, the city's deficit elimination plan, current budget and other sources.

09.23.10: Don't Forget the Motor City » (narrative & photos)

Boondoggle in the Motor City: Detroit's Train to Nowhere - Detroit has become a place Hollywood directors come for great wreckage shots. One quarter of the city's 140 square miles are deserted. Detroit public school students boast the nation’s worst reading scores, the products of a corruption-ridden school system that recently flirted with bankruptcy. Detroit bested Baltimore in 2009 to take the dreaded “murder capital” title. It may also be the worst place in the country to have a heart attack: prepare to wait half an hour for an ambulance. In a town lacking essential services, what do local leaders and federal politicians have in mind for helping the city? What's needed to hoist Detroit back to its 1950 heyday, when it was America's fourth largest city, with more than double its current population? Why, light rail, of course! The Motor City is moving ahead with a plan to build a 9.3-mile light rail line that will run from downtown Detroit to the edge of the suburbs. It’ll cost an estimated $500 million. Three-quarters of the bill will be paid by federal taxpayers, with the rest picked up by a consortium of foundations and businesses. If built, the project will end up on the Mackinac Center's list of government-subsidized white elephants touted as “crucial to Detroit’s comeback,” its “rebirth,” and pivotal to “turning things around." In reality, it’ll just be another train to nowhere, much like Detroit’s existing light rail line, the unfortunately named "People Mover,” which operates at 2.5% of capacity.

Pontiac agrees to disband the city's police department - Pontiac has signed a contract to disband its police department and turn patrols over to the Oakland County Sheriff.  Mayor Leon Jukowski says by January 2011 the 66-thousand-resident city will make the change.  The city's $12 million budget deficit urged the move.  The proposal provides the city with 74 personnel, the same amount that's currently employed by the Pontiac Police Department. Under the contract, all full-time members of the Pontiac Police Department will be eligible for employment.

Majority of Jefferson County commissioners now considering bankruptcy option in sewer case - A majority of the soon-to-depart Jefferson County commissioners are now threatening to move the county into bankruptcy because negotiations with creditors have stalled since a court-appointed receiver seized the county sewer department last month.The commissioners say they may resort to bankruptcy before they leave office Nov. 9 if they feel creditors who own the county's $3.2 billion sewer debt are trying to wring too much money out of the sewer system and its ratepayers.Commission President Bettye Fine Collins, who has staunchly opposed bankruptcy, is now putting the option on the table."We should have been able to reach a settlement by now," Collins said Friday. "If they start playing hardball here, Chapter 9 bankruptcy could then become a viable option for the county."

President Obama Proposes More Tax Credits for Higher Education - So President Obama came out today pushing for an extension of his American Opportunity (Tax) Credit for higher education, which was a provision in the stimulus bill that expanded the Hope Credit enacted in 1997 under Pres. Clinton. The AOC, which is set to expire on December 31, expanded Hope and made it refundable. Now Pres. Obama is not only looking at extending AOC, but also expanding it even further. Even ignoring the possible issue of economic incidence and whether or not this credit would mostly lead to higher tuition instead of lowering the net price faced by students, one of the problems with this credit is the downside of tax credits known as "buying out the base." The credit will indeed entice some additional amount of people at the margin to go to college. However, it will mostly give a huge windfall to those who were going to go to college in the first place. If more people in college is truly what you want, there are likely better ways to do it than via a refundable tax credit that doesn't target those at the margin.

Buffalo Schools Could Layoff Over 900 Employees - The Superintendent of Buffalo Schools says the school district is on the verge of a major financial crisis. If the situation is not resolved, Dr. James Williams says there could be as many as 900 layoffs across the board. Dr. Williams concern is centered around Governor Paterson's veto of Article VII. The veto removed the cap on Charter School payments and eliminated revenue for public pension costs dating back to 2004.  It has created a $22.8 million dollar shortfall. In order to tackle the potential deficit, Dr. Williams said 912 layoffs across the board are possible.

Bobb wants state to wipe out DPS debt — Detroit Public Schools officials may ask the state to forgive its $332 million deficit as part of a plan that could reshape the district. Otherwise, more school closings, classroom sizes of 62 pupils could result, district says District officials plan to present a proposal to Gov. Jennifer Granholm by Nov. 15 that calls for wiping out the debt and transforming the school system modeled on President Barack Obama's "Race to the Top" program. They could include giving principals more authority and extending the school day and year.

Michigan education retirement costs hit new high: Schools will pay 20 percent surcharge on payroll - While the state tries to sort out how to distribute millions in federal "EduJobs" funds, local superintendents say they need the money -- but it won't allow them to hire lots of new teachers. Instead, they'll spend it to keep the teachers they have and pay pensions to those already retired. Ballooning pension costs -- paid by a surcharge on district payrolls -- will top 20 percent for the first time this school year, the state has announced. That's up from 19.41 percent this year and 16.47 the year before. "For every payroll check that we write, another 20.66 percent is sent to our state officials to cover the retirement costs of those who are no longer working in our K-12 system,"

Michigan's universities face an uncertain future - The U of M is older, bigger, richer, and outranks MSU in academic surveys. But the schools have very different missions. Founded as an agricultural college before the Civil War, MSU was never meant to just train farmers. It was designed to do research in agriculture and the "applied sciences" and take it to the people. Michigan State's example was the inspiration for the land-grant university movement that began in earnest during the Civil War. But Lou Anna Simon, MSU's current president, worries about her school's future -- and the state's. There are worries that next year's looming deficit and political short-sightedness among the politicians may cripple the state's universities, at a time when there is broad agreement Michigan needs more higher education.  "I think people have a false sense of security about the state budget," Simon said, during a long interview in her office. Last month, state universities got by with only a 2.8-per-cent cut to their appropriations. But next year will be much grimmer.

Ezra Klein - How much can we blame on state pensions? - Wondering why New Jersey isn't finishing its much-needed commuter tunnel to New York? Easy, says David Brooks. Blame public employees, their pensions and their pay. "States across the nation will be paralyzed for the rest of our lives because they face unfunded pension obligations," he writes. State pension systems are a problem. But they're not the problem right now. And they're certainly not what's standing between New Jersey and its tunnel. After all, Christie didn't fund the pension system this year. He simply skipped the $3.1 billion payment, saying he wouldn’t add money to a "broken" system. If I didn't buy lunch today, you can hardly blame the cost of my lunch for the fact that I don't have bus fare. Brooks's column doesn't do much to put the pension obligations of the states in context, so we'll do it here. "The problem in this moment," says Betsy Zeidman, director of the Center for Emerging Domestic Markets at the Milken Institute, "is revenue." The word "revenue," incidentally, doesn't appear in Brooks's column.

More Trillions for Pensions – ANNUAL STATE BUDGET crises have trained officials from California to New York in the wily ways of accelerated revenues and deferred expenses. But the most widespread way in which state and local governments become indebted without a vote is in their cavalier treatment of employee pensions.  About 84% of state and local government employees are covered by defined-benefit pension plans—the traditional pensions in which all the promised benefits are supposed to be funded in advance in a trust. Private industry and even the federal government realized decades ago that they were unwilling and unable to assume such open-ended responsibility. A series of private pension-plan disasters—in mining, metals and manufacturing--underscored the danger. Now about 17% of private-sector workers are in defined-benefit plans, down from 41% in 1980.

Report warns of coming wave of municipal pension shortfalls  -The nation's largest municipal pension plans are carrying a total unfunded liability of $574 billion, which comes on top of as much as $3 trillion in unfunded pension promises made by the states, according to a report released Tuesday.  The report calls the unfunded pension obligations "off-the-balance-sheet debt" that threatens to starve services such as police protection, recreation centers, parks and libraries.  "The ability of local governments, particularly cities, to provide the levels of service they do now is threatened by this liability," The report is based on an analysis of pension funds in 50 major cities and counties that together account for two-thirds of the nation's 3 million local government employees. It argues that cities routinely cling to unrealistic projected investment earnings to understate their pension liabilities, a strategy that has been exposed by the financial crisis and recession, which severely diminished investment returns.  The result is a growing wave of pension shortfalls that threatens to wash over many local governments in the near future, the report said. The authors calculated that each household in the 50 cities and counties they studied owes an average of $14,165 to current and past government employees for their pensions.

Philadelphia, Chicago and Boston Are University Study’s Worst-Off Pensions –Philadelphia will run out of money by 2015 to pay pension obligations with existing assets, and Chicago and Boston by 2019, a study by economists at Northwestern University and the University of Rochester forecasts.  The study examines 77 of the largest city and county defined pension plans, covering 2 million employees and retirees, roughly two-thirds of the municipal workers in such plans. The estimated liability of all municipal retirement funds is $574 billion. Chicago residents face the highest individual burden for pension liabilities from seven municipal retirement plans, amounting to almost $42,000 per household. New York City residents face the second-highest per-household burden, just under $39,000.  These amounts are in addition to the estimated $3 trillion in unfunded liabilities that taxpayers will shoulder from state retirement systems, which Rauh and Novy-Marx examined in a 2009 report.

Hard-pressed American states face a crushing pensions bill (The Economist) Joshua Rauh, of the Kellogg School of Management at Northwestern University, and Robert Novy-Marx, of the University of Rochester, estimate that the states’ pension shortfall may be as much as $3.4 trillion and that municipalities have a hole of $574 billion. Mr Rauh calculates that seven states will have exhausted their pension assets by 2020—even if they make a return of 8%, a common assumption that looks wildly optimistic. Half will run out of money by 2027. If pension promises are to be kept, this will place immense strain on taxes. Several have promised annual payments that will absorb more than 30% of their tax revenues after their pension funds are exhausted (see chart 1). The severity of states’ pension woes was disguised for years, because asset markets were so strong and because of the way states accounted for the cost of pension provision. But the 21st century has been dismal for stockmarkets, where most pension money has been put. State budgets came under huge pressure as a result of the 2008-09 recession, which caused tax revenues to plunge. Meredith Whitney, an analyst who made her name forecasting the banking crisis, believes the states could be the next source of systemic financial risk.

Mayors hear dire warnings about future of state cities - Pennsylvania cities will begin to topple like dominoes in five to 10 years unless the state Legislature drastically reforms state law controlling employee pensions and other public finances, Allentown Mayor Ed Pawlowski told a municipal association meeting Thursday. Pawlowski said Allentown's annual payments to the pension fund were $6.5 million when he took office five years ago. Now they are $15 million and 20 percent of the city budget, and by 2012 will be 25 percent. But Reading Mayor Tom McMahon said Pawlowski is too optimistic: The cities only have two or three years. More than two dozen mayors and municipal officials from across the state met at Albright College for the third and final session of the Core Communities in Crisis Task Force, an effort of the Pennsylvania League of Cities and Municipalities.

State facing soaring pension funding gap; could cost $900M a year - Boston, Mass. — Paying for the state pension system, stung by heavy stock market losses during the recession, could soon force taxpayers to shoulder an additional $900 million a year, a scenario that had one gubernatorial candidate warning Thursday of a looming “train wreck.” Although top Patrick administration officials warned a year ago about the potential spike, little has happened since to forestall the increase. Many fiscal analysts and lawmakers now believe that the most politically feasible course to avoid the increase is to push part of it onto future generations of taxpayers, a move that others warned comes with its own peril."

City of Tampa grapples with rising cost of pension plans  - Tampa's pension costs are rising at an alarming rate, city officials say, even as the city has shed hundreds of jobs and cut spending to meet its payroll obligations. Four years ago, city taxpayers contributed about $1.5 million to Tampa's police and fire pension fund. Next year, city officials project that figure to surpass $19.5 million. Overall, the city's contributions to its public safety and general employee pensions have doubled in the past two years, from $20 million to a projected $40.6 million next year

States Should Cut Pension Costs, Not Default on Debt, Deutsche's DWS Says - States should cut pension costs through measures such as extending the retirement age rather than defaulting on debt, DWS Investments said in a report.  Pension funds are “unsustainable on their current trajectory,” and “represent a significant and growing threat to the long-term financial health of muni bond issuers,” according to the e-mailed report released today by the research unit of Deutsche Bank AG.  The average state’s pension is 76 percent funded, according to data compiled for the Bloomberg Cities and Debt Briefing in New York last month. Illinois’ is only 50 percent funded; Kentucky, New Hampshire and Louisiana are funded at 60 percent or lower. The average five-year return of pension assets is about 3 percent, below the 7 percent or 8 percent benchmarks many states use, according to consulting firm Wilshire Associates.

State pension head warns of dire future for Pittsburgh - Pittsburgh's pension problem is bad, and probably going to get worse, the head of the state's pension system told city lawmakers this morning. "While the funding levels are frighteningly low, the real problem is the negative cash flow being experienced by the plans," said James B. Allen, secretary of the Pennsylvania Municipal Retirement System. "In 2009, the plans paid out $30 million more in benefits and administrative costs than they took in from municipal and employee contributions. At that rate, the plans would be bankrupt in 10 years."

NY Faces $200 Billion in Retiree Health Costs - The cities, counties and authorities of New York have promised more than $200 billion worth of health benefits to their retirees while setting aside almost nothing, putting the public work force on a collision course with the taxpayers who are expected to foot the bill. The total cost appears in a report to be issued on Wednesday by the Empire Center for New York State Policy, a research organization that studies fiscal policy. It does not suggest that New York must somehow come up with $200 billion right away. But the report casts serious doubt over whether medical benefits for New York’s retirees will be sustainable, given the sputtering economy and today’s climate of hostility toward new taxes and taxpayer bailouts.

No Social Security Increase Next Year - NYT reports No Social Security Increase Next Year: More than 58 million retirees and disabled Americans will get no increase in Social Security benefits next year, the second year in a row without a raise. The Social Security Administration said Friday inflation has been too low since the last increase in 2009 to warrant an increase for 2011. The announcement marks only the second year without an increase since automatic adjustments for inflation were adopted in 1975. The first year was this year. The cost-of-living adjustments, or COLAs, are automatically set each year by an inflation measure that was adopted by Congress back in the 1970s. A little more than 58.7 million retirees and disabled Americans receive Social Security or Supplemental Security Income. Social Security was the primary source of income for 64 percent of retirees who got benefits in 2008.

Obama Says 'All Options' Must Be Examined for Social Security-- President Barack Obama said “all options” are on the table to keep the Social Security system solvent, including raising the cap on payroll taxes. Obama, answering questions at a town hall carried live on the Viacom Inc. cable channels BET, MTV, VH1 and CMT, said the payroll tax for Social Security currently ends at $106,800. “That could be modified or changed in a way that would help extend the solvency of Social Security,” Obama said, repeating a stance he took during his presidential campaign

Retirees Will Feel COLA Withdrawal - The government’s decision not to boost social-security payments in 2011 is justified by the numbers, but it won’t feel that way to a lot of retirees. According to the Social Security Administration’s preferred measure of inflation — the consumer price index for urban wage earners and clerical workers, or CPI-W — prices haven’t risen since the last adjustment in 2008, so no increase in benefits is forthcoming. For retirees looking at just the past year, the picture has been different. Using data from the Labor Department, we constructed a price index for the kinds of things people 65 years of age and older tend to spend their money on — a basket weighted toward items such as health care. In the three months through September, the index was up 1.45% from a year earlier. Health care rose 3.27% and transportation 5.04%.

It’s Back: Goodies for Granny In Lieu of the COLA - The Social Security Administration announced today that for the second year in a row there would be no cost-of-living increase in Social Security benefits for 2011.  Why not?  As the SSA explains, this is a straightforward, non-political determination based on historical economic data: The Social Security Act provides for an automatic increase in Social Security and SSI benefits if there is an increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of the last year a cost-of-living adjustment (COLA) was determined to the third quarter of the current year.So very objectively, there will be no cost-of-living increase in Social Security benefits in 2011 because there was no increase in the cost of living, as measured by the CPI-W, from the 3rd quarter of 2008. Well, no matter.  Last year at this time, when the CPI in September 2009 came in even lower (note the data point in the chart), the President and members of Congress called for $250 checks for seniors to make up for the lack of a COLA.

Don't Cut Social Security, DOUBLE It - In the aftermath of the Great Recession, a debate over Social Security is heating up. This debate raises fundamental questions about what kind of society in which Americans wish to live. So far, the debate has been between those deficit busters who say Social Security must be trimmed back to reduce government indebtedness and others who want to maintain it as is. But the New America Foundation just released a study that I authored that proposes a different approach: doubling the current Social Security payout and making it a true national retirement system. Creating a more robust system of "Social Security Plus" not only would be good for American retirees, but also would be good for the greater macro economy.

State officials warn of surge in Medicaid - Next year's state budget deficit could worsen by hundreds of millions of dollars if state social services officials are correct that Connecticut's Medicaid costs will skyrocket by nearly $1 billion starting in July. A preliminary budget request from the Department of Social Services particularly tosses a fiscal wrench into Republican gubernatorial nominee Tom Foley's plans to balance the budget without tax hikes. The Greenwich businessman has said he could save more than $500 million by reducing state health care costs by at least 10 percent

500000 adults in Washington could lose prescription-drug coverage - Some 500,000 Washington adults whose prescriptions are covered by Medicaid could soon lose that benefit unless lawmakers provide special funding when they reconvene in January. Medicaid's adult drug program, which provides medication to the state's poorest individuals through a combination of state and federal funding, will be eliminated in March if the Legislature can't come up with $40 million before Feb. 1, according to the Department of Social and Health Services (DSHS). Washington would be the only state to eliminate the program, according to Pharmaceutical Researchers and Manufacturers of America, an industry group in Washington, D.C. For Doug Porter, the state's Medicaid director, losing the program would be "beyond painful."

Feds urge states: Push insurers to offer child-only health policies - In what appears to be an early skirmish in implementing the health-care overhaul, federal officials Wednesday urged states to push insurance companies to sell health policies for children — about a month after many insurers stopped selling child-only policies. Saying the insurers had "reneged on a previous commitment," Kathleen Sebelius, secretary of Health and Human Services, sent a letter to the National Association of Insurance Commissioners outlining ways the federal government and some states are trying to encourage insurers to again offer child-only policies. Such policies currently are unavailable in Florida. "Although this is a small market and children currently insured by such policies will not be affected, the decision of some health-insurance companies to stop selling new policies for children is extremely disappointing," Sebelius wrote. "Nothing in the Affordable Care Act, or any other existing federal law, allows us to require insurance companies to offer a particular type of policy at this time."

Many physicians see Medicaid pay cut as enrollment rises - Twenty states cut Medicaid physician pay in fiscal year 2010 -- the most since 21 states did so in fiscal 2004 -- as states struggled to cope with strong Medicaid enrollment growth, according to an annual survey of state Medicaid programs.Meanwhile, 11 states, six of which also cut pay in 2010, and the District of Columbia have enacted physician pay cuts for fiscal 2011, which in many states began June 30. Many of the 2010 and 2011 pay cuts were small in scale and more likely to affect specialists than primary care physicians, because states sought to preserve access to primary care, said Vernon K. Smith, PhD, managing principal of Health Management Associates, a research and consulting firm. He's the co-author of the report, which was released Sept. 30 by the Kaiser Family Foundation.

Basing Pay-for-Performance on Outcomes - In last week’s post I presented the flow chart below, exhibiting the path from the production of health care proper to human well-being, and I asked where in this process one should monitor the performance that we might seek to encourage through financial incentives. I noted that adherence to what is thought to be best clinical practice for given medical conditions is the most widely used approach to measuring performance, even though it is generally agreed that a better way is to measure performance by clinical outcomes — that is, changes in the health status of patients (Box B in the chart). Much work is now under way to move in that direction. Unfortunately, measuring performance by clinical outcome is easier said than done. It would be very difficult, for example, to isolate the incremental contribution to a change in one patient’s health made by an individual physician, because so many other variables intrude. The medical treatment involves many other human and physical inputs besides the physician’s, and the effect of medical treatment on the patient’s health status is also affected by the patient’s behavior and his or her socioeconomic and physical environment.

Fair and Efficient Health - Maxine Udall - Physician Aaron Carroll at The Incidental Economist has been doing a good job of demonstrating that the US pays too much for the health outcomes we actually attain. And he documents that the US spends more per capita on health and as a percent of national output than any other developed country here. It turns out that even though the US spends more, our population health indicators, such as life expectancy and infant mortality, are significantly lower than similar developed countries, such as the UK, France, Japan, and Germany.  In fact, we rank lower than all but a handful of countries, such as the Czech Republic, Turkey, and Mexico. (See this Commonwealth Fund Report for a detailed recent update.)A related post by economist Uwe Reinhardt provides a very nice explanation of the components of health care costs and why "bending" any of them poses real problems in the current political and economic environment. My goal in this post is to highlight some features of the fine-tuning process that make it economically, ethically, and politically complicated. At the same time, I want to lay the ground work for my own conjecture that the US "system" has evolved in such a way that we are delivering too much (over-priced) care that yields very small increments in health to those who are insured and therefore able to pay for it.

The Health Reform (Almost) Everyone Loves - Come with me to the land of happy health reform. It is a place where Republicans and Democrats find common ground, a place where physicians, hospitals and health insurers sit together as partners, a place where criticism is respectful, not rancorous. It is the world of Accountable Care Organizations (ACOs).What are ACOs, and why have they escaped the general onslaught of opprobrium from Obamacare opponents?The term Accountable Care Organization was originated by Elliott Fisher of the Dartmouth Center for the Evaluative Clinical Sciences, picked up by the Medicare Payment Advisory Commission and then enshrined in Section 3022 of the Patient Protection and Affordable Care Act (otherwise known as health care reform). The language is explicitly designed to use financial incentives to change the health care delivery system.

US life expectancy after 65: Why so low? - Matt Yglesias cited Aaron’s post and figures on mortality after age 65 and commented, Strong evidence of systematic underperformance in the American system. And yet since we’re talking about Medicare-eligible people here that also suggests that the issue can’t be solved by messing with who has insurance or how insurance-provision is organized. You need to actually delve down into the delivery of health care services. That’s one conclusion, and I’m inclined to think the delivery system is part of the problem. But it could be an insurance issue too. Seeing it that way requires going deeper in another direction.

What Changes In Survival Rates Tell Us About US Health Care - Many advocates of US health reform point to the nation’s relatively low life-expectancy rankings as evidence that the health care system is performing poorly. Others say that poor US health outcomes are largely due not to health care but to high rates of smoking, obesity, traffic fatalities, and homicides. We used cross-national data on the fifteen-year survival of men and women over three decades to examine the validity of these arguments. We found that the risk profiles of Americans generally improved relative to those for citizens of many other nations, but Americans’ relative fifteen-year survival has nevertheless been declining. For example, by 2005, fifteen-year survival rates for forty-five-year-old US white women were lower than in twelve comparison countries with populations of at least seven million and per capita gross domestic product (GDP) of at least 60 percent of US per capita GDP in 1975. The findings undercut critics who might argue that the US health care system is not in need of major changes.

Fighting Food Subsidies with Food Subsidies - What if all it took to reduce the incidence of diabetes in America was to lower the relative price of low-carb food with respect to high-carb food for diabetic patients?  That question is relevant today because of the work of Chad Meyerhoefer of Lehigh University and Ephraim Leibtag of the USDA, who found that changes in the relative prices of low and high carbohydrate foods can affect the medical expenditures related to treating diabetes in a recent paper that appeared in the American Journal of Agricultural Economics (here's an ungated version of the paper.) Meyerhoefer's and Leibtag's public policy suggestion is significant in that it deviates from the "tax the 'bad' food or ban it" approach favored by many politicians, such as New York City Mayor Michael Bloomberg, who has famously pursued his obsession with using the power of government to control the personal consumption habits of others with both approaches for both soft drinks and trans-fats.

US corn shortage seen to raise meat prices - A surprise contraction in the US corn supply will push up beef, pork and chicken prices in what parts of the industry warn will be a “game changer”. With the US harvest halfway through, the US Department of Agriculture said the average corn field will yield 155.8 bushels per acre, 6.7 bushels less than its September estimate. “The impact of this is huge, a complete game changer,” says Gregg Doud, chief economist of the National Cattlemen’s Beef Association. “This is an all-time record change in corn yield from one month to the next. We were caught completely flat-footed.” The beef industry is only this year recovering from the commodity price spikes of 2007 and 2008 – events that led to a dramatic diminution of the number of cattle raised for slaughter.

Meat Market Corn Crunch Means Costliest Beef in Quarter Century - (Bloomberg) -- Meat prices are poised to extend a 14 percent rally this year that drove U.S. retail costs to the highest levels since the 1980s as surging corn futures prevent livestock producers from expanding their herds. The U.S. cattle herd in July was the smallest since 1973 and the number of breeding hogs last month was near the lowest ever, government data show. Corn futures jumped to a two-year high today and the price of the main feed ingredient is more than 70 percent above the 10-year average.  U.S. per-capita beef supplies next year will be the lowest since 1952 and pork the smallest since 1976, industry researcher CattleFax said. Hog futures will rise 14 percent by July and cattle may gain 3.6 percent by April, according to a Bloomberg survey of analysts. Wendy’s/Arby’s Group Inc., the maker of the 1,360-calorie Baconator Triple burger, and CKE Restaurants Inc., owner of the Hardee’s chain, have warned investors they are contending with higher commodity costs.

Large-scale crop failures to increase under climate change, finds study - A new study has shown that large-scale crop failures like the one that caused the recent Russian wheat crisis are likely to become more common under climate change due to an increased frequency of extreme weather events. However, according to the research by the University of Leeds, the Met Office Hadley Centre and University of Exeter, improved farming and the development of new crops could mitigate the worst effects of these events on agriculture. The unpredictability of the weather is one of the biggest challenges faced by farmers struggling to adapt to a changing climate. Some areas of the world are becoming hotter and drier, and more intense monsoon rains carry a risk of flooding and crop damage

Land 'evapotranspiration' taking unexpected turn: huge parts of world are drying up - The soils in large areas of the Southern Hemisphere, including major portions of Australia, Africa and South America, have been drying up in the past decade, a group of researchers conclude in the first major study to ever examine "evapotranspiration" on a global basis.Most climate models have suggested that evapotranspiration, which is the movement of water from the land to the atmosphere, would increase with global warming. The new research, published online this week in the journal Nature, found that's exactly what was happening from 1982 to the late 1990s.But in 1998, this significant increase in evapotranspiration – which had been seven millimeters per year – slowed dramatically or stopped. In large portions of the world, soils are now becoming drier than they used to be, releasing less water and offsetting some moisture increases elsewhere. But one possibility is that on a global level, a limit to the acceleration of the hydrological cycle on land has already been reached. If that's the case, the consequences could be serious.

Deep Waters, Slowly Drying Up - CLEMENT weather and plentiful water mean that Punjab produces an eighth of India’s total food grains. But the water table has dropped by ten metres since 1973 and the rate of decline is accelerating on both the Indian and the Pakistani sides of the region. It is a similar story for the north-western Sahara aquifer system (NWSAS), shared by Algeria, Tunisia and Libya. Withdrawals increased ninefold between 1950 and 2008. Springs are drying up and soil salinity has increased. Such depletion of aquifers is a classic tragedy of the commons. Farmers pump, oblivious of others’ actions or the impact of their own. Scarcity stokes this rather than braking it. Worse, much abstracted water is used in inefficient irrigation; compounding that, underpricing means it is often used for watering low-value crops. Powerful farming lobbies have little interest in changing the status quo.Aquifers, like fish stocks, are most at risk when they cross national borders, making property rights weaker. Groundwater provides about a fifth of the planet’s water needs and half its drinking water. In arid countries such as Libya or Saudi Arabia, that figure is close to 100%. Almost 96% of the planet’s freshwater resources are stored as groundwater, half of which straddles borders. UNESCO, a United Nations body, estimates that 273 aquifers are shared by two or more countries.

Drought Withers Lush Farmlands in Syria - The farmlands spreading north and east of this Euphrates River town were once the breadbasket of the region, a vast expanse of golden wheat fields and bucolic sheep herds.  Now, after four consecutive years of drought, this heartland of the Fertile Crescent — including much of neighboring Iraq — appears to be turning barren, climate scientists say. Ancient irrigation systems have collapsed, underground water sources have run dry and hundreds of villages have been abandoned as farmlands turn to cracked desert and grazing animals die off. Sandstorms have become far more common, and vast tent cities of dispossessed farmers and their families have risen up around the larger towns and cities of Syria and Iraq.  The collapse of farmlands here — which is as much a matter of human mismanagement as of drought — has become a dire economic challenge and a rising security concern for the Syrian and Iraqi governments, which are growing far more dependent on other countries for food and water. Syria, which once prided itself on its self-sufficiency and even exported wheat, is now quietly importing it in ever larger amounts. The country’s total water resources dropped by half between 2002 and 2008, partly through waste and overuse, scientists and water engineers say.

Asia facing worsening water crisis, warns ADB - Asia is facing a worsening water crisis that threatens to curtail food production while taking an increasingly heavy toll on the region’s economies, the Asian Development Bank said on Tuesday. People, governments and industries around the region urgently need to stop wasting so much of the precious resource if they are to limit the shortage, ADB infrastructure adviser Arjun Thapan said. “The water footprint in our towns and cities, in our irrigation systems, our energy production systems and in industry in general, is extravagant,” Mr Thapan said at a water crisis conference hosted by the Manila-based lending bank.  “It needs to shrink and Asia needs to become acutely conscious of the scarcity value of its accessible fresh water, and the imperative of efficiency in managing it.” In a report, the ADB faulted weak enforcement of laws for the degradation of Asian water quality, with between 80 and 89 per cent of all untreated wastewater leaching into fresh water in east and south Asia, respectively.

Index shows global hunger growing - More than one billion people in the world are now undernourished, according to latest figures.  The 2010 Global Hunger Index shows that child malnutrition is the biggest cause of hunger worldwide, accounting for almost half of those affected. Countries in sub-Saharan Africa and South Asia were shown to have the highest levels of hunger.  The report's authors called on nations to tackle child malnutrition in order to reduce global hunger.  The Global Hunger Index is produced by the International Food Policy Research Institute (IFPRI), Welthungerhilfe and Concern Worldwide.

Too Much of a Good Thing: Human Activities Overload Ecosystems With Nitrogen - Humans are overloading ecosystems with nitrogen through the burning of fossil fuels and an increase in nitrogen-producing industrial and agricultural activities, according to a new study. While nitrogen is an element that is essential to life, it is an environmental scourge at high levels. According to the study, excess nitrogen that is contributed by human activities pollutes fresh waters and coastal zones, and may contribute to climate change. Nevertheless, such ecological damage could be reduced by the adoption of time-honored sustainable practices. Appearing in the October 8, 2010 edition of Science and conducted by an international team of researchers, the study was partially funded by the National Science Foundation.

Farm Loan Defaults Soar in 2010 - Farm loan delinquencies have hit a 17-year high, and 2.3 percent of all agricultural production loans made by commercial banks were past due, up from 1.3 percent a year ago, according to the Federal Deposit Insurance Corp. The number of Minnesota farmers defaulting on agricultural loans has swelled dramatically since 2008, reaching levels not seen since the 1980s farm crisis permanently altered the state’s rural economy, reported the Minneapolis Star Tribune October 4. Lenders have sent farmers more than 3,670 default notices in the past 12 months, according to the University of Minnesota’s Farmer-Lender Mediation Program. That’s up 83 percent in just two years.

Tropics in decline – WWF 2010 Living Planet report - New analysis shows populations of tropical species are plummeting and humanity’s demands on natural resources are sky-rocketing to 50 per cent more than the earth can sustain, reveals the 2010 edition of WWF’s Living Planet Report — the leading survey of the planet’s health. The biennial report, produced in collaboration with the Zoological Society of London and the Global Footprint Network, uses the global Living Planet Index as a measure of the health of almost 8,000 populations of more than 2,500 species. The global Index shows a decrease by 30 per cent since 1970, with the tropics hardest hit showing a 60 per cent decline in less than 40 years.“There is an alarming rate of biodiversity loss in low-income, often tropical countries while the developed world is living in a false paradise, fuelled by excessive consumption and high carbon emissions,” said Jim Leape, Director General of WWF International.

Western lifestyles plundering tropics at record rate, WWF report shows - The Earth's population is using the equivalent of 1.5 planets' worth of natural resources, but the long-term decline of animal life appears to have been halted, a WWF report shows. The latest Living Planet report, published today by the conservation group, also reveals the extent to which modern Western lifestyles are plundering natural resources from the tropics at record levels.The report shows shows the impact of living off the planet's "savings": in the last 40 years human consumption has doubled, while the Living Planet index – measuring the decline and increase of thousands of species on land, in rivers and at sea – has declined by 30% overall, and by a massive 60% in the tropics.

Fortune: What a scientist didn't tell the New York Times about his study on bee deaths - Few ecological disasters have been as confounding as the massive and devastating die-off of the world's honeybees. The phenomenon of Colony Collapse Disorder (CCD) -- in which disoriented honeybees die far from their hives -- has kept scientists, beekeepers, and regulators desperately seeking the cause. After all, the honeybee, nature's ultimate utility player, pollinates a third of all the food we eat and contributes an estimated $15 billion in annual agriculture revenue to the U.S. economy. The long list of possible suspects has included pests, viruses, fungi, and also pesticides, particularly so-called neonicotinoids, a class of neurotoxins that kills insects by attacking their nervous systems. For years, their leading manufacturer, Bayer Crop Science, a subsidiary of the German pharmaceutical giant Bayer AG has tangled with regulators and fended off lawsuits from angry beekeepers who allege that the pesticides have disoriented and ultimately killed their bees. The company has countered that, when used correctly, the pesticides pose little risk. A cheer must have gone up at Bayer on Thursday when a front-page New York Times article, under the headline "Scientists and Soldiers Solve a Bee Mystery," described how a newly released study pinpoints a different cause for the die-off: "a fungus tag-teaming with a virus." The study, written in collaboration with Army scientists at the Edgewood Chemical Biological Center outside Baltimore, analyzed the proteins of afflicted bees using a new Army software system. The Bayer pesticides, however, go unmentioned.

A Painless Way to Save Energy: Save Food - Food production consumes a big chunk of energy in the U.S., ranging from 8 percent to almost 16 percent according to some estimates, so achieving even a modest percentage of energy conservation in this sector could yield significant results. Actually, there is a lot of room for improvement, because the U.S. Department of Agriculture has estimated that about 27% of food is wasted in the U.S. The authors of the study picked apart the data to calculate the figure of 350 million barrels, which translates into about 2 percent of U.S. energy consumption. That might not sound like much but it’s on par with, or better than, other important energy conservation measures.

Tropics in decline – WWF 2010 Living Planet report - New analysis shows populations of tropical species are plummeting and humanity’s demands on natural resources are sky-rocketing to 50 per cent more than the earth can sustain, reveals the 2010 edition of WWF’s Living Planet Report — the leading survey of the planet’s health. The biennial report, produced in collaboration with the Zoological Society of London and the Global Footprint Network, uses the global Living Planet Index as a measure of the health of almost 8,000 populations of more than 2,500 species. The global Index shows a decrease by 30 per cent since 1970, with the tropics hardest hit showing a 60 per cent decline in less than 40 years. “There is an alarming rate of biodiversity loss in low-income, often tropical countries while the developed world is living in a false paradise, fuelled by excessive consumption and high carbon emissions,” said Jim Leape, Director General of WWF International.

The Cap-and-Trade Blame Game -How much blame do President Obama and his staff deserve for the failure to pass climate legislation this year? There has been a lively debate on this question over the last week. In one camp are those people who point to specific instances in which the White House made political missteps that hurt the chances of a bill’s passage in the Senate. In the other camp are those who point to the daunting politics of climate legislation even under the best of circumstances, let alone in a deep economic downturn. I want to lay out both cases here and offer a few thoughts. Ryan Lizza of The New Yorker started the debate, with an impressively detailed article on the demise of the Senate bill. The main thesis is that the White House undercut the senators trying to negotiate a bill. Here

Why do Republican politicians hate science? - Ross Douthat, the conservative New York Times op-ed columnist and blogger, offers an intriguing explanation for why Republican politicians in the U.S. are far fiercer in their climate skepticism than their right-wing counterparts in the rest of the world. He points to polling data from Western Europe that suggests that large swathes of the populations of countries like England and Denmark don't believe in man-made climate change either, and suggests that the difference between there and here is that American politicians are more responsive to what the people believe.Bill McKibben does a much better job than I ever could of exploring, and bemoaning the intellectual roots of conservative climate change denialism. But I think he gives short shrift to a factor that undermines this notion of Republican "populist" street cred -- the extent to which Republican positions on climate change mirror the priorities of the energy industry that has poured so many millions of dollars into opposing any meaningful action on climate change.

GOP Gives Climate Science A Cold Shoulder - When British Foreign Secretary William Hague visited the U.S. last week, he placed combating climate change near the very top of the world's To Do list. "Climate change is perhaps the 21st century's biggest foreign-policy challenge," Hague declared in a New York City speech. "An effective response to climate change underpins our security and prosperity."  "While no one weather event can ever be linked with certainty to climate change," he said, "the broad patterns of abnormality seen this year are consistent with climate-change models."William Hague is not a holdover from the left-leaning Labor Government that British voters ousted last spring. He's not even from the centrist Liberal Democrats who are governing in a coalition with the Conservative Party of Prime Minister David Cameron. Hague is one of Cameron's predecessors as Conservative Party leader. His strong words make it easier to recognize that Republicans in this country are coalescing around a uniquely dismissive position on climate change. The GOP is stampeding toward an absolutist rejection of climate science that appears unmatched among major political parties around the globe, even conservative ones.

52 Percent of Americans Flunk Climate 101 - A new study by researchers at Yale University suggests that Americans’ knowledge of climate science is limited and scattershot, with some understanding of basic issues like the contribution of fossil fuels to global warming and some singular misconceptions as well. For instance, more than two-thirds of those surveyed believe that reducing toxic waste or banning aerosol spray cans will curb climate change. And 43 percent believe that “if we stopped punching holes in the ozone layer with rockets, it would reduce global warming,” the survey’s authors write. Overall, just 1 in 10 of those surveyed said they were “very well informed” about climate change and 45 percent said they were not very worried or not at all worried about it. If letter grades were given by the survey’s authors (based on absolute scores, not grading on the curve), 1 percent would have received an A, 7 percent a B, 15 percent a C, 25 percent a D and 52 percent an F.

Toxic algae rapidly kills coral - Harmful algal blooms have the potential to lay waste to coral reefs.  Scientists studying coral reefs in the Gulf of Oman have issued the warning after being shocked by the impact of one large-scale bloom, which destroyed a coral reef in just three weeks.  Around 95% of the hard coral beneath the algae died off and 70% fewer fishes were observed in the area.  The rapidly growing patches of microscopic marine plants starve coral of sunlight and oxygen.  Coral reefs are increasingly under threat from environmental stress in the form of climate change, coastal development, overfishing, and pollution.

NASA reports hottest January to September on record - Hottest September in UAH satellite record, Spencer puzzled by "stubborn" temperatures - Last month, NASA reported it was the hottest January-August on record.  That followed 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 September for NASA.  We  have entered a moderate to strong La Niña, which NOAA says is “expected to last at least through the Northern Hemisphere winter 2010-11.”

New England sets new records in electricity use - Despite the weak economy, electricity consumers in New England have set new records for power use. ISO-New England, the Holyoke-based grid operator for the region, says peak demand hit record levels in May and September. The region also set an all-time record in electricity consumption for one month in July. ISO-New England says July was the second-hottest July in New England since 1960 and New England's all-time electricity consumption for one month was recorded that month at 13,385 gigawatt hours. The previous one-month consumption record was set in July 2006, with 13,365 gigawatt hours of electricity used.

Nice Economy You’ve Got There . . .The coal industry seems to have learned something. Now that the EPA is recommending revoking a mountaintop mining permit (mountaintop mining is when, instead of drilling holes to get at coal underground, you simply blow the top off the mountain), the coal company in question has this to say: “If the E.P.A. proceeds with its unlawful veto of the Spruce permit — as it appears determined to do — West Virginia’s economy and future tax base will suffer a serious blow.“Beyond that, every business in the nation would be put on notice that any lawfully issued permit — Clean Water Act 404 or otherwise — can be revoked at any time according to the whims of the federal government. Clearly, such a development would have a chilling impact on future investment and job creation.” No, every business would be put on notice a permit could be revoked for a project that ”would bury more than seven miles of the Pigeonroost Branch and Oldhouse Branch streams under 110 million cubic yards of spoil, killing everything in them and sending downstream a flood of contaminants, toxic substances and life-choking algae.”  (If you want to see what mountaintop mining looks like, go to this Google Maps mashup and zoom in. It’s the big gray scars in the green mountains.)

On Climate, How Much Could E.P.A. Do? - One near-term alternative to a cap-and-trade bill is a big increase in funds for clean energy research. Another alternative is having the Environmental Protection Agency crack down on greenhouse gas emissions.As Bradford Plumer has written, “back in 2007, the Supreme Court ruled that the E.P.A. was required to regulate greenhouse gases under the existing Clean Air Act if it found those gases posed a threat to public health and welfare (which, most scientists agree, they do).”Matthew Yglesias adds that “you really can make a fair amount of progress under the E.P.A. path and try to focus legislative attention on efficiency measures and other things that are outside the E.P.A.’s purview but also a good deal less controversial than carbon pricing. How much progress

How to Spend on Clean-Energy Research - If the federal government decided to spend $25 billion on clean-energy research — as my column this week discusses — how should it spend that money? Michael Greenstone of M.I.T. and the Hamilton Project suggests starting by building a monitoring system that uses satellites and ground-based instruments to measure the carbon emissions of each country. Without that, he points out, we will never know if countries are actually living up to their own emissions goals. “It’s insane,” as Mr. Greenstone said in a Chicago speech earlier this year, that “we don’t have the technology available to monitor emissions.” Some scientists estimate that such a system could cost $5 billion to $10 billion to build, and it would be a one-time cost. So that leaves plenty of money. Mr. Greenstone would spend it on a combination of research into clean-energy sources and research into things like carbon-capture sequestration and geoengineering. The latter category would not reduce carbon emissions. But it would have the potential to counter those emissions and slow global warming — say, by storing the carbon emitting by coal plants under the earth. “We don’t know if that will work,” Mr. Greenstone says, and it’s worth finding out.

N.C. opposing clean air rules - The state agency responsible for enforcing air pollution standards is fighting a federal move to mandate cleaner air. The U.S. Environmental Protection Agency is expected to announce the nation's strictest-ever ozone limits this month. The decision will put the Triangle and much of the country in violation of national air pollution standards and require states to figure out ways to make the air cleaner at a time when money is tight and the economy fragile. The N.C. Department of Environment and Natural Resources is urging the EPA to weigh the economic consequences of cutting ground-level ozone, or smog, even though the EPA is prohibited by law from considering costs when setting pollution standards. The state agency contends that imposing stricter ozone standards could result in people losing their jobs, homes and health insurance, which is not in the public interest.  "The bottom line is we're going to need additional pollution controls to achieve those lower standards," said Sheila Holman, director of the Division of Air Quality at DENR. "What is better for North Carolina's citizens at this point? Do you want to keep them working with health care, or potentially face more layoffs?"

Will Budget Concerns Ever Influence Carbon Policy? - Climate change legislation died an ignominious death in the Senate earlier this year. If you’d like to understand why, check out Ryan Lizza’s autopsy of the effort in the latest New Yorker. Lizza documents how the “tripartisan” trio of John Kerry, Joe Lieberman, and Lindsey Graham came up short in their effort to craft a 60-vote coalition in the Senate. Lizza’s article is rich with anecdotes, but it’s the larger picture I’d like to emphasize. Kerry, Lieberman, and Graham adopted a traditional approach to building a Senate coalition. They identified their main goal–comprehensive climate change limits–and then started negotiating with individual Senators and special interests to see how they could get to 60 votes. Nuclear power, electric utilities, oil refiners, home heating oil, even cod fisherman all make an appearance at the bargaining table. But it’s not clear that such horse-trading could ever yield 60 votes.

US in position to build massive wind farms- DOE - If politics and economics align, the United States is well-positioned to build massive wind farms off of U.S. coasts and in the Great Lakes to meet a substantial amount of the nation’s electricity needs, according to the Department of Energy. In a 240-page study of the potential and barriers for building 54 gigawatts’ worth of offshore wind capacity, DOE’s National Renewable Energy Laboratory estimates that doing so means the creation of at least 43,000 permanent jobs. Potential exists for $200 billion in economic activity, and government analysts predict 20 jobs would be created for every megawatt produced off of U.S. shores. With the best-known offshore project, off the coast of Cape Cod, Mass., mired in a decadelong regulatory morass, the United States trails Europe and China in the development of projects.

Offshore Wind Power Line Wins BackingGoogle and a New York financial firm have each agreed to invest heavily in a proposed $5 billion transmission backbone for future offshore wind farms along the Atlantic Seaboard that could ultimately transform the region’s electrical map.  The 350-mile underwater spine, which could remove some critical obstacles to wind power development, has stirred excitement among investors, government officials and environmentalists who have been briefed on it.  Google and Good Energies, an investment firm specializing in renewable energy, have each agreed to take 37.5 percent of the equity portion of the project. If they hold on to their stakes, that would come to an initial investment of about $200 million apiece in the first phase of construction alone, said Robert L. Mitchell, the chief executive of Trans-Elect, the Maryland-based transmission-line company that proposed the venture. Trans-Elect said it hoped to begin construction in 2013.

Spanish wind giant signs big China deals - Spain’s Gamesa, one of the world’s top wind turbine groups, has announced three new contracts with Chinese firms as part of a surge in investments in the country to meet its rising demand for clean energy. Gamesa’s wind turbine division signed the deals with two of its biggest customers in China, Guangdong Nuclear Wind Power and Datang Renewable Power, and a new customer, Henan Weite Wind Power, it said in a statement on Thursday. The group will supply a total of 197 turbines with combined capacity of 251 megawatts. China, the world’s most populous country, wants renewable energy like wind to meet 15 per cent of its energy needs by 2020, double its share in 2005, as it seeks to rein in emissions that have made its cities among the smoggiest on Earth.

Climate Proposal That Looks Beyond Cap and Trade -To put it another way, the death of cap and trade doesn’t have to mean the death of climate policy. The alternative revolves around much more, and much better organized, financing for clean energy research. It’s an idea with a growing list of supporters, a list that even includes conservatives — most of whom opposed cap and trade. On Wednesday, the reliably conservative American Enterprise Institute and the left-of-center Brookings Institution will release a joint proposal to increase federal spending on clean energy innovation to as much as $25 billion a year, from the currently planned $4 billion a year. The proposal would also toughen rules for such money, so that recipients could continue getting it only if they were reducing the cost of clean energy. Today, many subsidies for wind, solar power and ethanol are more lenient.  Along similar lines, Al Gore is working with Reed Hundt and John Podesta, former Clinton administration officials, on a proposal aimed at “lowering the cost of clean,” as Mr. Hundt recently told the Web site Earth2Tech. The current rock-bottom interest rates would help the government finance the investments.

Gas-Tax Revamp Pushed to Fund Transit Projects -—States are starting to lobby Congress to replace the decades-old federal tax on gasoline with a new system that would raise revenues to pay for highway and transit projects.  The proposal, proponents hope, could provide the funding needed to pay for a long-term transportation bill that the White House and congressional Democrats hope to pass next year. The debate over the plan is expected to begin shortly after the November midterm elections, as the White House uses the lame-duck session of Congress to push a $50 billion "down payment" on the transportation plan.  The gas-tax proposal, being pitched by the American Association of State Highway and Transportation Officials, would have drivers at the pump pay an 8.4% tax on a gallon of gas instead of the current 18.4-cent tax. The tax on a gallon of diesel would be 10.6% instead of the current 24.4 cents.  AASHTO estimates the changes would potentially raise an additional $43 billion over six years, assuming the price of gasoline rises as the government projects.

RIGZONE - US Shale Discovery Bonanza Is Over - Chesapeake CEO - Chesapeake's Chief Executive Aubrey McClendon said that most significant natural gas and oil shale fields in the U.S. have already been found, and that investors shouldn't hold their breath for major new discoveries."If you decided, I'm going to pass on the Barnett, pass on the Haynesville, pass on the Marcellus, and you were going to wait for the next four or five--there won't be any," McClendon said Wednesday during the company's annual meeting with analysts, referring to tight, hydrocarbons-rich rock formations in Texas, Louisiana and the U.S. Northeast, respectively. "By the end of 2011 it will be over. There won't be any basins that have escaped investigation.

North Sea Oil: Striking The Set - But the industry is not what it was. Many of the old fields are spent; most of the new finds are small. Many platforms are reaching the end of their operational lives, and are starting to be decommissioned. According to Oil and Gas UK, the oil-industry trade body, around 284 installations in 144 separate fields will need to be dismantled by 2020, at a (tax-deductible) cost to the oil firms of around £9.2 billion. The costs of working offshore have risen rapidly, so the bill is swelling: five years ago, the best estimates of the ultimate cost of hauling down Britain’s entire North Sea infrastructure were around £11 billion; today’s figure is £27 billion.  Strict laws forbid dumping the platforms at sea; instead they must be brought back to shore for disposal. That means a bonanza for the engineering firms, ship operators and breaker’s yards that will do the work. The scale of the job is enormous: the biggest platforms are over 300 metres high (taller than the Eiffel tower) and weigh over 20,000 tonnes. Four new decommissioning vessels are being built by specialist firms to handle these enormous structures

Crude Awakening - In 2011 the fundamentals of supply and demand are likely to exert more upward pressure on prices. Francisco Blanch of Bank of America Merrill Lynch reckons that global demand is set to expand by 1.4m bpd as growth in developing countries offsets a decline in demand from sluggish rich countries. As a result he expects prices to hit $100 next year and to average $85 a barrel over the course of 2011. Looking still further out, the booming economies of China, India and other developing countries are set to need much more fuel in years to come. The rich world should eventually rediscover its thirst, too. Non-OPEC supplies, which have grown in recent years, may start to decline in 2012. New wells will fail to plug the gap left as older fields dry up, despite the investment that 2008’s higher prices encouraged. OPEC is likely to respond by calling on its spare capacity—belonging mainly to its biggest member, Saudi Arabia. OPEC is tight-lipped about how much it has on tap. Some estimates put it at about 5m-6m bpd, though others think the amount that could readily hit the market is much lower.

White House Lifts Ban on Deepwater Drilling - The Obama administration lifted the moratorium on deepwater oil and gas drilling on Tuesday, but it will be weeks or months before drilling resumes while industry and government regulators scramble to meet strict new rules intended to prevent another disaster like the Deepwater Horizon explosion and spill. The moratorium, imposed after the BP accident that killed 11 workers and spewed nearly five million barrels of oil into the Gulf of Mexico, was a blow to the oil industry and angered Gulf Coast communities dependent on offshore drilling for jobs and income. Lifting the ban mollified some of its sharpest critics, but the debate over the economic and environmental impact of oil development in the gulf continues

China's CNOOC tests U.S. with Chesapeake shale deal (Reuters) - China's top offshore oil producer, CNOOC Ltd (0883.HK), agreed to pay $1.1 billion for a stake in a U.S. shale oil and gas field, testing the U.S. political climate for the first time since its 2005 failed bid for Unocal. CNOOC shares hit a three-year high on news of the deal with Chesapeake Energy Corp (CHK.N), which could be the start of more outbound acquisitions as the Chinese company races to meet its aggressive production growth forecasts to feed the country's fast-growing economy, analysts and bankers said. "We expect them to expand their footprint in the Canadian oil sands and also in Brazil's deepwater. That's the last frontier where you can extract big oil volumes," said Gordon Kwan, head of Asian energy research for Mirae Asset Securities, adding that Nigeria and Angola could also be attractive.

Iran Ups its Reserves Cache - Last week, Iraq claimed it had overtaken Iran. Coming ahead of an Opec meeting on Thursday, one analyst said the two countries were in a "bidding war" over reserves, which is usually a consideration including other criteria such as production capacity when it comes to allocating quotas.  Oil Minister Massoud Mirkazemi told a news conference Iran had 150.31 billion barrels of reserves, up from a previous estimate of 138 billion barrels and added that figure would be revised even higher soon.  "This latest figure will definitely go up by the end of the year," Reuters quoted him as saying.  Last Monday, Iraq raised its proven oil reserves figure by a quarter to 143 billion barrels, surpassing Iran and putting it behind only Saudi Arabia in terms of conventional crude, and third after Venezuela if unconventional reserves are counted.

Iran to hold Opec presidency for first time in 36 years - Iran will assume the presidency of the Organization of Petroleum Exporting Countries (Opec) for the first time in 36 years.  The country's oil minister was elected as Opec president at a one-day meeting of the group, which is made up of 12 oil producing states. Masoud Mir-Kazemi will hold the presidency from 1 January 2011.

OPEC Members Seek $100 Oil to Counter Dollar Weakness - The 13 percent decline in the Dollar Index since June has led some OPEC members to call for oil to rise to $100 a barrel.  The U.S. currency’s weakness means the “real price” of oil is about $20 less than current levels, Venezuelan Energy and Oil Minister Rafael Ramirez said after yesterday’s meeting of the Organization of Petroleum Exporting Countries in Vienna. The group, which accounts for 40 percent of global crude output, left targets unchanged and called for greater adherence to quotas, which are being exceeded by a supertanker load a day.  “OPEC is not interested in compliance right now,”  “They’re concerned about the dollar because as the dollar weakens, prices go up. They’re not paying any attention to production discipline.”

Summary of annual meeting of the Association for the Study of Peak Oil-USA (ASPO-USA) The basic consensus of the group is that oil production is in fact peaking now as production has been within 5% of the same level of production around 83 to 85 million barrels per year over the last five years, and will begin to irreversibly decline within the next five years. Additionally, the current economic downturn and high unemployment levels are directly tied to the precipitous rise in oil price from 2003 to summer of 2008. Simply put, the world economy, and primarily that of the US and the rest of the OECD, could not afford and is not structured to function in a world of oil price > $100/BBL. Southeast Asia is growing up in an oil economy as it peaks out, but they are adjusting from transport systems such as scooters and bicycles. Additionally, as Jeff Rubin ( likes to point out (and he’s a good speaker), the OPEC exporting countries are consuming oil at a faster rate than anyone because they keep their prices artificially low (Iran, Saudi Arabia, Venezuela, etc.).

Global Oil Production Still Going Sideways - IEA and OPEC are both out with their initial numbers for September global liquid fuel production (the EIA is currently up to July).  I have updated my graphs accordingly.   As you can see above, we are still in the "sideways stagnation" period that we've been in since February - almost within striking distance of the global record production in summer of 2008, but no longer heading upward more-or-less steadily as we were through most of 2009. Here's the longer context: So have we passed peak oil on a monthly liquid fuel basis?  Who knows - anyone who claims they know is blowing smoke in my opinion (though of course some faction of the smoke-blowers might get lucky).  A revival of the financial crisis (latest alarms here) would send demand plunging again, then posit more chaos in Iraq so that the al-Shahristani plan never comes to pass.  Then we could very well have passed the highpoint of oil production (by the time demand recovered again, there could be enough additional depletion that the previous high couldn't be achieved).  Then again, reverse those assumptions - even just a few good months could be enough - and we could exceed the 2008 peak quite easily.

Future Chaos: There Is No "Plan B" - Chris Martenson -This article builds on my recent report Prediction: Things Will Unravel Faster Than You Think.  It explores the coming energy crunch in more detail by looking at existing government planning and awareness, and the implications of what international recognition of peak oil as early as 2012 might mean.The hard news is that there is no "Plan B": the future is likely to be more chaotic than you probably think. This was the primary conclusion I came to after attending the most recent Association for the Study of Peal Oil & Gas (ASPO) in Washington DC in October, 2010. The impact of peak oil on markets, lifestyles, and even national solvency deserves our very highest attention - but, it turns out, some important players seem to be paying no attention at all.

U.S. is no longer the world’s biggest energy user - China is now the world’s largest energy user, overtaking the United States and accounting for nearly half of the world’s [increase in] oil demand, the head of the International Energy Agency said today.“China is now the largest energy consumer by our definition,” said Nobuo Tanaka, executive director of the Paris-based IEA. “Probably half of the oil demand increase comes from China. Nobody knows when it [will] slow down.” Tanaka also said that Iraq, which has increased the size of its proven reserves by 25 percent, would change the oil markets for the better.

China overtakes U.S. as biggest energy consumer - (Reuters) - China has become the world's largest energy user, having overtaken the United States, the head of the International Energy Agency said on Tuesday. "China is now the largest energy consumer by our definition," the executive director of the Paris-based IEA, Nobuo Tanaka, told an industry conference. "Probably half of the oil demand increase comes from China. Nobody knows when it (will) slow down." The IEA advises 28 developed countries. China is not a part of the IEA but the agency monitors the country as its oil demand can have a significant impact on prices. Tanaka said Iraq, which has just revised up its estimates of proven oil reserves by 25 percent, could have a major influence on the oil market.  "Iraq can be a game changer. We need Iraq oil," Tanaka said.

State Palladium Stockpile Nears Depletion - Norilsk Nickel, the world's biggest producer of autocatalyst metal palladium, said Friday that it expected Russian state stocks of the white metal to be "finished" next year. "This year will be the last year when any substantial quantity from this stock has any chance to enter the market," deputy CEO for sales and distribution Viktor Sprogis said at a briefing. "That is why we expect that next year this stock is finished." Officially levels of Russian metals stocks are a state secret.

China Rare Earth Exports Still Stalled - Japanese officials said Tuesday they have not seen any easing of China's de facto ban on exports of rare earth minerals — crucial for advanced manufacturing — despite a thaw in tensions over a territorial row between the two Asian powers. China has denied that it has halted exports of the materials. But Japanese companies have said shipments of rare earths have virtually stopped since around Sept. 21, held up at Chinese ports by increased paperwork and inspections. "The reality is, the situation has not at all returned to normal," trade and industry minister Akihiro Ohata told reporters Tuesday. Ohata said he is considering sending senior trade officials to Beijing for talks if the problem persists. China produces 97 percent of the global supply of rare earths. To cope with growing demand at home, China has been reducing export quotas of rare earths over the past several years, causing concern about the minerals' supply long before September's restrictions to Japan.

China’s Rare-Earth Monopoly - MIT Technology Review - For three weeks, China has blocked shipments of rare-earth minerals to Japan, a move that has boosted the urgency of efforts to break Beijing's control of these minerals. China now produces nearly all of the world's supply of rare earths, which are crucial for a wide range of technologies, including hard drives, solar panels, and motors for hybrid vehicles.  In response to China's dominance in rare-earths production, researchers are developing new materials that could either replace rare-earth minerals or decrease the need for them. But materials and technologies will likely take years to develop, and existing alternatives come with trade-offs. China apparently blocked the Japan shipments in response to a territorial squabble in the South China Sea. Beijing has denied the embargo, yet the lack of supply may soon disrupt manufacturing in Japan,

Japan Scrambles for Rare Earth - Alarmed by China's move to cut shipments of critical metals used by high-tech companies and auto makers, Japan is scrambling to find alternative supplies, particularly by developing new mines abroad. Japanese companies have faced sharp cuts in imports of what are known as rare-earth metals from China since July, a situation that has deteriorated sharply since the two nations became embroiled in a thorny bilateral spat following a ship collision in disputed waters in the East China Sea last month. This has fueled anxieties in Japan, by far the world's largest rare-earth importer, as China has come to dominate the metals' world production with a 97% share, having priced out producers in other nations like the U.S. and Australia in the past two decades.

Chinese Leader Denies Using Mineral Exports for Political Ends— Prime Minister Wen Jiabao of China has told European political and business leaders that China has not imposed any bans on exports of industrial minerals for political purposes, and that it does not intend to stop exports in the future, according to a report on Friday in China Daily.  But rare earth industry executives said that as of Thursday, Chinese customs officials were still refusing to let any rare earth minerals be loaded aboard ships bound for Japan. Rare earths are used in the manufacture of hybrid gasoline-electric cars, computer screens, large wind turbines and many other applications.  Mr. Wen made his remarks in a speech on Wednesday at a China-European Union business meeting in Brussels. Chinese officials have consistently taken the position that they have not imposed any regulations banning rare earth exports; any such regulations could be easily challenged at the World Trade Organization.

China Raises Banks' Deposit-Reserve Ratio by Half a Point, Reuters Reports - China’s central bank unexpectedly and temporarily raised reserve requirements for six large commercial banks, reining in liquidity as the economy stabilizes and money flows in from abroad, according to a Reuters report.  The ratio will increase 50 basis points and for two months, the news agency said, citing four unidentified people. The current level is 17 percent for the biggest banks and 15 percent for smaller ones. Market News cited unidentified traders to the same effect. The People’s Bank of China declined to comment.  Today’s move may signal policy makers’ confidence that the fastest-growing major economy can maintain momentum even as the government seeks to cool the real-estate market to limit asset bubbles. The central bank will continue to focus on quantitative monetary tools instead of raising interest rates, Bank of America-Merrill Lynch said.

That Hissing? A Property Bubble’s Slow Leak - Andy Xie - China's property bubble has peaked. Prices in Tier I cities are unlikely to reclaim the heights seen late last year in places such as Shanghai, or during this year's first half in Beijing and Shenzhen. True, prices in some Tier II and Tier III cities may rise to new highs, mirroring the froth evident on the ChiNext exchange, at a time when China's main board is down 60 percent from peak. But overall a mild bear market for property is settling in. It may last five years. Bottom-line prices will likely fall by half, eventually scraping bottom at an average price per square meter that's equal to about two months average salary. Land prices will fall much farther: Land prices in Zhejiang's hottest market may decline 80 percent.

11 of the world's top 20 wealthiest self-made women are Chinese - Zhang Yin, head of a Chinese recycled paper company, is the wealthiest self-made female entrepreneur in the world.  According to the Hurun List of Self-Made Women Billionaires list, 11 of the top 20 wealthiest self-made women in the world are Chinese. Zhang, 53, founder and chairwoman of the company Nine Dragons Paper, has topped the list with an estimated personal fortune of 5.6 billion dollars, reports the China Daily. Wu Yajun of Longfor Property, comes in second with 4.1 billion dollars and Chen Lihua of Fu Wah International, ranks third with 4 billion dollars. The US talk show host Oprah Winfrey ranked ninth on the list with 2.3 billion dollars in assets and the British author J.K. Rowling placed 20th with a fortune of 1 billion dollars.

Communism! - WHATEVER the official classification of China's politico-economic state, it's pretty clear that private wealth is no bad thing in today's Middle Kingdom. The latest publication of Huran Report's Chinese rich list tells the tale. "Drinks king" Zong Qinghou is China's wealthiest individual, worth $12 billion. According to the report, 95% of those on the rich list earned their money by  focusing on domestic consumption; just 5% are export moguls. It is estimated that just over half of the world's 20 richest self-made women are Chinese. The vast majority of people on the list—over 99%—are self-made. And among China's rich, "rabbits [are the] most popular star sign". But as is often true of emerging markets, inequality is a huge concern. Alongside the more than 1 million Chinese dollar millionaires, there are around 300 million Chinese workers living on $1 or less a day. This is one of the reasons China is concerned about the continued functioning of its job creation machine.

China local governments loan default fears - About two trillion yuan (300 billion dollars) in loans to Chinese local governments are at serious risk of default, an investigation published in state media warned on Thursday. The government probe found that around 26 percent of the 7.66 trillion yuan lent to local authority finance vehicles by the end of June were in danger of going bad, said a report in the official China Securities Journal.  The China Banking Regulatory Commission said in July that authorities would carry out spot checks at commercial banks in the third quarter to ensure banks could cope with potential non-performing loans.

China Faces Risks From Government Debt, Bad Bank Loans - Fitch - China's sovereign credit rating faces risks from high government debt and a potential fall in banks' asset quality from bad loans after the fiscal stimulus measures launched in late 2008, Fitch Ratings analysts said Friday. Local government investment companies in China have large amounts of debt that may put general government debt between 32% and 47% of gross domestic product, and a big portion of the local debt may have repayment-risk issues, said Vincent Ho, an associate director on Fitch Ratings' Asia sovereign ratings desk, during a teleconference. "If this part of the debt really goes sour eventually, it will affect the (non-performing loan) ratio to go up by about 4%-5% of total loans," he said.

China's World-Record Currency Reserves May Hit $2.5 Trillion, Fuel Tension - China’s foreign-exchange reserves, the world’s largest, may have climbed to a record $2.5 trillion, adding fuel to complaints that the nation’s currency intervention is undermining the global economic recovery. Currency holdings rose about $48 billion in the third quarter, according to the median estimate in a Bloomberg News survey of eight economists. That would compare with a $7 billion gain in the previous three months, the smallest increase in 11 years. The central bank may release the number this week. “The massive build-up of the foreign-exchange assets would only give more ammunition to those China critics who call for a rapid appreciation of the yuan,” said Tom Orlik, a Beijing-based analyst for Stone & McCarthy Research Associates, who formerly worked for the U.K. Treasury.

Default Swaps Show Hu Jintao Bond Risk Approaches Treasuries - At a time when governments around the world are facing growing debt, China’s bonds are becoming almost as safe as U.S. Treasuries in the market for insuring against defaults.Five-year credit-default swaps contracts on the nation’s bonds fell 29 percent in the past month, the biggest drop among more than 80 nations, and ended last week at 56 basis points, according to data compiled by CMA and Bloomberg. Default swaps for the U.S. were little changed at 46.China’s bonds have become cheaper to insure than those of the U.K. and France since August as the fastest-growing economy surpassed Japan to become the world’s second-largest. Moody’s Investors Service said last week it may raise China’s debt rating from A1, five levels below the top Aaa grade

China: Surplus Shrinks, Reserves and Credit Grow Amid Speculation on Revaluation - There are four developments in China to note today.  First, China reported that its reserves jumped to $2.65 trillion from $2.45 trillion in June. The almost $200 bln increase is much more than the $7.19 bln in Q2 and the $48 bln in Q1. The reserve growth poses a management problem for Chinese officials and an absorption problem for rest of the world. Second, China reported stronger than expected loan growth of CNY595.5 bln. The consensus had been for a CNY500 bln increase, which would have been the slowest of the year. But the actual report puts it at the highest for Q3 and suggests the loan growth will exceed the target this year. Third, despite the surge in CNY loans, the PBOC’s Zhou was quoted by the news wires indicating that there will be no rate hike in the remainder of the year.  Fourth, China reported a $16.88 bln Sept trade surplus. This was about $1 bln less than expected and a little more than $3 bln less than the Aug surplus. This is the smallest surplus since the March-April holiday distortions. Exports rose to $145 bln from $139.3 bln in Aug (25.1% above year ago levels vs 34.4% in Aug). Imports rose to $128.1 bln from $119.3 in August (24.1% year-over-year vs 35.2% in Aug).

Trade Deficit increases sharply in August - The Census Bureau reports: [T]otal August exports of $153.9 billion and imports of $200.2 billion resulted in a goods and services deficit of $46.3 billion, up from $42.6 billion in July, revised. The first graph shows the monthly U.S. exports and imports in dollars through August 2010. After trade bottomed in the first half of 2009, both imports and exports increased significantly. However in 2010 export growth has slowed, and imports have been increasing much faster than exports.  The second graph shows the U.S. trade deficit, with and without petroleum, through August.The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products. The increase in the deficit in August was due to both oil and China, although the bulk of the increase was because of trade with China. The trade deficit with China increased to $28.0 billion in August from $25.9 billion in July (NSA).

US trade deficit widens sharply to $46.3 billion - Trade deficit widens sharply to $46.3 billion in August as gap with China hits all-time high The U.S. trade deficit widened sharply in August, reflecting a surge in imports of consumer products as businesses restocked their shelves in hopes of a pickup in consumer demand.The politically sensitive deficit with China climbed to an all-time high, a development that was certain to increase pressure on the Obama administration to take a tougher line on trade issues including China's tightly controlled currency. The Commerce Department said Thursday the deficit in August increased 8.8 percent to $46.3 billion. Exports edged up a slight 0.2 percent but this increase was swamped by a 2.1 percent jump in imports.

Currency conflicts come to prominence again - From the mid 1990s onwards, the US trade balance has steadily become bigger. This is a centrepiece of the problem of `global imbalances'. Starting from values of roughly zero, this got all the way to values like $70 billion a month, where the US was importing over $2 billion a day of capital to pay for the trade deficit. Here's the picture:This was termed as the `Bretton Woods II' configuration, where exporting countries like China gave loans to the US, in a form of suppliers' credit, and the US bought Chinese goods. This magnitude of capital import was un-sustainable for the US. Something had to give.Bretton Woods II first broke down in the financial crisis. In the downturn, the mighty American consumer purchased fewer 50" television sets. The US trade deficit dropped nicely all the way to $25 billion per month. In recent months, this movement reversed itself and the US trade deficit once again started getting worse.   A deterioration of $20 billion per month is visible; i.e. a deterioration of $240 billion a year. Suddenly, the story of global imbalances righting themselves came under question. The present US run rate is around $40 billion a month or $0.5 trillion a year.

Exports Surge in China, and Imports Hit a Record Value - China posted a $16.9 billion trade surplus for September, capping the largest quarterly excess since the financial crisis in 2008 as pressure mounts for a stronger renminbi.  Exports rose 25.1 percent compared with a year earlier and imports climbed 24.1 percent, the customs bureau said on its Web site Wednesday. In August, the excess was $20 billion.  Imports rose to a record value of $128.1 billion, limiting the surplus to the smallest in five months, while exports were $145 billion. The quarterly trade excess was about $65.6 billion.  European and United States officials argue that a stronger Chinese currency would aid the global recovery by stoking demand within the nation and reducing international economic imbalances. Currency forwards surged to the highest level in more than two years this week on speculation that Prime Minister Wen Jiabao’s government will yield to foreign pressure.

U.S. to Investigate China’s Clean Energy Aid - The economic tension between the United States and China escalated on Friday, as the Obama administration pledged to investigate Beijing’s subsidies to its growing clean energy industries while delaying a politically volatile report on the Chinese currency. The approach — part carrot, part stick — reflected the delicate balance the administration is trying to strike in a campaign year by taking a newly assertive posture over China’s trade and commercial policies, while pursuing delicate negotiations as an alternative to confrontation.  Hours after the Office of the United States Trade Representative announced an investigation into China’s support for makers of wind and solar energy products, advanced batteries and energy-efficient vehicles, the Treasury Department said it would delay its semiannual report on foreign-exchange rates, which was due Friday, and could be critical of Beijing’s efforts to keep its currency artificially low.

Currency wars: China should impose green taxes on its exports - Vox EU: US and European policymakers have been clamoring about starting a currency war against China to force it to appreciate its currency. Even Paul Krugman, whose economic insights have been so precious in the Great Recession, is loudly supporting the Levin bill giving the Obama administration more power to impose tariffs on Chinese imports. A lesson from the Great Depression was that moves to impose tariffs on one’s competitors spiral into a global trade war that brings international trade into a nosedive and leads to even more global economic misery. Let us, for once, look at the issue calmly from the Chinese side. Exchange-rate policy is in the end not decided by the Chinese Central Bank but by the Politburo. The more they feel bullied into appreciating their currency, the more they will resist such calls. There is a creative solution that would show genuine international leadership on the part of Chinese leaders: start imposing a green tax on Chinese exports

Bashing China and going to currency war is wrong and risky: Former US diplomat –In an interview to DNA, Harrison flags the risk of a currency war, but reasons that blaming China alone – as politicians and policymakers in the US have done – is wrong and risky. Excerpts: There appears to be widespread concern about the undervaluation of the yuan. Is the criticism warranted or are countries ganging up on China?I think it’s warranted; the yuan is undervalued on a purchasing power parity basis. That may have been fine before the crisis, when too it was undervalued, but now it becomes more critical for countries looking to remain competitive in an environment in which there’s slow credit growth, slow aggregate demand. However, the Chinese say they’re looking for some sort of exchange rate stability; they could say that in good times and in bad, the yuan has stuck with the peg to the US dollar. There were times when the dollar was trading high against the euro and the pound, and there are times when it’s been low. But the yuan has been anchored to the dollar. To the degree that other countries outside the US are complaining, it goes back to the US exchange rate. Since the yuan is anchored to the dollar, if the dollar moves, it’s going to move too.

China Currency Bill Could Pass Senate, Baucus Says-- A bill punishing China over the value of the yuan may well pass in the U.S. Senate, with Congress submitting it to President Barack Obama for his signature, Senate Finance Committee Chairman Max Baucus said. “I think it is a very real possibility that a currency bill would pass and be sent to the president,” Baucus told reporters today in Beijing, where he is meeting with government leaders on the issue. “A lot of people think an undervalued renminbi costs jobs, and I conveyed that to the Chinese leadership.” Baucus’ panel has jurisdiction over trade and is due to consider a measure after the November congressional elections that would let U.S. companies petition for duties on imports from China to compensate for the effect of a weak yuan. The U.S. House of Representatives passed a similar measure on Sept. 29. China says the legislation will do nothing to ease the U.S. trade deficit and would hurt global growth.

Low Prices Are a Benefit - Here’s a letter to the Washington Post: You complain about China’s allegedly undervalued currency (“Mr. Wen confesses,” Oct. 10).  Please explain why we Americans should be upset if the Chinese government spends Chinese taxpayer funds to subsidize our consumption of Chinese-made goods. The standard explanation is that China’s cost advantage is ‘unnatural’; it’s the product of government policy.  True – and were I a Chinese citizen I would protest against this wasteful misuse of my resources.  But I’m an American, and so I – and Americans generally – benefit from the largesse that Beijing’s policy bestows upon us.

Puzzling Out China’s Saber Rattling - Yves Smith - Of late, China has become a conundrum to the wider world. Developed economies are troubled by Middle Kingdom’s increasingly aggressive economic stance; neighboring countries are rattled by its recent belligerence. China’s recent use, or as some might characterize it, overuse of force, is a departure from past policies. As the Financial Times notes: “In the last 12 months, they have managed to undermine everything they achieved in the past 12 years around China’s periphery in terms of smoothing diplomatic relations,” says Prof [David] Shambaugh [a China expert at George Washington University].The Financial Times piece,”China: View from the inside” and a Foreign Policy article by Kerry Brown, “The Power Struggle Among China’s Elite” (hat tip reader Don B) both endeavor to shed light on this behavior change. The FT story covers ground that is familiar, in that it rings the changes on issues often presented by Chinese leaders and spokesmen, that of a misunderstood power seeking to claim its rightful place on the world stage. By contrast, the Brown story makes it clear that China is going through a political transition that makes it particularly hard for outsiders to read. And that greatly increases the odds of misunderstanding and miscalculation.

Baker Vs. Scissors: A Debate on China - NYTimes - A goal of our recent series on the Chinese renminbi currency was to give readers — and, frankly, ourselves — a better sense of the different arguments out there. With that in mind, we’ll put a coda on the series today with a back-and-forth debate between two economists on opposite sides of the issue. The two are Derek Scissors of the Heritage Foundation, who thinks the currency issue is overblown, and Dean Baker of the Center for Economic and Policy Research, who thinks a stronger renminbi would be a big help to the American economy. Mr. Scissors had one of the earlier entries in our series, which Mr. Baker responded to. Below, Mr. Scissors responds to Mr. Baker, and the debate continues from there. (They conducted it via e-mail, through me.) They each end with a bottom-line summary that the other did not see before writing his own.

News Analysis - Currency Rift With China Exposes Lost - At a private dinner on Friday at the Canadian Embassy, finance officials from seven world economic powers focused on the most vexing international economic problem facing the Obama administration.   Treasury Secretary Timothy F. Geithner urged his counterparts from Europe, Canada and Japan to help persuade China to let its currency, the renminbi, rise in value — a crucial element in redressing the trade imbalances that are threatening recovery around the world.  But the next afternoon, the annual meetings of the International Monetary Fund ended with a tepid statement that made only fleeting and indirect references to the simmering currency tensions. The divergence between the mounting anxieties over Chinese policy and the cautious official response was a striking display of the difficulty of securing international economic cooperation, two years after the financial crisis began.

Do not overreact to China’s currency delays - Michael Pettis - The angry statements about currency manipulation continue, with anger focused on China’s renminbi. It is not the only country to intervene, but the scale of its action and the size of its trade surplus make it an obvious target. An excessive focus on the renminbi will soon make a bad situation worse, however, especially for China. As Premier Wen Jiabao’s testy statement last week in Europe revealed, for all its growth, China’s economy remains unbalanced and vulnerable to deterioration in its trade account. There are many ways for China to rebalance, although all involve transferring income from producers to households, so the latter can increase their share of consumption. Raising the value of the renminbi increases household income by reducing the cost of imports, although it also lowers the profitability of exports. The result, if done carefully, should nonetheless see the household share of China’s gross domestic product rise, and with it consumption. Since more of what China produces is then consumed domestically, China’s trade surplus should fall too.But what would happen if China raised its currency too quickly, as most of its trading partners want and as Mr Wen warned against? In that case, the profitability of the export sector would decline so quickly that exporters would be forced either into bankruptcy or into lower-wage countries. They would fire workers, who would then consume less. So China faces a choice: rebalance speedily with high unemployment, or slowly with low unemployment.

How would Beijing respond to yuan revaluation? - Most of all the Chinese leadership is worried about maintaining jobs (sound familiar?).  And so: It will lower real interest rates and force credit expansion  This of course will have the effect of unwinding the impact of the renminbi appreciation.  As some Chinese manufacturers (in the tradable goods sector) lose competitiveness because of the rising renminbi, others (in the capital intensive sector) will regain it because of even lower financing costs.  Jobs lost in one sector will be balanced with jobs gained in the other. But there will be a hidden cost to this strategy – perhaps a huge one.  The revaluing renminbi will shift income from exporters to households, as it should, but cheaper financing costs will shift income from households (who provide most of the country’s net savings) to the large companies that have access to bank credit.  So China won’t really rebalance, because this requires a real and permanent increase in the household share of GDP.  Instead what will happen is that it will reduce Chinese overdependence on exports and increase China’s even greater overdependence on investment. This will not benefit China.  It will fuel even more real estate, manufacturing and infrastructure overcapacity without having rebalanced consumption.  Expect, for example, even more ships, steel, and chemicals in a world that really does not want any more.

U.S. is currency war's "tomb maker": China economist (Reuters) - The United States fired the first shot in the currency war and the rest of the world must be on guard for its deliberate strategy to devalue the dollar, a Chinese economist said in an official newspaper on Thursday. In a front-page commentary in the overseas edition of the People's Daily, Li Xiangyang described the United States as the conflict's "first maker of tomb figures," a Chinese idiom that means someone who creates a bad precedent. Li, head of the Asia department at the Chinese Academy of Social Sciences, a top government think tank, said continued intervention in currency markets by developed economies would deal a blow to global economic recovery.

The morality of trade with China - In his latest Post column, Matt Miller even went so far as to question who is more progressive: labor groups seeking to protect American workers or American corporations who creating jobs for millions of Chinese workers. It is a provocative assertion, but one that is wrong both on the particulars and on the larger "moral" lesson we should draw from the past decade. Miller suggests that the main beneficiaries of expanded trade have been workers in China, India, and other developing countries, millions of whom have been lifted out of poverty. In fact, the main beneficiaries have been American-based multinationals and Chinese state corporations. Because productivity has increased so much faster than wages in both the United States and China, corporate profits have soared, as has inequality. In America from 2001 to 2006, profits as a share of output exploded from 6.9 percent to 13.6 percent. Comparing profits directly with wages produces even more worrying results, with profits hitting an all-time peak of 26.8 percent in 2006, as Tony Jackson of the Financial Times points out. The figure today is 25.8 percent, just below its all-time high. Meanwhile real median wages in the United States increased only modestly during this period, and real median family income actually fell.

China's 'Indigenous Innovation' as Protectionism - This post is a neat continuation of the one below. And, it offers a contrasting perspective on the increasing belligerence of China towards Western multinationals. While I think it's an offshoot of the "obsolescing bargain," Adam Segal of the CFR presents a more conventional argument. It's certainly a tempting proposition if you have 1.3 billion people--perhaps not a captive market, but not really quite a true market economy as Chinese officials like to portray it, either. Broadly speaking, the idea behind the article from Foreign Affairs which follows is that since a lot of the value-added activities in global supply chains are still not provided by China--intellectual property, branding (more on this later), and so forth--it will be increasingly difficult to capture value-added if all you can offer are labour and environmental arbitrage opportunities. Not only are the prices of commodities going up worldwide, but wages are too in the PRC. Chinese officials do recognize that, sooner or later, an increasingly affluent middle class will demand a move towards less labour- and energy-intensive forms of production. Or, a greater deployment of "knowledge economy" inputs to create more from less. There comes a time when LDCs need to move up the value-added ladder. However, it is certainly an open question if the Chinese can manage this feat with a lot of what I can only describe as "semi-enlightened central planning."

Martin Wolf: US Victory in Currency War Assured* - It seems the FT's Martin Wolf is continuing a line of argument that began with his book Fixing Global Finance. In it, he ascribes more blame for the global financial crisis on developing countries which do not necessarily subscribe to the whole neoliberal package including unfettered capital flows and more or less market determination of exchange rates. Is it really a North-South conflict over currency practices? For what it's worth, consider that the Japanese are now chiding South Korea and China over currency intervention in the run-up to the Seoul G20. While this strikes me as a bit rich since the BoJ recently went back into the currency markets after being absent for six long years, their authorities dubiously claim that their action was not really meant to influence the USD/JPY level but to temper excess volatility. Well, whatever. Let's now turn to those Americans who are about to drop tonnes of dollars from the skies via renewed helicopter-dropping [1, 2]. Martin Wolf's new argument is a simple one in the context of Guido Mantega's so-called international currency war: You cannot "defeat" the US in this battle since its ammunition is infinite. A lot of dead trees + the printing press = unlimited dollar emissions to overcome the most determined foe of quantitative easing part two

Treasury Sales China's Best Tool Against US Pressure, Researcher Writes - Reducing holdings of Treasuries is China’s most-effective tool for dealing with the U.S., Zhang Monan, a researcher with the State Information Center, wrote in a commentary published in the Securities Times newspaper today. China should ponder how to use its role as the U.S.’s biggest creditor when yuan appreciation is expected to cause the value of its foreign exchange reserves to shrink, Zhang wrote. This role should be used to counter outside pressure, Zhang wrote.  Cutting its holdings of Treasuries is also in China’s long- term interests, Zhang wrote. The State Information Center is a research unit under the National Development and Reform Commission, China’s top economic planning agency.

American Hypocrisy And The Currency War - I usually keep my emotional distance from the issues I discuss on DOTE, but there is so much nonsense about U.S. dollar policy and the coming "currency wars" making the rounds right now that I am actually angry and disgusted. The first issue to be cognizant of—this consideration is paramount—is that many economists and commentators are having exactly the discussion that Tim Geithner (and Paul Krugman) want them to have.It has become fashionable to blame trade relations and international currency valuations for the economic problems of the United States. I first covered this issue in When In Doubt, Blame China. It is not an accident that this discussion is taking place right before the mid-term elections.

All together now? - WITH all the talk of currency wars (which are either impending or ongoing, depending on who you listen to), it was not surprising that the yuan issue was discussed at a panel that was ostensibly on whether to stimulate or consolidate in the present economic climate, held at the IMF on Friday afternoon as part of the Fund's annual meetings. Dominique Strauss-Kahn seemed to be trying to strike a tone of balance on the yuan issue: he repeated (with Zhou Xiaochuan, the governor of the People's Bank of China sitting next to him) that the IMF believed that the yuan remained undervalued, but he also said that "war" was too strong a word. Any sharp moves from China are highly unlikely, as most have long maintained. The PBOC chairman said, as he has many times before, that China was already committed to moving to a market-based exchange rate regime; that it was already reforming its regime; and that reform would continue. The implication, of course, was that it would continue at the rate that China saw fit.

IMF fails to strike deal over currency frictions - The International Monetary Fund on Saturday night failed to reach agreement on tackling mounting global "frictions" over exchange rate policies despite US calls to deal with the issue more forcefully.  The IMF policy committee, which has been struggling to agree a consensus on easing currency tensions among key economies including China and the US, said the organisation should instead keep the issue under watch.  Pressure has been piling on China to speed up the pace of economic reform by dropping its policy of using a weak currency and reserve accumulation to boost exports. Finance ministers at the 187-strong lending agency have accused China of imperilling the global recovery by fostering the imbalances that are preventing deficit countries like the US and UK from returning to economic health.

No deal in Washington – let the currency war begin - Another fruitless IMF meeting, with officials reading out prepared statements; there was no sign of any compromise, as Beijing blames Washington over ultra-loose monetary policy, and Washington demands a renminbi revaluation; Schauble rejects French proposals for global monetary systems reform; Tremonti warns about a return of the speculators; the Spanish marvel at IMF predictions that they will soon overtake Germany again; Yves Mersh said the EFSF should do the bond buying, not the ECB; Wolfgang Munchau says it is wrong for the ECB to contemplate a monetary policy exit at this stage; Jurgen Stark believes it is the right time to exit; Karl Whelan looks at the consequence of the ECB’s threatened withdrawal of liquidity support for weak banks on Ireland; the OECD criticises financial investors for herd behaviour in the European capital markets; King Albert II, meanwhile, has told the separatists NVA that they must return to the negotiating table. [more]

Summary of IMF meeting communique - Global economy: “Economic recovery is proceeding, but remains fragile and uneven across the membership. Faced with this source of potential stress, we underscore our strong commitment to continue working collaboratively to secure strong, sustainable and balanced growth and to refrain from policy actions that would detract from this shared goal. ... The rejection of protectionism in all its forms must remain a key element of our coordinated response to the crisis; renewed efforts are urgently needed to bring the Doha Round to a successful conclusion.” Mandate for international monetary stability: “While the international monetary system has proved resilient, tensions and vulnerabilities remain as a result of widening global imbalances, continued volatile capital flows, exchange rate movements and issues related to the supply and accumulation of official reserves. Given that these issues are critically important for the effective operation of the global economy and the stability of the international monetary system, we call on the Fund to deepen its work in these areas, including in-depth studies to help increase the effectiveness of policies to manage capital flows. We look forward to reviewing further analysis and proposals over the next year.”

Threat of a global currency war - It may not really be a currency war, but even I was surprised by the aggressive language being used by senior American and Chinese officials in Washington last week. Not to mention the head of the IMF. It's been a long time since economic relations between the major powers have been this bad-tempered.  I reported from the "frontline" last Thursday, but here's an "idiot's guide" to the debate over global currencies, which I've just done for the World Service. Coming out of the financial crisis, every country wants to grow as fast it can. That's not the problem. The problem is how.  The United States and Britain have the largest budget deficits in the G20 - which means they're looking at years of cuts. They're looking for exports to pick up the slack, and the best way to boost exports is through a weaker currency.  The problem is that the eurozone wants the same thing. So does Japan. And so does China - even though America and the eurozone think it's time that the Chinese consumer stepped up to the plate.

Finance Leaders Avoid Pressing China on Yuan - — The world’s financial leaders failed on Saturday to reach agreement on how to contain an escalating currency dispute that has threatened to undermine global cooperation on economic recovery.  Despite loud calls from the United States, and more muted appeals by Europe, Japan and other countries, the annual meeting of the International Monetary Fund did not succeed in placing significant pressure on China to allow a prompt and meaningful rise in the value of its currency, the renminbi.  In essence, the topic was deferred until leaders of the Group of 20 economic powers, including President Obama, gather in Seoul, South Korea, in November.  But the leaders here called on the I.M.F. to play a stronger role in monitoring how the policies of each member affect the others — a move the Obama administration supports in the absence of more direct pressure on China to revalue the renminbi.

Yuan Rises to Record as US Pressure for Appreciation Mounts - The yuan rose to the strongest level since 1993 on speculation American lawmakers will step up calls for faster appreciation after the U.S. yesterday said its trade deficit with China widened to a record $28 billion in August. The People’s Bank of China set today’s reference rate for yuan trading at 6.6497 per dollar, the highest since a dollar peg was ended in July 2005, and the currency completed a sixth weekly advance. A twice-annual report by the U.S. Treasury Department about whether China manipulates its exchange rate is due today. “The political pressure is quite strong,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. “It makes both economic and strategic sense for China to allow a strong currency.”

Switzerland hit by currency devaluation race - Switzerland’s hand is becoming increasingly weakened as the global poker game of currency devaluation gathers pace. Swiss exporters are already facing the double whammy of a franc strengthening against the euro and the dollar. And there are signs of more trouble as the United States, China, Japan and other nations signal further currency weakening. Recent weeks have seen a spate of statements from around the world indicating future rounds of quantitative easing – central banks printing more money to stop currencies from appreciating.  China, long criticised for keeping the renminbi low, argued this week that allowing the currency to appreciate would hit manufacturing profits and cause chaos to the economy. The United States Federal Reserve is widely expected next month to flood its market with more printed money. Japan recently ended a six year hiatus on currency intervention and has threatened a repeat trick.

Poland’s Central Bank Governor Belka on Currency Wars - Poland’s central bank governor Marek Belka spoke with The Wall Street Journal on the sidelines of the IMF meetings in Washington, where he offered his views on currency wars, quantitative easing, the zloty and Poland’s eventual entry in the euro zone. The following is a transcript of his remarks. RISKS OF A GLOBAL CURRENCY WAR: “Of course it worries me. All those wars produce a lack of stability, and the warring parties forget the basic point. The bottom line is devaluations and appreciations change your competitive position temporarily but they don’t change your competitive position for good. If you want to strengthen your competitiveness by devaluing your currency, this is a sign of despair, this isn’t a policy. I am worried because this destabilizes the global economy and it does not lead to rebalancing, something we all long for.”

Cut rates to rein in rand, say analysts - In the face of rand strength, there is room for a further 1 percentage point cut in interest rates, according to André Roux, the head of fixed income at Investec Asset Management.  He said on Friday the most effective instrument the Reserve Bank had to contain rand strength was interest rates and he advised a cut in the bank's repo rate to 5 percent, possibly in two phases, at the next meetings of the monetary policy committee (MPC). The MPC cut the repo rate by a half percentage point at its meeting last month, to 6 percent. It will meet again on the 16th and 17th of next month and again early next year.  Like most emerging market and commodity-based economies, South Africa is battling currency strength, which makes local producers relatively less competitive in the face of lower-cost producers in other parts of the world. The Reserve Bank has attempted to reduce the upward pressure on the currency by buying foreign exchange for its reserves. It has also cut the repo rate to historically low levels.

Singapore move hits dollar, India intervenes (Reuters) - Singapore widened the trading band for its currency in response to increasing market volatility and India intervened to temper a rising rupee as foreign exchange tensions persisted ahead of a key G20 meeting. The U.S. dollar, under pressure for weeks on expectations the Federal Reserve will soon print money again to buoy a faltering economy, fell sharply against a range of currencies on Thursday after the surprise move by Singapore. Emerging nations are in a policy bind because of an influx of footloose global capital seeking higher returns than the near-zero interest rates on offer in the developed world, which is driving their currencies up and threatening their exports. In response, several governments have stepped into foreign exchange markets or tried to curb capital inflows, raising fears of a currency "race to the bottom" that may trigger protectionism and hobble global growth.

Russia worried about reserve currency volatility - The rising volatility in reserve currencies is a sign of the global financial system's instability, Russian Deputy Prime Minister Alexei Kudrin, who is also the country's finance minister, said at the fifth Russia - EU Dialog plenary session on financial and macroeconomic policy.  "Unilateral attempts by some countries to control exchange rates in order to even out their balances of payments and stimulate economic growth are of particular concern," Kudrin said. At the same time, the reasons for global imbalances lie not just in currency regulation, he said. "The main reason probably lies in the varied ability by various companies to compete and their varied specializations in one sector or the economy or another," Kudrin said. For this reason, "trade imbalances are primarily structural in nature," Kudrin said.

Inflation Unexpectedly Quickens to 8.62%, Adding to Interest Rate Pressure - India’s inflation unexpectedly accelerated, increasing pressure on the central bank to extend the most aggressive monetary policy tightening in Asia.  The benchmark wholesale-price index rose 8.62 percent in September from a year earlier after an 8.5 percent gain in August, according to a commerce ministry statement in New Delhi today. The median forecast of 25 economists in a Bloomberg News survey was for the gauge to remain unchanged at 8.5 percent.  Prices are rising even after the Reserve Bank of India raised interest rates five times this year and allowed the rupee to be the best performer in Asia in the past month. Governor Duvvuri Subbarao may tighten monetary policy further, in contrast to central banks from Australia to South Korea, which kept borrowing costs unchanged this month to assess the risk of a slowdown in the global economy.

India's Central Bank To Intervene In FX Mkt If Flows Lumpy - Gov--India will intervene in the foreign exchange market if capital inflows become volatile or lumpy, Reserve Bank of India Governor Duvvuri Subbarao said Saturday, in what may be a sign of the central bank's growing concern on a sharp rupee rise. "If the inflows are lumpy and volatile or if they disrupt the macroeconomic situation, we will do so (intervene)," Subbarao said in an address to global central bankers at the International Monetary Fund in Washington, posted on the central bank's website.  "Our intervention will be to keep liquidity conditions consistent with activity in the real economy and to maintain financial stability, and not to stand against developments driven by changing economic fundamentals," he said.

India: Economic power house or poor house? - India’s economic miracle is a perfect example of how appearances can be deceiving. The dominant narrative on the country goes like this: as the fourth largest economy in the world, with a steady annual growth rate of close to 9 per cent, India is a rising economic superstar. Bangalore is the new Silicon Valley. Magazines such as Forbes and Vogue have launched Indian editions. The Mumbai skyline is decorated with posh hotels and international banks. There are numbers to back up this narrative. The average Indian takes home $1,017 (U.S.) a year. Not much, but that’s nearly double the average five years ago and triple the annual income at independence,India is also on the up and up in terms of human well-being. Life expectancy and literacy are steadily rising, while child mortality continues to decline. The poverty rate is down to 42 per cent from 60 per cent in 1981. If we examine these statistics in real numbers, however, a different narrative emerges, one the Indian government likes less.  With a population as big as India’s, 42 per cent means there are some 475 million Indians living on less than $1.25 per day. That’s 10 times as many facing dire poverty as Malawi and Tanzania combined.  It means India is home to more poor people than any other country in the world.

Dollar Weakness Leads Philippines to Consider Diversification of Reserves - The Philippine central bank is considering ways of diversifying its record-high foreign- exchange reserves as the dollar weakens, Governor Amando Tetangco said. “In the face of possible further weakness in the U.S. dollar, the central bank continues to assess investment diversification options,” Tetangco said in an e-mailed reply to questions late yesterday, without elaborating. He didn’t say whether Bangko Sentral ng Pilipinas is considering emerging- market currencies such as China’s yuan.  The nation’s foreign-exchange reserves reached $53.5 billion at the end of September, rising $3.6 billion from the previous month, boosted by government borrowing and the central bank’s dollar purchases to stem gains in the peso. The authorities are building up the reserves to shield the Philippines from any potential risks and to build market confidence, the governor said.

China Seeks to Add Emerging-Market Currencies to Foreign Exchange Reserves – China is moving to add more emerging-market currencies to its foreign-exchange reserves, a strategy central banks around the world are following to diversify their $8.7 trillion in holdings. “We can diversify more the foreign reserves, to consider not only smaller countries, but some emerging-market economies,” central bank Governor Zhou Xiaochuan said at an event during a meeting of the International Monetary Fund in Washington yesterday. With increased assets, “you can shift some to riskier, but higher-return investment instruments,” said Zhou. China almost tripled its holdings of South Korean government bonds to 5.15 trillion won ($4.6 billion) in the first nine months of this year, according to South Korea’s Financial Supervisory Service. Peruvian central bank President Julio Velarde said in an interview in August he is “surprised” to see several monetary authorities buying government bonds denominated in the sol.

Currency race that everyone is trying to lose - For all the talk of global currency wars in recent weeks, central banks have had little success in reining in their rising currencies against the sliding dollar. The overriding theme in currency markets remains one of dollar weakness as investors await an expected extension of the Federal Reserve’s quantitative easing programme at its policy meeting next month. The dollar’s lurch lower – it has dropped more than 6 per cent on a trade-weighted basis since the start of September – has prompted central banks of emerging markets across Asia to intervene more aggressively to stem gains in their currencies to protect exporters. Between September 27 and October 11, central banks in South Korea, Malaysia, Indonesia, Thailand and Taiwan collectively purchased $28.74bn, according to estimates by IFR Markets. Simon Derrick at Bank of New York Mellon estimates that the scale of intervention from these central banks means they have accumulated foreign exchange reserves at between two and six times normal rates in recent weeks. But despite this, the South Korean won has climbed 5.7 per cent against the dollar since the start of September, while the Malaysian ringgit has gained 1.3 per cent and the Thai baht 4.3 per cent. Meanwhile, China has allowed the renminbi to rise by 2 per cent against the dollar since the beginning of last month.

Asia stiffens resolve to resist capital inflow(Reuters) - Thailand slapped a tax on foreign investment in government debt on Tuesday, Japan said it could intervene anew to weaken the yen and China again talked down the prospects of a faster rise in the yuan. After the failure of a weekend International Monetary Fund meeting to defuse escalating foreign exchange tensions, Asian governments are redoubling efforts to resist capital inflows that are boosting their currencies and undercutting the competitiveness of their exporters. Thailand's cabinet agreed to impose a 15 percent withholding tax on capital gains and interest income from foreign investment in government debt in a bid to curb the baht, which is at its highest since the 1997 Asian financial crisis. With the dollar hovering near 15-year lows against the yen, Japan said it would wade into the foreign exchange market again if need be, despite widespread disapproval by its peers of a bout of dollar buying last month. And the People's Bank of China applied the brakes to the yuan by setting a weaker midpoint reference rate for the day's trading, while its foreign exchange arm said currency reform did not equate to yuan appreciation. China's insistence that the yuan's rise must be gradual is a huge obstacle to the appreciation in Asian exchange rates policymakers say is needed to reduce global imbalances.

Brazil urges fiscal measures – elsewhere - Who’s responsible for rebalancing the global economy? The developing countries whose high interest rates are so attractive to foreign investors? Or the advanced economies whose cheap money is driving a rising tide of inflows into emerging markets? As Brazilian finance minister Guido Mantega sees it, the ball is in the developed countries’ court. Fiscal measures are certainly needed to correct global imbalances, he told reporters today in New York. But that means using fiscal stimulus to boost demand in developed economies, not changing Brazil’s fiscal policies to bring down interest rates. “The origin of this problem is the low level of economic activity in developed countries and low level of demand in the markets”, he said, but the expansionist monetary policy undertaken by the US, UK, Japan and their peers has simply devalued their currencies. The further quantitative easing markets are anticipating from the Fed will even further weaken the dollar, the pound and the yen, he added – without driving the economic recovery. “The only tangible effect [of quantitative easing] would be the devaluation of the dollar”, he said.

Thai bond tax: bid to cool hot money | If the currency wars really are on, then emerging markets are facing an ever-worsening bout of the “Impossible Trinity” syndrome, according to a report from Morgan Stanley. The Impossible Trinity are three policies that relate to the currency war: pegged exchange rates, free flows of capital, and independent monetary policy. But they are “impossible” because you can’t have all three at the same time; governments can only choose two. And we’re now seeing these choices play out: on Tuesday Thailand became the latest emerging nation to impose restrictions on capital flows - a tax on foreign bond ownership. As Reuters reports from Bangkok, the Thai government agreed on Tuesday to impose a 15 percent withholding tax - effective Wednesday - on interest and capital gains earned by foreign investors on bonds issued by the government, the central bank and state enterprises.

Bank Of Japan Vows More Action If Needed - Bank of Japan Governor Masaaki Shirakawa repeated on Friday that the central bank is ready to take more easing action if necessary to breathe life into the nation's recovery."In steering monetary policy, we will carefully examine economic and price outlooks and take appropriate steps as a central bank," Shirakawa was quoted as saying in Tokyo. The Japanese central bank recently cut interest rates to virtually zero from an already low 0.1%, and also unveiled plans to buy up assets using a 5 trillion yen fund.

Currency wars – ‘The crisis is upon us’  - We’ve already commented on the rampant descent of the dollar on Thursday. But here’s a scarily convincing argument from Marc Ostwald at Monument Securities about what all these QE-related currency war shenanigans could really be indicating. In one smooth line he suggests “the cracks are getting wider, the crisis is upon us”: Which means currency wars may end up bolstering the vicious circle many of the world’s most prominent economies are already in. Interventionist moves are not going to help — please stop. The imposing result, otherwise, could be something pretty ugly — and just in time for Christmas too.

25 interventions in a one week band, redux - Keeping up with currency wars can be a busy business. It’s time, therefore, to give our already extensive intervention list, originally compiled on September 28, an update. And check out the emerging market entrants. Via BNP Paribas, intervention from Egypt: And a ‘we’re thinking about it’ entry for India: Which takes our list to* :

Currency wars are necessary if all else fails - The overwhelming fact of the global currency system is that America needs a much weaker dollar to bring its economy back into kilter and avoid slow ruin, yet the rest of the world cannot easily handle the consequences of such a wrenching adjustment. There is not enough demand to go around.  Asian investment in plant has run ahead of Western ability to consume. The debt-strapped households of Middle America, or Britain and Spain, can no longer hold up the dysfunctional edifice. Asians must take over, or it will come down on their own heads. The countries actively intervening in exchange markets to suppress their currencies – China, Japan, Korea, Thailand, even Switzerland, to name a few – are all too often the same ones that have the biggest trade surpluses with the US.

Only the Weak Survive - Roubini - Today’s tensions are rooted in paralysis on global rebalancing. Over-spending countries – such as the United States and other “Anglo-Saxon” economies – that were over-leveraged and running current-account deficits now must save more and spend less on domestic demand. To maintain growth, they need a nominal and real depreciation of their currency to reduce their trade deficits. But over-saving countries – such as China, Japan, and Germany – that were running current-account surpluses are resisting their currencies’ nominal appreciation. A higher exchange rate would reduce their current-account surpluses, because they are unable or unwilling to reduce their savings and sustain growth through higher spending on domestic consumption. Within the eurozone, this problem is exacerbated by the fact that Germany, with its large surpluses, can live with a stronger euro, whereas the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) cannot. On the contrary, with their large external deficits, the PIIGS need a sharp depreciation to restore growth as they implement painful fiscal and other structural reforms.

Currency Chaos - Today, every country seems to want to depreciate its currency. Japan has resumed foreign-exchange intervention, and the US Federal Reserve and the Bank of England are preparing another large-scale purchase of government bonds – a measure called “quantitative easing,” which lowers long-term interest rates and indirectly weakens the currency.China is fiercely resisting US and European pressure to accelerate the snail-paced appreciation of the renminbi against the dollar. Emerging-market countries are turning to an array of techniques to discourage capital inflows or sterilize their effect on the exchange rate. Only the eurozone seems to be bucking the trend, as the European Central Bank has allowed a rise in the short-term interest rate. But even the ECB cannot be indifferent to the risks of appreciation, because a strong euro may seriously complicate economic adjustment in countries like Spain, Portugal, Greece, and Ireland

Extreme Measures: Currency/Trade Tensions Rising, Will Action Follow? - Yves Smith - We seem to be getting back to Extreme Measures territory, with the trigger this time the unresolved problem that is politely described as global imbalances. Depending on what your vantage is, you might characterize it as “overspending, overborrowing deficit countries” like the US, Spain, England, Ireland and their compatriots, or you might focus on export powerhouses, in particular China (but also Germany) who take mercantilist stances relative to their trade partners. While their behavior certainly sounds virtuous, any behavior carried too far can and often does lead to undesirable outcomes. In the case of China, it has accumulated the biggest foreign exchange reserves in relationship to GDP of any country in the last 100 years, possibly ever. Its nearest competitors? The US on the eve of the Great Depression, and Japan at the peak of its bubble.  Put it more simply, a country that runs persistent, large trade surpluses drains employment from its current account deficit incurring trade partners. No one minded very much when global growth rates were decently positive. But now that the world economy has taken a big hit and has yet to regain former level of employment, the refusal or perhaps inability of China and other large exporters to change course is putting stress on the international currency and trade architecture.

My thoughts on the 'currency war' - I spoke to the Russian TV broadcaster Russia Today and the popular Indian website DNA India late last week about the escalating rhetoric surrounding the forex market. The video from RT is not available yet but the link to the DNA post is right below. Let me summarize my view.I believe the developed economies are already in a nascent currency war because domestic demand growth is weak in both countries with external surpluses (exporters) as well as those with external deficits (importers and consumers of last resort). The consumption demand weakness in developed markets has led to a zero-sum mentality which is dangerous and which risks escalating. Countries like Switzerland and Japan are attempting to stop their currencies from becoming more overvalued, while the U.S. is attempting to increase its currency’s undervaluation.  The result has been a flood of liquidity in the developed economies. When the Brazilian finance minister voiced concern, it was clear that emerging markets were concerned that the flood of money produced by the developed economies was going to destabilise emerging market economies as well. Policy makers need to take a step back and consider the risks of escalating rhetoric because they will find themselves with a significantly reduced set of policy options if it continues in this fashion.

Currency Wars: The Phantom Financial Menace - For now, the threat of a large scale currency fight is being presented as “minimal” but potentially relevant. In fact, the war has been slowly taking root since at least 2008, right after the initial collapse of the mortgage derivatives bubble when the private Federal Reserve lowered interest rates to near zero and began openly purchasing U.S. Treasury debt. Only this past month has the MSM finally begun discussing the wider implications of these measures, along with the obvious reactions of other nations, including the escalation of trade wars into a full fledged fiat battle royale. But all is not what it seems…As I hope to demonstrate clearly in this article, not only is the currency war threat utterly unnecessary, irrational, and fiscally pointless, it is also completely engineered to serve a purpose beyond the policy directives of any one sovereign nation, and meant to benefit only a small handful of financial elite…

Emerging markets rush turning into secular move - (Reuters) - Investors caught in the middle of simmering global currency tensions are finding little option but to grab anything that is emerging markets as low rates and a falling dollar feed into a rush into high yielding assets. Key finance chiefs meeting in Washington and Seoul over the coming weeks will try to sooth tensions, intensified by Japan's currency intervention, expectations of more money printing in the United States and Brazil's measures to slow capital inflows.But such flows into emerging markets are part of investors fundamentally rebalancing their portfolio, away from low-growth advanced economies into the emerging world which some estimate will generate 85 percent of global growth in the next decade.Emerging markets are still under-represented in global market indices. For example, emerging markets account for $3 trillion, or only 15 percent of market capitalization of the benchmark MSCI world index .MIWD00000PUS. "It's an ultimate paradox at the moment. Investors sitting on a neutral asset allocation are only exposed 15 percent to emerging markets. You're pushing at an open door when you are talking to clients about diversifying out of the West," said Michael Power, global strategist at Investec Asset Management.

A Detailed Look At Global Wealth Distribution - By now it should be common knowledge to everyone that in American society, the top wealthiest 1 percentile controls all the political power, holds half the wealth, and pays what is claimed to be the bulk of the taxes (despite mile wide tax loopholes and Swiss bank accounts). The rest of the population is merely filler, programmed to buy every latest self-cannibalizing iteration of the iPad/Pod while never again paying their mortgage and brainwashed to watch 2 hours of prime time TV commercials to keep it distracted from the fact that the last time America was a democracy was around the time the Wright brothers were arguing the pros and cons of frequent flier programs. So far so good. But what about the rest of the world? How is wealth stratified in a global perspective? Where do the "rich" live? What kind of wealth is controlled by various countries? Where are the Ultra High Net Worth people? For answers to all these questions, and much more, confirming that just like in America, the wealthiest 0.5% control over 35% of world wealth, Credit Suisse has compiled and released its latest "Global Wealth Report." The findings are summarized here.

Why Are China, India and Brazil Rebounding so Fast - Why did China, India and Brazil all emerge so much more rapidly from the global financial crisis  than advanced economies did? In a presentation in Denver to the National Association for Business Economics, Nobel Prize-winning economist Michael Spence, now of New York University, offered several reasons:

  • These economies learned bitter lessons in the 1997-98 crisis that afflicted them more than advanced economies.
  • They were in “a good initial position” with relatively low leverage, and thus didn’t get hit with the severe “balance sheet recession” that hit the U.S.
  • They hadn’t any complex securitized financial instruments.
  • They had built up large foreign-exchange reserves.
  • Their central banks responded, much as advanced countries’ central banks did, with speed and agility to the credit tightening.
  • Their economic managers displayed “a high degree of competence.”

Decoupling is back, with a vengeance - In the early days of the global financial crisis, there was some optimism that developing countries would avoid the downturn that advanced industrial countries experienced. After all, this time it was not they that had engaged in financial excess, and their economic fundamentals looked strong. But these hopes were dashed as international lending dried up and trade collapsed, sending developing countries down the same spiral that industrial nations took.  But international trade and finance have both revived, and now we hear an even more ambitious version of the scenario. Developing countries, it is said, are headed for strong growth, regardless of the doom and gloom that has returned to Europe and the United States. More strikingly, many now expect the developing world to become the growth engine of the global economy. Otaviano Canuto, a World Bank vice president, and his collaborators have just produced a long report that makes the case for this optimistic prognosis. I am of two minds on this. Here is why.

Can developing countries carry the world economy? - In the early days of the global financial crisis, there was some optimism that developing countries would avoid the downturn that advanced industrial countries experienced. After all, this time it was not they that had engaged in financial excess, and their economic fundamentals looked strong. But these hopes were dashed as international lending dried up and trade collapsed, sending developing countries down the same spiral that industrial nations took.  China, in particular, needs to confront the fact that the rest of the world will not allow it to run a huge trade surplus forever. An undervalued currency, which serves to subsidize China’s manufacturing industries, has been a key driver of the country’s economic growth for the last decade. A significant appreciation of the renminbi will reduce or even eliminate that growth subsidy.     Regardless of developing countries’ growth prospects, there is a deeper question. Will a world economy in which developing countries have substantially greater weight foster the kind of global governance that sustains a hospitable economic environment? Emerging-market economies have not yet shown the kind of global leadership that suggests an affirmative answer to this question.

Where the Crisis Has Wreaked the Most Damage - As my colleagues detailed recently, the financial crisis has caused longer-term pain that is expected to last well beyond the confines of the financial panic itself. It has wrought a sort of economic reset, slowing down growth for years to come. Our reporters focused on the United States, but the longer-term scarring is actually far worse outside American borders, according to this paper recently published by the Brookings Institution. The paper’s authors looked at projections for different countries’ growth patterns as estimated in a flagship annual report published by the International Monetary Fund. They were interested in what expectations for growth were around the world before and after the financial crisis. For many countries, for example, the rate of growth in the medium-term outlook is significantly slower than the rate recorded in the period before the crisis hit:

Unsafe as houses - Our interactive overview of global house prices and rents - Is housing the most dangerous asset in the world? Any explanation of the recent financial crisis would have the property boom in America as Exhibit A: according to Robert Shiller, an economist and bubble-spotter, house prices were virtually unchanged in real terms between 1890 and the later 1990s, before almost doubling in the ten years between 1997 and 2006. Because buying a house usually involves taking on lots of debt, the bursting of this kind of bubble hits banks disproportionately hard. Research into financial crises in developed and emerging markets shows a consistent link between house-price cycles and banking busts. The Economist has been publishing data on global house prices since 2002. The interactive tool above enables you to compare nominal and real house prices across 21 markets over time. And to get a sense of whether buying a property is becoming more or less affordable, you can also look at the changing relationships between house prices and rents, and between house prices and incomes.

Who's saving where? An application of the 3 Sector Financial Balances Map - Rebecca Wilder - Dean Baker finds gaping holes in deficit hawk rhetoric using the simple accounting identity that national saving must equal the current account (S-I = CA). If the domestic private-sector's desire to save is positive, then the only way for the public sector (i.e., government) to net save is for the economy as a whole to run a sizable current account surplus. Singapore does just that. Spanning the years 2004-2009, the average current account surplus was near 21% of GDP, which enabled the government to run surpluses near 5% of GDP and the private sector to save 16% of GDP. Singapore is a net-saver in all sectors of the economy: private, public, and international. However, it's Singapore's huge current account surplus that allows the domestic sector to net save, and not all financial balances are created equally. Let's use a slightly different version of Rob Parenteau's 3 Sector Financial Balances Map to illustrate that not all financial balances are created equally

Debt Crisis Will Hit Japan Next, Then US: Historian (CNBC) Europe's sovereign debt crisis isn't over and will continue to spread, first to Japan and then to the U.S., warned renowned Harvard University professor, Niall Ferguson. "There are more of those (sovereign debt crises) to come and, ultimately, it is going to come to Japan and the United States. And those crises of sovereign debt will be the big story," he told CNBC Wednesday. The explosion of public debt will inevitably lead to either inflation or default, Ferguson added. "It just depends on whether you borrow in your own currency in which case is probably going to be inflation; or someone else's, in which case is probably a default."

Subprime Soothsayer Bass Says Japan to Default on Debt as Economy Unravels = Japan will be forced to default on its debt, Greece’s economy is “done” and Iceland is worse off than Greece, said J. Kyle Bass, the head of Dallas-based Hayman Advisors LP who made $500 million in 2007 on the U.S. subprime collapse. Nations around the world will be unable to repay their debt and financial austerity in a country such as Ireland is “too late,” Bass said  Japan’s economy may unravel in the next two to three years, and its interest payments will exceed revenue, he said. “Japan can’t fund itself internally,”

Those are the brakes - YOU might expect the Bank of England to be focused on inflation these days. Almost alone among central banks in the rich world, the Bank of England has been successful in fighting off deflationary pressures so far. The latest data indicate that consumer prices rose at a 3.1% pace in September, marking the seventh consecutive month in which inflation came in above the banks target. But most Bank officials are not particularly worried about rising prices. They see what's looming on the horizon. Their concern? The impact of one of the world's most ambitious programmes of fiscal consolidation. In the space of just a few years, Britain's government is planning to trim its deficit to the tune of 8% or more of GDP. That would be an ambitious, and economically tricky, task at the best of times. Amid continued economic weakness around the rich world, it has the potential to be quite dangerous.

One in three Britons could not survive a week on their savings - Fifteen million Britons could not survive from one weekend until the next on savings, according to research by HSBC. The bank has found that 30% of adults have less than £249 set aside as a financial safety net: 11% have some savings but less than £249, while 19% have no savings at all. Apparently £249 is the equivalent of five days' average take-home pay, though the recommended minimum safety net is three months' pay, which based on the average would be £4,683. Although the flippant side of me wants to know who the 70% with savings are, the personal finance writer side knows this is very worrying.

Dangers of an early exit - In May 2009, the European Central Bank for a final time to 1 per cent but rejected calls to adopt a zero rate policy. At the time, I heard the following explanation: what really mattered for the economy was not the official interest rate but the actual money market rates. And those were close to zero per cent because of the way the ECB operated its liquidity policies. So while official rates were higher than in the US, the real-world difference was not big.  If you accept that argument, then you must conclude that the ECB raised interest rates this month. By phasing out its liquidity policies, the money market interest rates have been creeping back up towards 1 per cent, the official short-term policy rate. So while the US Federal Reserve and the Bank of England are currently considering another round of quantitative easing, the Europeans are not only thinking loud about a monetary policy exit – they have already started.  Is this the right time to leave?

Axel Weber pushes for an increase in European interest rates - Bundesbank presidents demands immediate end to bond purchases, says they have been useless; advocates early monetary exit, while maintaining liquidity support operations (we would advocate the exact opposite); the Fed’s minutes show that board is inclined to accept the argument in favour of further quantitative easing, and is considering a new communication strategy to make this stick; Mike Woodford argues that the Fed needs to set a temporary price level target to raise inflationary expectations; a Frankfurter Allgemeine dreams about an interest rate increase (!) in the US; the Yen reaches a new high, despite the intervention, and Thailand imposes capital controls; French anti-reform protestors achieve massive turnout in the latest strikes; Wolfgang Munchau says global policy co-ordination has turned into a pitiful failure, which will not be corrected before the next big crisis; Martin Wolf, meanwhile, expresses confidence that the US will win the currency wars through a policy of inflation, and forcing capital flows into countries with current account surpluses.  [more]

Banks to fight EU bonus rules - Banks have three weeks to publicly put their case against tough new rules to curb bonuses to Europe's banking watchdogs. The Committee of European Banking Supervisors backed stringent EU plans last Friday to cap the proportion of their bonuses that bankers can take in cash at 30 per cent. It has also recommended other measures such as a minimum bonus deferral period of three to five years, longer for managers, and a provision for clawbacks, especially if the institution is undergoing financial difficulties. The committee has called for further consultation and issued an open invitation to interested parties to present their comments on 29 October. The committee's support for the tough proposals will be a shot across the bow for UK banks which are about to enter the bonus season. The UK regulator, the Financial Services Authority, has taken a softer stance, allowing up to half of the bonuses to be paid in cash.

IMF Considers Extension of Greece's Loan Package, ECB's Bini Smaghi Says - The International Monetary Fund may transform its loan to Greece into a longer-term repayment plan, a move that would allow the country to pay its loan back later without restructuring, European Central Bank Executive Board member Lorenzo Bini Smaghi said.  “The IMF is certainly thinking of these issues,” Bini Smaghi said in a speech in Washington. “There are mechanisms in the IMF to prolong packages.” “There is a standard procedure which has been implemented many ways, in which the IMF transforms short-term programs to longer-term programs” when it sees a country is on track, he later told reporters.

French strikes: 3.5 million take to streets to protest pension reform - More than three million people took to the streets of France in protest at pension reforms, with distant echoes of May 1968 as students and schoolchildren swelled numbers to record highs. In the fourth such protest in a little over a month, unions estimated that 3.5 million people had taken to the streets against President Nicolas Sarkozy's pension bill – a 20 per cent rise from previous marches and what they called an "exceptional" figure. Even the interior ministry conceded that turnout had reached a new high, although gave a more conservative figure of 1,230,000, compared to 997,000 on September 23.

The French: a guide for the perplexed – Today, for the third time in a month, France goes on strike. What for this time? The same as last time—and the time before. They want to prevent the government raising the retirement age from 60 to 62 (if you’ve worked the requisite number of weeks) and from 65 to 67 (if you haven’t). This time, however, the French are striking to prevent something that has already happened. The first two strikes were to stop the proposed reform. But last week, and yesterday, the key clauses went through the Senate. Now nothing can stop the reform becoming law. And the French are still going to strike? Airports, railway stations, schools will all close again. The real issue is whether the schoolkids will come out. Sarko has admitted in private that is his nightmare. Traditionally once the lycéens (15-19 years old) get a taste for the street they can’t be bothered to go back to school. The shadow of 1968 hangs heavy over France. But ordinary people—I mean adults—are willing to lose a day’s pay walking up and down a Boulevard shouting slogans about something that’s already history?

A “one dollar, one vote” explanation of the welfare state -Many economists and other social scientists have tried to explain the rise of the welfare state and to quantify the determinants of social redistribution. The current consensus among researchers is that the pre-tax-and-transfer distribution of income is not a key determinant of the size of the welfare state. This consensus has been formed because various studies have documented a weak link between income inequality and redistribution. Why do Europe and the US, both affluent regions, differ so much in the size of their welfare state? To answer this question, this column examines OECD countries between 1975 and 2001, finding that countries with wealthier rich- and middle-classes are associated with a smaller welfare state while those with a richer poor class are associated with a larger one – supporting the “one dollar, one vote” explanation.

Italy public debt hits new record - Italy's public debt, already one of the highest in the world, hit another record in August after reaching 1.843 trillion euros (2.572 trillion dollars), figures from the Bank of Italy showed on Wednesday. The public debt was at 1.840 trillion euros in July. The August level was 4.69 percent higher on a 12-month comparison. Italy's public debt reached 115.8 percent of gross domestic product (GDP) in 2009 and the government has forecast it will rise to 118.5 percent this year.

A political crisis looms large in Portugal - Opposition threatens to withhold support on the 2011 budget, which would plunge the country into a political crisis; Socrates said he would resign if budget is not pass, thus opening the way for new elections; 10% of Germans said in a poll they wanted a Führer, as anti-immigrant sentiment increases markedly; Germany’s economics institutes are optimistic on a broadly-based recovery, but warn that the crisis did lasting damage to potential output; German newspaper are beginning to wonder what Axel Weber’s outspoken criticism of the ECB’s governing council will do to his chances of succeeding Jean Claude Trichet; Greek bond spreads are falling, while Irish and Portuguese spreads remain elevated at over 4%; Mohamed El Erian says QE now a certainty, the only question is how much, and what goals; Karl Whelan, meanwhile, does the math on the EFSF and concludes that the funding costs will be about 5.7%. [more]

Ireland, Portugal join sovereign risk elite - The latest quarterly sovereign risk report from CMA Datavision is out, and wouldn’t you know — Ireland and Portugal have cracked the top ten of the world’s riskiest sovereigns. Meanwhile, the constituents of the top ten safest sovereigns stayed unchanged, but the US was the worst performer in the group, declining from third to ninth place: In fact, when it comes to Q3 performance, the US is keeping fine company: We probably needn’t mention (but will anyway) that there is still quite a bit of distance between the US and the other names on this list, and that CDS prices aren’t always reliable as predictors of default.

Is Ireland About To Impair Bank Senior Debtholders (And Boldly Go Where America Was So Terrified To Venture)? - The biggest piece of news this evening is, surprisingly, not the latest monsoon season suddenly to hit Manhattan, but comes from a few thousand miles to the East, out of Ireland to be specific, where we learn via the FT that the country "has opened the door to a renegotiation with senior bondholders of its two nationalised banks despite previously opposing any such move for fear of drawing the wrath of creditors around the world." This would be a huge change in strategy, and if effectuated, would mean that Ireland (for lack of an alternative) would be forced to do what the US was terrified of doing when Citi, Fannie and all the other still-bankrupt companies were on the brink. While the US never impaired the senior debt, for fear of enraging creditors (mostly China) who would have experienced their first capital loss on US-debt, it seems the dominoes are about to topple for Ireland as Irish eyes are about to stop smiling and take their bitter medicine, which our own Uncle Sam will avoid until well past the bitter end. Alternatively, this would also mean the end of the strong EUR regime once again, as the ping-ponging burden of proof of solvency shifts once again to Europe

The Irish Mess (III) - The Irish authorities priced the third and apparently final batch of bad loans to be transferred from maimed Irish banks into NAMA, in exchange for some nice, clean, heavily haircut NAMA bonds. Since that announcement, ten days ago, Irish bond yields have dropped a tiny bit (20bps) from their all time highs at the beginning of the month, and it’s time to take stock. The discounts on the toxic loans have got bigger (again), from 47 to 56 to 67 per cent. This partly reflects the difference in loan collateral, partly a growing recognition that development land in overbuilt Ireland really isn’t going to be worth very much at all for a long time. In the name of administrative efficiency, the authorities are leaving 6.6Bn in smaller toxic development loans on the balance sheets of AIB and Bank of Ireland. So, not a complete clean-up then. Expect more writedowns from the banks and (in future years) the possibility of some shortfall confessions from NAMA, which would be embarrassing. So what happens now? With the bulk of the banking confessions now done, it’ll be down to politics and economics for a bit: Ireland has borrowed all it needs up to the middle of next year and the banks are stabilized.

The Belgian mess (III) - Another little escalation of the pressure in Belgium. Via EuroIntelligence: The political situation in Belgium is becoming increasingly dramatic. After negotiations have broke down twice, the king asked for a new round of consultations to find a compromise over institutional reforms, possibly the last chance before organising new elections. Many expect that new elections would nothing but radicalise the positions, Le Monde reports. According to polls, the separatist NVA would get more than 30% of the votes in Flanders.. One suspects, though, that this 30% figure for Flemish separatism doesn’t convey the main point: a more widespread Flemish view that, short of outright separatism, it’s not time to back down from a tough negotiating stance. The Flemish rejoinder to another Walloon suggestion takes a very predictable form: French-speaking socialists now evoked a plan B, where Wallonia and Brussels would form a new Belgium. The Flemish response was that if they want to keep the heritage they can also keep the whole of the Belgian debt. So that’s the Belgian national debt dragged into this increasingly fraught-looking game of chicken. One hopes the players know what they are doing.

A last chance for Belgium - Another election beckons in Belgium unless the warring parties manage to agree a last-minute compromise; polls suggest that the radical separatists would do even better now; Sarkozy met with Draghi last night, and we all wonder what they talked about; Germany rejects an extension of the repayment schedule for Greece; hopes are fading for a global agreement on a resolutions regime for banks; Ewald Nowotny favours global coordination to avoid excessive exchange-rate fluctuations; French unions are planning the forth large-scale strike against pension reform today; the Irish finance minister, meanwhile, is holding out the possibility of a “voluntary” agreement to participate bank bondholders in the bailout costs. [more]

Is Belgium next - For four months Belgium has been without a government, its public debt is approaching 100% of GDP and the spread of Belgian 10-year bonds over the German benchmark is today three times as high as at the beginning of this year. Is Belgium the next country with a sovereign debt crisis?  So far the country has managed to stay off the radar screens of most international investors, who focus on Greece, Ireland, Spain and Portugal. But that may change if the political crisis – which has been going on for more than two years - is not resolved soon. At the June general elections, the separatist NVA emerged as the strongest party in Flanders, while in French-speaking Wallonia, the Socialists came out first. In the ensuing coalition negotiations, the N-VA has chosen to get a federal reform agreed first before building a government, in a complex bargaining process between the seven parties that currently participate in the negotiation talks. The result is a political stalemate that risks paralysing the political system for months.  

Hungary plans to axe 25,000 public sector jobs - report (Reuters) - Hungary plans tough public sector staff cuts in 2011 and may impose taxes on the energy sector to keep its pledge to the European Union to cut its budget deficit below 3 percent of GDP, a local website said on Tuesday. Meeting deficit goals is essential for Hungary to maintain investor confidence and keep EU funds flowing into an economy struggling to return to growth after a deep recession in 2009. The news portal said ministries must cut their staff by five percent next year and some state-run institutions by 10 percent, according to a planning document of the 2011 budget obtained by the portal. The measures could axe up to 25,000 jobs, cut bonuses and lead to tens of thousands more losing their jobs if state funding to local municipalities is curbed, the portal said.

20 years after Berlin Walls falls, Eastern Europe has yet to catch up with world economies - The fall of the Berlin Wall brought broad hopes that the former Soviet and Warsaw Pact states would get the economic equivalent of a full body makeover. But 20 years on, with China in the World Trade Organization, Brazil anchoring growth in Latin America, and countries such as South Korea tapping international investment, Eastern Europe is at risk of becoming an also-ran among the world's emerging markets.  That's something Thomas Mirow is battling to prevent as head of the European Bank for Reconstruction and Development (EBRD), but it is a tough environment. The region, in a sense, is trapped between fast-growing Asia and the laggard pace of the Western European economies next door.

Extreme Opinions: Right-Wing Attitudes On the Rise in Germany – SPIEGEL - A new study has revealed that far-right attitudes are deeply rooted in German society. One-third of Germans would send foreigners home if there weren't enough jobs, while one-sixth think Jews have too much influence.  "Germany is in serious danger of being overrun by foreigners." It's a sentence one would expect to find on an election poster for Germany's far-right NPD party. As it happens, it's a view that is held by over one-third of the German population -- a new survey has revealed that 35.6 percent of Germans agree with the statement. Additionally, more than 30 percent think that "foreigners come to take advantage of the welfare state" and that when jobs are scarce foreigners should be sent "back to their own country." More than one-tenth would like a "Führer" -- the survey deliberately used the German word for "leader" that is associated with Adolf Hitler -- who would govern the country "with a firm hand" for the benefit of all.

Italy’s crackdown on Gypsies reflects rising anti-immigrant tide in Europe  - MILAN - This venerable city, long known for savory saffron risotto and the leggy models of Fashion Week, is moving to establish itself as something else: a zero-tolerance zone for Gypsies.  Anti-Gypsy campaigns in neighboring France have sparked international criticism, with officials there in recent months deporting more than 1,000 ethnic Roma - a clannish people migrating west in large numbers from Eastern Europe. But with great bravado, Milan is taking the lead in responding to Italy's own "Gypsy Emergency."  Blaming rising crime on the new waves of Roma immigrants, authorities are moving to dismantle Milan's largest authorized Gypsy camp, Triboniano, a teeming shantytown of street musicians and day laborers that officials decry as a den of thieves. At the same time, Milan is bulldozing hundreds of small, impromptu camps inhabited by newer arrivals and issuing mass eviction notices to Roma families living in another long-established camp in the city's largest immigrant neighborhood.  "These are dark-skinned people, not Europeans like you and me,"

ECB Prints 500-Page Book in Defense of Monetary Pillar - The European Central Bank Thursday — in a book that has almost 500 pages — staunchly defended the role of money in its conduct of monetary policy, arguing it provides valuable signals of risks to price stability. The ECB has been widely criticized by academics for its fixation with monetary aggregates as other central banks, like the U.S. Federal Reserve, no longer target and seldom mention monetary aggregates in their deliberations. Economists see “no compelling reason” to assign a prominent role to money in the conduct of monetary policy. But the ECB is adamant in its defense. “The monetary analysis can and does provide concrete, relevant input into our monetary policy decisions,” it said in a book summarizing the results of three-years of research.

Democracy or Autocracy: Which is Better for Economic Growth? - The Economist in its October 2-8 issue has a cover page with the title: “How India’s growth will outpace China’s”. One of the main reasons they give for this claim in their leader on this topic is that India is democratic while China is autocratic. The other is that India has higher birth rates, and hence a younger population. Both arguments can be questioned, although I concentrate my discussion on whether democracies favor economic growth. Visionary leaders can accomplish more in autocratic than democratic governments because they need not heed legislative, judicial, or media constraints in promoting their agenda. In the late 1970s, Deng Xiaoping made the decision to open communist China to private incentives in agriculture, and in a remarkably short time farm output increased dramatically. Autocratic rulers in Taiwan, South Korea, Singapore, and Chile produced similar quick turnabouts in their economies by making radical changes that usually involved a greater role for the private sector and private business. Of course, the other side of autocratic rule is that badly misguided strong leaders can cause major damage.

S&P: 60% of countries will be bankrupt within 50 years - Predicts US will have a debt of 415% of GDP by 2050 - Some sixty percent of the world's economies will be so in debt by 2060 that their debt will be downgraded to "junk" status, effectively bankrupting the countries, says a report from Standard & Poor's ratings agency, which also warns that attempts to deal with the problem could cause social instability. The report (PDF) -- entitled Global Aging 2010: An Irreversible Truth -- says that the proportion of the world's population that is elderly is set to explode to such a degree that many countries will simply not be able to keep up with the ballooning costs of health care and other services. As elderly people live longer, due to better health care, the proportion of elderly to the rest of the population grows, meaning an ever shrinking proportion of working people is relied upon to fund services for the elderly.

Manifesto of the appalled economists - Introduction: The world economic recovery, permitted by a massive injection of public spending into the economy (from the United States to China), is fragile but real. One continent lags behind, Europe. Finding again the path of growth is no longer its priority policy. Europe has embarked on another path : the fight against public deficits.  In the European Union, these deficits are certainly high - 7% on average in 2010 - but this is much less than the 11% in the United States. While American states whose economic weight is greater than Greece’s, such as California, are virtually bankrupt, financial markets have decided to speculate on the sovereign debt of European countries, especially those of the South. Europe is in fact caught in its own institutional trap : states must borrow from private financial institutions, which obtain cheap cash from the European Central Bank. As a consequence, the markets hold the key to the funding of the states. In this context, the lack of European solidarity gives rise to speculation, all the more so when the rating agencies’ game accentuates the mistrust.

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