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

Saturday, October 23, 2010

week ending Oct 23

US Fed Total Discount Window Borrowings Wed $48.28 Billion - The U.S. Federal Reserve's balance sheet contracted slightly in the latest week as its Treasury securities holdings increased.The Fed's asset holdings in the week ended Oct. 20 dipped to $2.308 trillion from $2.313 trillion a week earlier, the Fed said in a report released Thursday. Total discount window borrowing slid to $48.28 billion on Wednesday from $ 49.34 billion a week earlier. Meanwhile, borrowing by commercial banks through the Fed's discount window fell to $20 million on Wednesday from $47 million a week earlier. U.S. government securities held in custody on behalf of foreign official accounts climbed to $3.282 trillion from $3.266 trillion in the previous week. Treasurys held in custody on behalf of foreign official accounts as of Wednesday rose to $2.549 trillion from $2.531 trillion in the previous week. Holdings of agency securities fell to $732.95 billion from the prior week's $ 735.10 billion.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--October 21, 2010 

Officials Hint Fed on the Verge of More Easing -(Reuters) - A string of Federal Reserve officials on Tuesday indicated the central bank will soon offer further monetary stimulus to the economy, with one saying $100 billion a month in bond buys may be appropriate. While internal differences on the unconventional policy are still evident, the consensus view at the Fed appears to be that the economy is weak enough to warrant further support, most likely through increased purchases of Treasury debt. The U.S. economy is expected to have grown just 1.9 percent in the third quarter, a level considered too low to bring down unemployment. The debt purchases would help lower long-term interest rates in the hope of boosting demand. Investors, who are parsing any and all Fed communication for clues on the central bank's next move, heard from a flurry of Fed officials on Tuesday.

Fed Presidents Reinforce Case for Additional Asset Purchases - Three Federal Reserve regional presidents reinforced the idea that policy makers will start a second round of unconventional monetary stimulus, with two saying asset purchases must be big enough to aid the economy. Chicago Fed President Charles Evans said the central bank would need to buy securities on a large scale several times to carry out his preferred strategy of aiming to raise inflation temporarily. Atlanta Fed President Dennis Lockhart said in a CNBC interview that a pace of $100 billion of purchases a month is “in the range of numbers one might consider.”  Separately, William Dudley, New York Fed president and vice chairman of the central bank’s policy-setting Open Market Committee, said his Oct. 1 assertion that officials will probably need to add stimulus “still stands.” While Evans and Lockhart don’t have FOMC votes this year, all three presidents have aligned in prior decisions with Fed Chairman Ben S. Bernanke, who said Oct. 15 that that there appears to be a “case for further action.”

Fed's Kocherlakota: Hard To Assess Whether More QE Is The Right Move -(Dow Jones)- More bond buying would have a muted effect on rates, said Federal Reserve Bank of Minneapolis President Narayana Kocherlakota Tuesday, noting that it is difficult to assess whether more buying is the right move as the effects are hard to pinpoint. Quantitative easing is "a way for the FOMC to signal--in a perhaps more striking way--that it plans to keep the fed funds rate low for an even longer time to come," he said. More buying, however, would likely have a more muted effect on rates than the Fed's first buying program, as financial markets are functioning much better in late 2010 and spreads are lower. Theoretically, another round of quantitative easing, or QE, would signal the Fed plans to keep rates low for an even longer time to come, and give banks new reason to create money. It also would reduce the exposure of the private sector to interest rate risk--with lower rates sparking businesses to expand and hire-- and shift risk from bondholders to taxpayers. In reality though, the impact of more buying is unclear.

Fed's Evans-inflation target is communication tool (Reuters) - Targeting higher inflation is one way the U.S. Federal Reserve can communicate to markets that interest rates will stay low for a long time, a top Fed official said on Tuesday. If the Fed were to adopt 'price-level targeting', "We would continue to be accommodative for not only an extended period but until those prices moved up," Chicago Fed President Charles Evans said after a speech. Evans said the Fed could buy assets to push inflation up temporarily, and doing so should help boost the economy. "Just getting back up to 2 percent (inflation) and making up for under-runs would increase the opportunity cost of holding cash" and could spur lending, he said. "I think this could be helpful, I think we should talk about it."

Fed Pursuing the Right Strategy - Jim Hamilton points to a slide from Charles Evan’s presentation that does exactly what I hoped. It shows how price-level targeting would map on to the usual inflation rate speak that Bankers and CFOs are used to. It shows in the blue bars what market participants would expect. A gradual return to the target.It shows in red bars what “price level targeting means for them” that is an inflation rate that temporarily overshoots before settling back down to the target.This is the kind of thing that people can understand and it helps clear up what’s going on. Its not some wild new regime that they cannot predict. It is a temporary deviation that leaves the long-run target intact. I especially like how the two bars line up in 2014, giving a clear expectation of when the traditional world and when this new strategy will converge.  Of course, any policy explanation – and I am assuming the official channel for something this complex has to be the Fed minutes – needs to include a “revised as data becomes available” clause and regular updates on where we are in the process.

An Unusual But Interesting Argument Which May Help To Understand Why QE2 Is Now Almost Inevitable - For reasons which aren’t worth going into now, I’m reading through a recent report by Deutsche Bank Global Markets Research entitled “From The Golden To The Grey Age” this afternoon. The report (all 100 pages of it, many thanks to researchers Jim Reid and Nick Burns who produced the thing) looks at the extent to which a variety of macro indicators – like GDP growth, inflation rate, equity yields, etc – may have been influenced by demographic forces over the last 100 years or so. It is certainly one of the most systematic reports of its kind I have seen, and well worth losing a Saturday afternoon to read. But in the middle, there is an argument which caught my eye, and I thought it worth reproducing. Basically the starting point is this chart, which if you haven’t seen by now (or something like it) I’m not sure where exactly you’ve been during the last 2 or 3 years.

Has the Fed Painted Itself Into a Corner? - Yves Smith - A couple of articles in the Wall Street Journal, reporting on a conference at the Boston Fed, indicates that some people at the Fed may recognize that the central bank has boxed itself in more than a tad. The first is on the question of whether the Fed is in a liquidity trap. A lot of people, based on the experience of Japan, argued that resolving and restructuring bad loans was a necessary to avoid a protracted economic malaise after a severe financial crisis. But the Fed has consistently clung to the myth that the financial meltdown of 2007-2008 was a liquidity, not a solvency crisis. So rather than throw its weight behind real financial reform and cleaning up bank balance sheets (which would require admitting the obvious, that its policies prior to the crisis were badly flawed), it instead has treated liquidity as the solution to any and every problem. Some commentators were concerned when the Fed lowered policy rates below 2%, but there we so many other experiments implemented during the acute phases that this particular shift has been pretty much overlooked. But overly low rates leaves the Fed nowhere to go if demand continues to be slack, as it is now.

The Unbearable Slowness of Understanding - Krugman - OK, I’m about to be unfair. But this article about how the Fed is gradually coming to realize that low inflation and a liquidity trap might be a problem fills me with despair.  I mean, we’ve been there for two years:  It was obvious to me, soon after Lehman fell that we were well on our way to a lost decade unless decisive action was taken quickly. Yet we’ve spent most of the last two years worried about the wrong things — inflation, crowding out, invisible bond vigilantes. Even now, we get things like this: Many economists remain confident that the United States will avoid the stagnation of Japan, largely because of the greater responsiveness of the American political system and Americans’ greater tolerance for capitalism’s creative destruction...There are multiple things wrong with that paragraph — but what on earth would give one reason to consider our political system “responsive”? The truth is that we’re responding worse than Japan did. And yes, I’m depressed about it.

Through the looking glass again - I’ve been catching up on my reading and dear Bento, if anyone tells you they have a clear view on what is going to happen to the econo-world from here, walk away briskly. As Ed Hyman of ISI* puts it, with the now imminent onset of QE2 we are in “scary times”, a world of “unintended consequences”. The only intellectually honest position to take at this point, it seems, is to admit we haven’t a clue. Personally I, Baruch, am getting really confused. My default setting is that we will muddle through and everything will be OK. But the cone of potential outcomes that surround that base case is now as loose and flappy as a wizard’s sleeve. Where to start? Well, here’s a list of the factors that I think are going to make us move, in the form of a dialog in Baruch’s head. None or all of them could dominate. Maybe some are already priced in. Some of them I hope are  made up and will go away. There’s nothing particularly original here I admit, but I want, at this juncture, to sum up where we may be. Baruch’s future self might find it interesting. Here goes:

Degrees of Monetary Skepticism - I think going forward there’s a need for more clarity between people who are “skeptical” in the sense of “skeptical that monetary policymakers will in fact do what’s necessary” (this is the view of Atrios, Goldman Sachs’ Jan Hatzius, etc.) and “skeptical” in the sense of “skeptical that monetary measures can be made to work” which I believe is the view of Mark Thoma and Dean Baker and others. This is important, among other things, because a lack of clarity on these points sometimes confuses people about what happened in Japan. I heard from some readers, for example, that the Bank of Japan spent a lot of time trying to create inflation and failed. That’s not really what happened. Instead, the Bank of Japan spent a fair amount of time trying to fight deflation and had limited but real success

Delong and Thoma Do Not Like the Communications Vehicle - 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? It’s a very different animal we have today. And it is also not the time to talk about how monetary policy can be carried out via the Federal Reserve’s communications strategy.Thoma:As I said many times, I don’t expect any of these [expectations related channels] to have particularly powerful effects, they create incentives for businesses and consumers to increase spending, but there’s no guarantee that they will act on those incentives given the negative outlook for the economy.  Mark is more clear, however, I am not exactly sure why Brad is so down on the communication or commitment strategy as I would call it. Lets think about an extreme case of the Fed committing to zero interest rates for 10 years.  I expect that Brad would agree that this would cause the yield on the 10 year Treasury to collapse to roughly zero.

A "Watershed Event" for Bernanke: The Fed Is "Pushing Water with a Fork," Harrison Says (Tech Ticker Video) When he declared "inflation is running at rates that are too low" last week, Federal Reserve chairman Ben Bernanke did a lot more than just pave the way for more quantitative easing, says Todd Harrison, CEO of  The Fed chairman's use of the "d-word" (deflation) is "an admission of defeat" by the central banker, Harrison says. "It's a watershed event." Bernanke's dovish tone was notable (even for him): "A modestly positive inflation rate also reduces the probability that the economy could fall into deflation, which under some circumstances can lead to significant economic problems," he said in a speech at the Boston Fed. But whether it proves to be a "watershed event" remains to be seen. Thus far, the financial markets have taken Bernanke's speech with a grain of salt and a dash of optimism about prospects for QE2.

Bernanke Let Down? - Much of the econo-sphere seems displeased with Bernanke’s speech at the Boston Fed. Brad Delong sees it as very bad. David Beckworth is disappointed. Krugman sees a central bank that is still turning Japanese.Perhaps I am giving the FOMC too much credit. It wouldn’t be the first time. Still, while I would have preferred a little more punch, the Fed rightfully takes time to lay the groundwork for big moves. It needs to make sure that market participants carefully absorb what the Fed is trying to do. Bernanke, doubtlessly, still remembers the volatility induced by side comments to Maria Bartiromo in 2006. Remember also the vast array of opinions which are subsumed under the headline “market participants.” Lets take a sample.

“QE 2” or “Ben’s Titanic”? - Federal Reserve Chairman Ben Bernanke seems to want desperately to prove Warren Buffett wrong. He is, in fact, betting the U.S. economy on it. Bernanke, as all the financial world knows, is pushing the Fed into a multi-billion dollar buying spree of Treasury securities at a time when Treasury securities are at all-time record high prices. Here’s how he justified it this past Friday: -- 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,” Ben’s theory is that the Fed can drive the price of Treasury securities even higher than the market has, on its own, priced them; that this, in turn, will cause the interest rate on those securities to drop (even further than interest rates have already dropped); and that this, in turn, will somehow prompt companies to start hiring again.

Handoff, or fumble? - In a much-anticipated speech on Friday, Fed Chairman Ben Bernanke invoked a favorite metaphor of economists to describe the current, critical period in the recovery. Now is the moment, he said, that a “handoff” must occur between temporary boosts to growth, like government stimulus, and more lasting drivers, like spending by consumers and businesses. Bernanke stressed that the handoff was underway, but he conceded that “growth has been proceeding at a pace that is less vigorous than we would like.” The particular source of his anxiety was consumer spending, which the chairman worried was flagging amid high unemployment, sideways home prices, and the debt we all took home from the recent subprime party. It comes as no surprise that consumers would weigh on the Fed chairman, of course. While it’s certainly possible for the economy to grow without consumers pitching in, it’s much, much easier when they do. Because consumer spending accounts for about 70 percent of GDP, a 2 percent increase raises GDP growth by almost 1.5 percentage points. By contrast, it would take a roughly 10 percent increase in investment—spending on things like factories, equipment, and new-home construction—to boost GDP growth by roughly the same amount, because investment only accounts for about 14 percent of GDP.

Noam Scheiber on Richard Koo’s Balance Sheet Recessions - Noam Scheiber has a fantastic piece this morning, Handoff, or Fumble?, which is about the handoff “between temporary boosts to growth, like government stimulus, and more lasting drivers, like spending by consumers and businesses”, a handoff that needs to occur in order for even feeble growth to take off. Administration economists believe such a handoff, weak as it may be, will take off due to consumer spending.  The other side in this argument is the idea of a “balance-sheet recession”, which is primarily associated with Richard Koo. In this side’s mind historical data won’t be of much use to us because the nature of this recession is different. This article by Noam is a great introduction to Koo’s thinking: The question—really more like a nagging terror—is whether something has happened since the recent financial crisis to fundamentally change the way consumers behave, rendering the administration’s model moot. As it happens, there’s a school of wonks that worries this is the case. The godfather of this group is a Japanese economist named Richard Koo, whose framework for thinking about this appears in a book he modestly titled The Holy Grail of Macroeconomics. (Paul Krugman, among others, has identified himself with some of Koo’s ideas.)

The Challenges of Monetary Policy in Today's Economy - Key Points of Speech - Lockhart sees the prospect of continued slow but gradually accelerating economic growth, with quite low but stable inflation and a positive but frustrating pace of job creation. He believes that the possibility of deflation cannot be completely dismissed, although deflation is by no means his base case expectation.  Lockhart thinks that there is scope, at the margin, for further monetary stimulus to boost demand growth and reduce unemployment. Therefore, he is sympathetic to more monetary stimulus in the near future and views additional quantitative easing as a form of risk management. He will factor in the deliberations of the FOMC before arriving at a final view. Lockhart is open to the adoption of a more explicit inflation objective as a further step to ensure the anchoring of public expectations about long-term inflation and the response of the FOMC to adverse price developments

Fed's Lockhart: QE2 is an "insurance policy" against further disinflation - Another U.S. central bank official is giving support to the Federal Reserve embarking on a program of asset buying to help spur growth in a moribund U.S. economy. “I am leaning in favor of additional monetary stimulus while acknowledging the longer-term risks the policy may present,” Federal Reserve Bank of Atlanta President Dennis Lockhart said in the text of a speech to be delivered Monday. Lockhart isn’t currently a voting member of the rate-setting Federal Open Market Committee. “At this juncture, and given the circumstances of sluggish growth and measured inflation that is too low, I give greater weight to the risk of further disinflation leading to deflation,” the official said. Buying long-term assets “is a form of risk management — an insurance policy that is prudent to put in place at this time.”

Fed's Lockhart: Quantitative easing must be big (Reuters) - Atlanta Federal Reserve Bank President Dennis Lockhart said on Tuesday that further easing by the Fed has to be large enough to help boost demand, and purchases of $100 billion of securities a month would be a possibility. "If we're going to pursue another round of quantitative easing, it has to be a large enough number to make a difference," Lockhart said in an interview on CNBC."As a monthly number ($100 billion) is fairly consistent with what we did before, and so I think it would certainly be in the range of numbers one might consider ... but if you were talking about $100 billion as simply the overall program, I think that's too small," he said.Most analysts expect the Fed to announce another round of large-scale asset purchases at its next policy meeting scheduled for November 2-3, and expect buying of around $500 billion overall. Lockhart said he is leaning toward providing further help to the weak recovery.

Fed's Bullard could back easing in $100 bln steps (Reuters) - St. Louis Federal Reserve President James Bullard said on Thursday he would favor Fed purchases of Treasury securities in $100 billion increments one Fed meeting at a time if the U.S. central bank decides monetary easing is necessary. "If we do decide to go ahead with quantitative easing ... we could think in units of about $100 billion," he said."And then I think we could give forward guidance for the next meeting that would suggest how likely the committee thinks it is to continue these purchases," he added. Bullard's comments add to those of other Fed officials whose remarks suggest the U.S. central bank is on the cusp of pumping more money into the economy to support a flagging recovery.

Will Fed Buy Treasuries for an Extended Period? - One hundred billion here, one hundred billion there. Pretty soon we're talking real money. It may not be "shock and awe" at first blush, but the ultimate sums involved in a second, widely anticipated program of Treasury bond buying from the Federal Reserve could ultimately rival the hefty first round of asset purchases. With expectations of at least $500 billion already built into financial markets, the Fed may try to counter possible disappointment by making its commitment open ended. It will likely do so by setting parameters vague enough to convince the markets that, like its promise to keeping interest rates low, the second round of so-called quantitative easing will be around for an "extended period" if needed. The rationale for further monetary accommodation has been laid out by Chairman Ben Bernanke, whose views on policy carry the day at the Federal Open Market Committee.

How To Think About QE2 (Wonkish) Paul Krugman - QE2 amounts to a decision by the US government to shorten the maturity of its outstanding debt, paying off long-term bonds while borrowing short-term. This should drive down long-term interest rates. But how much?How do we get to this view? Think first of the Fed’s balance sheet. The Fed’s liabilities are the monetary base — currency in circulation, plus bank reserves. Those bank reserves are essentially short-term borrowing: the Fed pays a small interest rate on them, which is comparable to the interest rate on Treasury bills. More broadly, in a near-zero-rate world, cash — an official liability that pays no interest — is essentially equivalent to T-bills — another official liability that pays more or less no interest.\What happens when the Fed buys long-term government securities? If we consider the Fed and Treasury as a consolidated entity — which, for fiscal purposes, they are — then what happens is that some long-term federal debt is taken off the market, and paid for by issuing more short-term debt in the form of monetary base. It’s just as if Treasury sold 3-month T-bills and used the proceeds to buy back 10-year bonds.So the question to ask is, how much do we think federal management of its maturity structure matters for the real economy? I think if you put it that way, most people wouldn’t be terribly optimistic.

Bernanke needs to send a stimulating message - In a recent speechat the Federal Reserve Bank of Boston, Bernankemade perfectly clear that the central bank is tired of watching the economy stagnate. "With an actual unemployment rate of nearly 10 percent," he said, "unemployment is clearly too high" - and, yes, the italics are in his prepared text. So the Federal Reserve is likely to begin purchasing Treasury bonds - "quantitative easing," it's called - in an effort to lower interest rates and spur the economy. They did this in 2009, and to great effect.  But the Federal Reserve can't go it alone. No one gets a job when the central bank buys a bond. It's only when the Fed's decision to buy a bond persuades some other economic actor to spend money that hiring ticks up. And thus far, that's not been happening. Banks and corporations have simply been stockpiling their cash, waiting for a recovery that, paradoxically, won't take hold until they start lending and spending again.  "I'm worried," says Alan Blinder, a former vice chairman of the Federal Reserve's Board of Governors. "I'm quite convinced that it'll be a lot less effective than the first time we did this, and that makes me worried that it won't be very effective."

Fed’s Fisher: Outcome of Coming Meeting Is Not Settled - Wall Street may think otherwise, but it is not yet a settled matter the Federal Reserve will provide additional support to a weak economy, a U.S. central bank official said Tuesday. “The outcome of the next [Federal Open Market Committee meeting] is yet to be determined,” Federal Reserve Bank of Dallas President Richard Fisher said in the text of a speech. Speaking to a group of New York economists, he said “you should bear this in mind given the recent speculation about the prospect for further quantitative easing or the shape and nature of forward policy guidance: no decisions have been made on these fronts and will not be made until the committee concludes its deliberations at its next meeting on Nov. 3.”

The X Factor of Economics: People - Economists — they certainly are a contentious bunch.  The latest evidence came last week, in the form of the minutes of the latest meeting of the Federal Open Market Committee, the brain trust that establishes monetary policy. The committee, we learned, is divided on a seemingly straightforward question: Should the Fed take action to goose the economy now, or wait, watch and perhaps goose later? Let’s leave aside the merits of these arguments and ask a question so basic it will sound naïve: Why do economists argue at all? Given that Fed members and economists are looking at the same data, and given the reams of evidence accumulated over decades — not to mention a few centuries of great minds, great theories and thick books that preceded this crisis — why isn’t a right answer self-evident?

Will the Federal Reserve Cause a Civil War? - What is the most likely cause today of civil unrest? Immigration. Gay Marriage. Abortion. The Results of Election Day. The Mosque at Ground Zero. Nope. Try the Federal Reserve. November 3rd is when the Federal Reserve's next policy committee meeting ends, and if you thought this was just another boring money meeting you would be wrong. It could be the most important meeting in Fed history, maybe. The US central bank is expected to announce its next move to boost the faltering economic recovery. To say there has been considerable debate and anxiety among Fed watchers about what the central bank should do would be an understatement. Chairman Ben Bernanke has indicated in recent speeches that the central bank plans to try to drive down already low-interest rates by buying up long-term bonds. A number of people both inside the Fed and out believe this is the wrong move. But one website seems to believe that Ben's plan might actually lead to armed conflict. Last week, the blog, Zerohedge wrote, paraphrasing a top economic forecaster David Rosenberg, that it believed the Fed's plan is not only moronic, but "positions US society one step closer to civil war if not worse."

Fed Economist Says It Should Build Up Capital - A senior Federal Reserve economist says the Fed should be setting aside more of its immense profits as a safeguard against future potential losses.“The Fed is earning and turning over to the Treasury an enormous amount,” James McAndews, co-head of research at the Federal Reserve Bank of New York, said during a panel discussion at the Boston Fed’s monetary policy conference. “There is a case that of these extraordinary earnings today, some portion of those could be set aside.” Through Oct. 13, the Fed had handed $60 billion in profits to the Treasury, up from $27 billion during the same stretch last year. The Fed’s holdings have expanded from about $900 billion before the financial crisis to more than $2.3 trillion today. For now, the Fed is raking in profits on those holdings, which consists largely of Treasury bonds and mortgage backed securities. It turns the bulk of its profits over to the U.S. Treasury.

Parroting Supply and Demand: Department of "Huh?!" - Myron Scholes appears not to understand the basics of supply and demand: Myron Scholes on Whether QE2 Will Work: Myron Scholes, the Nobel Prize-winning retired Stanford University finance economist, contemplates the prospects for another round of Federal Reserve quantitative easing, and wonders if it’ll work as well as the Fed hopes: 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. The risk premium can’t be affected by flows. Investors will sell risky assets to government and buy bonds. The Fed could end up holding all risky assets; investors will hold safe assets. The risk premium stays the same...If the Federal Reserve holds all the risky assets, then the risk associated with them is borne by taxpayers as a whole.Taxpayers as a whole are different from investors as a whole. Thus if the Fed buys risky assets for safe assets, it reduces the quantity supplied of risky assets to be held by private investors. In other words: the risk premium does not stay the same. It goes down. This is not rocket science, people.

What Would Milton Friedman Say? What Did Milton Friedman Say? - David Beckworth and William Ruger on what Friedman would have said: What Would Milton Friedman Say About Fed Policy Under Bernanke? Four years after his death, Milton Friedman's thoughts on monetary policy remain as relevant today as they were 30 years ago. Even Fed Chairman "Helicopter Ben" Bernanke (whose nickname comes from Friedman's famous "helicopter drop" idea for overcoming deflation) has referenced the Chicago don as an inspiration for his actions. ... [continue] ... Brad DeLong on what Friedman did say: It Is Not Just John Maynard Keynes, It Is Milton Friedman Who Is Being Thrown Over the Side Any time that the views of Milton Friedman are denounced as those of a left-wing semi-socialist kook, something has gone very, very wrong. Has something gone very very wrong? Yes, it has. Landon Thomas covers the train wreck, includes my observations about not Keynes, but not Friedman: ... [continue] ...

Good for the goose - TYLER COWEN says it's time to consider some of the arguments being raised against a new round of quantitative easing. He quotes Ed Hugh: Push to shove time has come, I fear, and if this reading is right then it is no exaggeration to say that a protracted and rigourously implemented round of QE2 in the United States could put so much pressure on the euro that the common currency would be put in danger of shattering under the pressure. Japan is already heading back into recession, as the yen is pushed to ever higher levels, and Germany, where the economy has been slowing since its June high, could easily follow Japan into recession as the fourth quarter advances. It's true that much of the world is surprisingly downbeat about the Fed's apparent warming to a monetary policy more appropriate to its macroeconomic situation. Europe and Japan are concerned about the impact of a falling dollar on the their trade balances and recoveries. It's a little odd. You'd think that the world would be excited about the prospect of a faster recovery in its largest economy.

Stiglitz Bashes QE - Yves Smith - The comment by Joseph Stiglitz in the Financial Times lambasting the Fed’s expected move to quantitative easing is certain to have no impact on the central bank’s course of action. His article nevertheless is proof that this idea is not as well received as the officialdom would like you to believe. It isn’t merely Stiglitz’s stature that makes his critique noteworthy; it’s that he is of the left leaning persuasion, and thus believes in government intervention to promote broad social goals, like reducing unemployment, which is something we seem to have in abundance these days. Note that Stiglitz doesn’t see QE as merely unproductive; he contends it might well be detrimentalIn certain circles, it has become fashionable to argue that monetary policy is a superior instrument to fiscal policy…Whatever the merits of this position in general, it is nonsense in current economic circumstances….….the impact on the real economy of changes in the interest rate remains highly uncertain. The fundamental reason should be obvious: what matters for most companies (or consumers) is not the nominal interest rate but the availability of funds and the terms that borrowers have to pay. Those variables are not determined by the central bank.

Fed's Plosser: QE2 Ineffective, Inflationary, Dollar-Damaging - Philadelphia Federal Reserve Bank President Charles Plosser said Wednesday that additional quantitative easing would probably do little to lower unemployment, and he said would tend to increase long-term inflation risks and further weaken the U.S. dollar.  Plosser, talking to reporters following a speech to the Union League Club, said that expanding the Fed's balance sheet through so-called "QE2" would make the Fed's eventual "task" of exiting from its easy money policy much tougher. Plosser, who will be a voting member of the Fed's policymaking Federal Open Market Committee next year, also said it would be "dangerous" for the FOMC to adopt QE2 just to fulfill market expectations. He said it would be better for the FOMC to "disappoint the markets" and focus on its long-term objectives.

Richard Alford: The Fed’s Mission Creep – Taking Too Many Roles Means Doing None of Them Well - In the 1960s and 70s, an arm of the US government destroyed villages in Vietnam in order to save them. Fifty years later, it appears an arm of the US government has been saving/supporting a TBTF financial institution only to sue it for misrepresenting loans it packaged. However, because the institution is too big to fail, the same arm of the government will continue to fund it at near zero rates in the hope that it will generate rates of return that attract more capital and make more loans. It has faith that cheap and abundant access to borrowings is the royal road to salvation, even though it appears that the real reason this bank, like others, can’t make more loans isn’t lack of low cost money, but lack of demand from borrowers. The Fed has truly put itself in a strange position. For a time, the Fed sought to pursue inflation-only targeting despite its dual legal mandate to promote price stability and full employment. The rationale for the exclusive focus on inflation was that it could better achieve price stability, which it thought would guarantee economic and financial stability. Now after back tracking on seeking to avoid the complexity of trying to balance the simultaneous pursuit of low inflation and full employment, the Fed has also embraced being an investor in privately issued financial assets, as well as maintaining exposures (on a non-fully collateralized basis) to financial institutions over which it has regulatory responsibility.

Bob Hall on Quantitative Easing - He was giving a talk on unemployment. Along the way, he said that with quantitative easing, the Fed borrows short and lends long. So the Treasury could do the same thing by issuing less long-term debt and more short-term debt. So he does not understand why quantitative easing is anything to get excited about. If the Treasury did this, and short-term interest rates started to go up, then the Fed would have to print money to maintain the short-term interest rate, which would make it clear that this is the same thing as quantitative easing. Anyway, food for thought.

Ezra Klein Endorses The Helicopter Drop - I might have said joins the “4% Club”, however, I think we may have won that battle. When the President of the New York Fed starts discussing what the dynamics of a temporarily higher inflation target might look like we are in the closing stage of that campaign. So, now we turn to a second battle, how do we make sure that markets are convinced that the Fed can indeed generate the inflation it wants? However, there are millions of unemployed workers on the line here. There is no reason to take chances. Hence, the second battle is to convince policy makers to warm up the choppers and prepare to deliver cash into the hands of American citizens.  Ezra adds much needed support The answer is obvious: "explicit (though temporary) cooperation between the monetary and fiscal authorities." In practice, that would mean Bernanke gets John Boehner, Nancy Pelosi, Harry Reid and Mitch McConnell in a room and says the politics and specifics of this are their job, but the economy needs more fiscal stimulus if it’s going to recover, and the Federal Reserve stands ready to make that not only possible but also virtually costless

Quantitative Easing Only Show in Town For Fed, BOE - Central bankers would like to be able to get back to business as usual where they change the price of money rather than its quantity. That day seems a long way off on both sides of the Atlantic.  The data this month that changed everything came from the U.S. labor market. September non-farm payrolls fell by 95,000; the creation of 64,000 jobs in the private sector wasn’t enough to compensate for the decline of 159,000 in the public sector. The minutes of the last Federal Reserve meeting, published last week, added fuel to the flames with calls for more action.  The markets have taken all of this as evidence that the Fed will start doing more quantitative easing at its meeting on Nov. 2-3. Stock markets surged and the dollar fell on the news.

Not Everyone Is Psyched About More Quantitative Easing - On Friday the Federal Reserve chairman, Ben S. Bernanke, made “a case for further action” from the Fed to try to grease the wheels of growth and combat high unemployment. His speech — which indicated that the Fed  was probably preparing to pour more money into the economy — seemed to be met with positive reaction in major United States stock indices. But not everyone is so happy about the new round of asset purchasing that seems likely to come. Xinhua, China’s official state-run news agency, published the following editorial yesterday: WASHINGTON, Oct. 17 (Xinhua) — The United States seems again planning to abandon the world on its track to economic recovery with the Federal Reserve’s latest hints on further monetary easing policy. Whether it can be a silver bullet to drag American out of the slump remains unknown, analysts say. Yet it seems certain that the measure is somehow self-centered and will create considerable spill-over effects in other parts of the world. Initial effects can already be found as prices of dollar-pegged commodities like oil and gold soar, and as fear of “an international currency war” hits headlines in the wake of further Fed easing policy guess.

Why most economists are not hopeful about QE -The U.S. economy's biggest problem, businesses and policymakers agree, is widespread lack of demand. If only people and companies would buy more stuff, the theory goes—a car, an office park, a forklift—then the stores and companies that make and sell that stuff would hire more workers, who would then spend more money, and just like that (or almost)—economic growth. One way the Federal Reserve has spurred economic growth traditionally has been to lower interest rates, which has a known and a tested impact. If the Fed lowers rates, money becomes cheap and the economy heats up. But the federal funds rate, the Fed's main lever, is now near zero. So the Fed is turning to a policy known as "quantitative easing." Essentially, the Fed is using its license to print money. (Technically, it doesn't have a license, but it knows someone who does.) On Nov. 3, the markets expect the Fed to announce that it has decided to create somewhere between $500 billion and $1.2 trillion that it will then spend to help goose economic growth. Rather than buying space in office parks or forklifts, though, the Fed—which purchases only government-backed assets, like bonds—will probably pick up long-term Treasury debt.

Tutorial on Central Bank Operations with Answers to FAQs About Monetary Policy and Exchange Rates - I have been doing some blogging lately on the topics of quantitative easing and exchange rate manipulation. Looking around, especially at comments,  I can see that many bloggers, myself included, are wrongly assuming that their readers understand the basic mechanics of central bank operations. In the hope of making a small contribution to economic literacy, I have prepared a short tutorial explaining what happens when the Fed, the People's Bank of China,  or any other central bank carries out certain monetary policy operations:

  • Purchases and sales of securities, including the large-scale programs called quantitative easing
  • Intervention in foreign exchange markets
  • Sterilization of exchange rate intervention

Arguments against QE2 - Having earlier reviewed some of the reasons in favor of additional quantitative easing (QE2), I'd like to acknowledge some of the dissenting views. (1) One concern was expressed by Edward Hugh it is no exaggeration to say that a protracted and rigourously implemented round of QE2 in the United States could put so much pressure on the euro that the common currency would be put in danger of shattering under the pressure. Japan is already heading back into recession, as the yen is pushed to ever higher levels, and Germany, where the economy has been slowing since its June high, could easily follow Japan into recession as the fourth quarter advances. (2) Stanford Professor Myron Scholes raises a separate issue:(3) Robert Waldman (along with Arnold Kling and Bob Hall)(4) Federal Reserve Bank of Kansas City President Thomas Hoenig (5) A final concern is that QE2 will be ineffective in restoring full employment. Variations on this perfectly accurate statement have been made by a great number of people; for a recent collection see Yves Smith. But the issue is not, and in my mind has never been, whether monetary policy can "solve our problems". Instead the question is whether a sufficiently low or negative rate of inflation would make our problems worse. If it would make our problems worse, then the goal of monetary policy is to avoid doing that. Here's another reminder from the October 14 FedViews of what's at stake:

Robert Samuelson is Worried QE Could Spark Strong Growth - I'm not kidding, read it for yourself. Samuelson notes Fed plans to buy more Treasury bonds. He then warns of the "dangers." He comments that the policy may prove ineffective -- the Fed may be pushing on a string: "But if all the cheap money spurs much higher economic growth, many of these reserves will turn into loans and raise the specter of higher inflation -- 'too much money chasing too few goods.' The Fed would then have to withdraw or neutralize the added money through higher interest rates." That's great, we're sitting here in the most prolonged downturn since the Great Depression, with the inflation rate closing in on zero, and Samuelson is worried that we may get a burst of growth that could lead to higher inflation. Only in the Washington Post.

Officials hint Fed on the verge of more easing (Reuters) - A string of Federal Reserve officials on Tuesday indicated the central bank will soon offer further monetary stimulus to the economy, with one saying $100 billion a month in bond buys may be appropriate. While internal differences on the unconventional policy are still evident, the consensus view at the Fed appears to be that the economy is weak enough to warrant further support, most likely through increased purchases of Treasury debt. The U.S. economy is expected to have grown just 1.9 percent in the third quarter, a level considered too low to bring down unemployment. The debt purchases would help lower long-term interest rates in the hope of boosting demand.

QE2 Is Already Working!  - I have some sympathy for worries that quantitative easing may not be very effective - that it will prove to be another incarnation of "pushing on a string" (see e.g., Annie Lowrey; Mark Thoma), but this Times story about tensions stemming from the declining dollar indicates its already having an impact:
The dollar’s decline is being driven by what everyone in global markets is now expecting: another round of so-called quantitative easing by the United States. Financial markets expect the Fed to announce at its meeting early next month that it will proceed with more quantitative easing, involving purchases of bonds, which reduces longer-term interest rates and puts further downward pressure on the dollar. That worries other countries. A stronger United States economy is in everyone’s interest, but they fear that investors will flee America’s low interest rates and declining dollar and instead pour capital into their markets, overheating their economies and creating the types of asset bubbles in stocks and housing that burst with such devastating effects in the 1990s. The great thing about expectations is that a policy can have an effect before it is implemented -

China Uneasy with Quantitative Easing Prospect - Chinese commentators are starting to show unease at the increasingly likely prospect that the U.S. Federal Reserve will relaunch a program of buying bonds to push down interest rates. And no wonder: Even before it has actually started, such so-called quantitative easing is complicating the nation’s continued effort to manage its currency. A commentary Sunday by the official Xinhua news agency cast doubt on the wisdom of the whole bond-buying enterprise. “Whether it can be a silver bullet to drag American (sic) out of the slump remains unknown, analysts say. Yet it seems certain that the measure is somehow self-centered and will create considerable spill-over effects in other parts of the world,” the commentary says. The overseas edition of the People’s Daily also last week prominently featured a commentary in a similar vein by Li Xiangyang, an economist at the Chinese Academy of Social Sciences.

PBOC: 'Stop printing money' - AN ADVISER to China's central bank on Monday issued a thinly veiled warning to the United States not to print more money to stimulate growth, as IMF and top central bank officials met in Shanghai. Xia Bin, a member of the monetary policy committee of the People's Bank of China (PBOC), also said a key task to strengthen the global economic recovery was to 'improve the flaws in the dollar-denominated international monetary mechanism'. 'The key is to restrict issuance of currencies of major powers, which is very difficult,' Mr Xia told a small group of reporters on the sidelines of the talks co-chaired by the International Monetary Fund and the PBOC in Shanghai.  'A nation that historically has had the dominant currency will not easily give up its interests.' The dollar has slumped on expectations that the US Federal Reserve will print more money to inject cash into the country's banking system and stimulate growth of the world's biggest economy, diluting the value of the currency.

QE: The Numberless Oblivion - Andy Xie - The world seems full of smoke ahead of a world currency war. The weapon of choice is quantitative easing, a.k.a. QE. If you print a trillion, I'll print a trillion. Of course, he and she will too. No change in exchange rates after a trillion? Let's do it again, QE2. If you listen to people like Geithner, the end of the world is quite near. Rich people everywhere are buying gold for a little peace of mind, not just the Chinese. They are literally trucking it by the ton or two home. When currency values vanish in a QE melee, at least the rich have the gold to stay rich. If you listen to American pundits, politicians or government officials, it's all China's fault. China is far from perfect. Its currency policy certainly isn't. But it is not the cause for the world's ills. The U.S. is by far the biggest source of uncertainty and the initiator of the QE war.  Its elite created the biggest financial bubble since 1929, even removing regulations designed to prevent it, and left the U.S. economy in shambles after its burst. The same people want to find a quick cure to hold onto their power. Unfortunately, there is no quick cure.

Gresham's Law Meets Murphy's Law - Oh boy, there we go again, QE and Fraudclosure are the topics of the day.  There's a lot to say about foreclosures, so let me just say a few words about QE. Something I read this weekend gave me an A-HA moment; to understand what is wrong with the Fed's upcoming next round of quantitative easing (as well as former rounds, both domestic and abroad), we need to look at Gresham's Law, which states that bad money always drives out good money. In an otherwise entirely forgettable piece, Mike Moriarty makes this astute observation: The Mother of All Shorts The Federal Reserve, in conjunction with the Treasury simply traded T-Bonds and T-Bills for the crap paper under the theory that trading good paper for bad paper turns the bad paper into good paper. There is a simple error in that logic. Actually the way the real world works is that trading bad paper for good paper morphs the good paper into bad paper. Gresham's Law is not called a law for nothing: it always applies.

The Recklessness of Quantitative Easing – Hussman - With continuing weakness in the U.S. job market, Ben Bernanke confirmed last week what investors have been pricing into the markets for months - the Federal Reserve will launch a new program of "quantitative easing" (QE), probably as early as November. Analysts expect that the Fed could purchase $1 trillion or more of U.S. Treasury securities, flooding the financial system with additional bank reserves. A second round of QE presumably has two operating targets. One is to directly lower long-term interest rates, possibly driving real interest rates to negative levels in hopes of stimulating loan demand and discouraging saving. The other is to directly increase the supply of lendable reserves in the banking system. The hope is that these changes will advance the ultimate objective of increasing U.S. output and employment. On the supply side, the objective of quantitative easing is to increase the amount of lendable reserves in the banking system. Again, however, this is not a constraint that is binding. The liquidity to make new loans is already present.

QE Didn't Save Us From The Crisis -- Lying About Asset Prices Did -by John Hussman - One of the arguments for quantitative easing is the notion that the Fed's purchase of $1.5 trillion of Fannie Mae and Freddie Mac debt somehow "pulled the U.S. economy back from the abyss" of a Depression. But a closer examination of the past 19 months suggests that a much more specific mechanism - suspension of truthful disclosure - was actually the key element. Unfortunately, the benefits of this suspension are also impermanent, because the underlying solvency problems have been left unaddressed. In early 2009, many major U.S. banks were faced with clear capital shortfalls that effectively rendered them insolvent - their liabilities exceeded their assets. Instead of restructuring this debt, or dealing with the problem in a sustainable way, the Financial Accounting Standards Board, responding to Congressional pressure, suspended "mark to market rules" and allowed major U.S. financials to use "substantial discretion" in valuing their assets. Since it was neither possible nor credible for banks to immediately write up those assets overnight, loans from the Troubled Asset Relief Program (TARP) were critical in bridging the immediate shortfall.

Robert Reich (The Fed's New Bubble (Masquerading as a Jobs Program)) The latest jobs bill coming out of Washington isn’t really a bill at all. It’s the Fed’s attempt to keep long-term interest rates low by pumping even more money into the economy (“quantitative easing” in Fed-speak). The idea is to buy up lots of Treasury bills and other long-term debt to reduce long-term interest rates. It’s assumed that low long-term rates will push more businesses to expand capacity and hire workers;Problem is, it won’t work. Businesses won’t expand capacity and jobs because there aren’t enough consumers to buy additional goods and services. The dollar’s drop won’t spur more exports. It will fuel more competitive devaluations by other nations determined not to lose export shares to the US and thereby drive up their own unemployment. And middle-class and working-class Americans won’t be able to refinance their homes at low rates because banks are now under strict lending standards. So where will the easy money go? Into another stock-market bubble.

The Fed should buy munis - A few months ago I was running through some out of the box thinking for how the Fed might be able to give quantitative easing more of an impact. Not that I think the Fed should go QE, but if they do, the question is what should they do. Here’s what I came up with: The Fed could buy municipal bonds. There has been a lot of talk about the anti-stimulus being provided by states and local municipalities (see Federal largesse was countered by state and local cutbacks). I have noted on a few occasions that Illinois and California bonds are trading with a high degree of default risk. But Michigan is up there too. New York has serious problems as does New Jersey to name the largest and most problematic states. Most every large state in the union is in fiscal trouble, which is why I have been warning that municipal bonds should be labelled buyer beware.’ But what if the Federal Reserve started QE2 with munis as the asset class of choice for credit easing?

QE Muni Buying – A Game Changer? - Yesterday Ed Harrison at Credit Writedowns pointed out an article on Bloomberg by David Blachflower, a former member of the Bank of England’s Monetary Policy Committee, and a professor of economics at Dartmouth College.  Blanchflower says the following VERY important statement with regards to QE (via Bloomberg): “What will they buy? They are limited to only federally insured paper, which includes Treasuries and mortgage-backed securities insured by Fannie Mae and Freddie Mac. But they are also allowed to buy short-term municipal bonds, and given the difficulties faced by state and local governments, this may well be the route they choose, at least for some of the quantitative easing. Even if the Fed wanted to, it couldn’t buy other securities, such as corporate bonds, as it would require Congress’s approval, which won’t happen anytime soon.” This is potentially significant.  The ramifications here are different than if the Fed is buying treasuries or MBS.  That is merely an asset swap.  It doesn’t alter private sector net financial assets.  Buying munis, on the other hand, potentially could.

Richard Alford: Fed Hasn’t Learned From the Crisis - By Richard Alford, a former economist at the New York Fed. Even prior to the financial crisis of 2007, economists and policymakers actively debated whether central banks should use interest rate policy to “lean” against possible asset price bubbles or “clean” up after an asset price bubble burst, reserving interest rate policy for inflation targeting. A consensus has started to emerge: there are instances in which it would be advantageous for central banks to use interest rate policy to lean against asset price bubbles. Some current and former Fed officials have reversed their position and now embrace the consensus view. This view is consistent with the position that the Fed kept the Fed funds rate “too low for too long,” but any admission of that by Fed officials remains implicit at best. It also appears that the Fed has not generalized any lessons it might have learned from the crisis. It has committed itself to both exceptionally low interest rates for an extended period of time and now to QE despite parallels between run up to the crisis of 2007 and current developments in the currency and international capital markets.

It is folly to place all our trust in the Fed- Traditionally, monetary authorities focus policy around setting the short-term government interest rate. But, leaving aside the fact that with interest rates near zero there is little room for manoeuvre, the impact on the real economy of changes in the interest rate remains highly uncertain. The fundamental reason should be obvious: what matters for most companies (or consumers) is not the nominal interest rate but the availability of funds and the terms that borrowers have to pay. Those variables are not determined by the central bank. The US Federal Reserve may make funds available to banks at close to zero interest rates, but if the banks make those funds available to small and medium-sized enterprises at all, it is at a much higher rate.  Indeed, in the last US recession, the Fed’s lowering interest rates did stimulate the economy, but in a way that was disastrous in the long term. Companies did not respond to low rates by increasing investment. Monetary policy (accompanied by inadequate regulation) stimulated the economy largely by inflating a housing bubble, which fuelled a consumption boom.

Regional Fed Presidents Back More Policy Action Against Deflation Threat - Two regional Federal Reserve presidents said the central bank should consider more policy action to stimulate the economy while seeking to avert a debilitating, broad-based decline in prices. Chicago Fed President Charles Evans, speaking at a Boston Fed conference yesterday, advocated targeting a path for the price level as a way to stop the inflation rate from falling. He said the U.S. economy is in a liquidity trap and more accommodation is not a "close call." Boston’s Eric Rosengren said "insuring against the risk of deflation may be much cheaper than" trying to eradicate it after it takes hold. Fed Chairman Ben S. Bernanke and the Federal Open Market Committee are considering strategies, before their Nov. 2-3 policy meeting, to raise inflation expectations and purchase additional assets to help reduce unemployment persisting at more than 9 percent. Bernanke said in a speech opening the conference that there appears to be a "case for further action."

Some Officials Mull More Flexible Inflation Mandate - Is the Federal Reserve on the verge of changing how it deals with inflation? Comments from some central bankers indicate the answer may be yes. Two Fed policy makers see potential merit in a modification of the central bank’s inflation mandate that would allow for greater nuance in how it pursues its inflation objective.If the strategy is employed, it could mean the Fed tolerates higher levels of price pressures for a time, to compensate for periods of overly weak price gains. The new regime would be tied to the current difficulties and most likely ended once the economy more fully revived. It’s also seen as a complement to other stimulative effort, which most on Wall Street expect to come in the form of renewed Fed buying of long-dated assets. The Fed’s legal mandate directs officials to pursue price stability and maximum sustainable growth and employment levels. Officials have long interpreted the first part of that objective to mean they should aim for core inflation rises of around 1.5% to 2%.

Ben’s new rabbit: Inflation expectations - Once again, we find ourselves holding our breath for a new fluffy rabbit coming out of Ben’s hat on November 2nd (the day of the next FOMC meeting). In previous pieces I have discussed the limitations of unconventional measures (QE in particular) in stimulating aggregate demand. Here, I want to revisit this discussion in light of Bernanke’s new magic trick: that of managing inflation expectations.The starting point is the two principal factors restraining aggregate demand currently: First, the ongoing balance-sheet repair by a certain segment of households, corporates and banks; and second, the fact that economic agents that are cash-rich maintain a strong preference for liquidity. Put differently, those with little cash and lots of debt can’t spend; and those with lots of cash and little debt won’t spend. So the question is: What tools does the Fed have available for addressing these two problems? Pre-empting my conclusion, Large-Scale Asset Purchases (or LSAPs) of US Treasuries are an ineffective—indeed, a counterproductive—tool for addressing any of the two problems above; the kind of LSAPs that would work are *not* available to the Fed in the current political climate.

Fed may have to let inflation climb (Economic Times - India) A situation the Fed has long feared has come to pass: The central bank, after spending two decades taming inflation, now needs more of it.  And so the Fed is having to shift substantially from the approach that has come to define it and from which it has long derived its institutional self-esteem.  “In the 1980s and 1990s, few ever questioned the desired direction for inflation – lower was always better,” Ben S Bernanke, the Fed chairman, said at a conference here this weekend, acknowledging the sea change in the Fed’s orientation. Since the summer, Fed officials have grown increasingly worried that the US could slip into deflation , a decrease in prices of the kind that has bedeviled Japan since the late 1990s. That worry has taken centrestage as Bernanke prepares the markets for a widely expected new round of unorthodox actions, starting in November, to prop up the recovery by lowering long-term interest rates. Nearly two years ago, the Fed lowered short-term interest rates to essentially zero.

Fed President Evans: Higher Inflation is Necessary - The roll out is coming fast and furious. This is the central bank of the United States mind you, arguably the most powerful economic institution in human history. Evans on price level targeting: I think there are special circumstances when price-level targeting would be a helpful complement to our current and prospective strategies in the U.S. Clearly communicating an expected path for prices would help guide the public’s understanding of the Fed’s intentions while we carry a large balance sheet and promise continued low interest rates for an extended period. Let me be very clear about the setting for this proposal. In my opinion, much more policy accommodation is appropriate today. In a speech two weeks ago,[2] I stated that I believe the U.S. economy is best described as being in a bona fide liquidity trap. This belief is not a new development for me; instead, it is a dawning realization. Risk-free short-term interest rates are essentially zero. Both households and businesses have an excess of savings relative to the new investment demands for these funds. With nominal interest rates at zero, market clearing at lower real interest rates is stymied.

Fed Inflation Quandary - It’s Too Low - A situation the Federal Reserve has long feared has come to pass: the central bank, after spending three decades taming inflation, now needs more of it.  . Since the summer, Fed officials have grown increasingly worried that the United States could slip into deflation, a decrease in prices of the kind that has bedeviled Japan since the late 1990s. That worry has taken center stage as Mr. Bernanke prepares the markets for a widely expected new round of unorthodox actions, starting in November, to prop up the recovery by lowering long-term interest rates. Nearly two years ago, the Fed lowered short-term interest rates to essentially zero.

The Fed wants asset price inflation not consumer price inflation - The Fed’s intent is not to create consumer inflation, but rather asset inflation — primarily in the equity market.  By pulling longer-term bond yields lower, the Fed hopes that this will alter how investors value equities relative to the fixed-income market.  Moreover, the Fed will be actively pushing up the value of bonds that exist in investor portfolios, and as such the intent is to induce these investors to rebalance their asset mix towards equities in order to maintain their current allocation.  The Fed is also trying to incentivize fund flows into the equity market. This in turn would theoretically boost household wealth and as such make  consumers, who now feel richer, to go out and spend more.  So the theory goes  — we shall see how it works in practice.  The Fed’s intent is also to lower both the debt and equity cost of capital so that companies will, at the margin, compare that to expected returns on newly invested capital and begin to spend more on new plant and equipment.  The hope here is that the investment spending multiplier will kick in and that stepped-up job creation would occur in tandem with the renewed capex growth.

Mary Daly of the SF Fed: We are at Risk of a Long period of Sustained Disinflation - Mary Daly, vice president at the Federal Reserve Bank of San Francisco, gives her views on the economy. Fed Views, by Mary Daly, FRBSF The outlook presents a strong case for another round of quantitative easing, and whatever other help we can give the economy. Would the help be effective? That is, is the unemployment problem mainly structural and hence hard to change, or is there a large cyclical component that policy can address? She notes that "Even if structural unemployment has increased, the unemployment rate is still far above the highest survey estimate of the natural rate," implying that a substantial cyclical component to unemployment is present:

deflation, technology, and political economy In the modern industrial era, there have been three great deflationary periods. The post American Civil War/Populist era, the Depression era, and the Japanese for the past two decades. Deflation remains not very well understood. Each era has some similarities but also great differences. Money definitely plays a role, but how much as cause, opposed to effect, is very much open to debate. At this point, money as prime cause dominates economic thinking. However, massive societal and/or global deflations represent much greater problems than questions on the quantity of money. They represent fundamental imbalances and changes in an economy, driven in large part by technological change. Just as those of the past, our present deflation challenges will not be met without addressing these greater issues of political economy. The greatest barrier to a more encompassing and valuable understanding of deflation is the almost complete dominance of monetary thinking in all things economic.

Halting disinflation is an important goal - AMONG prominent economists, there is broad disagreement ocncerning how much a new round of Fed easing could accomplish. There are some who think that the entire cyclical shortfall can be erased through appropriate monetary policy. Others think more easing would be a good idea but more fiscal policy is likely necessary to support a stronger recovery. Still others think more easing might not do much but is worth trying. A few think it would be outright harmful. But I'd guess that the default position is now that more monetary easing would be of net benefit to the economy. One person who doesn't see things that way is Joseph Stiglitz, who argues that a new monetary boost would be a mistake. In an interview with Ezra Klein, he says: [T]hink of the various channels through which monetary policy will operate now. The one that traditionally is the focal point is investment. Remember that quantitative easing’s effect on interest rates, after all, is only .2 or .3 percent. So broadly, there are two categories of firms right now: the large enterprises flush with cash -- they’ve got about $2 trillion. Then there are the small and medium-sized enterprises that are cash-starved, , and that part of the banking system is still sick.  

Not Letting It Happen Here: The Lost Decade of Japan - Mark Thoma posts this graph. In early 2008 I said Inflation is here, yes. Commodity prices in general and agricultural prices are skyrocketing. This is something that we talked about here last year. However, the Japanese Scenario is becoming more salient everyday.As I say regularly to my colleagues, “This is not just sub-prime, this is not just housing. This will get much worse before it gets better.”The reason I point this out is that the basic path of the recession was totally foreseeable if you paid attention to the incoming data on liquidity demand.This is key because we are now engaged in a great debate on how to get out of this crisis. I maintain that the type of analysis that foresaw a crisis of this exact nature coming should be given extra weight.If the people who were saying in early 2008 that a severe liquidity crisis was brewing were correct, shouldn’t this at least raise somewhat the general estimates that resolving the liquidity crisis is the key to growth.

Japan's Toxic Cocktail Fails US Taste Test - Japan is an old country, and I’m not talking about the place.  Twenty percent of the population is 65 or older, putting Japan in first place, in a tie with Italy, in the geriatric country competition, according to the Stanford Center on Longevity.  The average number of births per woman has been below the replacement rate of 2.1 births per woman for 40 years. At the same time, Japan boasts the highest life expectancy of any country: 82 years.  Put it all together, along with a reluctance to address financial-sector insolvency and industry inefficiency, and you get a toxic mix. A shrinking workforce must support a growing number of retirees, auguring slower economic growth and reduced living standards.  Deflation, in other words, isn’t the worst of Japan’s problems. It’s a symptom, not a cause, of two decades of post- bubble economic malaise.

A good time for price-level targeting? -  Atlanta Fed's macroblog - Though the idea arises periodically, interest in price-level targeting is a hot topic again thanks to recent comments from Federal Reserve Bank of Chicago President Charles Evans. The essence of Evans's approach (and described in his own words) is this:"If the Federal Reserve decided to increase the degree of policy accommodation today, two avenues could be: 1) additional large-scale asset purchases, and 2) a communication that policy rates will remain at zero for longer than ‘an extended period.'"A third and complementary policy tool would be to announce that, given the current liquidity trap conditions, monetary policy would seek to target a path for the price level. Simply stated, a price-level target is a path for the price level that the central bank should strive to hit within a reasonable period of time. ."The challenge presented by short-term interest rates near zero is one clear motivation for this policy proposal. By allowing inflation that is "higher than 2 percent for a time," inflation-adjusted short-term interest rates would fall, presumably moving real interest rate close to their market-clearing levels.

Deleveraging, Deceleration and the Double Dip - For a long time I’ve focused on the contribution that the change in debt makes to aggregate demand, in the relation that “aggregate demand equals the sum of GDP plus the change in debt”. An obvious extension of that was that “change in aggregate demand equals change in GDP plus acceleration in the level of debt”—which would imply that change in unemployment is driven by changes in the rate of growth of debt. Though I was aware of this implication of my analysis, I held off from testing it because I was concerned that this was pushing the data one step too far. A physical system with a similar relationship between velocity (the rate of change of one variable) and acceleration (whether the velocity of another variable is increasing or decreasing) would generate a large volume of sufficiently detailed data that the relationship could be empirically tested. It turns out that I shouldn’t have been so cautious: the data well and truly supports this, on the surface, weird causal relation: the change in employment is strongly affected by the acceleration or deceleration of debt. This can give the paradoxical result that the level of employment can rise, even when the economy is deleveraging, if the rate of deleveraging slows.

Economy: CEO Sentiment Souring on Economy, Profits: Survey…America's corporate leaders are profoundly more pessimistic this fall about prospects for the U.S. economy and their own profitability than they were this spring, according to a survey of CEO sentiment released on Thursday.  The Business Council, a group that counts 150 chief executives of the largest U.S. corporations as its members, said that only a third of the CEOs who participated in its latest survey believe their own industry will improve over the next six months—down from two-thirds back in May, when it last polled them.  "After sharp and continuous improvements in business confidence during the past 18 months, the current survey indicates that members of The Business Council believe the acceleration phase of the recovery is over," the group said.

 Federal Reserve’s ‘beige book’ survey finds economy continues to rise modestly, but hiring still ‘limited’ - The economy is no longer decelerating but the pace of growth has remained tepid in recent weeks, according to a new Federal Reserve survey.  The Fed's "beige book," a compilation of anecdotal reports from businesses across the country released Wednesday, reported that "national economic activity continued to rise, albeit at a modest pace" from September through early October. That conclusion contrasted with that of the previous beige book, released in early September, which reported "widespread signs of deceleration compared with previous periods."  Still, the new survey gave little evidence that the job market is picking up, saying that "hiring remained limited, with many firms reluctant to add to permanent payrolls given economic softness."

Recovery, Please - Will the recession just go on and on and on? In the absence of far more vigorous government action, it certainly looks that way.  At a recent conference sponsored by several think tanks, Paul Krugman declared that the recession could literally continue indefinitely because the economy is stuck in a cycle of depressed wages, reduced consumer purchasing power, damaged banks, and business hesitancy to invest -- and no strategy on the political horizon is about to alter this dynamic.  It's not surprising to hear that from Krugman. The startling thing was that his two co-panelists, former Reagan chief economist Martin Feldstein and the chief economist of Goldman Sachs, Jan Hatzius, agreed that massive stimulus spending was the necessary cure.  In similar circumstances in the middle and late 1930, GDP growth turned positive, but unemployment remained stuck in double digits. It took the accident of World War II for government to spend and invest at a level that finally brought back full production and full employment. Annual deficits were as high as 28 percent of GDP, more than triple the current level. Once prosperity returned, however, the debt level came steadily down.

Number of the Week: Big Boost From Dollar Decline - .5 percentage point: The potential boost in annual U.S. economic growth from the dollar’s decline since August 27. As finance ministers from the Group of 20 developed and developing nations meet in Seoul in an effort to avert a currency war, it’s helpful to recognize the temptation they face. A little move in an exchange rate can have a big impact on a country’s growth. Consider the recent fall in the dollar. Since August 27, when Federal Reserve Chairman Ben Bernanke signaled the central bank was likely to pump more dollars into the economy, the greenback’s value has fallen about 4.8% against the currencies of U.S. trading partners (data through October 15). Given the historical behavior of U.S. exports and imports, a sustained move of that magnitude should shrink the U.S. trade deficit by nearly $140 billion over the next two years. That’s the equivalent of an added 0.5 percentage point of economic growth in each year. To some extent, a shrinking U.S. trade deficit would be a good thing for the whole world.

The Worst Economist in the World – Krugman -A thought: it has occurred to me that we could use an economics equivalent of Keith Olbermann’s “Worst Person in the World” award. I’d encourage others to enter this game — and yes, I know that various paid trolls and others will award me the title five times a day if they can. But here’s what caught my eye: the WSJ’s Real Time Economics explaining (or rather, “explaining”) the risks from competitive devaluation: When one country devalues its currency, others tend to follow suit. As a result, nobody achieves trade gains. Instead, the devaluations put upward pressure on the prices of commodities such as oil. Higher commodity prices, in turn, can cut into global economic output. In one ominous sign, the price of oil is up 8.7% since August 27. Urk. Why do dollar commodity prices tend to rise when the dollar falls? Because other countries buy commodities too, so that a constant dollar price would mean a fall in terms of other currencies. To a first approximation, in fact, you’d expect commodity prices to remain constant, other things equal, in terms of a GDP-weighted basket of currencies around the world. So yes, a fall in the dollar tends to raise the price of oil in dollars — but it also tends to reduce the price of oil in euros.

The Real Danger to the Economy - George Soros - Conflict between the United States and China dominated the meeting of the IMF on October 9 and 10. The United States was pressing China to revalue the renminbi upward while China was blaming the turmoil in currency markets on the United States policy of providing cheap credit. When Brazil’s finance minister spoke of an imminent currency war he was not far off the mark. China and the US were talking past each other but it would have been better if they had listened to each other because both sides were making valid points. Both China and the US, and the global economy as a whole, would fare much better if both sides accepted the other side’s recommendation. The rest of the world echoed the American viewpoint—that China has been undervaluing its currency to help its export-driven economy—with greater or lesser stridency. Faced with opposition from developing countries, China is likely to yield and the renminbi will appreciate; only the pace and extent of the move is in question. But China’s viewpoint is also valid: the US ought to apply fiscal stimulus—i.e., more government spending—rather than monetary stimulus. Unfortunately the Obama administration is not in a position to do so because it is under domestic political pressure to hold down the deficit.

Cats and Dogs Living Together - Paul Krugman is at it again with his calls, using a model based on what I believe to be an entirely flawed conception of monetary policy at the zero bound, to argue that China’s currency policy is harming the US: So again, the Fed is moving in the right direction, both for US interests and for the sake of the world as a whole. China is beggaring its neighbors, which in this case means everyone else. Krugman is continuing his call that we begin threatening to engage in protectionism through legislation aimed at Chinese products. Of course, this is wholly unnecessary. Matt Yglesias has the money quote: Monetary stimulus plus Chinese currency policy will equal an undesirably large amount of inflation in China. That means that in order to avoid an undesirably large amount of inflation, Chinese leaders will need to engage in a more rapid currency readjustment than they want to. That, however, merely underscores that unilateral monetary action is the right way for the US government to handle our concerns about China’s currency policy. We don’t need to threaten them, or bribe them, or cajole them, or go to “currency war” or anything. What we need to do is to adopt monetary policies that are appropriate for our economic situation.

America cannot win the currency wars alone - FT - How ironic that the world’s reserve currency issuer (the US) and its long-term rival to that status (China) are competing to nearly debauch their own currencies? America’s behaviour – more effect than intent – takes the form of quantitative easing. China’s takes the form of not letting its currency strengthen (which makes the recent monetary tightening deflationary for others). But unilateral American action against China cannot be the basis for resolving the currency wars. Effective and legitimate multilateral action to induce Chinese co-operation is necessary. Mobilising a broader coalition of the “affected but as yet unwilling” countries before the upcoming Group of 20 summit in Seoul should be America’s priority. US unilateralism runs into two difficulties, internal and external. Domestically, America is divided. At a time of high unemployment, labour groups seek strong action against the undervalued renminbi. But US companies are ambivalent because capital is mobile and can escape the effects of the undervaluation.

What is a currency war, and how do you win one? - The finance ministers of the world's largest economies are in the middle of one of their regular gatherings, and to no one's surprise, they're arguing about money. Specifically, they are talking about exchange rates, and tensions are running high. The Economist's latest cover features fearsome-looking bank notes, shaped into paper planes, whizzing at one another under the banner "Currency Wars." And the overseas edition of the People's Daily, a mouthpiece of China's Communist Party, warns that the United States has sparked a conflict that promises to retard global economic growth.  But what is a currency war, and is the United States in one? If so, how will we know who won? A "currency war" is just a headline writer's term for what economists describe as "competitive devaluation." It's helpful, in this context, to think of a dollar or a euro—any currency, really—as just another product: Its value goes up and down according to market forces. At any given time, any given currency exists in a global market determined by supply (how much of a currency exists) and demand (how much investors want to buy goods and assets denominated in that currency).

The end of Bretton Woods 2? - I suppose it’s presumptuous for me to pontificate on Bretton Woods II, given I found out the meaning of the term only a few weeks ago.  But heh, that’s never stopped me before.  Here’s Wikipedia: Bretton Woods II was an informal designation for the system of currency relations which developed during the 2000s. Well at least I was aware of the phenomenon. There’s been a lot of recent discussion of whether Bretton Woods II is about to fall apart, with this post by Tim Duy being perhaps the most authoritative: I don’t know whether Bretton Woods II is about to collapse or not.  But I am skeptical of much of the discussion of global imbalances, which in my view focuses far too much on currency/trade questions, and far too little on savings/investment imbalances.  Before considering Duy’s views, I’d first like to address an argument recently made by Michael Pettis:

What should replace Bretton Woods 2? - IN THE years after the Second World War, the international economic system was rebuilt around an edifice that came to be known as the Bretton Woods monetary system, after the New Hampshire town where Allied leaders negotiated the postwar international financial architecture. Most economies pegged their exchange rates to gold under the system, which worked fairly well for two decades. By the early 1970s, however, inflation and stagnant growth were placing stresses on the system, which ultimately broke down when America abruptly suspended convertibility in 1971.Over the decades that followed, a new, informal system sprang up, which came to be known as Bretton Woods 2. This system involved the accumulation of large dollar reserves by emerging markets, and it has been sorely tested by the rise of large global imbalances and destabilising capital flows. It is unlikely to persist for much longer.That raises the question: what should come next? We asked the economists at Economics by invitation and got a wide range of answers.

The Future of the Dollar - The goal of a strong dollar at home has guided the Federal Reserve at least since Paul Volcker crushed inflation in the early 1980’s. Although the United States does not have a formal inflation target, financial markets understand that the Fed aims for an inflation rate close to 2%. And, while the law mandates the Fed to ensure sustainable growth as well as low inflation, monetary officials recognize that sustainable growth requires price stability. The Treasury does not intervene in currency markets to bolster the dollar, and the Fed does not raise interest rates for that purpose. In recent years, countries around the world have accumulated very large volumes of foreign exchange, topped by China with more than $2 trillion, but including hundreds of billions of dollars held by Korea, Taiwan, Singapore, India, and the oil-producing countries. Most of these funds are now invested in dollar securities. The US dollar is and will remain these countries’ major investment currency, reflecting the depth of the US capital market and the relatively favorable outlook for US government policies.

How much will currency policies really affect our economy? - A number of economists of the liberal Keynesian persuasion have been arguing recently that dollar devaluation is an important step in moving us back toward full employment. In principle, of course, a cheaper dollar should raise US exports and lower US imports. But what’s missing from many of these arguments is a concrete, quantitative analysis of how much a lower dollar would raise demand for American goods. In the interest of starting a discussion, here is a very rough first cut. There are four parameters to worry about, two each for imports and exports: how much a given change in the dollar moves prices in the destination country (the passthrough rate), and how much demand for traded goods responds to a change in price (the price elasticity). We can’t observe these relationships directly, of course, so we have to estimate them based on historical data on trade flows and exchange rates. But once we assign values to them, it’s straightforward how to calculate the effect of a given exchange rate change. And the values reported in published studies suggest that the level of the dollar is a relatively minor factor in US unemployment.

US Treasury chief Timothy Geithner says America will not engage in dollar devaluation - Timothy Geithner, the US Treasury Secretary, said the United States would not engage in a currency war by devaluing the dollar to boost the country's flagging economy.  "It is very important for people to understand that the United States of America and no country around the world can devalue its way to prosperity, to [be] competitive," he said. "It is not a viable, feasible strategy."  This is the first time since February that Mr Geithner - who helped create the "strong dollar mantra" in the 1990s - has broken his silence on the weakening US currency.

Geithner Weak Dollar Seen as US Recovery Route Versus BRICs - For U.S. Treasury Secretary Timothy F. Geithner, a weaker dollar may now be in the national interest.  The dollar has dropped more than 7 percent since Aug. 27, when Chairman Ben S. Bernanke signaled the Federal Reserve is prepared to ease monetary policy. Where once such a decline may have been met with resistance from the U.S., Geithner may now be tolerating it as a way of bolstering the recovery.  Companies from Costco Wholesale Corp. to Deere & Co. have credited the weaker dollar for giving their earnings a boost

Screwflation Nation - Ben and Tim at it Again! - Strong dollar?  Hahahahahahahahahahahaha.... That is was the answer to a question I had this summer when I met with an unnamed Treasury official whose name might rhyme with Jimothy.  The unnamed official nearly fell off his chair laughing when I said "So, does the US still have a strong dollar policy?"  It was meant as a joke.  I was sitting at Treasury with Yves Smith, John Lounsbury, Steve Randy Waldman and a couple of other writers on Aug 16th, with the dollar at 82.5, down from 88.7 in May.  I mentioned in my Aug 17th post that, based on my meeting at Treasury: "we’re certainly not going to be expecting a "strong dollar" policy."  At the time, I summed up the meeting saying:  Geithner’s view of the economy is about the same as John Cleese’s view of the dead parrot: "This bird wouldn’t go "voom" if you put a million volts through it!"  I agree, Krugman agrees, the Dallas Fed agrees, Bernanke agrees - this is a $15Tn, 300M person economy that is at a virtual standstill.

France, Germany, Russia Agree On Need For Monetary Reform - German and Russian leaders Tuesday said they are supporting France in its projects for the Group of 20 industrial and developing nations, especially on reforming the global monetary system. France has identified three key priorities for when it takes the presidency of the G20: reforming the international monetary system, addressing problems and volatility in commodity markets, and improving global governance. "The choice of the theme of a future monetary architecture is a very good choice and we support [France] very actively on this project," German Chancellor Angela Merkel said.  "We are seeing the question of currencies and exchange is central and one of the potential risks of moving towards protectionism," Merkel added, speaking at a summit with French President Nicolas Sarkozy and Russian President Dmitry Medvedev. Medvedev also pledged support for France's monetary reform plans and said the G20 should make "decisive steps.""We will talk about reserve currencies and perhaps the creation of a global reserve currency," the Russian President said

A World of Multiple Reserve Currencies - The competition for reserve-currency status is conventionally portrayed as a winner-take-all game. There is room, in this view, for just one full-fledged international currency. The only question is which national currency will capture the role. Market logic, it is argued, dictates this result. For importers and exporters, quoting prices in the same currency – say, the dollar – as other importers and exporters avoids confusing one’s customers. For central banks, holding reserves in the same currency as other central banks means holding the most liquid asset. With everyone else buying, selling, and holding dollars, it pays to do the same, since markets in dollar-denominated assets will be the deepest. While it is always possible that there could come a tipping point at which everyone migrates from one currency to another, the network-based nature of the international monetary system, it is said, leaves room for only one true international unit. But this premise is wrong, for three reasons.

Feasible global rebalancing: A case for monitored and temporary dual exchange rates - Struggling developed economies – with the help of the IMF and related institutions – are escalating pressure on surplus emerging market economies to take a more active role in rebalancing global aggregate demand distribution. China is the most visible target, but the assumption is that once China concedes the others will have no choice but to fall in line. Unfortunately, the bulk of the developed economies' argument is self-serving. To paraphrase their argument: “We are in trouble, and you need to help!” Emerging markets with large trade surpluses are reluctant to heed calls for them to help with global aggregate-demand rebalancing by appreciating their currencies. They fear harm to their export-led development and sudden reversals of capital inflows in the future. Here one of the world’s most innovative macroeconomists suggests a way to square the circle: A dual exchange-rate system that would shield their exporters while fostering imports.

As U.S. Dollar’s Value Falls, Currency Conflicts Rise -  Is this a currency war or what? Fast-growing nations like Thailand are trying to devalue their exchange rates to bolster their export-driven economies. In Washington, where “strong dollar” has been the mantra for years, policy makers are taking steps that could make the already weak dollar weaker still.  European policy makers worry that a resurgent euro will threaten growth in their own backyard. And the entire world, it seems, is jawboning China to level the playing field and let its undervalued currency, the renminbi, appreciate. It is a step that Beijing, by all accounts, does not want to take.  With so many economies struggling, it suddenly seems as if it is every nation for itself in the currency markets. Policy makers the world over are worried that economic rivals are trying to turn exchange rates to their advantage, and considering how they should respond to preserve jobs and growth at home.

Preventing a National Debt Explosion - The projected path of the U.S. national debt is the major challenge facing American economic policy. Without changes in tax and spending rules, the national debt will rise from 62 percent of GDP now to more than 100 percent of GDP by the end of the decade and nearly twice that level within 25 years. This paper discusses three strategies that, taken together, could reverse this trend and reduce the ratio of debt to GDP to less than 50 percent. The first strategy, which focuses on the current decade, would reduce the Administration’s proposed spending increases and tax reductions that would otherwise add $3.8 trillion to the national debt in 2020. The second strategy would augment the tax-financed benefits for Social Security, Medicare and Medicaid with investment based accounts would permit the higher future spending on health care and pensions with a relatively small increase in saving for such accounts. The third strategy focuses on “tax expenditures,” the special features of the tax law that reduce revenue in order to achieve effects that might otherwise be done by explicit outlays. Tax expenditures now result in an annual total revenue loss of about $1 trillion; reducing them could permanently reduce future deficits without increasing marginal tax rates or reducing the rewards for saving, investment, and risk taking.

National Debt Up $3 Trillion on Obama's Watch (CBS) New numbers posted today on the Treasury Department website show the National Debt has increased by more than $3 trillion since President Obama took office. The National Debt stood at $10.626 trillion the day Mr. Obama was inaugurated. The Bureau of Public Debt reported today that the National Debt had hit an all time high of $13.665 trillion. The Debt increased $4.9 trillion during President Bush's two terms. The Administration has projected the National Debt will soar in Mr. Obama's fourth year in office to nearly $16.5-trillion in 2012. That's more than 100 percent of the value of the nation's economy and $5.9-trillion above what it was his first day on the job

Lawrence Kotlikoff - The Fed And Treasury's Actions Are Equivalent To Child Abuse - Kotlikoff says: "This massive Ponzi scheme is turning the American Dream into the American Nightmare" adding that what the Fed is doing now is equivalent to "child abuse" and adding "If things continue as we adults have planned, our nation’s debt, measured as a share of gross domestic product, will reach Greek levels just when the grandkids start heading to work. At that point, simply stabilizing the debt-to-GDP ratio will require raising taxes by 50 percent, thereby lowering the grandkids’ living standard from 74 to 61." And it gets much worse. Read on for Kotlikoff's view on why the Fed should be banned by the Geneva Convention.

U.S. debt called 'best horse in glue factory' - U.S. debt is "still the best-looking horse in the glue factory," a trader of sovereign debt told Dallas Fed President Richard Fisher after the publication of Treasury inflow data, according to a transcript of a speech Fisher is delivering at the New York Association for Business Economics. Fisher, who lamented being the "least worst" of major economies, repeated his long-standing concern that regulatory uncertainty is what is holding back businesses from spending money, as well as his opposition to a second round of quantitative easing. Fisher, who becomes a voting member of the FOMC in 2011, said there's still a great deal of legitimate debate still to take place within the FOMC on the subject

Budget and Economic Outlook for 2011 and Beyond - CBO Director's Blog - CBO and most private forecasters expect that the economic recovery will proceed at a modest pace during the next few years. In the forecast that we completed this summer, the unemployment rate remains above 8 percent until 2012. Two key factors influence that forecast. First, international experience suggests that recoveries from recessions that were spurred by financial crises tend to be slower than average. Following such a crisis, it takes time for consumers to rebuild their wealth, for financial institutions to restore their capital bases, and for nonfinancial firms to regain the confidence required to invest in new plant and equipment; all of those forces tend to restrain spending. Second, our projection is conditioned on current law, under which both the waning of fiscal stimulus and the scheduled increases in taxes (resulting from the expiration of previous tax cuts) will temporarily subtract from growth, especially in 2011.

Pentagon Mostly Gets a Pass From Deficit Hawks - Several GOP candidates have said military-spending reductions should be considered, along with cuts to entitlement programs. In a videotaped statement posted on his campaign website, Rand Paul, the libertarian-leaning Republican Senate hopeful in Kentucky, singled out what he described as an "enormous amount of waste" in defense spending.   "There's not enough money just in welfare to cut to balance the budget," Mr. Paul said. "You have to look at the entire budget, and approximately 40% of that budget is military."   That isn't necessarily the party line: The GOP's Pledge to America platform calls for fiscal austerity but makes notable exceptions for the military. Marco Rubio, the party's Senate nominee in Florida, for instance, generally supports efforts to trim federal spending but opposes specific measures to roll back defense budgets. Former Alaska Gov. Sarah Palin, who commands a following among tea-party groups, has said publicly that defense shouldn't be touched.

Martin Wolf - Britain and America seek different paths from disaster - The US and UK have similarities that go beyond speaking the same language: both had huge expansions in household credit; both had to rescue their financial sectors; both have watched their central banks push interest rates close to zero and adopt “quantitative easing”; and both have experienced massive post-crisis increases in fiscal deficits. Yet a big policy divergence is on the way. The coalition government of the UK will on Wednesday announce details of their cuts in government spending. Nothing comparable is expected in the US. In its latest forecasts, the International Monetary Fund has noted this divergence. But the bond markets seem quite insouciant, at least so far (see chart). Why, then, has this divergence occurred? What impact might it have? How far will QE offset its impact? What, finally, might we learn about the respective roles of monetary and fiscal policy?

A Natural Experiment in the Making - Martin Wolf makes an interesting point today in his column.  He argues that the divergent policy paths of the United States and the United Kingdom are providing a natural experiment on the efficacy of "expansionary" fiscal austerity: The US and UK have similarities that go beyond speaking the same language: both had huge expansions in household credit; both had to rescue their financial sectors; both have watched their central banks push interest rates close to zero and adopt “quantitative easing”; and both have experienced massive post-crisis increases in fiscal deficits. Yet a big policy divergence is on the way. The coalition government of the UK will on Wednesday announce details of their cuts in government spending. Nothing comparable is expected in the US...What we do know is that the UK has launched a remarkable policy experiment. The contrast with the US should at least be instructive. While this will make for an interesting comparison going forward,  it will be difficult to disentangle the effects of monetary policy from that of fiscal policy.  Martin wolf cites an IMF study in his column that speaks to this issue.

`Savage' Austerity Is in US's Future, Buiter Says: Fiscal austerity measures detailed today by the U.K. government will soon be needed in the U.S., according to Willem Buiter, Citigroup Inc.’s chief economist.  Britain’s deepest budget cuts ever, outlined by Chancellor of the Exchequer George Osborne, will eliminate almost 500,000 public-sector jobs and impose a levy on banks. The moves are part of a plan to reduce the 156 billion-pound ($245 billion) deficit, which is forecast to be 10.1 percent of gross domestic product this year, to 2.1 percent in the 2014-15 fiscal year.  “The only question was really the timing and the composition,” given the finite willingness of financial markets to endure budget shortfalls, New York-based Buiter said in a roundtable interview today on “Bloomberg Surveillance Midday” with Tom Keene. “This is very savage, but no more savage than what the U.S. will have to endure when it gets going.”

How we misunderstand our deficit problem — and the solution - Gallup's survey of voter preferences for closing the entitlement gap is incomplete. It suggests the options on entitlements are like a second-grade arithmetic problem: You can either add stuff (tax increases) or subtract stuff (benefit cuts). What's missing is the option you learn about in high school: growth. No one cares about the size of a country's debt. People care only about how big it is in comparison with the rest of the economy. That's why economists and rating agencies watch the debt-to-GDP ratio: $1 trillion in debt will crush an economy that produces only $500 million every year, but it's meaningless for an economy that produces $20 trillion a year. Our problem, put simply, is that our debt is growing faster than our economy. A lot faster. But you can't solve that by cutting spending or raising taxes. Those options will buy you time, but nothing more than that. Think of it this way: If you've got $1 trillion in debt and it's growing at 10 percent a year, you can cut $80 billion -- a huge cut in one year -- and be back to $1 trillion in debt by the next year. What matters is the growth rate, not the number.

Fed, Japan Treasury Holdings Set to Surpass China: Chart of the Day - The Federal Reserve and Japanese investors are poised to pass China and become America’s largest creditors following efforts from U.S. policy makers and the Bank of Japan to stimulate growth. The CHART OF THE DAY shows the U.S. central bank’s Treasury holdings have risen to a record $821.2 billion, approaching China’s $846.7 billion. The figure for Japan is $821 billion, the most ever. China overtook both the Fed and Japan in 2008 as the communist nation bought dollars to hold down the yuan as a way to aid exporters, funneling the greenbacks into U.S. debt.  “Since August, the Fed has been buying Treasuries,” said Hiromasa Nakamura, a senior investor at Mizuho Asset Management Co. in Tokyo, which manages the equivalent of $36.8 billion and is part of Japan’s second-largest bank. “After the Bank of Japan’s intervention, maybe they will invest in Treasuries. China is diversifying its assets. They may buy the bonds of other countries."

The Non-Surge In Government Spending, Continued - Paul Krugman - A bit more on how government spending has not, contrary to what you hear everywhere, surged under Obama. Let me offer a calculation that will, I hope, make things a bit clearer.   So, what would we have expected total government spending — federal, state, and local — to do over the past three years if there had not been a crisis and a change in government control? A first approximation would have been spending growing along with the trend growth in the economy — that is, real GDP growing with the economy’s potential, and government spending growing at real GDP plus inflation. Actual growth has been higher: 19.5 percent. So government spending is about 7 percent, or about $350 billion, higher than a simple trend projection would have suggested. What accounts for the higher spending? Well, none of it is government consumption; it’s all in transfer payments. BEA data aren’t quite as helpful here as I’d like, but it’s clear that a large chunk, roughly $100 billion, is unemployment benefits, which have surged along with unemployment, and another large chunk is Medicaid spending, which has surged because the slump has impoverished more people. Some more for other safety net programs, like food stamps. Also, Social Security and Medicare outlays have gone up about $85 billion more than my 11.7 percent norm.

Democrats shrank US spending, deficit in last fiscal year, figures show - The US deficit shrank nine percent last fiscal year but still topped one trillion dollars, the government said Friday in a report seized on by Democrats' rivals weeks ahead of mid-term elections. For the 2010 fiscal year that ended on September 30, the government had a budget shortfall of 1.294 trillion dollars, down 122 billion dollars from the previous year's record-setting high. Revenue rose and spending fell amid recovery from recession and as President Barack Obama's Democratic administration wound down some of the emergency measures taken to restore growth. The final figures "underscored the administration's commitment" to cutting the massive government deficit, Treasury Secretary TimothyGeithner said in a statement."By carefully managing the emergency initiatives to stop the financial panic and by accelerating our exit from those investments, we have significantly lowered the cost to taxpayers, bringing the costs of the financial rescue down by more than 240 billion dollars this year."

Even More On The Origins of the Deficit - Paul Krugman - I’ve thought of another way to present the data on GDP, spending by all levels of government, and taxes. Let’s look at trends in GDP, spending, and revenues over two periods — one designed to capture “normal” growth, the other the economic crisis. For the first period, I look at trends from the business cycle peak in the first quarter of 2001 to the peak in the last quarter of 2007. This is a standard way of measuring economic trends, by the way, since business cycle peaks presumably measure the economy’s output at or near capacity. And yes, this means that I wrote this post in a fit of peaks.For the second period, I use the quarters since that 2007 peak.So here’s what you get: During the pre-crisis period, spending grew slightly faster than GDP — that’s Medicare plus the Bush wars — while revenue grew more slowly, presumably reflecting tax cuts. What happened after the crisis? Spending continued to grow at roughly the same rate — a bulge in safety net programs, offset by budget-slashing at the state and local level. GDP stalled — which is why the ratio of spending to GDP rose. And revenue plunged, leading to big deficits.

Spending Money Can Be Difficult for Some Middle-Aged Governments - Paul Krugman continues his series on the lack of government spending under the Obama administration.  I don’t think he hits the point quite hard enough that when economists say government spending they mean government consumption and investment. Government outlays are the sum of all checks the government writes.However, many of those checks are just pass-throughs: collect from person A, distribute to person B. At the end of the day the money is still spent by individuals on things that they themselves want. Such funds are not subject to the Friedman critique: Nobody spends somebody else’s money as carefully as he spends his own. Nobody uses somebody else’s resources as carefully as he uses his own. So if you want efficiency and effectiveness, if you want knowledge to be properly utilized, you have to do it through the means of private property. So what we really want to look at is Federal Government Consumption and Investment. Lets check the tape:

The National Review's silly attack on Paul Krugman - No better proof that the right feels continues to feel threatened by Paul Krugman is needed than the sight of The National Review's Stephen Spruiell devoting a whopping 3600 words to a full-bore assault on the man. Spruiell is ambitious -- his magnum opus is no ordinary takedown, as proven by the concluding sentence alone. But he is more like Captain Ahab, leading his diminishing crew of followers on a doomed quest in search of the great white stimulus package that will redeem us or destroy us, but either way will finally silence all those doubting voices.Diminishing? Do we have any evidence of this? Are his pageviews going down? Are his blogs and columns any less popular?Perhaps what Spruiell means, or hopes, is that Krugman's influence on public affairs is losing force. But this is also an odd accusation to make, since Krugman has criticized virtually every policy initiative of the Obama administration as insufficient or unworkable. If anything, one would imagine that Krugman's influence and number of followers would be gaining as a result.

The Opposite of Leadership - A willingness to sacrifice jobs for political gains is the opposite of leadership: Obama said that just as people and companies have had to be cautious about spending, “government should have to tighten its belt as well. ... Obama has asked agencies to develop plans for cutting budgets 5 percent. A leader would explain why the government -private sector equivalence is false in this instance, fight to keep people working instead of caving to the Austerians, and do everything possible to provide more jobs for people, not less (even if, in the end, the fight is lost the political gains from trying to push a jobs program through would, in my opinion, be far greater than the gains from issuing pink slips -- the administration needs to show it cares as much about saving jobs as it does about saving big banks). The jobs that are sacrificed will do almost nothing to help with the long-run budget problem, cutting the budget makes things worse in the short-run, and even if there was an argument for this, the political gains are unlikely to materialize. This is very disappointing.

Money, Will and Power - Robert Samuelson is skeptical  Economists seem split into two camps. Some, such as Paul Krugman, the New York Times columnist, believe the economy is so weak that the government should do almost anything (bigger deficits, more cheap credit) that might help slightly; and others, such as Meltzer, fear that expedient measures now will lead to bigger problems later. Between them, there’s an unstated common presumption that there are no instant cures for the economy’s lethargy. There may be limits to what the Fed is willing to do. It sometimes hard to workout the arcane language of the Federal Reserve Act, but there are definitely limits on what the Fed is legally allowed to do. However – for our purposes – there is no limit to what a Central Bank has the power to do. Right now we are talking about the Fed purchasing government bonds in an effort to drive down yields. The limit to this is obviously when the Fed has purchased all the available government securities. However, in theory the Central Bank does not have to stop there. It can begin to buy private bonds. Indeed, it need not stop there, it can buy stocks. Indeed, it need not stop there, it can buy output directly. That is, the Fed could simply go to Wal-Mart and say – I’ll take half your inventory.

Pledging Our Way to Fiscal Disaster - The poll results are from a new USA Today/Gallup survey, but they track other recent research. Even after decades of Inside-the-Beltway entitlement talk, very little has registered with real people. Denial, as they say, ain’t just a river in Egypt. And the result is an exceedingly dangerous political climate in which the nation must try to address its long-term fiscal problems. The Gallup poll shows the usual partisan divide over both the definition of the problem and potential solutions. Eighty-six percent of Republicans surveyed believe entitlements will cause big trouble, but only 69% of Democrats agree. And entirely predictably, more Republicans (41%) want to cut benefits than do Democrats (22%) or independents (32%). By contrast, tax increases are backed by 60% of Democrats but only half as many Republicans and 40% of independents.And congressional candidates, who read the polls, are scrambling to pander to the free-lunch beliefs of their respective bases. As a result, they are locking themselves into opposing both reductions in future benefits and tax increases.  Houston, we have a problem.

The Debate We Should Be Having - In the narrative of fiscal conservatives, the road to recovery is paved with sacrifice -- budget balance rather than job creation, fiscal freezes well before the economy has returned to full employment, long-term cuts in entitlements, and automatic triggers if Congress misses a preset target. A presidential fiscal commission, most of whose members accept this broad story, is due to report by Dec. 1. This premise has infected elite opinion to the point where even some Democrats are entertaining needless cuts in Social Security as proof of their fiscal toughness. As a faded "recovery summer" gives way to a chilly election season, the Obama administration finds itself painted into a corner by concern for these views, reluctant to propose stronger medicine that might temporarily increase deficit spending.

Nobel Laureate Joseph Stiglitz: Foreclosure Moratorium, Government Stimulus Needed to Revive US Economy - As the Obama administration rejects a foreclosure moratorium and austerity protests grip Europe, we assess the state of the US and global economy with Nobel Prize-winning economist Joseph Stiglitz, author of Freefall: America, Free Markets, and the Sinking of the World Economy. Stiglitz backs calls for a foreclosure moratorium and says opponents of a new government stimulus "don’t understand basic economics." On war, Stiglitz says Iraq and Afghanistan are "the first wars in America’s history financed totally on the credit card." [includes rush transcript]

Ezra Klein - Stiglitz: We need more stimulus, not quantitative easing - I'll have a column this weekend on what Fed Chairman Ben Bernanke needs to do to make a second round of quantitative easing work. As part of my reporting for the column, I called Nobel Prize-winning economist Joseph Stiglitz, who's been very skeptical of further action from the Fed. The column, in part for reasons relating to my assessment of the politics of the issue, ends up taking a different position than Stiglitz, but I thought it worth publishing his interview in full, and he graciously agreed. An edited transcript follows.

The Wars That America Forgot About - Notice anything missing on the campaign landscape?  How about war? The United States is now in its ninth year of fighting in Afghanistan and Iraq, the longest wars in American history. Almost 5,000 men and women have been killed. More than 30,000 have been wounded, some so gravely they’re returning home to become, effectively, wards of their families and communities. In those nine years, the United States has spent more than $1 trillion on combat operations and other parts of the war effort, including foreign aid, reconstruction projects, embassy costs and veterans’ health care. And the end is not in sight.  So why aren’t the wars and their human and economic consequences front and center in this campaign, right up there with jobs and taxes?

What is the Burden? The Future of European and American Defense Budgets -- Fiscal austerity has arrived in Europe, and defense is not being spared, which now risks opening a new round of useless bickering over the "defense burden."  The Germans have announced plans to reduce their combat forces by more than one third, or 85,000.  The French are slowing their defense acquisition programs and looking for new ways to partner on projects with their allies.  And the UK announced yesterday a plan to reduce their defense plans by eight percent over the next four years, retiring its Harrier aircraft, eliminating the Nimrod aircraft program, trimming the force structure, and mothballing one of the two aircraft carriers it plans to build over the next decade. As I have argued for some time, this day is coming for the United States.  US defense spending will be hit by a double tsunami in the next two years.  One wave will be rising demand for the same kind of fiscal austerity the Europeans are facing.  It will receive new impetus from a likely Republican victory in the November elections, bringing a new wave of small government conservatives into the Congress.  Additional fuel will be poured on by post-election reports from the Bipartisan Policy Center's Debt Reduction Task Force (co-chaired by Dr. Alice Rivlin and Sen. Pete Domenici), due in mid-November, and the President's National Commission on Fiscal Responsibility and Reform (co-chaired by Sen. Alan Simpson and former White House Chief of Staff Erskine Bowles), due in early December. 

What's The Economic Stimulus Equivalent Of The Immaculate Reception? - Over at Economist's View, Mark Thoma comments on a piece by Joseph Stiglitz from Monday's Financial Times that questions the value of using monetary rather than fiscal policy to deal with the economy.  Stiglitz makes a number of very good points (you can almost hear the frustration in his writing), but he quickly goes past what I see as the money quote: The Fed has bought more than a trillion dollars of mortgages and long-term bonds, the value of which will fall when the economy recovers – precisely the reason why no one in the private sector is interested. The government may pretend that it has not experienced a capital loss because, unlike banks, it does not have to use mark-to-market accounting. But no one should be fooled. Substitute "Congress" or "The White House" for "The Fed" in the above graph and the real reasons monetary policy is now the only economic game in town become immediately apparent: it doesn't appear to cost anything, doesn't add to the budget deficit, and doesn't require any votes by members of Congress

Taking a stand that appeals to no one - This is pretty much what President Obama has done. He's making vague noises about the "government tightening its belt", which has made Delong, Krugman and Mark Thoma go ballistic. Of course, contingency plans for a possible 5% cut that might involve not filling vacancies is not going to do anything to placate deficit hawks and Tea Party Peeps.Sure the President is in a rough spot. The incumbent party generally loses seats in a mid-term election, and voters tend to punish incumbents for poor economic performance, but Obama seems to have gone totally tone deaf, appealing to neither the left or the right. Perhaps the most disconnected part of his remarks are where he blames the upcoming electoral debacle on the Supreme Court

No such thing as shovel-ready projects - On September 27th the President told Peter Baker of The New York Times: He realized too late that “there’s no such thing as shovel-ready projects” when it comes to public works. Yet just three weeks earlier, in a speech to the LaborFest in Milwaukee, the President said: So, that’s why, Milwaukee, today, I am announcing a new plan for rebuilding and modernizing America’s roads and rails and runways for the long term. … But the bottom line is this, Milwaukee — this will not only create jobs immediately, it’s also going to make our economy hum over the long haul. Q1 for Team Obama:  If there’s no such thing as shovel-ready projects, how will the $50 B of new infrastructure spending create jobs immediately? Q2:  If shovel-ready projects do exist and are queued up to create jobs immediately, shouldn’t they have been funded already by the stimulus law enacted in early 2009, leaving only the slower-spending projects left to be funded with the new money?

Why does Obama keep telling reporters there are ‘no shovel-ready projects’? - Perhaps I should've written this post before interviewing Jared Bernstein, the vice president's chief economist, on the same subject. But if you read that interview closely, you'll see a White House that doesn't exactly know what to do with the president's comments. The administration doesn't think the stimulus failed. At the end of the day, the law met its spending targets. As promised, it dispensed with 70 percent of the funds within two years. Most of the remaining money will pay out when projects that are underway reach completion. Today, the White House released a video in which Austan Goolsbee, the chairman of the Council of Economic Advisers, argues that the intervention saved the job market (though by looking only at private-sector jobs, he stacks the deck, as the public sector is where recent job losses have been concentrated). So why did the president tell Peter Baker -- and before him, David Brooks -- that there are no "shovel-ready programs"? Those were three of the most important words used to sell the program -- and the president's decision to walk them back is giving plenty of ammunition to his enemies.

Why Public Works Are Poor Stimulus and Why We Still Need Them - It is surprising that the lack of shovel-ready projects or the slow pace of public works spending is a revelation to anyone. Obama’s statement is simply an admission of the obvious. I have no doubt that Larry Summers, Christie Romer and Peter Orszag all told him that public works were not likely to provide much short-term stimulus. Their main value is that public goods stimulate long-term growth and the best time to produce them is when the private sector has a lot of idle resources and they can be financed at low interest rates. These are still very good reasons to undertake public works now before the economy recovers, interest rates rise and the private sector competes for the resources necessary for large public works projects.

Measuring the Public Benefits From Taxes - In America, taxes and transfers have a significant impact on income inequality, which has been rising since 1980, according to a report by Thomas L. Hungerford of the Congressional Research Service. You can see the report here. Hungerford warns that new tax policies, aimed at bringing what we levy in line with what we spend, need to be evaluated in terms of the redistributive effects to avoid unintended consequences. But for taxes and transfers, America would be the 19th most unequal nation in the world, if you apply Hungerford's data to the annual CIA World Fact Book report on income inequality.

New Video: Sally, Redistribution, Taxes and the Deficit – video - Government is redistributing more than $826 billion each year from a small group of Americans like Jane to a larger group of Americans like Sally and Bob. How are we ever going to reduce the deficit and the debt if government looks free to so many, but expensive to so few? 

Why the Correlation Between Top Marginal Rates and Real Economic Growth is Positive - Discouraging Greg Mankiw From Working Would be Good for the Economy, Part 2: I had a post the other day noting that the correlation between top marginal rates and real GDP per capita is positive. Depending on how you look at it (i.e., growth over several years, growth over one year, going back to 1929, focusing only on the period since Reagan took office, etc) that correlation might be small or it might go above 50%, but it is positive. That is to say, higher top marginal income tax rates have not caused with slower real economic growth in this country. Not the message you'll get from most economists, but the data says what the data says, and where economists disagree with the data, its a sign that something is seriously wrong with the profession, not the data. (Note - the post appeared at the Presimetrics blog and at Angry Bear, and was in response to an op ed piece by Greg Mankiw noting that higher marginal income tax rates would dissuade him from working.) Now, in that post I didn't explain why higher top marginal income tax rates haven't reduced growth, and may have, at times, dare I say it, actually been a force for faster real economic growth. So I'm going to cover that here.

From Obama, the Tax Cut Nobody Heard Of - In a troubling sign for Democrats as they head into the midterm elections, their signature tax cut of the past two years, which decreased income taxes by up to $400 a year for individuals and $800 for married couples, has gone largely unnoticed. In a New York Times/CBS News Poll last month, fewer than one in 10 respondents knew that the Obama administration had lowered taxes for most Americans. Half of those polled said they thought that their taxes had stayed the same, a third thought that their taxes had gone up, and about a tenth said they did not know. As Thom Tillis, a Republican state representative, put it as the dinner wound down here, “This was the tax cut that fell in the woods — nobody heard it.” Actually, the tax cut was, by design, hard to notice. Faced with evidence that people were more likely to save than spend the tax rebate checks they received during the Bush administration, the Obama administration decided to take a different tack: it arranged for less tax money to be withheld from people’s paychecks.

The World's Greatest Tax Cut? - Michael Cooper writes today that the Obama tax cut, which was part of the 2009 stimulus bill, was so subtle that lots of people think their taxes have gone up under Obama: In a troubling sign for Democrats as they head into the midterm elections, their signature tax cut of the past two years, which decreased income taxes by up to $400 a year for individuals and $800 for married couples, has gone largely unnoticed. In a New York Times/CBS News Poll last month, fewer than one in 10 respondents knew that the Obama administration had lowered taxes for most Americans. ....The tax cut was, by design, hard to notice. Faced with evidence that people were more likely to save than spend the tax rebate checks they received during the Bush administration, the Obama administration decided to take a different tack: it arranged for less tax money to be withheld from people’s paychecks.

The tax cut that failed -This is a great opening line by Michael Cooper: "What if a president cut Americans’ income taxes by $116 billion and nobody noticed?" It happened, of course. But the nobody noticing was by design. The Making Work Pay tax credit was built for stealth. Working off of economic evidence suggesting that people are more likely to save a one-time windfall than a small increase in wages, the tax cut was used to lower the amount of tax withholding in people's weekly paychecks. The hope was that they would spend it, and it would thus do more to stimulate the economy. This created two political problems for the tax cut. First, it was invisible. A recent CBS/NYT poll showed that fewer than 10 percent of Americans knew Obama had cut taxes. Second, because the administration had a distinct tax-cut design in mind, they added that to the stimulus rather than giving Republicans space to negotiate out a tax-cut portion that they would own. Obama has repeatedly named this as one of his major political mistakes..

Why Nobody Noticed Obama’s Tax Cuts - This despite the fact that about one-third of the much-reviled 2009 stimulus—or almost $300 billion--came in the form of tax reductions. According to Tax Policy Center estimates, 96.9 percent of households enjoyed a tax cut that averaged almost $1,200. Just one measure—Obama’s Making Work Pay tax credit—put more than $116 billion into people’s pockets in 2009 and 2010.  Yet, a Times poll found that fewer than 10 percent of those surveyed had any clue. Remarkably, fully one-third thought their taxes went up—even though the actual number was about zero.  How could so many people have missed it? After all, $1,200 ain’t nothing. In large part, it was due to the design of Obama’s tax plan. Earlier stimulus tax cuts often came in the form of ostentatious checks from the Treasury. In 2008, for example, President Bush proposed a tax reduction only half the size of Obama’s (about $145 billion). But it was delivered to households in the form of rebate checks—generally $600 per adult and $300 per child.

The New Tax Man: Big Banks And Hedge Funds - Nearly a dozen major banks and hedge funds, anticipating quick profits from homeowners who fall behind on property taxes, are quietly plowing hundreds of millions of dollars into businesses that collect the debts, tack on escalating fees and threaten to foreclose on the homes of those who fail to pay. The Wall Street investors, which include Bank of America and JPMorgan Chase & Co., have purchased from local governments the right to collect delinquent taxes on several hundred thousand properties, many in distressed housing markets, the Huffington Post Investigative Fund has found. In many cases, the banks and hedge funds created new companies to do their bidding. They gave the companies obscure, even whimsical names and used post office boxes as their addresses, masking Wall Street's dominant new role as a surrogate tax collector.

Google 2.4% Rate Shows How $60 Billion Lost to Tax Loopholes - Google Inc. cut its taxes by $3.1 billion in the last three years using a technique that moves most of its foreign profits through Ireland and the Netherlands to Bermuda. Google’s income shifting -- involving strategies known to lawyers as the “Double Irish” and the “Dutch Sandwich” -- helped reduce its overseas tax rate to 2.4 percent, the lowest of the top five U.S. technology companies by market capitalization, according to regulatory filings in six countries.  “It’s remarkable that Google’s effective rate is that low,” said Martin A. Sullivan, a tax economist who formerly worked for the U.S. Treasury Department. “We know this company operates throughout the world mostly in high-tax countries where the average corporate rate is well over 20 percent.” The U.S. corporate income-tax rate is 35 percent. In the U.K., Google’s second-biggest market by revenue, it’s 28 percent.

Dividend Repatriation Redux? Not In The Next Two Years. - Is there a pot of U.S. multinational money parked overseas?  Yes, approximately $2.3 tr.   Will the U.S. government temporarily lower U.S. tax rates by 85% again, as it did in 2004, so those firms will bring roughly $565 b. of it home?  No, at least not during the next two years, mainly because studies show the 2004 dividend repatriation didn't create many jobs here, and most of it went to buy back shares and to pay dividends.  The Senate rejected it in early 2009.  President Obama opposes it, and, even if the Republicans take Congress, they won't have enough votes to overcome a Senate filibuster or a veto. The Financial Times touted the idea Tuesday, starting a lot of talk on foreign currency trading desks.

Regulating Wall Street: The Dodd-Frank Act and the new architecture of global finance - Viral Acharya talks to Viv Davies about a new book, 'Regulating Wall Street'. He discusses the success and failings of the Dodd-Frank Act and its implications for the US financial system. He outlines the crucial role of derivatives, the new council of systemic risk, SIFIs and the different approaches to resolution in the US and Europe. Acharya compares the Basel III proposals with the US reforms and suggests what should be priorities for discussion at the upcoming G20 summit.

Dodd-Frank: A critical assessment -The Dodd-Frank Wall Street Reform and Consumer Protection Act is widely viewed as the most sweeping set of reforms to the US financial sector since the Great Depression. Yet despite being broadly in favour of the measures, this column identifies flaws that fail to deal with the main causes of the crisis and that will lead to further implicit government guarantees. In our forthcoming book, Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance, we provide our overall assessment of the Act in three different ways:

    • From first principles in terms of how economic theory suggests we should regulate the financial sector;
    • In a comparative manner, relating the proposed reforms to those that were undertaken in the 1930s following the Great Depression;
    • How the proposed reforms would have fared in preventing and dealing with the crisis of 2007 to 2009 had they been in place at the time.

Financial Regulation Overhaul Draws Weak Public Support - Many Democrats hoped this summer’s financial regulation overhaul would help them in elections this fall. A survey by economists at the University of Chicago and Northwestern University indicates they’re not getting much traction from it. Just 12% of respondents in the survey said they were satisfied with the Dodd-Frank law to revamp financial oversight, while 54% were dissatisfied. Two out of three people said they believe the measure is insufficient to protect against future bailouts. Even among only Democrats, the law has little support. Just 35% of Democrats said they were “satisfied” or “very satisfied” with the measure. The vast majority of Republicans, 80%, said they were dissatisfied, along with 54% of independents.

Macro-Prudential Policies: Putting the “Big Picture” into Financial Sector Regulation IMFdirect - The devastating impact of the global financial crisis created a consensus that pre-crisis financial regulation didn’t take the “big picture” of the system as a whole sufficiently into account and, as a result, supervisors in many markets “missed the forest for the trees.” In other words, they did not take into account the macro-prudential aspects of regulation, which has now become the focus of many authorities. Consensus regarding the need for macro-prudential regulation is particularly striking—previously this type of regulation had been used relatively little and, at present, there are no agreed standards that can be applied internationally.

Fed’s Plosser: Bad Incentives Drove Much of Financial Crisis - A veteran Federal Reserve official cast his lot Wednesday with those who believe the government itself was a major player in driving events that led up to and created the financial crisis. “The financial crisis was not a failure of our capitalist system,” Federal Reserve Bank of Philadelphia President Charles Plosser said. “Nor was it largely the result of a lot of greedy evildoers whom we could just put in jail to solve the problem.”Instead, the official said “it largely reflected a collection of incentives, some arising in private markets and some created by the government, that motivated individuals to act in ways that proved damaging to the nation’s overall economy.”

The Bank Wins ... -The Dodd-Frank financial reform law is supposed to correct the problems and abuses that led to the crisis. It could take years to implement. Meanwhile, Wall Street is still engaged in many of the same practices. That was abundantly clear in Louise Story’s article in The Times this week on securities lending, a multitrillion-dollar activity, both before the crash and today.  In a typical securities lending deal, a pension fund, or other institutional investor, lets a bank lend some stocks to another investor, say, a hedge fund. (Investors use borrowed shares to “short” or bet against stocks.) In return, the hedge fund puts up a cash deposit. The pension fund then allows the bank to invest the cash, in presumably safe investments to eke out a little extra return.  Here’s where things can get tricky. If the invested cash turns a profit, the deposit is easily repaid when the shares are returned, and the pension fund and the bank share in the gains. If the invested cash incurs losses, however, the deposit cannot be repaid in full, and the pension fund has to cover the shortfall.

Wow - I would have to say that this is unprecedented, at least I hope so: Commodity Futures Trading Commission (CFTC) Administrative Law Judge George H. Painter made serious allegations regarding fellow CFTC judge Bruce Levine in announcing his retirement.In a notice sent to complainants and their attorneys, Judge Painter claims that Levine  told him that he had promised former CFTC Chair Wendy Gramm “that he would never rule in a complainants favor”. Painter’s notice goes on to say, “A review of his rulings will confirm that he has fulfilled his vow.”Yes, I’d say those charges are pretty serious, and disturbing.  Judges don’t, as a rule, criticize one another.  Things must have been pretty bad for Painter to break that rule.  But it doesn’t seem that in the end it will have a real effect.

World Justice Project report on the rule of law - A new study on the rule of law in 35 countries differs from previous efforts by emphasizing the actual experience of ordinary citizens. North America and Western Europe, as a region, rank at the top of a set of seven regions. However the US ranks 6th among the 7 countries studied within that region. A long-standing problem is access to the civil justice system. Another area of concern is limits on government power.  From time to time one sees various measures of corruption, or the strength of contracts, etc, in various countries. This week one such study came out which seems to me to be particularly useful. Naked Capitalism pointed yesterday to a study on the rule of law across 35 countries. This comes from The World Justice Project, who say about themselves  Our mission is to lead a global, multidisciplinary effort to strengthen the Rule of Law for the development of communities of opportunity and equity.

Banks Shared Clients’ Profits, but Not Losses - JPMorgan Chase & Company has a proposition for the mutual funds and pension funds that oversee many Americans’ savings: Heads, we win together. Tails, you lose — alone.  Here is the deal: Funds lend some of their stocks and bonds to Wall Street, in return for cash that banks like JPMorgan then invest. If the trades do well, the bank takes a cut of the profits. If the trades do poorly, the funds absorb all of the losses. The strategy is called securities lending, a practice that is thriving even though some investments linked to it were virtually wiped out during the financial panic of 2008. These trades were supposed to be safe enough to make a little extra money at little risk.  JPMorgan customers, including public or corporate pension funds of I.B.M., New York State and the American Federation of Television and Radio Artists, ended up owing JPMorgan more than $500 million to cover the losses. But JPMorgan protected itself on some of these investments and kept millions of dollars in profit, before the trades went awry.  How JPMorgan won while its customers lost provides a glimpse into the ways Wall Street banks can, and often do, gain advantages over their customers.

Bankruptcy as Economic Stimulus - With bankruptcy this lucrative, who needs solvency? Lehman Brothers' demise has so far meant more than a billion dollars in fees for its reorganization pallbearers.  Makes you think we missed a great opportunity for economic stimulus by propping up so many other faltering companies up... From DealBook:Lehman Brothers Holdings on Monday said it has paid more than $1 billion to its lawyers, consultants and financial advisers since filing the largest U.S. bankruptcy two years ago, Reuters reports.Professional and other fees totaled $1.01 billion through September 30, up $51.8 million from $961.3 million a month earlier, a filing with the U.S. bankruptcy court in Manhattan shows. Lehman’s bankruptcy is the costliest in U.S. history...Well, I want in on some of that action!  Maybe I'll walk over and see if they could use a blogger on the job or something.  I mean, since it's a carrion feast anyway, how could one more beak in the mix hurt anyone?

 Are You Happy Or Angry That The Government Has Made 8.2% on TARP? - This story from Bloomberg is making the rounds in the blogosphere today....The U.S. government’s bailout of financial firms through the Troubled Asset Relief Program provided taxpayers with higher returns than they could have made buying 30-year Treasury bonds -- enough money to fund the Securities and Exchange Commission for the next two decades. The government has earned $25.2 billion on its investment of $309 billion in banks and insurance companies, an 8.2 percent return over two years, according to data compiled by Bloomberg. That beat U.S. Treasuries, high-yield savings accounts, money- market funds and certificates of deposit. But as the story also notes, "Democrats are struggling to turn those gains into political capital..."How is it possible that an investment that makes the federal government look like it has the smarts of Warren Buffet is such a hard sell with voters?

Paying To Be Too Big Too Fail - This paper estimates the value of the too-big-to-fail (TBTF) subsidy. Using data from the merger boom of 1991-2004, we find that banking organizations were willing to pay an added premium for mergers that would put them over the asset sizes that are commonly viewed as the thresholds for being TBTF. We estimate at least $14 billion in added premiums for the eight merger deals that brought the organizations to over $100 billion in assets. In addition, we find that both the stock and bond markets reacted positively to these deals. Our estimated TBTF subsidy is large enough to create serious concern, since recent assisted mergers have allowed TBTF organizations to become even bigger and for nonbanks to become part of TBTF banking organizations, thus extending the TBTF subsidy beyond banking.  You can download the paper at the link or find it here.

I Told You So - Robert Waldmann is pleased to note that he was right and that Paul Krugman and Joeseph Stiglitz were wrongggg. They claimed that PPIP was a huge giveaway, because purchases of toxic assets would be 85% financed by no-recourse loans from the FDIC. I noted that this financing would only be available if the FDIC (not just Treasury) agreed, and that the FDIC had no intention of being taken to the cleaners. Now I read that, so far, PPIP has generated a 36% annual return for the Treasury. That's not the point. The point is that it has generated approximately no profit or loss for the FDIC, because the FDIC refused to be played for suckers. They key sentence is The Treasury is an equal equity partner in each of the funds and provided debt financing for the $29.4 billion program.

Bank of America Posts $7.3 Billion Loss on Cost of New Rules - Bloomberg - Bank of America Corp., the largest U.S. lender, reported a $7.3 billion loss tied to new rules on consumer accounts and credit cards and said it’s fighting demands for the lender to buy back allegedly faulty loans.Chief Executive Officer Brian T. Moynihan, 51, must contend with stricter rules on consumer fees and disclosures and rein in mortgage losses. A probe by attorneys general in all 50 states focusing on faulty foreclosure documents has raised concern that lenders will be forced to buy back billions of dollars of loans from investors. The bank said yesterday it plans to resume foreclosures after an Oct. 8 halt to review its procedures. “This is not pleasant, and we would like to get through it,”

Unofficial Problem Bank List at 871 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Oct 22, 2010. Changes and comments from surferdude808:  Failures contributed to the Unofficial Problem Bank List changes this week. There were eight removals, with seven because of failure, and four additions, which leaves the list at 871 institutions with assets of $402.2 billion.

FDIC Folds to Banks, Again - The FDIC announced this morning that they will not be going through with the scheduled increase for deposit insurance for America’s banks. The reason for the roll back in premiums comes as a result of a downward revision of the losses the FDIC faces: The FDIC has updated its income, loss and reserve ratio estimates and has concluded that expected losses for the period 2010 through 2014 are lower than were projected in June 2010. The FDIC now projects that losses during this period will be $52 billion, rather than $60 billion as projected in June. What has changed since the June analysis that showed a $60b loss versus the mid October guess of only $52b? How about the foreclosure fraud issue? As of today we have no clue what the impacts will be of this mess. It could be very significant. The stock market has been beating up the stocks of the banks since this story has been on the front page. While the actual impact may be unknown, what is now a certainty is that the banks will have to take additional losses due to the foreclosure disaster. Some of those losses will take some banks into the hands of the FDIC.

Felix Rohatyn Looks Back, and Sighs - Andrew Ross Sorkin writes about a conversation with Felix Rohatyn, the veteran investment banker who helped save New York City from bankruptcy in the 1970s, advised RJR Nabisco on its sale to Kohlberg Kravis Roberts in the 1980s and sold Columbia Pictures to Sony in the 1990s.  About to publish a memoir about his major deals in finance, Mr. Rohatyn reveals some uneasiness about his own industry and its effect on society. “No matter how much I try to be really objective, the financial community has not covered itself with glory in these last 50 years,” he said.

Exclusive Excerpt: America on Sale, From Matt Taibbi’s ‘Griftopia’ - Sovereign wealth funds, or SWFs, are huge in the Middle East. Most of the bigger oil-producing states have massive SWFs that act as cash repositories (with holdings often kept in dollars) for the revenues generated by, for instance, state-owned oil companies. Unlike the central banks of most Western countries, whose main function is to accumulate reserves in an attempt to stabilize the domestic currency, most SWFs have a mission to invest aggressively and generate huge long-term returns. Imagine the biggest and most aggressive hedge fund on Wall Street, then imagine that that same fund is fifty or sixty times bigger and outside the reach of the SEC or any other major regulatory authority, and you've got a pretty good idea of what an SWF is.

The Perfect Storm - Robert Reich - It’s a perfect storm. . I’m talking about the dangers facing our democracy. First, income in America is now more concentrated in fewer hands than it’s been in 80 years. Almost a quarter of total income generated in the United States is going to the top 1 percent of Americans.  The top one-tenth of one percent of Americans now earn as much as the bottom 120 million of us. Who are these people? With the exception of a few entrepreneurs like Bill Gates, they’re top executives of big corporations and Wall Street, hedge-fund managers, and private equity managers. They include the Koch brothers, whose wealth increased by billions last year, and who are now funding tea party candidates across the nation. Which gets us to the second part of the perfect storm. A relatively few Americans are buying our democracy as never before. And they’re doing it completely in secret.  Hundreds of millions of dollars are pouring into advertisements for and against candidates  — without a trace of where the dollars are coming from. They’re laundered through a handful of groups. Fred Maleck, whom you may remember as deputy director of Richard Nixon’s notorious Committee to Reelect the President (dubbed Creep in the Watergate scandal), is running one of them. Republican operative Karl Rove runs another. The U.S. Chamber of Commerce, a third.

Guest Post: 70% Of All Stock Market Trades Are Held for An Average of 11 SECONDS - The Fourteenth Banker writes today:In the stock market, program trading dominates volume. I heard recently that 70% of trade positions are held for an average of 11 seconds. He’s correct. As the New York Times dealbook noted in May: These are short-term bets. Very short. The founder of Tradebot, in Kansas City, Mo., told students in 2008 that his firm typically held stocks for 11 seconds. Tradebot, one of the biggest high-frequency traders around, had not had a losing day in four years, he said Similarly, FT’s Martin Wheatley pointed it out last month:  And market analyst Peter Cohan writes at AOL’s Daily Finance. The fact that the vast majority of stock market trades are held for 11 seconds shows that the stock market is not a real market with real traders governed by the law of supply and demand, and with no real price discovery..

The Normalization of Sociopathology in America - My entry on the moral rot which has taken hold in all socio-economic levels of America drew a number of insightful responses: Runaway Feedback Loops, Wealth Concentration and Gaming-The-System While the American/Western worldview holds that we are autonomous individuals exercising free will at every moment, in reality we are all heavily programmed by our socio-economic class conditions. What is so striking about present-day America is the way in which the narcissistic, no-moral-compass social pathologies of entitlement, denial and fabrication of "truth"/reality has been "normalized" (accepted as normal behavior and thinking) in all social classes. Before we analyze that further, let's get some direct experiences from three observant readers.  First up in Freeacre, one of the proprietors of the excellent Trout Clan Campfire blog:

The Loss of Trust and the Great Unraveling To Come -Anyone who believes the foreclosure crisis can be contained is deluded, because the real issue in play is the citizens' trust in their government's ability to govern the nation's Financial Elites according to the rule of law. Clearly, our government has failed its citizens--utterly, completely, totally, at every level of governance (Federal, State, local) and at every level of oversight and regulation.  The bitter truth is that the nation's Financial Power Elites are not constrained by rule of law, and as a result of this revelation Americans' trust in their government and political class has been shattered.  Despite raising their voices 600 to 1 against the TARP and related bailouts of the nation's Financial Power Elites (who stripmined the nation's wealth from their investment banking and mortgage banking fortresses) in 2008, the government shoved trillions of dollars of bailouts and guarantees into private hands with pathetically little control in return.

Nine Stories The Press Is Underreporting — Fraud, Fraud And More Fraud -If it wasn't already blindingly obvious that pervasive fraud was at the heart of the financial crisis and the ensuing foreclosure catastrophe, you would think that the latest news -- that banks have routinely been lying their heads off in the rush to kick homeowners off the properties they fraudulently induced them to buy in the first place -- would pretty much clinch it. And yet the mainstream media still by and large hasn't connected the dots. What we are seeing all around us are the continued effects of a vast criminal enterprise that has never been brought to account, employing a process that, as University of Texas economist James Galbraith explains, involved the equivalent of counterfeiting, laundering and fencing. So the person with the right expertise to lead us here is a criminologist -- in particular William K. Black, one of the few effective regulators in recent history (during the savings and loan crisis of the late 1980s), a notorious knocker of heads and currently professor at the University of Missouri-Kansas City and author of the book, "The Best Way to Rob a Bank Is to Own One".

Crime Pays: The SEC's Slap on the Wrist for Angelo Mozilo - Let's say a business leader makes hundreds of millions of dollars through criminal practices that end up wiping out the wealth of myriad homeowners and contributing to the biggest economic crisis in 70 years. Then, as punishment, he is forced to fork over $67.5 million -- and yet faces no prison time. Has justice been done? Well, if you listen to the SEC -- and plenty of media commentators, too -- the settlement just reached with former Countrywide CEO Angelo Mozilo was tough stuff. It was reportedly among the largest fines ever imposed on an individual by the SEC. To be sure, $67.5 million is big money. Except in comparison to the fortune that Mozilo made presiding over one of the shadiest mortgage firms of all time -- reportedly a half billion dollars. Time magazine didn't just name Mozilo one of the "25 people to blame for the financial crisis," it put him on the top of the list.

Insider Trading is Legal for Congressional Insiders - Bloomberg: Your senator learns that a much- maligned weapons system now has enough votes for funding. Before the news gets to a reporter, he buys shares in the arms manufacturer for a quick, handsome profit. What’s wrong with this picture? Nothing, according to the law... U.S. senators, representatives and congressional staffers routinely attend high level, closed briefings or engage in conversations where secrets are disclosed that might send shares climbing or slumping if widely known. That access lets them buy low and sell high based on material, non-public information, and they can do it without concern that their remarkable prescience will alert federal investigators of possible wrong doing.

Republicans, Democrats Shift on Whether Gov’t Is a Threat - Overall, 46% of Americans believe the federal government "poses an immediate threat to the rights and freedoms of ordinary citizens," little changed from the prior reading in 2006. However, during that time, Republicans' and Democrats' views of the government as a threat have shifted dramatically. The results suggest that Americans' perceptions of the government as a threat may be less dependent on broader, philosophical views of government power, and instead have more to do with who is wielding that power. Throughout the Bush administration, Democrats were more likely than Republicans to perceive the government as a threat. Now that a Democratic president is in office, the reverse is true.

The New York Fed and small business lending - One of the big debates in US economic and financial circles amid the sluggish recovery has centered around this question : are small businesses suffering, and not hiring, mainly because of a lack of demand for their products and services and uncertainty about the future, or is lack of available credit also constraining them in a significant way?The Federal Reserve Bank of New York weighed in on this question today, releasing a new survey of small businesses conducted during the summer. “Prudent lending to creditworthy small firms who contribute to the recovery is in our collective interest: it’s good for our communities and it’s good for the American people,” said Kausar Hamdani, community affairs officer at the New York Fed. The findings of the New York Fed tilt towards the conclusion that lack of credit availability is indeed a problem for many small businesses. According to the results, there was “evidence of unabated demand for credit by small business owners and widespread reports of unmet credit needs.” For instance, more than three quarters of applicants received only “some” or “none” of the credit they wanted, the New York Fed said.

Small Business Lending in Low- and Moderate-Income Neighborhoods during the Financial Crisis - San Fran Fed [paper] Over the last three years, the financial crisis and ensuing recession have led to tectonic shifts in the availability of credit, especially for small businesses. Data show that the number of loans to small businesses has dropped from 5.2 million loans in 2007 to 1.6 million in 2009. This trend is of significant concern to policy-makers, particularly given the important role that small businesses play in the US economy. Making credit accessible to small businesses, therefore, is seen as a critical component of economic recovery. Despite this policy focus, however, few studies have documented recent trends in small business lending, and even fewer have focused attention on the implications of the reduction in credit for small businesses in low- and moderate-income neighborhoods.In this paper, we seek to address this gap by examining trends in small business lending in low- and moderate-income (LMI) neighborhoods by large banks regulated under the Community Reinvestment Act (CRA). We find that there is a strong relationship between the boom and bust housing market cycle and patterns in small business lending, both over time and over space.

Fed's Dudley: 3 million excess vacant housing units -From NY Fed President William Dudley: Regional Economy and Housing Update [L]et's consider the slow housing recovery. Housing market activity—both new construction and sales—remains depressed. On the construction side, total housing starts are running at just 600,000 units per year (seasonally-adjusted) in recent months. This is up from 530,000 units at the trough in the first quarter of 2009 but it is still extremely low by the standards of the last 50 years. In fact, the rate of new construction is so low that there is barely any net growth in the U.S. housing stock these days.One reason why so little housing is being built is that many existing homes stand vacant. We estimate that there are roughly 3 million vacant housing units more than usual. And more vacancies are added daily as the foreclosure process moves homes from families to mortgage lenders.

FDIC Sued by Bank of America Over $1.75 Billion Taylor Bean Mortgage Loss - The Federal Insurance Deposit Corp. was sued by Bank of America Corp. over $1.75 billion in investor losses stemming from an alleged fraud by failed lender Taylor Bean & Whitaker Mortgage Corp. The FDIC has denied claims by Bank of America against Colonial Bank and another financial institution in receivership that bought fake mortgages from a Taylor Bean unit, Ocala Funding LLC, according to a complaint filed Oct. 1 in federal court in Washington. Bank of America was the trustee for notes issued by Ocala Funding, according to the complaint.  Ocala financed Taylor Bean’s mortgages, issued debt and used the proceeds to buy the mortgages, Bank of America said in the complaint. Ocala then sold the notes to pay off the debt or buy additional mortgages, according to the compliant.

FHFA Projections for Fannie and Freddie draws, and House Price Assumptions - From the FHFA: FHFA Releases Projections Showing Range of Potential Draws for Fannie Mae and Freddie Mac To date, the Enterprises have drawn $148 billion from the Treasury Department under the terms of the [Preferred Stock Purchase Agreements] PSPAs. Under the three scenarios used in the projections, cumulative Enterprise draws range from $221 billion to $363 billion through 2013. The key to the size of future draws is the trajectory of house prices. The following graph shows the three house projections used by the FHFA:

Fannie and Freddie May Need Infusion - The federal bailout of Fannie Mae and Freddie Mac may be winding down with relatively little additional cost to taxpayers so long as the economy continues to recover. But if the economy tips back into recession, the bailout could nearly double in size, according to new government projections announced on Thursday. The troubled mortgage companies are likely to require about $19 billion in additional federal aid over the next three years, according to a projection by the Federal Housing Finance Agency.  If the economy recovers more quickly than expected, the projections show that the companies could need as little as $6 billion in new aid. By contrast, if the economy falls into recession, the companies could need another $124 billion.

Fannie Mae and Freddie Mac Will Draw Up To $363 Billion Through 2013 - Taxpayers will pay a very stiff price for allowing the government to over-encourage homeownership.  Early this afternoon, the Federal Housing Finance Agency released estimates that through 2013, Fannie Mae and Freddie Mac will draw between $221 billion and $363 billion from the Treasury under three different economic scenarios.  Since they were taken over on September 7, 2008, Fannie Mae and Freddie Mac have drawn $148 billion.  Cleaning up this mess will take well beyond 2013, so these costs could rise higher. Treasury is due to release a proposal for what to do with Fannie Mae and Freddie Mac in President Obama's FY12 budget, due February 7, 2011.  Secretary Tim Geithner has vowed to prevent them from ever again running up such losses, but it's unclear how he would do that. 

Fannie, Freddie could need $363 billion, FHFA says  -- The Federal Housing Finance Agency on Thursday released projections of the financial performance of Fannie Mae and Freddie Mac and estimated they could draw between $221 billion to $363 billion from the government under the preferred stock purchase agreements. To date, the firms have drawn $148 billion. The projected credit losses in each scenario primarily reflect possible further losses on the enterprises' pre-conservatorship mortgage business.

Commercial Property Prices in U.S. Decline to Eight-Year Low, Moody's Says - Bloomberg - U.S. commercial property prices tumbled for a third straight month in August to the lowest level in eight years, pulled down by declining values for distressed real estate, according to Moody’s Investors Service. The Moody’s/REAL Commercial Property Price Index fell 3.3 percent from the prior month to surpass the post-crash low in October 2009, the company said in a statement today. The measure is 45 percent below its October 2007 peak and is at its lowest since June 2002. The data suggest a “trifurcated” market, Nick Levidy, a Moody’s managing director in New York, said in the statement. Prices for distressed buildings, defined as those in default or foreclosure or whose owner is in bankruptcy, are “falling sharply,” while values the best assets jump and smaller properties are flat, he said. More than 25 percent of sales in August involved distressed real estate, according to Moody’s.

Moody's: Commercial Real Prices fall to 2002 Levels - Moody's reported today that the Moody’s/REAL All Property Type Aggregate Index declined 3.3% in August. This is a repeat sales measure of commercial real estate prices. Below is a comparison of the Moodys/REAL Commercial Property Price Index (CPPI) and the Case-Shiller composite 20 index. Notes: Beware of the "Real" in the title - this index is not inflation adjusted. Moody's CRE price index is a repeat sales index like Case-Shiller - but there are far fewer commercial sales - and that can impact prices.The Case-Shiller Composite 20 residential index is in blue (with Dec 2000 set to 1.0 to line up the indexes).  It is important to remember that the number of transactions is very low and there are a large percentage of distressed sales.  Commercial real estate prices (as measured by this index) fell over 10% over the last three months.  The index is now down 45.1% from the peak in October 2007.

CMBS unpaid balances reach $62.19 billion, CRE CDO delinquencies up - The delinquent unpaid balance within commercial mortgage-backed securities is more than double a year ago and 28 times higher than March 2007. In its monthly delinquency report, Realpoint said the delinquent unpaid balance for CMBS last month rose 1.3% to $62.19 billion from $61.39 billion in August. The gain of $801.2 million in September is higher than the previous two months, but below the average of $3.14 billion a month during the first half of 2010, according to Realpoint. A year ago, the delinquent unpaid balance was $31.73 billion. The September delinquency ratio of 8.04% rose slightly from 7.93% a month prior and is up substantially from 3.94% a year earlier, according to Realpoint. The research firm said the current ratio is 28 times higher than the record low of 0.283% in June 2007.

How We Can Really Help Families - Shaun Donovan, Huffington Post. Yves Smith: Really disingenuous, but intriguing that an administration official feels compelled to put out these talking points. First, it conflates stopping new foreclosures (which the banks are doing on their own, thanks to their affidavit and other problems) with halting sales of properties owned by banks as a result of PAST foreclosures. Two different issues completely. Second, it was the Administration that created this “national foreclosure ban” straw man. There is no reason to halt foreclosures on properties where the original lender still holds the loan.

Helping Homeowners By Printing Money - Kevin Drum hits the nail on the head when it comes to the politics of averting foreclosures, something I think a remarkable number of progressive bloggers overlook: The only other thing I can think of that the administration screwed up seriously is mortgage reform. Again, though, that would have been politically difficult even if they had played all their cards perfectly. Like it or not, the American public hates the idea of seeing their neighbors get bailed out from stupid mortgages. It makes them feel like saps: we scrimped and saved and bought a house we could afford and we’re getting nothing. Joe and Betty down the street lived the high life, took out a NINJA loan they knew was way more than they could afford, and now they’re getting a taxpayer-funded bailout and living easy. That’s not a vote getter. It’s probably even worse than that. Across the board principal modification would have undone some optimistic accounting lurking on bank balance sheets and required additional government capital injections (read: bailouts) of large financial firms. I’m resolutely pro-bailout, of households and banks alike, but the public feels differently.

White House Urges Caution on Foreclosure Moratorium - Amid a rising uproar over slipshod bank foreclosure practices, members of the Obama administration on Sunday expressed anger about the revelations, but urged caution as multiple investigations into the crisis unfold. In a piece posted on the Huffington Post Web site, Shaun Donovan, the secretary of the Department of Housing and Urban Development, wrote: "The notion that many of the very same institutions that helped cause this housing crisis may well be making it worse is not only frustrating — it’s shameful." But, he added, "a national, blanket moratorium on all foreclosure sales would do far more harm than good, hurting homeowners and home buyers alike at a time when foreclosed homes make up 25 percent of home sales."It was the second effort in two weeks by the administration to deflect pressure for a national moratorium on foreclosures

Epitaph For An Administration – Krugman - In today’s report on the foreclosure mess, a revealing sentence:As the foreclosure abuses have come to light, the Obama administration has resisted calls for a more forceful response, worried that added pressure might spook the banks and hobble the broader economy. Surely this can serve as a generic statement:As NAME ISSUE HERE has come to light, the Obama administration has resisted calls for a more forceful response, worried that added pressure might spook the banks and hobble the broader economy.Stimulus, bank rescue, China, foreclosure; it applies all along. At each point there were arguments for not acting; but the cumulative effect has been drift, and a looming catastrophe in the midterms. Or to put it another way, the administration has never missed an opportunity to miss an opportunity. And soon there won’t be any more opportunities to miss.

Commentary: Mortgages Lost in the Cloud - The U.S. and other Western democracies have grown wealthy over the past three centuries for a simple reason: Their citizens have been able to establish clear title to land, buildings, and other property. Property rights beget prosperity.  That's why the burgeoning foreclosure mess in the U.S. strikes at the nation's economic heart. Confusion is so rife that Bank of America (BAC), the biggest mortgage lender, suspended foreclosures in all 50 states to determine whether faulty documents were used to confiscate homes. Americans took their title-recording system for granted, abused it during the housing boom, and let it deteriorate. "Somehow in the last 10 or 15 years, everything that was good record-keeping isn't telling the truth anymore," says de Soto, reached by phone while traveling in Copenhagen. "My feeling is this: Your recession is going to last. And it's going to last, and it's going to last, because essentially the trust has broken down."

This Land is My Land?, by Maxine Udall: Peter Coy at Bloomberg provides an excellent commentary on how banks playing fast and loose with property rights strikes at the heart of capitalism...US property rights law tended over time to adapt to and accommodate fairly populist notions of land ownership. Bolstered by the Homestead Act of 1862, under which settlers could hold 160 acres of free land as long as they lived on and developed it, the United States accomplished a redistribution of property and capital from indigenous peoples to future US citizens that while bad for the indigenous peoples would be extremely good for the then agrarian United States. As a product of the middle class and generations of small business owners and as someone who until recently had firm confidence in markets when they work, regulation when they don't, watching the real wealth of our nation siphoned off and destroyed in a financial casino enabled by laissez faire regulators and lawmakers has been deeply disturbing to me.. If the players in that casino now succeed in dismantling or weakening the US property rights system, especially those parts of it that favor homeowners and small businesses, they will have done more to destroy, not just the United States, but the Idea of the United States, than any foreign nation, communist or otherwise, ever could have done.

Why Foreclosure Fraud Is So Dangerous To Our System Of Property Rights - Ritholtz - 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 the rights that are being trampling upon.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.

The Death of Capitalism? - Maxine Udall - Those pesky banks and bankers are at it again. Yves Smith at nakedcapitalism, Mike Konczal, and others have been providing first rate, up-to-date documentation and descriptions of the mortgage morass that may tip our fragile economy into another downturn.  What makes this worse IMHO is that the current mortgage morass appears to be the result of capital's failure to observe and adhere to the rudiments of property rights: the proper and legal transfer and holding of a title and a promissory note; the proper and legal processing of said documents to initiate foreclosure; and a level of outright cruel and confiscatory behavior that until lately I had only associated with totalitarian governments. (If you doubt me, see here). So this is a message to bankers and anyone else who at least putatively cares about capitalism and commercial exchange. I am probably among the most sympathetic to both and to the institutions that support them. I am losing sympathy. Nay, I have lost it. This is the stuff from which revolutions are born and you will have brought it on yourselves. The problem is that capitalism when done right yields real value, real benefits to us all. So when it dies, when you have killed it, as with all of your other financial chicanery, we will all pay the price.

The Foreclosure Mess - Homeowners can only be foreclosed and evicted from their homes by the person or institution who actually has the loan paper—only the note-holder has legal standing to ask a court to foreclose and evict. Not the mortgage, the note, which is the actual IOU that people sign, promising to pay back the mortgage loan Before mortgage-backed securities, most mortgage loans were issued by the local savings & loan. So the note usually didn’t go anywhere: it stayed in the offices of the S&L down the street.  But once mortgage loan securitization happened, things got sloppy—they got sloppy by the very nature of mortgage-backed securities.  The whole purpose of MBSs was for different investors to have their different risk appetites satiated with different bonds. Some bond customers wanted super-safe bonds with low returns, some others wanted riskier bonds with correspondingly higher rates of return.

State antiquated property registration cause of foreclosuregate? WAPO says yes? - A Washington Post editorial suggests the meme that deliquencies are the main concern for us to consider instead of ownership issues that are more fundamental and problematic. But the author also suggests the states are at fault for their antiquated registration system... To be sure, the revelations of "robo-signing" and other sloppy or unlawful methods are disturbing. There are big lessons to be learned, especially about how mass securitization of poorly underwritten home loans may have swamped the states' antiquated, cumbersome property registration and foreclosure procedures. But what matters most is whether the misconduct caused large numbers of people to lose homes they otherwise could have kept. And so far, officials have found no evidence of that. This is logical. The robo-signed affidavits at issue were part of a technical review of documents, not the actual determination of a borrower's delinquency. By the time robo-signers put pen to paper, default had been well established. Banks have suggested there are only technical glitches for mostly foreclosure procedures, but to simply bypass documenting property ownership without asking anyone is okay?

Mauldin: The Subprime Debacle: Act 2 - “So somewhere between the REMICs and MERS, the chain of title was broken.“Now, what does ‘broken chain of title’ mean? Simple: when a homebuyer signs a mortgage, the key document is the note. As I said before, it’s the actual IOU. In order for the mortgage note to be sold or transferred to someone else (and therefore turned into a mortgage-backed security), this document has to be physically endorsed to the next person. All of these signatures on the note are called the ‘chain of title.’“You can endorse the note as many times as you please…but you have to have a clear chain of title right on the actual note: I sold the note to Moe, who sold it to Larry, who sold it to Curly, and all our notarized signatures are actually, physically, on the note, one after the other. “If for whatever reason any of these signatures is skipped, then the chain of title is said to be broken. Therefore, legally, the mortgage note is no longer valid. That is, the person who took out the mortgage loan to pay for the house no longer owes the loan, because he no longer knows whom to pay. “To repeat: if the chain of title of the note is broken, then the borrower no longer owes any money on the loan. “Read that last sentence again, please. Don’t worry, I’ll wait. “You read it again? Good: Now you see the can of worms that’s opening up.

A little bit of sanity, please - Where to start? You might think the mortgage and banking world is ending, if you manage to read some of the financial blogs and news sources out there as of late. The world of financial writing and reporting has seemingly and collectively degraded itself into one, long version of CNBC’s Fast Money — where everyone is competing to see who can scream the loudest about the most useless information, until everyone forgets what they started talking about in the first place. This week’s column isn’t an answer to any one of them. It’s an answer to all of them. I won’t claim to have read everything that’s out there, nor will I call out the ridiculously long list of names of those involved, but it’s amazing to see that some previously ‘serious’ financial influencers have gone off the deep end on the issues surrounding ‘foreclosure-gate.’ In particular, when I see the usually level-headed and clear-minded John Mauldin repeating outright false claims surrounding securitization and foreclosures as if they were fact, it’s clear that someone needs to decide to be the grown up in the room. So, let’s start by getting everyone’s facts straight. And then we’ll discuss the real issues out there that actually should matter, but are being drowned out in the din. It’s going to be a long ride this week, so strap on in…

Why did the mortgage servicers use "robo-signers"? - I think there are several reasons: the flood of foreclosures, the lack of experienced staff, cost cutting - and also because several of the servicers seemed to use the same service providers to set up their processes (probably the lowest bidder). Way back in February 2007, Tanta wrote: Mortgage Servicing for UberNerds. Tanta made it clear there are times when servicers are really hurting:  1) When rates are falling and borrowers are refinancing. The servicers get paid a slice of each monthly payment, however their fixed costs are front-loaded. So if people are refinancing too quickly, the servicer doesn't receive enough payments to recoup their fixed costs, and ... 2) When the 90+ day delinquency bucket is increasing rapidly. . And right now mortgage rates are falling, and many borrowers are refinancing. And at the same time the 90+ day bucket is at record levels and the servicers are swamped with foreclosure activity. So these are the worst of economic times for servicers. So, to cut costs and control cash flow, some servicers outsourced foreclosures to the lowest bidders.

Guest Post: So Why Did the Mortgage Servicers Use “Robo Signers”? - By MBSGuy: CR has a post up today which is a troubling, in that it mentions “hysteria” and “misinformation” yet misconstrues critical issues. The article, “Why did the mortgage servicers use “robo-signers”?” despite being well intentioned, does not answer the question posed in its headline, adds no real information and is about two weeks late.  It is patently incorrect to say that the “foreclosure gate” issue is about “robo-signers”. A dozen top banks or servicers voluntarily halted foreclosure across much of the country because title insurers were no longer comfortable working on their foreclosure sales, borrowers were having increasing success challenging the foreclosures, their sub-contractors (such as Lender Processing Services and various foreclosure mill law firms) were being investigated for fraud and perjury, and news was starting to get out that the problems were much more widespread than had been previously reported. The entire legal structure of foreclosure was coming undone. Robo-signers were just a manifestation of a much larger issue that was already becoming a problem. People who believe that the foreclosure crisis issue is just about servicing are either new to the issue or unwilling to ask some obvious questions about what is going on.

Investor Alert: It Isn’t Just Borrowers That Are Suffering At Servicer Hands - By MBSGuy - In comments to my post yesterday, “So Why Did the Mortgage Servicers Use ‘Robo Signers’?“, reader Justica pointed out another element of servicer misbehavior, namely, investor lack of confidence in the reports, and therefore the disbursements, that servicers are giving them. From “Investors Grumble Over Flawed Remittances” at Asset-Backed Alert: Mortgage-bond buyers are losing faith in the accuracy of remittance reports, and some say the apprehension could soon factor into their investment strategies. Why have the once-reliable reports been wrong? Investors point in part to increasing use this year of mortgage-modification programs that government agencies and lenders have implemented to aid troubled borrowers.  On one level, this article looks like yet another lame servicer excuse not to do mortgage mods; “See, this is SOO hard, we can’t even account for it properly.” One of the reasons they don’t have the people to work all this complicated stuff out is because they fired all of the experienced people and kept the cheapest staff.

A stab at securitisation - Some weekend foreclosure scandal, securitisation-related reading. It’s based on a 159-page class action lawsuit, filed in Kentucky on behalf of all Kentuckian homeowners, and against MERS and several financials. And it rather sums up what’s happening in the States at the moment — an outright attack on the legality of mortgage securitisations, specifically the idea of true sale. We’re going to steal the below chart from the FCIC again. It shows the typical creation process for a Mortgage-Backed Security (MBS). We’ve added in the master document custodian, which keeps and maintains key documents in the deal. In words, here’s how it works. The originators or mortgage lenders, sell their mortgage notes to the sponsor to be turned into an MBS bond. Between the sponsor and the trustee stands the depositor. At the end of the whole process is the master document custodian — who store original mortgage notes etc. in document vaults. Mortgage notes have to be conveyed throughout the securitisation process, or ‘mortgage assignments’ showing transfer of ownership have to be made.

The Surrealist Vista - The latest rogue wave broke about ten days ago, when an orgy of foreclosure revealed massive irregularities in mortgage contracts and property titles, suggesting a slovenliness so arrant and broad that even the states' attorneys general woke from their narcoleptic raptures of golf to shut down transfers of distressed property. But this was only after the banks themselves declared "moratoria" in a perhaps vain attempt to forestall further discovery of their countless misdeeds. And somewhere along in there the title insurance industry had a whack attack.  During this period a new cliché issued from a million pie-holes: the rule of law. Well, as Joni once sang to we happy Boomers, " don't know what you got 'til it's gone...."   To systematically ignore the niggling, stodgy lawful protocols regarding contract documents - notarization, due diligence, various dotted "i"s and crossed "t"s - was easy on the way up Fraud Mountain. On the ride down, though, it turns out all those niceties comprised the braking apparatus,  Now the cargo of swindles is accelerating out-of-control and breaking apart. Suddenly this cliché - the rule of law - begins to assert its meaning for this nation of slobs, morons, and grifters, to the degree that even lawyers begin to understand what's at stake (as opposed to just how much they can get paid), though the bankers may never learn.

The Foreclosure Mess - This commentary, forwarded by David Kotok, is a very worthwhile read — but it has a significant legal flaw in it that requires me to preface it with the following: Courts have long had the authority to apply principles of equity, as opposed to common or statutory law, to cases brought before it.Included in this means is preventing outcomes that unjustly enrich wrongdoers, or other similar bad outcomes. With the foreclosure fraud cases, we have two actors that are not blameless here: The homeowner, who is in default, and the banks/securitizers, that failed to do the document creation and title management correctly. Judges in civil cases do not want to see an absurd outcome. Rewarding either the homeowner (free house!) or the lenders (No penalty for massive screw ups!) would offend those principles of equity and fairness.

The Foreclosure Mess-a Follow-up - Wow, there were many, many emails in response to the recent piece entitled “Foreclosure Mess.” Here are some of those observations. Some folks missed the opening disclaimer and attributed the piece to me; that was their error. I did not write it [BR: The original was from Gonzalo Lira's blog]. I only edited out the expletives. I do not believe that F this and F that add anything. MK wrote back: “The article’s issues needed the expletives. In this particular case they would have been in context and not extraneous. Next time leave them in.

Is MetLife's Foreclosure Process Review By Moody's A Harbinger Of The Excrement Show To Come? As observant readers will recall, the one proximal catalyst that brought down the financial system last time around was something as innocuous as a rating agency downgrade of AIG, which precipitated a waterfall of margin calls and liquidity deficiencies, resulting in the near collapse of capitalism. This in itself was not surprising: it is always the least expected events (i.e., Moody's performing its function honestly and ethically) that tend to have the most adverse impact in a precarious scenario. Which is why when Moody's put MetLife's Home Loan Servicer ratings on downgrade watch it resulted in a chorus of fear and incredulity: after all Wall Street had seen this scenario all too recently. One person whose phone line off the hook was Morgan Stanley's Nigel Dally who sent out a letter to clients today trying to calm everyone down that this was not the apocalyptic event many are fearing it could be. True, as Nigel pointed out, MetLife only has $1.5 billion in mortgages serviced for others per SNL (whose data we presented yesterday when discussing exposure at JPM, WFC and BofA), but the fact that this is sufficient for Moody's to look at the company vis-a-vis its foreclosure practices should set red light everywhere

Mortgage Damage Spreads - The unfolding foreclosure-processing debacle is causing bank stocks to slide and putting millions of delinquent borrowers in limbo. But how disruptive the crisis ultimately becomes—for homeowners, the housing market and the broader economy—depends on how quickly a number of technical problems and legal challenges are resolved in the months ahead. In essence, fast-paced modern finance is colliding with the much slower machinery of the U.S. legal system. While finance aims for efficiency and maximized profits, the courts demand due process. And that's becoming a growing issue as lenders come under attack for taking short cuts to oust homeowners who haven't mailed in a mortgage check for months.

Megabanks At Risk As Analyst Identifies New Problems With Mortgages - Pension funds and other investors who have suffered losses on mortgage-backed securities could have a "strong legal basis" to call into question the very securitized mortgages they purchased stakes in, increasing the pressure facing large Wall Street firms that packaged these securities during the housing boom, a prominent mortgage bond analyst said Thursday. Wall Street firms have packaged and sold trillions of dollars in mortgage-linked securities this decade. But in their rush to push paper through various levels, from the firm giving homeowners a mortgage ultimately to the investor, shortcuts were likely taken due to the large volume at play. More than $4.4 trillion in mortgages not guaranteed by the federal government were bundled into securities and sold to investors from 2003 through 2007, according to Inside Mortgage Finance, a leading trade publication and data provider.

Will "Foreclosure-gate" Cost the Banks Billions? - So just how bad is "Foreclosure gate?" To get the answer to the first part of that question I called a guy who is one of my go-to people on how banks take advantage of homebuyers, Thomas Martin. He runs something called America's Watchdog and has long been crusading about the bogus fees that banks and title companies charge people who take out a mortgage. He's not usually one to overlook bad behavior especially when it comes to screwing consumers. So I asked him how much of a scandal he thought foreclosure-gate was. On a scale of one to 10, he said 5, possibly 6. Yes, the banks and their lawyers may have forged documents in order to complete foreclosures on homeowners. But many of these people weren't paying their mortgages anyway, so they were going to be in foreclosure anyway. Kathleen Day at the Center for Responsible Lending would put the scandal closer to a 10. The foreclosure processes at the bank were so bad that there have been a few instances where banks have forged documents and pushed through foreclosures on houses where people have never missed a payment. But bad mistakes like that are not the point. She says that no would have their stuff taken from them. There are rules around foreclosures meant to protect borrowers. And everyone deserves the same protection under the law, even if they have been late on their mortgage.

Foreclosuregate's Price Tag: $70 Billion? - The growing foreclosure debacle, involving a host of lenders caught filing dubious paperwork, has finally caught up with the stocks of major banks. This week, Bank of America's stock sank by 5 percent, while JPMorgan Chase's dipped 3 percent. More staggering, though, are financial analysts' predictions on just how much the foreclosure disaster will end up costing Wall Street. One analyst with Connecticut-based Rochdale Securities told the New York Times' Nelson Schwartz that "Foreclosuregate," as it's being dubbed, could cost banks $1.5 billion a quarter. Another analyst with FBR Capital Markets estimated $6 billion to $10 billion altogether. Offering the doomsday prediction is San Francisco-based Branch Hill Capitol, which surmised that Bank of America alone could bleed $70 billion from pools of mortgages that it may be forced to repurchase from the largely taxpayer-owned, government housing corporations Fannie Mae and Freddie Mac. To a degree, Wall Street's big banks are bracing for the pain. As the Times reported, JPMorgan has set aside an additional $3 billion in reserves to cover the repurchasing of mortgage loans. Still, no bank has $70 billion in reserves, and as some rightly fear, a prolonged foreclosure crisis could cripple some of the country's largest financial players.

Mortgage Buybacks May Cost Lenders $120 Billion, JPMorgan Says -- Forced repurchases of soured U.S. mortgages may be the “biggest issue facing banks” even as errors in the foreclosure process draw attention to other industry risks, according to JPMorgan Chase & Co. analysts. Future losses from repurchases of home loans whose quality failed to meet sellers’ promises will likely total $55 billion to $120 billion, or potentially $10 billion to $25 billion for the next five years, the New York-based mortgage-bond analysts led by John Sim and Ed Reardon wrote in a Oct. 15 report. While a “firestorm of news” sparked by some loan servicers’ decisions to halt action on defaulted loans is drawing renewed attention to banks’ mortgage-repurchase risks, the foreclosure issues themselves are mostly “process-oriented problems that can be fixed,” the analysts wrote. “Putback risk may be the biggest issue facing banks,” the analysts wrote, referring to items such as faulty appraisals that can be used to force lenders to repurchase mortgages under sales contracts. The analysts declined to comment beyond the report.

Wall St blames homeowners in foreclosure fiasco -(Reuters) - Wall Street's reaction to the allegations that some banks cut corners while foreclosing on 3 million homes since 2007: Pay your mortgage in the first place.  The building furor over whether the largest U.S. mortgage lenders used so-called robo-signers and incomplete paperwork to force delinquent borrowers from their homes has mushroomed into a probe by the attorneys general in all 50 states, with U.S. Congressional hearings not far behind. Those on Wall Street, however, are largely unsympathetic, insisting that possible errors in the foreclosure process are beside the point, that the process begins only when a borrower starts missing mortgage payments."If you didn't pay your mortgage, you shouldn't be in your house. Period. People are getting upset about something that's just procedural." said Walter Todd, portfolio manager at Greenwood Capital Associates.

Timothy Geithner forecloses on the moratorium debate -Treasury Secretary Timothy Geithner is good at telling fairy tales. Geithner first became known to the general public in September of 2008. Back then, he was head of the New York Federal Reserve Board. He was part of the triumvirate, along with Federal Reserve Board chairman Ben Bernanke and then Treasury secretary Henry Paulson, who told congress that it had to pass the Tarp or the economy would collapse. This was an effective fairytale, since congress quickly handed over $700bn to lend to the banks with few questions asked. Of course, the economy was not about to collapse, just the major Wall Street banks. But the Geithner fairytale did the trick. Terrified members of congress tripped over each other to make sure that they got the money to the banks as quickly as possible. Now, Geithner has a new fairytale. This time, it is that if the government imposes a foreclosure moratorium, it will lead to chaos in the housing market and jeopardise the health of the recovery.

When all Else Fails, Find the Foreclosure Facts - It does not appear that Ms. Bair, or any senior official in the Obama administration, has focused on the fact that it has been standard operating procedure, for several years, for lenders, CDO holders, and courts to “jump to any conclusion” necessary to foreclose on homes regardless of whether the loan was fraudulently induced by the lender and regardless of whether the entity foreclosing on the mortgage engaged in foreclosure fraud.  She also frames the problem euphemistically as limited to – “process” – instead of the known facts, which constitute fraud by the entities that are foreclosing. “We have been told this is a process issue.” Ms. Bair's statement can only be truthful if the FDIC has only been talking to liars. Ms. Bair cannot have been talking to those representing the debtors. The banking regulators have failed to shake off the corrosive effects of the “reinventing government” movement, which instructed them to refer to the banks and S&Ls as their “customers.”

Why Care About the Banks’ Foreclosure Scandal? : CJR - The pushback on the foreclosure scandal has already begun along predictable lines and amongst the usual suspects. It’s blame the borrowers all over again! Time to wheel out Rick Santelli’s “losers.”According to variations of this spin, the scandal is a “paperwork” (WSJ) problem involving “clerical errors” (ex-Goldman dude) but at base it’s still about “deadbeat” (John Carney) borrowers hoping to get a “house as a freebie” (Megan McArdle). First, forgery is pretty much by its nature a “paperwork problem.” Funny how the Journal glosses over the bedrock functions of the property system when its convenient for Wall Street. As Barry Ritholtz said the other day in knocking down this line: It is a legal impossibility for someone without a mortgage to be foreclosed upon. It is a legal impossibility for the wrong house to be foreclosed upon, It is a legal impossibility for the wrong bank to sue for foreclosure. And yet, all of those things have occurred. The only way these errors could have occurred is if several people involved in the process committed criminal fraud. In order for the process to fail, many people along the chain must commit fraud.

Foreclosure-gate and the US banks - Chris Walen of Institutional Risk Analytics, speaking at a panel discussion “Living in the Post-Bubble World” organised by the American Enterprise Institute, a Conservative think tank, said that the mortgage foreclosure saga in the US has the potential to make 2008 look like a cake walk.He presented a chart which graphed the operating efficiency of banks, a key ratio which basically looks at how much it costs the bank to make each dollar. If the banks can operate at 70 cents worth of costs for every dollar they make they are doing all right. If it gets up to 80 cents in the dollar they are in serious trouble. Anything higher than that and it is good night and God bless - time for a US Government, aka US taxpayer, bail out of a broken bank. The significance of this chart for the mortgage foreclosure issue is that unfortunately for banks, they are geared up to be highly liquid institutions dealing with finance. They are not geared up for handling real assets. Yet they have become, willy nilly, massive property owning enterprises and they are having to deal with potentially millions of foreclosures, which are complex, time consuming, real world processes. This costs them hugely in man hours and drives up their cost ratios even as foreclosures crystallise their losses. This issue of itself is likely to drive a number of US banks into bankruptcy in the next year or two, he suggests, triggering another massive financial crisis in the US with a global spill-over to follow.

Foreclosuregate Fallout: How Bad Can It Get For Wall St - Foreclosure fraud is ruffling a lot of feathers on Wall Street, and while the full scope of losses remains unclear, even major banks are now acknowledging that this is a multi-billion-dollar disaster, not just a set of minor paperwork headaches. So how bad will it get for Wall Street? There are several disaster scenarios in which the housing market simply shuts down, where the potential losses for Wall Street are simply incalculable. But even situations that do not directly rip apart the basic functioning of the mortgage system could be enough to shut down one or more big banks, creating serious trouble for the financial system, and a major test of the recent Wall Street reform bill. JPMorgan Chase loves using its research department to push its political agenda, and the bank is currently characterizing the foreclosure fraud outbreak as a set of “process-oriented problems that can be fixed.” That puts them in the rosy optimist camp for this crisis, and they’re projecting a total of $55 billion to $120 billion in losses for the entire industry, spread out over a few years. But take a look at the analysts’ methodology. The actual scope of losses gets drastically larger if you just change a few arbitrary assumptions.

Fed Is Monitoring Mortgage Foreclosure Process -The leader of the Federal Reserve Bank of New York addressed the ongoing saga of mortgage foreclosures, saying “the Federal Reserve actively encourages efforts to find viable alternatives to foreclosure, like loan modifications, or deeds in lieu.” But he added, “we also support due process and access to legal counsel for homeowners facing foreclosure, for instance through legal aid programs.”The central banker offered a positive note on the darkest side of the housing market debacle, saying “our data indicate that, in recent quarters, borrowers are becoming less likely to fall behind on their mortgages, so fewer households are now entering the foreclosure process.” Much of what New York Fed President William Dudley had to say Tuesday centered on the housing market, both on the national level and based on what he was seeing in the district his bank watches over. Nationally, the situation still remains troubled, while within the New York Fed’s area, it’s more of a mixed picture.

Guest Post: Foreclosure Counterattack – Propaganda, Pseudo-Legality, and Thuggery - The first line of defense is the propaganda line that this is just a technical glitch, not a fundamental problem with the loan or the security, or any kind of systematic intentional fraud. So far this has been the preferred PR line for the administration and the mainstream media. But the banks are also working the line that no matter what the flaw, it can simply be legalized by legislative brute force.; I had a conversation yesterday with a Congressional staffer who matter-of-factly said (but with little understanding of the underlying issues) that Congress would intervene on behalf of the industry, via its authority over national banks. Congress took one step in this direction by frantically grabbing and unanimously passing a pre-existing bill which would require all states to accept the weakest state-authorized electronic notarizations. This would be only a minor fix of one of the technical issues, and isn’t very important in itself. But it probably foreshadows the far more expansive legislation we can expect to see after the election. Bolstering all of this, the banks are making extortionate threats against the real economy. At the same time a concurrent propaganda line, seeming to somewhat contradict the other, is a hectic emphasis on speed.

Lawmakers Increasing Heat on Servicers on the Foreclosure Front While Regulators Try to Give a Pass - Yves Smith - At least some legislators are taking the foreclosure crisis seriously. Representative John Conyers, Marcy Kaptur, Raúl Grijalva, and Alan Grayson wrote to Neil Barofsky, Special Inspector General for the Troubled Asset Relief Program, to ask that he investigate foreclosure fraud and conduct an audit of GMAC, Fannie, and Freddie. SIGTARP is a full fledged prosecutor, and Barofsky has an established history of being a serious investigator.  In a parallel action, six senators (Sherrod Brown, Tom Harkin, Barbara Boxer, Debbie Stabenow, Sheldon Whitehouse and Mark Begich wrote Timothy Geithner and Ben Bernanke, demanding that they crack down on foreclosure abuses “in the best interest of homeowners and investors.” In general (quelle surprise), the Congressional response is breaking along party lines, with Democrats at the liberal end of the spectrum taking interest, Republicans working with banks to try to make this go away quickly and the Obama Adminstration trying to befriend the banks as much as possible without riling progressives too much. From Politco: How long will President Barack Obama and Congress be able to avoid wading into the foreclosure mess? …

Wall Street Journal Runs Inaccurate Piece on Antiforclosure Lawyers -  Yves Smith - It take a fair degree of skill to pen a journalistic story that hews to the appearance of objectivity yet is out to sell a point of view.  The lead article in the Journal tonight, “Niche Lawyers Spawned Housing Fracas” telegraphs its bias in its headline: the foreclosure crisis is merely the creation of two bit lawyers who by implication don’t know what they are doing, and are pumping trivial issues up for their own enrichment, with the housing market as collateral damage.  Funny that anyone can think this spin is remotely true. The fact that solo practitioner lawyers could have such an impact on the system is not proof that they are miscreants, as the Journal implies. It is that the foundation of mortgage securitzations are rotten as a result of widespread abuses, first on the origination end, later in the foreclosure process. These small firm players are using the legal equivalent of toothpicks; the fact that their efforts have destablized the foundation of the residential mortgage backed securities market is tangible proof that they were imperiled to begin with. Let’s parse some sections of the article, starting from the top:

Here's The Devious Reason Why Banks May Be Releasing A Wave Of Mortgage Modifications - I have heard this story directly from a few folks in Nevada. I know someone in NY who has a similar story. But when I heard from yet another person in Florida this morning I said, “There must be something to this”. My sample of information is too small. I want to know if this is a coincidence or is there something bigger and nefarious afoot. There has been (from my narrow perspective) a flood of approved loan mods in just the last few weeks. People who were on the edge and not paying a mortgage get a letter in the mail that says their application has been approved. After weeks and months of hanging on a phone and waiting for an axe to drop some relief arrives. Nothing particularly unusual about that. Mods are granted all the time. But I was struck by the timing. The foreclosure story is exploding around the banks. It is not possible to see where this will end but it is a certainty that it will cost the banks big time. What might a banker do if he was sitting on a pile of defaulted mortgages and  now the traditional route of foreclosure was blocked? Adding to the problems of the bankers is that there is no assurance that they even have a valid claim to foreclose given that so much of the paperwork is tainted.

FHA Sending Review Teams into Servicing Shops - Over the next few weeks, the Federal Housing Administration will send  review teams into several FHA servicing shops to see how they are handling foreclosures, National Mortgage News has learned. "We want to understand what processes are in place," FHA commissioner David Stevens said in an interview with NMN.   Allegations concerning "robo-signings" and other improper foreclosure practices have become a national issue for the mortgage industry, prompting the Obama Administration to take action.  "We have zero tolerance for any servicer that tries to cut corners or break the law," the FHA commissioner said.   FHA servicing teams have recently reviewed the loss mitigation practices and operations at several mortgage firms, the agency confirmed, without identifying the companies.  

The mortgage bond scandal FAQ - I’m going to be spending the next couple of weeks in South Africa, which means I’ll be off the grid (on a plane) for all of Monday, and less-than-fully online thereafter. I’ve invited the old team from the Curious Capitalist—Justin Fox and Barbara Kiviat—to help out with some guest-blogging, which I’m very excited about. But in the meantime, here’s a FAQ on the mortgage bond scandal to keep you tided over, since there seems to be a lot of confusion out there.

Answers to Your Questions on the Foreclosure Crisis - Yesterday we asked you to submit questions for Thomas A. Lawler, a housing expert, about the foreclosure crisis. Mr. Lawler is a founder of Lawler Economic & Housing Consulting, and a former director and senior vice president at Fannie Mae. Below is his first batch of responses.

Answers to Your Questions on the Foreclosure Crisis, Part II - Thomas A. Lawler, a housing expert, answers a reader question about why the foreclosure process takes so long.

Who’s Who in the Foreclosure Scandal: A Primer on the Players - The unfolding foreclosure scandal just keeps expanding. Scrutiny first fell on the “robo-signers” who rubber-stamped banks’ foreclosure paperwork [1], but they’re one of the many players who may have contributed to the mess. To help sort it all out, we’ve drawn up a cast of characters. Let’s start with the basics: Loan Originators/Mortgage Issuers – Banks make mortgage loans to homeowners, which homeowners must repay. The home serves as collateral in case the borrower defaults on the mortgage. Mortgage Servicers – Mortgage servicers collect mortgage payments and foreclose on delinquent loans. These are usually the nation’s biggest banks [2], which all have mortgage servicing units. Other contractors – Lender Processing Services, as we’ve noted,  helps servicers manage data [11]. When loans fall into default, servicers sometimes transfer the loan information to these processing firms, effectively outsourcing management of the foreclosure process to companies like LPS. “Foreclosure Mill” Law Firms – In states that require judges to vet a foreclosure, law firms execute affidavits certifying a number of facts key to the foreclosure case. Robo-signers – The term “robo-signers” has been defined [20] on a New York Times blog as a “nickname for those who processed large numbers of foreclosure affidavits.”  Most of the robo-signers who’ve lately been in the news have been employees at mortgage servicers [21], but that’s not always the case. Fannie Mae and Freddie Mac – Fannie [25] and Freddie [26] are government-controlled mortgage giants that buy up qualifying mortgage loans and guarantee them to investors. They were essentially independent companies until they exploded spectacularly during the financial crisis, and were bailed out by the feds to the tune of $148 billion so far. MERS (Mortgage Electronic Registration Systems) – MERS is a confidential electronic registry that banks created in 1997 to more efficiently “track” mortgage paperwork. It saved banks time and money by cutting down the paper shuffle and helping banks avoid paying recording fees to government recorders, who traditionally kept track of mortgage sales.

What the Foreclosure Fiasco Means for People in Foreclosure - It’s hard to keep up with all the foreclosure news or to make heads or tails of it, but two articles strike me as critical reading for foreclosure defense attorneys and people in foreclosure, the first quoting our own Adam Levitan, as well as one on the MERS debacle quoting both Adam and Professor Chris Petersen of the University of Utah. Both explain why robo-signing is not about formalities but real, substantive defenses to foreclosure. The latter article also explains why questions about MERS’ standing are not frivolous. There also is a fabulous series of PBS videos those in foreclosure might want to watch.  So what should a lawyer do in defending a foreclosure now that we know what we know? Do some basic chain-of-title interrogatories and other discovery, to start. Today I was chatting with my colleague Professor Jim Butler, who is supervising the UNM Business and Tax Clinic this semester.  Jim warns us to make our discovery requests narrow and to the point, so as not to run up lender attorney fees that borrowers could end up liable for.  He also mentioned a couple of baseline discovery requests that might help consumers.

'Foreclosure Mill' Employees Got Gifts For Altering Documents, Witness Says - Florida authorities are investigating the law offices of David J. Stern over how it handled foreclosure paperwork. As the AP notes, Cheryl Salmons, an office manager at the law offices of David Stern, "would sign 500 files in the morning and another 500 files in the afternoon without reviewing them and with no witnesses," according to Kelly Scott, a former assistant at the firm. The perks for good performance were considerable, according to Scott's statement. Tampa Online notes office employees were lavished with gifts:  "As a perk of Samons' [sic.] job, Stern's office would routinely pay her personal mortgage, a car payment, her electric bills and her cell phone bill, according to Scott, who told investigators Stern also bought Samons [sic.] a new BMW sport utility vehicle every year and gave her and other employees jewelry. Additionally, Stern purchased employee David Vargas a house, a car and a cell phone, Scott claims in her statement."

Have Banks Wrongly Evicted Millions? - Michael and Pamela Negrea, of Cleveland suburb Eastlake, Ohio, have never missed a mortgage payment. Yet their mortgage company, GMAC, has tried to foreclose on their house, not once, but three times. And GMAC is still trying to haul the couple out of their house. It's one of the incredible stories in the past few weeks that have come out of Foreclosure-gate that just makes you shake your head in disbelief. The question, though, that is rapidly emerging is this: Are stories like the Negreas the anecdotes that prove banks regularly kick people wrongly out of their homes, or are these just the exceptions in a clearly bungled process that still general ends up evicting the correct folk? The reporters at the Cleveland Plain Dealer, who uncovered the Negrea's story, seem to think that it is the former: Indeed, the possibility that bank employees illegally "robo-signed" thousands of foreclosures without even reading the information shows the production-line mentality not just of foreclosures, but of the entire mortgage process.

U.S. Housing Market Foreclosure-gate Doomsday Revolution Erupts - Foreclosure-gate is heating up and the mad scramble for what's left of $45 trillion in real estate is guaranteed to leave homeowners homeless, pension funds unable to pay their pensions and even some of the biggest banks insolvent.   A great housing goat rodeo was created when some of the 65 million mortgages on U.S. homes didn't follow proper legal procedures;

  • Fraud by homeowners who lied on their loan applications
  • Fraud by banks who didn't follow proper legal procedures around the notarization and processing of mortgage documents
  • Fraud by investment banks who packaged this junk and resold it to unsuspecting pension funds
  • Pension funds promised returns to their pensioners they could never achieve

The Daily Caller vs the banks - Joseph Tauke has a monster 5,600-word excoriation of the mortgage industry. It’s a great read, and it includes a lot of information you probably won’t know unless you’re a regular reader of Naked Capitalism and 4closureFraud. But the most important thing about the story is nowhere to be found in the story itself; rather, it’s the fact that it was published by the Daily Caller, Tucker Carlson’s right-wing website. The Tea Party wing of the Republican party has never been a big fan of Wall Street, of course. But at the same time, it has also tended to oppose any Democratic attempts to bring Wall Street into line. And it hasn’t made bank-bashing a central part of its platform at all. So if the Daily Caller’s story is any indication, there might just be a consensus in Congress to gang up on the banks and dole out a bit of punishment for their fraudulent behavior with respect to respectable homeowners.

Lawyering up and the foreclosure losses - Unlike many, whose righteous indignation is driven by moral certainty, I am in two minds about the foreclosure mess. There seem to be many different things going on here.

  • There are clear operational errors, as in getting the wrong address on a mortgage document. Obviously this is indefensible, and banks should get this kind of thing right. Equally clearly, if you have a three million mortgages, then you are going to have some mistakes.
  • Continuing on the related theme of cost cutting that ends up costing so much more, there is the MERS problem. Do MERS documents actually work, in the legal sense of transferring ownership? I have no idea, but if they don’t, that’s a problem.
  • Will the uncertainty over the legality of foreclosures crush the housing market, especially given the increased cost of title insurance?
  • If it turns out that the ownership chain in many, perhaps even most securitisations are fatally compromised, is there anything to be done or are most US RMBS affected? This is a huge deal potentially, but so uncertain no one can predict the outcome yet. My guess would be that it is so important that it will get fixed regardless of the actual legal position.
  • There will almost certainly be reps and warranties litigation by both protection sellers on RMBS, and purchasers of RMBS.
  • This leads me to the unpalatable truth that many of these foreclosures are, at the end of the day, fair.

'Foreclosure Mill' Employees Got Gifts For Altering Documents, Witness Says - Florida authorities are investigating the law offices of David J. Stern over how it handled foreclosure paperwork. As the AP notes, Cheryl Salmons, an office manager at the law offices of David Stern, "would sign 500 files in the morning and another 500 files in the afternoon without reviewing them and with no witnesses," according to Kelly Scott, a former assistant at the firm. The perks for good performance were considerable, according to Scott's statement. Tampa Online notes office employees were lavished with gifts:  "As a perk of Samons' [sic.] job, Stern's office would routinely pay her personal mortgage, a car payment, her electric bills and her cell phone bill, according to Scott, who told investigators Stern also bought Samons [sic.] a new BMW sport utility vehicle every year and gave her and other employees jewelry. Additionally, Stern purchased employee David Vargas a house, a car and a cell phone, Scott claims in her statement."

Beware of Attorneys General Bearing Gifts, Foreclosure Crisis Edition I (Florida) - Yves Smith  -As much as state attorneys general could be an effective force in acting for consumers and investors against banks, the fact that an attorney general has saddled up does not necessarily mean the effort is serious. Consider the curious conduct of one Bill McCollum, the lame duck attorney general of Florida. It appears that McCollum has been going after the foot soldiers in the foreclosure chicanery business (although some of them, like David Stern, head of the biggest foreclosure mill in the state, have earned a tidy fortune). His recent actions have targeted firms offering dubious foreclosure advice, and more recently, the foreclosure mills as well as a firm that may be best known for its real estate related document fabrication activities, Lender Processing Services, through its DocX subsidiary.  Now starting with these actors isn’t a bad thing at all; in fact, prosecutors often target low level criminals with the hope of getting them to turn evidence on the kingpins. And there is good reason to think McCollum has no interest in asking tough questions that will inconvenience bigger fry.  McCollum Is falling in with the banking industry party line. He appears to regard not disrupting the foreclosure process, a top priority of the financiers, as a worthy goal.

Guest Post: Mortgages Were Pledged to Multiple Buyers at the Same Time - Bank of America alleged in a court filing this June: It appears as though many loans and other mortgage-related assets have been double and even triple-pledged to various constituencies  - Boa Answer to Freddie Objection in Re Taylor Bean & Whitaker Mortgage Corp. scribd -  April Charney – a consumer lawyer with Jacksonville Area Legal Aid – and CNBC’s Dennis Kneale noted in February 2009 that courts have found that some mortgages have been sold again and again to different trusts, when they should have only been sold once. (video) Kneale explained that that is the reason that two different banks sometimes try to simultaneously foreclose on the same home:  And today, Chris Whalen told CNBC’s Larry Kudlow that Bear Stearns will be exposed as having sold the same loan to different investors on numerous occasions (see 6:45 into video):  As I have repeatedly pointed out, the failure of the mortgage originators and banks to prepare and record proper documentation has led to an epidemic of fraud. The pledging of the same mortgage again and again to different trusts related to mortgage backed securities is just one result.

Why The Paperwork Appears "Sloppy" - After centuries of lending money and preparing loan documents it seems that the least likely suspect for screwing up the paperwork on tens of millions of “loans” would be the Banks themselves. Yet that is what occurred. The purpose of this article is to show that it was not sloppy, it was intentional. And I will tell you why it was intentional. The much expected announcement that after a thorough review they have determined the paperwork is in order is a last-ditch desperate effort to block inquiries into the mortgage creation process and the sale of “mortgage bonds” to investors. They attempted to emulate the government’s PR stunt last year with the “stress test” forgetting that they are private companies in litigation subject to discovery. They have now opened the door to discovery, which is the last thing they wanted. The documents were not sloppy and they were not processed sloppily. They were created and treated exactly as planned. They did it because they thought they could get away with it. They had enough money to buy off any legislator or Judge, or so they thought. But it isn’t working out that way. It’s not the first time these mega-banks have stepped on a land mine and it won’t be the last, as long as we allow them to grow into such behemoths such that that ascribe to themselves the qualities of government or God.

 ForeclosureGate: Time to Break Up the Too-Big-to-Fail Banks? - Ellen Brown - Looming losses from ForeclosureGate qualify as the sort of systemic risk warranting the breakup of the too-big-to-fail banks under the new financial reform bill. The new Financial Stability Oversight Council (FSOC) probably didn't expect to have its authority called on quite so soon, but Rep. Alan Grayson (D-Florida) has just put the Kanjorski amendment to the test. It provides federal regulators with new powers to pre-emptively break up large financial institutions that - for any reason - pose a threat to US financial or economic stability.Grayson wrote a letter to the heads of the regulatory agencies tasked with cleaning up the fallout from the financial sector meltdown and preventing another catastrophe, asking for an emergency task force on foreclosure fraud."The liability here for the major banks is potentially enormous, and can lead to a systemic risk. Fortunately, the Dodd-Frank financial reform legislation includes a resolution process for these banks," Grayson wrote, suggesting the government assert its new powers. Grayson is seeking a foreclosure moratorium on all mortgages originated and securitized between 2005-2008, until such time as the FSOC task force is able to understand and mitigate the systemic risk posed by the foreclosure fraud crisis.

An Early Stress Test For The Financial Stability Oversight Council by Simon Johnson - How much damage to the financial system should we expect from what is now commonly called the foreclosure morass, the still-developing scandal involving document robo-signing (and robo-dockets), completely messed up mortgage paperwork and high-profile inquiries into accusations of systematic and deliberate misbehavior by banks? The damage to banks’ reputation is immeasurable. They have undermined property rights – the ability to establish clear title is a founding idea of the American republic. They have mistreated customers in a completely unacceptable manner. If anyone doubted the need for a new consumer protection agency dealing with financial products – and the importance of having a clear-thinking reformer like Elizabeth Warren at its head – they are presumably silenced by recent events. (If you need to get up to speed on the basics of this issue, see this series of posts by Mike Konczal.) But what is the cost in terms of additional likely losses to big banks? The likely size and nature of these are leading to exactly the kind of systemic risks that the Financial Stability Oversight Council was recently established to anticipate and deal with.

Obama Team On Furor Over Foreclosures: 'Problem For The Banks and Servicers To Fix' - U.S. Housing and Urban Development Secretary Shaun Donovan said Wednesday that the Obama administration will attempt to protect homeowners and police the kind of paperwork fraud that led the nation's largest banks to temporarily halt foreclosures this month, but added that the administration had yet to find anything fundamentally flawed in how large banks securitized home loans or how they foreclosed on them. "Where any homeowner has been defrauded or denied the basic protections or rights they have under law, we will take actions to make sure the banks make them whole, and their rights will be protected and defended," Donovan said at a Washington press briefing. "First and foremost, we are committed to accountability, so that everyone in the mortgage process -- banks, mortgage servicers and other institutions -- is following the law. If they have not followed the law, it's our responsibility to make sure they're held accountable." He added, however, that the administration is focused on ensuring future compliance, rather than on looking back to make sure homeowners and investors weren't harmed during the reckless boom years. "to make sure these problems don't happen again."

Next Stop in Foreclosure Fight May Be Courtroom - About a month after Washington Mutual Bank made a multimillion-dollar mortgage loan on a mountain home near Santa Barbara, Calif., a crucial piece of paperwork disappeared.  But bank officials were unperturbed. After conducting a “due and diligent search,” an assistant vice president simply drew up an affidavit stating that the paperwork — a promissory note committing the borrower to repay the mortgage — could not be found, according to court documents.  The handling of that lost note in 2006 was hardly unusual. Mortgage documents of all sorts were treated in an almost lackadaisical way during the dizzying mortgage lending spree from 2005 through 2007, according to court documents, analysts and interviews.  Now those missing and possibly fraudulent documents are at the center of a potentially seismic legal clash that pits big lenders against homeowners and their advocates concerned that the lenders’ rush to foreclose flouts private property rights.

Federal Law Enforcement Looking at Criminal Violations in Foreclosure Fraud - Even if the mega-banks were correct that the foreclosure fraud scandal merely concerns document errors, and that the replacement documents will fix everything, they cannot rewind history. First of all, judges may not accept the new documents, and may make the banks file entirely new cases. Second, the banks did supply those fake documents, backdated documents, forged documents, false affidavits. All that will be the subject of both the Ohio lawsuit against GMAC and the 50 state AG investigation. In addition, the banks clearly violated criminal statutes by breaking into occupied homes, changing locks, and engaging in other forms of intimidation. That, along with the document fraud, should draw criminal charges, and there’s an indication today that it will, from federal law enforcement: Federal law enforcement officials are investigating possible criminal violations in connection with the national foreclosure crisis, examining whether financial firms broke federal laws when they filed fraudulent court documents to seize people’s homes, according to people familiar with the matter.

Will Bankers go to Jail for Foreclosure-gate? - More and more, Foreclosure-gate is looking like the housing bust's Enron. One of the amazing developments of the unraveling of the financial crisis has been the fact that there have been so few people we can actually point to and say without a doubt that guy or gal is a crook. Yes, Bernie Madoff and his fellow ponziers, but they were only flushed out by the financial crisis. They didn't really cause it. The Bear Stearns hedgies beat their case. The mastermind of AIG's demise Joe Cassano looks to have made a clean getaway. Lehman's Dick Fuld is still in the clear. Goldman and just last week Countrywide's  executives had to pay out large fines. But none of them are headed to jail. John Paulson and other hedge funds that help construct CDO debt bombs and bet against them, haven't even been forced to give some of their winnings back. I can't think of anyone of any real consequence who is facing hard time.

New Fronts Opening in Foreclosure Crisis: Criminial Investigation, Constitutional Probe Launched - New fronts are opening in the foreclosure mess.  A lot of people have wondered why no one has gone to jail over what by commonsense standards is fraudulent activity. The possibility that the violations were indeed criminal is finally being investigated. From the Washington Post: Federal law enforcement officials are investigating possible criminal violations in connection with the national foreclosure crisis, examining whether financial firms broke federal laws when they filed fraudulent court documents to seize people’s homes, according to people familiar with the matter. Yves here. On the one hand, I would not underestimate the ability of Team Obama to give the banking industry a free pass when tough action is warranted. On the other hand, there is a proud tradition of the Federal government rousing itself when measure by the states run the risk of showing it to have been complacent to the point of negligence (one well known example is when state securities law suits force the generally lapdog SEC to take swing into gear). So if state or even private lawsuits expose enough damaging material, it will be hard for this task force to sit on its hands.

Bad Press on Bank Foreclosures Making Some Judges More Cautious - Lawyers who defend homeowners against foreclosures, even when their client has a good case, like servicing errors, often run into bank-friendly judges. The plaintiff’s argument typically boils down to, “We’re a bank, they are a deadbeat.” It looks as if banks are increasingly hoist on their own petard. There has been so much coverage of what can most charitably be called “improprieties” that some judges are no longer accepting the bank case at face value. We had linked to a Bloomberg story last week describing how Florida’s rocket docket had slowed down considerably. Although the main cause was banks delaying foreclosures to check documentation, the story also made clear that judges now felt compelled to take borrower allegations of fraud seriously, rather than zip through cases. Some courts in formerly bank-friendly Florida are going further and demanding underlying documents, not just affidavits. From The Palm Beach Post:

Foreclosure-Gate: GMAC resumes some foreclosures - Statement from GMAC: GMAC Mortgage Statement on Independent Review and Foreclosure Sales GMAC Mortgage ... has engaged several leading legal and accounting firms to conduct independent reviews of its foreclosure procedures in each of the 50 states.  In addition to the nationwide measures, the review and remediation activities related to cases involving judicial affidavits in the 23 states continues and has been underway for approximately two months. As each of those files is reviewed, and remediated when needed, the foreclosure process resumes. GMAC Mortgage has found no evidence to date of any inappropriate foreclosures.  Earlier I posted the BofA and Citi comments (BofA is resuming foreclosures, Citi said their foreclosure process was "sound".) Several large banks report Q3 results over the next two days (BofA, Goldman Sachs, Wells Fargo and Morgan Stanley), and I expect more comments on foreclosure issues (and possibly more questions).

GMAC Ends Foreclosure Freeze - GMAC Mortgage resumed foreclosures in 23 states Tuesday after it had halted practices earlier this month following an employee’s admission of approving thousands of foreclosure notices without reading the paperwork.“As we review the affected files in the 23 judicial states and take any needed remediation, the foreclosure process continues,” said Gina Proia, a spokeswoman for GMAC Mortgage. The original freeze did not include Michigan. Last week, the U.S. Treasury Department’s special inspector general confirmed it is looking into the practices of GMAC Mortgage, part of Detroit-based Ally Financial Inc., which is 56.3 percent owned by the federal government. The government has loaned $17.2 billion to Ally Financial. GMAC said last week it has hired legal and accounting firms to review foreclosures in all 50 states. Bank of America Corp. also said Tuesday it has resumed foreclosures in all 50 states.

Citigroup: Foreclosure Process is 'Sound', BofA expects to submit new affidavits next week - From Dow Jones: Citigroup Says Its Foreclosure Processing Is 'Sound' Dow Jones is reporting that the Citigroup CFO John Gerspach said they have found no issues with the foreclosure process, and they see no reason to halt foreclosures.  "While we use external attorneys to prepare [foreclosure] documents, each package is reviewed by a Citi employee, who verifies the information and signs the foreclosure affidavit in the presence of a notary," Gerspach said ... And from the WSJ: BofA Sets Timetable for Foreclosure Review. The WSJ is reporting that BofA will resubmit new affidavits for 102,000 pending foreclosures, and that they expect to resubmit the affidavits, with the proper reviews and new signatures, by October 25th.

Bank of America Resumes Foreclosures in 23 States - CNN reports that Bank of America is resuming foreclosures in 23 states: Bank of America reviewed 102,000 foreclosures in the 23 states where a court must sign off on the proceedings, and it is now restarting the process on those cases, the company said Monday. The company said the first of the new affidavits will be submitted by Oct. 25, and that it will continue its review in 27 other states. According to a spokeswoman for the bank, no errors were found during the review, and fewer than 30,000 foreclosure sales across all 50 states will be delayed as a result of the investigation. This is rather curious, since there is evidence of Bank of America foreclosing in the name of Bank of America (meaning Bank of America is presented as the owner of the loan) when the loan was originated by Countrywide and Countrywide provided testimony that 96% of its mortgages were securitized (meaning the owner should be a trust, not a bank). It’s an interesting anomaly that only the 4% of the mortgages that Countrywide originated are the ones that are going bad. Note also the peculiar emphasis on “fewer than 30,000″ which presumably means nearly 30% are being delayed.

Largest Bank Will Resume Foreclosure Push in 23 States - Bank of America announced on Monday that it would resume home foreclosures in nearly two dozen states, despite the running controversy over how banks handled tens of thousands of cases of homeowners facing eviction. Bank of America, the nation’s largest bank and the servicer of roughly one in five American mortgages, insisted that it had not found a single example where a foreclosure proceeding was brought in error.  The move is also likely to encourage other giant lenders, like JPMorgan Chase, to resume the foreclosure process that threatens two million homeowners.  Meanwhile, GMAC Mortgage, whose procedures helped prompt the controversy when one its executives testified that he had signed 10,000 documents in a month, is also proceeding with foreclosures.

Banks' foreclosure hustle - On Monday, two of the nation's largest financial corporations, Bank of America and GMAC, announced that they were reopening their foreclosure mills, which they had shuttered earlier this month in the wake of reports that they were processing foreclosures with essentially no oversight. Federal officials are now investigating the foreclosures for possible financial fraud.  The resumption of the high-speed foreclosure industry comes as a shot in the arm to those who feared that America had lost its knack for mass production or, in this case, mass destruction. We may not be turning out cars and tools like we used to, but the accounts of robo-processors signing hundreds of repossessions daily look increasingly like the chronicles of Henry Ford's assembly lines. The system, as Ariana Eunjung Cha and Zachary A. Goldfarb documented in The Post on Friday, "was set up to prioritize one thing over everything else: speed."  Mortgage companies penalized processors if they foreclosed too slowly. The firms that worked the quickest received bonuses from the banks that employed them and higher marks from credit-rating agencies.

Foreclosure Fairy Dust - On Oct. 1 Bank of America said it would temporarily halt foreclosures in the 23 states where foreclosures require a court proceeding so that it might review the seizures in light of reports about industry-wide irregularities. (See my previous column, "Ask George Bailey.") The bank pledged to "amend all affidavits in foreclosure cases that have not yet gone to judgment."  Seventeen days later, the bank said it had completed its review in these 23 states and would resume foreclosures starting Oct. 25. In effect, the bank said on Oct. 18 that it had reviewed 102,000 foreclosures, figured out whatever may have been wrong with them, and was ready to get back to the business of seizing and selling off these delinquent properties. Bank of America won't explain exactly what it did. I phoned the bank's press office and asked how the 102,000 pending mortgages were checked out. I didn't expect fine-grained detail, but I figured at least the bank would have prepared a fact sheet for the many, many reporters likely to ask this question. Instead, I was told that somebody would return my call. No one did. As best I can tell, no news outlet has gotten Bank of America to elaborate on its terse announcement.

Problem For Banks: Due Process - Like everyone else, I’d been reading with amazement the stories about one of those legal problems: the robo-signing scandal that has ensnared all the banks with mortgage servicing subsidiaries, Bank of America included. That’s the scandal in which a tiny handful of employees had signed — or allowed others to forge their signatures — on thousands of affidavits confirming that the banks had the legal right to foreclose on properties they serviced. In truth, they had often never seen the documents proving the bank had that legal right. In some cases, the documents didn’t even exist. As a result of the mounting publicity, many big banks had halted all foreclosures while they reviewed the legality of their affidavits.  Mr. Moynihan said that, at Bank of America, at least, the foreclosure halt in 23 states that require judicial proceedings was over. It had reviewed some 102,000 affidavits and — guess what? — no big problem! “The teams reviewing data have not found information which was inaccurate” or that would change the plain facts of foreclosure — namely that the homeowners it wanted to foreclose on were in serious arrears.

Fraud in foreclosure summons a disturbing trend in Duval County Florida - The foreclosure case against Patrick Jeffs was thrown out of court when a Jacksonville judge ruled that the summons to inform him of the lawsuit was counterfeit. Mark Browne was in Iraq when a process server tried to give his mother in New Mexico a summons to inform him that his house in Jacksonville was being foreclosed on. She didn't accept it, but the server signed a document that said she did. Nancy Rush sold her Jacksonville condo in March, walking away poorer after the short sale and was getting on with her life when her phone rang with unlikely news: She was in foreclosure. A week after she unloaded the unit at Kendall Town in Arlington, a Jacksonville judge ordered the home sold at auction to settle a $190,000 mortgage debt, even though Rush had never received a summons saying she was being sued. Even the summons, the simple but important legal notice required to inform homeowners that they are being foreclosed on, has not been immune to the massive problems surrounding what has become known in Florida and across the nation as the foreclosure mess.

Foreclosures spawn new attitude to ownership - Whether more of the millions of homeowners now facing “negative equity” decide to follow the path of Jeff and Shasta is making plenty of banks, regulators and investors very nervous. More defaults, especially by people still making monthly interest payments, increases losses for banks and the investors owning billions of dollars of securities backed by mortgage payments. A particular worry is whether the tales of shoddy documentation completed by so-called “robo-signers” at mortgage lenders and growing foreclosure delays will affect people’s behaviour. It could for three reasons. First, a longer gap between stopping payments and being evicted from the property allows people to build up a nest-egg. In many states, homeowners do not owe the bank anything more than the keys to their home if they default on a mortgage. Second, a slowdown in foreclosures creates an ever-growing backlog of unsold homes, which will at some point be sold, pushing house prices lower. If people think home prices will not recover, they are more likely to throw in the towel. Third, it further damages the reputation of the banks who made the mortgages, and this could make borrowers more unwilling to pay. “More bad news and uncertainty creates more anger against the banks and frustration with the system,”

Foreclose on the Foreclosure Fraudsters, Part 1: Put Bank of America in Receivership - After a quick review of its procedures, Bank of America this week announced that it will resume its foreclosures in 23 lucky states next Monday. While the evidence is overwhelming that the entire foreclosure process is riddled with fraud, President Obama refuses to support a national moratorium. Indeed, his spokesmen on the issue told reporters three key things. As the Los Angeles Times reported: A government review of botched foreclosure paperwork so far has found that the problems do not pose a "systemic" threat to the financial system, a top Obama administration official said Wednesday. Yes, that's right. HUD reviewed the "paperwork" problem to see whether it threatened the banks -- not the homeowners who were the victims of foreclosure fraud. But it got worse, for the second point was how the government would respond to the epidemic of foreclosure fraud. The Justice Department is leading an investigation of possible crimes involving mortgage fraud. That language was carefully chosen to sound reassuring. But the fact is that despite our pleas the FBI has continued its "partnership" with the Mortgage Bankers Association (MBA). The MBA is the trade association of the "perps." It created a ridiculous on its face definition of "mortgage fraud." Under that definition the lenders -- who led the mortgage frauds -- are the victims.

Foreclosure Crisis Triggers Debate on Role of Mortgage Registry - On July 1, a federal judge took away Robert Bellistri’s house in Arnold, Missouri.  Bellistri, who bought the house as an investment after it was seized for non-payment of taxes, failed to notify Mortgage Electronic Registration Systems Inc. of his purchase, the judge said. A state appeals court last year had ruled otherwise, finding Bellistri didn’t need to tell MERS, a company that lets banks electronically register their sales of home loans so they can avoid trudging down to the county land-records office.  The case highlights a debate raging in courts on the role MERS has, if any, in home foreclosures. How it’s resolved will determine whether MERS’s involvement produced a defective process and clouded millions of property titles. A definitive ruling against MERS might slow any future bundling of mortgages into securities since the company played a role in that process.  “MERS is the central device by which the banks have tried to opt out of the legal system and the real-property record system,” U.S. Representative Alan Grayson of Florida said in an interview.

Fidelity National Requires Banks to Sign Foreclosure Warranty -Fidelity National Financial Inc., the largest U.S. title insurer by market share, will require lenders to sign a warranty assuring their paperwork is sound before backing sales of foreclosed homes. An indemnity covering “incompetent or erroneous affidavit testimony or documentation” must be signed for all foreclosure sales closing on or after Nov. 1, the Jacksonville, Florida- based company said in a memorandum to employees today. The agreement was prepared in consultation with the American Land Title Association and mortgage finance companies Fannie Mae and Freddie Mac. Bank of America Corp., the biggest U.S. lender, agreed to a similar contract with Fidelity National on Oct. 8, the same day it extended a freeze on foreclosures to all states amid concern by federal and state officials that lenders are seizing homes without properly reviewing documents. The bank plans to start resubmitting foreclosure affidavits next week. Attorneys general across the country have opened a joint investigation into foreclosures, saying they will seek an immediate halt to any improper practices at mortgage lenders and loan servicers.

The Putback Parade Cometh: Pimco, New York Fed Said to Seek Bank of America Repurchase of Mortgages - Summary: As the putback parade gets going, the question is not whether the banks can afford to buy back the mortgages. The question is “Can the Banks Afford the Instantaneous and Guaranteed HIT to CAPITAL?” What investors will lend money to see it instantly evaporate, and how much will they charge for those evaporation services? TARP 3.0 coming to a door step near you!!! As clearly articulated in detail in The Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008!, entities are looking to stem losses by putting it to the originating banks and/or servicers. From Bloomberg: Pimco, New York Fed Said to Seek Bank of America Repurchase of Mortgages

Major Bondholders seek BofA Mortgage Repurchases - From Bloomberg: Pimco, New York Fed Said to Seek BofA Repurchase of Mortgages Pacific Investment Management Co., BlackRock Inc. and the Federal Reserve Bank of New York are seeking to force Bank of America Corp. to repurchase soured mortgages packaged into $47 billion of bonds by its Countrywide Financial Corp. unit, people familiar with the matter said.  The bondholders wrote a letter to Bank of America and Bank of New York Mellon Corp., the debt’s trustee, citing alleged failures by Countrywide to service the loans properly ... This will take time - and be contested - but the battle over Reps and Warranties will probably continue to grow. Fannie and Freddie have been ramping up their push backs for some time, and here come the push backs from the private investors.

WSJ: Here come the GSE Put-Backs From the WSJ: Regulator for Fannie Set to Get Litigious - [The FHFA] hired a law firm specializing in litigation as the agency considers how to move forward with efforts to recoup billions of dollars on soured mortgage-backed securities purchased from banks and Wall Street firms.... In a statement, the FHFA said it is analyzing requested information and that "no decisions for future action have been made." The GSEs have a huge advantage over other investors because the FHFA can issue subpoenas. The article mentions estimates that the banks could face put-backs ranging from $24 billion to as high as $179 billion. Quite a range and the actual amount will probably be towards the lower end of the range, and this will play out over a long period (unless there is a settlement).Note: It is difficult for private investors to obtain the actual loan documents - and that is one of the hurdles the investors asking BofA to repurchase loans need to overcome. Yves Smith at Naked Capitalism points out some of the difficulties: More on Why the PIMCO, BlackRock, Freddie, NY Fed Letter to Countrywide on Putbacks Is Way Overhyped.

Pimco, New York Fed Said to Seek Bank of America Repurchase of Mortgages Pacific Investment Management Co., BlackRock Inc. and the Federal Reserve Bank of New York are seeking to force Bank of America Corp. to repurchase soured mortgages packaged into $47 billion of bonds by its Countrywide Financial Corp. unit, people familiar with the matter said. The bondholders wrote a letter to Bank of America and Bank of New York Mellon Corp., the debt’s trustee, citing alleged failures by Countrywide to service the loans properly, their lawyer said yesterday in a statement that didn’t name the firms. Investors are stepping up efforts to recoup losses on mortgage bonds, which plummeted in value amid the worst slump in home prices since the 1930s. Last month, BNY Mellon declined to investigate mortgage files in response to a demand from the bondholder group, which has since expanded. Countrywide’s servicing failures, including insufficient record keeping, may open the door for investors to seek repurchases by bypassing the trustee, said Kathy Patrick, their lawyer

Bondholders Pick a Fight With Banks - As banks restart foreclosures they had suspended, bondholders are stepping up efforts to recoup losses on soured mortgage portfolios amid concern about sloppy mortgage servicing and underwriting practices.In a letter Monday, a group of institutional bond investors raised objections to the handling of 115 bond deals issued by affiliates of Countrywide Financial Corp., acquired by Bank of America Corp. in 2008.The investor actions, which seek to have certain loans be repurchased among other things, come as Bank of America on Monday took steps to defuse claims that its foreclosure troubles are deep-seated. The bank on Monday said it was restarting the foreclosure of more than 100,000 homes. The letter, to Bank of New York Mellon Corp. and Bank of America, cited Bank of America's "failure to observe and perform, in material respects" its duties as the servicer for the bond deals. The failure to properly handle the loans "has materially affected the rights" of bondholders, the letter said.

Dear Brian Moynihan: Here's Why Bank Of America Owes The Bond Insurers $10-$20 Billion - Can't get enough of mortgage repurchase-gate? For your reading pleasure, here's the letter that was sent in early September to Bank of America CEO Brian Moynihan from the Association of Financial Guaranty Insurers (the monolines) arguing why they believe his bank will owe their members $10-20 billion for mortgage repurchases.(Remember last week this issue really spilled out into the open -- though it's been brewing for a long time. Manal Mehta, the hedge fund manager who is short BofA on repurchase risk is also long the monolines on this idea that they'll recoup a significant amount in this next phase of the crisis.) Association of Financial Guaranty Insurers Letter to Bank of America-1

PIMCO, NY Fed Pressuring BofA to Repurchase Dud Mortgages (Empty Threats Edition) -As dramatic as this headline sounds, there is much less here than meets the eye. In addition, either the article that discussed this development is confused, or the underlying legal pressure is not well framed. First, let’s get to the report, which certainly sounds serious. BusinessWeek reports that PIMCO, BlackRock, and the New York Fed are pushing Bank of America to repurchase the delinquent mortgages underlying $47 billion of bonds:  Pacific Investment Management Co., BlackRock Inc. and the Federal Reserve Bank of New York are seeking to force Bank of America Corp. to repurchase soured mortgages packaged into $47 billion of bonds by its Countrywide Financial Corp. unit. Note several things before we go any further: first, this is NOT litigation, it’s a mere nastygram. Second, this is almost certain to be a new strategy in a effort mounted by an investor group (presumably now identified to turn up the heat on BofA) which so far has gotten nowhere.

More on Why the PIMCO, BlackRock, Freddie, NY Fed Letter to Countrywide on Putbacks Is Way Overhyped - Most readers were not happy when I didn’t buy into the mainstream presentation of a the widespread news reports that a letter sent on behalf of a group of investors constituting approximately $16.5 billion (per the Wall Street Journal) of $47 billion (presumably face amount) of bonds was a Really Big Deal in terms of the damage it might do to Bank of America. Let’s start with the obvious. I’m no fan of Countrywide, in fact I was a early to criticize Bank of America’s staged purchase. I think mods are a great thing, and anything to promote mods is a plus. There is plenty of evidence that servicers behave badly, so the idea that Countrywide has behaved in ways that would make people eager to sue them is entirely credible. So you would think I’d like this case. While the letter that the investors sent to Countrywide is laying the groundwork for litigation, any litigation is going to be more of an uphill battle and less lucrative than the breathless reports would lead you to believe. Part of this overreaction is in keeping with the excitement over similar putback litigation by the monolines, who despite their better grounds for lawsuits, is similarly overhyped. But the presence of famous names, particularly that of the New York Fed, has led this case-in-the-making to be treated as more damaging than it is likely to be.

New York Fed Wants Banks to Buy Back Bad Mortgages - Two years after the Fed bought billions of dollars in mortgage securities as part of the financial bailout, its New York arm is questioning the paperwork — and pressing banks to buy some of the investments back.  The Federal Reserve Bank of New York and several giant investment companies, including Pimco and BlackRock, have singled out Bank of America, which assembled more than $2 trillion of mortgage securities from 2004 to 2008.  Bank of America is already dealing with the fallout from the fight over whether foreclosures were handled properly. It insists that no foreclosures have been initiated in error, and on Monday announced it would resume the foreclosure process in 23 states where court approval is required to go ahead.  But while the human toll of the foreclosure crisis has grabbed the headlines, the fight over how these loans were created in the first place could last longer and ultimately cost the banks much, much more. And it is setting the stage for a huge battle between mortgage holders like the government, hedge funds and other institutional investors on one side and the big banks on the other.

New York Fed Faces ‘Inherent Conflict’ in Mortgage Buybacks - The Federal Reserve Bank of New York’s effort to recover taxpayer money used in bailouts during the crisis may be at odds with its mission to ensure the stability of the financial system.  The New York Fed, which acquired mortgage debt in the 2008 rescues of Bear Stearns Cos. and American International Group Inc., joined a bondholder group including Pacific Investment Management Co. that aims to force Bank of America Corp. to buy back some bad home loans packaged into $47 billion of securities, people familiar with the matter said this week.  Concern that Bank of America may be forced to buy back soured mortgages helped send its stock down almost 5 percent in the last two days, wiping out $5.92 billion of its market value. The decline runs counter to the Fed’s goal of strengthening the banking system after the worst crisis since the Great Depression.

Regulator for Fannie Set to Get Litigious - The federal regulator overseeing Fannie Mae and Freddie Mac hired a law firm specializing in litigation as the agency considers how to move forward with efforts to recoup billions of dollars on soured mortgage-backed securities purchased from banks and Wall Street firms. The Federal Housing Finance Agency, which in July issued 64 subpoenas to issuers of mortgage securities, bank servicing companies and other entities, is working with Quinn Emanuel Urquhart & Sullivan LLP, a Los Angeles-based firm that specializes in business litigation, to coordinate its investigations. In a statement, the FHFA said it is analyzing requested information and that "no decisions for future action have been made." Quinn Emanuel confirmed its hiring by FHFA but declined to comment further. Since the financial crisis, 400-lawyer Quinn Emanuel has avoided building a banking clientele, making it a top suitor for plaintiffs pursuing banks. The firm has represented MBIA Insurance Corp. in several lawsuits against top U.S. mortgage banks alleging that the insurer was fraudulently induced to cover losses on mortgage-backed securities.

Federal Home Loan Bank of Chicago sues B of A, others - The Federal Home Loan Bank of Chicago has sued several of the nation’s largest banks, including its biggest shareholder, Bank of America Corp., alleging that their failure to disclose lax mortgage underwriting standards led the Home Loan Bank to suffer losses after purchasing poor-quality mortgage-backed securities from them. The Home Loan Bank’s lawsuit, filed in Cook County Circuit Court, asks the court to void the sales of the securities and direct the banks to reimburse the Home Loan Bank plus 10% annual interest, according to Bloomberg News. The $88-billion-asset Federal Home Loan Bank of Chicago is one of 12 federally chartered wholesale banks around the country that make low-interest loans to their member banks and in the past have purchased mortgages originated by their member banks. With one of the biggest mortgage-buying programs of any of the 12 wholesale banks, the Chicago institution has struggled through the recession. It’s under orders from its federal regulator not to pay dividends to its members and is redeeming their shares, which don’t trade, only under very limited circumstances.

Obama Administration: “Nothing to See Here” on Foreclosure Crisis -  Yves Smith - The Obama Administration is entirely predictable. It ever and always sides with large corporate interests, while trying to create the impression that it is actually concerned for the welfare of the average citizen. Admittedly, the occasionally tough talk with little follow through feeds a perverse spectacle of plutocrats sulking, pouting, and claiming that they are really, really badly treated.  Yesterday, the Financial Times reported “Foreclosure crisis tops Obama agenda” and described a closed door meeting scheduled with top officials. This mountain of effort so far seems to be producing a molehill, apparently by design. Team Obama is resorting to another of its well ingrained bad habits, of using PR as the preferred solution for all policy problems.  The only question here is whether the powers that be are so out of touch that they regard the foreclosure crisis version of extend and pretend as a viable strategy, or whether they are simply using it to buy time.  Presumably, any bank-favoring measures would be radioactive right now, while voters will lack immediate recourse after November 2.

B of A pressured to buy back bad mortgages: report - A bondholders' group is seeking to force Bank of America Corp. to buy back some $47 billion in bad mortgages packaged by Countrywide Financial Corp., according to a published report Tuesday. Bloomberg News, citing unnamed people familiar with the matter, reported that Pacific Investment Management Co., BlackRock Inc, and the Federal Reserve Bank of New York wrote to Bank of America and Bank of New York Mellon Corp., the debt's trustee, faulting Countrywide for not servicing the loans properly. Bank of America acquired Countrywide in 2008.

Mortgage Mess: Shredding the Dream; Major Fight over Enormous Losses Yet to Come - The foreclosure crisis isn't just about lost documents. It's about trust—and a clash over who gets stuck with $1.1 trillion in losses say BusinessWeek writers in a comprehensive 7 page article called Mortgage Mess: Shredding the Dream. The article kicks off with a high-profile case of Joseph Lents who has been in default for 8 years and is still living in his home because no one can come up with the note. Such cases are extremely rare, yet highly publicized as if they widely occur.The article continues with a discussion about MERS including this interesting comment:  "The Florida Bankers Assn. told the state Supreme Court last year that in many cases the physical document was deliberately eliminated to avoid confusion immediately upon its conversion to an electronic file." Then there is the issue of LPS, America's biggest mortgage-and-foreclosure outsourcing firm. "LPS supplies much of the digital plumbing for the convoluted home-finance system. At the start of 2010 it said its computer programs were handling 28 million loans with a total principal balance of more than $4.7 trillion—or more than half the nation's outstanding mortgage balances."

Should We Just Call a "Do-Over" on the Mortgage Market? - Over at Unqualified Offerings, Thoreau asks why we shouldn't just cancel all the damn mortgages and start over.  I sense that he isn't the only one thinking this sort of thing these days, and while the temptation is to snort and say "that's ridiculous!", the fact is that something similar has been tried before, in land reform schemes that aimed to address an untenable inequality between landholders and the much more numerous unlanded poor.  So what are the advantages of what you might call a "reboot"?  Simplicity is perhaps the greatest; the person who now has title, keeps it, free of liens.  If you are in favor of redistributing wealth, this certainly does so, away from the holders of capital and towards small landholders. Meanwhile, you're doing a lot to clean up overburdened hosuehold balance sheets.  People being dragged under by a huge mortgage suddenly get a lot of breathing room.  Households gain assets in the place of net liabilities (their underwater mortgage).  Those assets might be leveraged for creative activity; at the very least, being freed from the fear of homelessness might enable people to take entrepreneurial risks that they otherwise wouldn't.

Jubilate! Mortgages and Property - The implications of the Land Scandal keep rippling out to ever more distant shores of political possibility. By now it has sunk into the public consciousness: Your alleged bank may not have the note on your mortgage. It may only be posing as the real owner of your house. It may have no legal right, even according to its own bank-friendly laws, to foreclose if you stop paying the mortgage. Show Me the Note! People understand that the reason they’re losing their homes is not because of any moral failing on their own part, but because the banks have systematically destroyed America’s jobs through their program of forced globalization, outsourcing, offshoring, downsizing, and consolidation. The main goal of all of these, other than direct looting on the part of banksters, was to destroy all decent American jobs. At the same time the banks undermined the economy and all social protections to the point that losing one’s job or having a medical emergency is likely to trigger a personal mortgage crisis. (As is often pointed out, only in the banksters’ America does losing one’s job mean losing one’s health insurance. This system of a double-hit was intentionally set up by the corporatists as a form of socioeconomic terrorism. It’s meant to quash dissent among the work force.)

The Real Meaning Of Foreclosure-Gate - Lately we have been flooded with news stories about Foreclosure-Gate. The blogosphere is on fire! Banks have been foreclosing on families without proper documentation. So-called robo-signers working for the banks have been signing thousands of foreclosure notices without reading them. One poor citizen had his home invaded, and he didn't even have a mortgage. Most commentators are up in arms. The real-estate and bank industries are rife with fraud! These people are shocked—shocked!—that the foreclosure process is often not on the up and up. At this point I've got to ask those who are upset about the new wave of fraud a simple question: What kind of world do you think you're living in?  Not long ago, widespread fraud—Bill Black calls it "control fraud"—in banking and real estate drove the Housing Bubble scam, which finally had its inevitable meeting with a pin in the fall of 2008. When the chickens came home to roost, the American economy was exposed as the phony House of Cards it is, and has been for at least 15 years now. And now people are alarmed that families are being foreclosed on without proper documentation?

The Homeowner Wins, Without a Lawyer – In a column on Tuesday, I discuss legal arguments regarding whether MERS — Mortgage Electronic Registration Systems — has violated state real estate laws, and note a couple of cases where rulings have gone against it. One of those cases, in Oregon, may prove to be a classic example of how a single person can affect the legal system. The case was filed by Natache D. Rinegard-Guirma, a homeowner in Portland who is way behind in mortgage payments. She is acting as her own lawyer. Judge Garr M. King issued an injunction in United States District Court blocking the foreclosure of Ms. Rinegard-Guirma’s home, saying she was likely to prevail in her argument that the basic structure of MERS violates Oregon law and renders the mortgage invalid.

Joseph Lents Dodged Foreclosure for 8 Years, Started a Movement - In 2002, an accountant in Boca Raton, Florida, named Joseph Lents was accused of securities-law violations by the U.S. Securities and Exchange Commission. Lents, who was chief executive officer of a now-defunct voice- recognition software company, had sold shares in the public company without filing the proper forms. Facing a little over $100,000 in fines and fees, and with his assets frozen by the SEC, Lents stopped making payments on his $1.5 million mortgage.  The loan servicer, Washington Mutual Inc., tried to foreclose on his home in 2003 but was never able to produce Lents’s promissory note, so the state circuit court for Palm Beach County dismissed the case. Next, the buyer of the loan, DLJ Mortgage Capital, stepped in with another foreclosure proceeding. DLJ claimed to have lost the promissory note in interoffice mail. Lents was dubious.  “When you say you lose a $1.5 million negotiable instrument -- that doesn’t happen,” he said in an interview in Bloomberg Businessweek’s Oct. 25 issue.

WSJ Blames Evil Consumer Lawyers - Although the Wall Street Journal has provided some excellent coverage of the foreclosure crisis, this story by Robbie Whelan (via Naked Capitalism rebuttal) is pure drivel.  The ludicrous premise is that a coterie of clever consumer lawyers have contrived to keep deadbeat homeowners out of foreclosure by raising silly technicalities.  Never mind that the case used as an illustration involved a homeowner whose timely payments were improperly refused by GMAC Mortgage, and whose dispute is still in litigation.   While I try, not always successfully, to provide dispassionate commentary about the foreclosure crisis, these attacks on the legal services lawyers and private practitioners who I know well make my blood boil.  These lawyers are the heroes of this crisis.  They are devoting countless hours not only to finding fraudulent affidavits, but also and more importantly to decoding servicer payment histories, endlessly resubmitting modification paperwork, trying to enforce bankruptcy plans, and getting servicers to acknowledge their own shockingly frequent errors.  Most of these consumer lawyers earn far less than their counterparts in the foreclosure mills and white shoe firms who are obsequiously protesting that banks can do no wrong.

Lawyers got it right on the foreclosure mess - Don't blame the lawyers. The crisis over faulty or fraudulent paperwork in mortgage foreclosures -- which is either a big deal or a humongous deal, depending on which experts you believe -- is the fault of arrogant, greedy lenders who played fast and loose with the basic property rights of homeowners.  Banks and other lenders, it seems, made statements in courts of law that turned out not to be true. Because judges have such an underdeveloped sense of humor when it comes to prevarication, this mess may be with us for a while.  The mortgage industry would love to blame the whole thing on predatory, opportunistic lawyers who are seizing on mere technicalities to forestall untold numbers of foreclosures that should legitimately proceed. The bankers are right when they complain that the delays are gumming up the housing market, as potential buyers for soon-to-be-foreclosed properties are forced to bide their time until all the questions about documentation and proper title are answered.

NY to hold lawyers accountable on foreclosures – (AP) -- The chief judge of New York's courts on Wednesday imposed a new rule requiring lawyers handling foreclosures to verify that all paperwork is accurate. The move comes amid an uproar over accusations that mortgage lenders nationwide cut corners on paperwork and legal procedure as they moved to seize millions of homes. It follows a slew of other state efforts to respond to the foreclosure-paperwork debacle. Attorneys general in all 50 states and the District of Columbia are jointly investigating whether mortgage companies have violated state laws. In Maryland, an emergency measure that the state's highest court approved this week outlines how state judges can review foreclosures and stop them if documents are invalid. The Obama administration's top housing official said Wednesday that lenders are within their rights to resume foreclosures. But he cautioned that they could face federal fines if found to have broken the law.

More Judicial Pushback Against Bank Foreclosure Processes: New York Requires “Reasonable” Verification (Updated) - From Bloomberg: New York state courts will require lawyers in residential foreclosure actions to certify they have taken “reasonable” steps to verify the accuracy of documents submitted to the court. The new rule, released in a statement by the New York state Unified Court System, is effective immediately. Chief Judge Jonathan Lippman introduced the requirement in response to disclosures of deficiencies in residential foreclosure filings nationwide, including notarization and “robo-signing” and affidavits that falsely state the signer has knowledge of the facts, the statement said. “We cannot allow the courts in New York State to stand by idly and be party to what we now know is a deeply flawed process, especially when that process involves basic human needs — such as a family home — during this period of economic crisis,” Lippman said in the statement.

Law Expert: MERS Mess Could Have “a Massive Effect on the Economy” - It’s important to know from the beginning that MERS is a wholly owned subsidiary of big financial institutions. The mortgage bankers wanted to avoid recording fees and reduce their overall expenditures. So they basically devised a method that would free them from those fees, ran an accounting study showing the savings, and just created MERS. There was no public debate or legislative statute to overturn what had been the customary practice for generations. The money backing MERS came from investors, according to Peterson, including some of the biggest banks and mortgage brokers in the country like Bank of America, Citi, and Countrywide, as well as Fannie Mae. You can see all their shareholders right here. It’s just a creation of the banks. There are actually two MERS companies at this point. There’s MERSCORP, which owns some physical assets, including an office location in Reston, Virginia, and has about 60 employees, including a group of lawyers. There’s also MERS Inc., which has zero employees. This shell company is the one listed as the “mortgagee” on about 60 million American homes, or 60% of the total mortgage market.

Foreclosures Profit Some Equity Firms - New York Times. - Yves Smith: This is a very bizarre article. It mentions the litigation against Great Hill in Federal bankruptcy court, and skips as quickly as possible past the central claim, that Prommis Solutions (and its owner Great Hill) are engaged in impermissible legal fee sharing. The US bankruptcy trustee for Mississippi has joined the case, both on her own behalf (meaning for her district) and on behalf of all bankruptcy trustees in the US. This means the allegations are serious; the bankruptcy trustee would not join if she thought the suit was frivolous. Yet the article avoids the dead body in the room. It looks like they pointedly avoided talking to the plaintiffs, and tried to reach only the defendants. Admittedly, the piece purports to be about the broader issue of private equity involvement in foreclosure mills, but how can you NOT dwell on whether the basic arrangement is permissible?

Mess Puts Homeowners in Limbo - Across the U.S., the mortgage mess is deepening the anxiety and uncertainty swirling around homeowners who are facing foreclosure. Foreclosure is already a slow process, but the decision by lenders such as Bank of America Corp. and J.P. Morgan Chase & Co. to halt most or all foreclosure sales and internal scrutiny by other financial institutions likely will keep many troubled borrowers in their homes for weeks or even months longer. The decision by GMAC, a unit of Ally Financial Inc., means that Mr. Stiles and his two teenage sons can stay in their three-bedroom home, Still, the foreclosure sale is set to proceed Nov. 18. So far, there are few signs lenders and servicers will undo substantial numbers of the foreclosure proceedings being reviewed across the U.S. No one has been "evicted out of a home who shouldn't have been," James Dimon, J.P. Morgan Chase's chairman and chief executive, said in a conference call last week.Wall Street analysts generally are taking a similar view, saying the halts in foreclosure sales are likely to cause little financial impact on banks in the long run. "Sorry, no free houses," 

ForeclosureMom Raps - Warning: this is rap by a middle aged white woman, so adjust your expectations accordingly. There have been a number of reports of cases like hers, of borrowers told to become delinquent to qualify for a mod. They often fail to get the mod and lose their homes.

So you bought a foreclosed home. Now what?- It seemed too good to be true: You bought a house in foreclosure at a fraction of the former price. Maybe you even knocked out a wall or two and remodeled with all the money you saved. But now thousands of foreclosures around the country may be invalid because of bank paperwork problems. Should you worry? "Anyone who's purchased a foreclosed property in the last three years should really be concerned," says George Babcock, a Providence, R.I., attorney who represents homeowners who have been foreclosed on. "They should call the attorney that did their closing and say, 'Hey, do I have a problem?'"

Strong Medicine: The Long-Term Health of the Housing Market Requires a National Foreclosure Moratorium - What is it about due process that people don't understand? The reason for a national foreclosure moratorium at this time is to preserve things as they are for a brief period of time until questions about the validity of the banks' claims against homeowners allegedly behind in their mortgages can be answered. The purpose of such a moratorium is not to bankrupt the banks. It's not to give borrowers a holiday from their mortgages. It's not to deprive potential first time homebuyers of the chance to buy homes out of foreclosure. Rather, the idea behind such a moratorium is a simple one: one does not send in the crime scene investigators while the fire is in progress -- one sends in the fire department. Similarly, while a nationwide investigation is underway that will determine whether banks have engaged in widespread fraud, we cannot stand idly by as homeowners may be victimized by that fraud, and lose their homes while those investigations run their course.  Three major banks have already admitted to what was essentially widespread criminal activity. Yes, there are borrowers who have failed to pay their mortgages on time. Yes, there are some who knowingly took out mortgages they could not afford. But many borrowers are victimized twice: first when they take out risky and sometimes fraudulent mortgage; and second, when their bank attempts to foreclose on them without proving it is entitled to bring the foreclosure action in the first place.

A Better Way to Fix the Foreclosure Process - In the 1990s, capitalism was on the march and the United States mortgage market seemed like a model. In much of the world, it seemed miraculous that ordinary Americans could move into a big home by borrowing large sums of money for 30 years. A crucial element in the American system was that lenders could take the homes of delinquent borrowers; it was impossible to imagine a well-functioning mortgage market in places like Russia and Bolivia, without a similar ability to foreclose. Today, the great mortgage morass has elicited constant calls for a publicly enforced foreclosure moratorium. But shutting down the foreclosure process would only delay the inevitable and take yet another step away from the rule of law. A far better solution would be to experiment with ways of providing more legal resources to borrowers and courts that would make the foreclosure system more efficient and fair.

Scary Paragraph - Business Week reports, Laurie Goodman, a mortgage analyst at Amherst Securities Group, said in an Oct. 1 report that if government doesn't step up its intervention, over 11 million borrowers are in danger of losing their homes. That's one in five people with a mortgage. "Politically," she wrote, "this cannot happen. The government will attempt successive modification plans until something works."  It's her last sentence that is frightening. My view is that the longer the government attempts modification plans, the longer the crisis will last.

Seven Million U.S. Mortgages Past Due or in Foreclosure: LPS - There are 7,018,000 mortgages in the United States that are 30 or more days delinquent or in the process of foreclosure, according to new data from Lender Processing Services (LPS). The Florida-based analytics and technology firm offered the media a preview Friday of its September month-end mortgage performance figures, derived from the company’s loan-level database of nearly 40 million mortgage loans. Of the more than 7 million home loans in the country currently going unpaid, 2,055,000 have already commenced foreclosure proceedings. LPS reports that4,963,000 are in the pre-foreclosure default stages, with nearly half of these falling into the 90-plus-days delinquent bucket.

Foreclosure Nation - % map by county

FRB: Mortgage Debt Outstanding, First Quarter 2009 - Type of holder and property

Most mortgage meltdowns not caused by subprimes - Subprime mortgages were not the main reason behind the housing crisis that started in 2009 and continues to bedevil the faltering U.S. economy, according to a University of Michigan study. "Our analysis shows that the major underlying driver of the continuing foreclosure crisis was aggressive refinancing using adjustable rate mortgage loans that looked safe at the time because of increasing housing prices," said Frank Stafford, an economist at the U-M Institute for Social Research (ISR). In California, Florida, Arizona and Illinois, the percentage of first mortgages refinanced between 2004 and 2007 was especially high – reaching nearly 60 percent in California. In the same period, the percentage of first mortgages that had adjustable rates grew to nearly 15 percent, from just over 10 percent in the late '90s.

Drowning Or Waiving - AMERICA’S south-west may be a very dry place but nowhere else in the country are more homeowners “under water”, owing more on their mortgages than their homes are worth. In cities like Phoenix and Las Vegas prices have fallen by up to 50% from their peak; more than half the mortgages in Arizona and Nevada are in negative equity (see map). Yet the problem is national. One in four American borrowers are under water. Over 4m households owe at least twice as much as their home is worth. Such inundations have nasty effects. Homeowners that are reluctant to default but unable to sell at a loss are left stuck where they are. This throws sand in the gears of America’s famously fluid labour market. A recent IMF paper attributes 0.5 to 1.25 percentage points of America’s unemployment rate to this factor. Defaults may be an even bigger problem. Job losses will often push underwater borrowers into default since a sale isn’t a realistic option. The resulting foreclosures cause lots of damage. Underwater borrowers who sell their home typically get a price 13% below the mortgage value. When homes are foreclosed upon and sold by lenders, the discount rises to 35%

Underwater Mortgages - SF Fed Economic Letter - House prices have fallen approximately 30% from their peak in 2006, accompanied by a level of defaults and foreclosures without precedent in the post-World War II era. Many homeowners have mortgages with principal amounts higher than the market value of their properties. In general, though, the rational default point is below the "underwater" point where house price equals the remaining loan balance, and depends on prospects for future house price appreciation and borrower default costs.

Underwater Homes, Then vs. Now - This first map estimates the incidence of underwater first-lien mortgages in 2000. The second shows the same measure for the fourth quarter of 2009. In 2000, the share of borrowers who were underwater exceeded 2 percent in exactly one state: Hawaii. Things look very different today. Just take a look at California, Florida and Nevada, where more than 20 percent of homeowners have principal mortgage balances that are greater than the estimated values of their homes, according to John Krainer and Stephen LeRoy of the Federal Reserve Bank of San Francisco. Maps are courtesy of the San Francisco Fed.

Drop in Mortgage Applications Reflects Foreclosure Crisis, Rising Interest Rates -Consumers are pulling back on applying for mortgages to buy new homes or refinance their current houses, and while the foreclosure crisis may be playing a role in the decline, rising interest rates are also partly to blame.According to the Mortgage Bankers Association (MBA), applications for mortgages declined 10.5% for the week ending Oct. 15, the biggest drop in four months. Applications for home purchases were down 6.6% compared to the previous week and declined nearly 30% compared with year-ago levels. Refinancing applications fell an even larger 11.2%. The association said that was likely linked to the fact that average rates on 30-year fixed mortgages increased from 4.21% -- the lowest level on record -- to 4.34% last week. "Bigger picture, there may be a psychological component to this," says Michael Fratantoni, MBA vice president for research and economics. "It may be just another aspect of the uncertainty with respect to the mortgage market right now, and it may cause people to pause regardless of whether they are thinking about a purchase or refinance."

California home sales drop 17% in September - California new and existing home sales totaled 33,176 in September, down 17.5% from a year ago and 3.1% from the previous month, according to the San Diego-based real estate provider DataQuick. Despite record low mortgage rates, the entire housing market is still waiting for new demand to replace the boost from the homebuyer tax credit that expired in April. While transactions are down, prices are still up for the 11th month in a row, following more than two years of straight declines. The median price on a California home was $265,000, a 5.6% increase from last year and a 1.9% bump from the previous month. The trough came in April 2009 at $221,000. The peak was $484,000 in early 2007.

Homeowners Are More Pessimistic Than Ever About the Short-Term Housing Market - A new Rasmussen Reports survey finds that 32% expect the value of their home to decrease over the next year, the highest finding since Rasmussen Reports began asking the question regularly in December 2008. Just 21% believe the value of their home will go up over the next year. Looking longer term, people are feeling a bit better. Fifty-two percent (52%) of homeowners say the value of their home will increase over the next five years, the highest level of optimism measured since May.For the second month in a row, only 55% of homeowners say their home is worth more than their mortgage. A third (33%), however, report that the mortgage is bigger than the home value. Over half of Americans know someone who has lost their home because they could not pay their mortgage, but just 20% believe that when banks foreclose on a home, it's generally due to unfair lending practices.

Clear Capital: "Sudden and Dramatic Drop in U.S. Home Prices" - Case-Shiller is the mostly widely followed, and the Federal Reserve uses Corelogic.  The Clear Capital index is also repeat sales, with a price-per-square-foot model, and is a rolling three months average that can be updated daily. I thought I'd pass along this alert today:  Clear Capital™ Reports Sudden and Dramatic Drop in U.S. Home Prices “Clear Capital’s latest data through October 22 shows even more pronounced price declines than our most recent HDI market report released two weeks ago,” said Dr. Alex Villacorta, senior statistician, Clear Capital. “At the national level, home prices are clearly experiencing a dramatic drop from the tax credit-induced highs, effectively wiping out all of the gains obtained during the flurry of activity just preceding the tax credit expiration.” This special Clear Capital Home Data Index (HDI) alert shows that national home prices have declined 5.9% in just two months and are now at the same level as in mid April 2010, two weeks prior to the expiration of the recent federal homebuyer tax credit. This significant drop in prices, in advance of the typical winter housing market slowdowns, paints an ominous picture that will likely show up in other home data indices in the coming months.

Home Prices Double Dip in "Sudden Dramatic Drop"; 20% More to Come says Gary Shilling - Clear Capital™ has issued a special press release report on home prices that shows a Sudden and Dramatic Drop in U.S. Home Prices – Clear Capital (, is issuing this special alert on a dramatic change observed in U.S. home prices. “Clear Capital’s latest data shows even more pronounced price declines than our most recent HDI market report released two weeks ago,” said Dr. Alex Villacorta, senior statistician, Clear Capital. “At the national level, home prices are clearly experiencing a dramatic drop from the tax credit-induced highs, effectively wiping out all of the gains obtained during the flurry of activity just preceding the tax credit expiration.”This special Clear Capital Home Data Index (HDI) alert shows that national home prices have declined 5.9% in just two months and are now at the same level as in mid April 2010, two weeks prior to the expiration of the recent federal homebuyer tax credit. Video: Gary Shilling says single-family home prices will drop another 20% over the next few years with number of homeowners underwater to rise from 23% to 40%.

Fewer Economists See Housing Recovery in 2011 - Exactly half of the 109 economists surveyed by MacroMarkets during the first two weeks of October expect to see the onset of recovery in 2011; the balance don’t expect don’t expect a rebound to take hold until sometime in 2012 or later. “Even the optimists are not expecting the housing market to recover to the trend that prevailed prior to the bubble. The recovery optimists are projecting cumulative appreciation of more than 14 percent through 2014, while the pessimists are expecting an increase of less than 3 percent over the same period. The disparity of these scenarios confirms that significant uncertainty persists regarding the future path of U.S. home prices. All other things the same, the 11 percent plus expectations gap translates into a difference of $2 trillion in projected household wealth, which underscores the importance of monitoring factors that can affect the timing or strength of housing recovery,” said Terry Loebs, MacroMarkets managing director.

Housing Starts increase in September -Total housing starts were at 610 thousand (SAAR) in September, up 0.3% from the revised August rate of 608 thousand (revised up from 598 thousand), and up 28% from the all time record low in April 2009 of 477 thousand (the lowest level since the Census Bureau began tracking housing starts in 1959). There has been an increase in multi-family starts over the last two months, although single family starts are significantly below the levels of earlier this year. Single-family starts increased 4.4% to 452 thousand in August. This is 25% above the record low in January 2009 (360 thousand). The second graph shows total and single unit starts since 1968. This shows the huge collapse following the housing bubble, and that housing starts have mostly been moving sideways for almost two years - with a slight up and down over the last six months due to the home buyer tax credit.Here is the Census Bureau report on housing Permits, Starts and Completions.

Housing Starts and the Unemployment Rate - This graph shows single family housing starts and the unemployment rate (inverted) through September. Note: Of course there are many other factors too, but housing is a key sector.You can see both the correlation and the lag. The lag is usually about 12 to 18 months, with peak correlation at a lag of 16 months for single unit starts. The 2001 recession was a business investment led recession, and the pattern didn't hold. Housing starts (blue) rebounded a little last year,and then moved sideways for some time, before declining again in May. Usually near the end of a recession, residential investment1 (RI) picks up as the Fed lowers interest rates. This leads to job creation and also household formation - and that leads to even more demand for housing units - and more jobs, and more households - a virtuous cycle that usually helps the economy recover. However this time, with the huge overhang of existing housing units, this key sector isn't participating.

Is debt too high? Debt, pensions, and houses - Debt to income levels are high by historical standards in Canada and the US. Here's a recent report (pdf) from TD Economics showing household debt/income ratios at around 150% in both countries. But is that "too high"? And is that evidence that some people, like the Flopsy Bunnies, are very improvident? I'm going to play with a very simple model, and do some back of the envelope calculations, to try to work out what the average debt to income level would be even if everybody were perfectly provident. In my toy model, total debt/GDP ratios are driven by lifecycle savings. It is providence that causes high total debt/GDP ratios. Provident people save and lend for their retirement, which creates debt. But the most interesting (to me) result is that forced saving in pension plans has a very large effect on personal debt/income ratios. The greater is forced saving, the smaller is voluntary saving, and the more slowly people pay down their mortgages. It is easy to explain high personal debt/income ratios in this way. You can easily get personal debt/income ratios around 100% just from this cause alone.

Luxury sales rebound to pre-crisis levels - The luxury sector is rebounding better-than-expected this year thanks in large part to wealthy Americans replenishing their wardrobes after a year of self-denial and nouveau riche Chinese indulging in a worldwide spending spree, according to a new study released Monday. Sales of designer clothes, fine leather goods, jewelry, watches and other indulgences around the globe is forecast to surge 10 percent to euro168 billion ($236.7 billion) in 2010, recovering from a disastrous 2009 when sales declined 8 percent to euro153 billion, Bain & Co. said in its annual review of the sector commissioned by Italy's Fondazione Altagamma association of high-end producers. "It is really impressive how customers have rebounded in their approach to these purchases, in particular in the United States and in Europe,"

Retail Theft Reaches New Level of Insanity - What are shoplifters nabbing, and why? Are cultural trends mirrored by criminal activity? Yesterday, AOL ran a package of Minyanville articles about those objects that are most wanted -- and least paid-for -- across the country. The list included meat, books, OTC pills, alcohol, baby formula, razors, Brighton jewelry, cosmetics, and gadgets, games, and smartphones. Then, today, a comment popped up from a reader that needs to be shared with all: "We have a furniture store in Las Vegas. Last year when we were reordering accessories for Christmas, we did not reorder the smaller Ten Commandments plaque as we had 15 in stock. Wrong: they all had been stolen! Now, we only sell the larger Ten Commandments. Too big for a purse."

It's Official: Food Inflation Coming To A Grocery Store Near You - CPI Food at Home Rises, But Rate of Increase Below PPI. September’s CPI results represented the 5th consecutive month of year-over-year increases in the CPI Food at Home Index, which is an indication that food prices at retail continue to rise. To explain, this month, the YOY index rose 60 bps sequentially, from 0.8% to 1.4% - which we note is much higher than the ~10 bp average sequential change over the prior 3 months. However, in spite of the evidence that retail prices have continued to increase, we point out that the spread between PPI and CPI has widened once again and now stands at ~370 bps compared to ~300 bps in August. Recall that this spread suggests that wholesale price increases continue to outpace price hikes at retail (i.e. inflation is not being 100% passed through to consumers). Looking ahead, with recent spikes in commodity prices already reflected in the producer price index, we’ll be keeping a close watch to see if the gap will widen (potentially negative for grocer margins) or if retail prices will "catch up" to wholesale prices. Here's how it's looking on a category-by-category basis:

Production in U.S. Unexpectedly Falls for First Time in a Year - Production in the U.S. unexpectedly dropped in September for the first time in more than a year, evidence of the slowdown in growth that is concerning some Federal Reserve policy makers.  Output at factories, mines and utilities fell 0.2 percent, the first decline since the recession ended in June 2009, according to figures from the Fed today. Another report showed builders were less pessimistic than projected this month.  Slackening production means it will take longer for the economy to make a dent in the excess capacity that is containing prices and prompting Fed Chairman Ben S. Bernanke to consider additional monetary stimulus. Improving demand from overseas and gains in business investment indicate orders at manufacturers like Alcoa Inc. will not weaken much more.

Industrial Production and Capacity Utilization Fall - Awhile back, I posted a graph showing the relationship between unemployment and capacity utilization. Here's an updated version:Note: To highlight the relationship, the graph shows 100-(UN rate) on the left-hand scale. Thus, an upward movement in the red line represents a decline in unemployment. Though one month does not constitute a trend, today's data on capacity utilization are not very encouraging: Industrial production decreased 0.2 percent in September after having increased 0.2 percent in August. ... The capacity utilization rate for total industry edged down to 74.7 percent, a rate 4.2 percentage points above the rate from a year earlier but 5.9 percentage points below its average from 1972 to 2009. Calculated Risk and spencer at Angry Bear have more on the report.

Industrial Production, Capacity Utilization decreased in September - From the Fed: Industrial production and Capacity Utilization - Industrial production decreased 0.2 percent in September after having increased 0.2 percent in August. ... The capacity utilization rate for total industry edged down to 74.7 percent, a rate 4.2 percentage points above the rate from a year earlier but 5.9 percentage points below its average from 1972 to 2009. This graph shows Capacity Utilization. This series is up 9.5% from the record low set in June 2009 (the series starts in 1967). Capacity utilization at 74.7% is still far below normal - and well below the the pre-recession levels of 81.2% in November 2007. The second graph shows industrial production since 1967. Industrial production declined slightly in September, and production is still 7.5% below the pre-recession levels at the end of 2007.

Dollar Skirmish Could Worsen Cost-Price Squeeze on Small Businesses - The escalating currency skirmish may have a casualty in the U.S.: smaller businesses that use imported materials and components to produce their final goods. The financial markets are focused on how nations, including the U.S., would prefer weaker currencies in order to make their exports cheaper on global markets. Indeed, multinational companies Caterpillar and McDonald’s reported Thursday that their bottom lines benefited from stronger international sales. The flip side of that weak-currency strategy, however, is that imports into the U.S. become more expensive. If so, that will be a problem for millions of companies that don’t have an export presence. These companies, especially small and medium-sized firms, will see their profit margins squeezed because of higher costs.

Main Street America and getting to be middle class - We all know the arguments about the loss of good jobs. Automation, competition, outsourcing. We've been told that America was striking out to raise it's status when it came to jobs. Don't lament the loss of those blue collar manufacturing jobs to cheap labor. They aren't worth it. Step up. The new jobs will pay more if you get educated. Well, an entire generation got educated, and they are now looking for a job that will just keep them at their status quo.  We seem fixated on just this singular aspect of the decline of the middle class. Well, there is an entire sector of our economy that was and is just as important to growing and keeping a middle class: Retail. The entire economic focus on finance to the point of believing that all that is important to having a successful economy is to keep improving the efficiency of money has not only generated a formula for making money from money (CDO, CDS, ABS, subprime, leasing, arbitrage, shorting, longing, etc, etc, etc) it has also convinced us and made us act on the idea that consolidation is efficient and that efficiency is growth. The old "economies of scale" thingy.

Gallup Finds U.S. Unemployment at 10.0% in Mid-October - Unemployment, as measured by Gallup without seasonal adjustment, is at 10.0% in mid-October -- essentially the same as the 10.1% at the end of September but up sharply from 9.4% in mid-September and 9.3% at the end of August. This mid-month measurement confirms the late September surge in joblessness that should be reflected in the government's Nov. 5 unemployment report.Certain groups continue to fare worse than the national average. For example, 14.2% of Americans aged 18 to 29 and 13.8% of those with no college education were unemployed in mid-October. The percentage of part-time workers who want full-time work is at 8.6% of the workforce, not much different from the 8.7% at the end of September, but well below the 9.2% reading in the middle of last month.

Jim Quinn: Depression 2.0 - A little reality about the job situation in this country is in order. The unemployment rate reported by the Bureau of Labor Statistics and parroted by the mainstream media is currently 9.6%. Once you stop counting people who have given up looking for jobs and “left the workforce”, discouraged workers, marginally attached workers and workers forced to work part-time, you magically get a 9.6% rate. Using the method of measuring unemployment used during the Great Depression and reproduced by, the real unemployment rate is a depression-like 22.5%. The peak unemployment rate during the Great Depression was 25%. There is no doubt that we are in the midst of 2nd Great Depression, but where are the bread lines and the lines of unemployed winding around the corner? No need. This is the electronic Great Depression – iDepression 2.0. Your 99 weeks of unemployment and food stamps are direct deposited into your bank account so that you don’t have to leave the comfort of your McMansion that you haven’t made a mortgage payment on in the last 14 months. There were no credit cards in 1933. Without a job or a house, you needed to move to where there might be a job. Hence the mass migration from the Midwest to California – ala The Grapes of Wrath. Today, a neighbor in a matching McMansion down the street, with the perfectly manicured lawn, could be unemployed for three years and no one would ever know. They could sustain themselves on unemployment payments, food stamps, and credit cards. Welcome to the iDepression 2.0.

Employer Credit Checks on Job Seekers Draw Scrutiny - Checking the credit histories of job applicants—a common practice among employers—is coming under fire. Four states have passed laws in the past three years that limit the practice, and similar bills have been introduced in 20 other states and Congress. The issue has surfaced in the wake of the recession, which has left many unemployed workers with tattered credit.The underlying concern is that poor credit could become a barrier to landing a job. Employers contend credit checks help them evaluate candidates and protect against fraud. Another concern is the potential discriminatory impact on hiring. Opponents of the practice cite studies showing that African-Americans and Latinos tend to have lower credit scores. They also dispute whether credit reports are an accurate way to measure an employee's qualifications.

2010 Census: Final Weekly Payroll Update - The Census Bureau has released the final weekly payroll report for the 2010 Census. The report shows only 2,766 temporary workers were on the payroll for the week ending Oct 2nd. This graph shows the number of Census workers paid each week. The red labels are the weeks of the BLS payroll survey. I'm providing this update because every month there is some confusion over how to report the payroll numbers in the employment report. Starting with the October employment report (to be released on November 5th), we can go back to reporting the headline number (not ex-Census), and we can ignore the impact of the temporary Census hiring on the monthly payroll numbers - well, until the next decennial Census!

A Long-Term Jobs Recovery? Think Again - It's been awhile since I examined the long-term outlook for jobs in America. I did note after the September report that at the current rate of jobs "growth" (-95,000) it will take forever to get back to pre-recession employment levels. Some recent articles have looked at the job creation challenge facing the nation, but I think the analyses presented, as grim as they are, do not tell the whole story.I first looked at the timing of a long-term jobs recovery in When Will "Full" Employment Return Again? (March 17, 2010). I updated and reprinted that article on July 2, 2010. My view, which had not changed when I published the update, was that we might see "full" employment in 2017 if everything that can go right does go right. I now think my earlier assessment was overly optimistic, as I will explain below.The Huffington Post's U.S. Economy Is 11.5 Million Jobs Short, EPI Says shows us the current jobs picture.

A Long-Term Jobs Recovery? — Outsourcing - Yesterday in A Long-Term Jobs Recovery? Think Again. I cast doubt on a long-term jobs recovery in the United States. One plausible scenario says it won't be until 2019 that we recover all the jobs lost during the "Great" recession. What that means, in effect, is that the American economy will not actually add any jobs above and beyond the 2007 level until 2019. Even if this scenario is too pessimistic, it is impossible in 2010 to concoct a scenario under which the economy will add anywhere close to the millions & millions of jobs required to achieve "full" employment in 2019. For two decades now, just about every economist in the United States has extolled the virtues of globalization and free trade. Unfortunately for us, the real world differs considerably from the flawed models economists use at universities. One "benefit" of globalization has been the outsourcing (aka. offshoring) of American jobs. A recent article in the Los Angeles Times reminds us that this trend is continuing. The longer it goes on, the harder it will be to restore the jobs lost during the meltdown. The graph and text below are from U.S. jobs continue to flow overseas

The Output Gap and Unemployment - A 9.6 percent unemployment rate is flat-out unacceptable.  That it has only come down 0.2 percent from last year’s 9.8 percent is also unacceptable (vs. Sept 2009).  The Fed’s mandate is to “maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”  Herewith a look at a couple of relevant factors and some comparisons to the historical record. Estimates generally coalesce around an unprecedented $1 trillion dollar output gap.  Best I can represent, that number is derived by simply subtracting Real Potential GDP from Real GDP.  It’s a larger hole, by some $600 billion, than the $479 billion we saw in 1982.  That trillion dollar hole is what the incoming administration faced in the early months of 2009 (it’s still just over $900 billion).

Cyclical unless proved structural - To the average man or woman in the street it may be obvious why unemployment is so high – around 10% in both the United States and the euro area. There was a financial crisis, bubbles burst, people stopped spending, banks lending and firms investing. Result: unemployment shot up.  Why is it still high? Because the crisis is not over. Remedy? Maintain and expand measures to keep spending up until the economy recovers and unemployment falls back. For a growing number of economists and policymakers, however, this is much too simple. Yes, joblessness resulted from the crisis, but unemployment is likely to stay high, they argue, because it has become ‘structural’: workers either have the wrong skills for the new jobs that are being created or are in the wrong places (and may be immobile because they cannot sell their house). In such a case expansionary policies are useless, even dangerous – they will cause inflation. Instead we need a programme of ‘structural reform’, a phrase that can cover anything from training in new skills to cutting unemployment benefit so as to ‘incentivise’ greater mobility. However, I am with the man or woman in the street on this one. Unemployment is currently overwhelmingly cyclical, on both sides of the Atlantic and should be treated as such

Jobless Benefits About To Crash - The sour economy, with unemployment stuck above 9 percent for a year and a half, has been the backdrop for this fall’s midterm elections, but long-term fixes for the unemployment insurance system have hardly been a hot campaign issue.  Democratic and Republican leaders alike say that helping the unemployed is a top priority. But critics say neither side has done enough to avert the looming insolvency of the outmoded unemployment system, which reaches less than half of the jobless and yet is shuddering under $40 billion in debt. States, which have already raised employment taxes, will be forced to cut benefits even further next year without the kind of overhaul of unemployment insurance that has always seemed to slip off the congressional agenda, according to McDermott, who’s tried for years to modernize a program that has changed little since it was created in 1935.  A stop-gap measure that allows states to borrow from the federal government interest free expires in January, and the debt will start growing sharply, hitting $65 billion in 2013, according to the Government Accountability Office.

Report: 1.2 Million Workers could lose Unemployment Benefits next month - From the National Employment Law Project: 1.2 Million Workers Out in the Cold for the Holidays If Congress Fails to Renew Federal Jobless Benefits that Expire November 30th A new analysis released by the National Employment Law Project today reveals that 1.2 million workers will be cut off of federal jobless benefits by year’s end if Congress fails to renew the federal emergency extensions that expire on November 30th.Of the 1.2 million workers at risk of losing federal benefits, 387,000 are workers who were recently laid-off and are now receiving the six months (26 weeks) of regular state benefits. After exhausting state benefits, these workers would be left to fend for themselves in a job market with just one job opening for every five unemployed workers and an unemployment rate that has exceeded nine percent for 17 months in a row—with no federal unemployment assistance whatsoever. This doesn't include the '99ers - the workers who have exhausted all available unemployment benefits.

The Young, the Old, the Unemployed - Roosevelt Institute intern Charlie Eisenhood dug up this data on the unemployment rate by age and education. Here it is in September 2010: And here it was in December 2007 when the recession started: Here is the difference between the two, along with the percent increase, so a (100%) is a doubling: What jumps out for me? College educated 20-24 year olds have the highest percentage increase in unemployment. This should go against a structural unemployment story, as college educated people have the ‘freshest’ skills and incredibly high mobility. It’s worth pointing them out in particular because if their careers hit a rough spot, hysteresis sets in and they’ll have serious wage losses years down the road (see this classic White House blog post on the subject by Peter Orszag). Their situation is also important because the crisis is often seen as a small deal for college educated workers.

The haves, the have-nots and the dreamless dead - In 2007, when the world was on the brink of financial crisis, U.S. income inequality hit its highest mark since 1928, just before the Great Depression. Coincidence? Maybe not. Economists early findings suggest inequality may not directly cause crises, but it can be a contributing factor. This raises a host of social, economic and political questions. Should public policy aim to reduce inequality, and if so by what means? Does concentrated wealth at the top of the income spectrum generate asset bubbles, or vice versa? Could raising taxes or interest rates ward off financial meltdowns?Americans are generally not bothered by inequality because they believe with hard work, they, too, can strike it rich. Government policies aimed at spreading the wealth rarely get much support. (Remember 2008, when then-candidate Barack Obama's campaign-trail comment about redistributing the wealth catapulted "Joe the Plumber" into media stardom?) "It is usually only left-leaning rich people that care about inequality in the U.S.,"

Shared Prosperity Lost - CBPP - Describing the social and economic costs of growing income inequality, economist Robert Frank explained in yesterday’ New York Times that while the first three decades after World War II were a time of broadly shared prosperity, income gains over the next three decades went almost entirely to the very wealthy. You can see the striking contrast in the graph below.In the first generation following World War II, a rising tide really did lift all boats. Incomes for families just 20 percent up the income ladder, median-income families halfway up the ladder, and families 95 percent of the way to the top all roughly doubled between 1947 and 1973, after adjusting for inflation. The period since then has been a different story altogether.The chart shows the divergent trends between the rich and everyone else since the 1970s that we have analyzed in greater detail here and here.

Why do people care so much about the minimum wage? - Over at my old stomping grounds, Adam Cohen has written a fascinating article about the movement to have the federal minimum wage declared unconstitutional. This goes hand-in-hand with the emergence of the minimum wage as a campaign issue in the midterm elections. My question: Why do people care so much? For much of its recent history, the federal minimum wage hasn’t even been all that binding. State minimum-wage laws have led to higher pay, or companies paid more on their own. According to the Labor Department, only 980,000 people made the federal minimum wage last year. Even when you add in the 2.6 million workers who made less (people like tip-collecting waitresses and teenagers just working for the summer), you still only wind up with 4.9 percent of all hourly-paid employees– and just 2.9% of the total U.S. wage-earning workforce.

Income Inequality: Too Big to Ignore - During the three decades after World War II, for example, incomes in the United States rose rapidly and at about the same rate — almost 3 percent a year — for people at all income levels. America had an economically vibrant middle class. Roads and bridges were well maintained, and impressive new infrastructure was being built. People were optimistic. By contrast, during the last three decades the economy has grown much more slowly, and our infrastructure has fallen into grave disrepair. Most troubling, all significant income growth has been concentrated at the top of the scale. The share of total income going to the top 1 percent of earners, which stood at 8.9 percent in 1976, rose to 23.5 percent by 2007, but during the same period, the average inflation-adjusted hourly wage declined by more than 7 percent. Yet many economists are reluctant to confront rising income inequality directly, saying that whether this trend is good or bad requires a value judgment that is best left to philosophers.

Is culture to blame for poverty? - Over the weekend, the NYT ran a piece about academics rediscovering the “culture of poverty.” The story goes that for decades it was taboo to offer social, as opposed to economic, explanations about why particular people and neighborhoods were poor—unless, of course, you belonged to a certain camp of conservative critic. According to the Times: The reticence was a legacy of the ugly battles that erupted after Daniel Patrick Moynihan, then an assistant labor secretary in the Johnson administration, introduced the idea of a “culture of poverty” to the public in a startling 1965 report. his description of the urban black family as caught in an inescapable “tangle of pathology” of unmarried mothers and welfare dependency was seen as attributing self-perpetuating moral deficiencies to black people, as if blaming them for their own misfortune. Now, it seems, culture is again fair play. Over the past few years, culture-informed explorations of poverty have been seeping into the research literature. High-profile examples include these Princeton/Brookings papers about unmarried parents and this special issue of The Annals of the American Academy of Political and Social Science (which led to a recent Congressional briefing).

Poverty In Suburbs Increasing Rapidly During Economic Downturn -The American suburb is no longer a refuge from poverty in cities. A pair of analyses by the nonprofit Brookings Institution paints a bleak economic picture for the 100 largest metropolitan areas over the past decade and in coming years, and finds that suburbs now are home to one-third of the nation's poor, and rising.The study of census data finds that since 2000, the number of poor people in the suburbs jumped by 37.4 percent to 13.7 million. The growth rate of suburban poverty is more than double that of cities and higher than the national rate of 26.5 percent.At the same time, social service providers are spread thin in many suburban areas, according to a detailed Brookings survey of groups in representative metropolitan areas of Chicago, Los Angeles and the District of Columbia. That has forced providers to turn away many poor people due to scarce aid that typically goes to cities first. "Millions of Americans at all income levels moved to the suburbs looking for better schools, better jobs, affordable housing, and a sense of security, but in recent years, as incomes have fallen, people had a harder and harder time making ends meet," "As a result, Americans who never imagined becoming poor are now asking for assistance, and many are not getting the help they need."

Generation Homeless: The New Faces of an Old Problem -- Young adults are the new face of homelessness. Twenty-two-year-old Tony Torres sags, exhausted, onto the pavement just beyond a skate park where kids from this affluent Seattle suburb, Bellevue, flip tricks off ramps to the beat of a boombox. This is a safe place to hang out until he knows whether he'll get a bed on this night at the nearby YMCA, which donates its rec room as a shelter for young adults at night.  His odds of getting a spot to throw a mat on the floor are about one in seven. Torres is joined by a few other worn-out looking young people, who sling their packs down and slump against the wall. They've all been on their feet all day, moving from park to park, job application to job application, library to library -- anywhere they can hang for a few minutes before being asked to move along.

As food stamp use grows, some lawmakers eye program's funding for other priorities - The number of Connecticut residents relying on food stamps jumped 33 percent over the last year, hitting a record high fueled by expanded eligibility and economic hard times.At the same time, lawmakers in Washington have begun tapping the federal food stamp program to pay for other priorities, including a pending child nutrition bill.  The twin developments have pit anti-hunger advocates against public health experts, two interest groups that normally work shoulder-to-shoulder in Washington. Now, they are on opposite sides of a debate over whether to preserve hard-won gains in the federal food program or move ahead with a dramatic overhaul of childhood nutrition policy. "I shouldn't be fighting with nutrition people," said Lucy Nolan, executive director of End Hunger Connecticut!, But she is, because lawmakers in Washington are "taking away money from low-income families to feed kids better food."

Beveridge Curves for 36 U.S. Cities - A lot of talk about Beveridge curves these days. Most (all?) discussions revolve around national level data; see, for example, here: A Curious Unemployment Picture Gets More Curious. I thought it might be interesting to look at city-level data and over a longer horizon.  The following charts were constructed by Constanza Liborio (my faithful RA). To ease cross-city comparisons, all charts are of exactly the same dimension. The help wanted index (HWI) is from the Conference Board Help Wanted Index (1987=100). Constanza divided the city-level HWI by city-level employment, and then normalized 1987=1. The city-level unemployment rate data is from the BLS.  We have data for most cities ranging from 1984-2009 (some include 2010). The 1980s are colored purple; the 1990s are colored red; and the 2000s are colored green. (You should be able to enlarge the diagrams by clicking on them). One thing that struck me was how steeply sloped the "long run" Beveridge curve appears to be across many cities. Take a look, for example, at Cleveland and Miami. The unemployment rates in those cities are now about the same as they were in the mid 1980s and mid 1990s; even though recruiting intensity has dropped to the floor.

Jobless Rates Remain Elevated - Unemployment rates were little changed in most states in September, as a recovery in the labor market remained sluggish across the country. The Labor Department reported that 23 states and Washington DC experienced jobless-rate decreases, while the rate rose in 11 regions and was unchanged in 16. States hardest-hit by the housing bust, such as Florida and California, continue to struggle with double-digit unemployment rates. Nevada remained the state with the highest unemployment rate in the nation — 14.4% — more than percentage point higher than the 13% recorded in second-place Michigan. In all, 15 states had rates above the 9.6% national figure released earlier this month. See the full WSJ interactive graphic.

State Unemployment Rates in September: "Little changed" from August - This graph shows the high and low unemployment rates for each state (and D.C.) since 1976. The red bar is the current unemployment rate (sorted by the current unemployment rate). Eleven states now have double digit unemployment rates. A number of other states are close. Nevada tied a series high at 14.4% and now has the highest state unemployment rate. Michigan held the top spot for over 4 years until May. From the BLS: Regional and State Employment and Unemployment Summary

Nevada Jobless Rate Still at Record High - Nevada’s unemployment rate was 14.4 percent in August, the highest of all the American states. That figure also tied its rate in August as the highest ever recorded for the Silver State since the Labor Department began keeping track in 1976, according to a report released Friday. Michigan, which until this spring had held the top unemployment rate in the country for four years running, came in second with a rate of 13 percent, followed by California with 12.4 percent unemployment. North Dakota once again had the lowest jobless rate, at 3.7 percent, followed by South Dakota, at 4.4 percent, and Nebraska, at 4.6 percent. Click the interactive map below to see the seasonally adjusted unemployment rates for each state and the District of Columbia.

State unemployment benefits fund billions in debt - California's now-resolved $19 billion budget shortfall got plenty of attention in recent months, but a state report released Wednesday highlights the state's other massive deficit - in the unemployment insurance fund, which will be $10.3 billion in the hole by year's end. The report by the nonpartisan Legislative Analyst's Office warns of dire consequences if California's leaders do not tackle the fund's insolvency: The federal government could impose steep taxes on California businesses beginning in 2012, and the state could lose $400 million in federal dollars annually. The deficit is the result of the state paying out more in unemployment benefits than it collects. The shortfall is offset by federal loans, but the state must begin paying interest on those loans next year.

California's jobless benefits fund faces $20 billion deficit - California’s unemployment insurance fund is more than $6 billion in the red. A report out today predicts that the deficit will balloon to 20 billion bucks by the end of next year. California employers contribute to the unemployment insurance fund that pays weekly benefits to workers who lose their jobs through no fault of their own. Last year a record number of Californians found themselves in that position.  The jump in requests for help drained the unemployment fund.  The federal government enabled California to continue benefits with American Recovery and Reinvestment Act dollars. But that federal, interest-free loan ends this year.

California's seen facing credit pressure: Moody's - California will face continued credit pressure as it will likely face another large mid-year budget gap and a significant deficit next year, a Moody's Investors Service analyst said in a report released on Tuesday. Vice President Emily Raimes in her report applauded California at last enacting a state budget earlier this month for its current fiscal year -- which began in July -- but said that "The bad news is that the budget relies heavily on one-time measures, optimistic revenue assumptions, and the receipt of funds, some of which may not materialize. "As a result, it is likely that the state will face a large mid-year budgetary shortfall later this year and that the budget gap for next year will be significant, both of which will place continued credit pressure on the state," Raimes said.

Homeless agencies suffering from reduced government funding - As people’s pocket books grow leaner, if not empty, state and municipal governments are slashing their appetites for spending. Slimming down is always good for personal health, but forced economic diets can wreak havoc on those struggling with poverty. The Urban Institute recently confirmed what many on the front lines of American homelessness already know—institutional caregivers are cutting their budgets. In fact, 82 percent of the United States’ human-service agencies are scaling back their operations on account of the struggling economy. Government cuts have hit social service agencies hard. During the recent political battle over California’s budget, Governor Schwarzenegger vetoed nearly $1 billion of spending for social welfare and services.

Senior Services May Be Next On Budget Chopping Block (video) – Senior citizens could be the next victims of New York City’s budget crunch. Elder advocates fear cuts in programs could be dangerous for the seniors who heavily depend on them, and the cuts look to run deep. The Department for the Aging has reportedly responded to the mayor’s call to help close a $3 billion budget deficit by proposing to slash case management visits to seniors’ homes by 40 percent. That means there’d be fewer visits by Walker to Divinsky’s home. “People would be at risk – their lives would be at risk, their health would be at risk,” Walker said. “It’s just very sad, a very sad situation.” A spokesman for the department would not discuss specifics, as no cuts have yet been finalized, but he did issue a written statement. “We looked at our entire portfolio of senior services to identify reductions that impact the fewest number of seniors,” Christopher Miller, director of public affairs for the Department for the Aging, said.

New York State Tax Collections $529 Million Less Than Foreseen in August - New York collected $529 million less in taxes during the past six months than the state budget office projected in August, according to a monthly report from Comptroller Thomas DiNapoli. New York’s tax revenue grew 5 percent from a year earlier, mostly from personal-income taxes, though the increase wasn’t as great as forecast, the report said. To meet the targets set in the budget approved in August, tax collections in all accounts must grow 9 percent for the remainder of the year, according to the report.

Why Does Abu Dhabi Own All of Chicago's Parking Meters? - Atlantic Wire has a post based on Matt Taibbi's book America on sale, Griftopia. There are a number of considerations to be drawn from this deal, but the head spins with possiblities. When visiting my son in Chicago this year he told me of the changes on the practical side...charges from 7 AM to 9 PM, no holiday parking waivers, no merchant holidays, rates raised 400% as a first step increase... The city of Chicago has 36,000 parking meters. In 2008, it sold them on a 75 year lease for over one billion dollars. The buyers were led by Morgan Stanley. But as Matt Taibbi reports in his forthcoming book Griftopia, previewed in Rolling Stone, the state-owned investment arm of Abu Dhabi ended up owning a large share -- possibility a controlling majority -- in Chicago's parking meter system. ... He then gave them the details: he had arranged a lease deal with Morgan Stanley, which put together a consortium of investors which in turn put a newly created company called Chicago Parking Meters LLC in charge of the city's meters. The council at this time has no idea who's actually behind the deal.

Vacant 'zombie' buildings devour local market - They’ve been dubbed “zombie” buildings: large commercial real estate properties that are completely vacant. Plenty of them haunt the Valley’s commercial real estate market, especially within the office and industrial sectors. Local real estate experts say Phoenix has been hit particularly hard because there is an oversupply of product, lack of tenant demand and owners with financial problems. Some buildings became vacant largely as a result of home-building and construction companies downsizing or going out of business. The southwest Valley has millions of square feet of empty warehouse space, including some newer buildings that have never been occupied.

Rats! Half-built homes mar residential neighborhoods - Every night before he goes to sleep, Ted Bachrach sets out four rat traps along a construction site next to his well-tended yard. "That's my daily routine," said the 36-year-old investment manager. Bachrach's charming wood-frame home sits next to two unfinished single-family homes on a quiet residential street in Chicago's Lincoln Park. For a while, he said, three homeless people were living in the garage of one house. The construction project started two years ago, but just months into the work, the bank cut off funding, property owner Robert Chavin said. Half-built homes have popped up all over Chicago and the suburbs, a jarring leftover from the real estate market meltdown and ongoing foreclosures. Many were tear-downs of existing homes, replaced by skeletal structures that neighbors fear will lower their property values.

Harrisburg City Officials Face Payroll Crisis - Harrisburg officials are once again trying to figure out how to meet the city's $1.2 million payroll next week.  The last payroll was met when the city received early payments from the Harrisburg School District, the Harrisburg Authority and the Harrisburg Parking Authority.  City Controller Dan Miller said without an influx of cash from loans or taxes, payrolls will be a constant crisis.  "Our issue of payroll is an immediate one and it's going to be immediate every week, or every two weeks when there is payroll. Do we have the cash to make payroll? We're looking at a $4 million cash deficit from now until the end of the year,"

Water Scarcity a Bond Risk, Study Warns - The municipal bonds that help finance a major portion of the nation’s water supply may be riskier than investors realize because their credit ratings do not adequately reflect the growing risks of water shortages and legal battles over water supplies, according to a new study.  As a result, investors may see their bonds drop in value when these risks become apparent, and water and electric utilities may find it more expensive to raise money to cope with supply problems, the study warned.  Looking at significant water bond issuers across the southern part of the country, the report concluded that Wall Street’s rating agencies had given similar ratings to utilities with secure sources of water and to those whose water sources were dwindling or were threatened by legal battles with neighboring utilities.  Among the seven cities and agencies examined in the report, Los Angeles and Atlanta were identified as the ones whose water systems faced the greatest risk in the years ahead.

Schools open lockers to advertising - School lockers are becoming the latest venue for bombarding kids with advertising. Just what that will look like is on display at the north suburban Centennial school administration building: four lockers wrapped in a bubblegum pink ad for the Mall of America's "Underwater Adventures" aquarium. On Nov. 1, the school board is slated to decide whether it will allow the ads on up to 10 percent of the available surfaces in all of the district's seven schools. That includes lockers, walls and floors. The take for the district? $184,000 a year. In a bleak economy, with dim prospects for any new state school funding, Centennial -- with $3.6 million in cuts this year and more likely on the way next year -- is just the latest school district looking at the ads as an alternative way to generate some cash. Paul Miller, president of Coon Rapids-based School Media's, the company that would install the ads, said he expects to have nine Twin Cities school districts signed up by the end of the year.

Nearly 1000 LAUSD workers to lose jobs on Nov. 30 - Nearly a thousand support staff in the Los Angeles Unified School District will soon lose their jobs, while more than three times as many will be forced to transfer to new positions in an upheaval that one official termed "musical chairs."  So-called reduction-in-force notices were sent out to about 4,600 classified staff on Friday, district officials said. Of those workers, about 990 were told they will be laid off Nov. 30.  The remaining personnel were ordered to report to new work sites - and in many cases to fulfill different duties at a lower salary or for fewer hours - on Dec. 1.  Employees ranging from office technicians and cafeteria workers to custodians to secretaries are affected.

An overemphasis on teachers - Michelle Rhee, regardless of her specific impact on D.C. students, has chosen to join New York City schools chancellor Joel Klein in a national campaign for an overly simplistic and, on balance, harmful attack on incompetent teachers as the single most important problem facing public education. Although the test score gains on which Mr. Klein stakes his reputation have been exposed as seriously inflated, he and Ms. Rhee nonetheless chose the eve of her departure as the occasion for a “manifesto” of their views, published last week in the Washington Post. Klein and Rhee base this assertion on a claim that, “as President Obama has emphasized, the single most important factor determining whether students succeed in school is not the color of their skin or their ZIP code or even their parents’ income — it is the quality of their teacher.”

Republican Spending Plan Would Cut Billions From Pell Grants, Eliminate Race To The Top - A cornerstone of the House Republican pitch on economic policy — first introduced by House Minority Leader John Boehner (R-OH) and reinforced in the Pledge to America — is immediately returning non-defense discretionary spending to its 2008 level. The GOP claims that this will reduce federal spending by $100 billion overnight, but flatly refuses to name specific programs that would come under the knife. “The line item would be across the board,” asserted Rep. Kevin McCarthy (R-CA), the Pledge’s architect. Taken at face value, as Dana Goldstein pointed out in the Daily Beast, these cuts would mean a significant reduction in federal Pell Grants and the complete elimination of the Obama administration’s Race to the Top program: Obama’s education-reform agenda — once the calling card for his commitment to bipartisan good governance — is under threat from both the left and right. Congressional Republicans, including those, like [Sen. Lamar] Alexander (R-TN), who once praised Obama’s education policies, are now calling for a return to 2008 levels of federal spending, which would stop the White House from funding additional Pell Grant student loans and cancel plans for another round of Race to the Top, Obama’s signature education-reform grant competition

School study sees benefits in economic integration - Low-income students in Montgomery County performed better when they attended affluent elementary schools instead of ones with higher concentrations of poverty, according to a new study that suggests economic integration is a powerful but neglected school-reform tool.  The debate over reforming public education has focused mostly on improving individual schools through better teaching and expanded accountability efforts. But the study, to be released Friday, addresses the potential impact of policies that mix income levels across several schools or an entire district. And it suggests that such policies could be more effective than directing extra resources at higher-poverty schools.  The idea is easier to apply in areas with substantial middle-class populations and more difficult in communities, such as the District, with large concentrations of poverty. Yet it lends fresh support to an idea as old as the Supreme Court's Brown v. Board of Education ruling in 1954:

The impact of college education on geographic mobility (NBER) We examine whether higher education is a causal determinant of geographic mobility using variation in college attainment induced by draft-avoidance behavior during the Vietnam War. We use national and state-level induction risk to identify both educational attainment and veteran status among cohorts of affected men observed in the 1980 Census. Our 2SLS estimates imply that the additional years of higher education significantly increased the likelihood that affected men resided outside their birth states later in life. Most estimates suggest a causal impact of higher education on migration that is larger in magnitude but not significantly different from OLS. Our large reduced-form estimates for the effect of induction risk on out-of-state migration also imply that the Vietnam War led to substantial geographic churning in the national labor market. We conclude that the causal impact of college completion on subsequent mobility is large and provide evidence on a range of mechanisms that may be responsible for the relationship between college education and mobility.

Boomerang kids: 85% of college grads move home - Getting a degree used to be a stepping stone to limitless career opportunities. Now it's more of a hiatus from living under your parents' roof. Stubbornly high unemployment -- nearly 15% for those ages 20-24 -- has made finding a job nearly impossible. And without a job, there's nowhere for these young adults to go but back to their old bedrooms, curfews and chore charts. Meet the boomerangers.  "This recession has hit young adults particularly hard," according to Rich Morin, senior editor at the Pew Research Center in DC. So hard that a whopping 85% of college seniors planned to move back home with their parents after graduation last May, according to a poll by Twentysomething Inc., a marketing and research firm based in Philadelphia. That rate has steadily risen from 67% in 2006. "It's peaking at levels we have not seen before," said David Morrison, managing director and founder of Twentysomething.

Freedom's just another word for getting a state subsidy - IT’S no secret that Europeans and Americans have different feelings toward income redistribution and meritocracy. The extent of this divergence became clear to me my final year at university when my Norwegian flatmate would regularly boast about her remarkable financial independence from family. Despite their considerable wealth, she did not take a cent from them. Her university fees and living expenses were paid by the Norwegian government, through generous government grants and interest-free loans. After graduation she hoped to work for a non-profit, and did not expect to ever earn enough to have to pay back her loans. She was very proud, I was horrified. “Yes, you may not take money from your father, but how do you feel about taking money from a less fortunate Norwegian tax-payer?” I’d ask. She was an extreme case, but throughout my years as an American at a British University, my coursemates would often marvel at the overseas fees I paid which they considered exorbitant. They’d shake their heads in disapproval that I was so dependent on my family at the age of twenty. Many of them relied on free tuition, grants and government loans, no matter how much their parents earned. But to me it only seemed fair.

Oklahoma lawmakers study loophole in teacher's retirement system for non-public educators - Oklahoma lawmakers are studying a loophole in the state's retirement system that critics say allows non-public educators to accrue benefits. The House Appropriations and Budget Committee met Tuesday to study proposed legislation that would abolish the loophole. The bill would have removed a provision allowing former educators to remain in the teacher's retirement system after they join private education associations. Officials say the state's seven pension plans have an estimated $15 billion in unfunded liability. The Oklahoma Teacher's Retirement System has unfunded liability of about $9.5 billion

First, Kill all the Pensions - Over at Ta-Nehisi's place, a guest-poster makes the following observationWork environments hospitable to continual innovation tend to have relatively low barriers to entry, and relatively low barriers to exit. Schools invert that. Many have extensive up-front credentialing requirements, forcing novice teachers to invest substantial time and money at the beginning of their careers, before they can even decide whether they are indeed well-suited for the job. Early career teachers tend to get the least desirable assignments, and to be paid barely enough on which to live. On the other hand, most compensation packages are grossly back-loaded, offering lock-step seniority raises and substantial retirement benefits. So it's tough to get in the door, and once you do, leaving entails abandoning the rewards for which you've already labored before you can enjoy them. That's crazy. Naturally, I am prone to believing that this is true.  Which, naturally, makes me suspicious at how sensible this sounds.  After all, I could tell a different story:  how teachers freed from the fear of being fired are more willing to innovate.  I'm sure I could track down at least one case where that's actually true.

Chicago Pension Funds Selling Assets to Meet Obligations; Needs to Double Property Taxes; Current Liabilities of $41,966 per Household - Congratulations of sorts go to Chicago for having the most messed up pension plan of any city in the nation. Please consider Chicago faces crisis over pension funding, how to pay for it Much has been made of retiring Mayor Richard Daley's plan to draw down reserve funds to balance next year's city budget and how it could burden his successor. But the chairman of the Finance Committee, Ald. Ed Burke, today talked about a far larger problem. One in four pension funds for city workers will go broke in the next decade, if current funding levels continue and markets don't improve, and all will be belly up by 2032 if nothing gives.Stabilizing employee pensions long-term would require greater employee contributions, higher taxes, major changes to the pension systems or a combination of those steps. Without relief, the city would have to about double its property taxes for the next 40 years to cover its pension obligations, said Gene Saffold, the city's chief financial officer.

California Pension Promises May Top Taxes Fivefold, Study Says  -- California, the U.S. state with the largest public-pension fund, faces liabilities that may exceed five times its annual tax revenue within two years unless lawmakers rein in benefits, according to a study. To keep their promises to retirees, the California Public Employees Retirement System, the biggest plan, the California State Teachers Retirement System, the second-largest, and the University of California Retirement System may have combined liabilities of more than 5.5 times the state’s annual tax revenue by fiscal 2012, according to the study released today by the Milken Institute. Levies are forecast to reach about $89 billion in the year that began July 1. Debts to government retirees including those in California, the biggest state by population, have grown into a national crisis as pension plans strive to meet obligations to more than 19 million active and retired firefighters, police officers, teachers and other state workers. Fewer than half the plans had assets to cover 80 percent of promised benefits in fiscal 2009, according to data compiled for last month’s Cities and Debt Briefing hosted by Bloomberg Link. “California simply lacks the fiscal capacity to guarantee public-pension payments, particularly given the wave of state employees set to retire” in future years, said researchers

Report: Calif. Pensions Cost Each Resident $3000 - A new report says the burden on California families to support the state workers' pension system could triple within a few years and drag the state down further into the financial hole. The Milken Institute, an independent think tank, said California's pension obligations to retired state workers already cost each Californian $3,000 every year. By 2014, that cost could go up to $10,000 a year, the group's report said. If we stopped everything today, we would be 500 billion dollars in the hole, of what we owe people that we've promised already," said Marcia Fritz, a pension reform activist with CalPERS, the state's largest pension system, pays out pensions of $100,000 or more to more than 9,000 retirees. CalSTRS, the pension system for teachers, gives out retirement packages of more than $100,000 a year to more than 3,000 retirees.

11 state pension funds that may run of out money: Here's a shocker: The most immediate state pension crises aren't in New York or California. They're in Middle America. When it comes to state pensions in the most trouble, do places like New Hampshire come to mind? Probably not, unless you live there, and maybe not even then. After all, it makes sense that the biggest, most populous members of the union, where budget follies are fairly common, would be facing the most urgently needed fixes. The truth is considerably different. The Granite State claims the No. 11 slot, and it's not the only unexpected name facing pension woes. Hawaii, Kansas and others made their way on to the list. Now, these pension plans aren't going to be obliterated tomorrow -- New Hampshire, for instance, is estimated to see its plan run out of money in 2022, so they've got 12 years to rectify the situation. For some other states, the matter is more pressing, and no more so than for the Land of Lincoln.

Pittsburgh Deal to Fund City Pensions Put in Park -Pittsburgh's city council nixed a deal this week to lease its parking assets to a consortium led by J.P. Morgan Chase & Co. Instead, the council is proposing that the city's parking authority issue a 30-year bond and pay it off with parking-rate increases. Part of the proceeds would go to the pension plan. Mayor Luke Ravenstahl said Friday that he was opposed to that proposal. The city pension plan, which had an unfunded liability of $718 million as of August, could fall into state hands without additional funding. J.P. Morgan Asset Management and LAZ Parking offered the city $452 million to operate garages, lots and 7,000 metered street spaces for 50 years.

Drastic fix urged for Md. pension shortfall  - Budget analysts warned Maryland officials Tuesday that the state's $33 billion in unfunded pension liabilities will continue to balloon out of control unless the state enacts immediate and drastic pension reform. "We really can't expect to invest our way out of this," Maryland state policy analyst Michael Rubenstein told a state-appointed commission studying pension reform. "The problem is getting worse and it's too late to address the funding gap of fiscal 2012." Maryland's pension liabilities -- $18 billion the state owes to current and future retirees in retirement benefits, and $15 billion in health benefits -- are currently funded at 64 percent.

Gov. Sanford Decries Unsustainable State Retirement Fund - Gov. Sanford Friday renewed his call to state citizens to urge government officials to formulate creative means of addressing one of the most serious problems faced by South Carolina in the coming years - the State Retirement System’s $12 billion unfunded liability, which makes up more than half of the state’s $21 billion debt owed by future generations. “Just this week 54 million Americans on Social Security were told that the federal government would not be giving them a cost-of-living increase for the second-straight year, marking the first time this has happened in a generation,” Gov. Sanford said. “This comes on the heels of news that Social Security is already paying out more money than it’s taking in, and may be completely insolvent in 25 years. Yet this fiscal nightmare is not confined to the federal government, as states and cities now harbor more than $3.5 trillion in unfunded pension liabilities - promises made but not paid for in capitals across this nation.

Americans Aren't Saving Enough for Retirement, Study Finds  -The typical middle-age American is saving far too little for retirement, and the Employee Benefit Research Institute has estimated the shortfall: an average of $47,732 per individual over the course of that person’s retirement. The number was intended to show how much additional income future retirees — in this case, people currently 36 to 62 — would need to sufficiently cover basic expenses and uninsured health care costs upon reaching retirement age. (Not all health care costs are covered by Medicare, after all.) The retirement savings shortfall varies by gender, household size and generation, according to the model used by the institute, which is a nonpartisan research organization.  For example, Generation Xers — that is, people born from 1965 to 1974 — have a higher estimated retirement shortfall for any given household type. That is primarily because health care costs are rising so quickly, and will be especially expensive by the time that generation retires.

Average American's retirement savings falls short by $47700 - The average American worker has a retirement savings shortfall of $47,732, according to a new study by the Employee Benefit Research Institute. That's how far short a typical 36- to 62-year-old is, in today's dollars, of being able to cover even basic expenses in retirement. While that may not sound like a lot, it adds up to $4.55 trillion for the entire work force. And the individual number masks the size of the problem that some people face. The EBRI says that more than half of Americans actually have adequate retirement savings or pensions. When you consicder only the people who don't, the savings shortfall is more than $100,000 per person. Things look even worse if you include the cost of a nursing home or home health care. That raises the average shortfall by $25,317 for a married couple, $32,433 for a single man and $46,425 for a single woman.

CBO’s 2010 Long-Term Projections for Social Security: Additional Information - CBO Director's Blog -Social Security is the federal government’s largest single program; outlays in fiscal year 2010 totaled $706 billion, roughly one-fifth of the federal budget. Tax revenues credited to the program totaled about $670 billion in fiscal year 2010, almost all from payroll taxes. Today CBO released additional information about the long-term projections of the Social Security program’s finances that were included in The Long-Term Budget Outlook (June 2010, revised August 2010) and in Social Security Policy Options (July 2010). The methodology used to develop those projections is described in CBO’s Long-Term Model: An Overview, a background paper published in June 2009. Today’s publication updates the projections included in CBO’s Long-Term Projections for Social Security: 2009 Update. As we reported in June 2010, the long-term gap between Social Security’s spending and revenues that CBO is currently projecting is larger than the shortfall projected in our August 2009 publication.

Americans Disagree on How to Fix Entitlement Programs -Gallup- More than three in four Americans believe the cost of the government's major entitlement programs, including Social Security and Medicare, will create major economic problems for the U.S. in the next 25 years if no changes are made to them. At the same time, Americans do not provide a mandate for raising taxes or cutting benefits to address the situation. While fewer than half of Americans say they favor raising taxes or cutting benefits to address the economic problems they foresee from the government's major entitlement programs, 62% do support one approach or the other. Specifically, 12% favor both options, 30% favor a tax increase but not benefit cuts, and 20% favor benefit cuts but not a tax increase. Still, the data show that there is little consensus on how to address a problem most Americans see looming, and more than one-third of Americans (35%) oppose both options.

Alaska Medicaid costs skyrocket - Alaska's Medicaid cost is up $300 million this year and it's not going down anytime soon. It's projected that the cost will hit $1.5 billion during the state's 2012 fiscal year.  Bradner's Alaska Economic Report says the increase is due to price escalation, increased enrollment under Denali KidCare and more patients utilizing Medicaid services. According to data presented to the Health Care Commission, Alaska has one of the highest Medicaid reimbursement rates in the country. The average rate for Alaska is around $108, about double other northwest states

Plan to Cut Medicare Without Stifling Innovation - The huge budget deficits that the country faces in coming decades are, above all, because of Medicare. The program will have to cover growing numbers of baby boomers while health costs are likely to keep going up. It won’t be possible to pay the bill by cutting other programs. They’re not big enough. Making big cuts to everything but Medicare and Social Security — shrinking the military and other programs to their smallest share of the economy since World War II — might save $200 billion a year by 2035. But by then, annual Medicare spending is projected to grow by more than $1 trillion. So any deficit strategy needs to focus on Medicare.  In the new issue of the journal Health Affairs, two doctors, both former Medicare officials, have laid out a plan to do so. It would give expensive new treatments three years to prove that they worked better than cheaper treatments, or their reimbursement rates would be cut to that of the cheaper treatments.

ObamaCare in Court This morning, Judge Henry E. Hudson of the Eastern District of Virginia presided over a summary judgment hearing for Virginia v. Sebelius. Both sides squared-off for just under three hours, and OCW was lucky enough to get a seat in the crowded courtroom.  This morning, Judge Henry E. Hudson of the Eastern District of Virginia presided over a summary judgment hearing for Virginia v. Sebelius. This case is the Constitutional challenge filed by Virginia Attorney General Ken Cuccinelli against ObamaCare, and shouldn't be confused with the multi-state suit filed in Florida by over 20 Attorneys General. Both sides squared-off for just under three hours, and OCW was lucky enough to get a seat in the crowded courtroom

Obama Administration Foolishness, Part 1 - When the question is asked whether the Obama Administration are fools or liars—and a certain Chicago mayoral candidate is often nominated as both—you can be certain discussion of “the public option” will come up. It doesn’t come up directly in today’s FT (page 4 of the print edition; no link; I get the paper edition, and there’s no relationship between the two*), but it certainly abides in the plan put forth by Paul Ryan (R-Innumeracy) to de-reform health care reform: Congressman Paul Ryan…says he believes an arcane budgetary procedure known as reconciliation could be a vital tool for his party to scale back funding for some of the administration’s policies. Under congressional rules, bills passed under reconciliation—which must be related to budgetary issues—need only 51 votes to pass in the Senate. It’s that self-same “arcane budgetary procedure ” that provided an opportunity to pass an initial health care reform bill with “the public option.”  Republican opposition to using reconciliation was varied and loud.

Philip Bredesen: ObamaCare's Incentive to Drop Insurance…Our recent health reform has created a situation where there are strong economic incentives for employers to drop health coverage altogether. The consequence will be to drive many more people than projected—and with them, much greater cost—into the reform's federally subsidized system. This will happen because the subsidies that become available to people purchasing insurance through exchanges are extraordinarily attractive.  For a person starting a business in 2014, it will be logical and responsible simply to plan from the outset never to offer health benefits. Employees, thanks to the exchanges, can easily purchase excellent, fairly priced insurance, without pre-existing condition limitations, through the exchanges. As it grows, the business can avoid a great deal of cost because the federal government will now pay much of what the business would have incurred for its share of health insurance. The small business tax credits included in health reform are limited and short-term, and the eventual penalty for not providing coverage, of $2,000 per employee, is still far less than the cost of insurance it replaces.

Railing against CBO scoring: The wrong debate - Each time CBO came up with a budget projection for health reform, swords came out. On one side were those who said CBO was being too optimistic. Those Medicare cuts won’t happen or more people will opt out (or be dumped from) employer coverage, they claimed. On the other side, CBO defenders suggested CBO was being reasonable, even conservative. And besides, they would add, somebody has to be the official arbiter of the budgetary effects of bills. Neither side is right, but they share one thing in common: a focus on the wrong problem.In a Kaiser Health News column today, Rea Hederman and Paul Winfree continue this debate, highlighting a new Heritage Foundation interactive health reform budgeting tool with which users can second guess CBO estimates and see the impact on future premiums, taxes, deficits, coverage rates, and “government dependency.”

Health Reform and Cost Cutting - If Medicare officials wanted to cut the reimbursement rate for expensive treatments that were not any better than cheaper treatments, would the new health-care law let them do so? Maybe. The law allows them to use comparative-effectiveness research from the newly created Patient-Centered Outcomes Research Institute as one factor in deciding what treatments to cover and how much to pay. But such research cannot be the only factor. Here is how Steven Pearson of Massachusetts General Hospital put it, in an e-mail: … the legislation makes it clear that the new Institute’s findings can’t be “hard-wired” as the only factor in Medicare coverage decisions but can certainly be considered as part (some would say most important part) of a process that includes other sources of evidence, public input, and professional comment. It’s not clear whether [comparative-effective research] findings would change coverage decisions that much, because coverage decisions are blunt “on-off” switches, and it’s very hard to say no to any coverage at all. The proposal from Dr. Pearson and Dr. Peter B. Bach that I describe in my column tries to get around this problem by using the research not to decide whether to cover a procedure but instead to decide how much to pay for it. .

Health Care Accounting Is Challenging, Not Impossible - In my last two posts I explored the methodological and practical challenges faced by a new measurement discipline one might call health care accounting, a branch of the wider discipline of health services research that has been formally defined by the Association for Health Services Research (now AcademyHealth): “The multidisciplinary field of scientific investigation that studies how social factors, financing systems, organizational structures and processes, health technologies and personal behaviors affect access to health care, the quality and cost of health care, and ultimately our health and well-being. Its research domains are individuals, families, organizations, institutions, communities and populations.” The narrower aim of health care accounting is to assemble and structure information on the health care system that is needed to hold the providers of health care formally accountable for the cost and the quality of the products and services they deliver. Such information could also be used to reward superior performance with superior pay. At the moment, this discipline is still in its infancy.

In These Health Care Markets, Antitrust Action Is Almost Inevitable - I'm in the time machine again this morning as I read this article by David Hilzenrath in The Washington Post about the federal government's new antitrust suit against Blue Cross Blue Shield of Michigan, that state's largest health insurer.  Here are two key excerpts from the article, which illustrate the issues:In some cases, Blue Cross's contracts required hospitals to charge other insurers significantly more than they charged Blue Cross, the federal antitrust suit said. In other cases, Blue Cross agreed to increase the prices it pays hospitals - boosting costs for its own customers - in return for commitments that other insurers would be charged no less, the lawsuit said.... The nonprofit Blue Cross plan in Michigan covers more than nine times as many Michigan residents as its next-largest commercial competitor and more than 60 percent of the state's commercially insured population, the government said. It is the second of these excerpts that allows BCBS to impose the unusual contracts on the hospitals

Insurers Denied Health Coverage to 1 in 7 People, Citing Pre-Existing Conditions - The nation’s four largest for-profit health insurers denied coverage to more than 651,000 people over a three-year period, citing pre-existing conditions, according to an analysis of insurer data detailed in a Congressional investigation. Between Aetna, Humana, UnitedHealth Group, and WellPoint, that averages out to a denial of coverage for one out of every seven applicants, according to an Energy and Commerce Committee memo about the investigation. The memo, released by Energy and Commerce Chairman Henry Waxman and Bart Stupak [1], both Democrats, touts provisions in the health care reform bill that address pre-existing condition denials. But all politics aside, the investigation contains some interesting figures and information culled from thousands of pages of documents provided by the insurers. The memo points out, for instance, that since 2007, the number of denials on the basis of pre-existing conditions has risen each year, outpacing the increase in applications for insurance coverage:

Doctors on Pharma Payroll: What Our Partners Found - The doctors handpicked by pharmaceutical companies as promotional speakers or consultants are supposed to be the most respected in their fields, but that’s not always the case, according to an investigation we launched today. Using data culled from the disclosures made by seven major pharmaceutical companies, we found hundreds of doctors on drug company payrolls [1] “who had been accused of misconduct, were disciplined by state boards or lacked credentials as researchers or specialists.” But that was just our focus. The project itself was a partnership with five other news organizations, NPR, the Chicago Tribune, the Boston Globe, Consumer Reports, and PBS’ Nightly Business Report. We assembled the database—tens of thousands of records totaling $257.8 million in payments from pharmaceutical companies to more than 17,000 doctors—and our collaborators had license to dig away. Here’s some of what they found:

Drug companies pay 17,000 U.S. doctors, report finds (Reuters) - More than 17,000 doctors and other healthcare providers have taken money from seven major drug companies to talk to other doctors about their products, a joint investigation by news organizations and non-profit groups found. More than 380 of the doctors, nurses, pharmacists and other professionals took in more than $100,000 in 2009 and 2010, according to the investigation released on Tuesday. The report said far more doctors are likely to have taken such payments, but it documented these based on information from seven drugmakers. The payments are not illegal and usually not even considered improper. But the investigation by journalism group ProPublica, Consumer Reports magazine, NPR radio and several publications showed doctors were sometimes urged to recommend "off-label" prescriptions of drugs, meaning using them for conditions they are not approved for. "Tens of thousands of U.S. physicians are paid to spread the word about pharma's favored pills and to advise the companies about research and marketing," the group says in its report, available here

Payments to Doctors by Most Pharma Companies Still Remain Secret - Though an investigation we published yesterday showed that hundreds of doctors with disciplinary records or limited credentials [1] are on the payrolls of major pharmaceutical companies, consumers hoping to know more about the payments that aren’t in our database will have to wait until 2013 for such disclosures to be made industry-wide. That’s because only seven of the more than 70 pharmaceutical companies operating in the United States have made disclosures about the doctors they pay to consult and promote their drugs, and new disclosure rules [2] [PDF] included in the health care reform bill don't require the companies to report such payments to the U.S. Department of Health and Human Services until March 2013. The government has until the end of September 2013 to make the information public and searchable.

The Health Racket Bailout is an “Austerity” Bill - Obama’s core promise in pushing for his Stamp Act, AKA the health racket bailout, was his constant mantra, “if you like the coverage you have, you’ll get to keep it.” This was intended to neutralize the majority who have employer-based coverage. Most of them don’t really “like” it, but they consider it adequate and feel more fear over change than hope that a good policy will bring something better. Obama was pushing what they rightly considered a dubious health bill, but he assured them that at worst they’d be able to keep what they have now. They were right to fear. Obama’s promise has already been unmasked as a Big Lie. Already the rackets and employers are moving on parallel tracks toward the bill’s real intended goal of driving people out of employer-based insurance and into the far more expensive, far less protected individual “market”, where we’ll face the rackets alone to buy our mandated individual Stamps. The goal here is to help employers get out of any responsibility for providing health insurance even as the government still refuses to exercise its own responsibility* to do so. The real goal is to revoke organized health care itself for a large portion of the population.

Malpractice Methodology - The health care legislation that Congress enacted earlier this year, contrary to much of today’s overheated rhetoric, does many things right. But it does almost nothing to reform medical malpractice laws. Lawmakers missed an important opportunity to shield from malpractice liability any doctors who followed evidence-based guidelines in treating their patients.  As President Obama noted in his speech to the American Medical Association in June 2009, too many doctors order unnecessary tests and treatments only because they believe it will protect them from a lawsuit. Why does this matter? Right now, health care is more evidence-free than you might think. And even where evidence-based clinical guidelines exist, research suggests that doctors follow them only about half of the time. One estimate suggests that it takes 17 years on average to incorporate new research findings into widespread practice. As a result, any clinical guidelines that exist often have limited impact. How might we encourage doctors to adopt new evidence more quickly? Malpractice reform could help — possibly a lot.

Those with a desk job, please stand up - In academic papers with titles such as, "Your Chair: Comfortable but Deadly," physicians point to surprising new research showing higher rates of diabetes, obesity, heart disease and even mortality among people who sit for long stretches. A study earlier this year in the American Journal of Epidemiology showed that among 123,000 adults followed over 14 years, those who sat more than six hours a day were at least 18 percent more likely to die than those who sat less than three hours a day. "Every rock we turn over when it comes to sitting is stunning," said Marc Hamilton, a leading researcher on inactivity physiology at the Pennington Biomedical Research Center in Louisiana. "Sitting is hazardous. It's dangerous. We are on the cusp of a major revolution about what we think of as healthy behavior in the workplace." He calls sitting "the new smoking."

Scientists suggest that cancer is purely man-made - The study of remains and literature from ancient Egypt and Greece and earlier periods – carried out at Manchester’s KNH Centre for Biomedical Egyptology and published in Nature Reviews Cancer – includes the first histological diagnosis of cancer in an Egyptian mummy.  Finding only one case of the disease in the investigation of hundreds of Egyptian mummies, with few references to cancer in literary evidence, proves that cancer was extremely rare in antiquity. The disease rate has risen massively since the Industrial Revolution, in particular childhood cancer – proving that the rise is not simply due to people living longer. Professor Rosalie David, at the Faculty of Life Sciences, said: “In industrialised societies, cancer is second only to cardiovascular disease as a cause of death. But in ancient times, it was extremely rare. There is nothing in the natural environment that can cause cancer. So it has to be a man-made disease, down to pollution and changes to our diet and lifestyle.” She added: “The important thing about our study is that it gives a historical perspective to this disease. We can make very clear statements on the cancer rates in societies because we have a full overview. We have looked at millennia, not one hundred years, and have masses of data.”

Does every murder in the United States really cost society $17 million? -Researchers at Iowa State University recently attempted to run the numbers. They wanted to include not just the direct costs—the damaged property and lost careers and prison upkeep and lawyer fees—but also the broader and more intangible societal costs, such as more frequent police patrols, more complicated alarm systems, and more expensive life-insurance plans. If we knew how much a crime costs society, their reasoning went, maybe we could better decide how much money to spend trying to stop it. They found that each burglary in the United States—a car break-in, for example—costs $41,288. For armed robberies the cost increases eightfold, to $335,733. Every aggravated assault costs $145,379. Each rape costs $448,532. Then there is murder. The researchers, led by sociologist Matt DeLisi, put the price tag at a whopping $17,252,656. That means in 2009, according to the FBI, murder cost the United States almost $263 billion—nearly as much the federal government annually spends on Medicaid.

When in Doubt, Shout - Abstract: A seminal case study by Festinger found, paradoxically, that evidence that disconfirmed religious beliefs increased individuals’ tendency to proselytize to others. Although this finding is renowned, surprisingly, it has never been subjected to experimental scrutiny and is open to multiple interpretations. We examined a general form of the question first posed by Festinger, namely, how does shaken confidence influence advocacy? Across three experiments, people whose confidence in closely held beliefs was undermined engaged in more advocacy of their beliefs (as measured by both advocacy effort and intention to advocate) than did people whose confidence was not undermined. The effect was attenuated when individuals affirmed their beliefs, and was moderated by both importance of the belief and open-mindedness of a message recipient. These findings not only have implications for the results of Festinger’s seminal study, but also offer new insights into people’s motives for advocating their beliefs.

The origin of complex life – it was all about energy - The 21st century is all about conserving energy. The push towards energy-efficient buildings, vehicles and lifestyles is both fashionable and necessary, but it’s also ironic. Our pattern of ever-increasing energy consumption is deeply rooted in our history, not just since the Industrial Revolution, but since the origin of all complex life on Earth.According to a new hypothesis, put forward by Nick Lane and Bill Martin, we are all natural-born gas-guzzlers. Our very existence, and that of every animal, plant and fungus, depended on an ancient partnership, forged a few billion years ago, which gave our ancestors access to unparalleled supplies of energy and allowed them to escape from the shackles of simplicity.

Corn Hikes To Jolt Grocery Shelves - Now's the time to grab a Thanksgiving turkey and a holiday ham and pop them in the freezer, as the cost of meat is on the rise. It's all about corn, experts say, which is a primary feedstock for beef and also is used to feed poultry and pork. And corn futures have soared close to a two-year high, experts say. "Stock the freezer," said Bill Sirakos, senior economist for Frost Bank. Higher- priced corn "is going to raise the price of food " no question, and raise the price of cows, of beef "absolutely." The price of corn had been trending up before taking a leap on Oct. 8, when the U.S. Agriculture Department slashed its estimate of U.S. corn production. Less than a week later, the Environmental Protection Agency said it would allow the amount of ethanol blended into fuel to rise to 15 percent from 10 percent. Ethanol is derived from corn.

‘Ten years’ to solve nature loss - The UN biodiversity convention meeting has opened with warnings that the ongoing loss of nature is hurting human societies as well as the natural world. The two-week gathering aims to set new targets for conserving life on Earth. Japan's Environment Minister Ryo Matsumoto said biodiversity loss would become irreversible unless curbed soon. Much hope is being pinned on economic analyses showing the loss of species and ecosystems is costing the global economy trillions of dollars each year. Ahmed Djoghlaf, executive secretary of the UN Convention on Biological Diversity (CBD), described the meeting in Nagoya, Japan, as a "defining moment" in the history of mankind."[Buddhist scholar] Daisetsu Teitaro Suzuki said 'the problem of nature is the problem of human life'. Today, unfortunately, human life is a problem for nature," he told delegates in his opening speech.

SSRN-Rainfall and Democracy - Why have some countries remained obstinately authoritarian despite repeated waves of democratization while others have exhibited uninterrupted democracy? This paper explores the emergence and persistence of authoritarianism and democracy. We argue that settled agriculture requires moderate levels of precipitation, and that settled agriculture eventually gave birth to the fundamental institutions that under-gird today’s stable democracies. Although all of the world’s societies were initially tribal, the bonds of tribalism weakened in places where the surpluses associated with settled agriculture gave rise to trade, social differentiation, and taxation. In turn, the economies of scale required to efficiently administer trade and taxes meant that feudalism was eventually replaced by the modern territorial state, which favored the initial emergence of representative institutions in Western Europe. Subsequently, when these initial territorial states set out to conquer regions populated by tribal peoples, the institutions that could emerge in those conquered areas again reflected nature’s constraints. An instrumental variables approach demonstrates that while low levels of rainfall cause persistent autocracy and high levels of rainfall strongly favor it as well, moderate rainfall supports stable democracy. This econometric strategy also shows that rainfall works through the institutions of the modern territorial state borne from settled agriculture, institutions that are proxied for by low levels of contemporary tribalism.

A cost estimate of electric utility regulation - The C-J (LG&E exces say rates could climb ...): The Obama administration’s new environmental proposals could drive up LG&E and Kentucky Utilities electricity rates 20 percent by 2019, the companies’ top executive warned Thursday. The new or anticipated rules include tighter restrictions on such air pollutants as ozone, mercury, sulfur dioxide, fine particles, and nitrogen dioxide. They also include a rule to limit the movement of power plant pollution from state to state. A good guess is that this cost estimate is too high. And: Kentucky residents should also consider the health and economic benefits of cleaner air, said [Frank] O’Donnell, president of Clean Air Watch in Washington, D.C.  “Studies have shown that literally hundreds of people in Kentucky are dying prematurely every year from dirty coal pollution, and hundreds of others end up in the hospital,” he said.

China's Zhang Says Obama Seeking `Votes' With Clean Energy Subsidy Probe - China’s top energy official said the U.S. was playing electoral politics with an announcement that it will investigate a union complaint that the Chinese government gives unfair subsidies to its alternative energy industry. “Does America want to get fair trade or a genuine dialogue, or get transparent information?” National Energy Administration Director Zhang Guobao asked at a Beijing press conference last night. “I think not -- it seems America’s main reason is to get votes.”  The U.S. acted on a complaint from the United Steelworkers union that China’s aid to its clean-energy producers violates global trade rules. Accepting the petition may lead the U.S. to file a protest at the World Trade Organization. The complaint, called a Section 301 filing, is the first filed and accepted by President Barack Obama’s administration after his predecessor, George W. Bush, turned down trade complaints against China.

Washington’s energy rift with China unpopular - When the US government picked the clean energy industry as the latest battleground in its cold war with China over currencies and trade, it did not find the domestic industry rushing to offer support. The Obama administration announced last Friday that it would proceed with an investigation into China’s support for its renewable energy industry, which could lead to litigation at the World Trade Organisation. The move followed a complaint of unfair practices by the United Steelworkers Union. With the midterm elections only two weeks away, the administration was under political pressure that proved impossible to resist. The allegations that stimulus funding for energy projects had created jobs in China have been a theme of Republican campaigning.Among US energy equipment companies and industry groups, however, support for the government’s move has been muted.

Both Are Necessary, But Neither is Sufficient: Carbon-Pricing and Technology R&D Initiatives in a Meaningful National Climate Policy - For many years, there has been a great deal of discussion about carbon-pricing – whether carbon taxes or cap-and-trade – as an essential part of a meaningful national climate policy.  It has long been recognized that although carbon-pricing will be necessary, it will not be sufficient. Economists and other policy analysts have noted that policies intended to foster climate-friendly technology research and development (R&D) will also be necessary, but likewise will not be sufficient on their own.Some recent studies and press accounts, which I reference below, have identified these two approaches to addressing CO2 emissions as substitutes, rather than complements.  That is fundamentally inconsistent with decades of research, and so my purpose in this essay is to set the record straight.

Why Research Alone Won't Fix the Climate - Robert Stavins, the environmental economist, argues that more funds for clean energy research will not, alone, solve climate change. Governments will also have to raise the cost of dirty energy, he says: … there is no other feasible approach that can provide meaningful emissions reductions, such as the 80 percent reduction in national CO2 emissions by 2050 that was part of the legislation passed by the U.S. House of Representatives and proposed in the Senate and part of the Obama administration’s conditional pledge under the Copenhagen Accord. Because of the ubiquity and diversity of energy use in a modern economy, conventional regulatory approaches – standards of various kinds — simply cannot do the job. Only carbon pricing – either in the form of carbon taxes or cap-and-trade — can significantly tilt in a climate-friendly direction the millions of decentralized decisions that are made in our economy every day. Think of this way: Very few people — if any — are going to use clean energy sources so long as dirty energy is cheaper. Energy is much more utilitarian than computers or other technologies.

U.N. urged to freeze climate geo-engineering projects - The United Nations should impose a moratorium on “geo-engineering” projects such as artificial volcanoes and vast cloud-seeding schemes to fight climate change, green groups say, fearing they could harm nature and mankind. The risks were too great because the impacts of manipulating nature on a vast scale were not fully known, the groups said at a major U.N. meeting in Japan aimed at combating increasing losses of plant and animal species. Envoys from nearly 200 countries are gathered in Nagoya, Japan, to agree targets to fight the destruction of forests, rivers and coral reefs that provide resources and services central to livelihoods and economies.

Arctic temperature rising at near record rates, sea ice melting faster - The temperature is rising again in the Arctic, with the sea ice extent dropping to one of the lowest levels on record, climate scientists reported Thursday.The new Arctic Report Card “tells a story of widespread, continued and even dramatic effects of a warming Arctic,” said Jackie Richter-Menge of the Cold Regions Research and Engineering Laboratory, a U.S. Army Corps of Engineers facility. “This isn't just a climatological effect. It impacts the people that live there,” she added. Atmospheric scientists concerned about global warming focus on the Arctic because that is a region where the effects are expected to be felt first, and that has been the case in recent years.There was a slowdown in Arctic warming in 2009, but in the first half of 2010 warming has been near a record pace, with monthly readings over 4 °C above normal in northern Canada, according to the report card released Thursday.

Arctic Report Card: Region Continues to Warm at Unprecedented Rate - The Arctic region, also called the “planet’s refrigerator,” continues to heat up, affecting local populations and ecosystems as well as weather patterns in the most populated parts of the Northern Hemisphere, according to a team of 69 international scientists. The findings were released Oct. 21, 2010 in the Arctic Report Card, a yearly assessment of Arctic conditions. Among the 2010 highlights: Greenland is experiencing record-setting high temperatures, ice melt and glacier area loss; Summer sea ice continues to decline — the 2009-2010 summer sea ice cover extent was the third lowest since satellite monitoring began in 1979, and sea ice thickness continues to thin. The 2010 minimum is the third lowest recorded since 1979, surpassed only by 2008 and the record low of 2007; and Arctic snow cover duration was at a record minimum since record-keeping began in 1966.

NOAA reports 2010 hottest year on record so far* - Zambia hits 108.3°F, 18th nation to set record high this year - Following fast on the heels of NASA reporting the hottest January to September on record, NOAA’s National Climatic Data Center has released its State of the Climate: Global Analysis for September.  It finds: For January–September 2010, the global combined land and ocean surface temperature was 0.65°C (1.17°F) above the 20th century average of 14.1°C (57.5°F) and tied with 1998 as the warmest January–September period on record. Meteorologist Jeff Masters, the source of the figure above, reports on the national records set this year: Zambia recorded its hottest temperature in history Wednesday, October 13, when the mercury hit 42.4°C (108.3°F) in Mfuwe. The previous record was 42.3°C (108.1°F) set on November 17, 2005 in Mfuwe. Zambia is in the Southern Hemisphere, and we are still three months from the peak heat of summer, but the nation is sufficiently close to the Equator that record highs and lows can be set at any time during the year. Zambia is the 18th nation to record a hottest all-time temperature this year, which is a new record. Here’s Masters’ full list of “National heat records set in 2010″:

Scientists: Caribbean coral die-off may be worst ever, Southeast Asia and Indian Ocean bleaching “may prove to be the worst such event known to science.”Science online.   Scientists studying Caribbean reefs say that 2010 may be the worst year ever for coral death there. Abnormally warm water since June appears to have dealt a blow to shallow and deep-sea corals that is likely to top the devastation of 2005, when 80% of corals were bleached and as many as 40% died in areas on the eastern side of the Caribbean. He explains: Bleaching occurs when crucial microorganisms leave coral reefs during stress. Corals, which shelter a quarter or more of all marine species, get bleached, and may die, after pHe explains:rolonged heating. A few weeks of water temperatures a few degrees above normal can be fatal. During the 2005 die-off, for example, water temperatures off the Virgin Islands rose just 3°C above the average in August—but stayed that way until November. “There has been little recovery in the Caribbean since,” says reef specialist C. Mark Eakin of the U.S. National Oceanic and Atmospheric Administration (NOAA) in Silver Spring, Maryland. But, as this NOAA graphic shows, 2010 is worse than 2005:

U.S. Gulf Coast Faces $350 Billion in Climate Damage by 2030, Study Shows - The U.S. Gulf Coast may face $350 billion in economic damage by 2030 as extreme weather fueled by climate change wreaks havoc on the region, according to a study released today by Entergy Corp. The estimate assumes severe weather similar to Hurricane Katrina — a storm that crippled the region in 2005 — will occur every generation rather than once a century, according to the study by Swiss Re, a Zurich-based reinsurer, and McKinsey & Co., a New York-based research firm. New Orleans-based Entergy, the second-largest U.S. producer of electricity from nuclear reactors behind Exelon Corp., commissioned the report. The study recommends spending $50 billion for projects such as overhauling building codes and reinforcing beaches and wetlands to curb losses. The region, which suffers an average annual loss of $14 billion, may lose as much as $23 billion a year from “extreme” climate change, the report said.

Asia tops climate change's 'most vulnerable' list - SEEKING to escape the worst effects of climate change? A comprehensive vulnerability index suggests you move to Scandinavia, Ireland or Iceland. And although Africa is often regarded as the most vulnerable continent, it finds that the teeming plains of Asia are at greater risk in the next 30 years. Ten of the 16 most vulnerable countries are in Asia (see map). The Climate Change Vulnerability Index was produced by Maplecroft, a British risk analysis firm. It has crunched data from more than 40 studies, and looked at a range of risk factors including a nation's exposure to climate-related disasters; its population density, poverty and dependence on agriculture; and its government's and infrastructure's ability to adapt to climate change. Bangladesh comes top of the "extremely vulnerable" category because of its large population, extreme rural poverty and high risk of flooding. India is second because of its billion-plus inhabitants. Other Asian nations at risk include Nepal, the Philippines, Afghanistan, Burma, Cambodia and Pakistan, which is still recovering from floods that engulfed a tenth of the country.

Bangladesh, India most at risk from climate change - Bangladesh and India are the countries most vulnerable to climate change, according to an index on Wednesday that rates the Nordic region least at risk. British consultancy Maplecroft said its rankings showed that several “big economies of the future” in Asia were among those facing the biggest risks from global warming in the next 30 years as were large parts of Africa. It said poverty and large low-lying coastal regions prone to floods and cyclones were among factors making Bangladesh the most exposed country. India, in second place, was vulnerable because of pressures from a rising population of 1.1 billion.

Climate change v capitalism: the feast is almost over - Six weeks from now, in Cancun, Mexico, the world's nations will gather under the auspices of the United Nations (the UNFCCC) to again discuss how to alleviate climate change. They'll try to pick up the broken pieces from last December in Copenhagen, where we witnessed tortured dances by government leaders trying to avoid the realities of our time, and the profound conundrums we face as a society. They accomplished nothing, and may reprise that performance in Cancun.Take the case of President Obama. He generally signals a serious desire to address climate issues, but, like the leaders of all the developed industrial nations, has been caught in a terrible dilemma. He tries to argue for lower emissions limits, both globally and in the US. But he is simultaneously desperate to revive rapid economic growth and stimulate a sluggish industrial economy hampered by rising costs of energy, rapidly diminishing resources and venal bankers.

How US Laws Prevent Mine Rescue Miracles - The record-breaking Chilean rescue has rightfully turned the world’s attention to miner safety. Mining is one of the most dangerous jobs in America, and probably the world.  With current safety standards, however, coal miners trapped in the US would face a situation more like the recent Chinese tragedy, in which 37 coal miners died, than the “Los 33″ Chilean miracle.  A significant amount of US coal reserves lie in so-called low coal mines, in which the coal seams being mined are less than 48 inches high. The national rescue shelter volume specification for that kind of mine is 30 cubic feet, or roughly 6 feet long, 2.5 feet wide and 2 feet tall. In other words, a trapped miner can’t sit up in a government-approved rescue space, let alone perform first aid or maintain mental stability. US shelters are set up to let trapped miners survive for four days, with four days’ worth of water and food for each miner. Mines need to provide oxygen tanks and carbon monoxide scrubbers to keep miners alive for four days.

Hidden costs of coal generation - Pollution from Chicago’s two coal-fired power plants costs neighboring communities $127 million a year in hidden health damages, according to a report released Wednesday that relied on research from the nation’s leading scientific organization. Environmental groups and Chicago aldermen have been fighting for years to force the aging Fisk plant in Pilsen and the Crawford plant in Little Village to either clean up or shut down. The former ComEd plants, now owned by Midwest Generation, also are tangled in anti-pollution lawsuits filed by the U.S. Environmental Protection Agency and Illinois Attorney General Lisa Madigan. While pollution problems at the two plants have been well-documented — both are major sources of lung-damaging soot and other noxious chemicals — this is the first time anyone has tried to calculate the economic costs of the steady stream of coal smoke that churns out of the smokestacks.

BP attorney suggests that the oil giant might seek to cap spill claims at $75 million - In a seemingly never-ending parade of radio, television, print and web ads, in addition to numerous official statements, BP officials have repeatedly insisted that the company intends to make the Gulf Coast and its residents "whole" again. In the latest such PR blitz, BP employee and New Orleans native Iris Cross reiterates that the company will do everything it has to do in order to "make this right." But yesterday in federal court, an attorney for the oil giant sent shockwaves throughout the Gulf region by suggesting that BP may seek shelter under the $75 million liability cap polluters can invoke under the Oil Pollution Act of 1990. U.S. District Judge Carl J. Barbier, who's presiding over the more than 300 consolidated lawsuits against the company, was taken aback when BP attorney Don Haycraft floated the idea of the liability cap. Barbier replied simply that "BP said it would pay whatever [is] necessary." "We're shocked over here to hear the defendants now bring up this $75 million cap," he said. "We were under the impression it was waived."

Deepwater Drilling Ban Lifted, Malaise Remains Intact - So the Obama administration has lifted the deepwater drilling moratorium. Unfortunately for the President, it’s going to be too late to regenerate many offshore jobs before election day, but we’ll take it. Before the Deepwater Horizon disaster there were 33 floating drilling rigs at work in the gulf. Today that’s down to just 6, with half of those doing plugging and abandonment work. Many of the rigs have been sent on long-term contracts (at rates ranging from $225,000 to $400,000 per day) to Brazil and west Africa. It’ll take years for them to come back. The bright side: that’ll give the government and the industry plenty of time to sort out the raft of new regulations and oversight aimed at making sure this kind of thing never happens again. Unsurprisingly, even some Obama allies are criticizing the lifting of the ban as too much too soon. Peter Lehner of the Natural Resources Defense Council said in a statement this afternooon: “Today’s actions are premature … To ensure a disaster like this never happens again, we must know what caused it in the first place. We’re still waiting for that answer and until we get it the moratorium should stay in place.”

Chevron takes first step into Gulf of Mexico, but others will follow - Chevron’s announcement that it will lead a $7.5bn investment in the deepwater Gulf of Mexico underlines how eager the industry is to get back out there despite BP’s accident. Certainly the new permitting process will have its challenges, but the majors need the gulf to bolster production in a world of increasingly inaccessible resources. Wood Mackenzie, the energy research firm, underlines in a recent report how important deepwater has become to the industry: A push into deeper water has been one of the key industry themes of the last 20 years. Over 130bn barrels of oil equivalent have now been discovered in these frontier regions, with $130bn of  value created by explorers in the last decade. Oil production from deepwater fields will contribute 7 per cent of global output in 2010, up from 2 per cent in 2000, and the proportion is expected to increase to over 10 per cent by 2020.

Goldman Forecasts `Substantially Higher Prices' for Crude in 2011, 2012 - Goldman Sachs Group Inc. forecasts “substantially higher prices” for oil in the second half of 2011 and 2012 as the global inventory surplus is exhausted. “We expect the supply-demand balance to continue to tighten in the fourth quarter of 2010 as continued global economic growth, albeit likely at a slower pace than in the first half, continues to strengthen demand,” the note said. “Moving into the second half of 2011 and 2012, we expect the global inventory surplus to be exhausted and OPEC spare capacity to be drawn on to balance the market, leading to substantially higher prices.”

"In America most people have no conception that anything can really change radically" - Interview with John Michael Greer - One of the problems that I see that a lot of people tend to think that whatever is happening at the present moment is the most important thing in human history. The crisis in industrial society, of which peak oil is one of the symptoms, is larger in scale than any previous example but is not different in kind. Most civilizations in the past have outrun their resource base and gone through the process of decline and fall. Ours is simply doing it on a bigger scale than previous civilizations because we have more energy to throw around.

World Bank pressured over fossil fuel loans - With new figures showing a record World Bank funding for projects relying on coal power and other fossil fuels, the issue of reforming the institution's energy lending was again a hot topic at the recently concluded World Bank and International Monetary Fund annual meetings.  The bank lent US$3.4 billion to coal projects, or one quarter of all its energy lending, according to data released last month. If a transmission project meant to connect coal-powered stations to the grid in India is included, that number rises to about $4.4 billion, according to an analysis by the NGO Bank Information Center (BIC). This higher total also means that lending for coal-based power rose 356% from the fiscal year 2009, largely due to a June loan

Kuwait adds '12 billion barrels to oil reserves' - Kuwait has added at least 12 billion barrels of crude oil to its reserves, which are estimated at over 100 billion barrels, following a comprehensive study, a newspaper reported on Thursday. Citing well-informed oil sources, Al-Jarida daily said the new oil was found in Greater Burgan, the world's second largest oilfield after Ghawar in Saudi Arabia, with reserves estimated at close to 70 billion barrels. The sources told the paper that more reserves have been discovered at a number of other reservoirs following a comprehensive study, which will boost the Gulf state's reserves - the credibility of which has been questioned in the past. In April, Kuwait's deputy premier for economic affairs Sheikh Ahmad Fahad al-Sabah told a symposium that Burgan reserves were in fact higher than published figures.

Vaclav Smil's Energy Myths and Realities - Vaclav Smil, professor of Environment and Environmental Geography at the University of Manitoba in Winnipeg, has written a new book called “Energy Myths and Realities.” In the book, he looks at a number of things he considers myths:

1. The future belongs to electric cars
2. Nuclear electricity will be too cheap too meter
3. Soft-energy illusions (local generation, etc.)
4. Running out: Peak oil and its meaning
5. Sequestration of carbon dioxide
6. Liquid fuels from plants
7. Electricity from wind
8. The pace of energy transitions

Distance isn't dead - TIM FERNHOLZ tweets a link to a fascinating post on international shipping, which focuses on a computation of the cost to ship bottled water from Fiji to Cambridge, Massachusetts: First, the 24,000kg figure applies to smaller, 20′ containers – the limit for 40-footers is 30,480kg. And the price from Suva to Cambridge for a 40′ container is just slightly higher – $5,540.30. That comes out to $0.18 per liter, three cents less than I calculated six years ago... It’s a four day trip from Suva to Auckland on the Pacific Islands Express, and then the bottles of Fiji water are transfered to OC1, the Oceania Americas Service. The Pacific crossing is a long one – 18 days to the Panama Canal, a quick stop in Cartagena, and we’re in Philadephia 25 days out of Auckland. It’s a truck ride from Philly to Cambridge, and that short hop is responsible for $950 of the total transit cost. The last line is particularly interesting to me. The final leg of the trip accounts for just 4% of the mileage but 17% of the cost. Why? Mostly because it's overland. This divergence between the cost of shipping overland and the cost of shipping by sea has long shaped the planet's economic geography

Why Isn't Mexico Rich?  - Over the last three decades, Mexico has aggressively reformed its economy, opening to foreign trade and investment, achieving fiscal discipline, and privatizing state owned enterprises. Despite these efforts, the country’s economic growth has been lackluster, trailing that of many other developing nations. In this paper, I review arguments for why Mexico hasn’t sustained higher rates of economic growth. The most prominent suggest that some combination of poorly functioning credit markets, distortions in the supply of non-traded inputs, and perverse incentives for informality creates a drag on productivity growth. These are factors internal to Mexico. One possible external factor is that the country has the bad luck of exporting goods that China sells, rather than goods that China buys. I assess evidence from recent literature on these arguments and suggest directions for future research.

U.S. Prevails in Trade Dispute With China — The United States claimed victory Friday in a trade dispute with China, after a World Trade Organization panel largely upheld tariffs that were imposed on an array of Chinese-made steel pipes, tires and other products during the Bush administration.  China had used a number of technical arguments in a September 2008 challenge to antidumping duties, which are supposed to compensate for unfair pricing and countervailing duties that are used to offset improper government subsidies. But a W.T.O. dispute settlement panel rejected most of those arguments.  The Bush administration announced levies on $200 million of steel pipe shipments from China, South Korea and Mexico in July 2008, a month after imposing similar countervailing duties involving a different kind of steel pipe. The Obama administration has defended those decisions.

China Plans to Reduce Its Exports of Minerals — The Chinese government plans a further reduction, of up to 30 percent, next year in its quotas for exports of rare earth minerals, in an attempt to conserve dwindling reserves of the materials, the official newspaper China Daily said Tuesday.  Plans for smaller export quotas come just four days after U.S. trade officials announced they would investigate whether China was violating international trade rules with a wide range of policies to help its clean energy industries. One of the policies under investigation involves China’s steady reductions in rare earth export quotas since 2005 and its imposition of steep taxes on the exports. China mines 95 percent of the world’s rare earths. They are crucial for compact fluorescent light bulbs, hybrid gasoline-electric cars, large wind turbines and other clean energy technologies, as well as for mobile phones and a number of military applications, like missiles, sonar and range finders on tanks.

China-Japan Rare Earth Fracas Continues – Despite earlier news reports that it had come to an end, China’s unofficial embargo on rare earth exports to Japan (which I reported on in a prior post) now appears to be continuing into its fourth week.  This rather surprising development gives rise to a couple of thoughts: What objective is China pursuing, and who exactly is driving the agenda?  The immediate diplomatic flare-up that sparked China’s action has been long since put to bed (both countries have returned each other’s detained citizens), although the underlying territorial dispute over the Senkaku/Diaoyutai Islands remains unresolved.  The only logical explanation for continuing the embargo is that China wants to demonstrate its capacity to “punish” Japan in order to gain future leverage in the dispute.  Of course, it also runs the risk of alerting Japan and other potential rivals (including the U.S.) of the risks inherent in China’s virtual monopoly over rare earth production, and provoking efforts to open up alternative sources of supply.  It’s also unclear whether China’s assertive stance represents a consensus among Chinese leaders, or whether certain elements (like the PLA) are driving policy, while others (such as the Commerce and Foreign ministries) are merely along for the ride. 

Rare and Foolish, by Paul Krugman - Last month a Chinese trawler operating in Japanese-controlled waters collided with two vessels of Japan’s Coast Guard. Japan detained the trawler’s captain; China responded by cutting off Japan’s access to crucial raw materials. And there was nowhere else to turn: China accounts for 97 percent of the world’s supply of rare earths, minerals that play an essential role in many high-technology products, including military equipment. Sure enough, Japan soon let the captain go.I don’t know about you, but I find this story deeply disturbing, both for what it says about China and what it says about us. On one side, the affair highlights the fecklessness of U.S. policy makers, who did nothing while an unreliable regime acquired a stranglehold on key materials. On the other side, the incident shows a Chinese government that is dangerously trigger-happy, willing to wage economic warfare on the slightest provocation.

Rare Earths Row Continues to Build - Yves Smith - Bloomberg reported on a rather peculiar announcement from the Chinese officialdom, which comes off as a rather lame rationalization of its ban on rare earths exports.  If you are late to this cause celebre, rare earths confusingly really aren’t rare, but they are found only in fairly low concentrations and are nasty to mine. They are used in high technology products, particularly high energy density batteries. China has become the dominant provider in recent years. As part of a heavy-handed retaliation, China imposes a de facto export ban on rare earths shipments. Note that a formal ban would violate WRO rules, but China is maintaining this is not official policy, merely a spontaneous outburst of sentiment. As Paul Krugman points out in the New York Times today: Oh, and Chinese officials have not improved matters by insulting our intelligence, claiming that there was no official embargo. All of China’s rare earth exporters, they say — some of them foreign-owned — simultaneously decided to halt shipments because of their personal feelings toward Japan. Right.

Rare Earth Elements — China Lowers The Hammer - Perhaps, finally, the Chinese have gotten Tim Geithner to shut up about the yuan-dollar exchange rate. On Tuesday, The New York Times reported the news in China Said to Widen Its Embargo of Minerals—HONG KONG — China, which has been blocking shipments of crucial minerals to Japan for the last month, has now quietly halted some shipments of those materials to the United States and Europe, three industry officials said this week. The Chinese action, involving rare earth minerals that are crucial to manufacturing many advanced products, seems certain to further intensify already rising trade and currency tensions with the West. Until recently, China typically sought quick and quiet accommodations on trade issues. But the interruption in rare earth supplies is the latest sign from Beijing that Chinese leaders are willing to use their growing economic muscle. I've written some detailed articles on America's rare earth elements (REE) problem, so if you want some background, read these posts:

China Says Its Medium, Heavy Rare Earth Reserves May Last Only 15-20 Years - China’s medium and heavy rare earths reserves may last 15 years to 20 years at the current rate of production, possibly requiring imports, the Ministry of Commerce said today.  Domestic rare earths deposits dropped to 27 million metric tons by the end of 2009, or just 30 percent of the world’s total known reserves, from 43 million tons, or 43 percent of the world total, in 1996, Chao Ning, section chief of foreign trade at the ministry said at a Beijing conference.  China, controller of more than 90 percent of production of the materials used in cell phones and radar, cut its export quotas by 72 percent for the second half and reduced output, spurring a trade dispute with the U.S. The country may not be able to meet growing global demand as the government continues to curb output, Lynas Corp. said in March.  “We cannot rule out the possibility that China may need to rely on imports sometime in the future for these minerals, instead of supplying the world,” Chao said.

Background paper on the economics of rare earths (pdf).China’s Rare Earth Elements Industry: What Can the West Learn?

Japan's rare earth minerals may run out by March: govt - Yoshikatsu Nakayama, vice-minister of the economy, trade and industry, said China was yet to normalise the Japan-bound exports of the minerals used in high-tech products, ranging from televisions to hybrid cars. "With recycling, imports from sources other than China, and cooperation among (Japanese) companies, it (the existing stock) seems to last until March or April," he told Japanese reporters, according to Jiji Press. China has not officially declared an export ban, but all of 31 Japanese companies handling rare earth minerals had reported disruption or stopping of shipments. China, which controls more than 95 percent of the global market, stopped shipment last month after Japan arrested a Chinese trawler captain in disputed waters.

China Said to Widen Its Embargo of Minerals - China, which has been blocking shipments of crucial minerals to Japan for the last month, has now quietly halted some shipments of those materials to the United States and Europe, three industry officials said this week. The Chinese action, involving rare earth minerals that are crucial to manufacturing many advanced products, seems certain to further intensify already rising trade and currency tensions with the West. Until recently, China typically sought quick and quiet accommodations on trade issues. But the interruption in rare earth supplies is the latest sign from Beijing that Chinese leaders are willing to use their growing economic muscle.  “The embargo is expanding” beyond Japan, said one of the three rare earth industry officials, all of whom insisted on anonymity for fear of business retaliation by Chinese authorities.

China Halts Shipments to U.S. of Tech-Crucial Minerals - A nasty trade dispute appears to have prompted Chinese customs officials to block shipments of rare earth minerals to the U.S.  The move underscores a deepening U.S. vulnerability because of its dependence upon China for tech-crucial rare earth minerals (also known as rare earth elements). Small but significant amounts of the minerals go into creating everything from PCs and cellphones to wind turbines and hybrid cars, as well as U.S. military technologies such as missile guidance systems.  This latest news came from three rare earth industry officials cited by the New York Times. The officials spoke on the condition of anonymity for fear of backlash from China.

China denies reports on halting export of rare earth -- China vehemently denied Wednesday that it has halted export of rare earth materials amid news reports that Beijing started blocking shipments of the crucial minerals to the United States and Europe following similar measures against Japan. "China will continue to provide rare earth to the rest of the world," the ministry of commerce said in a statement faxed to CNN. "At the same time, to protect exhaustible resources and achieve sustainable development, China will also continue to implement restrictive measures on the mining, production and export of rare earth." The New York Times, citing anonymous industry sources, earlier reported that Chinese customs officials had imposed broader export restrictions Monday morning.

European Union Can't Confirm China Is Blocking Some Exports of Rare-Earth - The European Union said it is unable to confirm reports that China is blocking exports of rare earths to the 27-nation bloc.  The EU “cannot confirm claims made by European industry officials in media reports of China blocking rare-earth shipments to the EU,” John Clancy, a spokesman for the European Commission, the EU executive in Brussels, said in an e-mailed statement from Brussels today. “The access to rare earths is a key concern for the European Commission and a key element of European industrial policy. We are therefore monitoring the situation closely.”  The New York Times reported today that the Chinese government has extended an embargo of Japan to include the U.S. and the EU. China, which mines more than 90 percent of the rare earths produced worldwide and cut its second-half export quota by 72 percent this year, denied the report

Has the global trade war started? German companies run out of some precious metals - This is an interesting story in Spiegel Online this morning. China has blocked the shipment of rare earth metals, a specialised metal for use in electrical engineering, as a result of which some German companies already suffer shortgages. China is a monopoly supplier or rare earth metals. Chinas has decided to cap the exports for the benefit of its domestic industry. The articles quotes geologists as warning of severely supply constraints ahead. The rare earth metals compromise 17 specific metals, with names like Lanthan, Europium, and Noedym, and are used for a very large number of technical equipment, including semiconductors, and computer screens. The best hope would be untapped rare earth metal depositories in Greenland and Canada.

Three ways of looking at Chinese economic statecraft - Beijing's stupid, short-sighted, self-fulfilling acts of economic coercion… Keith Bradsher reports on the latest move in Chinese economic statecraft: China, which has been blocking shipments of crucial minerals to Japan for the last month, has now quietly halted some shipments of those materials to the United States and Europe, three industry officials said this week.  Hat tip to Will Winecoff, who asks, quite reasonably, "What in samhell is China thinking?"  Assuming that the New York Times story is accurate, there are three ways to think about what Beijing is doing

Rare-Earth Furor Overlooks China's 2006 Industrial Policy Signal  - China’s curbs on rare-earth exports may owe more to a 2006 policy to create fewer, larger companies than a knee-jerk response to trade and territorial disputes.  A directive that year tagged mining among the pillar industries the government wanted state enterprises to dominate to enhance returns and global competitiveness. This year it started closing down private mining companies to consolidate the industry around a handful of producers led by Inner Mongolia Baotou Steel Rare Earth High-Tech Co.  Global repercussions from the overhaul drew attention in July when the government said it would cut export quotas 72 percent in the second half of the year. China accounts for more than 90 percent of worldwide production of the metals, used in components for Toyota Motor Corp. hybrid cars, Lockheed Martin Corp. radars and General Dynamics Corp. tanks.

Japan Says Economy Weakening As Strong Yen Hits - The Japanese government officially downgraded its view on the economy for the first time in over a year and half, as a strong yen and lower demand from elsewhere in Asia begins to cut into the core industrial sector.  "The economic momentum appears to be entering a lull," the government said in its monthly economic report issued Tuesday, downgrading the assessment for the first time since February 2009.  Briefing reporters on the results, Minister of State for Economic and Fiscal Policy Banri Kaieda cautioned that "the October-December period will be difficult."  The report is the latest indication that Japan's export-dependent economy is showing signs of weakness, although officials still contend that a modest growth path remains in place.

Japan, Once Dynamic, Is Disheartened by Decline - Few nations in recent history have seen such a striking reversal of economic fortune as Japan. The original Asian success story, Japan rode one of the great speculative stock and property bubbles of all time in the 1980s to become the first Asian country to challenge the long dominance of the West.  But the bubbles popped in the late 1980s and early 1990s, and Japan fell into a slow but relentless decline that neither enormous budget deficits nor a flood of easy money has reversed. For nearly a generation now, the nation has been trapped in low growth and a corrosive downward spiral of prices, known as deflation, in the process shriveling from an economic Godzilla to little more than an afterthought in the global economy.  Now, as the United States and other Western nations struggle to recover from a debt and property bubble of their own, a growing number of economists are pointing to Japan as a dark vision of the future.

NYT Japan Write-up Downplays Decades of Stimulus, Fails to ID Causes of Malaise - Only the New York Times could burn through 2,500 words about Japan's economy and not use the word "stimulus." The Old Gray Lady's Martin Fackler did refer to Fed Chair Ben Bernanke's just-announced second attempt to "stimulate" economy, but dodged the central lesson: The government created the Japanese people's malaise, and our government, despite Japan's experience, seems determined to do the same to us. The Times item is the first in a series, so I suppose Fackler may get around to it in subsequent reports, but it doesn't seem likely. Here are some paragraphs from Fackler's report that show how intent he and the Times were on not getting to the real root causes of Japan's nearly two-decade malaise (bolds are mine):

Deflating the Japanese Horror Story - The NYT devoted a lengthy piece to telling readers how bad things in Japan have been since its bubbles collapsed in 1990. It gets many things badly wrong. First and most importantly, Japan is actually considerably wealthier on average today than it was in 1990, contrary to the implication of this article. According to the IMF, per capita income is 16.4 percent higher in Japan today than it was in 1990. This is considerably less than the 21.5 percent growth in the UK over this period or the 36.6 percent increase in the United States, but it is still a substantial gain in living standards. It is also worth noting that Japan's gain in per capita income was accompanied by a considerable shortening in the ratio of hours worked to population (shorter workweeks and more retirees). However the biggest flaw in the piece is its obsession with deflation. Japan's has suffered from deflation in the last two decades, but the rate of price decline has always been very gradual. Only in 2009 did it even exceed 1.0 percent.

The NY Times is wrong about the Japanese economy - Rebecca Wilder - The NY Times writes Japan Goes From Dynamic to Disheartened. As highlighted by Dean Baker, this article grossly misrepresents the dynamics of the Japanese economy. I likewise read this article with some dismay, wondering was there any actual research done in preparation for this commentary? First, the reporter draws conclusions on the aggregate economy through anecdotal accounts of Japanese businesses and households. Here's one example: But his living standards slowly crumbled along with Japan’s overall economy. First, he was forced to reduce trips abroad and then eliminate them. Then he traded the Mercedes for a cheaper domestic model. As highlighted by Dean Baker, the Japanese standard of living, measured by real per-capita income listed in the IMF World Economic Outlook database, has grown markedly over the last two decades. Spanning the years 1990 to 2010 (f), Japanese real average income grew 17%, while that in the US grew 33%. The growth differential across the two countries is admitteldy large; but Japan's standard of living has not crumbled, rather grown.

When Rigorous Impact Evaluation Is Not a Luxury: Scrutinizing the Millennium Villages - Back in 2004 a major new development project started in Bar-Sauri, Kenya.  This Millennium Village Project (MVP) seeks to break individual village clusters free from poverty with an intense, combined aid package for agriculture, education, health, and infrastructure. The United Nations and Columbia University began the pilot phase in Bar-Sauri and have extended it to numerous village clusters in nine other countries.  They hope to scale up the approach across much of Africa.: Before we consider blanketing a continent with any aid intervention, we have to know whether or not it works.  For example, we have to know if different things have happened in Bar-Sauri than have happened in nearby Uranga, which was not touched by the project.  And we have to know if those differences will last.  Here I discuss a new research paper that I wrote with Gabriel Demombynes of the World Bank. We ask when it’s important to take great care in measuring a project’s impacts, and we illustrate one concrete case: the Millennium Village Project. We show how easy it can be to get the wrong idea about the project’s impacts when careful, scientific impact evaluation methods are not used. And we detail how the impact evaluation could be done better, at low cost.

Evaluating the Millennium Villages - World Bank - Here’s the quick summary of a new working paper I have co-authored with Michael Clemens of the Center for Global Development:When is the rigorous impact evaluation of development projects a luxury, and when a necessity? We study one high-profile case where it is a necessity: the Millennium Villages Project (MVP), an experimental intervention in rural Africa. We compare development trends inside versus outside the villages in three countries, and show that estimates of the project’s effects depend heavily on the evaluation method. The impact evaluation currently planned by the MVP is unlikely to yield adequate estimates of its effects on Africans in general, for five reasons we explain. But it is not too late to carefully measure the project’s effects, by making small and inexpensive changes to the next wave of the project.

Evaluating the Millennium Villages: A response - Millennium Villages Blog - The discussion around evaluating large-scale development projects is an important one. Michael Clemens and Gabriel Demombynes offer a critique of the Millennium Village Project (MVP) and its research methods. Their paper misunderstands the MVP’s aims and evaluation methods. We respond briefly here, to clarify some of those basic misunderstandings about the project’s goals and approaches to evaluation.

Beyond Being #2 - China has over ten times as many people as Japan which puts China's per capita income at less than one tenth of Japan's - hardly something to celebrate. Nevertheless, it is useful to look back at how far China has come, study the risks it faces in the future, and, if the country can overcome the existing challenges, explore how much further it can go in the next decade. China's economy took off in 2002 and since then nominal GDP has grown at 18.5%, and exports in dollars at 21.7% (I have extrapolated the economic performance for the remaining months of 2010). The nominal GDP has increased 2.9 times, and exports 3.8 times in USD and 2.9 times in RMB. Japan had a similar performance in the 1960's, Korea and Taiwan in the 1980's, but they are much smaller. In terms of scale, what China has done is unprecedented. When growth is sustained over many years, with the miracle of compounding there is a huge long-term impact. Twenty years ago China and India had about the same value in GDP, yet this year China's GDP is roughly four times that of India

The rising Chinese consumer - China's policies on currency and trade, seen by the United States and other Western countries as protectionist, are coming under increasing criticism. China's yuan policy is a potential flashpoint at the G20 meeting next month in South Korea, but Princeton University's JC de Swaan says a faster revaluation of China's currency is less likely to impact U.S. job growth than it is job growth in countries with more labor-intensive, low-value-added industries, such as India, Vietnam, and Bangladesh. U.S. companies are more concerned about China's preferential treatment of Chinese companies and lack of protections for intellectual property rights, he says. De Swaan also notes that the Chinese consumer is not as weak as some data suggests and will be a formidable force in the next five years. He stresses the benefits to foreign firms of improved infrastructure, more funding availability, and expanding financial services. "Ultimately China is an enormous opportunity for U.S. businesses and is becoming increasingly attractive over time."

Local Bonds and Breaking Public Debt Chains-_Caixin - China responded to the global financial crisis by initiating proactive fiscal policies and introducing an economic stimulus package valued at 4 trillion yuan. Under the stimulus plan, unveiled at the end of 2008 and effective for more than two years, the central government invested about 1.18 trillion yuan and local governments had to raise 1.25 trillion yuan. But because fiscal revenues declined incrementally, government borrowing became an important means for ensuring implementation of these proactive policies. Thus, over the past two years, local government debt has expanded sharply. The subsequent financial risk is worthy of close attention. For this reason, discussions about local government bonds as well as the possibilities and constraints of standardized fiscal management are currently important.

Rumblings of Reform in Beijing? - Over the past six weeks, China’s thin class of the politically aware has been gripped by a faint hope that maybe, against all odds, some sort of political opening might be in the cards this year. Monday’s conclusion of a key Communist Party meeting didn’t exactly crush this hope, but it did put things in a much more sober perspective.  The excitement began in late August, when Premier Wen Jiabao toured the southern Chinese boomtown of Shenzhen.Mr. Wen used the chance to advocate “political reforms” as well. Most of the time, political reform is a fairly empty phrase in China, The call was given de rigeur coverage by the party’s flagship newspaper, People’s Daily, but no one else picked it up. More pointedly, a subsequent speech by China’s top leader, Hu Jintao, failed to mention political reform, while the party’s top man for security issues, Zhou Yongkang, rejected political reform outright in a talk in the party’s leading theoretical journal, Qiushi. All this raised the question of whether Mr. Wen’s call really had been so hollow in the first place; if so, then why was everyone taking such care to ignore or rebut it?

Importing Paul Krugman: I Think I Get It Now - I was puzzled over Paul’s China criticisms. However, as a general rule of thumb, when you disagree with a Nobel Laureate on an area closely related to the one in which is received his prize, assume that the misunderstanding is on your part – not his. So, I have been quiet and kept reading. Now, I think I get and it comes in a few lines China isn’t fighting deflation — it’s fighting inflation, so the undervaluation of the yuan has to be accompanied by restrictive credit policies domestically. (China can separate exchange rate policy from domestic monetary policy because it has capital controls)The problem is not that Chinese monetary policy is too loose, it is that it is too tight. Paul is saying it has to be tight because of the way in which the Yuan to Dollar peg is maintained.When we generally think of pegging currencies, we think of monetary policies moving in tandem. China wants a cheap Yuan so when the Federal Reserve prints dollars, the Bank of China has to print Yuan. Saying the Yuan is too cheap is the same as saying the dollar is too expensive and of course we have a cure for that – print more dollars.

China Raises Rates – Krugman - As if to illustrate my point about the non-equivalence of the United States and China: China raises interest rates. So, the United States is pursuing an expansionary domestic monetary policy, which increases overall world demand; however, a side consequence of this policy is a weaker dollar. China is pursuing a weak-yuan policy; to counter the inflationary domestic effects of that policy, it’s pursuing a contractionary domestic monetary policy, reducing overall world demand. We’re doing the right thing; they’re making the world as a whole worse off.

China surprises the global markets - On Tuesday global stock markets got up on the wrong side of the bed thanks to news from an unexpected source: the People's Bank of China. The nation's central bank, analogous to the Federal Reserve in the U.S., announced it would raise rates on one-year loans and deposits by .25 percent, or 25 basis points. Central banks raise interest rates when they are concerned about inflation, or if they are worried that credit or the economy at large is expanding at an unsustainable pace. Higher interest rates make money more expensive, and thus should cut down on borrowing activity. China's economy is growing very rapidly, at a 10.3 percent annual rate in the most recent quarter, and inflation is running above the official target of three percent. For a country that has to make up as much ground as China does, no rate can be too fast. But housing markets, especially in coastal cities, have been raging. With observers fretting about bubbles, China's central bank has taken efforts to discourage real estate lending and choke off inflation. Raising interest rates is one way to do that.

PBoC rate hike announced The PBoC has just announced that it is hiking the one-year lending and deposit rates by 25 basis points. Here is what Bloomberg says: China raised its benchmark lending and deposit rates for the first time since 2007 after inflation accelerated to the fastest pace in 22 months. The one-year deposit rate will increase to 2.5 percent from 2.25 percent, effective tomorrow, the People’s Bank of China said on its website today. The lending rate will increase to 5.56 percent from 5.31 percent, it said.This is definitely good news.  It increases household income by raising the return on savings, which is a necessary part of the rebalancing process.  It (very slightly) reduces the incredible incentive to borrow money and splurge on manufacturing capacity, investment and real estate development.  And it signals that the PBoC is concerned about overinvestment. But it is a pretty small move and very late. The PBoC has been, very unwillingly I think, behind the curve on interest rates.  Most of us believe the PBoC has wanted to slow investment growth and to raise rates for a quite a while now, but it isn’t easy to do so.  One of the problems is that the economy – especially local and provincial governments and SOEs, not to mention the central bank itself – is so dependent on artificially low interest rates to remain profitable or viable, that even a small increase in interest rates can raise put pressure on cash flow and financial distress costs.

China Raises Benchmark Rates for First Time Since 2007 - China’s decision to raise interest rates to combat inflation may have the opposite effect by luring more capital into the world’s fastest-growing major economy.  The central bank yesterday unexpectedly raised borrowing costs for the first time since 2007, lifting the benchmark one- year lending rate to 5.56 percent from 5.31 percent. The deposit rate was increased to 2.5 percent from 2.25 percent.  China’s policy makers are trying to curb lending and prevent an asset-price bubble in a country that surpassed Japan this year as the world’s second largest economy. The danger is that higher rates will funnel speculative money from abroad into China, pushing property and consumer prices higher. The move comes days before Group of 20 officials gather in South Korea to discuss the global economy amid disagreements on whether the yuan is undervalued.

China Looking Inward With Rate Increase - China’s move to raise interest rates was seen in Washington primarily as a domestic-focused effort effort by the central bank to thwart inflation — which is running above U.S. levels — and head off a property price bubble, rather than as a response to criticism of China’s exchange-rate policy. With inflation around 3% and deposit rates below that, Chinese savers are tempted to put money elsewhere — such as real estate — to get a better return, said Nicholas Lardy, China hand at the Peterson Institute for International Economics, a Washington think tank. Every little upward move in deposit rates tempts some people to put the money in the bank instead. On the investment side, Mr. Lardy said the big state-owned enterprises aren’t likely to be affected, but private businesses and informal household-based businesses have been borrowing from the banks, and this increase taps the brake on that. “A very substantial amount of borrowing from the banks is interest-rate sensitive,” he said.

China's competitive devaulation - Rebecca Wilder - China took the world by surprise on Tuesday by raising bank lending and deposit rates for the first time since 2007. The story is, that restrictive monetary policy (i.e., raising rates) is needed to curb excessive lending, with an eye on mitigating inflation pressures. See this Bloomberg article to the point. While restrictive monetary policy is needed, raising rates is not the only tool available to policy makers: China could allow their currency (CNY) to appreciate. With support from the fiscal sector, a broad CNY appreciation would improve prospects for global growth ex China via import demand. Instead, the higher domestic rates may crimp domestic demand, perhaps reducing inflation, but contemporaneously lowering import demand. In my view, China's move yesterday should be viewed as competitive devaluation: reducing domestic prices in order to capture a competive edge. The currency war, as so-called by Brazil’s finance minister, Guido Mantega, is afoot; and China just confirmed its participation.

China: US has "Clearly a Double Standard" on Exchange Rates – It sounds hard to believe, but apparently China has detected a US “double standard,” whereby the US is demanding China strengthen its renminbi currency while itself intentionally weakening the dollar through money printing. These days, China is almost getting a little too good at calling it like it sees it. According to the AFP “The criticism of US monetary policy and its weakening dollar comes as Washington maintains pressure on Beijing over its yuan exchange rate, which US lawmakers claim is grossly undervalued and causing global trade imbalances.“US policies of ‘printing money’ and holding interest rates near zero were the main cause of the currency dispute, said a commentary by the Xinhua news agency, carried Monday in the central bank-backed Financial News. ‘In the eyes of some American politicians it is entirely reasonable to print money and keep the dollar exchange rate low, but it is illegal for other countries to protect their economic and financial security by pushing down exchange rates,’ it said. “‘This is clearly a double standard.’” OK, granted, it sounds a bit like a double standard. However, at least the US is standing firm in its stance, as opposed to equivocating on the position.

PBOC's 'Vicious Cycle' Worsened by Fed, Yu Says: China Credit -- Moves by the U.S. Federal Reserve to print cash would spur capital flows into China, hampering the Asian nation’s efforts to damp inflation and counter yuan gains, said Yu Yongding, a former central bank adviser. The People’s Bank of China sold a net 209.7 billion yuan ($32 billion) of bills during the last nine months, following net redemptions of 579.5 billion yuan in 2009. It raised the reserve-requirement ratio last week for six banks, including the largest four, by half a percentage point for the fourth time this year, a move China Securities Co. estimated will cut lending by 170 billion yuan. Cash is pouring into China to profit from economic growth that’s averaged more than 10 percent for the past five years and accelerating yuan gains following the end in June of a two-year peg. The nation’s foreign-exchange reserves jumped by $100 billion in September to a record $2.65 trillion, the biggest increase since Bloomberg began tracking the data in 1995, and the inflation rate hit a 22-month high of 3.5 percent in August.

The Empire Strikes Back: China Daily Warns About Currency War, Blames Dollar - You didn't think China was just going to do the rockaway and lean back, lean back, lean back. Nope - China Daily says: "A currency war is spreading as the dollar's value against major world currencies has continued to decline in recent days" and calmly confirms what everyone esle knows: "It is the dollar that triggered the currency war. Seemingly a market move, the depreciation of the dollar is actually active." Check to you, Tim Geithner and your currency manipulation report. What is remarkable, is how simply and accurately CD writer Li Xiangyang captures absolutely everything that Bernanke is trying to achieve.From China Daily:

Dollar-triggered currency war harms both US and global economies: Chinese scholars (Xinhua) -- The latest spate of worldwide currency turbulence has its root in U.S. monetary policies, and will not only hamper the global economy but backfire on the U.S. one if not stanched, two Chinese researchers said Friday. During recent weeks, a number of economies, including Japan, Brazil and South Korea, have scrambled to launch direct or indirect intervention measures to stop their currencies from rapidly appreciating against the U.S. dollar. The still ongoing contention came to the fore when Washington, in the wake of the latest global financial crisis, accused Beijing of deliberately keeping its currency undervalued despite the fact that the yuan has appreciated 22 percent in the past five years.

Richard Alford: The Labor Market, the Trade Deficit, And The 800 Pound Gorilla - By Richard Alford, a former economist at the New York Fed..Yves here. One thing I have noticed on posts that discuss the US labor market and trade is reflexive and frankly somewhat dogmatic defeatism. The position seems to be “China and Bangladesh have such cheap labor, there is no way we can compete.”  This view is simplistic. First, in capital intensive industries, direct labor is less than 10% of final product costs. So things like flexible, responsive manufacturing (ie, adding value to the customer by being more adaptive, minimizing inventory losses and order lead times) can overcome the impact of labor cost differentials, as can more mundane factors, like physical proximity to the end customer. And there are areas where the US still has a cost and technology lead, such as in coated paper (which believe it or not, unlike newsprint, is fussy to produce). Second, much of the low level labor cost savings of offshoring is considerably offset by greater managerial costs (more coordination needed) and various other offsets (longer lead times, which reduce flexibility, greater transit times, higher shipping and inventory financing costs). Third, US tax policies actually encourage offshoring.

The “Gathering Storm" warning on global economy - A group of top Fund Managers says the global economy is risking Doomsday, much worse than the events of the past three years. Eighteen investment experts have published their views in the book “The Gathering Storm." Business RT spoke with co-author Patrick Young to ask what governments and central banks are doing wrong.

Lie of the Tiger - The United States also has less leverage with China today than it did with Japan then. Washington needs China to deal with transnational threats like Iran, North Korea, and global warming, not to mention financing the mounting U.S. government debt. So Obama has been less able and less willing to act -- except, that is, when he is making inexplicable concessions. During his trip to China last November, for example, Obama pledged that the United States would assist Beijing in developing its own commercial jet, though aerospace technology is one of the few U.S. strategic industries that still exports to China. But even smarter tactics might not be enough to regain lost ground. For though Reagan's aggressive policies were enough to stop the bleeding, they weren't enough to make the U.S. economy genuinely competitive again. Most U.S. producers never recovered what they lost in the 1980s. In fact, the question of just who beat whom in the last great trade war has no easy answer. Consider this: Japanese GDP growth from 1990 to 2000 -- Japan's so-called lost decade -- was just 0.2 percent less than America's when you account for increases in the U.S. population.

We're Not China - Krugman - In various comments and other places I keep seeing people compare European complaints about the weak dollar to American complaints about the undervalued renminbi. It’s a false equivalence, which should be obvious if you think about the basics of the situation. What the United States is doing is an expansionary monetary policy in the face of a depressed economy and threats of deflation; what else do you expect us to do? Now, one effect of that policy, if it isn’t matched abroad, is a weaker dollar — but that’s not the goal of the policy.  Beyond that, the overall effect of quantitative easing in America is expansionary for the world economy as a whole: expansionary in the United States, and ambiguous for the rest of the world. (It’s ambiguous because there are two effects: the weaker dollar tends to reduce the US trade deficit, but a stronger US economy tends to increase the deficit, with the net effect uncertain.) Now compare this with China’s situation. China isn’t fighting deflation — it’s fighting inflation, so the undervaluation of the yuan has to be accompanied by restrictive credit policies domestically.The overall effect of the policy is therefore to reduce, not increase, world demand — and the effect on foreign economies is clearly negative.

China-Bashing - I'm back in St. Louis, and Paul Krugman is at it again. He discusses the recent marine dispute between Japan and China, then gets to the meat of the matter:  Major economic powers, realizing that they have an important stake in the international system, are normally very hesitant about resorting to economic warfare, even in the face of severe provocation — witness the way U.S. policy makers have agonized and temporized over what to do about China’s grossly protectionist exchange-rate policy. China, however, showed no hesitation at all about using its trade muscle to get its way in a political dispute, in clear — if denied — violation of international trade law. Note that Krugman is careful here to use the term "economic warfare." However, it's hard to draw the line between economic warfare and actual guns-and-bullets warfare. The United States, being a "major economic power" has hardly been hesitant in the past to use force to further its own economic interests.

A pundit in search of a problem - I HONESTLY don't understand why Paul Krugman is so determined to promote a policy of confrontation between America and China. I can't imagine why he thinks good will come of an attempt by one proud superpower to coerce another proud superpower into doing what the former wants. But determined he is, so much so that he's willing to make mountains out of rather modest piles of earth. Rare earth, in the latest case. China currently controls most of the world's production of rare earth minerals, which are useful in the making of many technology products. It has limited export of these materials, sending prices for the minerals soaring. And in some cases, as recently over a dust-up with Japan, China has been willing to restrict their export entirely. Mr Krugman sees a great threat in this

US has 'double standards' in currency dispute: China - China's state media on Monday accused the United States of "double standards" and blamed the loose monetary policies of the world's biggest economy for triggering global currency tensions.The criticism of US monetary policy and its weakening dollar comes as Washington maintains pressure on Beijing over its yuan exchange rate, which US lawmakers claim is grossly undervalued and causing global trade imbalances.US policies of "printing money" and holding interest rates near zero were the main cause of the currency dispute, said a commentary by the Xinhua news agency, carried Monday in the central bank-backed Financial News."In the eyes of some American politicians it is entirely reasonable to print money and keep the dollar exchange rate low, but it is illegal for other countries to protect their economic and financial security by pushing down exchange rates," it said."This is clearly a double standard."

Too much focus on the yuan? - Vox EU: China’s trading partners have long criticized the country’s policy of maintaining a weak renminbi. These complaints have intensified in the face of continuing high unemployment and slow recovery in high-income industrial countries (see recent contributions by Caballero 2010 and Huang 2010). Threats of trade sanctions by the US Congress have resulted in periods of measured and limited renminbi appreciation – most recently, a 2.3% rise against the dollar between early September and mid-October 2010. But such gestures by the Chinese authorities fall far short of the 20%-or-better, maxi-revaluation demanded by China’s critics in the US and elsewhere. International tensions have intensified as a number of other emerging market economies, following China, are likewise resisting currency appreciation. But promoting domestic economic growth at the expense of other countries through currency devaluation raises the fear that a “currency war” escalates into a war of administrative trade barriers that would severely harm the international trading system.

China's not the villain if the West tries to debase its debt through QE - The annual meetings of the International Monetary Fund in Washington are supposed to generate some kind of resolution. Instead, all we got was posturing and a slew of pious speeches saying that "co-operation is crucial".  What is now clear is that some of the world's leading economies are deliberately debasing their currencies in order to make their exports more competitive and lower the real value of the massive debts they owe the rest of the world.  Tempers are rising, as are protectionist sentiments. Across the globe, governments are talking about "aggressive tariff barriers" and "trade retaliation" - language that hasn't been used by mainstream peacetime politicians since the mid-1930s.  Yet instead of knuckling-down and addressing the urgent task of building some kind of an agreement to contain a fully-blown currency conflict, world leaders last Sunday urged the IMF only to "study the issues", and "play a stronger role in monitoring how the policies of each member state affects the others".

Why China resists currency reform - The chorus of voices criticizing China's stubborn resistance to reforming its controversial currency regime and allowing the yuan to appreciate keeps getting louder. Outrage in Washington has been growing, the European Union recently called on China to let the yuan rise, and even officials in usually polite Japan spoke out against China's stance last week. China is sure to take a diplomatic beating at the G20 summit in Seoul in November. China needs currency reform to aid its own economic development as well. But China continues to scold the world, insisting that the value of the yuan is nobody's business but China's. And although the yuan has started slowly creeping upward in value, it's still risen a mere 2.2% against the U.S. dollar since a two-year de facto peg to the greenback was lifted in June. Why does Beijing refuse to bow to the inevitability of yuan reform? China wants its currency to become a major force in world trade and finance, and the only way to achieve that is by making the yuan's value more representative of market forces. So it's really just a matter of when, not if, China will let the yuan free. In the meantime, Beijing's central bank keeps amassing more and more dollars it doesn't want in the process of resisting the appreciation of the yuan. Currency reserves topped $2.65 trillion in September.

Shaky China - IN MY view, an aggressively antagonistic approach to China is unlikely to get America what it wants, and is distressingly likely to lead to uncomfortable side effects. That doesn't mean that China's current politico-economic posture is a laudible one, or even that it makes much sense. China has been overreacting in damaging fashion to a number of recent incidents. As Dan Drezner notes, China appears to be playing a bad hand of diplomatic poker or taking an extremely short-sighted view of things. Or, he also says, the erratic path of Chinese diplomacy could have a lot to do with Chinese domestic politics: [T]his could just be all about domestic politics. Bradsher notes that the decision was made after a Central Committee meeting. It's possible that as the currency wars heat up, and as the U.S. starts complaining to the WTO, there was a need to assuage some nationalist outrage. Of course, no one really knows what Chinese domestic politics looks like, so who the hell knows how much validity to give to this argument.

A currency war the US cannot win - A new currency war is looming. The US Congress has already passed a bill for imposing currency import tariffs, although becoming an actual policy is still a long shot. Tim Geithner is urging the IMF and the international community to play more active roles in promoting more flexible exchange-rate regimes. Martin Wolf, following up the ideas of Gros (2010), prefers capital market restrictions, such as preventing China from purchasing US Treasury bills, as a way of avoiding trade sanctions the fight with ‘stubborn’ China (Wolf 2010). Fred Bergsten proposed countervailing currency intervention for the US to sell dollars to offset China’s intervention in foreign exchange markets (Bergsten 2010). And Paul Krugman has long advised the US government to declare trade war with China (Krugman 2010a, 2010b).This column argues that the US did not emerge victorious from the last currency war with Japan, and against China the chances are even slimmer. Instead the upcoming G20 meeting should focus on a broad range of structural adjustments from both sides.

“A currency war the US cannot win” - Yves here. This post cites a number of recent Western commentaries on China’s currency policies; I suggest, for one stop shopping, you read Martin Wolf comment, “Why America is going to win the global currency battle.”  There are several points in the argument below that are curious, to say the least. One is the notion that the US came out the loser as the result of forcing the yen up through the Plaza accords. If this was so terrible for the US, why is China resisting taking the same moves now? I’d say the contrast between the reasonably prosperous, if unsustainable two decades starting in 1986 in the US, versus the bubble turned to stuck-in-the-mire bust for Japan says any Japanese victory way Pyrrhic. Second is the contention that the US can’t influence the level of the renminbi. Narrowly correct, but irrelevant. If the US forces the dollar down, China will have to keep buying more dollars to suppress the remninbi. Its foreign exchange purchases are now so large that it can’t fully sterilize them, so a bigger level of purchases will generate even more inflation. A fixed currency peg with rising prices means higher export prices and thus worse competitiveness. Third, he argument the US needs China to fund its deficit is also incorrect (see our many posts on modern monetary theory or MMT; the constraint on spending is inflation, which is no where in sight right now, in fact, the Fed is so desperate to create some inflation that it is about to embark on QE).

Currency wars and (macro) competitiveness - With the cover page of the Economist [1] [2] worrying about currency wars, and various analysts arguing whether the US can or cannot win such a "war" (see Naked Capitalism for a discussion), I thought it would be useful to see where we now stand, in terms of "competitiveness", as understood by open economy macroeconomists. Competitiveness - Open economy macroeconomists typically defined competitiveness as the relative price of traded goods. Below, I've plotted the trade weighted value of the dollar against a broad basket of currencies in nominal (blue) and real (CPI deflated) terms (red), as measured by the Federal Reserve. Notice that by this definition, "up" is an appreciation.

Currency War Is Solved With One Trip to Bangkok - That’s where the “currency war,” which they naively believe they can avoid with their handiwork, is on display. Just as Thailand was on the front lines of Asia’s 1997 crisis, it’s being flooded by liquidity from Washington, Tokyo and Frankfurt.  On Oct. 12, Thailand removed a 15 percent tax exemption for foreigners on income from domestic bonds, joining South Korea and Brazil in curbing hot-money flows and currency gains. The former risks overheating, the latter threatens exports.  An obvious truth that policy makers missed in Washington is apparent in spades in Bangkok: the increase in currency activism means things will get even uglier as markets go further awry.  Think of markets as a giant game of Whac-A-Mole. Officials from Beijing to Brasilia stand at the ready, hammers in hand, to whack down any spike in exchange rates. The trouble is, everyone is whacking at once. When everyone tries to tame currencies simultaneously, there will be few, if any, winners.

Money Flooding Asia Poses `Instability' Threat, IMF Head Says in Shanghai - Capital flooding into Asia could lead to excessive exchange-rate moves, asset bubbles and financial instability, Dominique Strauss-Kahn, the head of the International Monetary Fund, said in Shanghai today. Some flows “can clearly be destabilizing,” Strauss-Kahn said in a speech distributed at a briefing after a conference sponsored by the IMF and co-hosted by the Chinese central bank.  Emerging economies have complained about near-zero interest rates in the U.S. leading to capital flooding their markets, while U.S. and European policy makers have criticized Asian governments for holding their currencies down to aid exports. Strauss-Kahn didn’t refer to the yuan today.

Korea strives to contain fallout of currency war - The Korean government is working on policy measures to minimize the impact of the ongoing currency battle on exporters, officials said Tuesday. Led by the Finance Ministry and other agencies, the work focuses on feasible policy measures that can be imposed to widen the share of exports by smaller companies. It includes sector-by-sector analysis of the effects of volatile currency movements, which its aims to addressed by diversifying buyers and improving conlomerate-subsidiaries relations.

Concerns Overseas About Quantitative Easing - Separate from the debate in the U.S. over whether the Fed should resume asset purchases, concerns about the program are growing overseas. In Korea, the discussions about further quantitative easing has given fuel to discussion of some capital controls. The following quote is from an editorial in South Korea’s largest newspaper: “The U.S. continues to print dollars to boost its economy, while Europe and Japan are also racing to expand money supply, causing speculative capital to hunt for profits in emerging markets in Latin America and Asia. This has prompted emerging countries to change their policy from simply watching out for asset bubbles and inflationary pressures to actually blocking the influx of foreign capital… “Korea’s financial markets are open and remain a prime target for speculative foreign capital to make quick profits. Policies to stem the tide must be made quickly. As the host of the G20 Summit, Korea cannot be seen to intervene in the foreign exchange market at will. But it must be ready to implement controls on foreign capital that other countries are enforcing, including scrapping of tax breaks on profits from sovereign bond investments by foreigners. The country must not let its status as the host of the G20 Summit hinder its capacity to deal with a crisis.”

South Africa's Gordhan Warns of Global 'Trade War' - South African Finance Minister Pravin Gordhan said the global economy could be heading toward a “trade war” as countries compete to weaken their currencies. “What we have right now is a serious danger of competitive devaluations,” Gordhan said in a speech to the Consumer Goods Council in Johannesburg today. “If we continue on this road, it will result in a trade war. And then each country is going to put up barriers. Free trade is something we’re likely to lose.” Emerging markets have seen a flood of foreign capital inflows into their economies this year as investors seek high- yielding assets. That’s prompted Brazil, South Korea, Turkey, Thailand and other emerging markets to take action to curb their currencies in what Brazil’s Finance Minister Guido Mantega described on Sept. 27 as a “currency war.”

Emerging markets at risk from a gigantic bubble - By orchestrating a massive appreciation of the yen in the mid 1980s, the US condemned Japan to decades of stagnation and ended the challenge to its own economic hegemony. Effectively, Japan was forced to commit financial hara-kiri.  This theory, once confined to Japan’s nationalistic fringe, is now being used by the Chinese authorities to justify their resistance to a substantial revaluation of the renminbi. By so doing they are misdiagnosing Japan’s woes and misperceiving the true threat to their own economy. The threat to China does not lie in an appreciating currency, but elsewhere.  Here’s what happened in the case of Japan. In the Plaza Accord of 1985 the G7 attempted to address global imbalances – worrying then, but small beer by today’s standards – by “encouraging” significant changes in currency parities. They got what they wanted. The yen took off and never looked back.

Satyajit Das: Weapons of Choice in Trade Wars - During the European debt crisis, in a matter of days, the dollar strengthened by around 10%. The weakness of the Euro and resultant appreciation of the Renminbi by over 14% reduced Chinese exporter’s earnings and competitiveness. Some of the moves reversed equally quickly when markets stabilised. Volatility of currency exchange rates has increased markedly in recent months. To paraphrase Oscar Wilde, the US dollar has no enemies, but is intensely disliked by its friends, especially key investors like the Chinese. The Euro is now the “Drachmark” (a derisory combination of the former Greek Drachma and German Deutschemark); investors have been left holding a currency underpinned by unexpected German extravagance and Gallic and Mediterranean rectitude. Despite sclerotic growth, public debt approaching 200% of GDP and a budget where borrowing is greater than tax revenues, the Japanese Yen has risen to its highest level against the dollar in 15 years. China is even switching some of its currency reserves into Japanese government bonds with returns only apparent under powerful electron microscopes. Amongst currencies, it is simply a race to the bottom.

From the Great Moderation to the global crisis: Ten years of exchange-market pressure - Exchange-rate policy is emerging as one of the most controversial issues from the global crisis. This column looks at how emerging markets have responded to exchange-rate pressures over the last decade. Among its findings is that emerging markets’ hoarding of international reserves is far better explained by financial factors than by trade concerns, both before and during the crisis.

G20 to mull current account targets: U.S. aide-- Finance ministers and central bank governors of the Group of 20 nations will discuss setting targets for current account deficits at their meeting in South Korea this weekend, a senior U.S. Treasury official said Wednesday. "That sort of conversation will be on the table," the official said. The officials said the U.S. would push the G20 nations for a stronger framework for cooperative action" in setting economic policies. The talks will focus on the "competitive non-appreciation" of currencies by some countries, the official said. The U.S. has been turning up the heat on China to allow its currency to strengthen. An agreement to reform the International Monetary Fund and give emerging markets more voting power "is within reach," the official said

Geithner calls for cap on trade surpluses - Washington has taken a fresh line of attack in attempts to get Beijing to allow its currency to appreciate, calling for the G20 group of leading economies to agree a cap on current account surpluses. The US has long sought faster and sustained appreciation of the renminbi but Beijing has consistently resisted specific targets. In order to break this impasse, Tim Geithner, US Treasury secretary, said G20 finance ministers, meeting in the South Korean city of Gyeongju on Friday, should commit to limit trade deficits and surpluses that create imbalances in the global economy. “G20 countries with persistent surpluses should undertake structural, fiscal and exchange rate policies to boost domestic sources of growth and support global demand,” Mr Geithner wrote in a letter to G20 ministers that was circulated among reporters.  Still, much of Mr Geithner’s language was tailored to the challenge posed by the renminbi. By building up domestic demand and increasing imports, China would be inclined to allow a faster strengthening of its currency.

Geithner Pushes for Cap on Current Account Surpluses -  Yves Smith - In all honesty, the news report out of the G20 strikes me as such a weird idea that I don’t know what to make of it. From the Financial Times: During an all-night meeting in South Korea of finance ministers from the G20 group of countries, the US called on nations to cap current account surpluses at an unspecified share of national income, a new tactic to encourage faster appreciation in the Chinese renminbi. Let’s parse this a bit. The impulse behind this proposal is sound. Countries that run persistent, large trade surpluses strain international trade and financial operations. And before you deem this to be a US centric view, Keynes worried long about the very same issue. The problem is the idea of a cap. How pray tell do you enforce it? What are the penalties for non-compliance? There are lots of international agreements that commit to lofty goals but have little follow through, starting with the Kyoto accords. The Geithner plan, by contrast, goes straight to a mechanism rather than stating a general goal, which might seem preferable, but I cannot fathom any way the particulars of an idea like this could be negotiated successfully, much the less made operational.

Today's US G-20 Gimmick: Geithner on CA Limits - Here's more from the white man & forked tongue department: Perhaps unsurprisingly, the Yanks are first out of the chute prior to this weekend's G-20 gathering in South Korea with yet another plan to get its way. Instead of focusing on undervalued currencies--which it in any case is wont to let go of as you'll soon see in the second paragraph below--their latest tack is calling for limits on the external imbalances participating states can run (got that, China?) There's also a continuation here of the longstanding call to use the IMF as a tool to beat other countries into submission via enhanced surveillance that, surprise, developing countries are not particularly keen on. Aside from having limited participation because of limited IMF reform of voting rights, where's the joy in giving the America a multilateral stick to bash your head with over "currency manipulation"? At any rate, here is the text of the letter Geithner sent to other G20 member economies in its entirety since it's relatively brief:

Thank G20 It's Friday! "Do as I say, not as I do - or say…" That’s the word from US Treasury Secretary Tim Geithner as he seems to forget that people follow him around with notepads and microphones as he begins the game of "Survivor - Global Currencies" although Tim seems to be following the very interesting strategy of trying to be voted out first so maybe there’s a method to his madness after all.   Like any good player, Timmy tries to form alliances and keep the other players off balance.  On Wednesday, he told Brazil’s Finance Minister, Guido Mantega, that the U.S. won’t allow the Dollar to weaken.   After telling Guido he had a hidden immunity idol that would protect the Dollar, Tim walked down the beach looking for others to form an alliance with and the cameras followed Mantega to one of those "private chat" areas, where he explained why he had formed an alliance with Timmy: He said he doesn’t intend to allow a devaluation of the dollar.  He assured me that the policy is not to weaken the dollar, but on the contrary, to strengthen it.

G-20 Cops Out on Currencies, CA Balances - Continuing from the previous post, there has been some lip service paid to what must be done about "international currency war" and global economic imbalances in the G-2o communique. For the former, currencies have been mentioned for the first time, though chronic surplus-running countries have repeated my point that helicopter dropping paper money alike what's being done by a certain North American country is indeed tantamount to declaring currency war. For the latter, there were no numerical percentage targets given to running a current account deficit or surplus as suggested by US Treasury Secretary Tim Geithner (plus/minus 4%). Supposedly, they're to be investigated and discussed further, but there's no definitive timetable. In other words, it's been left alone for now. As for using the IMF for beefed up macroeconomic surveillance, that unsurprisingly went untouched. So, it's likely same old, same old. Continue as you were--America certainly appears to have no intention of laying up on "quantitative easing," while chronic surplus-running countries take it as a reason not to take US overtures seriously.

An American whine - Paul Krugman recently did a post mocking those Europeans who complain about the Fed actually trying to do its job.  He quoted a European policymaker whining that monetary stimulus in the US would depreciate the dollar and thus hurt Europe.  Here’s Krugman’s response: In other words, how dare you act to protect your economy from deflation and double-digit unemployment? By doing so, you make our inappropriate tight-money policy even more destructive! I love it.  But at the same time it’s important to recall Bryan Caplan’s admonition that we Americans are much too quick to perceive harm inflicted by others, and reluctant to recognize when we are the villains.  So I tried to re-work the quotation, so that we could see how our complaints might appear to someone living in China: In other words, how dare you Chinese act to protect your economy from deflation and double-digit unemployment by refusing to revalue the yuan? By doing so, you make our inappropriate tight-money policy even more destructive!

Big Mac Index: Euro 30% Overvalued, Swiss Franc 80% - Economist - A weak currency, despite its appeal to exporters and politicians, is no free lunch. But it can provide a cheap one. In China, for example, a McDonald’s Big Mac costs just 14.5 yuan on average in Beijing and Shenzhen, the equivalent of $2.18 at market exchange rates. In America, in contrast, the same burger averages $3.71. That makes China’s yuan one of the most undervalued currencies in the Big Mac index, our gratifyingly simple guide to currency misalignments, updated this week (see chart). The index is based on the idea of purchasing-power parity, which says that a currency’s price should reflect the amount of goods and services it can buy. Since 14.5 yuan can buy as much burger as $3.71, a yuan should be worth $0.26 on the foreign-exchange market. In fact, it costs just $0.15, suggesting that it is undervalued by about 40%.

The Wars of Austerity - I have become increasingly less hopeful about prospects for a rapid recovery from the global recession. Coordinated fiscal expansion ($5 trillion) by the world’s leading governments arrested the downward slide, but failed to produce a healthy rebound. The current frustration is summed up by The Economist’s recent cover headline: “Grow, dammit, grow.”There are two reasons to be pessimistic. The first reason is the premature withdrawal of the “stimulus” measures agreed upon by the G-20 in London in April 2009. All the main countries are now committed to slashing their budget deficits. The second reason is that nothing has been done to address the problem of current-account imbalances. Indeed, the talk nowadays of currency wars leading to trade wars is reminiscent of the disastrous experience of the 1930’s. The problem of current-account imbalances is closely linked to the existence of a world savings glut. One part of the world, led by China, earns more than it spends, whereas another part, notably the United States, spends more than it earns. Provided the surplus countries invest in the deficit countries, these imbalances pose no macroeconomic problem.

PM Putin set to approve $59 bln Russian asset sale (Reuters) - Russia is fine-tuning a plan to sell off $59 billion in assets, Prime Minister Vladimir Putin's spokesman said on Thursday after officials unveiled key details of the Kremlin's biggest privatisation drive in a over a decade. Russia's leaders need money to plug a hole in the budget and ratchet up growth ahead of the 2012 presidential election, in which former president Putin has hinted he may stand. Putin, still seen as Russia's paramount leader, chaired a closed meeting of senior ministers late on Wednesday at which the draft plan to raise 1.8 trillion roubles ($59 billion) by selling off 900 state stakes was discussed. "The document requires further work and the working process is continuing,"

Sovereign-Wealth Funds Slow Investment - Sovereign-wealth funds dramatically slowed their pace of investing in the first half of this year. Investing by SWFs came to $22 billion in the first half of 2010, according to a new report from Cambridge, Mass.-based consulting firm Monitor Group and Fondazione Eni Enrico Mattei in Venice, Italy. That was down from $58 billion in the second half of last year. Those figures don’t include transactions by the government-owned investment vehicles that haven’t been publicly reported on. The slowdown hints that worries over sluggish economic growth and the possibility of a double-dip recession prompted SWFs to rein back investment.

Euro Exchange Rate Isn’t Key Factor in Competitiveness - The euro’s exchange rate isn’t the most important factor influencing the region’s global competitiveness, and European Union governments should concentrate instead on domestic, structural reforms, according to a European Central Bank research paper published Monday. The paper, written by ECB staff members Filippo di Mauro, Katrin Forster and Ana Lima, said the euro zone’s loss of market share in global exports had as much to do with unrelated factors, such as the region’s specialization in certain products and the fact that a large share of its exports go to countries that have been badly hit by the crisis. The authors acknowledged that cheaper currencies had helped the U.K. and the U.S. to stabilize and then regain market share across the globe. However, they said: “Notwithstanding this aspect, the extent of market share deterioration for the euro area compared to its major trading partners points to the critical importance of other, non-price factors.”

ECB’s Trichet Rejects Weber’s Call to End Bond Purchase Program - European Central Bank President Jean-Claude Trichet rejected Bundesbank President Axel Weber’s call to end the bond purchase program that has provided a lifeline for European governments and banks trying to shore up their finances.“This is not the position of the Governing Council, with an overwhelming majority,” Trichet said when asked to respond to Weber’s Oct. 13 call for an end to the program, according to the a transcript of an interview published yesterday in Italian newspaper La Stampa. Weber, who also sits on the ECB’s 22-member decision-making council, said the risk of “exiting too late” from the emergency measures was greater than pulling out too soon. “Trichet is sending a clear signal to Weber,”  “The majority seems to favor a safety belt option for the moment and isn’t comfortable with sending conflicting signals to the markets.”

Trichet distances himself from Weber – and applauds Draghi  - ECB’s president says governing board has a different view than Axel Weber on bond purchasing programme; he applauds Italy’s handling of the economic crisis, and the Bank of Italy’s role as a bank supervisor; Wolfgang Munchau wonders why Axel Weber would want the job of ECB president, as he is moving himself outside the consensus; Italy and France have raised reservations about the European Commission’s proposals for stability pact reform; Portuguese opposition links support to budget on pledges not to raise taxes; French trade unions wonder about how to exit from the conflict; 10-year spreads in the eurozone have narrowed, and the euro has weakened marginally against the dollar; Fed officials, meanwhile, are seriously debating whether to adopt temporary price level targets. [more]

Which man gets in the way of Axel Weber? - A senior German official had this to say about the succession to Jean-Claude Trichet at the helm of the European Central Bank: “Only one person can now stand in the way of Axel Weber, and that is Axel Weber.” Last week, it looked as though Axel Weber got in the way.   I disagree with almost everything he has been saying in recent months, but I cannot hide my respect for his gumption.  Mr Weber wants the ECB to end the bond-purchasing programme, which he alone had voted against. The ECB will not follow him. He advocates an early exit from low interest rate policies – and I am not sure he will prevail on that point either.  Perhaps most shockingly, he favours the eventual phasing out of the European Financial Stability Facility at a time when a consensus is emerging that the EFSF should evolve into a permanent institution of the European Union.

ECB Should Renew Monetary Support If Recovery Stalls, IMF Says - The European Central Bank should remain poised to extend non-conventional policies if the euro region’s economic recovery stutters, the International Monetary Fund said. “The ECB should remain ready to adjust the time horizon of its low-interest rate policy and re-deploy extraordinary monetary measures if the recovery should stall unexpectedly,” the Washington-based lender said today in its latest regional economic outlook for Europe.  The comments come after ECB President Jean-Claude Trichet and Bundesbank President Axel Weber publicly disagreed over whether to end the central bank’s bond-purchase program, which was first implemented in May to counter the region’s sovereign- debt crisis. Weber on Oct. 13 called for an end to the program that has provided a lifeline to European governments and banks trying to restore their finances, an idea Trichet rejected.

“Habemus Novum Pactum”: A political stability pact in exchange for an uncertain Treaty change on voting rights withdrawal - Germany was desperate to sell the agreement as a victory, but here are the facts: A decision to impose sanctions must be preceded by a vote in the European Council on the basis of QMV; once that the vote is taken, the procedure becomes semi-automatic, but sanctions can only be imposed after a delay of six months; France in turns pledged to support Germany’s request to change the Treaty to allow a temporary suspension of voting rights for deficit sinners; Jorg Assmussen claims that Germany prevailed with its automaticity request; Tremonti says that the pact is, and remains, political at its heart, and it also more flexible in its definition of fiscal sustainability than before; reports suggest that Olli Rehn was fighting against this agreement; von Rompuy presented his Task Force report, emphasising macroeconomic policy co-ordination, and early bubble warning detection systems – with the possibility of sanctions; the euro strengthen marginally, while bond spreads eased further; an ECB research paper says exchange rate not the most important part of competitiveness; French strikes against pension reforms intensify ahead of critical Senate vote; Irish government gets more realistic about growth forecast, doubling the savings required to get deficit below 3% by 2014 ; an Irish MEP, meanwhile, has asked some uncomfortable questions about the stress tests. [more]

“The president of the ECB does not subscribe to all elements of this report.”  - FT has a memo from Trichet’s office, which says Trichet does not like the deal on the stability pact; leak shows that there a serious differences over policy at the top level of the eurozone; Merkel has obtained an assurance from Sarkozy to support the idea of replacing the EFSF with a tough anti-crisis mechanism (in addition to a treaty change to withdraw voting rights, as already reported); vote on French pension reform is delayed, as protests continue; in Portugal, uncertainty over the budget continues; Commission proposes new EU watchdog to deal with cross-border banks in trouble; Commission also proposes EU-wide taxes to fund EU budget; Berlusconi and Tremonti plan a big reform of Italy’s budget process; James Hamilton consider the arguments against QE, and finds some of the convincing; a Spanish municipality, meanwhile, has become the first to suspend payments to its debtors. [more]

Debt Woes May Damp $3 Trillion Corporate Refinancing in Europe - Government debt concerns may hinder efforts by companies and banks in Europe to refinance more than $3 trillion of bonds through 2013, Standard & Poor’s said. Corporate borrowers may also be crowded out by sovereign fundraising in the region, while slowing economic growth may persuade banks to hoard cash rather than lend it on, S&P analysts led by Diane Vazza in New York wrote in a report published today. There’s also the risk that rising interest rates will hurt financial issuers, which account for 71 percent of bonds due in the next three years, according to S&P.  "The worsening state of public finances in some European countries -- particularly in the euro zone periphery -- remains an important source of concern," the analysts wrote in the report titled ‘Public Finance Woes Could Hamper Europe’s Ability to Meet Upcoming Refunding Needs.’ "Further deterioration in sovereign creditworthiness likely will have negative implications for financial and non-financial entities’ borrowing costs and access to markets." Portuguese, Irish, Greek and Spanish companies have $395 billion of debt maturing through 2013, and about 86 percent of the bonds are investment grade, according to S&P. About 86 percent of the total is from financial issuers, S&P said.

Dean Baker on the “Growth Through Austerity” argument - Like a game of wonk whack-a-mole, there’s an argument that says that if we cut the deficit in the middle of a slump and weak recovery we can spur growth.   No matter how much you hit it with a foam rubber mallet of OECD data and white papers, the argument just jumps up through another hole. Luckily Dean Baker and CEPR swing hard with their new report, The Myth of Expansionary Fiscal Austerity (full pdf here):Baker looks over the type of arguments made by Alberto Alesina and Silvia Ardagna, as well as a new report by Goldman Sachs that makes the same type of argument.   After taking apart their argument and showing how it requires a lot of things to be true for the United States that simply aren’t true, he concludes: There has been a considerable effort to tout the merits of fiscal austerity as a route to restoring growth. This argument has been put forward in direct opposition to arguments for increased stimulus for boosting the economy. While there may be a case that lower deficits can foster growth under some circumstances, the evidence presented in the Broadbent and Daly paper does not suggest that a movement toward lower deficits in the current economic situation in the United States would be expansionary.

Liquidate or liquify? "..Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people." This was the advice of US Secretary Andrew Mellon gave to his President Herbert Hoover in 1931. Mixing economic policy with morals is a bad idea as the ensuing events showed. The wave of bank insolvencies and foreclosures that swept the US during the early 1930s contributed to transform a crisis into the Great Depression.  Nowadays, we pursue the opposite approach, no liquidation at all. After the Lehman experience the official policy line in Europe is that liquidation must be avoided at all costs. This applies in particular to sovereigns and their banks. 

Many Countries Turn to Higher Taxes on Well-to-Do - A world-wide trend of lowering income tax rates on high earners in recent years has come to an end, with this year’s average global rate rising by 0.3%. “In the current economic environment, as many countries are faced with increasing budget deficits, they need funding for various economic stimulus packages,” Ben Garfunkel, a KPMG partner, said in a release. “Our study indicates that many of these countries are levying tax increases on their highest earning taxpayers in order to increase revenue. We also see governments becoming increasingly sophisticated and rigorous in the framing and application of their tax rules.” Most of the rate movement in 2010 has been in Europe, the report says. The U.K. implemented a 10% increase, raising its top rate from 40% in 2009-10 to 50% in 2010-11 — the highest rate increase around the world this year. Other Western European governments have followed suit.

Bienvenue en France (mais, nous sommes fermés) - Is there or isn’t there going to be enough fuel for Paris’ Charles de Gaulle airport to keep functioning after Monday? A near-national strike was set to grip France for another day on Monday. Truck drivers, refinery operators and rail staff have all now joined forces in protesting against President Nicolas Sarkozy’s plans to raise the retirement age by two years. According to Bloomberg, unions have called for a fourth day of national strikes to begin on October 19. But it’s ongoing strikes at France’s main refineries — now heading into their third week — which are really threatening to grind the country’s infrastructure to a halt. Protests which began at France’s main oil hub of Fos-Lavera, accounting for 43 per cent of the country’s total refining capacity, spread nationwide over the weekend, with workers now blocking a total of 61 ships from unloading cargoes into France.

Fuel supplies low as protests hit France - DIESEL and jet fuel supplies were running low yesterday in France amid another nationwide protest against President Nicolas Sarkozy's plans to raise the retirement age.  All 13 refineries in the country went on strike on Friday and many depots were blocked by protesters.  Government chiefs warned Charles de Gaulle airport in Paris only had fuel to last until Tuesday.  Police were called in to force three crucial fuel depots to reopen, including one near Marseille.  And transport minister Dominique Bussereau told oil companies to use their reserves after haulage firms struggled to find fuel.

Fuel Short, Flights Canceled as France's Strikes Intensify - As France began its second week of nationwide strikes in protest of planned pension reforms, workers blocked oil refineries and depots, and more than 1,000 gas stations reported being out of fuel. The intensifying fuel crisis, which aviation officials said would cut flights into French airports by half on Tuesday, stems from outrage over President Nicolas Sarkozy's vow to increase the minimum retirement age from 60 to 62. Sarkozy has said that pension costs have ballooned as France's population ages and must be cut to reduce the budget deficit, which last year rose to 7.5 percent of GDP. The showdown is escalating as neither the Sarkozy government nor the country's unions appear disposed to back down. The pension reform package has already been passed by the National Assembly, and the Senate is schedule to cast the vote necessary to make it law on Wednesday.

French strikes: Riot police launch dawn raids on blockaded petrol depots - French riot police forced strike-shuttered fuel depots to reopen today to ensure petrol supplies keep flowing. The raid came as the country's interior minister threatened to send in paramilitary police to stop rioting on the fringes of protests against raising the retirement age to 62. Youths wearing hoods and scarves on their faces rampaged through the Paris suburb of Nanterre, breaking shop windows and hurling stones at riot police.

French police force open blockaded fuel depot - French riot police forced open a strategic fuel refinery Friday that had been a bastion of resistance to President Nicolas Sarkozy's bid to raise the retirement age to 62, pushing striking workers aside with shields in a bid to end gasoline shortages. The operation came as the French Senate prepared to vote on a pension reform at the heart of the unions' anger, after the government shortened a protracted debate. The Senate is near certain to approve the measure — which raises the minimum retirement age from 60 to 62 — later Friday, despite months of strikes and protests that reached a climax of radical action and scattered clashes this week.

Berlin’s Quest for Tough Euro Zone Rules Has ‘Failed Spectacularly’ – SPIEGEL - Europe's attempt to adopt strict new budget rules to prevent a repeat of the euro debt crisis has suffered a setback because Germany has given in to France on the key issue of imposing automatic sanctions against deficit wrongdoers, German commentators say. Following talks between France and Germany, EU finance ministers meeting in Luxembourg on Monday agreed on a compromise under which ministers from member states will continue to have a say in whether fines should be imposed -- a level of political involvement that commentators fear could leave the reformed pact almost as toothless as the old one.  Germany had backed a proposal by the European Commission for an automatic process of sanctions to kick in at a certain point if countries persistently exceed the EU's budget deficit ceiling of 3 percent of GDP. France opposed that change, and got its way. In return, France agreed to a medium-term amendment of the EU treaty to allow the bloc to withdraw voting rights from member states that break the rules. But it will take years for the amendment to be agreed and ratified.  France, Italy, Spain, Portugal and Greece opposed the plan for automatic penalties, part of a set of proposals submitted by the Commission last month.

Madame Oui - There is uproar in Germany, and in several European capitals over Merkel’s secret deal with Sarkozy over Germany’s total surrender on the stability pact; Juncker says agreement is of limited value; Rehn says it has no relevance; Stark says it was disappointing; sanctions requires a qualified majority in the council; procedure is only moderately tightened; there will be no concrete targets on debt either; Germany’s FDP accuses Merkel of shifting her position; Wolfgang Munchau says the deal is a typical reflection of Merkel’s confused euro policies; Frankfurter Allgemeine accuses Merkel of a total surrender to France; six out of ten French support further strike action; the approval ratings of Silvio Berlusconi and his party are falling steadily; dollar rises against euro, ostensibly due to the rise in the Chinese exchange rate; eurozone spreads revert to previous high levels; Mervyn King, meanwhile, is very, very gloomy about the world economy in the absence of monetary co-ordination. [more]

BBC News – Merkel says German multicultural society has failed - Attempts to build a multicultural society in Germany have "utterly failed", Chancellor Angela Merkel says. "lmmigrants should learn to speak German" She said the so-called "multikulti" concept - where people would "live side-by-side" happily - did not work, and immigrants needed to do more to integrate - including learning German. The comments come amid rising anti-immigration feeling in Germany. A recent survey suggested more than 30% of people believed the country was "overrun by foreigners".

Budapest Experiences A New Wave of Hate - Budapest survived fascism and communism and blossomed after the fall of the Iron Curtain. But the Hungarian capital is experiencing a rebirth of anti-Semitism. The far-right Jobbik is now the country's third largest party and Jews are being openly intimidated.Neo-fascist thugs attacked Roma families, killing six people in a series of murders. The right-wing populists of the Fidesz Party won a two-thirds majority in the parliament, while the anti-Semitic Jobbik party captured 16.7 percent of the vote, making it the third-largest party in Hungary, next to the Socialists. Unknown vandals defiled the Holocaust Memorial with bloody pigs' feet. A new law granted the government direct or indirect control over about 80 percent of the media. The television channel Echo TV showed an image of Nobel laureate and Auschwitz survivor Imre Kertész together with a voiceover about rats. Civil servants can now be fired without cause. Krisztina Morvai, a member of the European Parliament for Jobbik, suggested that "liberal-Bolshevik Zionists" should start thinking about "where to flee and where to hide."

Britain slashes spending, raises retirement age - Britain will cut half a million jobs, lift the retirement age and slash welfare as part of an unprecedented cost-cutting drive announced on Wednesday which will test the strength of the economy and the government.The long-awaited spending review confirmed 80 billion pounds of cuts, sent unions into a fury and turned up the heat on the Liberal Democrats, the junior coalition partners who campaigned against such sharp fiscal tightening before the May election.The jury remains out on whether the economy -- just recovering from the worst recession since World War Two -- can survive the squeeze which will cut growth by around half a percent each year. Analysts expect the Bank of England to keep monetary policy super-loose for the foreseeable future.Nor is it clear whether the cuts -- aimed at bringing down a record budget deficit of 11 percent of GDP -- can actually be achieved. More of the burden has been shifted to the notoriously hard-to-cut welfare bill -- an extra 7 billion pounds on top of the 11 billion pounds cuts already announced.

UK slashes 490000 jobs amid deep budget cuts - The British government announced deep budget cuts Wednesday, as it tries to fight what its finance minister called "the largest structural budget deficit in Europe."  It will include "ruthless privatization" and will leave "no stone unturned in our search for waste," Chancellor George Osborne told lawmakers in the House of Commons. The government will slash 490,000 jobs from the public payroll over four years, he said.  But the cuts will also be guided by the principle of "fairness," he said, adding that "those with the broadest shoulders will bear the greatest burden." He specifically named banks when saying "those with the most should pay the most," amid a backdrop of widespread British anger at bankers.

In Britain, Keynesians Fall Out of Favor - In Britain, George Osborne, chancellor of the Exchequer, delivered a speech on Wednesday that would have made Keynes — who himself worked in the British Treasury — blanch. He argued forcefully that Britons, despite stumbling growth and negligible bank lending, must accept a rise in the retirement age to 66 from 65 and $130 billion in spending cuts that would eliminate nearly 500,000 public sector jobs and hit pensioners, the poor, the military and the middle classes because of what he insisted was the overwhelming need to reduce the country’s huge budget deficit. In Ireland, where the economy is suffering through its third consecutive year of economic slump, Keynes is doing no better. Devastated by a historic property crash and banking bust, the Irish government is preparing another round of spending cuts and tax increases.

To choose austerity is to bet it all on the confidence fairy… The Keynesian policies in the aftermath of the Lehman brothers bankruptcy were a triumph of economic theory. In Europe, the US and Asia, the stimulus packages worked. Those countries that had the largest (relative to the size of their economy) and best-designed packages did best. China, for instance, maintained growth at a rate in excess of 8%, despite a massive decline in exports. In the US the stimulus was both too small and poorly designed – 40% of it went on household tax cuts, which were known not to provide much bang for the buck – and yet unemployment was reduced from what it otherwise would have been – over 12% – to 10%. Now, financial markets – the same shortsighted markets that created the crisis – are focusing on soaring deficits and debts. We should be clear. Most of the increase is not due to the stimulus but to the downturns and the bank bailouts. Those in the financial market are egging on politicians to ask whether we can afford another stimulus. I argue that Britain, and the world, cannot afford not to have another stimulus. We cannot afford austerity. In a better world, we might rightfully debate the size of the public sector. Even now there should be a debate about how government spends its money. But today cutbacks in spending will weaken Britain, and even worsen its long-term fiscal position relative to well-designed government spending

Britain plans $131 billion in spending cuts by 2015 - Britain unveiled on Wednesday a campaign to dig itself out from under a mountain of public debt, setting up a global experiment: Can a major nation drastically slash government spending without derailing its economic recovery? The new Conservative-led coalition headed by Prime Minister David Cameron announced cuts deeper than the ones made by Margaret Thatcher in the 1980s, outlining a plan to eliminate half a million government jobs, slash welfare benefits and reduce $131 billion worth of other public spending on everything from fighter jets to social security to the arts by 2015. The effort puts Britain at the core of the debate over how fast, and how deep, to cut the crushing levels of public debt racked up by governments from the United States to Europe and now viewed by leading economists as one of the greatest threats to the global economy. Britain's pull-the-bandage-off-fast approach now stands in sharp contrast to the thinking in Washington, where senior administration officials are leery of the impact such drastic steps could have on the U.S. recovery, and where further increases in funding are still being considered.

Cut to the bone - A TIDE of austerity has swept over much of Europe since markets rebelled at high debt levels in Greece and elsewhere in the spring. Still, the world is watching in amazement as Britain's new government prepares to enact budget cuts that have not inaptly been called revolutionary. Yesterday, George Osborne, the government's chancellor of the exchequer, stood before Parliament and detailed the scope of the plan, which will slash government spending by £81 billion over four years in an aim to reduce Britain's deficit from its present 11% of GDP to 2%. [T]he scale of the cuts is...breathtaking. The police budget will fall by 20%. Spending on social housing will fall by three-fifths, with the difference to be made up from higher rents charged to tenants. Local council funding from central government will drop by 28%, a classic strategy in which ministers hope that voters will take their anger out on town halls instead of Whitehall. Spending on the arts will fall by a third. Nor will the damage be confined to the public sector. The government is a significant buyer of goods and services from private firms, after all. PwC, a consultancy, said the other day that it thinks that another half a million private jobs could go over the coming five years as a direct consequence of public-sector austerity.

Sobering thoughts from Mervyn King - Mervyn King's vision of the "sober" decade in prospect for Britain was designed to be the headline-grabber. But if you read the middle section of tonight's speech, you might conclude that we will be lucky to escape so lightly. The governor of the Bank of England devoted that passage to one of his familiar themes: the urgent need to address imbalances in global trade which are growing again. His language was the strongest yet. King said the international monetary system has become "distorted". The major surplus and deficit countries are pursuing strategies that are in "direct conflict". He called for nothing less than a "grand bargain" among major players of the world economy. The key quote was: "The need to act in the collective interest has yet to be recognised, and unless it is, it will only be a matter of time before one or more countries resort to trade protectionism as the only domestic instrument to support a necessary rebalancing. That could, as it did in the 1930s, lead to a disastrous collapse in activity around the world. Every country would suffer ruinous consequences, including our own."

The British mess (I) - Our public spending cuts, in the pipeline since July, have been announced. Here’s some background on the structure of public finance in the UK. Salient points: Public spending is divided into two: current spending on running costs of government, such as salaries and equipment; and capital spending on new roads, railways, bridges and schools. In the 2010-11 financial year, current spending is expected to be £637bn and capital spending £60bn. …so, not much scope to cut infrastructure spending; it’s a drop in the ocean; and who would want to anyway, at this point in the economic cycle. Then we have: The £637bn bill for current spending is split into two parts: the £343bn that the Treasury allocates to individual ministries such as the Home Office and the Ministry of Defence and the £295bn that goes on annually managed expenditure (AME), which is spent on servicing the national debt and welfare payments including state pensions. There is some discretion for Osborne to cut welfare payments – hence the means testing of child benefit – but not all that much, and debt interest payments have risen rapidly as borrowing has increased over the past three years. Here are the guts of the cuts, £81Billion in all, via the FT:

Age comes before austerity -It’s official: George Osborne is Gordon Brown’s mirror-world doppelgänger. Where his forerunner as chancellor offered vast spending sprees, crafted for political effect, Mr Osborne deals out equally vast cuts, with the same close attention to party political advantage. Mr Osborne insists that everyone is in this together. Anyone under the age of 65 will beg to differ: every perk and privilege of seniority in British society has been defended. Quite why prosperous pensioners deserve their special treatment is unclear to this economist, but no doubt perfectly obvious to the opinion pollsters. The effect of changes to taxes and benefits will reduce household income by, on average, 1.5 per cent – but rather splendidly, almost everyone will suffer less than the average. The richest 20 per cent and poorest 10 per cent will pay more. (In cash terms, the rich will pay very much more.) Everyone else will pay less than the average – so much for the squeezed middle.

The British Conservatives Have No Theory - Shame on David Cameron. Shame on Nick Clegg. Shame on George Osborne. Their shame would not be quite so great if they had a theory about what elements of spending will grow to offset their 9% of GDP planned fiscal contraction. Is the pound supposed to collapse and are exports than to surge? Is the prospect of rising unemployment in the U.K. supposed to greatly enhance business confidence and trigger a surge of private-sector investment? Is the 30-year gilt yield supposed to fall from 4% to 1% and that reduction in the cost of capital cause a surge of capital formation throughout Britain? Cameron, Clegg, and Osborne don't tell us.  They don't tell us because they are clueless dorks. They don't even have a theory about how the economy will avoid a double dip. They hope that--somehow, some way--Mervyn King will save them from themselves.  But if they actually carry through with their policies, I don't see how he can.

A spending review for a diminished country - With the comprehensive spending review, the UK sees some of the details behind the coming fiscal squeeze. Start with the politics. George Osborne, the UK’s youthful and decidedly “posh” chancellor of the exchequer, did his best to present the proposed cuts as not only the inevitable result of the incompetence of his Labour predecessors, but as supportive of growth, fairness and efficiency. . The ring-fencing of health and development assistance and the protection of schools can be presented as “progressive”. The pain seems concentrated relatively narrowly. This should prove good politics, provided the government can manage the backlash from those directly affected, particularly public employees. Yet, Mr Osborne’s big political difficulty remains: if the economy turns out to be persistently weak, the government will be blamed; it will never win credit for any hypothetical crisis averted. Now turn to the details of the package. The big cuts in major spending departments are in support for local government (a cumulative cut of 27 per cent in real terms by 2014-15), in business innovation and skills (down 25 per cent, largely because of cuts in support for teaching in higher education) and in the Home Office and the justice department (both down 23 per cent). In addition to health and development assistance, schools, defence and Scotland, Wales and Northern Ireland have come out at least relatively unscathed. But pain will be felt everywhere. Even protected health will find this a brutal change from the previous glut.

British Fashion Victims, by Paul Krugman, Commentary, NY Times: In the spring of 2010, fiscal austerity became fashionable. I use the term advisedly: the sudden consensus among Very Serious People that everyone must balance budgets now now now wasn’t based on any kind of careful analysis. It was more like a fad, something everyone professed to believe because that was what the in-crowd was saying. And it’s a fad that has been fading lately, as evidence has accumulated that the lessons of the past remain relevant, that trying to balance budgets in the face of high unemployment and falling inflation is still a really bad idea. Most notably, the confidence fairy has been exposed as a myth. There have been widespread claims that deficit-cutting actually reduces unemployment because it reassures consumers and businesses; but multiple studies ... have shown that this claim has no basis in reality.No widespread fad ever passes, however, without leaving some fashion victims in its wake. In this case, the victims are the people of Britain, who have the misfortune to be ruled by a government that took office at the height of the austerity fad and won’t admit that it was wrong.

Notes from a stalled island - PAUL KRUGMAN weighs in on the British government's austerity plan in his column today, and it's everything you've come to expect from one of the chief proponents of an aggressive expansionary response to the recession. The piece closes: What happens now? Maybe Britain will get lucky, and something will come along to rescue the economy. But the best guess is that Britain in 2011 will look like Britain in 1931, or the United States in 1937, or Japan in 1997. That is, premature fiscal austerity will lead to a renewed economic slump. As always, those who refuse to learn from the past are doomed to repeat it. That kind of a economic rut certainly isn't out of the question. But there is a big difference between Britain now and Depression-era America or Japan in the 1990s—for now, at least, the Bank of England is committed to generating inflation. For much of the 1930s, the American economy underwent significant deflation—basically, the first half of the decade and then again following the recession within a depression. In Britain, by contrast, consumer price inflation is currently running at just over 3%, and despite this the Bank of England is considering new asset purchases.

What I didn’t say on the BBC - I was on BBC Radio Five Live at about 4AM local time this morning for a good 5 to 10 minutes, talking about the coalition government’s austerity budget. My basic message was that austerity-lite might be defensible but full austerity is "reckless" if government doesn’t understand how it could contribute to a debt deflationary outcome. Let me flesh out my argument here by presenting you with a few comments about debt deflation first and then talk specifically about austerity in the UK and US context.

England’s Recovery Plan is Bullocks - The fiscal austerity measures announced by the British government this week, the largest since World War II, with welfare, councils, and police budgets all hit, follow on from earlier cuts made when the new leadership took power back in June. Then, pay for almost all government workers frozen for two years; now, as many as 500,000 public sector jobs are likely to be lost. The philosophy underlying the British government’s huge new spending cuts—namely, that fiscal austerity is good for growth—is spreading across the United States. Governments are increasingly being bullied into adopting austerity measures, apparently thinking they will help their economies grow, and if the recent polls for the midterm elections are anything to go by, this philosophy is likely to predominate in the new Congress. But an embrace of U.K.-style austerity will almost certainly ensure a major relapse for the U.S. economy.

Mervyn King hints at fresh round of quantitative easing - Bank of England governor Mervyn King signalled tonight that he was closer to embarking on a second round of quantitative easing after he said there was a strong case for pumping funds into the economy to spur growth and prevent inflation falling below its 2% target. King warned the next decade would be bumpy and the UK would struggle to claw back the 10% of output it lost following the banking crash. A lower exchange rate is expected to support a rise in exports and help rebalance the economy towards investment and exports. King famously described the 10 years after the mid-1990s as the "nice" decade – an acronym for non-inflationary, consistently expansionary.

Some sightings on squatter culture in the UK - Man leaves home for a week so it can be decorated and 15 squatters move in; - Squatters set up home in Duke of Westminster’s £30million Park Lane mansions; - Squatters wreck Inspector Morse’s £2m Victorian home; - Squatters move in to £3million home and tell owners: ‘We’ll call the law if you try to evict us’

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