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

Saturday, October 9, 2010

week ending Oct 9

Fed Balance Sheet Expands Slightly In Latest Week The U.S. Federal Reserve's balance sheet expanded slightly in the latest week as the central bank's holdings of U.S. Treasury securities rose. The Fed's asset holdings in the week ended Oct. 6 totaled $2.311 trillion, compared with $2.302 trillion a week earlier, the Fed said in a weekly report released Thursday. In the latest week, the Fed's holdings of U.S. Treasury securities rose to $ 819.07 billion Wednesday from $811.67 billion a week earlier. Holdings of mortgage-backed securities held steady at $1.079 trillion Wednesday. The report showed total borrowing from the Fed's discount lending window slid to $49.48 billion Wednesday from $49.77 billion a week earlier. Borrowing by commercial banks rose to $110 million Wednesday from $99 million a week earlier.U.S. government securities held in custody on behalf of foreign official accounts increased to $3.253 trillion, from $3.238 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts rose to $2.501 trillion from $2.485 trillion in the previous week. Holdings of agency securities, meanwhile, fell to $751.75 billion from the prior week's $752.54 billion.

FRB: H.4.1 Release--Factors Affecting Reserve Balances--October 7, 2010 

Fed's Sack: Managing the Federal Reserve’s Balance Sheet - This speech suggests to me that the Fed is prepared to embark on QE2 (subject to incoming data), and the program will be incremental - and persistent - and the amount of QE announced at each FOMC meeting. This is a long excerpt, but the speech has a number of key points. From New York Fed EVP Brian Sack: Managing the Federal Reserve’s Balance Sheet The sluggish outlook for the economy and the risks that surround that outlook have raised the possibility of further monetary policy accommodation....

Fed Official Defends Effectiveness of More Action - Expanding the Federal Reserve balance sheet would have a real and positive impact on the U.S. economy, should officials decide to follow that path, the man responsible for implementing central bank monetary policy goals said Monday. “The evidence suggests that the expansion of the securities portfolio to date has helped to foster more accommodative financial conditions, and further expansion would likely provide additional accommodation,” said Federal Reserve Bank of New York Executive Vice President Brian Sack. He leads the markets group at the regional Fed bank. But the official stopped short of saying any decision to act had been made. “Whether the [Federal Open Market Committee] decides to take such a step will be determined by its assessment of whether the benefits of additional policy stimulus outweigh the perceived costs of expanding the balance sheet,” Sack said.

Bernanke: Additional Asset Purchases Could Ease Financial Conditions - Federal Reserve Chairman Ben Bernanke Monday said he believes further asset purchases could help the economy, signaling he would support the move if the economy remains weak. Speaking to college students, Bernanke illustrated how the Fed was able to lift the economy even after it took short-term interest rates close to zero by buying $1.7 trillion bonds in what he defined as an “effective program.” Although there are many estimates of the impact of more asset purchases on the economy, Bernanke said he believes “additional purchases have the ability to ease financial conditions”At their latest meeting last month, Fed officials said they’re ready to take further steps to aid the recovery if the economy remains sluggish. The most likely move would be to buy U.S. Treasurys.

Fed boss: More securities buys could help economy— Federal Reserve Chairman Ben Bernanke said Monday that the economy could be helped by another round of asset purchases by the central bank. Bernanke's comment reinforces analysts' beliefs that the Fed is likely to take action at its next meeting Nov. 2-3. The Fed is considering launching a new program to buy government debt, a move aimed at driving down rates on mortgages, corporate loans and other debt. It's wrestling with how much it should buy."I do think the additional purchases — although we don't have the precise numbers for how big the effects are — I do think they have the ability to ease financial conditions,"

Fed's Evans Says Favors "Much More" Easing: Report - The U.S. Federal Reserve should do "much more" monetary easing to spur a sluggish economic recovery, a top Fed official said in an interview published on Tuesday. "In the last several months I've stared at our unemployment forecast and come to the conclusion that it's just not coming down nearly as quickly as it should," Chicago Federal Reserve Bank President Charles Evans told the Wall Street Journal. "This is a far grimmer forecast than we ought to have," he said, for which reason he favors "much more accommodation than we've put in place."

Fed's Evans: Favors "much more [monetary] accommodation"From a WSJ interview with Chicago Fed President Charles Evans,  Fed Official Calls for Aggressive Action "In the last several months I've stared at our unemployment forecast and come to the conclusion that it's just not coming down nearly as quickly as it should," [Chicago Fed President Charles] Evans said in an interview with The Wall Street Journal Monday. "This is a far grimmer forecast than we ought to have," he added. As result, he said, he favors "much more [monetary] accommodation than we've put in place." [Evans] has grown frustrated with a lack of progress in bringing down unemployment and is now forecasting inflation of 1% in 2012 and below 1.5% in 2013, well below his own 2% goal. Although Evans is not a voting member of the FOMC this year, he will be next year.  According to the article, Evans is forecasting inflation to be below target for the next three years - and for the unemployment rate to remain very high. This month the Fed Presidents will present their revised forecasts, and I think the tone will be generally grim.

Chicago Fed’s Evans on His Call for Aggressive Fed Action - Charles Evans, president of the Federal Reserve Bank of Chicago, is calling for strong action by the Fed to charge up the economy, including a new program of U.S. Treasury bond purchases and possibly an audacious public declaration by the central bank that it wants inflation to rise for a time beyond its informal 2% target. The following is an edited transcript of an interview he did with The Wall Street Journal’s Jon Hilsenrath. (Read the related article.)

Fed Crossing the Line? - New York Federal Reserve Bank (Fed) president Bill Dudley’s speech Friday attracted much press attention, as it should have. His speech is correctly read, as in the press commentary, as providing a broad hint of more policy easing to come. During my tenure as president of the St. Louis Fed, I overlapped with Dudley, who, along with being president of the New York Fed, is Vice Chairman of the Federal Open Market Committee (FOMC). I know him to be a competent and cautious  If every FOMC member were to indicate his policy position in advance of each FOMC meeting, the result would be chaotic. It seems to me that Dudley has crossed this line. His logic is clear. Unemployment is too high and inflation too low. Moreover, “…the timeframe over which they are likely to return to levels consistent with our mandate are unacceptable. … We have tools that can provide additional stimulus at costs that do not appear to be prohibitive.” It is hard for me to imagine a stronger statement that Dudley will be arguing for the Fed to buy more assets—the policy discussed at some length earlier in his speech. “Unacceptable” is a pretty strong word.

Kansas City Fed’s Hoenig Still Wants to Raise Rates - The economy doesn’t need further stimulus from the Federal Reserve and in fact needs a modest tightening of monetary policy, a veteran central bank official said Thursday. Countering the increasingly popular view that the Fed may again buy long-term assets to help spur growth, Federal Reserve Bank of Kansas City President Thomas Hoenig said, “I don’t think we should go that way at all.” The official repeated his previous call that the fed funds rate should be raised off its de facto zero-percent level, saying, “I don’t want high interest rates” and “I want non-zero interest rates.” Hoenig’s speech Thursday came at a time where the Federal Reserve is moving closer to providing additional support to the economy. Many private sector economists believe a very weak job market and ebbing price pressures, in an environment of tepid growth, means the Fed will most likely have to restart a program buying long-term assets that was shuttered last spring.

Dallas Fed’s Fisher Rebuts Calls for More Action - The head of the Federal Reserve Bank of Dallas mounted another strong attack Thursday on the idea the central bank needs to provide more support to the economy.“While none of us are satisfied with the current pace of economic expansion and job creation, presently it is not clear that conditions warrant further crisis-like deployment of the Fed’s arsenal,” Richard Fisher said, in text prepared for delivery before the Economic Club of Minnesota in Minneapolis. The official will hold a voting role on the interest-rate-setting Federal Open Market Committee next year, and as such, he is rising as a strong voice against something a number of core officials and many private- sector economists think is likely. There are rising expectations ebbing inflation pressures joined with tepid growth and persistent levels of high unemployment will drive the Fed to restart its buying of medium- and longer-term fixed-income securities, to drive down yields and cheapen borrowing costs for households and companies.

Fisher on Monetary Policy - Dallas Fed Governor Fisher speaks about the potential for more easing from the Fed. Key excerpts: The excess reserves of private banks sitting on the balance sheets of the 12 Federal Reserve Banks exceed $1 trillion. Nonfinancial corporations have an aggregate liquid asset ratio running at a seven-year high; cash flow from current production is running above total investment expenditure; and cash as a percentage of market cap is extraordinarily high.  The vexing question is: Why isn’t this liquidity being utilized to hire new workers and reduce unemployment? If current dramatically high levels of liquidity and low interest rates are not being harnessed to add to payrolls, would driving interest rates further down and adding further liquidity to the system through Fed purchases of Treasury securities induce businesses and consumers to get on with spending it?

Fed's Fisher: QE2 "debate still to take place" - From Dallas Fed President Richard Fisher: To Ease or Not to Ease? What Next for the Fed? - Since the FOMC meeting, a handful of my colleagues have fanned further speculation about QE2 by signaling their personal positions on the matter quite openly in recent speeches and interviews in the major newspapers. Hence the headline in yesterday’s Wall Street Journal, “Central Banks Open Spigot,” a declaration that surely gave the ghosts of central bankers past the shivers and sent a tingle down the spine of gold bugs from Bemidji to Beijing.  There is a great deal of legitimate debate still to take place within the FOMC on the subject of quantitative easing and the pros and cons and costs and benefits of further monetary accommodation. Whatever we might do, if anything, must be consistent with long-term price stability and not add to the nightmare of confusing signals already being sent to job creators.

Richard Fisher plays at central banker - RICHARD FISHER is president of the Dallas Fed: Since the FOMC meeting, a handful of my colleagues have fanned further speculation about QE2 by signaling their personal positions on the matter quite openly in recent speeches and interviews in the major newspapers. Hence the headline in yesterday’s Wall Street Journal, “Central Banks Open Spigot,” a declaration that surely gave the ghosts of central bankers past the shivers and sent a tingle down the spine of gold bugs from Bemidji to Beijing... Can ghosts get shivers? More importantly, who cares what they think? And perhaps even more importantly, who cares what Richard Fisher thinks? He's not an economist. He's not a voting member of the FOMC. And he seems to be much more interested in behaving like a caricature of a central banker than looking at actual data and making a reasoned monetary policy decision.

QE2: estimates of the potential effects - As the conviction grows that the Federal Reserve will adopt a second round of quantitative easing (dubbed by some as "QE2"), I thought it might be helpful to survey some of the different estimates of what effect this might have on long-term interest rates. Although we are used to thinking of the Federal Reserve as playing a key role in determining interest rates, it is far from clear that the Fed matters that much for interest rates at the moment. The Fed's traditional influence comes from changing the supply of reserves injected into the banking system, which in normal times would quickly change the interest rate at which banks lend those reserves to each other overnight. But with over a trillion dollars in excess reserves and the overnight rate practically at zero, the Fed's primary policy tool is completely irrelevant at the moment. There might still be some ability to affect longer-term interest rates from much more massive operations. The theory is that by taking some of the supply of longer-term bonds off the market, this might raise the price and thus lower the yield on those bonds.

The Rube Goldberg Fed - NEIL IRWIN has some interesting reporting on the specific actions the Fed is considering as it prepares to (probably) resume easing in November or December. Rather than targeting the money supply (for an interesting discussion of this policy, see Nick Rowe here), the Fed might promise to keep buying assets until interest rates reached a certain level. Why would it do this? That would help the economy by lowering rates for a broad range of borrowers, including Americans looking to take out a mortgage and companies looking to use debt to finance expansion. It is a strategy that Fed Chairman Ben S. Bernanke endorsed in a 2002 speech, when he was a governor at the Fed, explaining policies the central bank could take to make sure the United States does not fall into Japanese-style deflation. Well, ok. But if the Fed is primarily interested in preventing a dangerous decline in inflation, then why not just target...inflation?

Fed Officials Mull Inflation as a Fix - The Federal Reserve spent the past three decades getting inflation low and keeping it there. But as the U.S. economy struggles and flirts with the prospect of deflation, some central bank officials are publicly broaching a controversial idea: lifting inflation above the Fed's informal target. The rationale is that getting inflation up even temporarily would push "real" interest rates—nominal rates minus inflation—down, encouraging consumers and businesses to save less and to spend or invest more. Both inside and outside the Fed, though, such an approach is controversial. It could undermine the anti-inflation credibility the Fed won three decades ago by raising interest rates to double-digits to beat back late-1970s price surges

Bernanke Counters Fed Unity Doubt as Regional Chiefs Echo Views  (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke is leaving little doubt that he has enough support for more unconventional easing as soon as November. In one week, New York Fed President William Dudley, the Boston Fed’s Eric Rosengren and Chicago’s Charles Evans advocated further Fed action. Bernanke himself said Oct. 4 that restarting large-scale asset purchases would probably spur growth, after saying last week that the central bank has a duty to aid the economy as U.S. unemployment holds near 10 percent. Their remarks have overshadowed opposition from policy makers such as Philadelphia’s Charles Plosser, helping the Fed bring down borrowing costs as traders incorporate their expectations into the price of securities.

Gross Says Employment Report a Signal For More Fed Easing - Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said a larger-than-forecast loss of U.S. jobs indicates the Federal Reserve will buy more debt to stimulate the economy.  The September employment report “is simply a signal, a strong, strong signal for Fed QE2,” Gross said, referring to the purchase of fixed-income securities to drive down borrowing costs in the policy know as quantitative easing. “We will respond by riding the wave and then trying to anticipate when to get off. There is a certain point in terms of yield levels where it no longer makes sense.”  Yields on Treasuries maturing in five years and less have tumbled to record lows since Fed officials hinted in August about renewed purchases when saying they would begin reinvesting proceeds from maturing mortgage holdings back into Treasuries to keep money from leaving the financial system. Policy makers completed purchases of about $1.7 trillion of debt in March.

The Dangers of Insufficient Stimulus - Adam Posen - My basic argument is that the current macro policy discussion is mostly missing the point. Our situation (in the U.K., the U.S., and arguably in most of the major Western economies) is one where policy makers face a long uphill battle, in which monetary ease has an ongoing role to play, even if it may not deliver recovery on its own. Insufficient monetary action risks turning sustained low growth and near deflation into a self-fulfilling prophecy. This happened in Japan in the 1990s, and in U.S. and Europe in the 1930s. I don’t think things will be “that bad” in the sense of an outright depression, but we face a real risk of long-term stagnation with some distracting upward blips and slowly eroding capacity.

Need More Stimulus -I also agree that any 'traditional' monetary policy is unlikely to have much impact. Having said that, if there's the possibility of any help the Fed should be doing more, and the fact that they haven't tried is scary, but I still don't think that all we need to do as have Bernanke flip the switch and everything will be great. Absent running the printing presses and dropping money from helicopters, we need infrastructure spending. This is spending we need anyway, and spending we can do very cheaply at the moment given the absurdly low interest rates.

Queasing over Quantitative Easing, Part VI - I am no fan of quantitative easing, as readers may know.  One aspect of the dislike comes from the one-sided view of how low interest rates benefit the economy.   Does the Fed ask what entities they might be hurting through quantitative easing?  They hurt any entity that has to make payments over the long term. They do not benefit the economy, at least not as far as the following are concerned:

    • Endowments spend less, as their spending rules lead to less spending when interest rates are low.
    • Pensions find that their liabilities are more expensive than they thought.
    • Virtually every long-term financial plan fails, because they assumed far higher return assumptions.

Ben Can’t Fix This - QE2 can create money out of thin air, apparently, but it can’t create jobs of out thin air, evidently, and that is the crux of the limitations of and problems with continuing central-bank tinkering at this state of the game. ADP, the big check-processing outfit, gave its take on the September jobs picture, and it wasn’t pretty. The firm estimated the economy shed 39,000 jobs in September, below the Street view that it would report a gain of 20,000. Among a work force of 150 million some-odd workers, that’s not a big number either way, although psychologically it hurts more to see a negative number than a positive one. Now, ADP’s methodologies don’t exactly align with the BLS, which reports the “official” numbers on Friday, but they’re not that far off, so you can expect another weak report Friday. This is the entire problem, Mousketeers. Jobs aren’t being created, not anywhere on the level needed. Jobs are not being created because demand is not there. Maybe, in a world where the 10-year yield is at 7% or 8%, and mortgage rates are running even higher, the Fed can have success in goosing demand by lowering rates. But with the 10-year currently, right now, this morning, at 2.42% — — with mortgage rates already at all-time lows, what are lower rates going to do? Not much.

The Federal Reserve’s Relevance Test, by Joseph E. Stiglitz - With interest rates near zero, the US Federal Reserve and other central banks are struggling to remain relevant. The last arrow in their quiver is called quantitative easing (QE), and it is likely to be almost as ineffective in reviving the US economy as anything else the Fed has tried in recent years. Worse, QE is likely to cost taxpayers a bundle, while impairing the Fed’s effectiveness for years to come.  Keynes argued that monetary policy was ineffective during the Great Depression. Central banks are better at restraining markets’ irrational exuberance in a bubble – restricting the availability of credit or raising interest rates to rein in the economy – than at promoting investment in a recession.  The best that can be said for monetary policy over the last few years is that it prevented the direst outcomes that could have followed Lehman Brothers’ collapse. But no one would claim that lowering short-term interest rates spurred investment. They still seem enamored of the standard monetary-policy models, in which all central banks have to do to get the economy going is reduce interest rates. ... So, while bringing down short-term T-bill rates to near zero has failed, the hope is that bringing down longer-term interest rates will spur the economy. The chances of success are near zero.

Stiglitz: Central Banks Creating ‘Chaos’ - Central banks, especially the U.S. Federal Reserve, are creating chaos with their rate policies, Nobel laureate Joseph Stiglitz told the World Business Forum in New York. The economist, who called for the government to enact more stimulus to help get the economy out of a long-term malaise, was skeptical of more Fed action to support the economy. He said the central bank has flooded the market with liquidity, but that money isn’t flowing into domestic investment in the U.S. Banks are using the money to repair still-damaged balance sheets or funneling cash elsewhere in the world looking for better returns on investment, he said.Stiglitz worries about the level of instability in the global economy causing another crisis, such as a currency war among nations looking to make themselves more competitive which is exacerbated by investment from abroad. “That could give rise to a lot of turmoil,” he said.

Can my Voice be heard in the Wilderness? - I agree and disagree with Joseph Stiglitz in this article by Phil Izzo. Central banks are certainly raising havoc with banking practice, Government expenditures, and Consumer Demand. Central banks are extending Cash to individual banks practically for nothing, destroying Interest rates for Depositors along with their Consumer Demand. Governments are borrowing Cash at extraordinary rates on every level because of low or nonexistent Taxes and huge expenditures. No one should even imagine that this Government debt will disappear before the Interest rates return to normal. Banks Depositors are following the banks themselves in investing only in Treasuries–the only place where there is any rate of Interest; Consumers going further and curtailing normal Spending because the 10-year Treasuries exact a great deal of Time before you get repayment or even market sale. Banks can derive a secure rate of Return by investment in Treasuries, or much higher Risk Return by investment overseas. None of this helps the American economy, where Unemployed Labor cuts its Consumer Expense drastically.

More Evidence That There is a Serious AD Problem - Eric Rosengren, President of the Federal Reserve Bank of Boston,  recently delivered a speech  where he presented further evidence that the problems in the labor market are more the result of weak aggregate demand than structural factors:  [I]n each of the three previous recessions there was a decline [in employment] of 5 percent or more in no more than two industry categories – as the figure shows – with many industries experiencing little or no net job loss over the course of the recession. Structural hifts acrossindustries are not uncommon in recessions – and also, some structural dislocation seems inevitable as it will always take some time for capital and labor to flow to those industries with the greatest opportunities. n rather stark contrast, the most recent recession is far less a reflection of dislocation in a few industries but rather reflects a general decline in almost all industries. As the chart  [below] shows, in this recession there has been a peak to trough loss of employment of 5 percent or greater in construction, manufacturing, retail trade, wholesale trade, transportation, information technology, financial activities, and professional and business services. Here is the accompanying figure from his speech (Click on figure to enlarge):

September Jobs Data Raises Odds of Fed Asset Buying - September’s grim jobs environment is increasing already strong chances the Federal Reserve will act again to stimulate economic growth. The government reported Friday the private sector managed to add an anemic 64,000 jobs last month, but continued cuts in government staffing, which fell by 159,000, caused an overall job loss of 95,000 for the month. The unemployment rate was unchanged at 9.6%. Collectively, the report drove home the view growth is too low to make a meaningful dent in the unemployment rate. All of that raises the odds significantly that the Fed will act again to bolster growth. While Fed officials themselves have been hazy about their preferred path, many economists are confident stimulus will come in the form of renewed purchases of medium and long term assets, most likely Treasury securities. With the central bank’s overnight target pegged right around zero, it is that action, along with the possibility of more explicit guidance about the longer term interest rate outlook, that will likely make up the Fed’s response.

Bullard Gains Traction at Fed -An unlikely figure has emerged as an important player inside the Federal Reserve: James Bullard, president of the Federal Reserve Bank of St. Louis. Mr. Bullard wasn't the Fed's first choice to run the St. Louis bank when he was picked in April 2008. And for the first year, he didn't carry much weight inside the Fed or get much attention from financial markets.Now, Mr. Bullard's influence is rising both inside the Fed and in markets, which hang on every utterance of his more prominent colleagues at the central bank. His proposal for the Fed to gradually buy Treasury debt in response to the weak economy is gaining traction inside the Fed. And his warning over the summer that the U.S. economy could fall into Japan-style deflation got the attention of investors and quiet criticism inside the Fed for some of his suggestions. "In order to get really great policy, we have to bring all kinds of ideas to the table and hash it out and come to some decision," Mr. Bullard said.

Fed Bond Buying's Unintended Consequences May Mean Higher Rates (Bloomberg) -- A second round of bond purchases by the Federal Reserve may have the unintended consequence of pushing borrowing costs higher, say a growing number of U.S. government securities dealers, strategists and economists.  Yields on 10-year Treasury notes, a benchmark for everything from home mortgages to corporate bonds, rose last month for the first time since March even as the central bank hinted that it may conduct more so-called quantitative easing to bolster the economy. The median forecast of more than 60 estimates surveyed by Bloomberg News is for yields to keep rising the rest of this year and through 2011.  Based on what the Fed bought in 2009, yields are trading as if it has already acquired an additional $315 billion to $670 billion of securities, according to Deutsche Bank AG, one of the 18 primary dealers that trade with the central bank. Policy makers will announce plans buy $100 billion to $1 trillion in Treasuries before the year is out, a survey of 12 of the 18 dealers show.

FDIC's Bair wonders about bond bubble caused by longterm ZIRP - Federal Deposit Insurance Corp. Chairman Sheila Bair has joined the chorus of economists voicing concerns over continued use of the Zero Interest Rate Policy, or ZIRP, for an extended period of time. "Eventually (rates are) going to start going up and what happens?" Bair told CNBC earlier Tuesday. "A bit of a bond bubble it appears … and so how do we deal with that? I think there's a lot of liquidity out there, a lot of money looking for return to chase, and so trying to stay ahead of that and look at where it's going and what type of new risk that might present, I think is something we need to be very aware of." As the members of the Federal Open Market Committee prepare to convene for their next scheduled meeting the first week of next month, most expect officials to keep the target interest rate next to nothing and announce another round of quantitative easing. Although analysts at Bank of America Merrill Lynch think this could lead banks to begin a race to a new pricing bottom in an attempt to gain more market share.

Is It Wrong to Capitalize on Nonpublic Fed Information? - Perhaps the most well-known aspect of securities law is the illegality of insider trading. If a person gains access to nonpublic information about a firm, it cannot be used as a basis for buying or selling its stock. Yet, an interesting special report at Reuters reveals that the same rules don't apply to the Federal Reserve. Considering the importance monetary policy holds these days, shouldn't the same rules apply?  The authors of the Reuters article explain that some people with close ties to the Fed use their insider knowledge to their advantage. They provide the following example:  On August 19, just nine days after the U.S. central bank surprised financial markets by deciding to buy more bonds to support a flagging economy, former Fed governor Larry Meyer sent a note to clients of his consulting firm with a breakdown of the policy-setting meeting.The minutes from that same gathering of the powerful Federal Open Market Committee, or FOMC, are made available to the public -- but only after a three-week lag. So Meyer's clients were provided with a glimpse into what the Fed was thinking well ahead of other investors.

The Quasi-Monetarist - Scott Sumner summarizes the key tenets of those who observers, including myself, who have been labeled as quasi monetarists by Paul Krugman :
1.  Like the monetarists, we tend to analyze AD shocks through the perspective of shifts in the supply and demand for money, rather than the components of expenditure (C+I+G+NX).  And we view nominal rates as an unreliable indicator of the stance of monetary policy.  We are also skeptical of the view that monetary policy becomes ineffective at near-zero rates.  2.  Unlike monetarists, we don’t tend to assume the demand for money is stable, and are skeptical of money supply targeting rules. As I noted before, quasi-monetarists are not that different from other folks who see an AD problem in the economy.  One defining difference, though, is that quasi-monetarists see the insufficient AD issue ultimately as an excess-money demand problem and believe the Fed could meaningfully address it.   Another defining difference is that quasi-monetarists were calling for more Fed action long before it was vogue.

Was Milton Friedman right after all??? - Milton Friedman said that if the money supply kept growing at k% per year, where k was some small positive constant like 4%, nothing much could go very wrong with the macroeconomy, so that's what central banks should do. That never became part of conventional wisdom. Some people believed it in the 1970's. Almost nobody believes it now. I stopped believing it 30 years ago. So did the Bank of Canada, when it stopped targeting money growth. Milton Friedman was wrong on that one, and the current recession seemed to be just one more example of him being wrong. The current recession looked like an increase in money demand, either as part of a general excess demand for safe assets (as Brad DeLong argues), or a general demand for liquid assets. It didn't look like a fall in the money supply. Now I'm not so sure. Reading Gary Gorton and Andrew Metrick  (H/T Tyler Cowen) I realise I don't have a clue what's in the stock of money any more. And when I say "money" I don't just mean credit, or money substitutes; I mean full-blown media of exchange, like currency, or chequable demand deposits in fractional reserve banks. I mean stuff you can buy things with, without first having to sell them for money, or follow up by paying money later.

Central bankers are huddling in search of a magic elixir to ward off deflation - Finance ministers, central bankers and big-deal financiers have arrived in Washington for the annual Oktoberfest of economic policy-making, and in case you couldn't tell from the headlines over the past few days, they're plenty worried that the global recovery is about to lose steam. Central bankers, having pushed overnight interest rates to zero, are contemplating creative new ways to increase the supply of money and credit and prevent a deflationary dynamic from taking hold. The Bank of Japan took the first step by announcing it would pump the equivalent of $60 billion into the economy by buying not only government bonds but also short-term IOUs from banks and corporations and packages of securitized real estate loans. The European Central Bank is scooping up the bonds of some of its most debt-soaked member countries. And Federal Reserve Chairman Ben Bernanke seems to have convinced his colleagues that it's time to print up another trillion or two to buy Treasury notes and bonds with longer maturities.

Using TIPS to gauge deflation expectations -  Atlanta Fed's macroblog - In the recent Survey of Professional Forecasters, economists were asked to give their subjective probability of deflation during the next year. Specifically, they were asked about the chances that the quarterly consumer price index excluding food and energy (core CPI) will decline in 2011. According to the respondents, the probability of core CPI deflation in 2011 was only 2 percent.This rather sanguine view of the probability of deflation is encouraging. But is it a view shared by noneconomists? While there are many sources used to measure inflation expectations, there aren't many that gauge inflation uncertainty or the risk of deflation. However, one might estimate a probability of deflation as seen by investors by exploiting the different deflation safeguards of a pair of Treasury Inflation Protected Securities (TIPS), which have about the same maturity date but different issue dates.

Rampant Inflation In 2011? The Monetary Base Is Exploding, Commodity Prices Are Skyrocketing And The Fed Wants To Print Lots More Money - Are you ready for rampant inflation?  Well, unfortunately it looks like it might be headed our way.  The U.S. monetary base has absolutely exploded over the last couple of years, and all that money is starting to filter through into the hands of consumers.  Commodity prices are absolutely skyrocketing, and it is inevitable that those price increases will show up in our stores at some point soon.  The U.S. dollar has already been slipping substantially, and now there is every indication that the Fed is hungry to start printing even more money.  All of these things are going to cause a rise in inflation.  Not that we aren't already seeing inflation in many sectors of the economy.  Airline fares for the holiday season are up 20 to 30 percent above last year's rates.  Double-digit increases in health insurance premiums are being reported from coast to coast.  The price of food has been quietly sneaking up even at places like Wal-Mart.   Meanwhile the U.S. government insists that the rate of inflation is close to zero.  Anyone who actually believes the government inflation numbers is living in a fantasy world.  The U.S. government has been openly manipulating official inflation numbers for several decades now.  But we really haven't seen anything yet.

Fear undermines America’s recovery - Greenspan - Although rising moderately this year, US fixed capital investment has fallen far short of the level that history suggests should have occurred given the recent dramatic surge in corporate profitability. Combined with a collapse of long-term illiquid investments by households, they have frustrated economic recovery. These shortfalls, the result of widespread private-sector anxiety over America’s future, have defused much, if not most, of the impact of the administration’s fiscal stimulus. Moreover, the activism embodied in such programmes has itself stoked the degree of anxiety. The instinctive reaction of businessmen and householders to uncertainty is to disengage from those activities that require confident predictions of how the future will unfold. For non-financial corporations (half of gross domestic product), the disengagement is best measured by the share of liquid cash flow allocated to illiquid long-term fixed asset investment. In the first half of 2010, that share fell to 79 per cent, its lowest reading in the 58 years for which data are available.

A decade of slow growth, followed by two decades of slow growth - Northwestern economist Robert Gordon brings the gloom: [Gordon] belongs to the committee of distinguished economists who officially declared on Sept. 20 that the U.S. recession ended way back in June 2009. Don’t mistake that pronouncement for optimism. According to Gordon’s research into the long-term determinants of growth, America’s next two decades are going to be disappointing. He predicts that between 2007 and 2027, gross domestic product per capita will grow at the slowest pace of any 20-year period in U.S. history going back to George Washington’s Presidency. Although the data he examined closely go back only to 1891, he says that based on his knowledge of early American economic history, he thinks it is fairly safe to predict that the period will witness the slowest growth ever in GDP per capita and, therefore, American living standards. Why? The Baby Boomers will retire, meaning millions of them will stop contributing to the economy and will start living off of state programs like Social Security, disability insurance and Medicare. No technological revolution, like the internet, is on the horizon to juice growth either.

IMF admits that the West is stuck in near depression – If you strip away the political correctness, Chapter Three of the IMF's World Economic Outlook more or less condemns Southern Europe to death by slow suffocation and leaves little doubt that fiscal tightening will trap North Europe, Britain and America in slump for a long time. The IMF report – "Will It Hurt? Macroeconomic Effects of Fiscal Consolidation" – implicitly argues that austerity will do more damage than so far admitted. Normally, tightening of 1pc of GDP in one country leads to a 0.5pc loss of growth after two years. It is another story when half the globe is in trouble and tightening in lockstep. Lost growth would be double if interest rates are already zero, and if everybody cuts spending at once. "Not all countries can reduce the value of their currency and increase net exports at the same time," it said. Nobel economist Joe Stiglitz goes further, warning that damn may break altogether in parts of Europe, setting off a "death spiral".

Can I Please Go Back to My Home Timeline Now? - If you had told me four years ago that come October 2010 I would be forecasting that highly-efficient American steel companies would be operating at only 70% of normal capacity in 2011, that the U.S. Treasury would be able to borrow for 30 years at 1.61%/year real and at 3.71% per year nominal placing all inflation risk on the creditor, and that the last six months' CPI inflation would be 0.1% at an annual rate... ...I would simply not have believed you. I would have said that that could happen in some strange alternate universe but not in any real world that could plausibly exist....I would have said that, in the real world, with that much excess capacity and those low borrowing rates, 90% of both the Senate and the House would get behind big programs to push taxes off into the future and pull infrastructure into the present. How the &^#%^*@! did we get here? And why can't we get out?

Economic Measures Continue to Slow - John Hussman - The latest evidence from a variety of economic measures continues to suggest deterioration in U.S. economic activity. Probably the best way to characterize the latest round of data from the ISM and other surveys is that the data is coming in a bit less negative than we've anticipated, but continues to deteriorate in a manner that is consistent with stagnant economic activity. To obtain a broad indication of economic performance, we averaged eight different measures reported by the ISM and the Federal Reserve. These included the ISM National, Chicago, Cincinnati and Milwaukee surveys, as well as the Federal Reserve's Empire Manufacturing, Philadelphia, Richmond and Dallas surveys. The chart below shows the average standardized value of the overall indices, as well as the new orders and backlogs components (a standardized value subtracts the mean and divides by the standard deviation of a given series, so all of the variables are essentially Z scores).

Roubini: 40% Chance of Double-dip Recession - From MarketWatch: Roubini: 40% chance of double-dip recession There is a 40% probability of a double-dip recession, but you don't need one for the global economy to feel like it is in a deep, continuing recession, said Nouriel Roubini ... "You don't need another Lehman story, you don't need a major loss," said Roubini at an American Enterprise Institute event. "You can have death by a thousand cuts." I'm not sure how you assign precise odds (yesterday Goldman Sachs put the odds at about 25% to 30%), but I think the most likely outcome is sluggish growth. And that means the economy will remain susceptible to shocks. And, as Roubini noted, it doesn't matter if the economy is technically in a recession - it will feel like a recession to millions of Americans as long as jobs are scarce and incomes are under pressure.

Goldman Sachs Says US Economy May Be 'Fairly Bad' (Bloomberg) -- Goldman Sachs Group Inc. said the U.S. economy is likely to be “fairly bad” or “very bad” over the next six to nine months. “We see two main scenarios,” analysts led by Jan Hatzius, the New York-based chief U.S. economist at the company, wrote in an e-mail to clients. “A fairly bad one in which the economy grows at a 1 1/2 percent to 2 percent rate through the middle of next year and the unemployment rate rises moderately to 10 percent, and a very bad one in which the economy returns to an outright recession.” The Federal Reserve will probably move to spur growth as soon as its next meeting on Nov. 2-3, Hatzius said. Expectations for central bank action have already led to lower interest rates, higher stock prices and a weaker dollar, according to Goldman, one of the 18 primary dealers that are required to bid at government debt sales

Hatzius: Two main economic scenarios "fairly bad" and "very bad" - This all ties together ...Neil Irwin at the WaPo has an interesting graphic on the output gap and unemployment: Why it doesn't feel like a recovery, Ezra Klein at the WaPo reports on some comments from Goldman Sachs chief economist Jan Hatzius and professor Paul Krugman: Will America come to envy Japan's lost decade? And from Bloomberg: Hatzius Says Fed Easing Measures Will Probably `Fall Short' Hatzius, 41, said his two scenarios for the U.S. economy were “pretty bad” and “very bad.” And from a research note today, Hatzius wrote:  We see two main scenarios for the economy over the next 6-9 months—a fairly bad one in which the economy grows at a 1½%-2% rate through the middle of next year and the unemployment rate rises moderately to 10%, and a very bad one in which the economy returns to an outright recession. There is not much probability of a significantly better outcome.

'Fairly Bad' or 'Very Bad' Economic Scenarios - Don’t look to Jan Hatzius, the highly respected chief economist at Goldman Sachs, for a pep talk on the near-term state of the economy. As he writes in a client note today: We see two main scenarios for the economy over the next 6-9 months — a fairly bad one in which the economy grows at a 1½%-2 percent rate through the middle of next year and the unemployment rate rises moderately to 10 percent, and a very bad one in which the economy returns to an outright recession. There is not much probability of a significantly better outcome. The reason is that “short-cycle” factors such as the inventory cycle and the impulse from fiscal policy are likely to continue deteriorating through early 2011, keeping G.D.P. growth very sluggish. Yikes. He says the “fairly bad” situation is more likely, but estimates that the chances of reverting to another recession are still 25 to 30 percent.

Economists Panel: Budget Policy, Short-Term Recovery and Long-Term Growth (transcript): Krugman, Feldstein, Hatzius - CBPP

Video of Krugman, Feldstein and Hatzius from Oct 5th - Here is the video of Professors Paul Krugman and Martin Feldstein (former Reagan advisor and NBER president), and Jan Hatzius, chief economist of Goldman Sachs: The Economic Policy Institute conference on October 5, 2010  I'm not sure who is the most pessimistic.

What are the Risks to a Long Period of Economic Stagnation? - The Economist asks: What are the risks to a long period -- say, a decade -- of economic stagnation? Are policymakers underestimating these risks? What threat is most underappreciated? My answer, which shouldn't be too surprising, is here. There are also responses from Ricardo Caballero ("There is no risk for most rich countries") and Jesper Koll ("Government may cause the stagnation"). Additional responses may be posted later, but so far I seem to be the only one who sees risks ahead, and thinks government can help to reduce them. [All Responses]

Ezra Klein - Will America come to envy Japan's lost decade? - Perhaps the most depressing exchange of this morning's conference -- and believe me, there were plenty to choose from -- was between Goldman Sachs's Jan Hatzius and Paul Krugman. Hatzius started things off by questioning whether the Federal Reserve would really step up to the plate: If we talk about what else could be done, I think the Federal Reserve could certainly do more. The question is whether what they'll do will have a substantial effect. It'll have some effect. But the numbers for the total amount of asset purchases really required to move the needle a lot is very large. There's a natural bias towards caution among monetary policymakers in this kind of environment.  Then Paul Krugman jumped in:There's a trap, and it's the same thing that happened with fiscal stimulus. You do something in the right direction that's inadequate, and then people say, well, that didn't work, and instead of increasing the dosage and proving it right, you give the thing up altogether.  All of this is very familiar if you studied Japan in the '90s. In fact, we're doing worse than the Japanese did.

Will the US Be Jealous of Japan's 'Lost Decade'? - Nikita Kruschev is supposed to have said that after a nuclear war, the living will envy the dead. And after the financial equivalent of nuclear war, Paul Krugman thinks the survivors will envy Japan: All of this is very familiar if you studied Japan in the '90s. In fact, we're doing worse than the Japanese did. Our monetary policy is a bit more aggressive, but our fiscal policy has been less aggressive. We have a larger output gap than they did, and we've had a surge in unemployment that they never had, and our political will to act has been exhausted much faster than theirs was. On the current track, we're going to look at Japan's lost decade as a success story compared to us. What we should be doing is a really big dose of stimulus on all of these fronts. Throw the kitchen sink at it. But if you ask me for ways to solve this problem that lives within the constraints of policymakers who don't want to be bold, I don't know that I have an answer for that. I have several thoughts about this.

Will America come to envy Japan's lost decade? That's Ezra's question, read this too.  Moving away from traditional macro, I would add two points: 1. Japan has seen numerous quality improvements over the last twenty years, and Japanese consumers are renowned for valuing quality.  The CPI mismeasurement problem may be greater for Japan and real Japanese living standards perhaps have risen a bit more rapidly than the numbers indicate. 2. Japanese politics is less competitive and Japanese rent-seeking is less competitive than in the United States.  Sustained near-zero growth in the United States would mean that interest groups tear apart the social fabric and grab too lustily at the social surplus.  Whether we like it or not, we are "built to grow" and we use the fruits of that growth to buy off interest groups as we go along.  Japan in contrast has greater capacity to stifle these grabs for new redistributions because their politics is more of an insider's game.

IIF warns of a dollar collapse, and rising capital flows to emerging markets - The Washington-based Institute for International Finance has warned of a crash in the dollar as a result of the Federal Reserve’s expected policy of further monetary stimulus, according to Frankfurter Allgemeine. In a report, the IIF calls on the Fed to pursue a monetary policy that supports foreign demand for US goods. Otherwise there is a threat of a significant spike in capital flows to emerging markets, which would rekindle global imbalances and financial instability. The managing director of the IIF is quoted as saying that market participants have to be persuade that the large economies comprehend their collective responsibility to achieve balanced and sustainable growth. The IIF also published its forecast for net capital flows into emerging markets, raising its previous 2010 estimate of $709bn to $825bn. To avert the danger, the IIF has called on the world’s leading nationals to agree a currency pact, or face the risk of protectionism. This follows last week’s warning by Brazil’s finance minister Guido Mantego of a currency war. The IIF is specific about the pact, according to the FT. It should be an updated, and more far-reaching agreement than the 1985 Plaza accord, aimed at weakening the dollar at the time, and should include stronger commitments to medium-term fiscal stringency in the US, and for structural reforms in Europe. An exchange-rate deal alone would be insufficient, according to the IIF.

US Must Maintain Confidence in Dollar: Volcker - CNBC - The United States must preserve confidence in the dollar even as it looks at ways to combat the sluggish economy, Paul Volcker, a special economics adviser to U.S. President Barack Obama, said Wednesday. The former Federal Reserve chairman said it is difficult to find any sector of the U.S. economy that has any "spark," and authorities should be examining what fiscal and monetary tools they have available. "The challenge now is we have intervened, it becomes more and more difficult in the future, the monetary policy ... the fiscal policy. We sure have to maintain some confidence in the dollar or none of this would work," "Some people would say there's no possibility of a further stimulus program, but the risk is of course that would make things worse and you're going get a reaction that's unmanageable."

Stiglitz says Fed policy is competitive devaluation - U.S. monetary policy is flooding the world with cheap liquidity, Nobel Prize-winning economist Joseph Stiglitz said at the Canadian Consulate’s “Invest in Canada” luncheon yesterday. Our current policy, he explained, acts as a competitive devaluation against emerging-market currencies. Stiglitz added that he is worried about the prospect of a currency war but conceded that there’s not anything we can do about it. Stiglitz went on to say that what the Fed is doing is not so different from China’s interventions in the foreign-exchange markets and accused the U.S. central bank of undermining global financial market integration and only acting out of a sense of guilt:

Goldman Forecasts U.S. Dollar Set for Sharp Decline - As a result of the Federal Reserve’s next round of quantitative easing, Goldman Sachs is predicting a sharp slump in the US dollar’s value against other major currencies. In particular, the dollar is expected to weaken to $1.79 against the British pound over the next six months, $1.85 over the next year. The dollar will also weaken against the euro to as low as $1.55, according to Goldman. This is far cry from Dollar-euro parity. If the dollar does weaken to these levels, it will likely fan trade friction. Notable in this discussion is that the all of the adjustment for US dollar currency debasement falls on the floating rate currencies like the euro, the pound, the Swiss franc and the yen. China’s currency, because of its fixed peg to the US dollar, will depreciate as well, setting up tensions with Japan and Europe.

Dollar `Panic' Drop to Record 74 Yen Is Likely in 2011, Wakabayashi Says (Bloomberg) -- The dollar may fall to a record 74 yen by February 2012 as concerns about the U.S. budget deficit weaken its currency, said Eishi Wakabayashi, the strategist who forecast the yen’s surge to an all-time high in April 1995.  Wakabayashi, head of Tokyo-based Wakabayashi FX Associates Co., said concerns over the widening U.S. budget deficit will cause “panic” within a year, driving up Treasury yields and weakening the dollar. This year’s slide in government yields is likely to reverse as the U.S. economic recovery regains momentum, he said.  “The U.S. may experience its own version of a sovereign debt panic from around October next year,” Wakabayashi said. “A scary phase will start after” the next northern-hemisphere summer, he said.

Yuan could rise as 'supercurrency' - The drumbeats of a ‘currency war’ are resonating around the world, with countries competing with one another to devalue their currencies.  But economists and market watchers reckon that out of the dust kicked up by the slugfest, the Chinese currency — the yuan (or renminbi) — will inevitably emerge as the next preferred currency of global trade. “Confidence in international currencies could break down to such an extent that it could lead to sharp changes in the near future,” says Joseph Yam, who retired last year as chief executive of the Hong Kong Monetary Authority, the world’s highest paid central banker. In such a scenario, and in the absence of any other credible alternative to the US dollar as the reserve currency of choice, “the market may in the end turn to a sovereign currency currency — and that currency, I think, could be the renminbi,” he adds.

IMF Chief Warns On Exchange Rate Wars - Governments are risking a currency war if they try to use exchange rates to solve domestic problems, the head of the International Monetary Fund has warned. The comments by Dominique Strauss-Kahn came before the yen fell as a result of the Bank of Japan shifting towards quantitative monetary easing, cutting its key interest rate and proposing a new fund to buy government bonds and other assets.  “There is clearly the idea beginning to circulate that currencies can be used as a policy weapon,” Mr Strauss-Kahn told the Financial Times “Translated into action, such an idea would represent a very serious risk to the global recovery . . . Any such approach would have a negative and very damaging longer-run impact.” In recent weeks several major economies have taken measures to relieve upward pressure on their currencies. Japan intervened in the currency markets to sell yen for the first time in six years. Brazil has threatened intervention to hold down the real, and on Monday doubled a tax on foreign purchases of bonds in an attempt to reduce inflows

U.S. To Press Currency Issues At IMF -- Treasury Official - U.S. officials plan to press their foreign counterparts to avoid interfering in global currency markets at this weekend's International Monetary Fund meetings, warning of the potential effect on the global rebalancing efforts. A senior Treasury Department official, speaking to reporters at a briefing, said U.S. officials will stress the need for countries to allow for "market-oriented exchange rates" as part of a broader rebalancing of the world economy. Besides China's undervalued yuan, intervention by South Korea, Brazil and Tokyo in their currencies have raised foreign-exchange tensions, propelling the sensitive issue to the forefront of international talks.

Currency war fears tinge IMF meetings (Reuters) - If there's one thing the world's economic powers can agree on, it's that none of them wants a strong currency right now. Most advanced economies expect lukewarm domestic growth at least through next year, leaving them unusually export-dependent. The major emerging economies, including China and Brazil, rely on exports too. They all know a weaker currency gives their goods a competitive advantage. Fears that a currency war may be brewing will likely dominate talks when financial leaders gather at the twice-yearly International Monetary Fund and World Bank meetings in Washington beginning on Friday. In the past month, Japan has intervened to drive down the value of the yen, and a couple of emerging markets have followed. The U.S. dollar has tumbled as investors brace for the Federal Reserve to print as much as $1 trillion to fund debt purchases in the hope of propping up the recovery. Brazilian Finance Minister Guido Mantega said last Monday the world was in an "international currency war" that put emerging markets like Brazil at a disadvantage. Both the head of the IMF, Dominique Strauss-Kahn, and U.S. Treasury Secretary Timothy Geithner dismissed that view, however.

A Note On Currency Wars - Krugman - I’ve seen a number of people — most recently, Yglesias — suggesting that mutual attempts by major economies to depreciate their currencies could be really helpful right now. The intuition seems clear: it gets countries printing money; and there’s also the historical argument by Eichengreen that competitive devaluation in the 1930s was actually quite helpful. But I don’t think this argument really works — at least not as phrased. The hypothesized currency war in which the Fed buys euros and the ECB buys dollars might not do any harm, but it probably wouldn’t help, either. Why? In the 1930s, competitive devaluation mattered largely because a number of countries were still on the gold standard, and were keeping interest rates well above the zero lower bound in an attempt to preserve their gold reserves. Devaluation relaxed this constraint by making the gold worth more in domestic currency, and hence was expansionary. Today there’s nothing like that, and rates are pretty much at zero. And in that case, it’s hard to see what mutual intervention accomplishes.

Currency War Threats Escalating - Yves Smith - Last week, the simmering threat of trade disputes erupted into a full boil when Brazil’s finance minister Guido Mantega said that national governments around the world were weakening their currencies in an “international currency war” to gain competitive advantage. Mantega stressed that Brazil was prepared to back his words with action to lower the value of the Brazilian real. Yesterday, IMF chief Dominique Struass-Kahn warned that countries were beginning to use their currencies as “a policy weapon” in a Financial Times interview: “Translated into action, such an idea would represent a very serious risk to the global recovery . . . Any such approach would have a negative and very damaging longer-run impact.” And today, the Financial Times’ Martin Wolf declared China to be a legitimate target in an incisive article, “How to fight the currency wars with stubborn China.” Now it’s fair to point out, as David Rosenberg has that currency one-downsmanship has been with us since 2007. And it is similarly fair to point out that America has gotten itself in an unhealthy economic co-dependency with China.

The currency war starts not with a bang, but with buckpassing - The past week has seen an escalating series of news stories about a looming "currency war," as country after country tries to drive their currency downward, the United States blames China as the source of original sin on this, and China pisses off yet another country responds by digging in its heels, and the IMF wrings its hands.  If you need to read one article on why things are going down the way they are, it's Alan Beattie's excellent survey in the Financial Times of how countries as responding to this situation:   Washington is looking for allies -- particularly among the emerging economies, who complain about their own competitiveness and volatility problems -- in its campaign for exchange rate flexibility. Trying to take on Beijing single-handed makes the US vulnerable to the charge that it is a lone complainant blaming its own profligate shortcomings on the country that is kind enough to lend it money, holding the best part of $1,000bn in U.S. Treasury bonds…

Currency Wars To Be Feared — Not Celebrated - On Tuesday the market soared on the grounds that global efforts to engage in another round of monetary ease and devalue currencies would boost economies around the world. We think that the market’s initial reaction is a wrong-footed move that will soon be reversed upon further reflection. What we are actually facing is an all-out global currency war and old-fashioned "beggar-thy-neighbor" policies where every nation tries to devalue its currency to create more exports in order to boost its economy at the expense of every other nation. It is obvious, however, that it is impossible for all currencies to decline in relation to each other. The failure then leads to other desperate measures to increase protectionist barriers such as higher tariffs, quotas and various restrictions on international capital flows. The result is a collapse of world trade leading to depression and the dreaded deflation that nations are trying to avoid in the first place.

Finance Bigwigs Call for Ceasefire in Currency War - Well this is pretty much self-explanatory. Many are wondering about whether the Washington Consensus-era vogue of free-floating currencies is cut out for today's world. With the US showing no intention of easing on easy money policies and screwing over holders of their debauched currency, many developing countries have taken to propping up the dollar in fear of an outright dollar swoon that will severely damage their export competitiveness. Meanwhile, those in search of higher yield use the dollar as a funding currency to obtain higher-yielding ones in the developing world as dollar savings rates are near zero. Brazil's FinMin recently grabbed a lot of headlines by declaring that we're in the midst of an "international currency war," but it's certainly not far from the truth. And so those wary of the (foreign exchange) market's corrective ability now envision another 1985 Plaza Accord-style agreement. Whereas that deal involved the US and major trading partners Germany and Japan, the surplus-running countries are now more plentiful. There would be many more places at the negotiation table circa late 2010.

Geithner Calls for Currency Cooperation Amid Rush to Weaken(Bloomberg) -- Treasury Secretary Timothy F. Geithner called for cooperation to rebalance currency markets and warned of a “damaging dynamic” of competitive weakening that could limit global growth.  “More and more countries face stronger pressure to lean against the market forces pushing up the value of their currencies,” Geithner said in a speech yesterday in Washington. Currencies are “inherently a multilateral issue” that is “much easier to solve if countries come together.” Global exchange-rate policies are a source of contention ahead of this week’s meeting in Washington of the International Monetary Fund, World Bank and Group of 20 officials. Brazil’s Finance Minister Guido Mantega last week warned of a “currency war” as governments in Asia and Latin America seek to spur exports and economic growth.

Geithner calls for "more flexible, more market-oriented exchange rate systems"- From Treasury Secretary Geithner: Remarks at the Brookings Institution  [F]or the recovery to be sustainable, there must ... be a change in the pattern of global growth. For too long, many countries oriented their economies toward producing for export rather than consuming at home, counting on the United States to import many more of their goods and services than they bought of ours.  But as America saves more, countries overly reliant on exports to us for their own growth will need to change their policies, or else global growth will slow and all of us will be worse off. Countries that chronically run large surpluses need to undertake policies that will boost their domestic demand. That brings me to the second policy challenge: we believe it is very important to see more progress by the major emerging economies to more flexible, more market-oriented exchange rate systems. This is particularly important for those countries whose currencies are significantly undervalued.

Americans are Full of %^&! on Exchange Rates - Ooh, this makes me very, very mad. When it comes to the white man / forked tongue sweepstakes, America is well-nigh unbeatable. The United States has done nearly everything humanly possible to debauch its currency and expects others to gladly accept the consequences. Witness the following, and I will be very surprised if anyone faults these statements:

  1. The US government plays a large part in making the dollar unattractive by implementing near-zero interest rate policies, quantitative easing via clogging its central bank's balance sheet with toxic assets, running trillion dollar-plus deficits, and creating expectations that such practices will continue indefinitely and even expand given the remote prospects for sustained American recovery;
  2. Accordingly, the US couldn't care less about maintaining the value of the dollar, meaningless "strong dollar" statements here and there aside;
  3. Pleas to allow "market forces" to assert themselves are thus nothing more than an indirect way of saying "let the dollar go" as it would under normal circumstances.

Which brings me to US Treasury Secretary Geithner haranguing the so very many currency interventionists whose efforts pale in comparison with those of America.

Is the U.S. a Currency Manipulator? - The trade-weighted U.S. dollar index has depreciated by almost 40% over the last ten years vs. the world's major currencies (see chart above).  Does that make the U.S. a currency manipulator?  Here's a little editing fun of this article: "China The United States flatly denies that its currency manipulation undervalues the renminbi (yuan) dollar by 40 percent and has become one of the foremost impediments to fair and equitable global trade, experts say. “That undervaluation of the renminbi dollar acts as a subsidy for Chinese American exports, artificially making them as much as 40 percent cheaper when sold in outside the U.S. Conversely, it acts as a tax of as much as 40 percent on Americanforeign-made goods sold in China the United States,” according to a recent article on The Hill’s Congress Blog.

Treasury Sees U.S. 2010 Budget Gap at Almost 10% of Gross Domestic Product - The U.S. government’s deficit in the fiscal year 2010, which ended Sept. 30, will be almost as big a share of the economy as the $1.4 trillion 2009 shortfall, a U.S. Treasury official said today. “Due to the deep economic recession, there has been a large imbalance between revenues and expenditures, which caused the fiscal deficit to reach nearly 10 percent of GDP in fiscal year 2009,” said Mary Miller, assistant secretary for financial markets, referring to the economy’s size as measured by gross domestic product. “We expect this year’s deficit to be a similar or slightly lower percentage of GDP,” Miller said. Miller also said that the Federal Reserve’s decision to purchase Treasury securities in the secondary market will not affect debt management.

The Federal Budget Deficit for 2010—Nearly $1.3 Trillion – CBO blog - The federal government’s fiscal year 2010 has come to a close, and CBO estimates, in its latest Monthly Budget Review, that the federal budget deficit for the year was slightly less than $1.3 trillion, $125 billion less than the shortfall recorded in 2009. Relative to the size of the economy, the 2010 deficit was the second-highest shortfall—and 2009 the highest—since 1945. The 2010 deficit was equal to 8.9 percent of gross domestic product (GDP), CBO estimates, down from 10.0 percent in 2009 (based on the most current estimate of GDP). CBO’s deficit estimate is based on data from the Daily Treasury Statements and CBO’s projections; the Treasury Department will report the actual deficit for fiscal year 2010 later this month. The estimated deficit is about $50 billion less than CBO projected in its August Budget and Economic Outlook. Outlays turned out to be lower and revenues higher than CBO anticipated.

Biggest Deficit Reduction Ever From 2009 to 2010 - In previous years we would have been breaking out the champagne on this news: The monthly budget review released yesterday by the Congressional Budget Office estimated that the federal budget deficit fell by $125 billion from 2009 to 2010.  This by far is the biggest one-year nominal drop in the deficit that has ever occurred. There were two primary reasons there was no cheering yesterday. First, it's not at all clear that reducing the deficit was the correct fiscal policy given the slow growth in the U.S. economy. Second, in the current political atmosphere even a 50 percent reduction would have still left lots of room for those who want to do so to use the deficit as an issue.  To those folks, the $125 billion reduction simply isn't as important as the $1.29 trillion deficit that's available for campaign fodder. In other words, the $125 billion reduction in the deficit was both too much and not enough.

Greenspan Says US Creating `Scary' Deficit as Borrowing Rises - Former Federal Reserve Chairman Alan Greenspan said the U.S. fiscal deficit is “scary” and the federal government needs to cut spending on entitlements.  “We’re involved in a dangerous game,” Greenspan said yesterday at a foreign-exchange conference in New York sponsored by Bloomberg LP, the parent of Bloomberg News. “We’re increasing the debt held by the public at a pace that is closing” the gap between our debt and “any measure of borrowing capacity,” Greenspan said. “That cushion is growing very narrow.” U.S. companies may be holding back on investment because of the rising federal deficit, which causes uncertainty about future tax policies, Greenspan said in an opinion article for the Financial Times this week. Weak investment by businesses in capital equipment and fixed assets has helped to crimp the U.S. economic recovery, he said.

US deficit is 'real and growing' threat: Bernanke — Federal Reserve chairman Ben Bernanke called for quick and decisive steps to rein in the exploding US budget deficit, warning failure to act could result in a serious crisis.Warning that surging annual deficits presented a "real and growing threat" to the US economy, Bernanke told an audience in Rhode Island that a day of reckoning would come if action is not taken. "The only real question is whether these adjustments will take place through a careful and deliberative process... or whether the needed fiscal adjustments will be a rapid and painful response to a looming or actual fiscal crisis."

Fed Chairman Ben Bernanke Warns Against Hasty Action On The U.S. Deficit - Federal Reserve chairman Ben Bernanke has warned against the danger of tackling America's budget deficit while the recovery in the world's largest economy remains fragile.  "Economic conditions provide little scope for reducing deficits significantly further over the next year or two," Mr Bernanke told an audience in Rhode Island. "Indeed, premature fiscal tightening could put the recovery at risk."  The comments are a rare intervention by the Fed chairman in fiscal policy, which has been catapulted higher up the agenda as politicians on Capitol Hill argue over whether to extend tax cuts that are due to expire at the end of the year.

Bernanke calls for tougher budget rules - Federal Reserve Chairman Ben Bernanke called on Congress on Monday to adopt tougher budget rules even as the nation’s top central banker warned against taking deficit-cutting action too soon. Still, Bernanke also warned against tightening too quickly and reportedly said more asset purchases by the Federal Reserve could help the economy.   In a speech delivered at the annual meeting of the Rhode Island Public Expenditure Council and devoid of comments on monetary policy, Bernanke said that fiscal rules might be a way to impose discipline, particularly if those rules are transparent, ambitious, focused on what the legislature can control directly, and are embraced by the public.  “A fiscal rule does not guarantee improved budget outcomes; after all, any rule imposed by a legislature can be revoked or circumvented by the same legislature,” Bernanke said, according to a copy of prepared remarks made available in Washington.

Bernanke breaks promise, discusses fiscal issues - This speech isn't worth reading for substance (Ben Bernanke is clueless on budget issues), but it reveals something about Bernanke: Fiscal Sustainability and Fiscal Rules Bernanke never mentioned "PAYGO" when he was head of the Council of Economic Advisors in 2005. In fact Bernanke barely mentioned the deficit in 2005 - except in postive terms - even though the structural deficit was in place and the cyclical deficit was coming (because of the housing bubble). I wonder why? Well, he missed the housing bubble completely - but what about the structural deficit? Today he said:Our fiscal challenges are especially daunting because they are mostly the product of powerful underlying trends, not short-term or temporary factors. Two of the most important driving forces are the aging of the U.S. population, the pace of which will intensify over the next couple of decades as the baby-boom generation retires, and rapidly rising health-care costs.Weren't the baby boomers going to get older in 2005? Oh my ... This is an issue that 1) is outside of Bernanke's area of responsibility, 2) he has promised not to discuss, and 3) he has zero credibility on. Enough said.

Monetary Versus Fiscal - Krugman - Karl Smith has his own version of the models people are using to think about this crisis. I don’t have much disagreement, except that I would group the various non-Keynesian models together as all various attempts to see this as a supply problem: But there’s another point Smith raises: why did some of us emphasize the need for fiscal stimulus, rather than just calling for more expansionary monetary policies? He writes: On the other hand, Brad and Paul like to focus on spending. I suspect this is in no small part because they think government spending is too low anyway. Why not kill two birds with one stone: build some roads and get some jobs. I plead innocent on that one. I wanted and still want fiscal expansion because it’s relatively certain in its effect: if the government goes and buys a trillion dollars’ worth of stuff, that will create a lot of jobs. On the other hand, if the Fed goes out and buys a trillions dollars’ worth of long-term bonds, the effect is quite uncertain, with many possible slips between the cup and the lip.

Economics 101 for deficit hawks - The same Washington policymakers who inveigh against the deficit want a strong dollar – clueless about the contradiction.   The debate over the value of the dollar against the Chinese yuan is the latest episode in this silliness. The Washington tribal elite has been on the warpath against budget deficits in recent months. They have worked themselves into such a frenzy that nothing will stand in their way: neither concerns about unemployment, nor concerns about the well being of our elderly, nor even concerns about basic economic logic. The central problem stems from the simple accounting identity that national savings is equal to the broadly measured trade surplus. A country with a large trade surplus will also have large national savings. Conversely, a country with a large trade deficit will have negative national savings. These relationships are accounting identities – there is no way around them.This brings us to the next part of the story; where trade deficits come from.

Does focusing on deficit reduction reduce deficits? - The short answer to my question is no. I was thinking about this early today and here’s what I have come up with as a more fleshed out answer. Budget deficits are the result of an ex-post accounting identity. In plain English this means that the deficits are the effect and not the cause. For example, if I told you that the unemployment was X%, savings rates Y%, and capital investment Z%, this would go a long toward telling you how much revenue the federal government would be able to collect under any given tax regime. The point is not that you could predict the budget deficit in advance with remarkable accuracy but that you could build a range for federal deficits based on these inputs and other factors. This is what the US Office of Management and Budget does every year with a reasonable track record. The deficit is an exogenous variable – it’s causal effect is limited.

Rates keep falling: 2-Year Treasury Yield Hits Record Low - Just a look at falling treasury yields and mortgage rates ... From Reuters: US 2-Year Treasury Yield Hits Record Low The two-year U.S. Treasury note yield fell to a record low of 0.403 percent on Monday ... the 30-year T-bond rose almost a full point in price to yield 3.676 percent, down 4 bps. The 10-year yield is down to 2.49% and, according to Freddie Mac (for the week ending Sept 30th): "The 30-year fixed-rate mortgage rate [4.32 percent] dropped to tie the survey’s all-time low and the 15-year fixed-rate [3.75 percent] set another record low." And mortgage rates have probably fallen further over the last week. Lots of records ...

Brad DeLong and flight to safety - Brad DeLong ponders the issue of the root cause of the crisis. Is it that the full-employment planned demand for safe assets is greater than the supply, or is it that the full-employment planned demand for medium of exchange is greater than the supply? In other words, is it the flight to safety, or is it the flight to liquidity? Brad DeLong argues that we have the flight to safety: "Thus we would expect a downturn caused by a shortage of liquid cash money to be accompanied by very high interest rates on, say, government bonds--which share the safety characteristics of money and serve also as savings vehicles to carry purchasing power forward into the future, but which are not liquid cash media of exchange." The problem is that government bonds serve both as savings vehicles and as medium of exchange. As Gary Gorton said, "it seems that U.S. Treasuries are extensively rehypothecated and should be viewed as money". You purchase groceries with cash, and you purchase other financial assets with U.S. Treasuries, but in both cases we are dealing with media of exchange.

Obama says US fiscal situation 'untenable' - President Barack Obama on Monday said the United States was facing an "untenable fiscal situation" and would have to get serious about tackling its federal deficit. The US budget deficit is forecast at a record USD 1.47 trillion in the fiscal year that ended on September 30, 2010.Obama said that emergency government spending measures he took to support growth and hiring when he took office last year had temporarily added to the funding gap, but the deficit had to be tackled going forward.

In a new period of instability, Obama becomes Hoover - Yesterday I participated in a “Living in the post-bubble world: What’s next?” event with Nouriel Roubini. The key take-away from the discussion is that the U.S. and global economies are headed into a new period of instability and competitive currency devaluations. The primary driver of this breakdown in the international consensus around free trade and global markets is the overt policy by the Fed to use quantitative easing or “QE” to devalue the dollar. The final comments by John Makin illustrate this point very nicely. Now the Fed claims that further QE, which will include the purchase of hundreds of billions in debt issued by the Treasury, will help stimulate the U.S. economy and reverse the secular deflation that is depressing real estate valuations, employment and business investment. But the trouble is that QE is having little positive impact on American households. Without refinancing, there is no reflation of balance sheets or consumer spending. As I noted in an earlier comment, “Bernanke conundrum is Obama’s problem,” the Fed’s attempts to help American households is being blocked by the largest banks. We wrote about the issue again this week in The Institutional Risk Analyst, “Refinancing, Not Foreclosures, is the Issue.”

David Stockman: US Is in ‘Race to the Fiscal Bottom’ - It’s been nearly three decades since David Stockman was the brash and brilliant enfant terrible of President Reagan’s White House, but he hasn’t mellowed with age. The Bush tax cuts are “unaffordable,’’ he says. Extending them would be a “travesty.”  President Obama’s stimulus program was “futile.” Ben S. Bernanke, the Federal Reserve chairman, is undermining the whole economy. Today, Stockman says, “I invest in anything that Bernanke can’t destroy, including gold, canned beans, bottled water and flashlight batteries.”  Stockman, Reagan’s budget director from 1981 to 1985, initially became famous for his zeal in slashing government spending on almost everything except defense. But he will be best remembered for confessing, in an interview with William Greider for The Atlantic Monthly, his disillusionment with the “supply-side” economic policies that led to soaring deficits under Reagan. “None of us really understands what’s going on with all these numbers,’’ he declared, along with many other criticisms that nearly got him fired. Today, Stockman is working on a book about the financial crisis, and he recently shared his thoughts with The Fiscal Times about some of today’s most pressing fiscal issues. No surprise — he’s as brutally candid as ever. 

I Wasn't Invited - Matt Welch writes, There you have it. The 47 smartest economists around the president of the United States agree that the best way to solve the "untenable fiscal situation" is to boost education spending, weatherize homes, throw more bad money after bad in the housing market, more bad money after bad in the Small Business Administration, and maybe (though only over the president's dead body) freeze all taxes for two years. That oughtta tenabilize it. Welch is mostly calling out Martin Feldstein, who seems to be fixated with rewriting mortgage contracts.  I have been saying for more than two years now that the taxpayers would be better off if we just subsidized moving vans to get people out of the houses they cannot afford. I would rather create jobs for truck drivers and furniture-haulers than for mortgage servicing clerks.

The Politics of Fiscal Responsibility - In a couple words:  “not good.”  A Marketplace radio interview of me aired on Wednesday morning, whittled down from close to a half hour recording of my conversation with Steve Chiotakis.  As a result, I probably sound like a simple naysayer–complaining about how politicians are loathe to talk in any detailed way about how they’d reduce the deficit, but not offering up any specific ideas myself.  I notice I get that complaint a lot in the comments people leave, so over the next several months I’m going to make a conscious effort to feature more specific ideas for deficit reduction–whether my own (which I really have discussed before) or those of other experts.  My sharing some of these specific policy ideas here will be a good companion to the Concord Coalition’s Fiscal Solutions Tour. So stay tuned for ideas on how to not just raise taxes, by the way.  

America’s Fiscal Choices: Strengthening the Economy and Building for the Future - The Center on Budget and Policy Priorities, The Century Foundation, Demos and The Economic Policy Institute held a conference on October 5, 2010 with some of the nation's leading thinkers to discuss the critical economic choices and challenges confronting the nation. Panelists represented a range of perspectives on how to facilitate economic growth, spur public investment and reduce the national debt. The video shows the panel discussion on Budget Policy, Short-Term Recovery and Long-Term Growth, in which economists Martin Feldstein, Paul Krugman and Jan Hatzius all agreed that the economic outlook was bleak and the $787 billion Recovery Act in 2009 was not large enough given the magnitude of the downturn.

Fewer Budgets, Less Spending - Third Way, a centrist research group, has come out with an intriguing set of ideas for reducing the deficit. In dollar terms, the proposals are not huge. But they may be significant for other reasons. They include changes in pensions for federal workers and – my favorite – switching to two-year Congressional budgets from one-year budgets. As Jim Kessler of Third Way says: “In the first year, Congress appropriates. In the second year, it conducts oversight and looks for areas to cut.” The two-year idea has a nice lineup of supporters, according to The Hill: Kent Conrad, the North Dakota Democrat who chairs the Senate Budget Committee; Paul Ryan of Wisconsin, the top Republican on the House Budget Committee; Erskine Bowles, the former Clinton administration aide who co-chairs the Obama deficit commission; and Andy Stern, the labor leader. Mr. Kessler argues, via e-mail, that cuts like this one have to come before other cuts

Welcome to the anti-stimulus - The good news: The private sector gained 64,000 jobs in September. The bad news? The public sector lost 159,000.
The government is now impeding an economic recovery. But it's not for the reasons you often hear. It's not because of debt or because of taxes. Nor has it scared the private sector into timidity. It's because, at the state and local level, it's firing people. There are more than 14 million Americans looking for work right now -- to say nothing of the 9.5 million who have been forced into part-time jobs when they want, and need, full-time work -- and the government just added 159,000 more to the pool. Consider this: If we only counted private-sector jobs, we'd have had positive jobs reports for the last nine months. As it is, public-sector losses have wiped out private-sector gains for the past four months. Because the federal government has decided against backing up state and local governments, the bleeding continues, and that scares businesses away from investing in recovery. We create the stimulus that helped the economy survive 2008 and 2009, and we've created the anti-stimulus that's keeping it from recovering in 2010

You don't need to be a Keynesian to see a lot of potential government expenditures for which the benefits would far outweight the costs - Imagine you're in debt well past your eyebrows and then lose your job.  The only thing you can do to pay down your debt is collect aluminum cans and recyclable plastic bottles from trash bins and redeem them for pennies.  A high paying job across town is available for you, but to accept this job requires that you buy a car for the commute, a car that you can only buy by going deeper into debt.   Lenders trust you deeply and are not only willing to lend to you but are willing to lend to you cheaply, at a near-zero rate of interest.  And the job pays well enough to pay off both new car loan debt and contribute significantly more to paying down your current debt. Should you take out the loan, buy the car and take the job across town? Obviously, yes.  But some would claim that you're already deep into debt, so you should stop digging. This, in fact, is the world we live in:

The IMF on Fiscal Austerity - Paul Krugman - Chapter 3 of the IMF’s new World Economic Outlook is online; it examines the economics of fiscal austerity. It won’t make the austerians happy. Two things are worth noting. First, the report takes on Alesina-type studies, which have been heavily promoted by some commenters here (especially the trolls). The IMF basically finds them all wrong, largely for the reasons I have pointed out in the past: their methodology does a really terrible job at identifying actual changes in fiscal policy. Alesina and Ardagna don’t pick up that contraction at all, instead identifying some spurious cases of austerity in other years. And it turns out that identifying the episodes right reverses the results: contractions are contractionary, after all. Second, the study shows that fiscal contractions have normally been accompanied by both lower policy interest rates and currency depreciation, both of which help cushion the negative effects. It seems clear that when you’re both in a liquidity trap and facing a global slump, the negative effects of austerity are likely to be much worse.  The IMF, then, is talking sense. I wish I thought it would make a difference.

Premature Virtue - Soros -The Obama administration’s insistence on fiscal rectitude is dictated not by financial necessity, but by political considerations. The United States is not one of Europe’s heavily indebted countries, which must pay hefty premiums over the price at which Germany can borrow. Interest rates on US government bonds have been falling and are near record lows, which means that financial markets anticipate deflation, not inflation. Nevertheless, Obama is under political pressure. The US public is deeply troubled by the accumulation of public debt, and the Republican opposition has been extremely successful in blaming the Crash of 2008 – and the subsequent recession and high unemployment – on government ineptitude, as well as in claiming that the stimulus package was largely wasted.But, without a bailout, the financial system would have remained paralyzed, making the subsequent recession much deeper and longer. True, the US stimulus package was largely wasted, but that was because most of it went to sustaining consumption rather than to correcting the underlying imbalances.

Soros Calls For More U.S. Stimulus Spending - There is a real danger that U.S. President Barack Obama's goal of trying to cut in half the country's large budget deficit by 2013 could wreck the U.S. recovery and more stimulus spending is needed to breathe life into domestic demand, renowned investor George Soros has said. In a speech delivered at Columbia University on Tuesday, Soros said the Obama administration was caving in to pressure from Republicans to cut back on stimulus spending and target fiscal consolidation. "I believe there is a strong case for further stimulus," Soros said. "To cut back on government spending at a time of large-scale unemployment would ignore all the lessons learned from the Great Depression."

Summers calls for infrastructure spending - Larry Summers said the US must ramp up spending on domestic infrastructure to drive the economic recovery. Mr Summers called it a “short-term imperative and a long-term macroeconomic imperative” that the US government increase infrastructure investment. He said that a combination of low borrowing costs, cheap building costs and high levels of unemployment in the construction sector made this the ideal time to rebuild roads, bridges and airports. Acknowledging resistance to government spending at a time of high deficits, Mr Summers said that public support for investment demand needed to grow and said that the US needed focus on technology that creates new opportunities as “productive investment.” He said that the Obama administration would concentrate its efforts on technology that reduces healthcare costs and improves energy efficiency.

Thanks for Paying Your Federal Income Taxes, Here's Your Itemized "Taxpayer Receipt" - From the policy paper "A Taxpayer Receipt" from a D.C.-based policy group called "The Third Way": An electorate unschooled in basic budget facts is a major obstacle to controlling the nation’s deficit, not to mention addressing a host of economic and social problems. We suggest that everyone who files a tax return receive a “taxpayer receipt.” This receipt would tell them to the penny what their taxes paid for based on the amount they paid in federal income taxes and FICA." MP: See the example above of an itemized tax receipt for the median tax filer in 2009 making an adjusted gross income of $34,140, and paying $2,790 in federal taxes, and $2,610 in Social Security and Medicare "contributions," for a total federal tax bill of $5,400.

Obama Challenged on Tax Cuts - President Obama got into a protracted public debate on Monday with two of his outside advisers over whether to extend the Bush-era tax breaks for upper-income taxpayers.The debate came at a meeting of Obama and his outside advisers on ideas for boosting the economy. When Harvard professor Martin Feldstein’s turn came to talk, he suggested continuing the current tax rates for two years for everybody, then ending them. He said that course would bolster demand at a time when the economy is weak, and also would reduce the long-term federal debt that Obama projects. William Donaldson, a former chairman of the Securities and Exchange Commission, then offered similar suggestions, saying that confusion over future tax policy is adding to business uncertainty.

Letting rates go up for the rich - When I was asked by the New York Times to write a brief op-ed to counter arguments made in the Washington Post that the economy would be helped by cutting taxes for the rich (so that they stay the same as they were under the Bush temporary provision), I jumped at the chance. See Extending the Tax Cuts for the Wealthy--the discussion continues.  It seems quite clear that the "trickle-down" theory that assumes that if you help the rich, the world will be better off for all the rest of us has been clearly proven wrong by the four decades that it has held sway over economic, tax and social policy in the United States, starting with the presidency of Ronald Reagan. We have not had the stellar growth in jobs and opportunities for the middle class workers that the "reaganomics revolution" promised for good reason--those policies simply give more to big business and the rich, and do nothing to assure that any growth that does occur is shared with the vast majority of ordinary Americans.

I contest Mark Thoma's premise - Mark Thoma asks why US citizens don't support more income redistribution. I contest his premise in a long comment I disagree with the premise of the quoted article and the post. I think most people in the USA support explicit leveling. In particular I think a solid majority wants the tax code to be more progressive. Search for Gallup and fair here .  The majority of US adults has been convinced that the poor pay more than their fair share and the rich less than their fair share for decades.  This also shows up in polls on other topics. The only approaches to shoring up social security and paying for HCR with majority support were increasing taxes on the rich.

The Secret Big-Money Takeover of America, by Robert Reich: Not only is income and wealth in America more concentrated in fewer hands than it’s been in 80 years, but those hands are buying our democracy as never before – and they’re doing it behind closed doors. Hundreds of millions of secret dollars are pouring into congressional and state races in this election cycle. The Koch brothers (whose personal fortunes grew by $5 billion last year) appear to be behind some of it, Karl Rove has rounded up other multi-millionaires to fund right-wing candidates, the U.S. Chamber of Commerce is funneling corporate dollars from around the world into congressional races, and Rupert Murdoch is evidently spending heavily. No one knows for sure where this flood of money is coming from because it’s all secret. But you can safely assume its purpose is not to help America’s stranded middle class, working class, and poor. It’s to pad the nests of the rich, stop all reform, and deregulate big corporations and Wall Street – already more powerful than since the late 19th century when the lackeys of robber barons literally deposited sacks of cash on the desks of friendly legislators. Credit the Supreme Court’s grotesque decision in Citizens United vs. the Federal Election Commission, which opened the floodgates

Is America a plutonomy? - Has the American economy turned into a "plutonomy"? In 2005, three Citigroup analysts answered yes. They explained: "Plutonomies have occurred before in sixteenth century Spain, in seventeenth century Holland, the Gilded Age and the Roaring Twenties in the U.S ... Often these wealth waves involve great complexity, exploited best by the rich and educated of the time." According to the Citigroup experts, a plutonomic economy is driven by the consumption of the classes, not the masses: "In a plutonomy there is no such animal as 'the U.S. consumer' There are rich consumers, few in number, but disproportionate in the gigantic slice of income and consumption they take. There are the rest, the 'no-rich,' the multitudinous many, but only accounting for surprisingly small bites of the national pie."The data support their analysis. According to Moody’s Analytics, the top 5 percent of American earners are responsible for 35 percent of consumer spending, while the bottom 80 percent engage in only 39.5 percent of consumer outlays. Meanwhile, the top 20 percent received nearly half of all income generated in the U.S. -- 49.4 percent -- and the ratio of the income of the top 10 percent of Americans to the poor has risen from 7.69-to-1 in 1968 to 14.5-to-1 in 2010.

Class Structure in the Contemporary USA - The merits of different approaches to tax policy aside, perhaps the best way to describe the social reality that Cervone is noting here is simply to abandon the idea of the United States as a predominantly middle class society. Instead, there’s a smallish economic elite composed primarily of high-ranking executives and the princes of Wall Street. Then there’s a much larger middle class composed, more or less, of people with college degrees like this hypothetical cop/principal couple. And then there’s the working class majority with no bachelor’s degree.  Now none of that has any particular implications for tax policy, which really ought to be determined by thinking about how to raise a given sum of money efficiently, but I think it provides a better handle on the actual experience of class in today’s America.

The costs of rising economic inequality - If you asked Americans how much of the nation's pretax income goes to the top 10 percent of households, it is unlikely they would come anywhere close to 50 percent, which is where it was just before the bubble burst in 2007. That's according to groundbreaking research by economists Saez and Piketty. It wasn't always that way. From World War II until 1976, considered by many as the "golden years" for the U.S. economy, the top 10 percent of the population took home less than a third of the income generated by the private economy. But since then, according to Saez and Piketty, virtually all of the benefits of economic growth have gone to households that, in today's terms, earn more than $110,000 a year.  Even within that top "decile," the distribution is remarkably skewed. By 2007, the top 1 percent of households took home 23 percent of the national income after a 15-year run in which they captured more than half - yes, you read that right, more than half - of the country's economic growth. As Tim Noah noted recently in a wonderful series of articles in Slate, that's the kind of income distribution you'd associate with a banana republic or a sub-Saharan kleptocracy, not the world's oldest democracy and wealthiest market economy.

It's Not Just CEOs, the Top Pay for MLB Players, Oprah, Criss Angel, Cesar Millan is "Out of Control" - The CNBC discussion above focuses on the question of whether CEO pay is "out of control."  LA Times business writer Michael Hiltizk say Yes, and in a recent LA Times article he cited this Harvard Magazine article that reports that the "Ratio of Average CEO Pay to Average Worker Pay" has increased from 107:1 in 1990 to 344:1 in 2007. Big deal. The ratio of the median salary of the top 25 highest-paid Major League Baseball (MLB) players to the median U.S. household income has increased steadily from 70:1 in 1990 to an estimated 374:1 for 2010, an all-time historic high (see chart below). 

The Average Is Not the Typical...Why oh why can't we have a better press corps? Michael Kinsley writes: The Least We Can Do: According to a survey from the Federal Reserve Board, the average American household aged 65 to 74 has assets worth more than $1 million. Typically these amounts get spent down as people get older and sicker, so let’s say the second member of the typical couple dies leaving $500,000... Notice the slippage? As Steve Heston emails, the 2007 Federal Reserve Survey of Consumer Finances reports that the average wealth of a family with a head 65-74 was $1.015 million in 2007 (it is less now). But the median family with a head 65-74 had $239 thousand--in short, they owned their house and perhaps $100 thousand more. This matters because MIchael Kinsley is calling for a broad-based low-rate estate tax:

Estate Taxes, Capital Gains, and Paperwork - The one-year lapse of the federal estate tax this year came with the unwelcome requirement that heirs assume their benefactors’ bases for some assets they inherit in 2010, as Howard Gleckman explained in a recent TaxVox post. For some mid-sized estates, that meant higher taxes. But Howard touched only briefly on the burden the new basis requirement imposes on estate executors. Until this year—and again next year under current law—heirs received a step-up in basis along with their inheritances. That is, for the purpose of figuring capital gains taxes, their cost basis was an asset’s value at the time of a decedent’s death, rather than the original owner’s cost (including adjustments). That old model simplified estate accounting: Executors didn’t have to determine the original cost of assets, often a difficult task. Just try to figure the basis for a home bought 40 years ago so you include all of the capital improvements made over decades. Or the tax value of a family business developed with irregular cash infusions.

State Estate Taxes: Windfall Gold in Expiring Tax Cuts - As Congress delays action on extending the 2001-03 tax cuts, state revenue officers may be secretly hoping for continued legislative paralysis. Why? Because the federal estate tax, repealed for this year, will be back in January —and many states are in line for a windfall if the levy returns to its pre-2001 form. It’s not that states want to tax estates per se, but they wouldn’t mind getting some easy revenue.Until 2001, every state had a “pick-up” tax that piggybacked on the federal levy. Estates could claim a credit of up to 16 percent of their federal tax for estate taxes paid to states, so it was no surprise that states typically set their estate taxes at that maximum 16 percent rate. It was “free” money—the state got the tax revenue but estates paid nothing extra.The 2001 tax act that phased down and eventually repealed the estate tax for this year didn’t just raise the tax threshold and cut the rate. It also replaced the credit with a deduction starting in 2005. As a result, states that relied on pick-up taxes tied to the repealed federal credit lost their windfall

A terrible dependency of mind - As I watched snippets of President Obama's town hall-style meetings around the country recently, I was struck by how often questioners demonstrated the mindset that solutions to their problems will come from some central authority, in this case, the federal government.I see no easy way for a modern person, especially someone living in an urban setting--as the vast majority of people in the United States do--to avoid such dependencies altogether for now. To disengage from them completely would mean certain death for many if not most. For nearly everyone alive in wealthy countries there has never been a time when we were not faced with extreme dependence on the two most centralizing forces of the modern era, central government and behemoth corporations. So, given the current economic mess it seems natural for people to turn to the twin citadels of central power and demand that they alleviate our suffering. This demand assumes that those running our governments and corporations have the ability and the desire to respond to such suffering.

Beyond the bubble - MIT News - Financial bubbles cannot necessarily be prevented, but their impact can be limited by giving market participants better information about investment risks, finance experts said Friday during a panel discussion at the 25th-anniversary conference of MIT’s Center for Real Estate.Real estate has been in the middle of the current economic crisis, since the aggregation of home loans into mortgage-backed securities provided the financial instrument through which investment banks and other firms lost hundreds of billions of dollars. The mortgage meltdown forced a costly government bailout and led to passage of the Dodd-Frank financial-reform bill, which became law in July. But several economists took the position that bubbles fueled by borrowing are the price we pay for having active markets, and suggested it was unrealistic to expect regulation to prevent future bubbles.

Wall Street's Global Race to the Bottom - Robert Reich - Wonder what’s happening with bank reform? Watch your wallets. Having created giant loopholes in the Dodd-Frank law recently passed by Congress (keeping “customized” derivatives underground, for example), fighting off attempts to cap the size of the biggest banks, and keeping capital requirements relatively modest, Wall Street is now busily whittling back the rest through regulations. Squadrons of lawyers and lobbyists are now pressing the Treasury, Comptroller of the Currency, SEC, and the Fed to go even easier on the Street.Their main argument is if regulations are too tight, the big banks will be less competitive internationally. Translated: They’ll move more of their business to London and Frankfurt, where regulations will be looser. Meanwhile, Wall Street is warning Europeans that if their financial regulations are too tight, the big banks will move more of their business to the US, where regulations will be looser

Obscene Tax Break Survives Again - Taibbi - Once again a key piece of news has passed virtually without comment.  While the entire nation argues over nonsense congress yesterday quietly took a knee on the “carried interest” tax question. In doing so they decided not to take a vote on changes already approved by both houses that would scale back perhaps the most preposterous tax break in the entire federal code, one that leaves hedge-fund gazillionaires like Stevie Cohen and John Paulson paying less than half the top tax rate paid by most middle and upper-middle class Americans.  The carried interest tax break is a classic example of how in America constituencies with the means and the bureaucratic endurance to get what they want slowly hack away at the government over time, carving out exemptions to their civic responsibilities while ordinary people suck the proverbial egg. A 100% or 200% tax break for hedge fund and private equity billionaires is not the sort of thing that one passes instantly, by standing up in front of big campaign crowds and urging on a mob; it takes a long time and a lot of behind-the-scenes baby steps.

Repatriation of $ -Repatriation of $ from Center on Budget and Policy Priorities reminds us from 2009: The Business Roundtable and Chamber of Commerce have proposed resurrecting, as a stimulus measure, the 2004 “dividend repatriation tax holiday,”  Yet the evidence shows that the 2004 tax holiday did little more than give windfall profits to a small number of large multinational corporations and did not lead to increased investment and jobs in the United States. Indeed, as a recent Goldman Sachs analysis concluded, this idea is more likely to help corporations’ balance sheets than to stimulate demand.2 Resurrecting the tax holiday would also encourage corporations to shift profits and jobs out of the United States by increasing the tax advantages of foreign over domestic investment. That is likely why Congress, when it enacted the 2004 measure, explicitly stated that it should be a one-time-only tax break that should not be repeated.

Chamber of Commerce Issues First Lawsuit over Dodd-Frank FinReg - From Dealbook, what I believe is the first lawsuit related to Dodd-Frank specifically has been issued by the Chamber of Commerce and Business Roundtable: The United States Chamber of Commerce and the Business Roundtable on Wednesday sued the Securities and Exchange Commission to overturn a rule that makes it easier for investors to oust corporate directors, arguing the provision gave activist investors too much leverage, Bloomberg News reported.As Pension and Investments notes: “The SEC was authorized to adopt the rules as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Barack Obama on July 21.” This is pretty clearly in the law, not a ‘discretion’ thing. And the Chamber of Commerce and the Business Roundtable want to shut it down. It’s worth noting how this is the opening shot in what is likely to be a very long battle of lawsuits driven by corporate money and the financials sector to eat away at the good parts of the Dodd-Frank Bill.

Financial Reform in Peril - That period of intense interest is over following the passage of financial regulatory reform legislation this summer, Miller and others said on Monday. But that does not mean that reform is done. In fact, because political attention has flowed from Wall Street to immigration, unemployment and myriad other topics, reform is imperiled. The regulatory law gave guidelines for fixing the financial sector, but the rule-writing process has fallen to dozens of agencies and government bureaucrats currently hammering out the details. That means the real work of reform is just beginning and the country is only incrementally closer to a safer financial system.

Proprietary Traders Earn `Trust, but Verify' - Simon Johnson -The Financial Services Oversight Committee met for the first time last Friday. As required by the Dodd-Frank Act, the committee issued a request for comments on the proposed application of the Volcker Rule, which requires that large banks cease to conduct proprietary trading and significantly limit their private-fund investments to 3 percent of capital. There are two ways regulators can keep tabs on proprietary traders and their equivalents who can win big betting their firm’s capital or lose even bigger and threaten the world financial system. We can have a part-time lapdog, which is surely what the banks want, or a guard dog who keeps an eye on them 24/7. Given everything that happened in the run-up to September 2008 -- and in the two years since -- it’s pretty clear what we need, though it remains up in the air what we’ll get.

Will The Volcker Rule Really Be Enforced? - By Simon Johnson - The Financial Stability Oversight Council has put out a request for comments on the Volcker Rule – if you write to them soon, they may actually listen. One big issue is whether there will be high frequency monitoring of trades by big banks – potentially enabling regulators to know if the “no proprietary trading” rule is being violated. The default approach is probably to have a hands-off, light touch – pretty much continuing our recent and not-so-distinguished traditions with regard to supervising banks. I go through the issues in more detail – including who seems to be on what side within the government – in a Bloomberg column that appeared this evening.

Moral Hazard in the Shadow Banking System - Due to the push by the administration to defend TARP (e.g. see Tim Geither's "five myths about TARP" here), there is lots of discussion about the moral hazard problems the bailout created. For example, Ryan Avent says: Just last month I responded to the wave of praise for TARP ... by pointing out that whether or not TARP cost the Treasury much money, it left a giant moral hazard problem hanging out there, which has not yet been resolved. Not everyone would agree that recent Dodd-Frank legislation fails to address moral hazard, though as I'll explain below I tend to agree with Ryan. Let's take a stylized look at moral hazard, and how to overcome it. This is from a paper by Morgan Ricks (that I hope to present in more detail soon). The moral hazard problem was created by "ex-post support" that firms were given, and the paper details this support:

World financial reform agenda falters - Two years after investment bank Lehman Brothers collapsed and the financial system faltered, world leaders are deadlocked over key proposals for ensuring that such a crisis doesn't happen again, and concern is spreading that the chance for common action has waned.  Officials at agencies such as the International Monetary Fund and World Bank say they're worried about the loss of momentum, and private analysts are warning that narrow national interests could undermine further reform. There is increasing tension over currency rates and a growing expectation that the world's major financial centers each will impose substantially different rules on financial firms

Tim Geithner Still Doesn’t Understand Capital Requirements – CNBC - Last week Alan Blinder pointed out that despite all the hoopla about higher capital requirements coming out of the Basel negotiations, when the final requirements kick in in 2018, banks will only be required to have a Tier 1 leverage ratio of 33:1. Certainly, in the run up to the financial crisis, these kind of eye-popping leverage ratios made lots of ordinary people—and some extra-ordinary people—do something more than scratch their heads—it convinced them to sell their shares of financial companies.David Leonhardt asked Tim Geithner about this during the Washington Ideas Festival that took place last week (hat tip: Felix Salmon).  Geithner gave the answer eerily similar to the we heard many times from frustrated banking executives—that what mattered was not the simplistic measure of equity to assets—that is, leverage—but something more complex called “risk-weighted assets.”  “What matters is capital against risk. The assets in an institution are not a good measure of risk. What this [Basel III] requires you to hold is 10% of risk-weighted assets. And that’s the right measure,” Geithner told the folks as the festival for Washington ideas. (You can watch Geithner's answer here at about the 18:30 mark.)

Alarm bells must ring when banks welcome regulation -Goldman Sachs has taken out advertisements on websites and newspapers highlighting the bank’s role in helping a green energy company build wind turbines. And that is just the beginning. In the next few weeks, Goldman’s ad blitz will try to persuade the American public and politicians that its image as a money-grabbing “vampire squid” (Rolling Stone’s words, not mine) is at odds with the reality of a company that creates wealth, jobs and economic growth. The bank that used to relish telling outsiders to mind their own business is now pushing a tagline stating: “Progress is Everyone’s Business.” Goldman’s efforts to show its softer side are understandable. Nobody should fault the company for wanting to change its image after it had to pay $550m to settle regulatory fraud charges and became a lightning rod for criticism of the financial industry in Washington.

Goldman Sachs and the Economy -The influential Goldman Sachs economist Jan Hatzius has a new research note out (with Sven Jari Stehn), “Thoughts on the Macroeconomic Impact of Basel III,” arguing that the move to raise capital standards for banks will put a serious crimp in growth in the United States – knocking 1.5 to 2 percent off gross domestic product in the next few years. Their findings are questionable, but in any case we should broaden the discussion to consider exactly how banks like Goldman Sachs affect our macroeconomic dynamics going forward – particularly if they are able to effectively lobby against higher capital. Growth based on risky banking has a tendency to prove illusory. There are three issues. First, what is the short-term impact of raising capital requirements? Second, how should capital be increased? And third, and perhaps most important, do we really need global banks like Goldman Sachs to operate in their recent “high risk – highly variable returns” mode?

Just Do It—Shaping the New Financial System - IMF Blog - Fearful financial markets, an uncertain growth outlook, fiscal anxieties, long unemployment lines….no other financial crisis since the Great Depression has led to such widespread dislocation in financial markets, with such abrupt consequences for growth, trade, and employment.The crisis exposed fundamental weaknesses in many areas of the world economy, the most obvious being dramatic deficiencies in the regulation and supervision―nationally and internationally―of financial institutions and markets.On the bright side, the crisis has provided the impetus for a major overhaul of the financial regulatory system. So, are we making the most of this opportunity to fix the system?

The IMF worries about international banks - The IMF held its first-ever blogger meet-up on Friday, with PR honcho Caroline Atkinson, first deputy managing director John Lipsky, and various other Fund types sitting rather formally around a big table at IMF headquarters in Washington. “The discussion here is on the record, because I’ve been told that bloggers don’t do on-background,” said Atkinson — which made for an interesting contrast with how they do things at Treasury. I went in to the meeting with the idea that the Fund is on something of a downward trajectory these days. Its high point was surely the 2009 G20 meetings in London, which ended with a much beefed-up role for the IMF, and a lot more money too. But since then, the occasional Germany-mandated foray into Greek fiscal policy notwithstanding, the IMF seems to have played less of a role, especially in terms of crisis resolution and prevention, than I and many others expected it would.

Elizabeth Warren, Sensing Opportunity, Wants To Ease Burden On Lenders To Help Families - White House adviser Elizabeth Warren wants to make it easier for consumers to understand loan products by reducing the amount of "useless" information and paperwork that lenders are required to disclose, easing the burden placed on small lenders due to government red tape while boosting their ability to compete with large banks, the consumer advocate told The Huffington Post. In an interview last week in Washington, Warren reiterated her call for a more flexible approach towards government regulation of consumer credit products, emphasizing that excessive "thou shalt nots" create more confusion thanks to the proliferation of excessive disclosure forms while driving up the lenders' costs to comply. Instead of rules, regulators should adopt a regime based on core principles -- like fairness. "It breaks my heart to say this, but I think the word 'disclosure' has become a dirty word," she said. "What it's come to mean is layers and layers of fine print that nobody reads and nobody understands. Indeed, it's worse than useless because it is shrubbery to hide muggers," 

The Flash Crash: A Cautionary Tale - So the finger that caused the “flash crash” May 6 turns out to have been merely heavy instead of fat.An order to sell $4.1 billion of stock index futures as quickly as possible, and never mind the price, spooked an already-jittery market into a spectacular selling frenzy that day according to a long-waited forensic report by the Securities and Exchange Commission that was released last week. The “hot-potato” selling among high-frequency trading programs that ensued cost the US stock market nearly $1 trillion in seven minutes, a 9.16 percent fall in the Dow Jones Industrial Average, before the broad market recovered to close down about 3 percent on the day. The Midwest mutual fund that issued the order was quickly identified by several newspapers as Waddell and Reed Financial Inc., of Overland Park, Kansas.  The order was deliberate, not the result of a “fat finger,” or mistake, that might have added an extra zero or two.

The (Crippled) Invisible Hand - Maxine Udall - Smith's invisible hand as used in Wealth of Nations was risk aversion. Not unfettered self-interest aimed at making more money than anyone else in the world. The invisible hand was a constraint on avarice.  The problem is that for the last 30 years we have heard that unfettered self-interest alone was sufficient to assure properly functioning markets, financial and otherwise.I want to make it clear. A crippled risk-averse invisible hand is not the only reason for the concentration of wealth and power in the financial sector, but it is one of the reasons and an important one. That's why a no-strings, no-pain bailout of the same wonderful guys who gave us the most recent crisis was such a mistake. It amputates the invisible hand of risk aversion. With no down side, they're pretty much free to deliver more of the same. The only solution to this particular aspect of finance is wiser, more risk averse investors; wiser, more risk averse shareholders; and wiser, more risk averse managment. This almost certainly means that if even an arthritic invisible hand is to work there must be higher personal and business risks (as in bankruptcy) for the captains of industry and finance and those who aid and abet them in deceiving investors and the public.

Treasury Estimates Bailout Loss at $29 Billion -The Treasury Department expects to lose $29 billion on the federal bailouts stemming from the financial crisis, with most of the losses in its housing finance program and the auto rescue.  In a report released on Tuesday, the administration said it expected a $17 billion loss from its investments in General Motors, Chrysler and the auto finance companies, as well as a $46 billion loss from housing programs like the mortgage modification program known as the Home Affordable Modification Program. The new figures, which include profits that offset some of the losses, come just as the Obama administration tries to wind down the bailout program known as the Troubled Asset Relief Program, or TARP. Last week, the government announced a plan to exit its investment in the insurer the American International Group.

The Cost of TARP - Jackie Calmes reports on the good news about the very low net cost of the Troubled Asset Relief Program: But the once-unthinkable possibility that the $700 billion Troubled Asset Relief Program could end up costing far less, or even nothing, became more likely on Thursday with the news that the government had negotiated a plan with the American International Group to begin repaying taxpayers. To go even stronger here, it’s clear that the much-loathed core of TARP—the injection of government funds into insolvent banks—is going to earn a substantial profit. Losses will be attributable to efforts to use money to save the auto companies and to assist homeowners. Main TARP—the bank bailout—isn’t going to cost you anything. For a program that’s attracted such widespread derision, that’s pretty remarkable. Do you think letting the banks fail would have had zero disruptive impact on the economy? None whatsoever? What other programs can you name that garned support from Nancy Pelosi and George W Bush, helped people millions of people, and had a negative cost to the government? And yet people think it’s horrible, in part because the public sphere has utterly failed to defend it

Quelle Surprise! Team Obama Having Trouble Selling TARP Success - Yves Smith - Barack Obama is purported to have studied the Lincoln, Roosevelt, and Reagan presidencies in depth before he took office, yet he appears to have ignored one of Lincoln’s best known sayings: “You may fool all the people some of the time, you can even fool some of the people all of the time, but you cannot fool all of the people all of the time.” We’ve commented at length at the Obama Administration propensity to rely on propagandizing to mask the shortcomings of its policies. No where has this been so evident as on the financial services front. As we wrote:The widespread, vocal opposition to the TARP was evidence that a once complacent populace had been roused. Reform, if proposed with energy and confidence, wasn’t a risk; not only was it badly needed, it was just what voters wanted.But incoming president Obama failed to act. Whether he failed to see the opportunity, didn’t understand it, or was simply not interested is moot. Rather than bring vested banking interests to heel, the Obama administration instead chose to reconstitute, as much as possible, the very same industry whose reckless pursuit of profit had thrown the world economy off the cliff.

Fair Game - TARP Is Done, but Count on Sequels - THE government is pulling a sheet over TARP, the Troubled Asset Relief Program created during the panic of 2008 to bail out the nation’s financial institutions. With the program’s expiration on Sunday, we can expect to hear lots of claims from the folks at the Treasury that it was a great success.  Such assertions would be no surprise from a political class justifiably concerned about possible taxpayer unhappiness, the continuing economic turmoil and the midterm elections. But if we have learned anything during this crisis, it is that the proclamations emanating from the Washington spin machine must be taken with an extra-hefty grain of salt.  Consider the claims made last summer that the Dodd-Frank financial reform act reduces the threats that large, interconnected banks pose to taxpayers and the economy when the banks are deemed too big to fail. Indeed, as regulators hammer out the rules governing derivatives transactions, it’s evident that the law has created a new set of institutions that will almost certainly be deemed too important to fail if they ever get into trouble.

Was TARP Good for the Taxpayers? - On Sunday the Troubled Asset Relief Program (TARP) officially expired, though its "legacy programs" could continue for years. Probably more than any other issue, the pundits' handling of TARP has been extremely political. There were many right-wing analysts who were for the bailout when Bush Treasury Secretary Hank Paulson proposed it in September 2008, and yet these supporters mysteriously became some of the fiercest TARP critics after Obama was in the White House. (Glenn Beck is the most obvious example, but there were others.)On the other hand, I can't help but think that at least some of the left-wing analysts who are currently singing the praises of TARP would be singing a different tune had John McCain won the election. We can't know what would have happened in that alternate timeline, but I'm guessing many of these progressive bloggers would have excoriated the Republican bailouts of their fat-cat banker friends. (In fairness, Matt Yglesias and Paul Krugman have been consistent — they were for TARP, with caveats, from the beginning!)

Judging TARP - Warren Olney had a very interesting conversation this afternoon about TARP, as the official disbursements come to an end and the debate begins over whether or not it succeeded. The official spin is that TARP was a great success. But the official spin is decidedly unconvincing: Businesses have added jobs for eight straight months. Private investment and confidence in banks have returned. The cost of borrowing for businesses, municipalities and individuals has declined dramatically. This is true, but it has nothing to do with TARP: instead, it’s almost entirely a function of monetary policy. TARP might have arrested the global panic for long enough that Bernanke’s policies had time to start working, but that’s about it. Treasury complains that the public think of TARP as being mainly a bank bailout — but in fact that’s exactly what it was. The Detroit bailout might have been done very well, but it was an afterthought, done with funds left over which hadn’t gone to banks.

Elizabeth Warren: TARP is not a victory yet - The Obama administration has been crowing lately about the repayments flowing into the Troubled Asset Relief Program, and the new plan to end the bailout of American International Group has been touted as the clearest sign yet that the controversial TARP has been a success.  But not everyone sees the AIG bailout that way.  “The rescue of AIG continues to have a poisonous effect on the marketplace,” said one critic recently. “By providing a complete rescue that called for no shared sacrifice on the part of AIG and its creditors, the government fundamentally changed the rules of the game on Wall Street. As long as the biggest companies in America believe that you and I will bail them out, the worst effects of the AIG rescue will linger.” The critic was not a Republican politician or some conservative think tank. It was Elizabeth Warren, and her blunt assessment is shared, to some extent, by critics on the left and the right.

The End of TARP: Goodbye and Good Riddance--Two years after it was approved by a skeptical Congress in the midst of the financial crisis, the Troubled Asset Relief Program, or TARP, is finally being put to bed.  One of the most-loathed government programs in recent memory, the TARP is now viewed as a gigantic "Wall Street bailout"--one that, in the eyes of many, was both undeserved and unnecessary. TARP supporters, such as Treasury Secretary Tim Geithner and former car-czar Steven Rattner, maintain that the program saved the country from financial and economic collapse. They point to the current estimates of TARP losses of only $50 billion as a small price to pay for the horror that was averted. And they invoke the fact that it was a Republican administration that put the plan together as evidence that the TARP was sorely needed.

Going Viral: Why TARP, Like Herpes, is a "Gift" that Keeps on Giving--It’s interesting how thoroughly Wall Street, abetted by our political class and the media, has eviscerated the idea of making big financial firms — gasp! — smaller. Just look at the various hosannas to the Troubled Asset Relief Program following the program’s official termination on Sunday. Stripped to their undies, arguments defending TARP come down to this:

  • It saved the global financial system from annihilation
  • Taxpayers might make money
  • Government works

Implicit in this calculus is that TARP’s success increases the likelihood of future bailouts. Here’s Daniel Indiviglio at Much to the dismay of free market-loving Americans, TARP actually worked incredibly well. Sure, it will still end up costing Americans something. I agree TARP prevented total catastrophe. On the other hand, if the bailout worked so “incredibly well,” why should it end up costing Americans anything?

TARP didn't cover everything - MY COLLEAGUES at Democracy in America have been discussing the Troubled-Asset Relief Programme, or TARP, and its success and popularity (or lack thereof). M.S. writes: [Congressman Brad] Miller's statement that "there is no chance that Congress would pass more TARP" is a case in point. As pretty much everyone in the punditocracy has by now pointed out, TARP has been one of the most successful single pieces of legislation in the history of American government. It saved the world financial system for somewhere between $66 billion and $0 (or, perhaps, a profit of a few billion dollars). But we, the voters, hate it. If Congress wouldn't have the ability to do the same thing again, it's because of the people who elect them, and that's a pretty serious indictment of us. And W.W. responds by saying that expert opinion on the value of the programme is actually quite divided. Indeed it is! Just last month I responded to the wave of praise for TARP that M.S. is no doubt referencing by pointing out that whether or not TARP cost the Treasury much money, it left a giant moral hazard problem hanging out there, which has not yet been resolved

Who Owns A.I.G. (a Continuing Story) - The federal government’s exit plan from the American International Group involves one of the largest corporate reorganizations in history. It contemplates the conversion and sale of $49.1 billion in the government’s preferred share ownership interests, the $15.5 billion sale of A.I.G.’s Alico subsidiary to MetLife, the approximately $15 billion initial public offering of the company’s American International Assurance subsidiary and the repayment of a $20 billion loan to the Federal Reserve.  This restructuring also involves a rejiggering of the government’s ownership and control position in A.I.G., one that will bring the insurance giant under the direct control of the Treasury Department.  As part of the restructuring, the A.I.G. trust that formally held the insurer’s shares on behalf of the government will be dissolved. Instead, the Treasury Department will obtain direct ownership of 1.655 billion A.I.G. shares,  giving it 92.1 percent of the outstanding common stock. These shares will be issued in exchange for the conversion of the $49.1 billion in preferred shares held by the Treasury.

Treasury's Response On AIG – Kid Dynamite - I received a surprise followup from Treasury today regarding the questions I had posed them last week which went unanswered: "Why is the treasury converting senior obligations into junior obligations at a discount?  How does Treasury justify the roughly $45 conversion price?  Why are we giving non-government AIG common shareholders another subsidy?" I had an hour long conversation with a Senior Treasury Official (STO for short) in which he explained his thinking and rationale on the matter.  I'm going to keep him anonymous because the conversation was "off the record," although he gave me permission to detail aspects of the conversation, with the obvious caveat that I was accurate in my representations.  I've chosen to include a few direct quotes I found especially juicy, which I might not be able to include if I attributed them to a specific individual.

Federal Reserve Issues ‘Cease and Desist’ Order for HSBC North America - What could a TBTF bank possibly do to deserve a reprimand from their friends at the Fed? Bank Secrecy Act and Anti-Money Laundering (BSA/AML) related it appears, protecting flows of secrets and cash. I hope it is not related to HSBC's position as the primary custodian for GLD and their starting of the gold rush back in 2009.  "WHEREAS, the Federal Reserve Bank of Chicago (the “Reserve Bank”) reviewed and assessed the effectiveness of HNAH’s corporate governance and compliance risk management practices, policies, and internal controls, and identified deficiencies..."A copy of the Board's order is attached. Attachment (pdf)

Why we need to follow the Irish and restructure our ‘zombie’ banks - In Dublin, early last Wednesday morning, a protester rammed a cement truck – with the words "TOXIC BANK" emblazoned on the side – into the ornate iron gates of the Irish Parliament. The following day, Brian Cowen's government unveiled its plan to pump an additional €6.4bn into Anglo Irish Bank – the real-estate lender at the heart of the Republic's property meltdown. Having been nationalised in January 2009, the total cost of rescuing Anglo Irish could now be almost €30bn.  An additional €3bn capital injection into the much bigger Allied Irish Bank was also announced last week, with the state becoming majority shareholder in Ireland's second-largest lender. Finance Minister Brian Lenihan also admitted that even more rescue finance could be needed under a "severe hypothetical stress scenario" if Irish property prices fall further, and then fail to recover.

Watchdog: Treasury bailed out 66 weaker banks - Treasury Department officials sent bailout money to dozens of banks with known financial problems, and a growing number of bailed-out banks are struggling to stay afloat, a new government audit says. Banks seeking money from the $700 billion financial bailout faced different standards depending on which agency regulated them, according to a report Monday from the Government Accountability Office. Some questionable banks got bailouts by persuading Treasury officials to overlook their problems. Others were blocked by regulators from making a case to Treasury. Officials approved bailouts for 66 banks with known problems, the GAO found. The report blasts Treasury for failing to track decisions by regulators about which banks could apply for money and which are strong enough to repay. It says the same problems could plague a new program that will send $30 billion to small banks. The new program aims to boost lending by offering banks government money at very low rates.

Financial sector competition: The more the murkier - The Economist - COMPETITION is generally a good thing, but is it beneficial in finance? If banks expect a lower stream of profits in the future because of rising competition, then their incentives to take risks grow. There is a well-established line of thinking among bank regulators in places like Canada and Australia that reckons a less competitive industry leads to a more stable financial system. A new NBER paper looks at the same question from the perspective of the credit-rating agencies. The paper, by Bo Becker of Harvard Business School and Todd Milbourn of Washington University in St. Louis, examines a natural experiment in competition­—the rise of Fitch between the mid-1990s and the mid-2000s to stand alongside Moody’s and Standard & Poor’s (S&P) as the predominant ratings agencies. The authors find that this increased competition from Fitch coincided with a deterioration in the quality of ratings issued by Moody’s and S&P. First, there was ratings inflation, with more ratings rising towards the top of the scale as competition increased. Second, the correlations between issuers’ ratings levels and bond yields weakened. And third, the power of ratings to predict default went down as competition went up.

Bailout Lies – Corporate Paper Version - The NYT had a piece yesterday about another crime of the Bailout. Since 2008 the government has been stealing taxpayer money to prop up the corporate paper market. The lie was that without this bailout this essential market would collapse, you won’t have an economy, smoking crater, dogs and cats living together, mass hysteria, etc., etc.  Instead, as any honest observer could have predicted, the program has simply been used as a looting binge by big corporations. The NYT piece has economists calling this “rational”. It quotes a more honest corporate flack calling it “opportunistic borrowing”. Another commenter says corporations will use it to cut jobs. It is indeed a windfall. It proves that this aspect of the Bailout, like every other, was never needed or intended to help the American people, but only to enable corporate looting. Like with everything else this government does, the intent is to loot the people. And as usual the NYT’s intent is to whitewash it. The piece is actually a good example of how we can get the truth out of it as long as we ignore the propaganda. Here’s a good summary of the truth slathered with lies:

Empathy’s failures - 60 students were given a vignette to read about a case of fraud, where either 3 people or 30 people were defrauded by a financial advisor, but all the other information in the story was kept the same. In an ideal world, you’d imagine that someone who harmed more people would deserve a harsher treatment. Participants were asked to evaluate the severity of the crime, and recommend a punishment: even though fewer people were affected, participants who read the story with only 3 victims rated the crime as more serious than those who read the exact same story, but with 30 victims. And more than that, they acted on this view: out of a maximum sentence of 10 years, people who heard the 3 victim story recommended an average prison term one year longer than the 30 victim people. Another study, where a food processing company knowingly poisoned its customers to avoid bankruptcy, gave similar results.

Make Wall Street Risk It All - Two years after the near collapse of capitalism, we certainly have our fill of financial reforms. The 2,200-page Dodd-Frank Act, which President Obama signed this summer, creates an Orwellian alphabet soup of new agencies, oversight boards and offices intended to protect us from ourselves. The problem is that since the incentives on Wall Street have not been changed one iota by the new laws — nor are they likely to be changed by any of the soon-to-be-written regulations of federal agencies — we’re no better protected from bankers’ potentially reckless behavior than we were before the latest round of reforms. It’s not that Dodd-Frank ignored Wall Street’s past excesses. The law will ensure that some, but not all, derivatives will have to be traded on exchanges and that some, but not all, of the banks’ proprietary trading will be curbed and that some, but not all, of their private-equity and hedge funds will be shuttered or spun off. Dodd-Frank is also supposed to curtail Wall Street’s penchant for creating conflicts of interest, although how the law is going to do that is far from clear.

Unofficial Problem Bank List increases to 877 institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Oct 1, 2010. Changes and comments from surferdude808:  With the passage of another quarter, it is time to update the transition matrix. The Unofficial Problem Bank List debuted on August 7, 2009 with 389 institutions with assets of $276.3 billion (see table).  Over the past 13 months, 144 institutions have been removed from the original list with 103 due to failure, 29 due to action termination, and 12 due to unassisted merger. Thus, about 72 percent of the removals are from failure.  Nearly 27 percent of the 389 institutions on the original list have failed, which is substantially higher than the 12 percent figure usually cited by the media as the failure rate for institutions on the FDIC Problem Bank List. Failed bank assets have totaled $159 billion or nearly 58 percent of the $276.3 billion on the original list.

Unofficial Problem Bank List 877 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Oct 8, 2010. Changes and comments from surferdude808:  The number of institutions on the Unofficial Problem Bank List remained unchanged this week at 877 but assets rose slightly from $416.1 billion to $417.3 billon.

U.S. bank industry entering new crisis: analyst - The U.S. banking industry is entering a new crisis where operating costs are rising dramatically due to foreclosures and defaults, a well-known analyst said Wednesday afternoon. “We are less than one-quarter of the way through the foreclosure process,” said Christopher Whalen, managing director at Institutional Risk Analytics at an American Enterprise Institute event.  “Rising operating costs in banks will be more significant than in past recessions and could force the U.S. government to restructure some large lenders as expenses overwhelm revenue.”

Mark-to-market plan could be modified: FASB member (Reuters) - Strong opposition to a controversial proposal to expand fair value accounting could sway rulemakers to modify the plan, a member of the U.S. accounting rule-making board said on Tuesday.The proposal by the Financial Accounting Standards Board calls for loans and other financial assets to be valued based on what they would fetch in the market, known as mark-to-market, or fair value. That change is intended to give investors a clearer picture of assets held on banks' books.The banking industry has opposed the measure, saying it does not make sense to assign market prices to loans that will never be sold."Thus far, I think the count is up to about 1,500 or so comment letters," said Lawrence Smith, a board member of FASB, which sets U.S. accounting rules. "I think I've read one that supports what we propose."

Companies Borrow at Low Rates, but Don’t Spend - As many households and small businesses are being turned away by bank loan officers, large corporations are borrowing vast sums of money for next to nothing — simply because they can.  Companies like Microsoft are raising billions of dollars by issuing bonds at ultra-low interest rates, but few of them are actually spending the money on new factories, equipment or jobs. Instead, they are stockpiling the cash until the economy improves.  The development presents something of a chicken-and-egg situation: Corporations keep saving, waiting for the economy to perk up — but the economy is unlikely to perk up if corporations keep saving.

The Survival of the Safest, by Robert J. Shiller, Commentary, NY Times: Corporate managers struggling to preserve their companies and protect their core employees have inadvertently contributed to a vicious cycle of rising unemployment and plummeting national morale. If we are to break out of this downward spiral, we first need to understand the problem, then deal with it on a huge scale. Yet professional managers throughout the business world see it as their job to keep work-force morale high. But, paradoxically, the actions they take for their own workplaces often make the overall crisis more severe. Why doesn’t the labor market “clear”? If demand falls in markets for other productive factors — say, wheat...— the price usually drops until the excess supply is mostly gone. What is unusual about labor is that excess supply, which shows up as unemployment, can be prominent and persistent. Why? In short, the difference is morale. Factors of production like wheat or trucks or pumps don’t have morale issues. Human beings do. Managers say they usually consider it better to protect the crucial workers — and ... to clear out the less essential people quickly so their complaining doesn’t spoil the atmosphere.

Editorial - First Monday - NYTimes - The Supreme Court enjoys all but free rein in selecting which cases to review. From the end of one term in the summer until the start of the next, on the first Monday in October, the work of the court is to sift through thousands of petitions from parties that lost in one of the federal appeals courts or highest state courts and are eager for the justices to reverse their fate.  The Roberts court has championed corporations. The cases it has chosen for review this term suggest it will continue that trend. Of the 51 it has so far decided to hear, over 40 percent have a corporation on one side. The most far-reaching example of the Roberts court’s pro-business bias was Citizens United v. Federal Election Commission. By a 5-to-4 vote, the conservative justices overturned a century of precedent to give corporations, along with labor unions, an unlimited right to spend money in politics.

Pandering To Clients, Firm Distances Itself From Wall Street Whistleblower’s Testimony - When the former president and chief operating officer of Wall Street's foremost mortgage-loan due diligence firm testified under oath before a federal panel that his firm found that its clients' standards were a joke -- that as many as 2.5 million potentially toxic mortgages got a rubber stamp -- his former employer's representative, seated next to him at the hearing table, didn't say a word to contradict him. In fact, the two were quite cordial. The company lawyer, seated behind the two, didn't say anything, either. That was two weeks ago. Now, D. Keith Johnson's old company, Clayton Holdings, is distancing itself from the statements of its former executive, telling the same government investigators that his claims were "inaccurate." Clayton sent the Financial Crisis Inquiry Commission a letter pushing back against Johnson's claim that as much as 28 percent of the home mortgage loans its clients likely passed on to investors through the credit rating agencies failed to meet basic underwriting standards. The company also shared that letter with at least one credit rating agency, Fitch Ratings

Home Loan-Linked Bond Sales Face Lingering Concern-- Future sales of bonds backed by U.S. home loans hinge partly on lawmakers' acknowledging the role such securities may play in an economic recovery, said Christopher Flanagan, head of research on the investments for Bank of America Merrill Lynch. Elected officials are skittish over the practice of securitization, in which home loans are packaged into bonds, Flanagan said today at a conference in Miami. Financial institutions worldwide recorded more than $1.8 trillion in losses and asset writedowns sparked by sour U.S. residential mortgages since mid-2007, according to data compiled by Bloomberg. The meltdown triggered the deepest recession since World War II. "There is a schism in Washington on this," Flanagan said today at a conference in Miami. Many lawmakers consider bundling property loans into bonds a "crazy newfangled technology that never should have seen the light of day," he said.

Ambac Sues Bank of America Over Countrywide Bonds (Bloomberg) -- Ambac Assurance Corp. sued Bank of America Corp. over $16.7 billion of mortgage-backed securities, saying the bank’s Countrywide Financial Corp. unit fraudulently induced Ambac to insure bonds backed by improperly made loans. Ambac found that 97 percent of 6,533 loans it reviewed across 12 securitizations sponsored by Countrywide didn’t conform to the lender’s underwriting guidelines, according to the complaint filed yesterday in New York state Supreme Court. Many of the loans were made to borrowers with limited or no ability to meet their payment obligations, Ambac said. The lawsuit follows negotiations between Bank of America, which acquired Countrywide in 2008, and Ambac over mounting losses caused by loans made during the early 2000s as U.S. housing prices soared. Ambac has paid $466 million in claims from more than 35,000 Countrywide home-equity loans that have defaulted or been charged off, according to the lawsuit.

The Future of Freddie and Fannie - In the past, Fannie Mae and Freddie Mac operated as profit-making entities backed by an implicit government guarantee. That toxic combination always seemed designed to lose billions of taxpayer dollars, and that is exactly what happened. Looking forward, the best option is to replace them with an entirely public entity that enables securitization by guaranteeing 30-year fixed-rate mortgages and that charges a high enough premium to stay solvent. We then should hope that private competitors will eventually put the public entity out of business.  The free-market friends of privatizing those entities envision a bold new world where the government no longer stands behind their debt. But if the last three years have taught us anything, it is that the government is not going to sit by and let a major part of the financial system fail.  So the question of whether the government should bail out any Fannie-Freddie successor is moot. It will be bailed out. If the government is going to bear the costs of any future catastrophe, then it might as well acknowledge that inevitability and ensure that the entity is as prudent as possible.

Reis: Office Vacancy Rate at 17 Year High - This graph shows the office vacancy rate starting in 1991. Reis is reporting the vacancy rate rose to 17.5% in Q3 2010, up from 17.4% in Q2 2010, and up from 16.6% in Q3 2009. The peak following the previous recession was 16.9%. From the WSJ Signs of Recovery For Office Market [O]ffice buildings in 79 metropolitan areas tracked by Reis lost 1.9 million square feet of occupied space in the third quarter, pushing the national office vacancy rate to 17.5%, the highest level since 1993....Average effective rents ... fell by just a penny in the last three months, the smallest quarterly decline since 2008. It appears the rate of increase in the vacancy rate has slowed - and rents may be stabilizing.

CoStar: Commercial Real Estate Prices decline in August - This is the new repeat sales index for commercial real estate. Previously I've only been using the Moodys/REAL Commercial Property Price Index (CPPI) for commercial real estate.From CoStar: CoStar Commercial Repeat-Sale Indices General commercial real estate and the broad-based CoStar composite index for all commercial real estate reversed the positive trend reported in last month’s findings and came in at -3.48% and -1.38% respectively for the month of August. ...This graph from CoStar shows the indexes for investment grade, general commercial and a composite index. The investment grade index had been increasing since the beginning of the year, but the overall index is still declining. It is important to remember that there are very few CRE transactions (compared to residential), and that there is a high percentage of distressed sales.  On the number of transactions:  The CCRSI September report is based on sales data through the end of August. In August, 559 sales pairs were recorded. Distress continues to be a significant factor in the index results.

Trepp: CMBS delinquency rate tops 9% for first time in September - The delinquency rate on commercial mortgage-backed securities surpassed 9% for the first time in September, according to analytics firm Trepp. The rate for loans more than 30-days delinquent has increased steadily the past 12 months to 9.05% last month, up from 4.36% a year ago and 13 basis points higher than 8.92% for August. "For commercial real estate bears, the fact that the rate once again set a record is a sign that the CRE crisis is not yet over," Trepp analysts said in the firm's monthly delinquency report. "The CRE bulls, however, can point to the fact that the September increase in the delinquency rate is the second smallest for 2010."

Lenders gaining speed in going after commercial foreclosures - There’s no consensus on how many properties will be foreclosed upon except that it will fall short of the tsunami of commercial foreclosures that many in the industry were talking about 18 months ago. That wave never materialized as investors remained on the sidelines ready to scoop up discarded properties. Instead, lenders were working with owners to lower interest rates and extend loans. Now that philosophy is starting to change. “Banks are in the business of lending money and not in the business of managing property,” "The time for ‘extending and pretending’ by the banks for a variety of commercial real estate loans has ended,” . “There finally is a realization by the banks, regulators and borrowers that the market will not recover sufficiently to save many commercial projects from foreclosure.”

Jim Quinn: Consumer Deleveraging = Commercial Real Estate Collapse -Yves here. I did a small study for a then midlevel, now top level Russian oligarch in the early 1990s who bought a US retail chain. It wasn’t exactly the most astute purchase. One of the factoids I came across in assisting him in figuring out how to scrub it up for resale was the proliferation of retail store space. As of then, it had increased considerably over the 1980s to 27 square feet per capita. Compare this with the figures in Quinn’s piece that follows.There is a Part 2 to the story of Consumer Deleveraging that will play out over the next decade. Consumers will deleverage because they must. They have no choice. Boomers have come to the shocking realization that you can’t get wealthy or retire by borrowing and spending. As consumers buy $500 billion less stuff per year, retailers across the land will suffer. To give some perspective on our consumer society, here are a few facts:

* There are 105,000 shopping centers in the U.S. In comparison, all of Europe has only 5,700 shopping centers.
* There are 1.2 million retail establishments in the U.S. per the Census Bureau.
* There is 14.2 BILLION square feet of retail space in the U.S. This is 46 square feet per person in the U.S., compared to 2 square feet per capita in India, 1.5 square feet per capita in Mexico, 23 square feet per capita in the United Kingdom, 13 square feet per capita in Canada, and 6.5 square feet per capita in Australia.

Experts see more trouble for real estate (Reuters) - Commercial real estate is where the action will be next year, restructuring and bankruptcy experts said at the Reuters Restructuring Summit on Wednesday."I call it a slow-motion train wreck," "That's probably where I think you're going to see more action than anything over the next 24 months." Nearly $1 trillion of bank, insurance and commercial mortgage-backed securities, or CMBS, loans on U.S. commercial real estate are set to mature by the end of 2012, according to Deutsche Bank. Many of those loans are for properties that are worth less than their mortgages because of declining values. Other borrowers may be unable to get new loans in amounts great enough to cover maturing loans because lenders will be unwilling to finance those amounts. Commercial real estate has lagged other sectors in restructuring, but that is changing, "I'm seeing enough of a tip of the iceberg in commercial real estate that I think there will be a lot of activity," he said.

Reis: Apartment Vacancy Rates decline sharply in Q3 - From Reuters: US apartment vacancy rate drops sharply in 3rd qtr The national vacancy rate fell to 7.2 percent from 7.8 percent in the second quarter ... Factoring months of free rent and other concessions landlords used to lure tenants, effective rent was up 0.6 percent to $980 per month, Reis said. This is a significant decline from record vacancy rate set in Q1 at 7.9%. This decline fits with the recent survey from the NMHC that showed lower apartment vacancies. It appears the vacancy rate for large apartment buildings (and rents) bottomed early this year. This is something to watch - and indicates the excess housing inventory (that includes both vacant homes and apartments) is being absorbed.

Foreclosure? Not So Fast  - Mr. Machado and his lawyer, Tom Ice, say they now want to convince the owners of the mortgage to cut Mr. Machado's loan balance to between $150,000 and $200,000—the current selling price for comparable homes in his community near West Palm Beach. "The whole intent was to get them to come to the negotiating table, to get me in a fixed-rate mortgage that worked," Mr. Machado said.  Not long ago, that seemed highly unlikely. Prodded by the Obama administration, lenders have been willing to reduce interest rates on troubled mortgages or lengthen the repayment time. moves that have reduced mortgage payments.But rarely have banks agreed to sharply reduce principal balances. Most preferred to foreclose instead. But now that banks in Florida, Maine, Texas and elsewhere are withdrawing affidavits signed by robo-signers and dropping their cases against homeowners, some consumer activists say they have more power to keep theirsettlements that clients in their homes while negotiating for better mortgage terms.

On the Foreclosure Front - The housing mess got a lot messier last week as JPMorgan Chase halted 56,000 foreclosures amid doubts that it had correctly followed laws on the foreclosure process. The announcement came soon after GMAC Mortgage suspended an undisclosed number of foreclosures to gain time to review its legal procedures. There may be more suspensions to come.  At issue now are affidavits that a foreclosing lender must file in many states’ courts. The person signing the affidavits attests to having knowledge of important facts, like the lender’s legal standing to foreclose and the amount owed. But in a rush to process hundreds of thousands of foreclosures, it turns out that the signers at Chase and GMAC processed 10,000 or more documents a month — “robo-signing” in industry parlance — without personal knowledge of the facts.  The improprieties raise the prospect that some families may have lost their homes in a less-than-legal process, and that some buyers of foreclosed homes may not have clear title to their properties.

Flawed Paperwork Aggravates a Foreclosure Crisis - As some of the nation’s largest lenders have conceded that their foreclosure procedures might have been improperly handled, lawsuits have revealed myriad missteps in crucial documents. The flawed practices that GMAC Mortgage, JPMorgan Chase and Bank of America have recently begun investigating are so prevalent, lawyers and legal experts say, that additional lenders and loan servicers are likely to halt foreclosure proceedings and may have to reconsider past evictions. The implications are not yet clear for borrowers who have been evicted from their homes as a result of improper filings. But legal experts say that courts may impose sanctions on lenders or their representatives or may force banks to pay borrowers’ legal costs in these cases.  Judges may dismiss the foreclosures altogether, barring lenders from refiling and awarding the home to the borrower. That would create a loss for the lender or investor holding the note underlying the property. Almost certainly, lawyers say, lawsuits on behalf of borrowers will multiply.

4ClosureFraud Posts Lender Processing Services Mortgage Document Fabrication Price Sheet -  Yves Smith - A bombshell has dropped in mortgage land. We’ve said for some time that document fabrication is widespread in foreclosures. The reason is that the note, which is the borrower IOU, is the critical instrument to establishing the right to foreclose in 45 states (in those states, the mortgage, which is the lien on the property, is a mere “accessory” to the note). The pooling and servicing agreement, which governs the creation of mortgage backed securities, called for the note to be endorsed (wet ink signatures) through the full chain of title. That means that the originator had to sign the note over to an intermediary party (there were usually at least two), who’d then have to endorse it over to the next intermediary party, and the final intermediary would have to endorse it over to the trustee on behalf of a specified trust (the entity that holds all the notes). This had to be done by closing; there were limited exceptions up to 90 days out; after that, no tickie, no laundry. Evidence is mounting that for cost reasons, starting in the 2004-2005 time frame, originators like Countrywide simply quit conveying the note. We are told this practice was widespread, probably endemic. The notes are apparently are still in originator warehouses. That means the trust does not have them (the legalese is it is not the real party of interest), therefore it is not in a position to foreclose on behalf of the RMBS investors. So various ruses have been used to finesse this rather large problem.

Homes in Florida Seized Without Notice of Foreclosure: Suspiciously Large Number of “The Dog Ate My Summons” Filings - Yves Smith - More revelations from one of the epicenters of the housing implosion. 4ClosureFraud has published an eyepoppingly long list of affidavits of lost summons in foreclosure cases.  This is a teeny extract from their sample, so readers can see what their roster looks like:I spoke to the individuals who compiled this sample; the roster on the 4ClosureFraud site is from DuVal county only. They’ve pulled records from across the state and find similar high volumes in every county. They have refined their queries to exclude judicial notices that are not germane and are up to nearly 9000 questionable notices of lost summons, nearly all from 2010 (in three counties, they have gone into 2009 records). They are in the process of drilling back in time to come up with a more definitive figure. Both judicial and non-judicial states require that the person being foreclosed upon receive some sort of notification that they are at risk of losing their home as a result of serious delinquency on their mortgage borrowings. In judicial states such as Florida, the first step is the service of process

Foreclosure Relief Could Help Economy and End Chaos Faced By Borrowers - A bevy of recent New York Times articles claim that several lenders will now freeze certain foreclosure actions. Look,here, here and here. Why the sudden desire for reconciliation? Problems in the paperwork supporting lenders’ right to foreclose. News of these "problems” is not new. The June 2010 deposition of  GMAC exec Jeffrey  B.  Stephan revealed that he at times signed 12,000 affidavits a month, verifying personal knowledge of loan debts and even note ownership, when in fact he had no such knowledge.  As a result of widespread verification problems, GMAC Mortgage and JPMorgan Chase now say they will amend paperwork in cases in which affidavits were files that were not actually verifying known information.  Bank of America will go a step further, amending all affidavits in foreclosure cases that have not yet gone to judgment. Lenders claim the entire verification problem is cause by understaffing and an inability to keep up with the volume of foreclosures. Lawyers who defend foreclosures will likely agree that lenders are understaffed, or at least staffed in the wrong way. Lenders call customers five or six times a day to tell them to pay the mortgage, but these people who call have no idea what the actual status of the mortgage is.

Multi-Billion-Dollar Class Action Suits Filed Against Lender Processing Services for Illegal Fee Sharing, Document Fabrication; Prommis Solutions Also Targeted -- Yves Smith - Lender Processing Services, a crucial player in the residential mortgage servicing arena, has been hit with two suits seeking national class action status (see here and here for the court filings). If the plaintiffs prevail, the disgorgement of fees by LPS could easily run into the billions of dollars (we have received a more precise estimate from plaintiffs’ counsel). To give a sense of proportion, LPS’s 2009 revenues were $2.4 billion and its net income that year was $276 million.  These suits, one of which was filed late last week, the other Monday, appear to be the proximate cause for the sharp drop in LPS stock, which fell 5% on Friday and 8% Monday (curiously trading was halted after the close of the trading day).  Those close to the foreclosure process have lodged many complaints against LPS. But the two suits we highlight here level the most serious and wideranging allegations thus far.

Lender Processing Services Tries to Claim that Recent Disclosures are “Mischaracterizations” - 10/05/2010 - Yves Smith - Boy, you have to love the way beleaguered companies strain to create the impression that unfavorable revelations are “mischaracterizations.” And Lender Processing Services certainly has its back to the wall. Its stock traded down 5% on Friday and another 8% today before it halted trading after hours (which seems an awfully unusual move in and of itself). (for more detail on LPS’s business model, see our related post today). Recall that over the weekend, the site 4ClosureFraud disclosed a sheet listing services offered by LPS through its subsidiary, DocX, which as we discussed in some length, included “creating,” meaning fabricating, documents out of whole cloth for the purposes of allowing foreclosures to proceed.  LPS provided a press release attempting to rebut some of the concerns, but what was revealing was how much was tacitly admitted.

Flawed Paperwork Aggravates a Foreclosure Crisis - As some of the nation’s largest lenders have conceded that their foreclosure procedures might have been improperly handled, lawsuits have revealed myriad missteps in crucial documents.  The flawed practices that GMAC Mortgage, JPMorgan Chase and Bank of America have recently begun investigating are so prevalent, lawyers and legal experts say, that additional lenders and loan servicers are likely to halt foreclosure proceedings and may have to reconsider past evictions.  Problems emerging in courts across the nation are varied but all involve documents that must be submitted before foreclosures can proceed legally. Homeowners, lawyers and analysts have been citing such problems for the last few years, but it appears to have reached such intensity recently that banks are beginning to re-examine whether all of the foreclosure papers were prepared properly.

How ‘Flawed’ Was the Paperwork? - Gretchen Morgenson’s front page NYT piece is your must reading for today. She lets the facts speak for themselves; Calling these failures “problems” understate the case dramatically, but WTF: Its front page NYT. All of these errors “involve documents that must be submitted before foreclosures can proceed legally.“  (Sweet!) The flawed legal practices are so prevalent that numerous banks have voluntarily undertaken reviews of their legal procedures and document processing.As noted this morning, the real estate / financing industry has brought the same machine-like  technical prowess that they used to automate the process of underwriting mortgages to a similar automated foreclosure process. Is it any surprise that the results of this are similarly disastrous?

Karl Denninger, "MERS/MBS/Foreclosure Goes RICO" - This is worth a read, even though it's VERY long.  The bottom line is that all the Tickers I've written on this subject, from bad conveyances into REMICs, to the tax issues, to the fraudulent documents, to the fact that the MBS are "empty boxes", up and down the line - it's all in here. Anyone who thinks this is a "nothingburger" after reading this has rocks in their head. It asserts virtually everything that I've written about for the last three years related to REMICs and MBS (that the notes were not conveyed and now can't be under the law), and alleges Racketeering. I've read the whole thing, and want to present just a few short cites, but am embedding the entire document as well for those who "want it all".

More Law in the Hands of Banks: Breaking and Entering Homes in Florida - Yves Smith - We’ve discussed the fact the fact that banks have become so powerful in Florida that they have managed to get what amount to kangaroo foreclosure courts created. Not surprisingly, the assembly line imitation of justice railroads borrowers, and prevents legitimate grievances from being heard.  It turns out that banks in that state are so confident of their above the law status that they’ve also taken to casually changing the locks on and entering homes they don’t own, meaning haven’t foreclosed upon. This has become sufficiently common that the local press has taken notice. From the Sarasota Herald Tribune:Two Canadian tourists returning to their rental home from a day at the beach found evidence burglars had struck — or so it seemed.Their laptop computer and MP3 player were missing, as were six bottles of wine. A half-empty beer opened by the intruders was still cold and sitting on the kitchen counter. But why, then, had the locks on the front door been changed?It turns out that a Sarasota company working for a lender trying to retake the property through foreclosure sent two men to the Punta Gorda home to break in and change the locks, even though the home was obviously occupied.

The MERS System and the Land Recourse - The legal basis of the “ownership society” continues to unravel. Our aspiration is to make it politically unravel as well. The most important ideas, like walking away from underwater property and making the forecloser produce the note, are gradually spreading. The MERS system continues to unravel. Still, the produce-the-note movement is further advanced among those in the biz than it is even among the people. The past month has stepped up the tempo of the legalistic unraveling, as first GMAC and then JPM and BofA suspended tens of thousands of foreclosures upon revelations of systematic fraud by their robo-signers, officers who signed affidavits assuring the court that although they couldn’t produce the note, they were still the rightful note-holders. I admit I still don’t understand the concept in principle: “I’ve personally seen the note or otherwise know that it belongs to us, and I can personally vouch for the fact that it was lost or accidentally destroyed. This is one of many, many thousands of times this has happened in my experience.” Who would ever believe that? Is it supposed to rely on getting a different judge each of the thousands of times?What makes a mortgage note different? Only the political influence of the banks.

Rule of Law Versus Bank Profits: Mortgage Fraud Edition - Yves Smith - In the last two years, local attorneys working for the small minority of borrowers who contest foreclosures have reported a wide range of what in spin doctor land would be called irregularities. These reports were so widespread and consistent as to suggest that malfeasance was endemic, but without corroborating evidence that these abuses were happening on an institutionalized basis, it was easy to dismiss them as anecdotal. The admission by GMAC that it produced improper affidavits, followed by suspension of foreclosures by GMAC, Chase, and Bank of America in 23 judicial foreclosures states, is the tip of the iceberg of widespread foreclosure abuses. Yet comparatively few members of the media have asked the right question: why would servicers and law firms engage in fraudulent activity on such a widespread basis?  The ugly answer, as we have detailed long form in earlier posts (see here and here for more detail) is just as the front end of the mortgage securitization pipeline broke down, with originators increasingly simply pumping any deal through in the interest of pulling out fees, the same behavior spread to the back end.

Where is the foreclosure mess leading? - Yves Smith and 4closureFraud have doing an astonishingly good job of keeping on top of all of the legal matters surrounding mortgage foreclosure. There are lots of them — do you know what phony allonges are? — and they are all very complicated, and they vary from state to state and from bank to bank, with the result that it’s really hard to sum it all up in a simple overview. But it’s impossible to read those sites and not conclude that we’re at the early stages of an absolutely monster legal mess. Any one of Smith’s posts is astonishing enough — try here for a good starter, although you could do worse than to start here or here if you’re in Florida — but put them all together, and it becomes clear that the mother of all legal messes has already emerged from the foreclosure crisis, and threatens not only a large chunk of the financial system but also venerable civic institutions, like the courts, which have thus far emerged from the crisis largely unscathed. While there’s some evidence that Congress is willing to find a bank-friendly way out of this mess, I don’t think that’s going to fly, not when state AGs are already filing lawsuits against the likes of GMAC.

Mortgage Mischief to Add to Housing Illusion -- Sometimes I feel like when I am trying to analyze housing data these days I am watching one of those sleight of hand magicians. If you take your eye off the ball for a split second something is going to come out from nowhere and surprise you. From tax credits to mortgage modification plans to foreclosure fire-sales, demand, inventory, and pricing figures are moving targets. Now there's a new caveat to look out for. This week, GMAC (a.k.a. Ally) and JP Morgan Chase (JPM) have been busted for having fast-tracked the foreclosure process without properly assessing each case. I am not complaining that these banks are being exposed for some highly questionable behavior. In fact, the more mortgage fraudsters we can uncover the healthier the housing market can become. It irks me, however, that the resulting law suits, mortgage market reviews, and Federal attention are going to slow down the housing market cleansing process yet again.

Lawler: Trying to Make Sense of the Mortgage Foreclosure Fiasco - Since the GMAC “robo-signer” issue first “broke” last month, the “issue” has catapulted from what some (but not all) industry folks characterized as a “technical” issue in judicial foreclosure states to what the media (who predictably jumped on this story like a ... well, I can’t print that!) now characterizes as a “gigantic mess.” Not too long after the GMAC story came out, both Chase and Bank of America announced that they too were suspending foreclosures in the 23 “judicial” foreclosure states, and while some other big servicers (Wells and Citi) weren’t planning to suspend foreclosures, news reports surfaced suggesting that both companies had some “robo-signers” as well. The media, of course, then searched for individual cases of “foreclosures gone wild,” and found a number of instances where there were some real mistakes made by lenders/servicers that went well beyond “robo-signing.” I have been inundated with media (and other calls) calls asking what this “all means,” but quite frankly I don’t have enough information to give folks a credible answer – save, of course, is that foreclosure timelines in many states will lengthen yet some more.

Ohio Attorney General Sues GMAC Over Improper Affidavits; Maximum Damages Exceed $10 Billion - Yves Smith - So much for the idea that the affidavit problem is a mere technicality and a mere operational hassle for the banks. They had clearly viewed complying with their own agreements as an option, not a requirement, with the savings for cutting corners only somewhat offset by the costs of getting caught from time to time. Some jurisdictions aren’t buying the banks’ “crime pays” logic. These abuses challenge the basic principles of the rule of law. The latest salvo is a lawsuit by the Ohio state attorney general against GMAC for filing false affidavits. The full text of the suit is here. From Richard Corday, the attorney general, is seeking both fines of $25,000 per false affidavit plus a preliminary and permanent injunction against GMAC foreclosures. In other words, he wants them out of that business in his state. He has also sent letters to four other major lenders in Ohio (Bank of America, JPMorgan, Citigroup and Wells Fargo) and clearly also has them in his crosshairs.

Report: Title Insurance company stops insuring Chase Foreclosures - From the NY Times: Company Stops Insuring Titles in Chase Foreclosures The company, Old Republic National Title Insurance, told its agents Friday that it would not write policies on foreclosed Chase properties until “the objectionable issues have been resolved,” according to a memorandum sent out by the firm’s underwriting department. For those who haven't seen it, here is an excerpt from an affidavit signed by Jeffrey Stephen of GMAC: I've highlighted a couple of sentences in yellow. Source: Stopa Law Blog. According to the affidavit the affiant claims to have "examined" the details of the transactions in the complaint, and that he has "personal knowledge of the facts contained in the affidavit". In a disposition the affiant admitted to just signing the documents without verifying the details. If so, the affidavit is not correct. The affidavits are being withdrawn. Obviously the title insurance companies are concerned about what will happen to homes that have already been through foreclosure - with false affidavits filed during the process - and that have already been sold to another party

More Debt Data: Mortgages in the Crosshairs - I mentioned last time that there were stronger trends in the Mortgage data. In the comments Mike Konczal asks me to include HELOCs.  I can’t easily break out HELOCs from mortgages. I am not saying the data doesn’t exist, I am just saying I don’t know how to get it three clicks off of FRED. However, I can give you the mortgages and total liabilities and it tells an interesting tale. All of this data is from Federal Reserve Flow of Funds by the way. The red line is total liabilities as a fraction of total assets.The purple is mortgages and home equity as a fraction of total assets and the green is the difference between the two.Non-mortgage liabilities have been steady. Where Americans have gotten deep into debt is in their homes. That’s a trend that took off in the 1950s and then leveled off around the mid 1960s. In 1981 it took a little bounce that landed in the 1990s but since then there has been a whole new paradigm shift.

Major US Banks Investigated For Foreclosure Fraud - With well over a million homes being repossessed, 2010 is shaping up to be a record year for foreclosures in the U.S. But there are serious questions about the way many have been carried out, and now prosecutors are investigating whether some of the country's largest banks committed fraud.
Bank of America, Chase and GMAC Mortgage have put tens of thousands of foreclosures on hold and lawmakers are calling for a nationwide moratorium after bank employees acknowledged that they failed to conduct required reviews. The question is whether this was just a costly paperwork glitch for the banks or if it's another mortgage fiasco for the whole country. "I've tried to read everything I can, I've called tons of people -- I'm trying to figure out how big is this issue, and the answer seems to be nobody really knows," says Thomas Lawler, an economist and former vice president at the mortgage giant Fannie Mae.

Is A 90 Day "Mortgage Meltdown" Foreclosure Moratorium Imminent As The RoboSigning Scandal Goes Mainstream? - The Massive Mortgage Mess as we affectionately call it seems to be getting new names with each passing day - the latest one is, quite appropriately, RoboSigning Scandal During today's Kudlow segment, CNBC's Diana Ollick who is by and far the company's best (and only) investigative reporter, confirms various so far unfounded rumors, that the government is planning to institute a 90 day foreclosure moratorium as it deals with the realization of just how big and pervasive the mortgage problem is, and even worse, will soon be. It is so bad that even a typically ebullient Larry Kudlow is forced to note that this is the "housing equivalent of the credit financial meltdown" and that "this is going to go on for ever." The biggest issue that is now developing, as we noted last week, is the fact that title insurers (firms such as Fidelity National, First American, Stewart Info and Old Republic) are refusing to insure mortgages in foreclosure or otherwise, uncertain as to who actually owns the title. And for all those who believe this will merely keep prices artificially high, we have very bad news - the problem with the title insurers walking away on fears of lawsuits is that no lender will be willing to write a mortgage without title insurance,

The Foreclosure Mess: Why We Need Better Financial Regulation - The problem itself is driven largely by securitization. Mortgages were “sliced and diced,” repackaged, and sold as new securities and in the process it became very difficult to connect the financial assets to the underlying mortgages that they are composed of. In many cases, the bank holding the mortgage did not hold the title, and had little idea who did. Thus, when homeowners defaulted on mortgage payments, it was very difficult for the bank to show they have a claim on the house, a necessary step prior to foreclosure. This isn’t just an issue for individual homeowners. The speed of the economic recovery depends in part upon our ability to deal with the problems in the housing industry, foreclosures and all, and bring them to the best resolution possible for both homeowners and the economy more generally. What we are seeing doesn’t serve either goal as well as it should.

PNC Said to Be Latest Lender to Suspend Foreclosed Sales… PNC Financial Services Group has suspended sales of foreclosed homes for 30 days, according to a title insurer that received the memo from the bank, becoming the fourth major lender to impose a moratorium. PNC is alerting title insurance companies that it is postponing the closings effective immediately, according to the insurer who received the memo. A PNC spokesman, Frederick Solomon, declined to comment beyond saying that the lender was reviewing its mortgage servicing procedures. PNC, which is based in Pittsburgh, became one of the country’s largest lenders with the acquisition of Ohio-based National City Corporation two years ago. National City, an aggressive lender during the housing boom, collapsed during the financial crisis. Mortgage lenders are under fire in the wake of disclosures that at least three of them — GMAC Mortgage, JPMorgan Chase and Bank of America — filed foreclosure documents in court that falsely stated that their employees had reviewed cases.

Why the foreclosure mess could last for years - The dimensions of the foreclosure crisis keep expanding. Lenders and loan servicers including JPMorgan Chase and Ally Financial are facing an explosion in homeowner lawsuits and state attorney general investigations of claims of falsified mortgage documents. Lawmakers in both houses of Congress have called for investigations. And procedural mistakes in the handling of mortgage documents have clouded titles establishing ownership of the homes, a problem that could plague both buyers and sellers for years. "This is going to become a hydra," says Peter J. Henning, a professor at Wayne State University Law School in Detroit. "You've got so many potential avenues of liability. You don't even know the parameters of this yet." "My suspicion is that this will wind up being an industrywide issue," says Patrick Madigan, Iowa assistant attorney general. "Many companies were using robo-signers."

Foreclosure Mess: Little impact on California - From the North County Times: Lender woes unlikely to halt California foreclosures The pace of foreclosures in California will continue unabated, despite paperwork improprieties that drove three of the nation's biggest mortgage lenders to suspend foreclosures in 23 states last week, real estate attorneys said Monday. Last week, GMAC Mortgage LLC, JPMorgan Chase & Co. and Bank of America said they needed to review thousands of crucial legal documents that they may have signed without reading. But the documents only matter in states that require a judge's order for a foreclosure. The three lenders suspended foreclosures in these states, but announced no changes to their activities in California. Most foreclosures in California are non-judicial, so there will probably be little impact on the pace of foreclosures. And - all else being equal - the housing market in states that require judicial foreclosures will probably be under pressure for a longer period than states with non-judicial foreclosures.

Bank foreclosure cover seen in bill at Obama's desk (Reuters) - A bill that homeowners advocates warn will make it more difficult to challenge improper foreclosure attempts by big mortgage processors is awaiting President Barack Obama's signature after it quietly zoomed through the Senate last week. The bill, passed without public debate in a way that even surprised its main sponsor, Republican Representative Robert Aderholt, requires courts to accept as valid document notarizations made out of state, making it harder to challenge the authenticity of foreclosure and other legal documents. The timing raised eyebrows, coming during a rising furor over improper affidavits and other filings in foreclosure actions by large mortgage processors such as GMAC, JPMorgan and Bank of America. Questions about improper notarizations have figured prominently in challenges to the validity of these court documents, and led to widespread halts of foreclosure proceedings. The legislation could protect bank and mortgage processors from liability for false or improperly prepared documents.

Is HR3808 The Equivalent Of TARP 2 And Obama's "Get Out Of Bail" Gift Card For The High Frequency Signing Scandal? - Now that the High Frequency Signing (HFS, not to be confused with HFT) scandal is mainstream, and virtually every single foreclosure in the US in the past several years is under question, with the impact on mortgage servicers (who just happen to be the TBTF banks) could be just as dire as the fallout from the credit crunch, it appears that the get out of jail card for the banking syndicate has once again materialized, this time in the form of bill HR3808: Interstate Recognition of Notarizations Act of 2009, sponsored by Republican representative Robert Aderholt. The bill, it turns out, has passed both congress and senate, and is now quietly awaiting for Obama's signature to be enacted into law. In summary, the bill requires all federal and state courts to recognize notarizations made in other states. That's the theoretical definition: the practical one - the legislation, if enacted, could protect bank and mortgage processors from liability for false or improperly prepared documents. In other words, with one simple signature Obama has the capacity to prevent tens of billions in damages to banks from legal fees, MBS deficiency claims, unwound sales, and to formally make what started this whole mess: Court Fraud perpetrated by banks, a legal act, and to finally trample over the constitution.

Obama Plans to Veto Foreclosure Bill - White House officials said Thursday that President Obama would not sign a little-noted measure that suddenly gained attention amid questions about some big lenders’ slipshod bookkeeping on home foreclosures, Jackie Calmes of The New York Times reports from Washington. The president’s pocket veto — rejecting a bill by withholding his signature while Congress is away — effectively kills the measure since lawmakers, who are out of town until after the Nov. 2 midterm elections, are not in position to override his decision with a two-thirds vote of the House and Senate. The bill would have mandated that notarizations of mortgages and other financial documents done in one state, including those done electronically, be recognized in other states. By the time the bill arrived at Mr. Obama’s desk, however, it was caught in the controversy over major institutions’ acknowledgment of problems in processing documents for tens of thousands of foreclosures. Those included suspected forgeries and notaries’ failure to review the paperwork as required.

Obama Will Not Sign Bill on Affidavits; Had Raised Worries as Free Pass to Banks on Foreclosures - MIrabile dictu, for once Obama isn’t taking every order coming from the banking industry. There is no story up yet, merely a “Breaking News” headline “White House: President Obama will not sign foreclosure bill” and an e-mail alert from the Washington Post: Amid growing furor over the legitimacy of foreclosure proceedings, a White House official said President Obama will not sign a two-page bill passed by lawmakers without public debate after details emerged that the legislation could loosen standards for foreclosure documents. By way of background, we posted on this measure two days ago; it appears to have been treated as serious when Reuters picked up the story yesterday. Before readers get too encouraged, this little measure only would have addressed at most a component of the bank mess (there was some dispute as to how broad the implications of the bill might be; we have been told by folks on the Hill that there was no legal analysis of the bill). So while this step is a potential sign that the era of carte blanche for banks may have ended, it is far too early to be certain.

How Wall Street & Big Banks almost rammed through Congress another blow to the working class -By Ellen Brown Amid a snowballing foreclosure fraud crisis, President Obama Thursday blocked legislation that critics say could have made it more difficult for homeowners to challenge foreclosure proceedings against them. The bill passed the Senate with unanimous consent and with no scrutiny by the DC media.  In a maneuver known as a "pocket veto," President Obama indirectly vetoed the legislation by declining to sign the bill passed by Congress while legislators are on recess. The White House issued a statement regarding the veto, citing the need for "further deliberations on the intended and unintended impact of [the] bill on consumer protections, including mortgages, before this bill can be finalized." The swift passage and the president's subsequent veto of this bill come on the heels of an announcement that Wall Street banks are voluntarily suspending foreclosure proceedings in 23 states.

The Housing Market Is FUBAR (Again) - Human often have a very high opinion of themselves, but this unwarranted view is especially prevalent in the Finance Industry. The "foreclosure crisis" reminds us once again that the bankers' inflated view of themselves is unjustified. We have grown weary of a lesson we no longer want or need. Turning to the bigger picture, the crisis tells us that the Empire's decline is now in a very advanced stage. I was taken aback to read the following in CNN Money -- Get ready for a bumpy ride in the housing market. The growing number of freezes on home foreclosures is likely to shake up the struggling U.S. housing market. Experts say home prices could rise in the short term, but the eventual glut of foreclosure sales could hurt the market in the long run. Get ready for a "bumpy ride" in the housing market? So, I guess what we have now is a ride in the park? My view, which I have documented over and over again here at DOTE, was that the housing market was already fucked up beyond all recognition (FUBAR). The "foreclosure crisis" only confirms that view.

The Many Ways Banks Have Illegally Foreclosed on Borrowers - Here are some ways banks have cut legal corners in an effort to rush homeowners out of their houses. First off, bank employees have signed foreclosure documents without verifying "crucial information like amounts owed by borrowers." In other words, banks have been foreclosing on some houses without confirming the outstanding loan balance — a pretty fundamental element in the transaction. Second, there has been some mind-boggling notarization flimflammery:

  • Some documents have been notarized before the documents were prepared
  • Some notarizations may have been notarized even though the notaries didn't witness the signings. As The Times notes, "The law requires" notaries to witness the actual signings.
  • Some signatures on foreclosure documents appear to be forgeries — because "a single official's name is signed in such radically different ways."

Exclusive Bombshell of Foreclosure Fraud – Full Deposition of TAMMIE LOU KAPUSTA Law Office of David J Stern 4ClosureFraud. This deposition is wild reading, and not in a good way.  This just in and it is unbelievable!  We are neck deep in issues today so I do not have time to go through and highlight everything, and there is a lot, but here are some snips…

SEC Failure to Regulate MBS Resulted in "Interconnected Ponzi Scheme with Various Types of Concurrent Fraud" - The problems associated with a clogged foreclosure system continue to mount. Foreclosures in 23 states have been halted by major banks after allegations surfaced of various illegal practices. PBS has a video discussion of some of the issues in 'Robo-Signing' Paperwork Breakdown Leaves Many Houses in Foreclosure Limbo. SEC Failure to Regulate MBS Resulted in "Interconnected Ponzi Scheme with Various Types of Concurrent Fraud" Adding fat to the burning fire of consumer anger, Congress ramrodded a measure that would "streamline the recognition of notarizations across state lines", arguably validating much of the robo-signings.

DC Waking Up to Escalating Foreclosure Train Wreck: Grayson Calls for FSOC to Examine Foreclosure Fraud as Systemic Risk - Yves Smith - Wow, someone in DC has connected the dots: that the banks’ failure to adhere to contractual and legal requirements in the residential mortgage backed securities market are so extensive and widespread as to constitute systemic risk. Alan Grayson, Congressman from Ground Zero of the foreclosure mess, is calling on the Financial Stability Oversight Council to investigate the escalating foreclosure fraud crisis.  Although the data points we have seen so far could be considered anecdotal, we have evidence that strongly suggests that major RMBS originators, the investment bank packagers, and the bank trustees failed to convey the notes (the borrower IOU, which is critical to having the legal standing to foreclose in 45 states) to the RMBS trusts starting in 2005, perhaps even earlier. And comments from industry insiders suggest this problem is pervasive. That puts a cloud over the entire US RMBS market, the biggest asset class in the world. This paper was sold as secured; the ability to offset the cost of borrower defaults by seizing and selling his house is critical to the value of the instruments. And if no assets were conveyed to a particular trust by closing, an even uglier possibility exists: under New York law, which was elected by RMBS as governing law for the trust, it would be considered to be “unfunded”, which means it does not exist.

John Paulson Throwing Weight Around in DC Against Foreclosure Fraud Inquiries -- Yves Smith - I got a very interesting report from a contact who is reasonably well plugged in with some of the government authorities that are taking a hard look at the foreclosure crisis. Readers have no doubt heard of hedge fund manager John Paulson, whose famed subprime short bet is reportedly the most profitable single trade in history, netting him over $4 billion personally. Paulson famously reversed his stance in early 2009 and started buying distressed debt, including distressed mortgage securities.  Apparently he still has a substantial long position, because today a Paulson operative was making the rounds in DC, throwing temper tantrums about the impact various investigations might have on the residential mortgage backed securities market. He was particularly upset about the fact that the theory that we have discussed on this blog, that the problems facing deals where the notes were not properly conveyed (which we think are pervasive) are not easily remedied. As we have discussed, the “fixes” for the note conflict both with the provisions of the pooling and servicing agreement and New York Trust law.  Although Paulson’s minion reportedly got very angry, he did not offer a substantive critique or counterevidence to the thesis that these failings are very serious.

In foreclosure controversy, problems run deeper than flawed paperwork - Millions of U.S. mortgages have been shuttled around the global financial system - sold and resold by firms - without the documents that traditionally prove who legally owns the loans. Now, as many of these loans have fallen into default and banks have sought to seize homes, judges around the country have increasingly ruled that lenders had no right to foreclose, because they lacked clear title. These fundamental concerns over ownership extend beyond those that surfaced over the past two weeks amid reports of fraudulent loan documents and corporate "robo-signers." At the core of the fights over the legal standing of banks in foreclosure cases is Mortgage Electronic Registration Systems,The company, known as MERS, was created more than a decade ago by the mortgage industry, including mortgage giants Fannie Mae and Freddie Mac, GMAC, and the Mortgage Bankers Association. MERS allowed big financial firms to trade mortgages at lightning speed while largely bypassing local property laws throughout the country that required new forms and filing fees each time a loan changed hands, lawyers say.

Debunking Banks’ “Procedural Problems” Defense on the Foreclosure Crisis - Yves Smith - As more and more problems with foreclosures and borrower horror stories are coming to light, it isn’t hard to notice that banks are still gamely sticking with the pitch that the failings are technical and procedural even as the breadth of their response and the official reaction says otherwise. Suspending all foreclosures in the US, as Bank of America did today, is a very significant move. And the pressure appears to be escalating, as a multi-state effort is close to going live. Per Bloomberg: Attorneys general in about 40 states may announce by next week a joint investigation into potentially faulty foreclosures at the largest banks and mortgage firms, according to a person with direct knowledge of the matter.State attorneys general led by Iowa’s Tom Miller are in talks that may lead to the announcement of a coordinated probe as soon as Oct. 12, said the person, who asked not to be named because an agreement wasn’t completed. The Financial Times gives us Bank of America’s gloss on this shoddy situation

Bank of America Suspends Foreclosures in All States - Yves Smith - We have been saying for some time that the affidavit problem that has led GMAC, Bank of America, and JP Morgan to suspend foreclosures in 23 judicial states could not be limited to these states. The robo signing of affidavits was clearly done across all sorts of court actions. As we indicated, the bogus affidavits are used in all foreclosures in judicial states; they aver various things about the plaintiff’s indebtedness, including the plaintiff’s ownership of the debt that are integral to the process. Providing an improper affidavit is considered to be a fraud on the court. But the same fraud takes place in non-judicial states whenever a foreclosure is contested (which happens routinely in bankruptcy cases). So the false affidavit situation affects all states, just in much bigger numbers in judicial states.  Even more important, as we have stressed, the affidavit abuses are mere symptoms of much deeper problems with the mortgage securitizations. Why, pray tell, are law firms and servicers engaging in false representations and widespread document forgeries? It is because, as we have stressed, they made a botch of getting the notes (the borrower IOU) into the trusts, and simple fixes don’t work, hence the need to create a phony document trail. The Bank of America suspension of foreclosures in all states appears to be a tacit admission that the problems are as pervasive as we have suggested.

BofA Halts Foreclosures - Bank of America Corp. said it is placing a moratorium on all foreclosure sales across the U.S., amid political pressure on U.S. banks to examine foreclosure-documentation problems.  The nation's largest bank by assets is the first financial institution to stop all foreclosure sales amid revelations that the banking industry had used "robo signers," people who sign hundreds of documents a day without reviewing their contents, when foreclosing on homes. Bank of America, J.P. Morgan Chase & Co. and Ally Financial Inc. (parent of GMAC Mortgage) last week postponed foreclosures in 23 states where a court's approval is required to foreclosure on a home.  Bank of America also decided Friday to review the affidavits being used in foreclosure proceedings in the rest of the 50 states so the accuracy of the documents can be assessed.

Largest U.S. Bank Halts Foreclosures in All States - Bank of America, the nation’s largest bank, said Friday that it was extending its suspension of foreclosures to all 50 states.  The plan swept states with some of the highest foreclosure levels, including California, Nevada and Arizona, into a swelling crisis over lenders’ flawed paperwork that had been mostly confined to 23 other states that require judicial review of foreclosures.  Bank of America instituted a partial freeze last week in those 23 states, and three other major mortgage lenders have done the same. The bank’s decision on Friday increased pressure on other lenders to extend their moratoriums nationwide as well.

Strategic default just got a lot more attractive - Has Bank of America’s PR department been taking lessons in gnomic utterances from Alan Greenspan? Here’s their announcement today in full: “Bank of America has extended our review of foreclosure documents to all fifty states. We will stop foreclosure sales until our assessment has been satisfactorily completed. Our ongoing assessment shows the basis for foreclosure decisions is accurate. We continue to serve the interests of our customers, investors and communities. Providing solutions for distressed homeowners remains our primary focus.” The quote marks are theirs: this is a “statement”, I guess, as opposed to a press release which might actually pretend to explain what’s going on here. But it actually gets even more ridiculous than that: BofA CEO Brian Moynihan is talking at the National Press Club today, and, according to the WSJ, “a person close to him said he isn’t expected to discuss the moratorium decision”.

Lawler: “Foreclosure-Gate”: Who Will, and Who Should “Pay”? - CR Note: This is from economist Tom Lawler. The mortgage-foreclosure debacle, which started with a story about a GMAC “technicality” (and included a “GMAC denies foreclosure moratorium” story) but which quickly “ballooned” as more mortgage servicers were “implicated,” has now exploded into a full-blown “issue” of unknown proportions. One thing is pretty clear – many larger mortgage servicers simply “screwed up” by trying to deal with the surge in foreclosures by taking shortcuts to keep costs down, and this mistake has blown up in their faces. It seems pretty clear that one of the outcomes of the recent “revelations” is that many foreclosures will be postponed; there will be more “refilings” of foreclosure petitions that will cost money; more borrowers facing foreclosures will hire lawyers, and servicers will have to reimburse more borrowers for legal fees; and some foreclosures could be delayed for quite a while. It is unclear at this point whether there will be any significant number of completed foreclosures that might be reversed, but if so that’s gonna cost! Net, there are going to be significant costs that someone is going to have to bear.  But who will bear those costs? Will it be mortgage servicers? Well, if they also own the mortgage, sure. But what about for loans they service for others (including private-label securities, Fannie, Freddie, FHA, VA, …)? Who’s a’ gonna’ pay?

Buyers anxiously await foreclosure deals to go through - The initial measures by U.S. financial firms to freeze foreclosure sales - taken amid reports that at least several banks have used botched and fraudulent paperwork to evict people - have most severely affected those states where lenders need a court order to sell a home.  That's not required in Maryland, Virginia or the District, yet a chill is already affecting local sales. And a complete moratorium seemed much closer in the Washington region Friday after Bank of America became the first lender to announce that it would suspend foreclosure sales and proceedings nationwide.  In the region, 14,000 foreclosed homes were listed for sale by real estate agents, according to the most recent data available from Realty Trac.  Nick Chaconas, a Maryland real estate agent, said he was one week from completing a foreclosure deal for one client, who was buying a $470,000 fixer-upper in Potomac, when an e-mail arrived putting the deal on the skids.

Foreclosure Fraud For Dummies, 1: The Chains and the Stakes - The current wave of foreclosure fraud and the consequences for the economy are difficult to follow. As such, I’m going to write a few posts to simplify what is going on so you can follow stories as they unfold.  This is very 101 level, and will include a reading list of blog posts and articles at each stage to help provide depth.   (Special thanks to Yves Smith and Tom Adams for walking me through much of this.)  Let’s make three charts of the chains involved in the process. The first is what is currently going on with foreclosure fraud (click through for larger). As you can see, in judicial review states like Florida the courts require that servicers, or those who administer the bonds that are full of mortgages (securitization, residential mortgage backed securities, RMBS, are all phrases for them), say that they have everything necessary in order to have standing to bring a foreclosure. They need to have the note for a mortgage, which is supposed to be in the trust – part of the mortgage backed securities – that they administer.

US AG Says DOJ Looking Into Foreclosure Allegations At Large Banks - Attorney General Eric Holder said Wednesday the Department of Justice is looking into allegations that major U.S. lenders may have improperly processed mortgage foreclosures. Speaking at a news conference Wednesday, Holder's comments come just a day after House Speaker Nancy Pelosi (D., Calif.) and other House California Democrats urged top officials in the Obama administration to investigate the matter. "We are aware of the charges that have surfaced in the newspapers in the last couple of days, and we are looking at them," Holder said. Over the last several days, reports have emerged that major lenders including Ally Financial Inc. [formerly GMAC], Bank of America Corp. (BAC) and J.P. Morgan Chase & Co. (JPM) are temporarily suspending processing of mortgage foreclosures as they review whether problems exist within their systems

The Mortgage Morass - Krugman - After the Asian financial crisis of 1997-1998, it was often said that a key barrier to recovery was the uncertain state of property rights: so much debt had been run up during the boom, and there had been so many defaults in the bust, that it was no longer clear who owned anything. Plus, these countries lacked clear legal procedures, and in general suffered from insufficient rule of law. All this was said, of course, in a tone of superiority: we Americans had solved such problems. Or maybe not. Reading Mike Konczal’s crystal-clear explanation of the mortgage/foreclosure mess, you have to say that Thailand and Indonesia 1999 had nothing on America 2010. You really have to wonder how all this gets resolved.

The Finality of Foreclosure Sales - Over at the New York Times, Ron Lieber has an article today with a new angle on the document problems that have caused mortgage lenders like GMAC Mortgage, JP Morgan Chase, and Bank of America to call a halt to foreclosure proceedings. Lieber asks what would happen "if scores of people who had lost their homes to foreclosure somehow persuaded a judge to overturn the proceedings?" What would happen to the persons who had purchased the homes out of foreclosure and are now living in them? The answer, Lieber writes, might depend on whether they have title insurance. Lieber is not necessarily wrong, but the article conveys more of a sense of crisis than is probably appropriate for the title insurers. That is not to say that the mortgage documentation problems are not serious for other reasons or that the title insurers are home free. The law, however, strongly protects the finality of past foreclosure sales.

The solution to the mortgage mess - As people like Mike Konczal and Annie Lowery try and explain the foreclosure mess, it’s worth stopping to think about a possible long-term solution to the crisis. And given the sheer quantity of insufficiently-documented loans, the only sensible and scalable solution I can think of is to swap out those bad loans for good new ones. There are three main ways this can be done. The first is to refinance the current loan, possibly through HAMP. The second is for the banks and the homeowners to negotiate a principal reduction. And the third is to allow a short sale of the house. So long as the banks make sure they get their paperwork right this time, any one of those three actions would solve the problem at a stroke. Even better, any one of those three actions should actually be preferable, from the bank’s point of view, to a foreclosure in any event.

The Journal Trails Badly on the Foreclosure Scandal - So we’ve got a nationwide scandal in the still-crippled industry that caused the crisis in the first place—a scandal with potentially systemic (meaning crisis-causing) implications. And how has our leading financial newspaper covered it? Well it hasn’t, really. Not much, anyway. The Wall Street Journal hasn’t had a single page one piece on the scandal, which is now a couple of weeks old. And the paper has had just one section-front story on it: Wednesday’s good piece in Money & Investing on how mortgage-securities investors are threatened by it. Not that there’s been much inside coverage, either.The Journal is getting its clock cleaned on this story. And not just by biggies like the Times and the Post. Go click the real estate keyword over at Yves Smith’s Naked Capitalism and look how outclassed it has been by a single blogger.

Fighting for Homeowners: A Visit to a NACA Loan Modification Marathon The 100-hour event, which started on Thursday and closes today, was organized by NACA, the Neighborhood Assistance Corporation of America. Officials expected to get 40,000 struggling borrowers a chance to come to a solution with their lenders throughout the five days. NACA is a non-profit which gets borrowers in front of lenders for same-day solutions on loan modifications. On average, borrowers can save between $500-$1,000 a month on their mortgages, with either dramatically reduced interest rates or even principal reductions. The concept behind NACA is simple: they do the legwork with their “members” (the borrowers for whom they advocate) to verify income statements, and come up with a workable budget that includes an affordable mortgage payment on a first mortgage (because second mortgages cannot jump over first mortgages to foreclose on the home, NACA focuses on the first, and believes such a modification makes it easier to negotiate a solution with the second mortgage holder). After that, they set up legally binding agreements with the lenders to work out agreements based on the affordability parameters they set. For many borrowers, they can get these solutions the same day.

Pending Home Sales increase 4.3% in August - From the NAR: Pending Home Sales Show Another Gain The Pending Home Sales Index ... rose 4.3 percent to 82.3 based on contracts signed in August from a downwardly revised 78.9 in July, but is 20.1 percent below August 2009 when it was 103.0. The data reflects contracts and not closings, which normally occur with a lag time of one or two months. July was revised down from 79.4. Tom Lawler forecast an increase of about 4% - right on again. This suggests some bounce back in existing home sales in September and October, but months-of-supply will probably still be in double digits - putting downward pressure on house prices.

Flawed Foreclosure Documents Thwart Home Sales - With home sales this past summer at the lowest level in more than a decade, real estate is ill-prepared to suffer another blow. But as a scandal unfolds over mortgage lenders’ shoddy preparation of foreclosure documents, the fallout is beginning to hammer the housing market, especially in states like Florida where distressed properties are abundant.  “This crisis takes a situation that’s already bad and kind of cements it into place,” Three major mortgage lenders — Bank of America, GMAC Mortgage and JPMorgan Chase — have said they are suspending foreclosures in the 23 states where they first need a judge’s approval. They are also waving off Fannie Mae from selling any of the foreclosed homes whose loans they sold to Fannie.  The companies say they are reviewing their operations after disclosures that employees signed documents without determining the accuracy of the material, as is required by law. Those reviews are throwing into limbo hundreds of thousands of foreclosures and pending home sales, analysts estimate, though the lenders and Fannie Mae have been mostly silent about precise numbers and other specifics.

 Banks Breaking Into Occupied Homes In Foreclosure To Change Locks - In their zeal to complete foreclosure proceedings, some banks send representatives to change the locks on properties in foreclosure, even as they remain occupied. The incidents of lock-changing pile further skepticism on a process recently plagued by scandal. A contractor for JPMorgan Chase changed the front door lock on a woman's home in Orange County, Florida, as she hid out of fear in her bathroom, Eyewitness News reports. "I'm locked in my bathroom," she said on a 911 call. "Somebody broke into my house!" The woman, Nancy Jacobini, was reportedly three months behind on her mortgage and her home was reportedly in foreclosure, but, according to Eyewitness News, the bank isn't legally allowed to change the locks on an occupied home. The lock-changing strategy is intended to protect a property's value, since owners experiencing foreclosure often abandon their homes, leaving them vulnerable, notes Sarasota's Herald Tribune.

US offers mortgage aid to the jobless - Unemployed homeowners may be able to borrow up to $50,000 to help them make monthly mortgage payments — and in some cases not have to pay the money back — under a federal program unveiled yesterday that allocates $61 million to Massachusetts. The zero-interest loan program will benefit several thousand homeowners in the state who are facing foreclosure because they lost their jobs and have depleted their savings. Nationwide, about $1 billion is being allocated to assist 50,000 homeowners struggling to keep up with their mortgages, said Shaun Donovan, secretary of the Department of Housing and Urban Development. “Countless people who have lost their jobs through no fault of their own temporarily lack the steady income they need to pay their mortgage,’’ Donovan said during a news conference at Urban Edge Community Development Corp. in Roxbury. Nonprofit community groups such as Urban Edge will be involved in administering the program.

Study finds foreclosure crisis had significant racial dimensions - Although the rise in subprime lending and the ensuing wave of foreclosures was partly a result of market forces that have been well-documented, the foreclosure crisis was also a highly racialized process, according to a study by two Woodrow Wilson School scholars who assessed segregation and the American foreclosure crisis. The authors argue that residential segregation created a unique niche of minority clients who were differentially marketed risky subprime loans that were in great demand for use in mortgage-backed securities that could be sold on secondary markets. The authors use data from the 100 largest U.S. metropolitan areas to test their argument. Findings show that black segregation, and to a lesser extent Hispanic segregation, are powerful predictors of the number and rate of foreclosures in the United States – even after removing the effects of a variety of other market conditions such as average creditworthiness, the degree of zoning regulation, coverage under the Community Reinvestment Act, and the overall rate of subprime lending."This study is critical to our understanding of the foreclosure crisis since it shows the important and independent role that racial segregation played in the housing bust," said Rugh.

How the subprime crisis hit blacks hardest - America’s minorities, it seems, can’t catch a break when it comes to housing. Before the subprime boom, they were much less likely than their white counterparts to be able to get a mortgage. Then, when the subprime boom started, they were much more likely to be sold a predatory mortgage. A new study by Douglas Massey and Jacob Rugh of Princeton does a great job of quantifying this effect and nailing it down. My colleague Nick Carey has a story about it, but you should read the study yourself: I’ve uploaded it here and embedded it below.

The Problem with Inequality - Steven Pearlstein on inequality:The biggest problem with runaway inequality, however, is that it undermines the unity of purpose necessary for any firm, or any nation, to thrive. People don't work hard, take risks and make sacrifices if they think the rewards will all flow to others. Conservative Republicans use this argument all the time in trying to justify lower tax rates for wealthy earners and investors, but they chose to ignore it when it comes to the incomes of everyone else.It's no coincidence that polarization of income distribution in the United States coincides with a polarization of the political process. Just as income inequality has eroded any sense that we are all in this together, it has also eroded the political consensus necessary for effective government.

Does Inequality Make People More Conservative?, Monkey Cage: Yes, according to some new research (pdf) from Nathan Kelly and Peter Enns. They rely on a a yearly measure of “policy mood” from 1952-2006. This is an omnibus summary of the public’s ideological leaning, liberal to conservative. (See the graph and corresponding Excel file at Jim Stimson’s homepage.) They also draw on a specific measure of the public’s support for welfare. The question is whether and how both measures respond to inequality.Their first main finding: increases in inequality are associated with a conservative shift in mood and increasing opposition to welfare. (For more on why this would be true, see this paper (pdf) by Roland Benabou.)Their second main finding: increases in inequality are associated with a conservative shift among both the wealthy and the poor. One natural objection: perhaps some citizens, and especially poorer citizens, just do not realize that inequality has increased. But the third main finding contradicts this: over time, the poor are actually more likely to perceive increased inequality than do the wealthy.

Personal Bankruptcy Filings Jump - Personal filings for bankruptcy increased in September, pushing the total number of bankruptcies this year to nearly 1.2 million. The number of consumer bankruptcy filings so far this year is 11.3% higher than the same time in 2009, the American Bankruptcy Institute, an organization made comprised of attorneys, accountants and other bankruptcy professionals, said Monday. Filings for the first three-quarters of the year are the highest since 2005, when the bankruptcy system was overhauled to make it more difficult for consumers to shed their debts.

Consumer Bankruptcy Filings increase in September - Via MarketWatch: Consumer bankruptcy filings climb 11%. The American Bankruptcy Institute reported that there were 130,329 consumer bankruptcies filings in September, up 3.3% from August. Filings were up 11% over the first 9 months of the year compared to the first 9 months of 2009.  "We expect that there will be nearly 1.6 million new bankruptcy filings by year end," ABI Executive Director Samuel Gerdano said. This graph shows the non-business bankruptcy filings by quarter using monthly data from the ABI and previous quarterly data from In 2005 the so-called "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005" was enacted. Since then the number of bankruptcy filings has increased steadily.

Consumer Credit declines in August - The Federal Reserve reportsIn August, total consumer credit decreased at an annual rate of 1-3/4 percent. Revolving credit decreased at an annual rate of 7-1/4 percent, and [Non] revolving credit increased at an annual rate of 1-1/4 percent. This graph shows the increase in consumer credit since 1978. The amounts are nominal (not inflation adjusted). Revolving credit (credit card debt) is off 15.2% from the peak. Non-revolving debt (auto, furniture, and other loans) is off 1.1% from the peak. Note: Consumer credit does not include real estate debt. This has been very different from previous recessions with the decline in non-revolving debt

Living without a bank: Fees and confusion galore - In all, I racked up $93 in fees in a monthlong experiment of living without a bank and making a go of it on the economic fringe. That works out to $1,100 a year just to spend my own money. It may be hard to fathom why anyone would live this way, but a federal study last year found that about one in four U.S. households skirts banks and relies on services such as check-cashing and payday loans. Many of these households bring in less than $30,000 a year. Some do it because they believe they don't have enough money to open a bank account or were burned by fees in the past. But it's not always a matter of choice: Many can't open an account because of a history of bad checks or damaged credit.

Wondering How Lenders Are Making Up for Missing Credit Card Fees? Check Your Home Escrow - Following credit card reform, interest rates on credit cards have gone up, but this is not the only way lenders are making up for lost fees. My own home loan escrow was recently reset, and increased by $200 a month on a $1,450 loan. I saw similar things happening to clinic clients and decided to inquire. My taxes and insurance went up roughly $1,400 or about $120 a month. So what, I wondered, explained the extra $80 a month I was being charged?   The gentleman I reached at my lender (and yes I did find a live body) was super-polite. He explained that the extra $80 was the “voluntary” portion of my escrow. I asked why he called it voluntary.  He said this was the voluntarily portion because “if you would prefer not to pay it, we will stop charging you for it.”

Spending on Housing and Transportation Fell in 2009 - The two largest components of consumers’ budgets — housing and transportation — fell in 2009, according to the Labor Department’s latest Consumers Expenditures survey. Overall, average annual expenditures per consumer unit fell 2.8 percent, to $49,067 in 2009 from $50,486 in 2008. This was the first annual decrease in spending since the Labor Department began publishing the data in 1984. The graph below, from the Bureau of Labor Statistics, shows the change in spending in a variety of categories from 2008 to 2009, not adjusted for inflation:Health care was the only major category of spending that rose, climbing 5 percent in 2009 to $3,126. Not coincidentally, health care is also the only industry whose job count has grown every month in the last three years.

Middle Class Cuts Back on Booze - The recession was a sobering event for the American middle class. From 2007 to 2009, the 24,033 households in the middle fifth by income cut their average annual spending on alcohol by a stunning 20.1%, the Labor Department reported Tuesday in its Consumer Expenditures Survey. On average, U.S. households in the middle spent $330 last year on alcohol, down from $413 in 2007 before the recession kicked into high gear. The number isn’t adjusted for the price of alcohol purchased, so it could have something to do with people switching from chateau-bottled to Colt 45, but it’s impressive nonetheless.

Credit for the Recovery - Every time the United States suffers a recession, trendspotters hasten to identify signs of frugality, extol the rediscovery of thrift and find evidence that Americans are finally (finally!) kicking their demon debt habit.  Since the comprehensive, economy-wide debt bubble of the aughts burst spectacularly in September 2008, Americans, we are told, have rediscovered their inner skinflint. Indeed, the savings rate, which fell into negative territory in 2005 at the height of the boom, bounced back strongly. Through 2009 and thus far in 2010, Americans have been setting aside 5 percent to 7 percent of disposable income as savings.  When the Federal Reserve reports figures on consumer credit, despite the dry prose, we conjure up visions of shoppers throwing their Visa cards into public bonfires. “Household debt contracted at an annual rate of 2 1/4 percent in the second quarter, the ninth consecutive quarterly decline,” the central bank reported last month. The outstanding balances of revolving credit accounts — i.e. credit cards — peaked in 2008 at a little less than $1 trillion, and have fallen for 22 straight months, to $827 billion in July 2010.  It’s a great story — if you believe it.

All That's Left Of The "American Consumer" Is The Richest 20% = If the consumer is dead then someone forgot to tell Consumer Discretionary companies, who are making more money than ever before selling life's luxuries and conveniences. Just look at the dotted line below in a chart from Citi's Steven Wieting. Consumer Discretionary stocks are making the most money ever... but off of lower sales (in light blue). Sales actually haven't grown over the last five years.

Seasonal Retail Hiring Outlook: "Dim" - Typically retail companies start hiring for the holiday season in October, and really increase hiring in November. Here is a graph that shows the historical net retail jobs added for October, November and December by year and a forecast for 2010. This really shows the collapse in retail hiring in 2008 and the weak recovery in 2009. This also shows how the season has changed over time - back in the '80s, retailers hired mostly in December. Now the peak month is November, and many retailers start hiring seasonal workers in October. From the NY Times: Dim Outlook for Holiday Jobs The recruiting firm Challenger, Gray & Christmas, forecasts that retailers will add up to 600,000 jobs in October, November and December, compared with a net gain of 501,400 holiday jobs over the same three months in 2009. Challenger Gray expects that companies may wait to hire until November or December — once they have a feel for how much consumers are willing to spend.

Why Holiday Retail Sales Matter - Stephanie Clifford and I have an article in today’s paper about the outlook for holiday sales and holiday retail hiring, which is grim (especially when you consider that retailers are entering the season with very lean sales forces).  Why is so much attention paid to what happens during the holidays? Because for many stores, the holidays are what carries them through the year.The National Retail Federation, in its forecast for 2010 holiday spending, supplied this chart: As you can see, holiday sales make up a decent chunk of annual sales across the retail industry. In the jewelry subsector alone, 29.51 percent of annual sales come during the holiday season. In other words, a disappointing holiday season can affect 2011, too.

Anyone want a Job? - I tend to discount Mike Shedlock’s approach sometimes because it sounds a little more dire than warranted, but this account is truly sad.  I am trying to remember an old Report on budgetary channeling from the Dark Ages of the 1970s, as I spout the drivel which might have changed with the advent of Credit Cards with serious balances; this stating that Christmas Shoppers never begin to budget seriously for the Christmas Season until October. We might be getting Unemployment at exactly the wrong moment in history. The mortgage foreclosure rate and the decline of labor hours may join with the above information to suggest the largest buying segment of the Christmas Shoppers may be short a significant number of people. Mortgage holders traditionally are well-adjusted Tw0-Income families with young children, the Shopper who has the most to buy with the heaviest Mark-Ups. Card-Holders have been paying down their balances throughout the Recovery, but is it enough to produce effective Christmas budgets?

For Women, It Pays to Be Very Thin - We have posted before on how obese women have a far harder time climbing the career ladder than their slimmer female counterparts, while men actually improve their chances of reaching the corner office when they gain weight. Now, a new study goes a step further by showing that employers seem to treat women exactly the way the fashion industry does – by rewarding very thin women with higher pay, while penalizing average-weight women with smaller paychecks. Very thin men, on the other hand, tend to get paid less than male workers of average weight. Men earn more as they pack on the pounds – all the way to the point where they become obese, when the pay trend reverses.

BLS: Job Openings increase in August, Low Labor Turnover- Note: The temporary decennial Census hiring and layoffs has distorted this series over the last few months. From the BLS: Job Openings and Labor Turnover Summary The number of job openings in August was 3.2 million, which was little changed from July. Although the month-to-month change is small, the number of job openings has risen by 863,000 (37 percent) since the most recent series trough of 2.3 million in July 2009. Note: The difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. The CES (Current Employment Statistics, payroll survey) is for positions, the CPS (Current Population Survey, commonly called the household survey) is for people.  The following graph shows job openings (purple), hires (blue), Total separations (include layoffs, discharges and quits) (red) and Layoff, Discharges and other (yellow) from the JOLTS.

Nearly 5 Jobless Workers Per Opening in August - There were slightly fewer than five unemployed people for every job opening in August, according to a Labor Department report. The ratio was largely unchanged from July but below its highs from last fall.The chart below shows the jobless-worker-to-job-opening ratio going back to 2000, the earliest year that the Labor Department kept data on job openings: As of August, there were 4.64 jobless workers per opening, compared with a ratio of 4.65 in July. Both the number of job openings and the number of unemployed people crept up slightly in August, though the number of openings rose slightly more, in percentage terms. There were 3.2 million job openings in August, which is much better than the most recent trough of 2.3 million in July 2009, but still far below the 4.4 million available jobs when the recession began in December 2007. The job openings rate — that is, the number of openings, relative to the sum of openings and occupied jobs — was highest for professional and business services and lowest for construction.

The Incidence of Unemployment and Underemployment, by Income, by Menzie Chinn: As we ponder the plight of the over-$250K household income group (see the poignant story here), I think it worthwhile to examine the unemployment and underemployment rates for lower-income households. In researching statistics for our forthcoming book, Lost Decades, Jeff Frieden and I stumbled upon this study by Andrew Sum and Ishwar Khatiwada, with Sheila Palma... They characterized the mid-2010 employment situation as "A Truly Great Depression Among the Nation's Low Income Workers Amidst Full Employment Among the Most Affluent". We asked the authors for an update of their results, and they kindly obliged. Below, we present a graph of unemployment and underemployment rates, for the January - August 2010 period, conditional on household income in 2008.

Congress Will Have 7 Days To Reauthorize Jobless Aid; It Took 50 Last Time - When it returns from its mid-term break in mid-November, Congress will have only two weeks and seven voting days to reauthorize extended unemployment benefits before they expire at the end of the month. That's not much time, as the previous reauthorization consumed the Senate for 50 days this summer.  "This is going to be a really hard fight but it's a crucial issue and it is clear the congressional leadership understands that this is a top-tier, must-do item as soon as the lame duck session convenes," Congress has blown reauthorization deadlines for extended unemployment benefits three times already this year. The first two lapses were brief; they happened because of obstruction by Senate Republicans. The third lapse lasted for nearly two months, however, as Democratic leadership in the House and Senate fought Republicans and a handful of deficit hawk Dems over whether or not the $33 billion cost of the reauthorization should be offset with spending cuts.

ADP: Private Employment decreases by 39,000 in September ADP reportsPrivate-sector employment decreased by 39,000 from August to September on a seasonally adjusted basis, according to the latest ADP National Employment Report® released today. The estimated change of employment from July to August was revised up from the previously reported decline of 10,000 to an increase of 10,000. The decline in private employment in September confirms a pause in the economic recovery already evident in other data. A deceleration of employment occurred in all the major sectors shown in The ADP Report and for all sizes of payroll. Unlike the estimate of total establishment employment to be released on Friday by the Bureau of Labor Statistics (BLS), today’s ADP National Employment Report does not include the effects of federal hiring — and now firing — for the 2010 Census.  Note: ADP is private nonfarm employment only (no government jobs).  The consensus was for ADP to show an increase of about 23,000 private sector jobs in September, so this was way below consensus.

Gallup Finds U.S. Unemployment at 10.1% in September - Unemployment, as measured by Gallup without seasonal adjustment, increased to 10.1% in September -- up sharply from 9.3% in August and 8.9% in July. Much of this increase came during the second half of the month -- the unemployment rate was 9.4% in mid-September -- and therefore is unlikely to be picked up in the government's unemployment report on Friday. The increase in the unemployment rate component of Gallup's underemployment measure is partially offset by fewer part-time workers, 8.7%, now wanting full-time work, down from 9.3% in August and 9.5% at the end of July. The government's final unemployment report before the midterm elections is based on job market conditions around mid-September. Gallup's modeling of the unemployment rate is consistent with Tuesday's ADP report of a decline of 39,000 private-sector jobs, and indicates that the government's national unemployment rate in September will be in the 9.6% to 9.8% range. This is based on Gallup's mid-September measurements and the continuing decline Gallup is seeing in the U.S. workforce during 2010.

September Employment Report: 18K Jobs Lost ex-Census, 9.6% Unemployment Rate - This will be the last "ex-Census" report this decade. From the BLSNonfarm payroll employment edged down (-95,000) in September, and the unemployment rate was unchanged at 9.6 percent, the U.S. Bureau of Labor Statistics reported today. Government employment declined (-159,000), reflecting both a drop in the number of temporary jobs for Census 2010 and job losses in local government. Private-sector payroll employment continued to trend up modestly (+64,000).  Census 2010 hiring decreased 77,000 in September. Non-farm payroll employment decreased 18,000 in September ex-Census.  Both July and August payroll employment were revised down. The change in total nonfarm payroll employment for July was revised from -54,000 to -66,000, and the change for August was revised from -54,000 to -57,000. The second graph shows the job losses from the start of the employment recession, in percentage terms (as opposed to the number of jobs lost). The dotted line is ex-Census hiring. The two lines have joined since the decennial Census is almost over.

EMPLOYMENT REPORT (5 charts) The employment report was weak across the board as the unemployment rate remained at 9.6% as government employment fell -159,000 reflecting both falling temporary Census jobs and loses of some -76,000 local government jobs in both education and noneducation. Private payroll jobs expanded by 64,000-- about the same as over the last few months. Hours worked only grew 0.1% and the three month compound growth in hours worked slowed to 1.2% versus a recent peak of 3.7% in June.Even the diffusion rate continued to weaken. Average hourly earnings were essentially unchanged and with the drop in total employment this means that average weekly earnings actually ticked down.

Employment: A New Trough - The employment situation reported today showed a decline in nonfarm payroll employment. That means that my favorite indicator, labor capacity utilization, is at its lowest level since the recession began. The National Bureau of Economic Research, which uses spending as a major indicator, sees the recession as having started late in 2007 and ended in June of 2009. However, if you use labor capacity utilization as the sole indicator, the economy has been sinking since April of 2006 and continues to sink, with the decline only interrupted by temporary Census Bureau hiring earlier this year. The economy is not doing well at creating new patterns of sustainable specialization and trade. I do not think that this is President Obama's fault. I think it is the nature of the situation in which we find ourselves.

A brisk fall - TODAY, the Bureau of Labour Statistics released the last set of American employment numbers to come ahead of the November Congressional elections. If the Democrats were looking for a boost from the numbers, they're sure to be disappointed—and then some. For the fourth month in a row, nonfarm payroll employment declined in September, by a total of 95,000 jobs. The unemployment rate held steady at 9.6%. The drop in payroll employment was due, in no small part, to the continuing drawdown in the temporary census workforce. Census employment fell by 77,000 for the month, leaving a payroll decline ex-census of just 18,000 jobs. But with nearly 15 million Americans still without jobs, employment drops simply will not do. It is commonly estimated that over 100,000 jobs a month must be added simply to keep up with the country's labour force growth.  It's on the public side of the ledger that matters have been particularly ugly in recent months. In 2010, state governments have shed 38,000 jobs. At the local level the picture is worse still; 231,000 jobs have been cut from local governments in just the last 10 months.

Today’s Jobs Report in Pictures - As our statement and podcast both explain, today’s jobs report shows that the economy still faces a long and difficult climb out of the jobs hole created by the recent recession. Private-sector job creation has averaged fewer than 100,000 jobs a month this year — not enough to keep up with population growth and not nearly enough to bring down the unemployment rate. Worse, the pace of job creation is slowing as the economy slows; only 64,000 private-sector jobs were created in September. Below are some charts to show how the new figures look in historical context. See our chart book for more charts.

Fifteen months since recession’s official end, economy short 11.5 million jobs - The September 2010 employment report released this morning by the Bureau of Labor Statistics again showed positive but totally inadequate private sector employment growth, with the addition of 64,000 private-sector jobs in September.  State and local governments, their budgets crunched, lost 83,000 jobs.  The pain of the state and local budget problems are clear in these numbers: of the 83,000 state and local jobs lost, 58,000 were in education, as teachers and other education workers were not called back for the new school year.   September was the first month this year where, barring changes in temporary Census workers, the labor market lost jobs. The unemployment rate held steady at 9.6%. As the chart shows, the labor market remains an estimated 8.1 million payroll jobs below where it was at the start of the recession in December 2007.  This number includes both the 7.8 million jobs lost in the payroll data as currently published plus the announced preliminary benchmark revision of -366,000 jobs to last March’s employment level.  And even this number understates the size of the gap in the labor market by failing to take into account the fact that simply to keep up with the growth in the working-age population, the labor market should have added around 3.4 million jobs since December 2007.

Employment-Population Ratio, Part Time Workers, Unemployed over 26 Weeks - Here are a few more graphs based on the employment report ...This graph shows the job losses from the start of the employment recession, in percentage terms - this time aligned at the bottom of the recession From the BLS reportThe number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) rose by 612,000 over the month to 9.5 million. Over the past 2 months, the number of such workers has increased by 943,000. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job. The number of workers only able to find part time jobs (or have had their hours cut for economic reasons) was at 9.472 million in September, up sharply from August. This is a new record high, and is obviously bad news. This graph shows the employment-population ratio; this is the ratio of employed Americans to the adult population.The blue line is the number of workers unemployed for 27 weeks or more. The red line is the same data as a percent of the civilian workforce. According to the BLS, there are 6.123 million workers who have been unemployed for more than 26 weeks and still want a job. This is 4.0% of the civilian workforce. It appears the number of long term unemployed has peaked ... Although this may be because people are giving up.

Broader U-6 Jobless Rate up to 17.1%: Why the Jump? -The U.S. jobless rate was flat at 9.6% in September, but the government’s broader measure of unemployment rose even more to 17.1%, the highest rate since April and down just slightly from the October 2009 high of 17.4%. The comprehensive gauge of labor underutilization, known as the “U-6″ for its data classification by the Labor Department, accounts for people who have stopped looking for work or who can’t find full-time jobs. The key to the rise in the broader unemployment rate was due to a 612,000 jump in the number of people employed part time but who would prefer full-time work. Meanwhile, the number of discouraged workers and those who classify themselves as “marginally attached” to the labor force also increased. Those jumps were likely affected by a temporary end to extended unemployment benefits. Earlier this year, Congress let an extension of jobless benefits lapse. During that period people may have dropped out of the work force, and though many returned in August some were still coming back into the system last month

Grim News for Those Out of Job Market - Amid the grim news about local government losses and feeble private sector growth, today’s jobs report shows that those who aren’t even counted in the official unemployment rate fared uniformly worse in September. The number of people who are working part-time for economic reasons — meaning they would rather have a full-time job but could only secure a part-time one — rose by 612,000 to 9.5 million. The group of people known as those marginally attached to the labor force, which means they want work and have looked within the last 12 months but did not search during the four weeks preceding the Labor Department’s survey, increased to 2.5 million in September from 2.2 million a year ago. And discouraged workers, those who have stopped looking for work because they don’t believe there are any jobs available, increased by 503,000 from a year earlier, to 1.3 million. All of these people weigh on a broader measure of unemployment, which rose to 17.1 percent in September, up from 16.7 percent in August and the highest it has been since April.None of these numbers are going in the direction they should given that the economy is officially in recovery.-

Retraining workers won't work - Rebecca Wilder - From the NY Times, White House Plans Job Training Partnership: As part of efforts to address record-high levels of long-term unemployment, President Obama plans to announce a new national public-private partnership on Monday to help retrain workers for jobs that are in demand.“The goal is to encourage community colleges and other training providers to work in close partnership with employers, to design a curriculum where they want to hire the people coming out of these programs right away,” said Austan Goolsbee, chairman of the President’s Council of Economic Advisers.The White House has coined this program Skills for America's Future. The problem is, that lack of skills is not the problem for the 66% of the labor force aged 25 years and over without a bachelor's degree. The problem is the lack of jobs. The government needs to "add jobs", not "retrain workers" by stimulating domestic aggregate demand.

Unemployment by Level of Education and Employment Diffusion Indexes - This graph shows the unemployment rate by four levels of education, Note that the unemployment rate increased sharply for all four categories in 2008 and into 2009. Unfortunately this data only goes back to 1992 and only includes one previous recession. Clearly education matters with regards to the unemployment rate - but education didn't seem to matter as far as the recovery rate in unemployment following the 2001 recession. All four groups recovered slowly. Earlier this year, the group with "less than a high school diploma" recovered a little better than the more educated groups - possibly because of the tax credit related increase in construction - but that changed in September as the unemployment rate increased sharply. For the group with some college or an associate degree, the unemployment rate is at a new high for this employment recession. The BLS diffusion index for total private employment declined to 49.8 from 54.1 in August. For manufacturing, the diffusion index declined to 46.3 from 48.2 in August.  Both indexes are down sharply from earlier this year. Think of this as a measure of how widespread job gains are across industries. The further from 50 (above or below), the more widespread the job losses or gains reported by the BLS. From the BLS:

Duration of Unemployment - This graph shows the duration of unemployment as a percent of the civilian labor force. The graph shows the number of unemployed in four categories: less than 5 week, 6 to 14 weeks, 15 to 26 weeks, and 27 weeks or more. In Setpember 2010, the number of unemployed for 27 weeks or more declined to 6.123 million (seasonally adjusted) from 6.249 million in August. It appears the number of long term unemployed has peaked, but it is still very difficult for these people to find a job - and this is a very serious employment issue. The 5 to 14 week category declined in September, however the less than 5 week category continued to increase - and is now at the highest level since January 2010. The second graph shows the job losses from the start of the employment recession, in percentage terms (as opposed to the number of jobs lost).

Impact of estimated Benchmark Revision on Job Losses - As part of the employment report, the BLS released the preliminary annual benchmark revision of minus 366,000 payroll jobs. This will be finalized next February when the January 2011 employment report is released. Usually the preliminary estimate is pretty close to the final benchmark estimate. This graph shows the impact of the preliminary benchmark revision on job losses in percentage terms from the start of the employment recession. The red line on the graph is the current estimate, and the dotted line shows the impact of estimated coming benchmark revision. This puts the current payroll employment about 8.1 million jobs below the pre-recession peak in December 2007.Using the preliminary benchmark estimate, this means that payroll employment in March 2010 was 366,000 lower than originally estimated. This is slightly larger than a normal adjustment (see table below). So in February 2011, the payroll numbers will be revised down to reflect this estimate.

Where Young College Grads Are Finding Jobs: Government - Government has been the main hirer of young college grads over the past year.  And why not? Government jobs are safer, they pay well, and have better benefits than the private sector.  The next biggest hirer of young college grads is the broad category entitled professional and technical services, which includes such  industries as law, accounting, computer systems design, and management consulting.  These industries as a whole have not been expanding, or expanding only slow–but they have been shifting towards better-educated workers. Then comes the distressing category: Hotel and restaurants.  We hear anecdotes about young college grads being forced to work as waitstaff in restaurants, and here’s one indication that might be more common than we would like–the number of young college grads working in hotels and restaurants is up 33K over the past year. Two industries that I lump together in my mind as the ‘social and community’ sector are social assistance and membership associations.  Total young college grad employment in the social and community sector is up about 60K.

career opportunities and whigs - The new jobs report was out and the economy to no one's surprise is still not creating jobs. But lets be honest for a second here, the servant's economy has for the majority been producing shit jobs for a couple decades now. Which get's to the bigger problem -- left, right and center -- all talk of the economy is about getting back to where it was, not only is that not going to happen, but there were tremendous problems there. To really talk about "fixing" the economy, we need to talk about changing it, because it's never going to be fixed without changing it. So for example, you want jobs, lets talk about the 40 hour workweek. Oh, the unison cries of horror that arise across the political spectrum, getting to the even larger point. America is conservative in a very weird way. There's great nobility in a genuine conservatism, sometimes change isn't the right thing. But American conservatism, and this cuts across the political spectrum is conservative of many things which a few decades ago, or at most a century ago, didn't even exist. It's weird Bubba.Remember, the Whigs controlled the Congress and presidency in 1852, by 1856 the Whigs no longer existed.

COGNITIVE SLAVES -The companies that have created the most new value in the last decade, are Internet companies like Facebook, Google, etc.  They've created hundreds of billions in market value, driven by billions in financial profits.  Good for them, but bad for us. Why?  IF these companies represent the most valuable new industry of the early 21st Century, where are the jobs that will provide prosperity for millions today, and potentially tens of millions in the future?  They don't exist.  These companies create few real jobs.The distressing part is that in reality these companies actually employ hundreds of millions of people, particularly young and otherwise un or underemployed superusers.  People that work for them day in and day out for free: finding, sifting, sorting, connecting, building, etc

The Face of An American Lost Generation - One strangeness of our moment is that any U.S. Army commander going into an Afghan village can directly pay locals to, say, fix some part of that country’s destroyed infrastructure.  That’s considered a winning-hearts-and-minds counterinsurgency strategy.  On the other hand, here in the U.S., it's other hearts and minds that are targeted.  Our government has proven itself adept at handing untold sums over to failing banks, investment outfits, insurance firms, and auto companies, but remains allergic to handing significant dollars directly to out-of-work Americans, New Deal-style, to go back to work and help our aging infrastructure. With the backing of the Nation Institute’s superb Investigative Fund, TomDispatch has sent its associate editor Andy Kroll on the road to confront the reality of the meteoric growth of long-term unemployment, of what joblessness really means to hearts and minds in our country.

Want A Manufacturing Renaissance In America? Here's A Simple Plan - As we all know, Japan and Germany are the world's powerhouse exporters of advanced machine tools and other high-technology equipment and goods. In the Japanese plastics factory in Nagano Prefecture, neatly uniformed workers were shown cleaning plastic parts by hand. In the German packaging factory, neatly uniformed workers were shown guiding cardboard boxes onto a conveyor by hand. To the observer who knows something about either nation, both personally and as a mercantilist culture/economy, there is a wealth of information in these two short videos. 1. A staggering amount of "manufacturing" in advanced mercantilist economies still involves human labor. 2. Factory work is respected and not denigrated culturally.

Failing US transportation system will imperil prosperity - The United States is saddled with a rapidly decaying and woefully underfunded transportation system that will undermine its status in the global economy unless Congress and the public embrace innovative reforms, a bipartisan panel of experts concludes in a report released Monday.  U.S. investment in preservation and development of transportation infrastructure lags so far behind that of China, Russia and European nations that it will lead to "a steady erosion of the social and economic foundations for American prosperity in the long run." That is a central conclusion in a report issued on behalf of about 80 transportation experts who met for three days in September 2009 at the University of Virginia. Few of their conclusions were groundbreaking, but the weight of their credentials lends gravity to their findings.

The Time for Infrastructure Investment Is ASAP - Writing in The Washington Post, Ezra Klein correctly notes that the case for infrastructure spending during an economic downturn is compelling and that the most recent proposals for infrastructure spending are too small.  He writes: People than $2 trillion in repairs and upgrades.Because of the recession, construction materials are cheap. So, too, is the labor. And your borrowing costs? They've never been lowsay that the government should be run more like a business. So imagine you are CEO of the government. Your bridges are crumbling. Your schools are falling apart. Your air traffic control system doesn't even use GPS. The Society of Civil Engineers gave your infrastructure a D grade and estimated that you need to make more er. That means a dollar of investment today will go much further than it would have five years ago -- or is likely to go five years from now. So what do you do?

Infrastructure Spending Now - And to leave the long-term unemployed aside for a moment, the obvious thing to do with unemployment construction workers is to put them to work in the construction business. Compared to other developed countries, America already has a great deal of private housing. Hence unemployed. At the same time, compared to other developed countries our public infrastructure is pretty shabby. So with interest rates low and the private demand for construction workers also low, it’s an ideal moment for the government to borrow money and spend it on infrastructure. That doesn’t—and shouldn’t—mean an exclusive focus on sexy megaprojects like high-speed rail. This country does not suffer from a shortage of potholes, cracked sidewalks, or other minor problems that tend to not get fixed in a timely manner because of lack of money. Given the slack demand in the economy and low interest rates, we should be leaping to execute any quick-fix project of this kind ASAP. There are also tons and tons of middling issues with municipal water supplies.

Offshoring, outsourcing: U.S. jobs continue to flow overseas - latimes -Though some American firms are bringing overseas work back home, evidence is growing that companies are moving more jobs than ever to China and other countries — a trend that could exacerbate efforts to bring down the nation's stubbornly high unemployment rate. One sign of increased offshoring is the rising number of applications for federal Trade Adjustment Assistance, which usually goes to factory workers who lost their jobs because their work was sent overseas or was undercut by cheaper imports.  For the six months that ended Sept. 30, workers at about 1,200 offices and plants nationwide were approved for federal Trade Adjustment Assistance. That's about 20% more approvals than in the same six-month period last year, according to the U.S. Labor Department. In addition, the most recent Commerce Department data show that employment at the foreign subsidiaries and affiliates of U.S. multinational firms grew by 729,000 in two years, to 11.9 million in 2008 from 2006. Over that same period, domestic employment by such firms slipped by 500,000 jobs, to 21.1 million.

The Protectionist Instinct - As unemployment remains high and the election nears, many politicians are again campaigning against free trade and its cousin, outsourcing. Polls show voters are increasingly skeptical of the benefits of free trade. There is no area where the beliefs of ordinary citizens are more at odds with the views of professional economists. There are two aspects of our evolved psychology that help explain beliefs about trade. First, humans tend towards zero-sum thinking. That is, we do not intuitively understand the possibilities of economic growth or the benefits of trade in achieving it. Our ancestors lived in a static world with little intertribal trade and virtually no technological advance. That is the world our minds understand. Positive-sum thinking doesn't come naturally. By analogy, we learn to speak with no teaching, but we must be taught to read. Understanding the mutual benefits of exchange is like reading, not speech.

Increases in U.S. Worker Productivity, More Than China's Currency, Responsible for Loss of U.S. Jobs - It's true that the U.S. has lost more than 5.5 million manufacturing jobs in the last ten years, from more than 17 million jobs in 2000 to fewer than 12 million jobs in 2010 (see top chart above, data here), which is a 32.5% reduction in factory employment.  And yet during that same period, manufacturing output (data here) actually increased by more than 5%, from $3.1 trillion in 2000 to $3.26 trillion (measured in 2005 dollars) this year (see chart above).  On a per employee basis, manufacturing output per worker increased by more than 50%, from $182,000 in 2000 to $278,000 this year (see bottom chart above, measured in 2005 dollars).   Bottom Line: Manufacturing worker productivity has doubled in the last 17 years since 1993, and that has contributed to the loss of more than 11 millions jobs. That is, if factory workers were only as productive today as their counterparts in 1993, it would require more than 23 million factory workers today to produce $3.26 trillion worth of manufacturing output today, instead of the 11.7 million workers employed today to produce that much manufacturing output. 

Plan to Expand Rail Service Imperiled at State Level - Republicans running for governor in a handful of states could block, or significantly delay, one of President Obama’s signature initiatives: his plan to expand the passenger rail system and to develop the nation’s first bullet-train service.  In his State of the Union address this year, the president called for building high-speed rail, and backed up his words with $8 billion in stimulus money, distributed to various states, for rail projects.  But Republican candidates for governor in some of the states that won the biggest stimulus rail awards are reaching for the emergency brake.

Republican Candidates Reject Hi-speed Rail Funding In The Recovery Act. - America's sorry transportation infrastructure isn't just a source of inconvenience. It's also a source of economic weakness, according to a new report written up in the Washington Post: The United States is saddled with a rapidly decaying and woefully underfunded transportation system that will undermine its status in the global economy unless Congress and the public embrace innovative reforms, a bipartisan panel of experts concludes in a report released Monday. The Recovery Act, of course, has a lot of transportation funding in it--with a particular emphasis on high-speed rail, the area in which the U.S. may be most conspicuously behind other countries. It's one of those investments that virtually every reasonable expert, from left to right, would agree is worthwhile. But reasonable people appear to be in short supply in the Republican Party these days. From the New York Times: Republicans running for governor in a handful of states could block, or significantly delay, one of President Obama’s signature initiatives: his plan to expand the passenger rail system and to develop the nation’s first bullet-train service. ...

Railing Against Rail - Jonathan Cohn points out the curious opposition of Republicans to any improvement in our woefully inadequate rail system. As he suggests, this opposition goes beyond issues of cost; there’s something visceral about it. It’s not too hard to understand, of course: in real life, as opposed to bad novels, railroads aren’t run by rugged individualists (nor should they be). In fact, passenger rail is generally run by government; even when it’s partially privatized, as in Britain, it’s done so with heavy state intervention to preserve some semblance of competition in a natural monopoly. So rail doesn’t fit the conservative vision of the way things should be.  I suppose there’s some echo of this attitude on the other side; people like me probably have a slight affinity for rail because it’s a kind of socially provided good. But I don’t think it’s comparably irrational: rail just makes a lot of sense for densely populated regions, especially but not only the Northeast Corridor. New York could not function at all without commuter rail, and Amtrak even as it is is crucial to intercity traffic — it’s not just a question of expanding airport capacity, we just don’t have the airspace.

Budget Woes Hit Local Government Jobs - Local governments last month posted their deepest job losses in 28 years as budget cuts pushed teachers off public payrolls.State and local governments overall cut 83,000 jobs last month, the Labor Department’s employment report showed, contributing to the overall loss of 95,000 jobs across the economy. As a result of government cuts, September marked the first month of the year in which overall jobs declined even after excluding the effect of temporary federal Census workers.Budget cuts during the summer kept tens of thousands of teachers at home once the new school year started. Local government payrolls fell by 76,000 during the month, including almost 50,000 education jobs. State government payrolls overall declined by 7,000 and would’ve increased slightly if not for the loss of 7,800 education jobs.

Biggest Local Cuts in 30 Years - Local governments are cutting jobs at the fastest rate in almost 30 years.  They cut 76,000 jobs last month and over the last three months have cut 143,000 jobs, many in education, according to today’s jobs report. That’s 1 percent of total local-government employment across the country. Since the Labor Department began keeping records in the 1950s, the only other time that the cuts were so steep was in the harsh 1981-2 recession. The federal government has been cutting jobs, too, in recent months — partly because of the end of Census taking — and state and local governments have made small cuts in employment. Combined, these government layoffs have more than outweighed a modestly improving situation — or at least a stabilizing one — in the private sector. In the last three months, the private sector has added an average of 91,000 jobs a month. That’s down from of an average of 150,000 early this year, but up from about 75,000 in the middle of this year.

State and local governments in trouble – teachers out - The September 2010 employment report released this morning by the Bureau of Labor Statistics again showed positive but totally inadequate private sector employment growth, with the addition of 64,000 private sector jobs in September. State and local governments, their budgets crunched, lost 83,000 jobs.  The pain of the state and local budget problems is clear in these numbers: Of the 83,000 state and local jobs lost, 58,000 were in education, as teachers and other education workers were not called back for the new school year.  September was the first month this year where, barring changes in temporary Census workers, the labor market lost jobs. With the impact of the Recovery Act fading out, it is up to Congress to do more. The economy is no better, no worse. America’s workers are still in hell. -Heidi Shierholz, EPI economist

Poverty grows in suburbs, social services don’t keep up - Poverty has grown in America’s suburbs during the recent economic downturn, but poor people in many suburban communities are finding it hard to get the help they need, a report by University of Chicago researchers shows. “Many suburbs have seen significant expansion in the number of poor persons over the last several years, yet few of the suburban communities have a social services infrastructure in place to address the challenges this increased poverty poses,” said Scott Allard, Associate Professor in the School of Social Service Administration at the University.  Allard and Benjamin Roth, a graduate student at SSA, are the authors of a report, “Suburbs in Need: Rising Suburban Poverty and Challenges for Suburban Safety Nets,” prepared for the Brookings Institution, to be released Thursday, Oct. 7. For the study, the researchers examined census data, records from the Internal Revenue Service and interviewed representatives of social service agencies in suburban Chicago, Los Angeles and Washington, D.C.

Welfare's safety net hard to measure among states -The nation's welfare system of cash assistance, for decades the core of help for mothers and children in financial distress, has become a shrunken piece of the U.S. social safety net.  The welfare rolls have absorbed relatively few of the Americans who have tumbled lately into poverty or unemployment.  The number of families getting welfare checks, federal figures show, increased by about 185,000 between the start of the recession in late 2007 and this spring. During roughly the same period, the number of families living in poverty rose by more than 400,000 to record levels, according to the Census Bureau, which reported this week that, in Washington, three out of 10 children were poor last year.  State by state, welfare programs are a patchwork, with little connection between the condition of a state's economy and the number of people who have gone onto welfare.  Taken together, this new portrait of welfare answers a central question that hovered over the impassioned debate of the mid-1990s. How would the reshaped welfare system respond, policymakers and advocates wondered then, if the economy plunged into long, serious trouble?

States and Cities: Call Them ‘The Fiscally Challenged’ - The Pew Center on the States and the Public Policy Institute of California surveyed the public in five populous, and very different but all “fiscally challenged” states: Arizona, California, Florida, Illinois and New York. The bottom line: Residents are “more likely to say their elected leaders are wasting money and could deliver services more efficiently than complain that state government is too big.” Although they’d prefer to tax “the other guy” — the wealthy, corporations, smokers, drinkers and gamblers — they are “willing to increase their own taxes to pay for the things they consider most important, particularly K-12 education and health and human services.” The five comprise almost a third of the U.S. population and the nation’s economic output — and collectively account for 45% states’ total projected budget gaps for fiscal year 2011. The results show residents have strikingly similar priorities for state government, but their preferences clash with fiscal reality.

States Continue to Feel Recession’s Impact —The worst recession since the 1930s has caused the steepest decline in state tax receipts on record. State tax revenues were 8.4 percent lower in the 2009 fiscal year than in 2008, and an additional 3.1 percent lower in 2010, while the need for state-funded services did not decline. As a result, even after making very deep spending cuts over the last two years, states continue to face large budget gaps. At least 46 states struggled to close shortfalls when adopting budgets for the current fiscal year (FY 2011, which began July 1 in most states). These came on top of the large shortfalls that 48 states faced in fiscal years 2009 and 2010. States will continue to struggle to find the revenue needed to support critical public services for a number of years, threatening hundreds of thousands of jobs. States face:

40 states bank on rising tax revenue in 2011 - The vast majority of state governments are anticipating a rise in tax revenues this year after two years of sharp drops. Analysts caution that most states will face large budget gaps in the next few years.Forty states forecast having an increase in tax receipts in the current fiscal year, according to a forthcoming report by the National Conference of State Legislatures. Slow economic growth is boosting proceeds from income and sales taxes. That could reduce the impact of states' budget struggles on the economy. State budget shortfalls have led to widespread layoffs, tax increases, spending cuts and other measures that have restrained economic growth.

New York Personal Income Falls For First Time In 70 Years - The recession put a 3.1 percent dent in the personal incomes of New York state residents, who endured their first full-year decline in more than 70 years, according to a report released on Tuesday. Paychecks or net earnings tumbled 5.4 percent, while dividends, interest and rent slid 8.4 percent, to a grand total of nearly $908 billion, the state comptroller's report said. Not only did New Yorkers' personal incomes fall "almost twice" as much as they did in the nation as a whole, but they have yet to recover to pre-recession levels, Comptroller Thomas DiNapoli said.

Firefighters watch as home burns to the ground - Imagine your home catches fire but the local fire department won't respond, then watches it burn. That's exactly what happened to a local family tonight. A local neighborhood is furious after firefighters watched as an Obion County, Tennessee, home burned to the ground. The homeowner, Gene Cranick, said he offered to pay whatever it would take for firefighters to put out the flames, but was told it was too late.  They wouldn't do anything to stop his house from burning. Each year, Obion County residents must pay $75 if they want fire protection from the city of South Fulton.  But the Cranicks did not pay. The mayor said if homeowners don't pay, they're out of luck.

Cities in Debt Turn to States, Adding Strain - Now Harrisburg is calling on the state again. On Friday, the city said it could not meet its next payroll without money from the state’s distressed cities program.  Across the country, a growing number of towns, cities and other local governments are seeking refuge in similar havens that many states provide as alternatives to federal bankruptcy court. Pennsylvania will have 20 cities and smaller communities in its distressed-cities program if Harrisburg receives approval. Michigan has 37 in its program; New Jersey has seven; Illinois, Rhode Island and California each have at least one. This is on top of troubled housing, power and hospital authorities.  The increasingly common pleas for state assistance — after two relatively quiet decades — reflect the yawning local budget deficits that have appeared in the last two years.  As tax revenue has fallen, the cost of providing labor-intensive government services, like teaching and policing, has proved hard to reduce.

JeffCo. Commission President Now Backs Bankruptcy Option - In Alabama’s most populous county, and in a region many consider the economic engine, the topic of filing for bankruptcy over Jefferson County’s $3.2 billion sewer debt is once again drawing attention. This time, one of the key county commissioners adamantly against bankruptcy is changing her tune. On Tuesday, Commission President Bettye Fine Collins told reporters circumstances have changed. “If we get to the point, when people refuse to cooperate with us, as hard as we have worked on this, then I myself will have no problem in filing for Chapter 9,” Jefferson County Commission President Bettye Fine Collins said.

Not Leaving Las Vegas - Unemployment in Nevada is now 14.4 percent, the highest in the nation and a stark contrast to the 3.8 percent unemployment rate here just 10 years ago; in Las Vegas, it is 14.7 percent.  August was the 44th consecutive month in which Nevada led the nation in housing foreclosures.  The article is here and it details other grim aspects of the city's economy.  This is a simple yet effective example of the current non-separability of aggregate demand and structural problems.  Demand in Las Vegas is ailing and businesses are complaining of low sales.  Yet this is a sectoral shift as well, resulting from especially bad local housing problems, lower travel demand from outsiders, and a growing desire for investment safety rather than gambling risk.  Las Vegas needs for the United States to have higher real asset values, not just higher nominal aggregate demand.

Property Taxes Starting to Slip - Cities, which continue to face stressed finances, are starting to see lower property values translate into weaker property tax collections, according to a report released today by the National League of Cities.In 2010, city property tax revenues are projected to decrease 1.8% in 2010, the first decline since the recession began, according to the report. That is expected to get much worse. “The full weight of the decline in housing values has yet to hit the budgets of many cities and property tax revenues will likely decline further in 2011 and 2012 as declining property values continue to be reflected in city property tax assessments and collections,” says the NLC. While housing prices have been weakening since 2006, property taxes have continued to grow for most of the recession, despite falling property values and depressed construction. That is partly because some localities have raised their taxes to cover budget gaps, but also reflects a time lag: It can take localities two or more years to lower their taxes to reflect battered property values.

The Highest Property Tax Burdens in America - New York and New Jersey together accounted for all of the top 10 highest median property tax burdens, whether calculated by median property tax dollars paid, or as median taxes as a percent of median home value, or as median taxes as a percent of median income. Click the interactive map below to view all these figures for each of the 2,000 counties the Tax Foundation analyzed. The drop-down menu enables you to alternate between different measures of property tax obligations.

NJ stops 100 road, rail projects - New Jersey transportation officials said Tuesday they had indefinitely suspended about 100 state-funded road and rail projects in their early stages as the cash-strapped state grapples with how to pay for needed infrastructure improvements over the long haul.  The announcement came a day after work resumed on hundreds of transportation, transit, and local aid projects that Gov. Christie's transportation commissioner had ordered stopped because he said the fund dedicated to pay for the work had become dangerously low. Most of the projects resumed after lawmakers approved a $1.25 billion bond sale to keep the work funded through spring.  Those that were put on hold Tuesday are in the early phases of planning and development, and the costs and benefits of proceeding with each project will be reviewed, officials said.

Eating the seed corn - LAST week, there was a nice bit of bipartisan concord over the value of infrastructure investment during recession. Both the left-leaning Ezra Klein and a former economic adviser to President George W. Bush, Andrew Samwick, agreed that now is the time for public spending on infrastructure projects. The message isn't getting the traction it ought to. New Jersey Governor Chris Christie has won plaudits for his merciless approach to budget cutting in a fiscally challenged state. But the latest victim may be a cut too far: The tunnel, planned for about 20 years, had already received pledges of $3 billion each from the federal government and the Port Authority of New York and New Jersey, and ground had been broken to start the digging. But this week, elected officials and mass transportation advocates have been buzzing with rumors that Mr. Christie is about to withdraw the state funds that had already been committed. To do so would effectively scuttle the biggest transit project under way in the country, forfeiting the federal money and 6,000 construction jobs.

Tunnel Of Idiocy - Krugman - Many reports that Chris Christie is about to scuttle the second rail tunnel under the Hudson. If so, it’s arguably the worst policy decision ever made by the government of New Jersey — and that’s saying a lot. The story seems to be that Christie wants to divert the funds to road and bridge repair; but in so doing he would (a) lose huge matching funds from the Port Authority and the Feds (b) delay indefinitely a project NJ needs desperately ASAP. He could avoid these consequences by raising gasoline taxes. But no, taxes must never be raised, no matter what the tradeoffs. And it’s a social bad too: now is very much the time when we should be ramping up infrastructure spending, not cutting it. Awesome.

New Jersey's Tunnel Vision -I agree (almost*) entirely with Paul Krugman about the second rail tunnel from New Jersey to New York: Whatever you think of rail projects elsewhere, they work in the Northeast.  In the case of the New York tri-state area, that's too mild; the fact is, the city could't work without rail.  There's simply no way to cram more people onto the island of Manhattan without mass transit.  Not only are the three major entry points from New Jersey thoroughly bottlenecked, but also, the streets are so congested that bringing more cars in would be disastrous.  And since Manhattan already has roads about everywhere you can put one, the only answer is rail.  To the extent that New Jersey benefits from salaries earned on Wall Street, and other high-paying New York industries--and it does benefit, quite a lot--the rail tunnel will benefit the state by allowing it to get more workers into and out of the city every day.

Transit Economics - Krugman - The usual suspects on the comment board are, inevitably, arguing that rail transit should pay for itself. The obvious response is that road transit doesn’t; why should only public transit have to self-finance, when private vehicles generally drive on free roads built and maintained out of taxes? But in a way that misses the larger point: urban transportation is an area in which we know that market prices bear very little relationship to true social costs. Even if you ignore environmental impacts and the national security implications of oil imports, the fact is that driving in an urban area, especially in rush hour, imposes huge congestion externalities on other people. And I mean huge: Felix Salmon had a nice piece last year putting the external cost you impose on other people by driving into lower Manhattan at $160 a day. (I can’t find the reference, but Dave Barry once had an “ask Mr. Question Authority” about how long it takes to drive across Manhattan during rush hour. The answer was that nobody has ever succeeded in driving across Manhattan during rush hour.)

The unbuilt - TO FOLLOW up briefly on a story from yesterday, New Jersey Governor Chris Christie has indeed pulled the plug on the tunnel between his state and Manhattan. Mr Christie was concerned about cost overruns at the project, but you don't judge a project by its cost; you judge it by its cost relative to its benefit, and the benefit to the tunnel investment would have been substantial. Keep in mind the tunnel currently in use was constructed a century ago. Tot up the value to the state of New Jersey over that period, and you get some pretty substantial numbers. Meanwhile, outgoing administration economic adviser Larry Summers called for new infrastructure investment yesterday. Frankly, it would have been nice to hear more about this quite a bit sooner. Mr Summers was reluctant to include too much infrastructure spending in the stimulus package because of the difficulty in ramping up such spending quickly. That's not an unreasonable argument, but the administration also put off efforts to pass a transportation bill to replace the one that expired last year If these investments can't be made now, when costs are low and the need is high, it's not clear when they are likely to be made.

Cash-Strapped States Resurrect "Debtors' Prisons" - Brennan Center for Justice notes: Many states are imposing new and often onerous “user fees” on individuals with criminal convic­tions. Yet far from being easy money, these fees impose severe – and often hidden – costs on com­munities, taxpayers, and indigent people convicted of crimes. They create new paths to prison for those unable to pay their debts and make it harder to find employment and housing as well to meet child support obligations. This report examines practices in the fifteen states with the highest prison populations, which to­gether account for more than 60 percent of all state criminal filings. We focused primarily on the proliferation of “user fees,” financial obligations imposed not for any traditional criminal justice purpose such as punishment, deterrence, or rehabilitation but rather to fund tight state budgets.

Texas Governor Facing Up to $17 Billion Budget Battle - Texas is looking at a projected $11 billion to $17 billion budget shortfall, as lawmakers head into the 2011 session. Texas writes budgets in two-year terms, so the shortfall affects the 2012-2013 state budget.  "We have a balanced budget amendment in the state of Texas so we don't have deficit spending—very wise, the federal government should try that. You just prioritize what's important and you fund those. Then you make the reductions in spending. It's not fun, it's a tough process," Texas Governor, Rick Perry, told CNBC on Thursday.  "We did it in 2003 and it allowed Texas to really get back on course within a two-year period of time. When we came back in 2005 we had an $8 billion budget surplus," Perry said.

Illinois Deficit Forecast Grows as Financial Ills Deepen, Comptroller Says (Bloomberg) -- Illinois’s deteriorating financial condition threatens to swallow up more than half its general- fund budget in the next fiscal year, Comptroller Dan Hynes said.  The financial picture drawn by Hynes in a report yesterday projects a fiscal 2012 deficit of $15 billion or more, while this year’s budget calls for $26 billion in spending. The state’s financial condition “continues to deteriorate,” Hynes said, citing a 36 percent surge in fiscal 2010 bills to be paid from current-year revenue.  The amount of unpaid obligations for the current year may balloon to $8 billion by June 30, when fiscal 2011 ends, Hynes said. That figure may increase if the state doesn’t make $3.7 billion in pension payments due this year, he said. The deficit and late payments of current debts may create “chaotic fiscal conditions as the situation snowballs,” he said.

Illinois Pays More Than Mexico as Cash-Strapped States Sell Bonds Overseas (Bloomberg) -- Illinois capital-markets director John Sinsheimer and Citigroup Inc. bankers took a globe-girdling trip from the U.K. to China in June to persuade investors that the state’s $900 million of Build America Bonds were a bargain.  The seven-country visit worked. The state sold one-fifth of the federally subsidized securities abroad the next month, tapping investors who are the fastest-growing source of borrowed cash for U.S. municipalities. Illinois, with the lowest credit rating of any state from Moody’s Investors Service, dangled yields higher than Mexico, which defaulted on debt in 1982, and Portugal, which costs more to insure against missed payments.

Schwarzenegger, California lawmakers in budget deal - The head of California's senate announced late Friday that the legislature reached an agreement with Governor Arnold Schwarzenegger over the state budget and closing its 19.1 billion dollar deficit. Senate President Pro Tem Steinberg said that legislators will return next week to finalize their "comprehensive agreement," and could hold votes on Thursday."These are very difficult circumstances in difficult times,"  "Not a lot of celebrating. But we all stepped up and did the work we had to do." California will likely be forced to cut back public spending to bridge its massive budget deficit. In mid-May Schwarzenegger unveiled plans to plug the deficit by slashing billions of dollars worth of funding for services designed to help the state's poor. His budget proposal called for 12.4 billion dollars in spending cuts, including the elimination of California's welfare-to-work program and virtually all child care for low income families. Schwarzenegger's proposed spending cuts would also eliminate 60 percent of funding for community mental health, and low income families would also lose access to state-subsidized day care for children.

California Budget Deal Ends Impasse With Vote Expected in Days -California Governor Arnold Schwarzenegger and top lawmakers came up with a compromise to close a $19.1 billion deficit and give the state a budget, ending a record three-month impasse with a vote expected next week on the spending plan.The accord doesn’t raise taxes, as sought by Democrats, nor does it dismantle the state’s welfare system, proposed by Republicans, the leaders said yesterday. Passage of the plan would clear the way for Treasurer Bill Lockyer to borrow about $10 billion on Wall Street by issuing short-term notes needed to pay bills until tax revenue comes in later in the year.
Legislative aides briefed on the details said last week’s framework cuts spending by around $8 billion, less than the $12 billion the governor had proposed, and holds education spending about the same as last year’s level, around $49 billion. The framework also would suspend for two years a tax break that let companies deduct part of net operating losses in a previous year from current-year taxes, said the two people briefed on it.

Creative Accounting in California - Why worry about budget deficits when you can merely assume they won’t exist?: (AP) — California lawmakers got their first look Wednesday at a proposal that attempts to end the state’s record-long budget impasse and close a $19 billion deficit, primarily through targeted spending cuts and a large dose of creative accounting. The deal, reached late last week between Gov. Arnold Schwarzenegger and the four Republican and Democratic leaders of the Assembly and Senate, does not contain new taxes or fees. Instead, it relies on a series of assumptions and accounting maneuvers that in all likelihood will punt many of this year’s budget problems to the next governor… For example, it counts on the state receiving $5.3 billion from the federal government, nearly $2 billion more than Schwarzenegger projected in May. Schwarzenegger and the legislative leaders also assume an economic recovery in California that would be robust enough to send $1.4 billion in additional tax revenue to state coffers…

Companies Fleeing California For Utah Over Confiscatory Tax Rate - Computer software giant Adobe, computer game monster EA Games, and Internet auction king ebay are abandoning California to set up shop in Utah. Why? California’s horrid business climate and high taxes. Adobe Systems, maker of a suite of graphics programs such as Adobe PDF, Illustrator, Photoshop, and InDesign, have announced that they are building a $100 million facility in either Salt Lake City or in nearby Utah County, Utah. The facility will bring thousands of jobs to Utah over the next few decades. In May the Internet auction company ebay also announced a major new facility to be built in Salt Lake City.  Not to be forgotten, games maker Electronic Arts opened its new facility in July in Salt Lake City where around 100 employees are already at work.
These companies fleeing California’s horrid business climate are not alone. There has been a steady flow of businesses out of California for the better part of a decade. As California’s political morass worsens, as its budget woes increase, and as her politicians are proven incapable of making the hard budgetary decisions to take power from unions and chop unnecessarily lavish social programs, the state’s jobs are bleeding out. California is an a freefall the end of which is still unseen.

Auditor General Projects $5 Billion Deficit For 2011-2012 - Pennsylvania is heading toward a $5 billion “fiscal crisis,” according to Auditor General Jack Wagner. The Office of the Auditor General released a statement estimating the state will face the $5 billion deficit in fiscal year 2011-2012 through a combined loss of $2.5 billion in federal stimulus funds and $3 billion in unemployment payments owed to the federal government. The state also faces an increase of at least $800 million in rising government employee pension costs. The previous fiscal year of 2009-2010 ended with a nearly $2 billion deficit, due to lower than expected tax collections for the year.

Illinois Governor: Education Is Solution To Deficit - Illinois is facing a $13 billion deficit, but Gov. Pat Quinn isn't offering many details on what more he would do to fix it if he won a full term. As lieutenant governor, Quinn was thrust into the top job 19 months ago after former Gov. Rod Blagojevich was arrested on corruption charges by the FBI. In an interview Monday with The Associated Press, Quinn said he'd address the deficit by raising taxes for education. He says better schools will mean a better economy. He's also counting on more money from the federal government, but there's no indication Congress plans more major bailouts.

L.A. Schools Face $268M Budget Gap For 2011-12 - The Los Angeles school district faces a $268 million budget deficit for the next academic year that could affect as many as 3,300 jobs, the superintendent said Tuesday.  Superintendent Ramon Cortines said he was proposing to partially cover the shortfall by using $103 million in federal education jobs funding and reducing expenses by $5 million at central headquarters and district offices.  The remainder, though, could come from employee givebacks.  The district intends to discuss several options with unions to avoid layoffs. The possibilities include pay cuts, furlough days or a combination of furloughs and salary freezes, Cortines said.

Is it a bird? Is it a plane? - FOR America’s children the education system is often literally a lottery. That is the main message of a new documentary about America’s schools, “Waiting for ‘Superman’.”  The timing could hardly be better. The “jobless recovery” is finally bringing home to Americans the fact that too many of those who go through its schools are incapable of earning a decent living in an increasingly competitive global economy. The number of jobs advertised but not being filled is increasing even as the unemployment rate stays resolutely high. And despite its depressing enumeration of the failure of so many schools, particularly in poorer urban areas, its miserable ending, and the bleakness of its title, the movie also has a message of hope: there are good schools and teachers in America, whose methods could make its education system as good as any in the world if only they were allowed to. That truth, recognised by anyone who has spent even a few hours in, say, a KIPP charter school, is an inconvenient one to the teachers’ unions, which the film rightly identifies as a big chunk of kryptonite standing in the way of a dramatic rescue for the children of America.

University of Oregon President Richard Lariviere asks legislators for $800 million in bond money. -An impassioned University of Oregon President Richard Lariviere made his pitch before legislators today for funding his university with $800 million in state-issued bonds. If the university does not find a new way to raise money, tuition will keep climbing an average 7.5 percent per year, as it has for the past 38 years, he said. That means annual tuition will hit $17,000 by 2020, he said, a price tag that will squeeze out middle class students.  "We have to do something." Lariviere's controversial funding plan, which he says has never been tried anywhere in the country, will be introduced as a bill in the 2011 Legislature, said Sen. Mark Hass, D-Beaverton, co-chairman of the work group, which met at Portland Community College.

Making money off students, debit-card edition - This was probably inevitable: the minute that Dodd-Frank cracked down on the fees charged by credit cards aimed at students, some other bright financial innovation would crop up. This time, a debit card aimed at students. Which carries lots of fees. Ylan Mui reports that a company called Higher One has started signing up colleges around the country, taking on the burden of providing cash to students. In return, it gets lots of fees: Students say several of the fees associated with Higher One’s card are particularly irksome, including the $19 inactivity fee, a 50-cent charge for using a PIN to make a purchase rather than a signature, and a $2.50 fee for using other banks’ ATMs… If the fees are listed on Higher One’s website, they’re not exactly prominent. I did find this page, eventually, via this blog entry, but it just says that “when you swipe & sign, you won’t be charged the PIN-based transaction fee”. I haven’t been able to find a page showing a 50-cent transaction fee anywhere*, although I did manage to find this page, showing a $25 fee for domestic wire transfers and a $50 fee for international wire transfers.

Dad loses home in student loan debt trap - After years of fighting off debt, James Reach has lost the battle -- along with his house. Not unlike many consumed with debt, Reach desperately wants to file for bankruptcy. But even if he did, he would still be drowning in debt. That's because his debt largely consists of private student loans -- which, by law, cannot be discharged in bankruptcy -- unlike virtually every other type of private loan. A father of four children, Reach wanted to help them pay for college, and he thought private loans offered the best way for him to do that. So he co-signed on loans for all of them. However, in the case of one of his sons, Reach said the rates ended up being significantly different from what they had been quoted originally.

Why Are Progressives Fighting Student-Loan Reform? - High-stakes Washington lobbyists have multiple tactics to win policy fights on behalf of their clients. A classic move is to line up unusual allies, especially progressive supporters for special-interest causes. Sometimes this is done through shell groups, but it's far more effective to get established progressive leaders and organizations to lend their credibility to your cause.  Which is how the Obama administration, in its recent attempt to regulate the for-profit college industry, found some unusual opponents: Melanie Sloan, director of the government watchdog group Citizens for Responsibility and Ethics in Washington, and Tom Matzzie, MoveOn's former Washington director. With their help, the industry successfully delayed the implementation of new rules to obstruct predatory lending practices, in part by painting critics of the industry as scheming banksters.  "What we see here is that the for-profit school industry has not just bought off the Republican Party but has done an amazing job of buying off the elite of the political left as well,"

Bill Gates on Education and Philanthropy - I was impressed by the latest "60 Minutes" report on Bill and Melinda Gates and many of their choices about what to spend their fortunes on. One main choice is their large spending on producing a vaccine against malaria. Here's an excerpt:And listen to what they have spent already: $4.5 billion for vaccines; almost $2 billion for scholarships in America; and $1.5 billion to improve farming in Africa and Asia, just to name a few. The foundation's wealth ranks up there with America's biggest companies, just behind McDonalds and ahead of Boeing. I loved this segment:"Well, if you have money, what are you gonna do with it? You can spend it on yourself, you can have, you know, thousands of people holding fans and cooling you off. You can build pyramids and things. You know, I sometimes order two cheeseburgers instead of one. But we didn't have any consumption ideas. And if you don't think it's a favor to your kids to have them start with gigantic wealth, then you've gotta pick a cause," Bill Gates explained.

The false obstacles to pension reform - State and local government pension plans have become a lot more expensive for taxpayers over the last few years. This is because public pensions are largely "defined benefit" plans: workers are guaranteed a specific benefit amount regardless of the performance of the assets in which pension plans are invested. When the market underperforms expectations (as it has recently, in spades) it is taxpayers rather than pensioners who bear the loss.Across the country, pension actuaries are coming to state legislatures and calling for an increase in pension contribution rates, which is needed to shore up the funds since they have lost so much value. For example, New York City's pension costs have risen over the last decade from approximately $1 billion per year to $8 billion, and will soon reach $10 billion. In response, many states are acting to reduce costs, by trimming future benefits and requiring employees to pay more. 16 states enacted pension reforms in 2008 and 2009, and at least five more have followed in 2010.

New York Pensions Set Return Expectations Too High, Mayor Bloomberg Says New York Mayor Michael Bloomberg said city pension funds have set unrealistically high assumed rates of return on investments, at 8 percent, which may require spending more than has been budgeted for retirement benefits. It’s much too high an assumption for us, I think it should be lowered,” Bloomberg said today at a news briefing, referring to the city’s five pensions holding almost $104 billion. “That’s going to require the city to put in more money. It’s very difficult to see where we could get the money to do that.” The city, which must balance its budget or face a state takeover of operations, has to close a $3.3 billion budget gap projected for fiscal year 2012, which starts July 1. The deficit is forecast to grow to $4.8 billion in 2014, while officials expect pension costs to increase to $8 billion that year from $7.6 billion now. Last month, the state pension fund cut assumed returns to 7.5 percent from 8 percent.

Talking Social Security - With Congress in recess until after the midterms, many members are heading home to face tough reelection bids. If Democrats really want to rally their base and win over voters who are either on the fence or thinking of sitting this one out, they’d be smart to start talking Social Security. You won’t find any lack of enthusiasm at the grassroots when it comes to protecting this centerpiece of FDR’s New Deal reforms. Over the past 75 years, it’s proven to be our nation’s most effective anti-poverty program while also providing Americans a measure of dignity and hope and lasting security against the vicissitudes of the market and life. Currently, Social Security provides the majority of income for two-thirds of the elderly population, and one-third receive nearly all of their income from it. According to the Congressional Budget Office, if no changes were made to Social Security it would still be able to provide full benefits to every recipient through 2039, and approximately 80 percent of benefits thereafter. (By simply ending the cap of taxing only up to $106,000 of earned income, that problem is solved.)

Ben Bernanke Wants Your Social Security Money - Federal Reserve chair Ben Bernanke took another swing at Social Security and Medicare today, saying yet again that they'll need to be cut to protect our nation's financial health. Based on his record, any roadmap Bernanke lays out for the future is worth following ... as long as you hold it up to a mirror first so that it's reversed. For those of you who prefer equations to words, let me put it this way: BB on SS = BS. Bernanke's comments about Social Security yesterday weren't just wrong. They were spectacularly wrong. They were as wrong as his comments on housing in 2005, when he denied there was a housing bubble and said that a rapid decline in housing prices was "a pretty unlikely possibility."  They were as wrong as his comments in 2007, when he said "there's a reasonable possibility that we'll see some strengthening in the economy sometime during the middle of the new year"

Demography is not destiny -The conventional wisdom, often repeated in the media, is that the retiring baby boom generation will drive entitlement spending to unsustainable levels. That’s a very misleading view of what will really happen, though it has a grain of truth.Just take a look (again) at one of CBOs recent projections (with respect to the issues raised in this post it doesn’t matter which one you look at):Look at this figure very carefully. It reveals a lot, which is why I’ve discussed it a lot. One thing it shows is that Social Security spending grows between 2010 and 2030, and then it stops growing. Moreover, while it grows, the extent to which it does is small relative to health care spending. Federal health spending grows faster and continues to do so well after 2030. Already these facts tell us something important.

Americans' life expectancy continues to fall behind other countries',The United States continues to lag behind other nations when it comes to gains in life expectancy, and commonly cited causes for our poor performance—obesity, smoking, traffic fatalities, and homicide—are not to blame, according to a Commonwealth Fund-supported study published today as a Health Affairs Web First. The study, by Peter Muennig and Sherry Glied at Columbia University, looked at health spending; behavioral risk factors like obesity and smoking; and 15-year survival rates for men and women ages 45 and 65 in the U.S. and 12 other nations (Australia, Austria, Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, and the United Kingdom). While the U.S. has achieved gains in 15-year survival rates decade by decade between 1975 and 2005, the researchers discovered that other countries have experienced even greater gains, leading the U.S. to slip in country ranking, even as per capita health care spending in the U.S. increased at more than twice the rate of the comparison countries.

Medicare drug costs up 10% - Medicare beneficiaries will pay an average 10 percent more in premiums for prescription drug plans next year, according to a new Kaiser Family Foundation analysis that also finds the average beneficiary will have a choice of 33 Part D stand-alone prescription drug plans despite a 30 percent reduction in the total number of stand-alone plans available nationwide. The analysis shows that premiums for the plans will rise, on average, to $40.72 per month in 2011 if beneficiaries stay with their 2010 plans, the foundation said. That is up from $36.90 in 2010 and 57 percent higher than in 2006, the first year of the Medicare Part D drug benefit

Did Medicare Part D make anyone healthier? - While critics are wont to cite Medicare Part D as an expensive Bush handout to drug companies, it has received praise in the past from others. For instance, here is Tyler Cowen:I’d just like to note that – relative to its reputation – the Medicare prescription drug benefit is one of the most underrated government programs of our time.  If the goal is to cut or check Medicare spending, and I think it should be, we should do it elsewhere in the program. However, a new NBER paper suggests that the program increased spending by previously the uninsured without any improvement in health outcomes: In this paper, we provide an assessment of the effect of Medicare Part D on the previously uninsured…We find that gaining prescription drug insurance through Medicare Part D was associated with an 63% increase in the number of annual prescriptions, but that obtaining prescription drug insurance is not significantly related to use of other health care services or health, as measured by functional status and self-reported health.

The Uncertainties of Pay-for-Performance - An accusation frequently lobbed against Medicare is that it pays providers of health care for services regardless of the quality of these services, or even their appropriateness. In fairness, however, that accusation can be made against all third-party payers for health care, both private and public, in the United States and abroad.To be sure, during the past decade there has been much experimentation with payment for performance, or, as it is sometimes called, P4P, in both the private and public sectors. During the administration of George W. Bush, for example, the administrator of the Centers for Medicare and Medicaid Services, Mark McClellan, a physician and an economist, started to lay the groundwork for better quality control in Medicare and Medicaid with an eye to applying P4P in those programs further down the road. Several sections in the recently passed Affordable Care Act push those initiatives much farther.

Public Option Duplicity Revisited: Yet More Evidence of Obama Spinelessness - 10/06/2010 - Yves Smith - Proof that Obama’s failings are ones of character and experience comes from an area that was the centerpiece of his election campaign, an area in which he professed to have considerable interest, namely health care reform.  One of the big disappointments of the health “reform”, from the liberal perspective, was the abandonment of the public option. But Obama had never seem committed. Indeed, one of the truly bizarre features of the town hall debate fiasco was the failure of Team Obama to hit on the obvious argument to rebut the hysterical objection to it, that it would be “socialism”: “We have a very successful and popular government funded health care program now. It’s called Medicare. We want to build and expand on it.”  Glenn Greenwald was pilloried for pointing out the at best limp wristed Obama support during tortuous horse trading on the bill. But as he discussed yesterday, more disclosures have proven what everyone suspected, that Team Obama was never serious about the public option, and always regarded it as a bargaining chip:

Health Care Law’s Uneven Path to Better Insurance -Consider what it would be like to have a health insurance plan that capped annual benefits at $2,000. For any medical care costing more than that, you would have to pay out of pocket.   A typical hospital stay runs thousands of dollars more.  So does this insurance plan sound like part of the solution for the country’s health care system — or part of the problem?  A $2,000 plan happens to be one of the main plans that McDonald’s offers its employees. It became big news last week, when The Wall Street Journal reported that the company was worried the plan would run afoul of a provision in the new health care law. In response to the provision, McDonald’s threatened to drop the coverage altogether, until the Obama administration signaled it would grant some exemptions.

The Crucial Role of Health Insurance Mandates - The threat by McDonald’s to discontinue its health-insurance coverage is one recent aftershock of the health care overhaul, as my column this week discusses. In the end, McDonald’s seems unlikely to follow through on that threat. But another part of the new law will lead to real changes: the requirement that insurers offer coverage to all children, including those with pre-existing illnesses.As Reed Abelson has written, the new rule has caused “some insurers to balk at the idea that they will be forced to cover too many sick children. Aetna, Cigna and WellPoint, among others, have said they will stop selling new [child-only] policies in some states.”This situation perfectly illustrates why many economists say the health care law rightly mandates that everyone have health insurance. Without it, the market for health insurance won’t function very well. That has long been clear with individual policies — that is, those not offered by employers — which are terribly expensive. Why? Because the market is dominated by people who are sick and who expect to get sick.

The Health Racket Bailout - In September 2009 Obama declared, regarding the private health insurance rackets, “I believe it makes more sense to build on what works and fix what doesn’t, rather than try to build an entirely new system from scratch.” What kind of coded message is this? Since the system of paying for health care by forcing payments through this racket has long been a complete disaster from any rational or moral point of view, since in other words nothing works about this system except for the profit extractions on the part of unproductive gangsters, we have to assume it’s the good of these criminals which is what Obama meant by “what works”, and any threat to this extorted revenue stream is what doesn’t work. Look at the process, at the deals Obama struck with the insurance and drug rackets before the “negotiation” even began, the deals which were further worked to the rackets’ advantage throughout the process as the Democrats and liberal hacks steadily sold out every position, replaced every previous lie with an even more threadbare, empty lie.

Why it’s time to panic -What you are looking at is spending on health care as a percentage of GDP going back 30 years.  Lest you think I’m cherry picking, I’m showing you data from all 31 OECD countries.  It’s not hard to pick out the US line, is it? We should spend more money than other countries.  We’re richer than them.  But should we be spending so much more of our GDP on health care? Look at the slope of our line compared to every other line.  Yes, spending as a percentage of GDP is rising pretty much everywhere.  But it seems to be rising much faster in the US.  The gap between us and all other countries is just getting bigger. Is there anything about this chart that doesn’t make you worry?

Health reform to worsen doctor shortage: group (Reuters) - The U.S. healthcare reform law will worsen a shortage of physicians as millions of newly insured patients seek care, the Association of American Medical Colleges said on Thursday. The group's Center for Workforce Studies released new estimates that showed shortages would be 50 percent worse in 2015 than forecast. "While previous projections showed a baseline shortage of 39,600 doctors in 2015, current estimates bring that number closer to 63,000, with a worsening of shortages through 2025," the group said in a statement. "The United States already was struggling with a critical physician shortage and the problem will only be exacerbated as 32 million Americans acquire health care coverage, and an additional 36 million people enter Medicare."

New York City seeks a waiver to restrict food stamp (SNAP) benefits - New York City this week petitioned USDA for permission to disallow soda purchases with food stamp (SNAP) benefits.  USDA may well disapprove the proposal, having in previous years turned down requests from other states for similar waivers from federal rules.  Dan Sumner is an agricultural economist who participated in some recent work about food stamps with colleagues at the University of California Davis, where I am visiting.  By email this morning, he explained his misgivings about the new proposal: This policy proposal raises two questions in my mind. (1) Are we ready as a matter of policy to declare some legal foods are just BAD no matter what else one consumes and no matter the context? (2) Would such a ban have an effect on behavior of anyone, except those proposing the ban, who would presumably enjoy thinking that their taxes were not used to buy "bad" food and may then celebrate with a glass of red wine (which is already a banned food for food stamps)?

No way would I eat this crap - The origins of chicken nuggets. In case the picture isn’t revolting enough, try these words:[B]ecause it’s crawling with bacteria, it will be washed with ammonia, soaked in it, actually. Then, because it tastes gross, it will be reflavored artificially. Then, because it is weirdly pink, it will be dyed with artificial color.But why is it “weirdly pink” to begin with. Or is this picture taken after the ammonia wash and/or reflavoring? After all that, why do they even start with chicken? It must be either (a) the cheapest substrate or (b) the only legal way to call it “chicken” even though by the time all is said and done it is really nothing like chicken.

Soaring prices threaten new food crisis Fears of a global food crisis swept the world’s commodity markets as prices for staples such as corn, rice and wheat spiralled after the US government warned of “dramatically” lower supplies. An especially hot summer in the US, droughts in countries including Russia and Brazil and heavy rain in Canada and Europe have hit many grain and oilseed crops this year. This has raising concern of a severe squeeze in food supplies and a repeat of the 2007-08 food crisis. The US Department of Agriculture, in a closely watched report, predicted that the country’s stocks of corn would halve to their lowest levels in 14 years.

Genetically engineered “protatoes” boost yield, nutrition - Undernourishment and malnutrition are severe problems in the developing world. Many people—about a billion of them—eat primarily staple grain crops and do not get enough protein. Protein deficiency delays growth and development, can cause permanent brain impairments in babies and young children, and enhances susceptibility to disease. No single food crop exists that provides humans with all of the essential amino acids we need.  Researchers in India have made transgenic potatoes that contain more protein, are nonallergenic and nontoxic, and grow in different regions and climates. Just like regular potatoes, they taste better fried than boiled. (Seriously, they tested that.) They are called “protatoes,” for potatoes plus protein.

GMO proponents should call for stronger safety testing of the AquAdvantage genetically modified salmon -The FDA recently held hearings to discuss the safety and labeling of a genetically modified salmon, called AquAdvantage, from a company called AquaBounty. Scientists have added a gene to the DNA of this fish, so that it has a longer period of rapid growth each year. GMO supporters should reflect on what standard of food safety they want this new product to meet.  For example, if the new salmon turns out to have a slightly higher allergenicity than conventional salmon, leading to a slight increase in hospitalizations and deaths, it will not fly to say, later, "well, people with allergies probably shouldn't even be eating finfish like salmon anyway."  If the new salmon turns out to have slightly elevated average concentrations of a growth factor that has been associated with risk of cancer, it will not be adequate to say, later, "only a few of the additional cancers can be directly attributed to the GMO technology."  The politics of this debate are such that GMO proponents should want the first GMO animal food to be as safe as conventional food.

Do We Have a Right to Know If Our Food Has Been Genetically Modified? - The FDA is close to approving genetically modified (gm) salmon. See this and this. We know that at least some genetically modified foods can harm the environment. See this and this. And serious questions have been raised about whether some gm foods might increase allergies or cause other health problems in humans. See this, for example. Indeed, as Mother Jones pointed out last week, gm salmon may itself increase allergies: Consumers Union senior scientist Michael Hansen called the company's food safety tests "woefully incomplete," and the group pointed out that the FDA approval panel is mostly comprised of GE [i.e. genetic engineering] cheerleaders, with no fish ecologists or allergists. Why's an allergist important? Because the company's own tests suggest that the new salmon could be much more allergenic than regular salmon.

Mutant Worms Produce Piles of Spider Silk - Snippets of spider genes let mutant silkworms spin silk stronger than steel. Scientists have coaxed miles of spider-like silk from a colony of transgenic silkworms, opening the door for large-scale production of super-strong, tough and flexible fibers. “We can make a lot more silk from the silkworm process than you could possibly make from spiders,” said molecular biologist Malcolm Fraser of the University of Notre Dame. Spider silk has long been hailed as a superfiber, useful for everything from surgical sutures to bulletproof vests to scaffolding for growing cartilage. But spiders tend to be predatory loners who turn to cannibalism when raised in close quarters, making it nearly impossible to mass produce the treasured threads

Cheap gas makes people fat: A study argues that “8 percent of the rise in obesity between 1979 and 2004 can be attributed to the concurrent drop in real gas prices, and that a permanent $1 increase in gasoline prices would reduce overweight and obesity in the United States by 7 percent and 10 percent.”

Warmer, wetter weather has crops on the move… Warmer and wetter weather in large swaths of the country have helped farmers grow corn, soybeans and other crops in some regions that only a few decades ago were too dry or cold, experts who are studying the change said. Bruce Babcock, an Iowa State University agriculture economist, said soybean production is expanding north and the cornbelt is expanding north and west because of earlier planting dates and later freezes in the fall. "The Dakotas are pretty big corn producers now and soybeans have dramatically increased in North and South Dakota," Babcock said. The change is due in part to a 7 percent increase in average U.S. rainfall in the past 50 years, said Jay Lawrimore, chief of climatic analysis for the Asheville, N.C.-based National Climactic Data Center.

Water Funds: Coase in South America (and New York) Rivers often create important resource conflicts. Downstream cities want clean water to drink. Upstream residents want to make a living, but that sometimes damages water quality. In the highlands above Quito, Ecuador, for example, residents often convert land to farming and ranching; that allows them to raise valuable crops and livestock, but weakens the land’s ability to naturally cleanse water before it flows downstream. One response would be for a central government to enact laws and regulations that force the upstream folks to take better care of the watershed. Such laws can play an important role in improving water quality, but they raise several practical concerns. For example, regulatory burdens may place undue economic burdens on upstream residents. And the laws and regulations may be hard to enforce, particularly if local communities view them as an unwelcome burden.Another strategy is for the downstream water users to pay the upstream residents for keeping the water clean.

The Perils Of Groundwater Depletion Another unsustainable arrangement recently came to light when Marc Bierkens of Utrecht University (the Netherlands) released his results about groundwater depletion in agriculural breadbaskets all over the world— In an upcoming study, Bierkens and his colleagues find that not only is global groundwater extraction outstripping its natural recharge rate, this disparity has been increasing. Groundwater represents about 30 percent of the available fresh water on the planet, with surface water accounting for only one percent. The rest of the potable, agriculture friendly supply is locked up in glaciers or the polar ice caps. This means that any reduction in the availability of groundwater supplies could have profound effects for a growing human population.

$5,000,000,000,000: The cost each year of vanishing rainforest - British researchers set out the economic impact of species destruction – and their findings are changing world’s approach to global warming British scientific experts have made a major breakthrough in the fight to save the natural world from destruction, leading to an international effort to safeguard a global system worth at least $5 trillion a year to mankind. Groundbreaking new research by a former banker, Pavan Sukhdev, to place a price tag on the worldwide network of environmental assets has triggered an international race to halt the destruction of rainforests, wetlands and coral reefs. The Convention on Biological Diversity in Nagoya, Japan, later this month will shift from solely ecological concerns to a hard-headed assessment of the impact on global economic security.

California Sets 33% By 2020 Renewable Energy Standard - The California Air Resources Board (ARB) has taken matters into its own hands after Senate Bill 722 failed to pass last month. The ARB unanimously voted last week to set a new standard that mandates 33 percent of the state’s energy be renewable by 2020. California currently utilizes more than 14 percent renewable energy, but the new standards will target 20 percent as early as 2012. The ARB is hoping that new regulation will promote jobs in California-based renewable energy facilities while also reducing air pollution and lessening the state’s dependence on natural gas. “This standard is going to further diversify and secure our energy supply while also growing California’s leading green technology market, which will lead to cost savings for consumers.” Renewable energy comes in numerous forms, including solar, wind and biofuel power. It involves generating electricity from sources that are naturally replenished, instead of a limited-supply resource like petroleum.

AB 32, RGGI, and Climate Change: The National Context of State Policies for a Global Commons Problem -  Why should anyone be interested in the national context of a state policy?  In the case of California’s Global Warming Solutions Act (AB 32), the answer flows directly from the very nature of the problem — global climate change, the ultimate global commons problem.  Greenhouse gases (GHGs) uniformly mix in the atmosphere.  Therefore, any jurisdiction taking action — whether a nation, a state, or a city — will incur the costs of its actions, but the benefits of its actions (reduced risk of climate change damages) will be distributed globally.  Hence, for virtually any jurisdiction, the benefits it reaps from its climate‑policy actions will be less than the cost it incurs.  This is despite the fact that the global benefits of action may well be greater — possibly much greater — than global costs. This presents a classic free-rider problem, in which it is in the interest of each jurisdiction to wait for others to take action, and benefit from their actions (that is, free-ride).  This is the fundamental reason why the highest levels of effective government should be involved, that is, sovereign states (nations).  And this is why international, if not global, cooperation is essential.

Solar Power Plants to Rise on U.S. Land - Proposals for the first large solar power plants ever built on federal lands won final approval on Tuesday from Interior Secretary Ken Salazar, reflecting the Obama administration’s resolve to promote renewable energy in the face of Congressional inaction. Both plants are to rise in the California desert under a fast-track program that dovetails with the state’s own aggressive effort to push development of solar, wind and geothermal power. The far larger one, a 709-megawatt project proposed by Tessera Solar on 6,360 acres in the Imperial Valley, will use “Suncatchers” — reflectors in the shape of radar dishes — to concentrate solar energy and activate a four-cylinder engine to generate electricity.  A 45-megawatt system proposed by Chevron Energy Solutions and featuring arrays of up to 40,500 solar panels will be built on 422 acres of the Lucerne Valley. When complete, the two projects could generate enough energy to power as many as 566,000 homes.

For Those Near, the Miserable Hum of Clean Energy - They are among a small but growing number of families and homeowners across the country who say they have learned the hard way that wind power — a clean alternative to electricity from fossil fuels — is not without emissions of its own.  Lawsuits and complaints about turbine noise, vibrations and subsequent lost property value have cropped up in Illinois, Texas, Pennsylvania, Wisconsin and Massachusetts, among other states. In one case in DeKalb County, Ill., at least 38 families have sued to have 100 turbines removed from a wind farm there. A judge rejected a motion to dismiss the case in June.

Energy Dept spends 20% of stimulus dollars on nuclear waste - President Barack Obama vowed to use stimulus spending to help grow a new clean energy economy, but the U.S. Energy Department spent a large chunk of stimulus money to clean up a radioactive mess from the Cold War. The Energy Department allocated $6 billion, nearly 20% of its stimulus budget, to clean and decontaminate nuclear waste sites across the country. Chief recipients are the Savannah River site in South Carolina and the Hanford site in Washington, which produced plutonium for the “Fat Man” nuclear bomb dropped on Nagasaki, Japan, in 1945. The department allocated a total of $3.5 billion to the Savannah River and Hanford sites, according to an analysis by Dow Jones Newswires, and created or salvaged about 6,100 jobs as a result.

Hottest September in satellite record; new daily high temperature records outpace record lows by 5-to-1 - September was the hottest on record globally in the RSS satellite dataset.  In this country, the record-smashing temperatures in Southern California got most of the attention (see “No on Prop 23: It’s getting HOT out here!“)I like the statistical aggregation across the country, since it gets us beyond the oft-repeated point that you can’t pin any one record temperature on global warming.  If you want to know how to judge whether the 5.2-to-1 ratio for September is a big deal, here’s what a 2009 National Center for Atmospheric Research study found for “1,800 weather stations in the 48 contiguous United States” over the past six decades (see “Record high temperatures far outpace record lows across U.S.“):But, as Steve Scolnik of CapitalClimate reports, “that event was just one of literally thousands of daily high temperature records set in the U.S. during September,” continuing a trend that has persisted for almost the entire year.

Regulating knowledge monopolies: The case of the IPCC - Policymakers are increasingly referring to panels of experts to inform their decisions on a broad range of issues. This column uses the example of the Intergovernmental Panel on Climate Change to argue that relying too heavily on just one panel of experts allows the experts to behave like monopolists of the truth. It says that, like any monopolist, they should be regulated.

China Spurns Pledges in Climate-Change Pact, U.S. Says  (Bloomberg) -- China is ignoring pledges made under a global-warming accord reached last year after a face-to-face meeting between President Barack Obama and Chinese Premier Wen Jiabao, the chief U.S. climate negotiator said.  Chinese officials have acted as though the agreement “never happened,” Todd Stern, U.S. special envoy for climate change, said in a speech today at the University of Michigan Law School at Ann Arbor. China in December agreed to the Copenhagen Accord, a non-binding pact that aims to limit emissions blamed for global warming, he said.

Freshwater Flow Into Oceans Steadily Rising - The amount of water flowing into the oceans has slowly but steadily increased in recent years, signifying a possible speeding up of the water cycle due to climate change. These results came out of a research paper published on Oct. 4 in Proceedings of the National Academy of Sciences. It marks the first time satellites were used to quantify global river flows.  Between 1994 and 2006, the scientists measured an 18% increase in freshwater discharge into the oceans. The source of that water included river runoff and melting ice caps. It averaged out to an additional 540 cubic kilometers of water per year.

'Water mining' is now a prime culprit for raising sea levels - A new study shows that global warming is not the only cause of swelling seas. Much comes from "water mining" – the pumping of vast amounts of groundwater from beneath the earth, mainly to irrigate crops. This inevitably ends up in the oceans after it evaporates from farmland and comes down as rain. The study – to be published in a forthcoming issue of the journal Geophysics Research Letters – reckons that this accounts for about quarter of global sea-level rise, as much as the melting ice from all the glaciers outside Greenland and Antarctica. More worryingly, increased pumping threatens food supplies. Underground reservoirs are shrinking by more than 280 cubic kilometres a day, well over twice as much as in 1960. Nature cannot replenish them as fast. The vast Ogallala acquifer – which underlies eight US states, helping to grow food on which 100 countries rely – is being drawn down by a three feet a year. How much of that is replenished by rainfall percolation? A mere inch.

Can the oceans be cleared of floating plastic rubbish? - Scientists are investigating ways of dealing with the millions of tonnes of floating plastic rubbish that is accumulating in our oceans. They are a quirk of ocean currents - a naturally created vortex known as a gyre - where floating rubbish tends to accumulate.  The largest is in the North Pacific and covers an area twice the size of France. Others have since been discovered in the North Atlantic and most recently the South Atlantic.

Regional cap and trade is working - New Jersey helped mark a milestone in climate-change policy in 2008 with the launch of a 10-state program to control carbon dioxide emissions from power producers. The Regional Greenhouse Gas Initiative set up a form of “cap and trade” that requires power producers to pay for every ton of greenhouse gas emitted by buying allowances at quarterly auctions. Two years in, experts say, RGGI is working. Sort of. The complex auction is functioning well – a feat in itself – and has provided $729 million in new revenue to the states, including all of New England, New York, New Jersey, Delaware, and Maryland. (Pennsylvania dabbled in early discussions about the program, but never joined.) Most of the money is earmarked for energy efficiency, renewable energy, and ratepayer assistance.

Gas drilling technique sparks fears in Michigan - Michigan could be on the verge of a new and, possibly, risky era in underground exploration as companies jockey to cash in on the state's natural gas resources.  At the end of this month, oil and gas rights for 452,000 acres of state land across the northwestern Lower Peninsula will be auctioned off. A similar auction held in May generated $178.4 million for Michigan's Natural Resources Trust Fund, which state law designates as the recipient of all proceeds. Hydraulic fracturing has been used to harvest natural gas for decades in Michigan with few reported problems. Now, firms have found that by drilling much deeper vertically, and then drilling several thousand additional feet horizontally and using more water, they can unleash natural gas that previously wasn't harvestable.

The growing fallout of the shale revolution - Alberta Energy Minister Ron Liepert said this week that Alaskan natural gas would likely flow through the province ahead of gas from the Mackenzie Delta. Not so long ago, such a statement would have been regarded as treasonable. Now it appears merely common economic sense. In fact, the real issue is whether either source of Arctic gas will be developed before the age of hydrocarbons ends. That is due to the stunning improvements in the technologies of hydraulic fracturing and horizontal drilling that have made the production of vast amounts of shale gas feasible.  This gas not merely presents the possibility of an economic bonanza in many areas, including B.C. and Quebec, but of enhancing much-coveted U.S. energy independence. It also promises to rearrange energy geopolitics

New oil sands legislation would strip clause from 2007 Energy Act - Environmentalists are bracing for a renewed fight with lawmakers and the petroleum industry over whether the U.S. military should be allowed to meet its massive fuel needs with highly polluting Canadian oil sands. At issue is Section 526, a tiny clause that was tucked into the U.S. Energy Independence and Security Act of 2007. The measure forbids all federal agencies, except for space agency NASA, from purchasing carbon-heavy unconventional fuels that belch more emissions than traditional oil. It was supposed to close the long-running debate over the future of oil sands in the U.S. armed forces, the nation’s largest gas consumer. But now, new legislation is being pushed by two senators to remove it from the larger bill.

Hungary toxic sludge spill reaches Danube - Hungary’s toxic sludge spill, which has killed four people, reached the Danube river Thursday, threatening to contaminate the waterway’s entire ecosystem, officials told AFP. “The red mud pollution has reached the Danube — its so-called Mosoni Branch, about 10 kilometres (six miles) from the main branch of the river — this morning,” said Tibor Dobson, the local head of the disaster relief services. “At 09:27 am (0727 GMT), the pH level stood at 9.3. The experts are still measuring the pollution levels and the pH levels are descending.” Water authority official Jozsef Toth told AFP earlier that samples taken at the confluence of the Raba river and the Danube showed “alkalinity slightly above normal, with a pH value of 8.96-9.07,” against a normal tally of 8.0.

A Flood Of Toxic Sludge -On Monday, October 4th, a large reservoir filled with toxic red sludge in western Hungary ruptured, releasing approximately 700,000 cubic meters (185 million gallons) of stinking caustic mud, which killed many animals, at least four people, and injured over 120 - many with chemical burns. The 12-foot-high flood of sludge inundated several towns, sweeping cars off the road as it flowed into the nearby Marcal River. Emergency workers rushed to pour 1,000 tons of plaster into the Marcal River in an attempt to bind the sludge and keep it from flowing on to the Danube some 45 miles away. The red sludge in the reservoir is a byproduct of refining bauxite into alumina, which took place at an alumina plant run by the Hungarian Alumina Production and Trading Company. A criminal probe has just been opened by Hungarian authorities. (30 photos total)

Another sludge flood feared - Hungary's prime minister says the wall of a reservoir containing massive quantities of caustic sludge is cracking and very likely to collapse. If it does, it could send a new wave of red mud into towns devasted by a deluge earlier this week. The highly polluted water and mud burned people and animals. At least seven people were killed and hundreds injured.

Coral Reefs Are Trying to Tell Us Something: We Must Break Our Addiction to Fossil Fuels -Last week, the New York Times reported that scientists fear record high temperatures may cause large-scale loss of the world's coral reefs -- with indications that climate change is the culprit. Coral is extremely sensitive to heat, and when temperatures spike for a few days it can cause massive die-offs. This process has been dubbed "coral bleaching" because these once vibrant, colorful reefs are transformed into stark white graveyards. Scientists point to coral as a canary in the coalmine for climate change -- and their reaction to increased water temperatures isn't the only indication that carbon emissions are reaching dangerous levels. Last year I narrated a short documentary from the Natural Resources Defense Council called Acid Test that explored another one of the seas' warning signs: ocean acidification.

Underwater 'River' of Oil Confirmed in Gulf - And just when things were looking up for the Gulf... a huge underwater oil plume has been discovered.The hydrocarbon plume/river is 22 miles long, 1.2 miles wide, and 650 feet high. It isn't pure crude, of course; it's more like a mix of oil and water. Why isn't the oil floating to the top?Crude is lighter than water, so it usually does... But this spill is different. Apparently, the cold water and high pressure that exist at these depths are preventing it from coming to the surface. Dispersants may be playing a role as well. Here's a graphic of the plume, put together by the Woods Hole Oceanographic Institute

High levels of cancer-causing chemicals recorded since BP spill - Levels of some cancer-causing oil compounds rose significantly in the waters off the Louisiana coast during the BP spill in the Gulf of Mexico, according to Oregon State University researchers. "It's an incredibly huge jump in concentration in a natural environment," said Kim Anderson, an OSU environmental toxicology professor, who found a 40-fold increase in polycyclic aromatic hydrocarbons, or PAHs, from May to June.Anderson is still analyzing the results and was not prepared to say what, if any, threat the elevated levels posed to the gulf environment. "It's a huge increase that folks that deal with the more biologic side of it will have to address."

Obama Admin Blocked Scientists on BP Spill - Yves Smith -Today we have more corroboration of Obama Administration double dealing, this on the Gulf Oil leak. Recall that the executive branch was initially very slow to respond, and seemed content to buy BP’s PR on the size of the oil flow and let it take care of its own mess, despite the proximity of the well to important fishing grounds. Then as it became undeniable that the leak was serious and BP was not going to be able to halt it quickly, the Administration swung into “get tough” mode, or at least as tough as this crowd can get, which means not very. We decried the Administration negotiating with BP as an equal, and the lousy deal it cut. This looked to be classic Obama behavior redux: pretend to be aligned with the little guy, engage in some theatrics that manages to reveal unwillingness to draw on the power of the Presidential office, and cut way too generous a deal with big corporate interest.One of the revealing parts of where Obama’s true priorities lay was in his keeping informed third parties, most important scientists, as far away from the scene of the crime as possible. Having good estimates of the size of the outflow would be critical in assessing the true cost of the disaster; not obtaining them was a sign, at best, of wildly misguided priorities (putting PR concerns over results) and at worst, a cynical belief that the Administration’s interest were not all that different from BP’s.

Doubts Emerge Over BP’s Study - BP PLC's lawyers helped prepare its internal investigation into its Gulf of Mexico drilling disaster, according to the report's lead author, raising questions about the study's impartiality.  The report, led by Mark Bly, was presented by BP as an impartial investigation into what caused the April 20 explosion, which killed 11 workers and caused the worst offshore oil spill in U.S. history. But outside experts have been skeptical, saying its conclusions seemed convenient for BP's legal position. The 300-plus-page report was the first in-depth attempt to explain what caused the Deepwater Horizon disaster and will likely be a key document in the hundreds of lawsuits filed against the companies involved.

Matt Taibbi, "BP's Shock Waves" - It was sickening enough when British oil giant BP set new standards for corporate scumbaggery in the Deepwater Horizon oil spill, turning the Gulf of Mexico into its own personal toilet and imperiling entire species of wildlife in an attempt to save a few nickels. But with the Gulf geyser finally capped, there's still a way for BP to cause an even more unthinkable disaster: an AIG-style, derivative-fueled financial shitstorm. If the company decides to declare bankruptcy — a very real possibility with these bastards — it could trigger chaos in our casino system of finance, underscoring the insane levels of leverage and systemic risk we have left in place, even after the global economic crash of 2008. The first serious whiff of trouble came on June 15th, when Barack Obama manned up and went on national TV to tell the nation that he wasn't going to let BP worm its way out of this one. That sound you heard the very next day was Wall Street's collective sphincter slamming shut in terror. If the government was seriously going to stick BP with the tab for the worst environmental disaster in America's history, then there was suddenly a real chance that one of the most lucrative moneymaking machines the world has ever seen could go bankrupt. And if there's one thing we've learned from the disastrous implosion of AIG, there is no such thing anymore as a giant company dying alone

Iraq Lifts Oil Reserves Estimate to 143 Billion Barrels, Overtakes Iran - Bloomberg Iraq raised its estimate of national crude oil reserves to 143.1 billion barrels, Oil Minister Hussain Al-Shahristani said today, overtaking Iran as home to the world’s fourth-largest petroleum deposits. The 24 percent increase in estimated reserves lifts Iraq past neighboring Iran, which has 137.6 billion barrels, while leaving it behind Saudi Arabia, Canada and Venezuela. Iraq last estimated its oil reserves at 115 billion barrels, in 2001.

U.S. Military Orders Less Dependence on Fossil Fuels - Even as Congress has struggled unsuccessfully to pass an energy bill and many states have put renewable energy on hold because of the recession, the military this year has pushed rapidly forward. After a decade of waging wars in remote corners of the globe where fuel is not readily available, senior commanders have come to see overdependence on fossil fuel as a big liability, and renewable technologies — which have become more reliable and less expensive over the past few years — as providing a potential answer.

Petrobras May Need to Issue $60 Billion in Debt -- Petroleo Brasileiro SA, the Brazilian oil company that sold shares last month in the world’s largest offering, may need to raise an additional $60 billion to fund its investment plans, Nomura Holdings Inc. said.  Petrobras, as the company based in Rio de Janeiro is known, may issue $15 billion a year in debt between 2011 and 2014 to pay for oil and natural-gas projects, Nomura analysts led by Scott Darling said today in a note to clients.  “While we believe Petrobras is unlikely to raise further equity in the medium term, we expect the company to continue to tap debt markets,” the analysts said. Petrobras raised about $70 billion in a share sale last month to help fund its $224 billion, five-year investment plan, the global oil industry’s largest. The company aims to double production to 5.38 million barrels a day by 2020 by tapping deepwater fields in the pre-salt region, including the Tupi find, the Americas’ biggest discovery in three decades.

Oil Rising to $85 in '11 Survey Threatens OPEC on BRIC Demand (Bloomberg) -- Oil may rise to the second-highest annual level on record next year on demand from China, India and Brazil, upsetting OPEC and threatening the nascent recovery in developed countries.  West Texas Intermediate crude, the U.S. benchmark grade, will average $85 in 2011, compared with $77.70 this year, according to the median of 23 analyst forecasts in a Bloomberg News survey, the highest price for any year except for $99.75 in 2008. Goldman Sachs Group Inc., which correctly predicted a year ago that oil would reach $85 a barrel by the end of 2009, said oil’s mean price will be $100 next year. While China, India and Brazil need fuel to feed their growing economies, members of the Organization of Petroleum Exporting Countries say higher prices aren’t in the group’s interest and threaten the recovery. The International Monetary Fund’s No. 2 official, John Lipsky, said last week that the global economy’s “sluggishness will persist into 2011.”

A Pipeline Problem in Alaska? - The trans-Alaska Pipeline is the largest conduit of domestic oil, a funnel for crude from the North Slope’s Prudhoe Bay to the Port of Valdez. But the Prudhoe wells are drying up—and the prospect of replacing them appears ever more grim. Despite the capacity to carry 2 million barrels a day, the pipeline’s current flow is less than 700,000 gallons and falling at least 6 percent a year. Now its operators have commissioned a study to see how low the supply can get before crude freezes in transit. The most common estimate is about 500,000 barrels, a figure that ConocoPhillips recently predicted would be reached by 2015.

The oil problem - JED GRAHAM raises an interesting possibility in a new piece at Even before the anticipated launch of the next round of Treasury purchases — it’s expected to be made official on Nov. 3 — the Fed’s unmistakable signals have fueled commodity price gains as the dollar has sagged. Since the Fed’s Sept. 21 policy statement, crude oil had surged more than 9% to above $83 a barrel on Wednesday, approaching its highest levels since October 2008. The risk for the Fed is that such price increases will be felt in the economy long before any modest positive impact from lower interest rates. A weaker dollar does mean that Americans face higher prices at the pump. But the story of rising commodity prices, and rising prices for oil in particular, is about more than central bank action. The new issue of The Economist addresses the recent jump in crude:

Racing Against Time: Peak Oil = Peak Economy - Peak Oil will result in 'peak economy.'  Once it arrives, nothing will work quite the same way again. Let me explain. The concept of “Peak Oil” is simple enough:  Oil is a finite resource.  Someday, no matter how hard we try, we will hit a maximum rate of production.  From that time on, we will see less and less oil coming up out of the ground.  What Peak Oil refers to, then, is not "running out" of oil, but the fact that we are going to hit peak production sooner or later.  All of the data suggests that "sooner" is a better candidate than "later." By itself, the concept of having to get by on just a little bit less oil each year seems to be manageable enough.  Perhaps we can develop more hybrid/electric cars, wind/solar farms, and other technologies that can help us use energy more efficiently.  I will applaud these technologies as they become more widely available, but basic math indicates that they cannot possibly bridge the energy gap being left by retreating oil supplies fast enough.

American (relative) decline would be a good thing - Kevin Drum has a good post on the recurring waves of declinist sentiment in America, but I did want to encourage a different emotional orientation from this one: But what’s remarkable, really, is how little America has declined. Economically, our share of GDP fell surprisingly little in the postwar era, from 28% to about 22%, and has stayed very nearly flat since 1980. And political idiocy aside, our ability to lead the world in a rebound from a world historical financial crash has actually been pretty impressive.Anyway, I find that when I’m feeling depressed I think America is in terminal decline, and when I’m in a good mood I don’t. Something to note here is that relative decline would almost certainly be a good thing. America’s share of world population is pretty small, so far and away the most likely scenario for American relative decline would be “catch up” growth in large poor countries such as China, India, Brazil, Indonesia, Pakistan, Bangladesh, and Nigeria. And I hope it happens!

Prediction by Chris Martenson - Chris Martenson has released a very good writeup about 3 things that are "fact" more or less that have the potential to drastically alter investment returns over the next 5 years.  The one of the three that I am most familiar with is sovereign defaults and I completely agree with his assessment and the enormity of the problem.  I don't necessarily agree with the currency debasement theory but I certainly cannot rule it out and I agree that things will certainly be chaotic and people can do some very stupid things under pressure.  Another thing that Chris talks about is peak oil.  While I have listened to his Crash Course and agree with the peak oil idea Chris, as a research scientist by training, understands the facts much better than I do.  If Chris thinks that we are near "peak exports" then we may very well be in a very different world in 10 years...a world of scarcity (at least in terms of petroleum products).   As Chris says, things from outside of the world of finance can, and often do, affect financial markets much more than is commonly believed.

The Oil 'Peak' Has Been Reached - Jorge Nascimento Rodrigues is perhaps the only journalist in Portugal aware of the issue of oil scarcity. During the past few years, I have had the opportunity to collaborate with him several times, bringing the Peak Oil message to a larger audience on an almost regular basis. Last weekend, the largest weekly newspaper in Portugal (and among the diaspora), Expresso, had another article in its Economy section, penned by Jorge with a few thoughts on present events and trends. Samuel Foucher kindly provided an updated version of one of his graphs to illustrate the article.   Below the fold you will find an English translation of this article.

Robert Rapier on Peak Oil - Back in June, I gave a presentation on Peak Oil at the Global Footprint Conference in Siena, Italy. Following the presentation, he was asked to do a pair of interviews. One was for an upcoming documentary called Critical Mass. The second was for the conference itself, and that interview has just been made available.

E&ETV Spotlights ASPO-USA's Warnings on Peak Oil  - E&ETV, the leading source for comprehensive, daily coverage of environmental, energy and policy markets, highlighted the peak oil crisis during an interview with Jim Baldauf, the co-founder and president of the Association for the Study of Peak Oil and Gas (ASPO-USA). Baldauf discussed policy options for addressing a peak and ways to minimize the impact of a shrinking energy supply. He also emphasized that the debate over peak oil is over. "Peak oil is a theory the way gravity is a theory," Baldauf said.   "Peak oil is a finite resource," stated Baldauf. "Any finite resource has a beginning, a middle, and an end. We're not saying that we're out of oil. We're saying that we're about halfway out of it. There's still oil in the ground, but it's going to be more difficult, more costly to acquire from this point on," Baldauf said, adding that "we are already feeling the impact of peak oil." The recession has masked some of its effects, he said, but "even in the middle of this recession, oil is at $83 a barrel this morning. It was in 2005 that oil topped $50 barrel for the first time."

 Energy content of world trade - This paper constructs a comprehensive dataset of oil and total energy embedded in world trade of manufacturing goods for 73 countries from 1978 to 2000. Applying the data to debates on the dependency on foreign energy sources makes clear that achieving complete energy independence in the foreseeable future is unlikely to be feasible and may not be desirable. Applying it to the discussion of environmental Kuznets curves (EKCs) highlights an important distinction between production and consumption of energy. Richer countries use relatively less energy in their industrial production yet still consume relatively large amounts of energy indirectly. A further investigation largely excludes structural shifts of production in and out of the manufacturing sector as an explanation for the downward-sloping portion of the EKC. Country-level analyses add caveats but show tentative support for the cross-country conclusions.

Energy To The East The New Mantra - China is the fastest growing energy consumer in the world and in Russia it neighbours the biggest energy provider. It’s a business match that’s crying out to be made. The deals have been a long time in the making. Finally this week ink was put on the dotted line. Chris Weafer, Chief Strategist at Uralsib, says that the surprise is that Russia didn’t get any commitment from China on investment in exchange for committing to provide energy.“What was a surprise was that we didn’t see any reciprocal deals from China. Its quite clear Russia went down there looking to barter energy and materials exports to China, in exchange for some commitment on investment into Russia’s new industries – into infrastructure, into technology etc – and there wasn’t any mention of that whatsoever.”

Japan Recycles Minerals From Used Electronics — Two decades after global competition drove the mines in this corner of Japan to extinction, Kosaka is again abuzz with talk of new riches.  The treasures are not copper or coal. They are rare-earth elements and other minerals that are crucial to many Japanese technologies and have so far come almost exclusively from China, the global leader in rare earth mining.  Recent problems with Chinese supplies of rare earths have sent Japanese traders and companies in search of alternative sources, creating opportunities for Kosaka.  This town’s hopes for a mining comeback lie not underground, but in what Japan refers to as urban mining — recycling the valuable metals and minerals from the country’s huge stockpiles of used electronics like cellphones and computers

Rare earths and China: Dirty business | The Economist - RARE by name, though not by nature, 17 elements in the periodic table—the “rare earths”—are among the most sought-after materials in modern manufacturing. In tiny amounts, their unique magnetic and phosphorescent properties make them vital ingredients in a host of gadgets and components, ranging from hard drives to lasers. Though abundant in nature, extracting them is difficult, costly, time-consuming and dirty. China is the world’s largest (and for some of them the only) producer of rare earths. Fears are growing about the political effects of that clout. In September Japan claimed that China was blocking supplies in response to the arrest of a Chinese fisherman in disputed territorial waters. Japan, with its electronics and car industries, uses a fifth of the global supply, making it the world’s biggest importer of rare earths. China denies that it has interfered with shipments, but Japanese traders say that supplies were stuck in Chinese ports for a week. The Chinese dominance comes from heavy investments in the 1980s. As Chinese production came on stream, prices plummeted and other producers closed.

The Emerging Anti-Trade Coalition, and Its Dangers - Robert Reich - Smoot-Hawley here we come. Why do I think we’re on the way back to Smoot-Hawley? Because with Republicans and blue-dog deficit hawks gaining ground after November 2, the chance of boosting the economy with an “infrastructure bank,” another big spending package, or even a big round of middle-class tax cuts is roughly nil. This means a lousy economy — possibly for years.  And that leaves trade as a sitting duck.High unemployment turns the public against trade. In a recent Wall Street Journal/NBC News poll, more than half of those surveyed (53%) said free trade hurts America. That’s up from 46% in 2007, and just 32% in 1999. Traditional big-business Republicans support trade. But the tea partiers who are taking over the GOP don’t. An astonishing 61 percent of people who describe themselves as “Tea Party sympathizers” say trade is bad for America. That’s close to the 65 percent of union families who are against trade

When Did the Trade Deficit Start Falling? -Mr. Scissors argues that the rise in the value of the Japanese yen in the ’80s had little to do with the decline in the U.S. trade deficit with Japan. Scissors argued that the trade deficit just shifted to China. He claims that the main reason that the deficit fell in the ’80s was the slowdown in growth and the onset of the recession. There is a small problem with that argument. The trade deficit dropped while the economy was still growing rapidly. The fall from a peak of 3.1 percent of G.D.P. in the 2nd quarter of 1987 to less than 2.0 percent of G.D.P. in the 2nd quarter of 1988 is shown in the graph below. This quarter was sandwiched between two quarters of growth above 5.0 percent. The deficit declined further to less than 1.4 percent of G.D.P. by the 3rd quarter of 1989, when the economy grew 3.2 percent.In short, the recession cannot explain the decline in the size of the trade deficit because the deficit declined while the economy was still growing rapidly. The more obvious explanation is the decline in the value of the dollar that was negotiated at the Plaza Accords in 1986.

Trading places: Who's risky now? - There are two very different worlds described in the IMF's latest report on the global financial system. Increasingly, one looks a much better bet to international investors - and I'm afraid it's not the one we live in.One of these worlds has enjoyed rapid growth for most of the last decade, and can boast low and falling levels of government debt, high levels of investor confidence, and a rising share of global investment flows. The other world look a much riskier prospect to international investors: its economies and financial systems are still fragile after a series of highly damaging boom-bust cycles which have left governments and households with a heavy burden of debt.  Growth is weak, and many governments face big political obstacles as they try to put the level of public debt on a downward path.  Not so long ago, that would have been a fair description of many "emerging market" economies. Now - not so much.

The Two Rebalancing Acts - IMF Blog - Achieving a “strong, balanced, and sustained world recovery”—to quote from the goal set in Pittsburgh by the G-20—was never going to be easy. It requires much more than just going back to business as usual. It requires two fundamental and complex economic rebalancing acts.First, internal rebalancing. When private demand collapsed, fiscal stimulus helped reduce the fall in output. This helped avoid the worst. But private demand must now become strong enough to take the lead and sustain growth, while fiscal stimulus gives way to fiscal consolidation.The second is external rebalancing. Many advanced countries, most notably the United States, relied excessively on domestic demand before the crisis, and they must now rely more on net exports. Many emerging market countries, most notably China, had relied excessively on net exports, but must now look to domestic demand.These two rebalancing acts are taking place too slowly.

Imports from China, Numbers Please - The NYT discussed the issues involved in currency pricing and trade protection with reference to China and other countries. The article raised concerns that growing protectionism could hurt economic growth, but it never noted that most highly educated professionals already benefit from extensive protectionism. The inequality resulting from their protection is one of the key factors motivating protectionist sentiments in the United States. It also raises the prospect that a higher valued yuan would seriously damage China's economy. It would have been helpful to note the importance of China's exports to the U.S. to its economy. China's good exports to the U.S. are approximately equal to 6 percent of its GDP. Even a sharp rise in the yuan is unlikely to reduce its exports by more than one-third (2 percent of GDP) over a 2-year period. This is currently equal to less than 3 months of growth in China.

Protectionism by China Is Biggest Since World War II - China’s currency manipulation represents the largest protectionist measure maintained by any major economy since the Second World War. China has intervened in the foreign exchange markets by an average of $1 billion a day for the last five years, buying dollars to keep them expensive and selling renminbi to keep them cheap, building a gigantic reserve of $2.5 trillion in the process. Largely as a result, the renminbi is undervalued by at least 20 percent relative to economic fundamentals. The largest trading country in the world is therfore subsidizing all exports by at least 20 percent and imposing an additional tariff of at least 20 percent on all imports. Some observers argue that correcting this huge misalignment would not do much to reduce the trade deficit of the United States because our imports would simply shift to other countries. There would, of course, be some adjustments of this type. They must be taken fully into account in analyzing the impact of a stronger renminbi, but this effect would be swamped by three other factors.

Complaint Filed with U.S. Justice Department Against Standard & Poor’s and Moody’s Investors Service A Complaint filed by Sovereign Advisers with the Antitrust Division of the United States Department of Justice and the European Commission Directorate General for Competition against Standard & Poor's and Moody's Investors Service alleges that the credit rating duopoly actively assists the Chinese communist government, the People's Republic of China, in shedding its foreign debt obligation through the distribution of false sovereign credit ratings which ignore China's defaulted sovereign debt. The Complaint was filed on behalf of the Starwood Trust, which represents defaulted creditors holding full faith and credit sovereign obligations of the Chinese government which the People's Republic of China refuses to repay in violation of international law. Despite its refusal to repay the debt, both Moody's Investors Service and Standard & Poor's, which collectively control in excess of 90% of the industry and which are paid for issuing credit ratings, maintain "investment grade" credit ratings for China, according to the Complaint.

The effect of a renminbi appreciation on the US-China trade balance - The US-China currency dispute remains heated. This column argues that if a real appreciation in the Chinese currency is not achieved through exchange rate adjustment, it will happen through inflation in China and deflation in the US. It says a better Chinese policy mix would involve nominal appreciation of the renminbi combined with absorption-increasing policies such as developing human infrastructure.

Is China Getting Religion on Restructuring Its Economy? - Yves Smith - A story up on Bloomberg may be far more significant than its bland headline, “China to Spur Domestic Demand to Stabilize Economy, Wen Says,” suggests.  In recent posts, we’ve inveighed about the dangers of the path China is now on. Its economy is unbalanced to an unprecedented degree. Exports plus investment account for a full 50% of GDP, an unheard of level. And the investment share, which is now larger than the export contribution, is increasingly unproductive. It now takes $7 of borrowing to create every $1 of GDP growth in China. That’s a terrible ratio for a supposedly emerging economy. Even the US is only $4 or $5 of borrowing for every $1 in GDP growth. Creditor nations (the ones in China’s position) suffer the most in financial crises. That has not happened yet because the world (including China) has engaged in massive monetary stimulus and China has kept its currency artificially low via currency manipulation. That means it has maintained its trade surplus at the expense of others This movie has ended badly for everyone who has tried China’s game plan. As Michael Pettis has pointed out, China has the largest foreign exchange reserves relative to GDP of any country in modern history. Next two are the US on the eve of the Great Depression and Japan at the end of its bubble era.

China winning race for green jobs - China’s green jobs from solar and other cleantech industries are growing faster than the US and other countries, says Clean Edge annual report. China is prevailing in the global race for green jobs in sectors from solar panels to advanced lighting, and appears to be on an unstoppable upward path, an annual report by cleantech research firm Clean Edge said on Wednesday. The Chinese government spent $34.6 billion last year to propel its low-carbon economy, more than any other nation and almost double what the U.S. invested. The country is now headquarters for six of the biggest renewable energy employers—up from three in 2008—according to Clean Tech Job Trends 2009.

China Poised to Lead World in Patent Filings - Having passed Germany (exports), Japan (gross domestic product) and the United States (auto sales) over the past year, China is now poised to lead the world in yet another category: patent application filings.A new study released this week by Thomson Reuters says that by 2011 China will most likely pass the United States and Japan in new patent applications.With research and development spending rising here, and Beijing trying to encourage innovation, patent application filings in China are soaring.In 2009, China filed about 279,298 patent applications, ranking third behind Japan, which led the world with 357,338, and the United States, which had 321,741 filings, according to Thomson Reuters. But the growth of patent filings in Japan and the United States is slowing, while Chinese patent filings are surging in categories as varied as natural products and polymers and digital computers.

Number of the Week: Consumers in China, Brazil Discover Debt - 17.1%: The rise in Chinese credit-card balances in 2009. While consumers throughout the developed world struggle to shed debt, their counterparts in China and Brazil are piling it on. In 2009, the year the global recession hit bottom, the aggregate credit-card balances of Chinese consumers rose 17.1% even as those of U.S. consumers fell 8.7%, according to a study by financial consultancy Lafferty Group. Brazilians increased their balances by 28.9%, part of a 9.2% rise throughout Latin America. More people going into debt might not sound like a desirable development, but in some ways this could be. One of the global economy’s biggest problems has been its dependence on an overstretched U.S. consumer. If folks in places such as China and Brazil are now stepping up and taking on some of the burden, that could provide some much-needed rebalancing.

Chinese credit expansion has no place to put its money - In regards to Ed’s last post on China and trade, the position of Michael Pettis is much closer to mine (and Martin Wolf’s, which he expressed yesterday in the FT).  The quote of Pettis that Ed cites does not invalidate my position at all: So after years of dragging its feet, postponing a rebalancing, and forcing rising trade surpluses onto the rest of the world, China may have to adjust its currency policies so quickly that it risks a sharp contraction at home. So what will China do? It will lower real interest rates and force credit expansion. The problem is that China’s credit expansion remains directed toward additional EXPORTING, not domestic consumption.  This is the same problem that Japan had post the Louvre accords.  It doesn’t solve the underlying problem. In some high tech industries, the Chinese banks are financing capacity expansions equal to five times annual demand. Imagine that!  What does that tell you?  The Chinese credit expansion has no place to put its money.  All the targets have been saturated, which means that there will be overinvestment in all industries and to an incredible degree. This will kill industry after industry.  How can there be an encore? 

China's Syndrome The basic premise of economic growth in China is unsustainable. The government is trying various ways of forcing other economies to import more Chinese goods. But the saturation point has pretty much already been met. Now they are trying more artificial ways to stimulate foreign consumption, e.g. via currency manipulations What China is NOT doing is developing a consumer-based economy that can buy its own products (I mean, products that are largely controlled by Western companies, but manufactured in China, so these are in many cases not "Chinese" products at all). Right now, consumption in China accounts for only 30% of GDP, which is the lowest in the world. Moreover, this proportion is getting worse, not better. This is partly because of government policies re exceedingly low interest rates, which essentially systematically transfers wealth from the vast lower and middle classes into the upper class, and so pulls the rug out from under domestic consumption.

The Case Against Chinese Revaluation - The trade deficit between the United States and Japan has fallen over the last two decades, as the yen has appreciated versus the dollar. Many economists want China to appreciate its renminbi now, so that its trade surplus with other countries will shrink. Here’s Mr. Scissors: The reason the bilateral deficit with Japan fell, relative to G.D.P., is entirely because production relocated to China. Did it relocate primarily due to exchange rates? Two answers: 1) Relocation wasn’t primarily due to the yuan peg to the dollar.2) It doesn’t matter why it relocated. We never solved the bilateral Japan problem; we just moved it.

How China Sees Its Currency - It is important to know when and how the renminbi became undervalued. This aspect of the story is rarely covered in United States commentaries on the issue of China’s currency. In my opinion, the renminbi became undervalued late 2003 when China’s trade surplus — especially its bilateral trade surplus with the United States — fairly suddenly began a steep incline. The initial burst of China’s trade surplus, which had never been significant before, came on the heels of the sharp monetary expansion in the United States (and to a much lesser extent in some European Union countries) that was triggered by the switch to budget deficits in the early George W. Bush years. The Greenspan Fed’s interest rate cuts after the Nasdaq collapse and 9/11 also played a role. China was the only major exporter that could and did respond quickly to the sharp increase in global demand driven by the massive credit expansion in the United States. In other words, China’s surplus exploded not because of anything China did with its exchange rate – it did nothing – but because of an explosion in external demand led by credit expansion in the United States.

It Isn't Just China's Currency - The issue is not just about the trade balance. As you point out, a somewhat stronger renminbi might not change the trade deficit, but it might allow producers of competitive products like Buicks to export more. The structure of the trade is as or more important than the size of the imbalance. For instance, one of our biggest exports to China is waste paper and scrap metal. Our biggest import item is computers. Now suppose the reverse was the case. Suppose we were shipping computers to China and importing waste paper and scrap metal and suppose we imported so much waste paper that we still had a trade deficit. Nevertheless, I bet there would be a lot less concern about the deficit under those conditions. Because, in fact while we articulate our concern in terms of the size of the deficit, what is really important is the jobs, the job quality, and the technology developmental implications. We have a trade deficit with the oil producers and no trade friction. The frictions arise when industries that could be competitive under free market conditions start to lose out because of undervalued currencies and subsidies of various kinds.

China's currency: War is hell | The Economist - BACK in March, I wrote a post in which I mused that Paul Krugman's zeal for an aggressive American approach to the Chinese currency issue "looks like nothing so much as the argumentation deployed by the Bush adminstration as it rushed to war in Iraq". Mr Krugman did not take kindly to the remark, responding (with considerable snark) that he wasn't lining up suspect allies and falsifying evidence. And he wasn't. But that wasn't my point. Rather, I was suggesting that Mr Krugman was acting with unecessary impatience and was ignoring potentially costly negative outcomes to such a policy. As it turns out, Mr Krugman wasn't ignoring the potential for nasty outcomes; he was actively hoping for them. Earlier this week, he wrote:And look, if China continues on its present course, eventually we will have some serious currency and trade conflict. Furthermore, we should. Surely Paul Krugman—scholar, Nobelist, and very smart guy—wouldn't outright advocate for a serious trade conflict, right? Surely he's wary of moving the relationship between the world's two biggest economic powers in an explicitly hostile direction, isn't he? When have similar moves ever turned out well in the past?

Mysterious Renminbi Proposals - Krugman - As Chinese officials make increasingly frantic and bizarre statements — other emerging markets have experienced huge currency appreciations, so how is it that having China move modestly in the same direction would be a “disaster for the world”? — there seems to be a growing consensus that pressure must be placed on China. But how? Martin Wolf basically agrees with me on the economics of what is happening now, but calls for financial rather than trade pressure. But I don’t understand what he, Fred Bergsten, or Daniel Gros are saying. Bergsten calls for countervailing intervention. But how can this be done? China has capital controls (which is why its intervention is so effective). As Gros points out, China’s capital controls prevent the US, Japan and the European Central Bank from retaliating; there are simply no significant yuan assets that foreigners are allowed to invest in. Gros then proposes that we limit Chinese purchases of our assets instead. But how can we do that? We can exclude China from buying US government debt at debt auctions — but how do you stop it from buying it on the secondary market? — why can’t they just launder the money through offshore hedge funds?  I just don’t understand the mechanics.

Don't worry about this disaster - HERE'S an illustration of Paul Krugman's incomplete outlook on the Chinese currency issue. Today, he writes: As Chinese officials make increasingly frantic and bizarre statements — other emerging markets have experienced huge currency appreciations, so how is it that having China move modestly in the same direction would be a “disaster for the world”? — there seems to be a growing consensus that pressure must be placed on China. But how? Scott Sumner made this point not long ago, but contained within this paragraph is a troubling inconsistency. Mr Krugman is seemingly interested in just a modest appreciation, and he seemingly believes that the Chinese are wrong to be worried about such a shift. But if such a shift is likely to be no big deal, then why is it worth risking a trade war? Mr Krugman's implicit assumption is that both the American and Chinese economy are highly elastic with respect to the exchange rate—a small shift in the exchange rate would generate a big drop in Chinese exports and a big increase in American exports.

Mohamed A. El-Erian – Beyond brinkmanship: A better economic path for the U.S. and China -It is in virtually no country's interest -- including that of the United States -- for China's economic development to derail. China is the world's strongest growth engine, its largest creditor and its biggest trade partner. Chinese products provide cost-effective solutions to the demands of consumers around the world, and China's continued willingness to exchange domestically produced goods for paper claims issued by other countries allows these countries to maintain economic activity well above what would otherwise be possible.  These are just the visible indicators of China's importance. With an emerging middle class that still consumes a remarkably low fraction of the income it earns, China offers the best potential for sustained, multi-year global growth. We should also not underestimate its global multiplier effect. Confidence in the ability to benefit from China drives success, self-confidence and economic growth elsewhere -- especially in emerging economies such as Brazil and in industrial countries such as Germany.

More Countries Adopt China’s Tactics on Currency - As the Obama administration escalates its battle with Chinese leaders over the artificially low value of China’s currency, a growing number of countries are retreating from some free-market rules that have guided international trade in recent decades and have started playing by Chinese rules.  Japan and Brazil have taken measures recently to devalue their currencies, or at least prevent them from appreciating further against the Chinese currency, the renminbi. The House of Representatives last week overwhelmingly passed the first legislation to allow the United States to slap huge tariffs on Chinese goods unless China allows the renminbi to appreciate, another mechanism for making Chinese goods more expensive here and American exports more competitive in China.  In Europe, policy makers have begun to fret that, despite the debt crisis that sent investors fleeing just a few months ago, the euro has now risen sharply again against the dollar, potentially weakening exports by making European goods more expensive. Those exports have been one of Europe’s few sources of growth, and President Nicolas Sarkozy of France, who will take over leadership of the Group of 20 biggest economies, said over the weekend that he was pushing for a new system of coordinating global currencies as wealthy nations did in the 1970s,

Brazil’s rising real: action would speak louder than war of words - Brazilian finance minister Guido Mantega stepped up his rhetoric today, describing an “international currency war” among nations that “threatens us because it takes away our competitiveness.” But Mantega’s war of words, aimed at cooling off the rising real, also included a warning that the government may raise the tax on capital inflows. (Brazil introduced its 2 per cent tax on portfolio investments last October, partly to cool off inflows after Santander’s Brazilian arm’s $8bn IPO attracted a lot of interest.) So just how effective is that threat? That depends on how serious the central bank is about following through, Nomura analyst Tony Volpon says in his latest note:

The fragile bit of Bric. Despite Brazil's powerhouse reputation, Latin America needs to learn from China to secure future economic growth - Over the past 30 years, both China and nations across Latin America have sought to move away from inward looking economic models and integrate into the world economy. In 1980, the collective economic output of Latin America was seven times as large as that of China. Now, China's economy is larger than all of the economies in Latin America combined. In the process of leapfrogging over Latin America, China has tugged some Latin American economies along with it, but the longer run implications could prove less favourable. China's rise has been good for Latin America over the past decade. The region's exports to China jumped nine times between 2000 and 2009 in real terms, far outpacing the Latin America's overall export growth. In 2009, Latin American exports to China reached $41.3bn, almost 7% of all Latin American exports. The pre-financial crisis peak, 2006, for exports to China was $22.3bn. – Brazil raises tax on foreign inflows to 4% - Brazil has imposed fresh controls on inflows of foreign capital in an escalation of what Guido Mantega, finance minister, recently described as a “currency war” between the world’s leading economies.Mr Mantega, speaking in Brasília after markets closed on Monday evening, said Brazil would increase to 4 per cent a financial transactions tax (IOF) on money entering the country to invest in fixed income instruments, from the previous rate of 2 per cent, with effect from Tuesday.  Brazil’s currency, the real, gained 4 per cent against the US dollar between August 31 and Friday’s close, rising from R$1.75 to the dollar to R$1.68. It weakened sharply during late trading on Monday to close at R$1.70 after the finance ministry said Mr Mantega would make an announcement later in the evening. Mr Mantega said the measure was designed to prevent further appreciation of the currency but it would not apply to money entering Brazil to invest in equities or as foreign direct investment in the real economy. However, analysts questioned whether taxing fixed income alone would have the intended effect.

Currency Tensions Flare As Brazil, Japan Take Action (Reuters) - A drive by many of the world's economies to cap the strength of their currencies is gaining momentum, with Brazil firing the latest shot just days before world finance leaders meet in Washington. Ultra-low interest rates in Europe and Japan and concerns that the U.S. Federal Reserve is about to embark on another round of money printing that could weaken the dollar have pushed currencies to the top of the agenda for the gathering of finance chiefs from the Group of Seven rich nations on Friday. The International Monetary Fund, which holds its twice-yearly meeting this weekend, is also expected to discuss foreign exchange moves as part of its mission to get countries working together toward balanced global growth. The IMF is responsible for vetting national policies to ensure they don't clash, and will present its findings to world leaders at upcoming summits in Seoul, South Korea.

How a financial crisis morphs into a currency war - In a synchronized global economic downturn, the temptation for policy makers is to view economic growth as a zero-sum game and to take policies that, while favourable to domestic constituents, end up ‘stealing’ growth from elsewhere. The thinking goes: "If I can’t get the economy to grow quickly, I’ll have to depend on exports to do the heavy lifting until things stabilise." But what’s good for the goose is good for the gander and once we head down the path of today’s neologisms of quantitative easing, fiscal austerity, and competitive currency devaluations, the die is cast; there will be no domestic growth except that which comes at the expense of others.

Rajan: Beggaring the World Economy – Global capital is on the move. As ultra-low interest rates in industrial countries send capital around the world searching for higher yields, a number of emerging-market central banks are intervening heavily, buying the foreign-capital inflows and re-exporting them in order to keep their currencies from appreciating. Others have been imposing capital controls of one stripe or another. In recent weeks, Japan became the first large industrial economy to intervene directly in currency markets.Why does no one want capital inflows? Which intervention policies are legitimate, and which are not? And where will all this intervention end if it continues unabated? The portion of capital inflows that is not re-exported represents net capital inflows. This finances domestic spending on foreign goods. So, one reason countries do not like capital inflows is that it means more domestic demand “leaks” outside. Indeed, because capital inflows often cause the domestic exchange rate to appreciate, they encourage further spending on foreign goods as domestic producers become uncompetitive.

Morgan Stanley – No ‘Currency War’…Yet - Brazil's Finance Minister, Guido Mantega, recently sparked a lively discussion by saying that an ‘international currency war' has broken out. Most EM currencies have been appreciating throughout 2010, but the pace of appreciation has been much slower in the second half of the year. At a time when the US economy has shown distinct signs of slowing down relative to EM growth, one might have expected EM currency appreciation to step up rather than slow down. Combine that with concerns about currency appreciation voiced by EM central banks, some use of capital controls, along with the widening use of intervention in FX markets by EM (and some DM) policymakers, and then the story of a currency war doesn't sound far-fetched. However, one crucial ingredient that would suggest we are in a currency war still seems to be missing - retaliation.

The Currency Trilemma: Fixed exchange rate, independent monetary policy and free movement of capital - Morgan Stanley has an interesting piece out today, arguing there is  no ‘currency war’… yet. Win Thin made some points on this score yesterday, pointing to real effective exchange rates in developing countries. Morgan Stanley’s Manoj Pradhan has a different take, citing the lack of emerging market retaliation. ...I disagree with Pradhan here because there most certainly is a currency war in the developed markets between the US, the euro zone, Japan, the UK, and Switzerland. I understand that Pradhan and Thin are more focussed on emerging markets. And it was the Brazilian finance minister’s comments which started the focus on this issue. But it is the developed markets where the retaliation has already begun. Japan and Switzerland have already intervened to stop their currencies from appreciating. Meanwhile quantitative easing in the US is almost certainly coming by November 3 when the Federal Reserve next meets. Can the UK be far behind? And what will the euro zone do given the stress their appreciated currency puts on its periphery?

EM Real Effective Exchange Rates Hardly the Stuff of Competitive Devaluation - With all this talk about currency wars, several points need to be made.  The most important one that we have been stressing is that EM currencies are stronger now than they were a year ago, hardly the stuff of competitive devaluation.  Yes, many policy-makers are trying to limit currency strength but moves are by no means a mercantilist, “beggar-thy-neighbor” approach.  In addition, we think it’s important to make the distinction between bilateral exchange rates vs. USD and real effective exchange rates (REER).  EM policy-makers are worried about strong currencies vs. USD, but the REER is what really matters for trade and competitiveness, as it takes into account trade shares and relative inflation rates.  JP Morgan has a comprehensive data set for historical REERs for both EM and G10 that we find very useful.  Changes in the REER are surprising for some countries.  For instance, Korea’s concerns about a strong won seem misplaced as its REER is almost 25% weaker than it was in January 2007. 

BOJ Independence Challenged as Deflation Continues - Increasing risks to Japan’s recovery prompted what may become the biggest threat yet to the Bank of Japan’s independence as politicians seek to redress its failure to end the deflation entrenched in the economy since 1998. Your Party, an opposition group, plans to submit a bill in the Diet session running through December that would give the government a greater role in BOJ policymaking. Ichiro Ozawa, a former challenger to Prime Minister Naoto Kan whose calls for currency intervention and enlarged fiscal stimulus have been adopted by Kan, made a similar proposal last month. The debate comes after BOJ Governor Masaaki Shirakawa refused to expand purchases of government bonds this year even as deflation persisted.  Shirakawa’s intransigence has incurred the ire of politicians pressing the bank to boost efforts to end deflation, which erodes corporate profits, makes debt harder to pay back, and enhances the yen’s lure by lifting its purchasing power. The GDP deflator, a gauge of prices across the economy, has fallen 14 percent since 1997, according to data compiled by Bloomberg.

Bank of Japan eases monetary policy - From the WSJ: Bank of Japan Cuts Key Rate The Bank of Japan [announced] a 35 trillion yen ($418 billion) monetary easing program ... while cutting interest rates to virtually zero. It also launched a 5 trillion yen program to buy private- and public-sector assets.... the BOJ said the new program was designed to "encourage the decline in longer-term interest rates and various risk premiums to further enhance monetary easing." The central bank acknowledged its move was "an extraordinary measure for a central bank." Bank of Japan Gov. Masaaki Shirakawa said Tuesday that the central bank's [decision] was based on a worse-than-expected outlook for the domestic economy. The Japan central bank will be buying corporate debt in addition to government debt

Japan's Central Bank Cuts Key Rate to Around Zero - — Japan's central bank cut its key interest rate to virtually zero Tuesday and said it may set up a $60 billion fund to buy government bonds and other assets in a surprise move to inject life into a faltering economy.  In a unanimous vote, the Bank of Japan's nine-member policy board set its overnight call rate target to a range of zero to 0.1 percent. The central bank had not changed the rate since December 2008, when it was set at 0.1 percent.  The decision underscores growing worries about the Japanese economy, which is being battered by a strong yen and persistent deflation. Recent economic indicators point toward deteriorating exports, industrial production and corporate sentiment.

Bank of Japan Cuts Rates to as Low as Zero Percent - In a surprise move Tuesday, the Japanese central bank lowered its benchmark interest rate to a range of 0 percent to 0.1 percent, a tiny change from its previous target of 0.1 percent but a symbolic shift back into an age of zero interest rates.  The Bank of Japan also said it would set up a fund of ¥5 trillion, or $60 billion, to buy Japanese government bonds, commercial paper and other asset-backed securities amid concerns about weakening growth in the economy, the world’s third largest, after those of the United States and China. The bank also kept its credit facility for banks at ¥30 trillion.  With the interest rate cut, a bid to bolster lending in the moribund Japanese economy, the central bank effectively reintroduces a policy of a zero interest rate for the first time since July 2006. The decision underscores concerns that a strong yen and persistent deflation threaten Japan’s economic recovery.

Lessons Not Learned - No Failure Too Great to Admit It - Hoping to reverse a clear slowing of the Japanese economy, Japan Cabinet OKs $61 Billion Economic Stimulus Japan's Cabinet on Friday approved a 5.05 trillion yen ($61 billion) stimulus package aimed at boosting the country's flagging economic recovery.Tokyo has recently made several major moves to bolster its economy. Earlier this week Japan's central bank cut its key interest rate to virtually zero, and last month it intervened in currency markets to weaken the yen.  A couple of charts is all it takes to show just how ineffective Japan's currency intervention was. Yen Daily Chart Shows "One Day Wonder"The weekly chart helps put the size of that daily intervention "One Day Wonder" in proper perspective.

FT Alphaville » BoJ says: ‘Bye, bye bank note rule’ Could the market be underestimating the importance of the BoJ’s QE announcement on Tuesday?Here’s the current reaction to the “giant leap” by the Bank of Japan: In short, equities are up but there’s been a pretty muted reaction from the yen. Gold, however, is on fire: Which has not unduly surprised analysts at RBS: We think the underlying trend of the strong yen will remain for the following reasons:
1) the Fed continues to expand the QE II on its balance sheet;
2) the BoJ still seems reluctant to eliminate self imposed rule not to buy JGBs from the market more than total amount of banknote, and
3) it is hard for the Japanese authorities to ask other major countries’ cooperation in currency intervention.

Japan experts see economy worsening: report (MarketWatch) — Panelists at an economic forum agreed that Japan’s economy will worsen through next year, as benefits from the government stimulus program fade, and as the U.S. economy continues to languish, according to a report Wednesday.  Barclays Capital Japan Ltd.’s head of Japanese economic research, Tetsufumi Yamakawa, said at the forum Tuesday that while some stimulus measures will prop up the Japanese economy through fiscal 2010, they will “peter out” over the next fiscal year, the Nikkei business daily reported. Japan’s current fiscal year ends March 31, 2011.

Auerback: What’s Wrong With Japan (and the Shortcomings of QE) - Something is very wrong with Japan. The Japanese economy has been much weaker than any other major economy for a while now: over the last business expansion, through the Great Recession, and in the recovery since the Great Recession trough. Japan’s business cycle has been led by its exports for well over a decade. It has been my guess that overinvestment in industrial tradeables by Japan’s Asian mercantilist competitors, especially China, along with yen strength has been seriously undermining the Japanese economy for some time. The recent all-time new highs in Chinese overinvestment and this year’s crazy yen strength would only accelerate this process and might well presage what lies ahead for the rest of the world, especially the US. Throughout the past month, the data coming out of Japan has uniformly poor. This data — especially a METI forecast for a coming 3% decline in industrial production in the next two months — has been of a particularly gloomy and alarmist nature, especially from an organization such as METI, which has tended to be overly optimistic in its forecasts.

Inflation targeting matters in Asia - Following the Asian financial crisis of 1997-98, many of the region’s countries adopted inflation targeting. This column compares the persistence of inflation between those with inflation targeting and those without, finding that inflation persistence falls in the former. Nevertheless, the behaviour of inflation still varies across inflation-targeting economies.

India's economy: India's surprising economic miracle - India is doing rather well. Its economy is expected to expand by 8.5% this year. It has a long way to go before it is as rich as China—the Chinese economy is four times bigger—but its growth rate could overtake China’s by 2013, if not before (see article). Some economists think India will grow faster than any other large country over the next 25 years. Rapid growth in a country of 1.2 billion people is exciting, to put it mildly. There are two reasons why India will soon start to outpace China. One is demography. China’s workforce will shortly start ageing; in a few years’ time, it will start shrinking. That’s because of its one-child policy—an oppressive measure that no Indian government would get away with. Indira Gandhi tried something similar in the 1970s, when she called a state of emergency and introduced a forced-sterilisation programme. There was an uproar of protest. Democracy was restored and coercive population policies were abandoned. India is now blessed with a young and growing workforce. Its dependency ratio—the proportion of children and old people to working-age adults—is one of the best in the world and will remain so for a generation. India’s economy will benefit from this “demographic dividend”, which has powered many of Asia’s economic miracles.

India’s Workforce Growth and Education Challenge - Amy Kazmin has a very interesting FT piece about the promise and peril of India’s rapidly-growing workforce which, thanks to major differences in demographic structure, will soon far exceed China’s. The challenge, like in Brazil, is to provide enough upgrading of the workforce’s skill level to make an employment expansion that matches possible. Otherwise in a country that’s still very heavily rural, you just have a bigger burden on the existing stock of land:The problem is acute for those from rural areas, where government schools – often staffed by poorly trained, absentee teachers – produce low learning levels and high drop-out rates. But even privileged youths whose families have paid for private education can emerge ill prepared for the modern environment. “Unemployment to a large extent is because people are unemployable in the absence of a significant, urgent dose of skills upgrading,” says Mr Aziz.

RBI May Intervene To Check Forex Inflows The Reserve Bank of India (RBI) said on Tuesday that it  may consider steps to control the flow of foreign funds, which has already pushed the rupee to a five-month high of R45 against the US dollar. The RBI’s statement comes less than 24 hours after Finance Minister Pranab Mukherjee on Monday said that there was no immediate need to interfere in the foreign exchange market or cap foreign portfolio inflows.   India is not alone among emerging markets stuck with a problem of plenty in inflows this year. Thailand and South Korea have also expressed similar concerns and Brazil on Monday doubled tax on foreign purchases of local bonds. Though India’s reaction may not be as adverse as Brazil’s, RBI has hinted that it was keeping all options open and that the rupee was being monitored very closely.

Financial Shock and Awe -  The misunderstanding is the belief that the phenomenon we are now witnessing -- vaulted into the front pages last week when Brazil’s finance minister decried the onset of an “international currency war” -- is a zero-sum game. The story goes like this: The The Bank of Japan (BOJ), it is said, by intervening in the foreign exchange market to weaken the yen is making life harder for other countries. The Bank of England, likewise, is happy to see sterling decline, given how domestic demand is depressed by the government's aggressive austerity program, but this only creates problems for its neighbors. The Fed has no objection if the market produces a weaker dollar, even if this frustrates the BOJ's best efforts. The People's Bank of China continues to intervene big time to keep the renminbi down. Other emerging markets, from Brazil to India to South Korea, find themselves either having to fight fire with fire or watch as their manufacturing sectors wither. Meanwhile, the economy most desperately in need of a competitive exchange rate, Europe, ends up saddled with the opposite.

Canada at losing end of currency war –The loonie is being pushed higher amid speculation the U.S. Federal Reserve will soon ease monetary policy, sending the greenback down even further. Moves by other countries to cap their currencies, in response to the plunging greenback, are making the loonie an attractive alternative for investors. Countries are scrambling to keep their currencies competitive in a global battle over exports. Finance Minister Jim Flaherty expressed concern Wednesday about how this so-called currency war would play out in Canada.  There is “a danger” countries such as Canada, which allows the loonie to float freely in foreign-exchange markets, would become “disadvantaged by certain interventions made by other countries and [currency] inflexibility,” he said. “We don’t want these type of distortions in currency values and trading relationships.”

World Risks Depression if Currency Tensions Escalate: Mobius - Rising tensions amid an escalating global currency war has sparked talk of capital controls, but such a move would be dire for markets, warned Mark Mobius, executive chairman of Templeton Emerging Markets Group on CNBC Friday."We could really move into a depression globally," Mobius said, should currency controls, trade wars and trade restrictions be implemented. Fears of global currency and trade wars are now top of the agenda at IMF and World Bank meetings this weekend, Reuters reported. The Group of Seven meeting on Friday is also expected to focus on how to defuse currency tensions. "I think the linchpin of this is China and the U.S. - if they can come to some kind of agreement, then I think we could see that softening up and tempered," Mobius noted.

Call For New Global Currencies Deal - The world’s leading countries should agree a new currency pact to help rebalance the global economy, a leading association of financial institutions has urged. The Institute of International Finance, which represents more than 420 of the world’s leading banks and finance houses, warned on Monday that a lack of such co-ordinated rebalancing could lead to more protectionism. Charles Dallara, IIF managing director, said: “A core group of the world’s leading economies need to come together and hammer out an understanding.” Last week, Guido Mantega, Brazil’s finance minister, warned of the dangers of a “currency war” as countries unilaterally intervened to prevent the appreciation of their currencies. The US has been pressing China to allow its exchange rate to rise faster, while several countries including Japan, South Korea, Brazil and Switzerland, have been intervening to hold their currencies down.

Wanted: Chinese Leadership on Currencies - George Soros - The prevailing exchange-rate system is lopsided. China has essentially pegged its currency to the dollar, while most other currencies fluctuate more or less freely. China has a two-tier system in which the capital account is strictly controlled; most other currencies don’t distinguish between current and capital accounts. This makes the renminbi chronically undervalued and assures China of a persistent large trade surplus. Most importantly, this arrangement allows the Chinese government to skim off a significant slice from the value of Chinese exports without interfering with the incentives that make people work so hard and make their labor so productive. It has the same effect as taxation, but it works much better. This secret of China’s success gives the country the upper hand in its dealings with other countries, because the government has discretion over the use of the surplus. And it has protected China from the financial crisis, which shook the developed world to its core. For China, the crisis was an extraneous event that was experienced mainly as a temporary decline in exports. It is no exaggeration to say that since the financial crisis, China has been in the driver’s seat of the world economy. Its currency moves have had a decisive influence on exchange rates.

The End of Free Trade? - Smoot-Hawley has become a reliable punch line because it is so regularly—and hyperbolically—invoked in the debate over international trade, a debate that has reignited recently as America's jobless recovery drags on. Late last month, the House of Representatives passed legislation aimed at imposing trade sanctions against China unless it allows its currency to appreciate, thus diminishing its export advantage. Days later, in a speech thought to be directed at China, Japan and Brazil, Treasury Secretary Timothy Geithner warned against currency policies that might intensify "short-term distortions in favor of exports." Indeed, by this past Thursday, the U.S. dollar had hit record lows against several currencies. The managing director of the International Monetary Fund, which holds its annual meeting in Washington this weekend, warned about the possible outbreak of competitive currency devaluations, reminiscent of the Depression era.  To exacerbate matters, American politicians of both parties, facing midterm elections in just a month, have found a useful talking point in charges of unfair trade. So is it 1929 all over again? Is America preparing to raise its economic drawbridges? Has the ghost of Smoot-Hawley returned?

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

IMF supports a new round of Quantitative Easing - World Economic Outlook maintains global growth forecasts, but sees greater risks as US growth is slowing; also warns that lack of rebalancing poses additional risks; if risks materialise, central banks should consider another round of QE, low interest rates and financial market support; Spain is falling rapidly in the league table of the world’s largest economies; Wolfgang Schauble has offered Angela Merkel his resignation, but she declined, for now; More French strikes loom; we a chart showing the persistence of the Portuguese deficit; the Walloons are considering a francophone confederation with Brussels; Wen Jiabao said revaluation would have catastrophic effects of China and the world; the Irish regulator is considering voluntary agreement with senior bondholders to restructure or reschedule debt; Tadashi Nakamae says Japan’s currency is, if anything, undervalued; Daniel Gros says pooling of the eurozone’s votes at the IMF would increase the portion of cheap IMF money during rescue operations; Paul Krugman observed that hints of QE2 have already led to a fall in long-term interest rates, and a rise in inflationary expectations; Karl Whelan, meanwhile, says it would be a bad idea for the eurozone to link access to EFSF money to an increase in the corporation tax rate. [more]

Everybody goes for QE, except us. So guess what this means? - Of the macro policy nightmare scenarios, this is one is right up there. The Bank of Japan has become the latest central bank – after the central banks of the US, China and Brazil – to announce that it will adopt a policy of quantitative easing, as a result of which the yen weakened significantly. That leaves the ECB in a difficult position, as it is certain not to follow in the same direction, and may even tighten policy over the next year. The BoJ said it will keep interest rates at close to zero, and wants to depress longer interest rates through a programme of $60bn in asset purchases (this programme is still relatively small, at least in comparison with the next stage in QE in the US, which is estimated to involve securities of $1000bn.) The FT writes that the new package has three components: a shift in its overnight rate target from 0.1% to close to 0%; a signal that it will maintain that rate for some time; and the proposed creation of the new asset purchase programme. The asset purchasing programme includes government debt, commercial paper and corporate bonds.

EU urges faster yuan rise; China demurs (Reuters) - Euro area policymakers pressed China on Tuesday for a faster appreciation of its currency to help rebalance the world economy but said Chinese Prime Minister Wen Jiabao had differed with them. The chairman of euro zone finance ministers, Jean-Claude Juncker, told a news conference after talks with Wen in Brussels: "China's real effective exchange rate remains undervalued." He said the 16-nation European currency area had urged an "orderly, significant and broad-based appreciation" of the yuan. Asked how Wen had responded, Juncker said the message came as no surprise to the Chinese delegation, but added in French: "The Chinese authorities do not share our view." The United States and the European Union accuse China of keeping the yuan articifically low to boost exports, undermining jobs and competitiveness in Western economies

BBC News – EU presses China to act over cheap yuan - Eurozone policymakers have urged China to allow its currency, the yuan, to rise in value significantly. The plea came during talks in Brussels with Chinese Prime Minister Wen Jiabao on Tuesday. A top eurozone minister, Jean-Claude Juncker, called for a "significant and broad-based appreciation" of the yuan. The US authorities have accused China of keeping the yuan artificially low against other world currencies, making Chinese goods cheaper globally. Mr Juncker, chairman of the 16-nation eurozone finance ministers, told a news conference: "China's real effective exchange rate remains undervalued."

Europe In A Spot Over China's Snub Of Yuan Plea - China’s snub of pleas for a faster appreciation of the yuan triggered concern that Europe’s faltering economic recovery may suffer a further blow.  European officials voiced disappointment on Tuesday that China didn’t go beyond a June pledge to ease the yuan away from a dollar peg, leaving the euro at the mercy of depreciating currencies in China, the US, Japan and Britain .  “If the euro continues to bear a disproportionate burden in the adjustment of global exchange rates, the recovery of the euro-area’s economy might be weakened,” European Union Monetary Affairs Commissioner Olli Rehn told reporters after a Europe-China economic summit in Brussels on Tuesday.

Economics focus: Cutting edge | The Economist - MOST people, among them the tens of thousands of workers who rallied in Brussels on September 29th, believe that fiscal austerity leads to a shrinking economy, at least in the short run. Jean-Claude Trichet, president of the European Central Bank, disagrees. In June he said that “the idea that austerity measures could trigger stagnation is incorrect.” Arguing that a credible fiscal-consolidation plan would restore confidence, he said: “I firmly believe that in the current circumstances, confidence-inspiring policies will foster and not hamper economic recovery.” But is it right to claim, as Mr Trichet and other devotees of “expansionary fiscal consolidations” do, that belt-tightening can actually aid growth in the short term? The intellectual backing for these claims comes from a study by two Harvard economists, Alberto Alesina and Silvia Ardagna, which studied past fiscal adjustments in rich countries*. They found that, more often than not, fiscal adjustments that relied on spending cuts boosted growth, even in the very short run. But a new study by economists at the IMF reckons that the Harvard study was seriously flawed**.

Lenihan ‘nationalises’ majority of country’s banking system – By Christmas, the Government will be controlling -- at a safe distance -- about €295bn of bank assets, seven times the amount of assets managed by NAMA.  Finance Minister Brian Lenihan was steadfastly opposed to nationalisation as a policy, but horrifying events and the poor quality of Irish banks' loan books have propelled him toward a solution he would have preferred to avoid. Of course, nationalisation is an elastic word and technically AIB will only be 90pc-owned by the Government by year end. It will maintain a stock market listing and a small rump of non-government shareholders.  Likewise for Irish Nationwide and EBS, they are technically controlled through special investment shares, but ultimately they are nationalised in all but name (EBS could yet be bought by the private sector). Anglo, on the other hand, is a wholly owned subsidiary of the Department of Finance.

Saving the bondholders in Irish banks is a disgrace - No matter how much debt you might have, there always exists a projected income growth rate at which you can pretend to be solvent. The projected rate of growth is the issue on which I differ most with those who claim that Ireland is fundamentally solvent. They are moderately optimistic about future growth whereas I am not.  The Irish government last week recognised the scale of the country’s banking problem, and it deserves credit for that. The decision to recapitalise Anglo Irish Bank, the bank at the heart of Ireland’s property meltdown, will raise the country’s deficit to 32 per cent of gross domestic product this year. I am not worried by that number or by the projection that the debt-to-GDP ratio is headed towards 100 per cent. What I am worried about is the combined effect of bad policies in Ireland and a deteriorating external environment on Ireland’s solvency.

Moody's puts Ireland on review for rating cut (MarketWatch) — Ireland’s Aa2 credit rating is on review for possible downgrade, Moody’s Investors Service announced Tuesday, citing the rising cost of recapitalizing the nation’s crippled banking sector, as well as an uncertain domestic outlook and rising borrowing costs. “Ireland’s ability to preserve government financial strength faces increased uncertainty as a result of three main drivers, which together would further increase its debt and aggravate its debt affordability,” If Ireland's rating is cut by Moody’s, it would “most likely” be by one notch, which would leave the nation with an A rating. The agency said it intends to complete the review within three months.

Fitch Downgrades Ireland To A+ From AA- , Outlook Negative - The agency issued the following statement: "Fitch Ratings has downgraded the Republic of Ireland's (Ireland) Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'A+' from 'AA-' respectively. The Outlooks on the Long-term IDRs are Negative. Fitch has simultaneously downgraded Ireland's Short-term foreign currency IDR to 'F1' from 'F1+'. The Euro Area Country Ceiling of 'AAA' remains unchanged. The notes issued by the National Asset Management Agency (NAMA) have also been downgraded to 'A+' from 'AA-' and to 'F1' from 'F1+', in line with the sovereign ratings. "The downgrade of Ireland reflects the exceptional and greater-than-expected fiscal cost associated with the government's recapitalisation of the Irish banks, especially Anglo Irish Bank,"

Cost Of Irish Borrowing Rises Again - The cost of Irish borrowing has begun to climb again after ratings' agency Moody's put Ireland's debt on review for a possible downgrade. The agency said it took the step due to the cost of fixing the country's banks, the outlook for domestic demand and recent rise in interest rates for Irish debt. The development comes after three days of improving sentiment towards the country following the Government's publication of the €35bn bailout of Anglo and Nationwide and virtual nationalisation of AIB.

Irish budget deficit rises further as economy slows - This is a very typical situation for countries in a financial crisis, which delude themselves into thinking that a bit of austerity will do the trick. The FT reports that figures out today will show that the Irish deficit for this year will go up to 11.9%, rather than the previously projected 11.6% due to the weakening economy. It is very typical in situations such as this, that forecasting errors tend to be always in the same direction – which suggests that the governments is too optimistic about growth.  These figures exclude, of course, the effect of the recently announced bank rescue programme, which will raise the 2010 deficit to well over 30%. In his FT column, Wolfgang Munchau says that Ireland’s solvency will depend largely on its future economic growth rate, an issue on which he is less optimistic that the majority of Irish analysts. He says the decision to dump almost the entire cost of the restructuring of the banking system onto the taxpayer is expedient, but wrong. The bondholders should have been wiped out first.

Anglo Irish Default Swaps May Be Triggered on `Burden Sharing' -- Banks and hedge funds may have to pay out on Anglo Irish Bank Corp. debt insurance after the government insisted holders of its riskiest bonds share the pain of a $47 billion bailout. The cost of credit-default swaps protecting Anglo Irish’s subordinated notes has more than doubled since Sept. 1 on speculation of a payout. Irish Finance Minister Brian Lenihan said last week that holders of the bank’s 2.45 billion euros ($3.4 billion) of junior notes must take on some of the “burden” of the rescue, raising the prospect of the swaps being triggered.  Ireland is pledging more cash for Anglo Irish after nationalizing the lender in January 2009 as its bad loans mounted following the collapse of a decade-long real-estate bubble. The bill represents as much as 21 percent of Ireland’s economic output, the most for a euro-region bank rescue since the start of the credit crisis three years ago.

Irish Consumer Confidence Plunges as Fiscal Problems Spark `Great Panic' -- Irish consumer confidence plunged the most in more than four years last month as the mounting burden of bailing out Anglo Irish Bank Corp. and surging sovereign borrowing costs sparked a “great panic.”  The household sentiment index fell to 52.4, the lowest in a year, from 61.4 in August, KBC Ireland and the Economic & Social Research Institute in Dublin said in a statement today. A gauge of consumers’ expectations dropped to 37.9 from 52.1.  Finance Minister Brian Lenihan said last month he may have to pump extra cash into Anglo Irish, raising the cost of repairing the financial system to as much as 50 billion euros ($69 billion). “Ireland has experienced a great panic,” . There is a “risk that a sense of apocalyptic gloom may trigger a freeze in spending.”

Ireland the latest casualty in a grim new game of beggar thy neighbour –The most toxic mixture in modern economies is banks and property bubbles. When the bubbles burst the destruction of so much illusory wealth brings economic disaster. The prompt for these thoughts has been the plight of Ireland, where the government has just committed to inject another €30bn (£26.2bn) into Anglo-Irish Bank. Unfortunately, I doubt that this will be the end of it. When major property bubbles burst, the weight of debt hangs around your neck like an albatross – for consumers, banks and governments. The financial consequences of past mistakes immobilise current economic activity. And the conventional levers of policy don't work: interest rates fall to zero but banks don't want to lend or borrowers to borrow; governments should be boosting demand by Keynesian policy but they feel they cannot for fear of falling into the debt trap, from which the only escape is default or inflation. A period when anything seems possible and politicians can indulge their wildest dreams morphs into a period when the future looks irredeemably bleak and governments are reduced to impotence. 

Portugal’s economy expected to contract by 1.8 pct in 2011, S&P says – The Portuguese economy is likely to contract by 1.8 percent in 2011 and remain stagnant in 2012, according to the latest report on the Portuguese economy from international ratings agency Standard & Poor's. The agency justified its forecast for 2011 with the “expectation that consumption will be penalised by the rise in tax burden and by a lack of credit in the Portuguese economy.” The Portuguese government projects GDP growth of 0.5 percent for next year. "The budgetary consolidation measures for 2010 and 2011 announced by Portugal last week represent, in our opinion, a crucial step to stabilise the country’s debt to GDP ratio," S&P said.

Iceland’s politicians forced to flee from angry protesters - Protesters took to the streets of Reykjavik today, forcing MPs to run away from the people they represent as renewed anger about the impact of the financial crisis erupted in Iceland.The violent protest came amid growing fury at austerity measures being imposed across Europe. Disruption in more than a dozen countries this week included a national strike in Spain and a cement truck driven into the Irish parliament's gates.Witnesses said up to 2,000 people caused chaos at the state opening of the Icelandic parliament, with politicians forced to race to the back door of the building because of the large number of protesters at the front. Eggs were said to have hit the prime minister, Jóhanna Sigurðardóttir, other MPs and the wife of the Icelandic president, Ólafur Ragnar Grímsson.

What Stuttgart train station tells us about the global economy - I'm in Stuttgart in southwestern Germany, and everyone here is all worked up over the fate of the local train station. The government plans on demolishing the building, one of the few in this prosperous industrial town to have survived the devastation of World War II, and moving the station underground. An entire new neighborhood would emerge above it. The plan, called Stuttgart 21, is designed to improve the rail transport system by allowing the tracks to more easily pass through the city center. You'd think that urban dwellers anywhere would welcome more efficient transport and government infrastructure spending, but not the citizens of Stuttgart. A quite virulent protest movement against the government's designs has emerged, with tens of thousands of angry locals amassing at the old station. A fence outside has become covered with posters condemning the project, which one avid protestor told me is “more important than the Berlin Wall.” The entire nation was shocked when the protests degenerated into violence in late September, with police turning water cannons on the restive throng, injuring scores of protestors, including the elderly and young students.

Who Wins? - While Labor Unions celebrate Anti-Austerity Day in Europe, European Neoliberals raise the ante: Governments must Lower Wages or Suffer Financial Blackmail Most of the press has described Europe’s labor demonstrations and strikes on Wednesday in terms of the familiar exercise by transport employees irritating travelers with work slowdowns, and large throngs letting off steam by setting fires. But the story goes much deeper than merely a reaction against unemployment and economic recession. At issue are proposals to drastically change the laws and structure of how European society will function for the next generation. If the anti-labor forces succeed, they will break up Europe, destroy the internal market, and render that continent a backwater. This is how serious the financial coup d’etat has become. And it is going to get much worse – quickly. As John Monks, head of the European Trade Union Confederation, put it: “This is the start of the fight, not the end.”

Step Aside ECB: China Becomes Lender Of Last Resort To Failing Greece, In Exchange For Petrobras-Like Shell Game - Here is how you kill two birds with one stone, all the while confirming that Europe has been about a step away from a full collapse. Greece, which like Ireland, has been unable to peddle its bonds to anyone now that Bunds spreads are back to all time record levels, has just seen the last white knight of the Keynesian system come to its rescue: China. As Bloomberg reports, the European lender of last resort is no longer the ECB: "China has already bought and holds its Greek bonds,” Wen said in joint comments with Papandreou today, which were carried live on state-run ET-1 television. “It commits, very positively, to buy new bonds to be issued by Greece." Yet herein lies the rub: in exchange for the Chinese last-ditch rescue financing, which by the way is so transparent that everybody, except maybe for the Norwegian wealth fund will see right through it, Greece, in what is an almost identical replica of the Petrobras shell game, will use the money to turn around and buy Chinese ships. "Wen said a $5 billion shipping fund will be set up to tighten relations between the countries’ two maritime industries and facilitate the sale of Chinese vessels to Greeks." Truly brilliant what Keynesians will come up with in the last days of a collapsing economic religion.

While Europe Scrimps, European Union Spends - In Greece, taxes are up and so is the age of retirement. In Spain, civil servants have taken pay cuts. In Britain, spending on welfare, the military and education could be chopped by a quarter.  Despite mounting public protests across the Continent, an austerity drive unparalleled in modern, united Europe is building.  In Brussels, meanwhile, the bureaucracy that runs the European Union is haggling over how much to increase next year’s budget.  In 2011, the European Union will pour billions more euros into the Continent’s regions for infrastructure and other projects. Spending on justice and security is set to rise sharply, while even purely administrative costs are expected to increase by more than 4 percent.

Joseph Stiglitz: the euro may not survive - Telegraph - Joseph Stiglitz, one of the world's leading economists, has warned that the future of the euro is "looking bleak" and the fragile European economic recovery could be irreparably damaged by a "wave of austerity" sweeping the continent. The former chief economist of the World Bank and a Nobel prize winner also predicted that short-term speculators in the market could soon start putting pressure on Spain, which is struggling with a large deficit and high unemployment. Last week, Moody's cut the country's credit rating from AAA to Aa1.

When others enter, the ECB exits - What was becoming increasingly clear from yesterday’s news conference, according to the the FT, was that the ECB was relatively unperturbed by speculation of quantitative easing elsewhere, and it maintains its bias for a policy exit. Indeed, Mr Trichet even hinted at the fact that some governing council members were already advocating that such action be taken right now. The ECB predicts a moderate recovery this year, with an underlying positive momentum for next year, though with large uncertainty. Price pressures were subdued now, and firmly anchored for next year. The ECB said the risk to its optimistic economic forecast were slightly on the downside, while the risk to its inflation forecast was balanced.  Reuters Breakingviews says the ECB’s strategy is risky, because it augurs a further rise in the euro’s exchange rate against its major trading partners. The ECB a policy dilemma – to formulate a monetary policy appropriate for a moderately strong recover, and preventing an overshoot in the exchange rate.

Euro Area Business Cycle Dating Committee: Determination of the 2009 Q2 trough in economic activity. When did the Eurozone recession end? Identifying recessions is crucial to guiding policymaking. This column reports the findings of the CEPR Business Cycle Dating Committee for the Eurozone for the last recession. It reports that the trough in economic activity occurred in the second quarter of 2009, marking the end of the recession that began in the first quarter of 2008. The recession lasted 6 quarters and the total decline in output from peak to trough was 5.5%. April 2009 marked a clear trough in industrial production, following the peak in January 2008.

Regulators Seek Curbs for Bank Bonuses in Europe— Bankers should not receive more than half of their bonuses in cash and as much as 60 percent of the payment should be deferred depending on their position at the bank, according to European draft guidelines published Friday.  The proposals add more detail to a set of principles European regulators drafted in April 2009, after widespread criticism that some pay practices encouraged reckless risk-taking and contributed to the financial crisis.  The guidelines, which were published at the end of a two-day meeting in London of regulators and central bankers of European Union member states, are open to a one-month consultation process. The final rules are scheduled to take effect in January.

The impact of banking sector stability on the real economy - VoxEU - Does banking sector instability damage the real economy? Or the other way round? This column presents data from 18 OECD countries between 1980 and 2008. It finds that banking sector stability appears to be an important driver of GDP growth in subsequent quarters. It argues that monetary policy should therefore pay more attention to banking sector soundness.

Global banks face funding crunch, IMF warns - Global banks are facing a $4-trillion reckoning over the next two years as precrisis financing strategy comes back to haunt them. Over the past decade of cutthroat competition in international finance, banks sought to lower their funding costs by selling debt of shorter duration.  This meant more frequent trips to the debt market, but the tradeoff was worth it – significant savings on the cost of raising money because investors accept lower yields on debt that will mature relatively quickly.  The financial crisis short-circuited this approach. Yet despite warnings dating back to the end of 2009, banks in some of the biggest economies have been slow to come to grips with this new reality, the International Monetary Fund warned Tuesday.

IMF Says Public Debt, Fragile Banks Pose Risks to Global Economic Growth (Bloomberg) -- High unemployment, public debt and fragile banking systems pose risks to global prosperity, the International Monetary Fund said, urging policy makers to take bolder steps to assure a sustained recovery.  The world economy will expand 4.2 percent next year, the Washington-based IMF said in a report, down from its forecast of 4.3 percent three months ago. The fund projects growth of 4.8 percent this year, up from 4.6 percent.  Many advanced nations such as the U.S. have yet to adopt policies that will reduce their reliance on government spending and strengthen household demand and exports, the IMF said. At the same time, developing nations such as China are keeping their currencies weak and remain overly dependent on overseas sales to spur growth.

Debt woes dealt setback to financial stability: IMF  - The International Monetary Fund said on Tuesday that sovereign debt risk in Europe and continued real estate woes in the United States have dealt a setback to global financial stability in the past six months. The IMF said risks to the financial sector could be reduced if legacy problem assets were cleaned up, if governments improved their fiscal positions and if more clarity were provided on global financial regulation. "The global financial system is still in a period of significant uncertainty and remains the Achilles' heel of the economic recovery, the IMF said in its semi-annual Global Financial Stability Report. "The recent turmoil in sovereign debt markets in Europe highlighted increased vulnerabilities of bank and sovereign balance sheets arising from the crisis,"

Standing Up to the I.M.F. - As finance ministers, bankers and other interested parties from around the world flock to Washington for the semi-annual meetings of the International Monetary Fund and the World Bank, the fund is experiencing its most serious infighting in decades. The fight is over how to give more voice to governments representing the majority of the world’s people. Ironically, the quarrel is mostly between the United States and Europe.  Washington has had a veto and overwhelming influence over decision making ever since the I.M.F. was created in 1944, with Europe and Japan playing the role of subordinate partners. The borrowing countries — low- and middle-income countries who were often drastically affected by I.M.F. decisions — have had little or no say.  The decades-long struggle to change voting shares has so far produced only tiny results. Now the rich countries have agreed to shift possibly 5 percent of voting shares from rich to developing countries. But they can’t agree on who will give up some of their influence.

Apropos of nothing in particular - COUNTRIES do things that aren't really in their national interest all the time, for many different reasons. Still, it never ceases to amaze me how readily governments prevent skilled workers from having access to their economies. Indeed, governments treat as suspect figures or potential criminals many people who want nothing more than to contribute their talents to the domestic economy for a period of time, thereby increasing national wealth. America is obviously among the worst offenders on this score, but other countries (like, I don't know, Britain) can be nearly as bad. In some policy areas, economic logic has been utterly and hopelessly routed by populist politics and bureaucratic inertia.

U.K. 'On Cusp Of Second Banking Failure' - High street banks are on the verge of another credit crunch and taxpayers may be forced to plug a £25bn-a-month funding gap, an economic think-tank has claimed. Faced with a huge financial black hole, the New Economics Foundation (NEF) has said the banks could turn again to the Government for support. According to its report - Where Did Our Money Go? - an estimated £1.2trillion of state cash has already been pumped into the banking system.However, NEF has described a "shocking" lack of information about how that money has been used and demanded "urgent reform".The report warns that the industry is on a collision course for a severe funding crisis when current financial lifelines are withdrawn

UK tiptoeing towards Japan, warn consultants – The world's leading developed economies have a 40pc chance of falling back into a "malign" recession, a leading forecaster has warned. Problems in the banking sector and the growing risk of a sovereign debt default have raised the prospect of a "prolonged" era of slow growth or contraction, Fathom Consulting says today in its forecast for UK, US, Europe and Japan. "Confidence in the global recovery is waning," it adds. According to Fathom, the main reason for the stalling recovery is that banks still need to recognise losses and re-capitalise. Until then, "credit supply will remain constrained" – suffocating a business-led recovery. Citing the UK and the US in particular, Fathom adds: "The banking crisis is far from over and will continue to pose a major downside risk to activity while that remains the case."

Is Britain's budget deficit the worst in the G20? - The politics of the government's clumsy axing of child benefit for higher rate taxpayers, which will surely have to be revisited, are that you have to show the better-off are suffering in order to be able to spread the pain more widely. But if this £1 billion cut is symptomatic of the problems in securing the other £80 billion or so, things are going to be difficult. The economics of the cut are that tough action is needed to cut a gaping budget deficit. That is true and both George Osborne and David Cameron have said the problem is underlined by the fact that Britain has the biggest budget deficit in the G20. It is a small point but that is probably not true. Last year, according to the IMF, America had a deficit of 12.5% of GDP, compared with 10.9% for Britain. This year, 2010-11, the Office for Budget Responsibility says Britain's deficit will be 10.1% of GDP, below America's 11%. The government is right to stress the need for fiscal action but it shouldn't talk up Britain's problems beyond what the data will permit.

Britain Cuts Child Benefit Payments in Austerity Drive - Britain will cap payments to jobless families and scrap child benefits for high earners in a sweeping overhaul of the country's welfare system, Treasury chief George Osborne said Monday.  Osborne, who is seeking to save about 86 billion pounds ($135 billion) in government spending over the next five years, said the cost of welfare payments was out of control — and rewarding some people for staying out of work.  At an annual rally of his Conservative Party, Osborne said Britain's coalition government would introduce a new welfare cap to make sure families in which both parents are unemployed do not receive more in benefits than an average family earn in wages.

FSA ’stress tests’ would ban half of all mortgages, warn lenders - About half of the eight million mortgages approved in the past five years would have been banned under the tougher affordability rules proposed by the Financial Services Authority (FSA), a study suggests. Research published today by the Council of Mortgage Lenders (CML) will also say that 3.8 million of those loans have "performed" throughout the financial crisis and recession, with just 200,000 having defaulted. It comes at a time of mounting concern about the state of the housing market, with mortgage approvals running at close to historic lows and widespread predictions of a fresh collapse.  There was further evidence of that yesterday as a poll of purchasing managers in the construction industry showed a sharp fall in residential housebuilding.

Three million London commuters hit by Tube walkout - A strike by workers on London's Underground system, the Tube, affected three million commuters on Monday, as leaders of business and the mayor of London called for new laws to make it harder for strikes to go ahead. Workers in two unions -- the Rail, Maritime and Transport Union (RMT), and the Transport Salaried Staff Association (TSSA) -- called members out on strike over cuts in staff levels that will see 800 jobs disappear. The jobs are in ticket offices, which are less busy now after new ticket machine and technology were introduced. The 24-hour strike began on Sunday evening.

Catch a thief from your armchair and win cash - Here is the latest from the UK: Anyone who owns a laptop computer can now fight crime from the safety of their home and win cash prizes for catching thieves red-handed, under a new British monitoring scheme that went live this week. The service works by employing an army of registered armchair snoopers who watch hours of CCTV footage from cameras in stores and high street venues across the country. Viewers can win up to 1,000 pounds ($1,600) in cash a month from Devon-based firm Internet Eyes, which distributes the streaming footage, when offenders are caught in the act.

Cuts threaten to knock recovery as jobs ‘flatline‘ - The British economy is facing a sharp slowdown during the third quarter, with a possible contraction arriving at the end of the year.  Experts are forecasting that, as with the emergency Budget in June, the Government's spending review itself on 20 October threatens to erode business and household confidence still further – long before any cuts come into effect. Fears are also growing that the UK will witness a "jobless recovery".  The Bank of England's Monetary Policy Committee meets today and will announce its latest decision on rates and quantitative easing tomorrow. No move is expected his month, and a three-way split on direction is predicted. As other central banks such as the US Federal Reserve and the Bank of Japan ease monetary policy still further pressure is growing on the MPC to resume QE next month, to coincide with its next Inflation Report.

Global unemployment to trigger further social unrest, UN agency forecasts The International Labour Organisation (ILO) has warned of growing social unrest because it fears global employment will not now recover until 2015. This is two years later than its earlier estimate that the labour market would rebound to pre-crisis levels by 2013. About 22 million new jobs are needed – 14 million in rich countries and 8 million in developing nations. The United Nations work agency today warned of a long "labour market recession" and noted that social unrest related to the crisis had already been reported in at least 25 countries, including some recovering emerging economies.

Measuring global poverty: Whose problem now? | The Economist… POOR people—the destitute, disease ridden and malnourished “bottom billion”—live in poor countries. That has been the central operating assumption of the aid business for a decade.  The thesis was true in 1990: then, over 90% of the world’s poor lived in the world’s poorest places. But it looks out of date now. Andy Sumner of Britain’s Institute of Development Studies* reckons that almost three-quarters of the 1.3 billion-odd people existing below the $1.25 a day poverty line now live in middle-income countries. Only a quarter live in the poorest states (mostly in Africa).  This change reflects the success of developing countries in hauling themselves out of misery. In 1998 the World Bank classified 61 countries (out of 203) as low-income (meaning an annual income per head of less than $760, in money of that era). In 2009 the number had shrunk to 39 out of 220. India, Pakistan, Indonesia and Nigeria all moved to middle-income status during that time.

Does globalization have a future? (video) - Dani Rodrik - I recently gave a lecture on this topic at the University of Florida, and a video of the lecture is now online here.  You will need Windows Media Player to watch it.

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