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

Saturday, November 20, 2010

week ending Nov 20

US Fed balance sheet grows on bond purchases ‎(Reuters) - The U.S. Federal Reserve's balance sheet grew for a third straight week on its purchases of Treasuries under its latest quantitative easing program to help the economy, Fed data released on Thursday showed. The balance sheet rose to $2.297 trillion in the week ended Nov. 17 from $2.295 trillion the previous week. The Fed's balance sheet is approaching its record peak of $2.333 trillion seen in May when it was about to end its initial bout of bond purchases that involved $300 billion of Treasuries and $1.425 billion in mortgage-related securities. The Fed's QE2 program coincides with its use of proceeds from maturing mortgage securities in its portfolio, a move that started in August. Since then it has bought about $104.5 billion in Treasuries. The central bank's holding of U.S. government securities totaled $873.62 billion on Wednesday, up from $853.04 billion last week. For balance sheet graphic: On the other hand, the Fed's ownership of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae fell to $1.038 trillion from $1.051 trillion last week.

A Look Inside the Fed's Balance Sheet - ‎Assets on the Fed’s balance sheet expanded to around $2.297 trillion in the latest week. But all the additions came from new Treasury purchases — some $20.58 billion just in the week ended Nov. 17. All other holdings were flat to lower. The Fed announced earlier this month that it will purchase an additional $600 billion of Treasurys over the next eight months in addition to previously announced purchases with money reinvested from its MBS portfolio. Though the overall size of the balance sheet is set to jump, the makeup is moving back toward the long-term trend. The MBS and agency debt holdings have steadily declined as loans are paid off or mature. The Fed still holds more assets in MBS — over $1 trillion — than any other portfolio, including Treasurys. Meanwhile, other assets were also declining. The Term Asset-Backed Securities Loan Facility, or TALF, ended in March, and is falling as the last loans made through the program mature. Liquidity swaps with foreign central banks have fallen back to the millions of dollars after jumping in the spring in response to European sovereign debt concerns. Direct-bank lending was essentially flat, remaining at precrisis levels. In an effort to track the Fed’s actions, Real Time Economics has created an interactive graphic that will mark the expansion of the central bank’s balance sheet. The chart will be updated as often as possible with the latest data released by the Fed.  See a full-size version. Click on chart in large version to sort by asset class.

On track for upper end of scheduled purchases - Following the schedule published on November 10th, the Fed has completed five Open Market Operations (OMOs) constituting a cumulative $36bn of purchases of Treasury securities, representing a level towards the upper end of the projected schedule. In the past week as of November 17th, the maturity distribution of the Fed’s holdings of Treasury securities focused on the 1 to 5 years maturity. The Fed increased its holdings of 1 to 5 year Treasuries by $11.2bn and of 5 to 10 year Treasuries by $4.9bn. As of November 17th, the Fed held $873bn in Treasuries, up from $837bn on October 28th, before the announcement of a second round of Large Scale Asset Purchases (LSAPs). The Fed’s total holdings of mortgage-backed securities (MBS) decreased from $1.051tr on October 28th to $1.038tr on November 17th. With regard to major financial indicators, bank credit growth is recovering, but it is still weak or declining across many categories. Major spreads and volatility indexes are stable as compared to two months ago.  Download Full US: FedWatch

Foreign central banks' US debt holdings rise - Fed (Reuters) - Foreign central banks' overall holdings of U.S. marketable securities at the Federal Reserve rose in the latest week, data from the U.S. central bank showed on Thursday.The Fed said its holdings of U.S. Treasury securities kept for overseas central banks rose by $10.4 billion in the week ended Nov. 17 to stand at $3.344 trillion. The breakdown of custody holdings showed overseas central banks' holdings of Treasury debt rise by $9.71 billion to stand at $2.614 trillion. Foreign institutions' holdings of securities issued or guaranteed by the biggest U.S. mortgage financing agencies, including Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB), rose by $690 million to stand at $730.11 billion.

Fed Will Complete $600 Billion Bond Plan, Three District Bank Chiefs Say - Three Federal Reserve district bank presidents said they expect the central bank to buy the entire $600 billion of Treasuries in a program aimed at spurring growth and reducing unemployment.  “Given my forecast, I fully anticipate we will purchase the entire amount,” Boston Fed President Eric Rosengren, 53, said yesterday in an interview with Bloomberg News. James Bullard of St. Louis said in a separate interview the Fed would buy less than planned only after a big improvement in the economy, while Dennis Lockhart of Atlanta told reporters the purchases will probably go ahead as scheduled.  The three regional bank chiefs expressed confidence in the program amid criticism over the purchases from outside and inside the Fed. A group of 23 people including former Republican government officials and economists urged Chairman Ben S. Bernanke this week to halt the expansion of monetary stimulus.

Fed’s Bullard Sees $600 Billion in Purchases as ‘Forward Guidance'…St. Louis Federal Reserve Bank President James Bullard said Wednesday he considers the central bank’s planned purchase of $600 billion in U.S. Treasurys as a “form of forward guidance” that can change based on incoming economic data. Bullard responded to criticism from conservative politicians and economists who believe the Fed’s planned purchase of $600 billion in U.S. Treasurys will fuel inflation and have a minimal impact on creating jobs. The Fed’s quantitative easing program, the second adopted since the economic meltdown of 2008, is aimed at lifting inflation back toward 2%, which is the Fed’s informal inflation target.

Under Attack, Fed Officials Defend Buying of Bonds - After a barrage of criticism over the last week — including from foreign leaders, Congressional officials, economists and Alan Greenspan, the former Fed chairman — the Fed came out to explain its efforts to inject $600 billion more into the sagging economy.  One worry of Fed watchers as well as its defenders is that some of the domestic criticism may have the subtext of challenging the Fed’s traditional independence in deciding monetary policy without political interference.  In a rare on-the-record interview, William C. Dudley, president of the Federal Reserve Bank of New York, said that the Fed’s move was not intended to affect the value of the dollar, but rather to encourage a faster, stronger recovery that will also assist international growth.  And in an interview with The Wall Street Journal, the Fed’s new vice chairwoman, Janet L. Yellen, defended the decision in broadly similar terms. “I’m having a hard time seeing where really robust growth can come from,” she said. “And I see inflation lingering around current levels for a long time.” Ms. Yellen said she was “not happy to see us caught up in a political debate."

Germany Was Right When It Called Our Financial Policy "Clueless" - It’s never a good thing when another country calls your financial policy clueless. It’s particularly bad if that other country is one of the world’s leading economies, and if it also happens to be right. “With all due respect, U.S. policy is clueless,” German Finance Minister Wolfgang Schaeuble said recently, referring to the Federal Reserve’s decision to throw $600 billion at our sluggish economy.  The Fed can create as much money as it likes, but the U.S. economy is presently unable to productively put that money to work. By setting near-zero interest rates, the Fed has established that money in this country has no real value. We give it to the banks for nothing, and the banks lend it back to the deficit-ridden U.S. Treasury for almost nothing. The result is a guaranteed profit for the banks, but no incentive to lend cash to creative entrepreneurs or expanding businesses. The Fed’s $600 billion intervention will make this foolishness more efficient by cutting out the middleman. There will be no need for banks to buy Treasury securities for the next eight months. The Fed plans to buy, for itself, just about as much debt as the Treasury plans to sell in that period. The banks will just sit there uselessly, unable to attract deposits with near-zero rates (or negative rates for many depositors, when fees are considered), and unwilling to risk making loans to businesses in a weak economy while regulators are worried about the banks’ financial strength.

Why I Do Not Like QE2- One justification frequently given for further Fed open market operations is that it will increase bank lending through raising bank reserves (“high powered” money). The reluctance of banks to lend has clearly been a factor in the slow down in the US recovery. Yet the Fed’s creation during the past couple of years of well over trillion dollars in additional reserves through open market operations has not induced rapid increases in bank lending. Instead, banks have accumulated huge amounts of excess reserves; that is, reserves above the amount they are required to keep as collateral for their deposit liabilities. Given that banks already are holding such large reserves that carry low interest rates, it is hard to see why creating additional reserves will stimulate much additional lending. The big constraint in the lending market is that both borrowers and lenders perceive considerable risk to investments. This is partly due to government policies, like the health care and the financial reform bills, and proposals to raise taxes on higher incomes and on capital gains that will raise costs of doing business, and lower after-tax incomes of investors. Perhaps that perception will change due to the recent election of many Congressmen who say they want to lower taxes and reduce the size of government, but this perception of a risky investment environment will not change because the Fed creates large quantities of additional reserves.

NY Fed’s Dudley Defends QE2 - The leader of the Federal Reserve Bank of New York hit back Tuesday at those who believe the U.S. central bank is trying to drive the dollar’s value lower. In the transcript of an interview with the CNBC television channel, New York Fed President William Dudley denied the dollar’s value was a major consideration when the central bank decided recently to restart its Treasury buying program. It will purchase $600 billion in Treasurys by the middle of next year, on top of around $300 billion in government bonds bought as part of an effort to reinvest the proceeds of maturing mortgages held by the central bank. The program is very controversial. Since it has been implemented a number of key foreign officials have been highly critical, arguing the Fed is trying to push the dollar down, in a bid to unfairly help the economy.

Fed’s Dudley: QE2 Exit Could Take Years -  A top U.S. Federal Reserve official defended the Fed's controversial bond-buying program on Tuesday, saying it could be years before pulling back easy money policies is warranted.  "This exit could be years away," New York Federal Reserve President William Dudley said an interview on CNBC. A transcript of the interview was made public.  The dollar fell against the euro and the yen on the comments. Dudley cautioned that it will take months of adding 200,000 to 300,000 jobs to foster a meaningful recovery, and said the Fed's program to buy $600 billion in longer-term Treasuries is unlikely to generate a spurt of growth.  "Modest effect. It's not a fantasy. It's not a magic wand," he said.  "It's going to make the economy grow a little bit faster. It's going to generate a little bit more employment growth. But you know, we have a long bumpy road to travel," Dudley said.

More From Evans and Rosengren on Fed Policy - In exclusive interviews with the Wall Street Journal, two regional Federal Reserve bank presidents — Charles Evans of Chicago and Eric Rosengren of Boston — expressed a commitment to the Fed’s controversial policy of buying U.S. Treasury bonds. They also expressed views on a wide range of subjects and criticisms related to Fed policy, including its impact on commodities prices and the dollar and on the Fed’s mandate to keep inflation low.  Below are excerpts:

5 Myths about the Fed - Greg Ip - The Fed isn't literally printing the $20 bills that end up in your wallet - it's doing the electronic equivalent. When it buys a $100 bond from a bank, it deposits $100 into the bank's account at the Fed. This electronic money is called reserves, and the Fed conjures it up out of thin air. However, this money can lead to inflation only if banks lend it and consumers and businesses spend it. Banks lend when they have strong balance sheets and when credit-worthy customers demand loans. People and businesses spend when their incomes are growing and they're confident about the future. None of this has been true lately. If the Fed had an explicit policy of devaluing the dollar, it would sell dollars on the open market, buying foreign currencies in return. However, the Fed does this only with the Treasury's consent. The Fed hasn't sold dollars since 2000. Even with our budget deficit as a share of GDP near a post-World War II record, there's no shortage of private and foreign investors to buy Treasury bonds. The Fed is technically independent from the rest of the government, but presidents and Congress have ample ways to pressure it. They can privately and publicly browbeat the chairman, withhold his reappointment, appoint compliant governors or amend the Federal Reserve Act. Unfortunately, the Federal Reserve's history is littered with mistakes, from those that led to the Great Depression in the 1930s to those that brought on stagflation in the 1970s.

Failed models and the real costs of QE2 - Now, as the Fed again launches another foray into an area that appears the domain of fiscal, not monetary authority, the supporters of the Federal Reserve’s “quantitative easing II” program have come out in force, wearing their neo-Keynesian credentials on their sleeves and waving their macro-economic models around like Excalibur. The same Fed that just announced a new Office of Financial Stability “to spot financial bubbles before they trigger financial crises” does not want anyone to notice the truth, namely that their models failed to predict any of the bubbles of the past 25 years and that its current policies are already inflating new and dangerous asset bubbles. In a blog post in defense of QE2, Paul Krugman goes after those of us who are against it and taunts us with "but what is their model? How do they think we got into a crisis that has depressed employment all around the advanced world?". Mr. Krugman, my model looks at reality and it has been more than accurate. How have the macro models of the Fed held up?

Felix TV: Why QE isn’t working - There are things which could go right with quantitative easing. But on the other hand, there are big things which could go wrong too. And right now corporate America seems to be more worried about the downside than it is certain about the upside. Which is why there’s a real risk that QE is going to cause more harm than good.

What Are We Doing Wrong - Statements like this from Allan Sloan indicate that we are failing miserably on so many levels. Part of that is because our country’s influence is shrinking—but another, big part of the problem is QE2, which is econ-speak for "printing money." Sloan has reported on the Fed’s raising and lowering of interest rates for years. All of which is econ-speak for “printing money.”  That is, of course why we call it Monetary Policy.  When I teach monetary policy, I go through this whole thing about fiat currency, legal tender, reserve requirements, etc. I assume Sloan was forced to sit through this lecture as well. I assume that he found it interesting since he went on to become a reporter on this issue.  Yet, the core concept that we conduct all forms of monetary policy by adjusting the rate at which the central bank prints money seems not to have sunk in.

Fed’s Pianalto ‘Encouraged’ By Impact Of Bond Buying - The head of the Federal Reserve Bank of Cleveland said Thursday the central bank’s recent decision to buy $600 billion in Treasurys is already starting to show some traction. “My choice was clear. I voted to support additional asset purchases, and I am encouraged by some of the results so far,” Cleveland Fed President Sandra Pianalto said. “Inflation expectations moved closer to my longer-term inflation objective in anticipation of our announcement, and they have stayed that way,” she said. “Our policy action offers the right kind of insurance that the Federal Reserve’s monetary policy will support the economic expansion while stabilizing inflation and inflation expectations consistent with our price stability mandate,” the official said.

San Francisco Fed Official Says QE2 Is Working - The Federal Reserve’s recently announced plan to buy $600 billion in Treasury securities to improve economic growth is having a positive effect on growth, the head of the Federal Reserve Bank of San Francisco economic research department said Monday. The goal of the buying is “to push medium and longer-term interest rates down further, giving added support to economic activity. So far, the responses in financial markets show that this program is working,” San Francisco Fed Executive Vice President John Williams said. “Monetary policy is doing what it can to promote recovery and price stability, and I am confident that with time we will once again attain maximum sustainable employment with low stable inflation.” The official has been the public face of the bank for some months now, since his former boss, Janet Yellen, was nominated and recently confirmed as the second in command of the Federal Reserve Board in Washington. Yellen had long been one of the officials most alarmed by the state of the economy, and she was very supportive of the various efforts pursued by the Fed. Williams’s comments came from the text of a speech to be delivered to the Seattle Community Development Roundtable.

QE Is Untested and Ineffective - Alan Blinder laid out his case for Fed asset purchases in today’s Wall Street Journal article, “In Defense of Ben Bernanke.” Dr. Blinder, a former Fed vice chairman, argues that the quantitative easing program is “pretty similar to garden variety monetary policy” and asserts that the Fed is not so incompetent as to cause a high rate of inflation. Later in the article, he says he would not choose to purchase medium-term Treasuries, preferring that the Fed buy private securities and lower the rate it pays on excess reserves. These issues are the crux of the debate and should be argued thoroughly, especially since U.S. is not in a financial emergency. By undertaking large-scale purchases of long-term assets with very little equity behind it, the Fed is drastically expanding its role in the bond market and in the economy. Owning long-term assets financed by overnight deposits (as the Fed is now doing) is as far from garden-variety monetary policy as good banking is from bad.

Is Ben Bernanke really "punishing" savers? - The Federal Reserve Chairman Ben Bernanke has caught a lot of flak, to say the least, about the central bank's decision to use government dollars to buy Treasury bonds. The plan is commonly called QE2, and it is supposed to drive down interest rates and boost the economy. Some say it won't work. Some say it will create inflation. Some say it will create new financial bubbles.  Some say it's not big enough. So far, at least to me, the criticism of Bernanke's plan that resonates the most has been that it hurts savers. Banks and large corporates get a big bonus from the Fed. And to a lesser extend home buyers. People who have money in the bank? Not so much. My post a few weeks ago about the Fed possibly starting a civil war was getting at how that will play out.But it turns out, as Pat Regnier points out in a very good post on the blog of our sister publication MONEY,  the argument that the Fed is anti-savers is not as compelling as I thought

Open Letter to Ben Bernanke - The following is the text of an open letter to Federal Reserve Chairman Ben Bernanke signed by several economists, along with investors and political strategists, most of them close to Republicans:  We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued.  We do not believe such a plan is necessary or advisable under current circumstances.  The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.  We subscribe to your statement in the Washington Post on November 4 that “the Federal Reserve cannot solve all the economy’s problems on its own.”  In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.  We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.

Fresh Attack on Fed Move The Federal Reserve's latest attempt to boost the U.S. economy is coming under fire from Republican economists and politicians, threatening to yank the central bank deeper into partisan politics.A group of prominent Republican-leaning economists, coordinating with Republican lawmakers and political strategists, is launching a campaign this week calling on Fed Chairman Ben Bernanke to drop his plan to buy $600 billion in additional U.S. Treasury bonds. "The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment," they say in an open letter to be published as ads this week in The Wall Street Journal and the New York Times. The economists have been consulting Republican lawmakers, including incoming House Budget Committee Chairman Paul Ryan of Wisconsin, and began discussions with potential GOP presidential candidates over the weekend, according to a person involved.

The Pot Again Calls the Kettle Red: Republicans, Democrats, the Fed and QE2 - Some conservatives are attacking current monetary policy as being too expansionary, as likely to lead to excessive inflation and debauchment of the currency. The Weekly Standard is promoting a critical letter to Fed Chairman Ben Bernanke signed by a list of conservatives, most of whom are well-known Republican economists. Apparently they are taking out newspaper ads tomorrow. If the National Journal and Wall Street Journal are right that the Republicans are trying to stake out a position that Democrats are pursuing inflationary monetary policy, they are on very shaky ground. I will leave it to others to make the most important point, how low is the risk of excessive inflation now compared to the risk of alarming Japan-style deflation, with the economy having only begun to recover from its nadir of early 2009. Or to acknowledge that QE2 — the Fed’s new round of monetary easing — is only a second best policy response to high unemployment. (Fiscal policy would be much more likely to succeed at this task, if it were not for the constraints in Congress.) I will, rather, respond to the partisan content of the National Journal’s question by pointing out some insufficiently understood history

That QEII Letter From Economics 21 - I noticed last week that there was going to be a moving of the goalposts when it came to right-wing conservatism and the Federal Reserve. This is accelerating. Yesterday Economics 21 released a letter calling for an end to QEII signed by a number of economists, financial market experts and conservative political actors. Like Krugman, I simply don’t know what model they have in mind for why QEII should be stopped. Are they basing their disagreement on a credit-channel model of monetary policy? A form of modern monetary theory? Koo-style debt overhang? That the fund rate has become detached from the financial markets? This is important because my first question to those opposing QEII is something like this:  Suppose we woke up tomorrow and realized that we accidently had the Fed funds rates at 1%, instead of 0-0.25%. Whoops! Should we go ahead and lower it to 0%?  (Or separately, should we just raise interest rates.)  Kansas City Federal Reserve Bank President Thomas Hoenig, who is worried unemployment might come down too quickly (and is now advising the House GOP), would say no, leave it at 1%. (He wants to raise interest rates with unemployment touching 10%!)  So would Raghuram Rajan. The hard-core Koo types would think that lowering the 1% interest rate would make no difference, as all monetary policy is ineffective with a debt overhang.  And so on.

The case against QE - An impressive group of right-leaning technocrats has signed an open letter to Ben Bernanke, objecting to his adoption of QE2. And it’s hard to disagree with what they have to say: We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment. It seems clear that the G20 meeting in Seoul achieved absolutely nothing largely because of the unfortunate timing of Bernanke’s QE2 announcement. It overshadowed everything else, it put Obama on the defensive, and it made it impossible for the G20 to agree on anything. I don’t think that the FOMC anticipated the volume of the international criticism of U.S. policy, and that alone is reason to reconsider what they’re doing. After all, if a policy designed to increase confidence only serves to increase mistrust, it probably isn’t working.

Liquidationists of the World, Unite! - Krugman - OK, so now it’s official: conservatives aren’t just against any effort to boost demand with fiscal policy, they don’t want the Fed doing anything positive, either. This open letter to Ben Bernanke is a remarkable document, not least for who signed it. Who knew that William Kristol was an expert on monetary policy? And who thought they’d gain credibility by adding someone who declared in 2005 that we needn’t worry about low savings, because Americans were doing fine thanks to rising home prices, then declared in 2007 that there was no reason to worry about the credit market? But the real question is, what is their model of the mess we’re in? What do they think is happening?  I believe we’re suffering from a severe deleveraging shock, in which the immediate problem is to get someone to make up for the loss of debtors’ spending. According to that view, the Fed needs to do all it can to reduce the real rates unconstrained borrowers face, and could badly use help from fiscal policy, too. Quantitative easing is literally the least the Fed can do.

The QE2 Letter - John B. Taylor - Many have asked me what I think about the letter criticizing QE2 which was signed by me and other economists. The letter has created quite a stir. I have already written and spoken many times explaining my oppostion to QE2, both before the decision was made and afterwards, so it might be helpful just to give a list of posts on this blog and some media interviews:

Jackson Hole, August 29 "the benefits in terms of lower rates are very small, while the short-term costs of greater uncertainty about the exit strategy and long-term costs from a loss of independence are large."
The Taylor Rule Does Not Say Minus Six Percent, September 1
it says .75 percent which provides no rationale for QE2
More on Massive Quantitative Easing, September 8 which refers to a WSJ oped and many other critiques
Announcement Effects Do Not Prove QE Works, October 7 so the evidence cited in favor of QE2 is pretty weak
A New Normal for Monetary Policy? October 27 reflects my concerns that there would be a QE3 and a QE4. Maybe the letter and other objections will reduce the chances of this.
Milton Friedman Would Certainly Not Have Supported QE2, November 3 so be careful about citing him as support
Empirical Concerns about Anticipation Effects of QE2, November 5 which disagreed with the Washington Post article by Ben Bernanke defending QE2
QE2 and G20, November 14 in which an unintended consequence of QE2 is discussed

Mankiw on QE2 - Greg Mankiw: QE2: ...I judge QE2 to be a small but risky step in the right direction.  In his post, Mankiw says: I do see some potential downsides.  In particular, the Fed is making its portfolio riskier.  By borrowing short and investing long, the Fed is in some ways becoming the hedge fund of last resort.  If future events require higher interest rates, the Fed will end up making losses on its portfolio.  And even if doesn't recognize these losses (by not marking to market), it could end up paying more interest on newly expanded reserves than it is earning on its newly acquired portfolio of long bonds.  Such a cash-flow deficit could potentially undermine the Fed's political independence Economics of Contempt emails: Pretty absurd post on QE2 from Mankiw, don't you think? Calling the Fed the "hedge fund of last resort" is about as disingenuous as it gets. If the Fed is becoming a hedge fund, it's a hedge fund that only invests in *Treasuries*! Is Mankiw seriously worried about the risks of the Fed owning 10YR and 30YR Treasuries? I *highly* doubt it.

The Triumph Of Reagan Over Friedman -Brad DeLong is exercised, and rightly so, over the fact that some good economists have joined the crazies in signing the Republican anti-QE letter. How is this possible? he asks. After all, we’re not even talking about Keynesianism here, we’re talking about monetarism — at least in terms of the spirit of the thing. For Friedman’s whole case against the Fed was not, fundamentally, about monetary aggregates; they were just intermediate targets. It was that the Fed was supposed to do whatever it took to avoid an economic plunge, and didn’t. So calling on the Fed not to act now is a betrayal of Friedmanism as well as Keynesianism. But it’s not really a mystery what’s going on here. In part, the GOP letter-signers are against doing anything that might help Obama, of course. But more fundamentally — and this is a point I think conservatives who believe they can remain reasonable about macro fail to grasp — this is about philosophy of government. If your bedrock faith is that government is always the problem, never the solution, then you’re not, ultimately, going to be willing to draw a line around the central bank and say that it’s OK for that semi-autonomous part of the government to engage in active problem-solving.

Brad DeLong on Economists (and non-economists) - In Economists (and Non-Economists) Behaving Very Badly Indeed Watch, Brad DeLong accosts the austerity bandwagon that objects to any more federal stimulus, whether from Congress or from the Fed.At the moment our flow of nominal spending at $14.7 trillion per year is some 12% below its pre-2008 trend. And in the absence of any 12% decline in prices and wages, that shortfall in spending has to produce our current macroeconomic distress: there is not enough "money" to support enough of a flow of spending to chase all the goods we could produce. We don't have a deficiency of real supply (for whatever reason). We have a deficiency of nominal demand.This is the problem we all know and recognize.  Since the financial crisis hit, banks, corporations and individuals have been deleveraging, and that means not enough money is out there being spent.  The stimulus bill was a bare minimum that staved out utter depression, but (on Republican insistence) was larded with much too many tax breaks for big corporations rather than targeted 100% towards the population that would best put the money to work in the economy. Private saving means that public spending has to step into the gap.  We did some, but not enough.  Jobs were saved, but not enough new jobs were created.  Thus, the Fed has a new proposal for a $600 billion stimulus--quantitative easing (essentially, printing money rather than borrowing it).  As DeLong notes, even a bunch of conservative economists of times gone by (including Milton Friedman) would say that "it is a central bank's business to intervene in asset markets to boost the flow of nominal spending back to what everybody expected it to be and counted on it being." But today's wingnuts can't seem to stomach any reasonable policy that might help someone other than managers and owners of the US MNEs

A Defection from the "Open Letter to Bernanke" - Over at FrumForum, Noah Kristula-Green gets some of the Open Letter to Ben Bernanke signers to discuss their motivations for doing so.  One of the signers, Charles W. Calomiris, looks like he does not belong on that letter: Charles W. Calomiris of the Columbia University Graduate School of Business told FrumForum in an email that he favored keeping interest rates were they currently were: There are many reasonable alternative views on how to target monetary policy. I favor Ben McCallum’s proposal to target nominal GDP growth at about 5%. Since we were on track with that target before QE II, at least for the moment, I would neither be raising or lowering interest rates. Though he also stated that he would be in favor of a looser monetary policy if the evidence could convince him the circumstances warranted it: If there were evidence of a need for further loosening to raise the growth of nominal GDP to that target rate, then some quantitative easing might be a reasonable proposal. If Calomiris believes in level targeting rather than growth rate targeting he definitely does not belong on that letter.

How negative should real interest rates be? - Standard monetary policy is about setting short-term nominal interest rates. Most macroeconomic models assume that inflation is sticky (constant) in the short run and by moving nominal interest rate the central bank is actually setting the real interest rate and by doing so influencing spending (consumption and investment) decisions. Of course, these spending decisions might depend on long-term interest rates and therefore we also need to understand how short-term interest rates affect both nominal long-term rates and inflation over a longer horizon (where we cannot assume that inflation is constant).  We can use this logic to think about the most recent quantitative easing policies announced by the Fed. That's what Mark Thoma does very well today in his blog. One issue that I am missing in his analysis is how we think about real interest rates (not just nominal) in the current context. This is very much related to the defense that some Fed officials have done over the last hours of their policies. For example, in his interview with the WSJ, Janet Yellen argues that QEII (the next round of quantitative easing) is not intended to raise inflation. That the Fed is happy with an inflation rate below but close to 2%.

GOP’s Pence Calls for Fed to Drop Focus on Employment - Rep. Mike Pence of Indiana, a top House Republican, said he plans to introduce legislation Tuesday to end the Federal Reserve’s dual mandate, which requires the central bank to balance both employment and inflation concerns in its monetary policy. Pence, a potential 2012 presidential candidate, is one of several GOP politicians in recent weeks to attack the Fed over its recent decision to buy government bonds to boost the economy, warning that the move — often called Quantitative Easing 2 — could spur significant inflation. On Monday, he called for striking the dual mandate to force the Fed to focus only on price stability. The Fed today, under a 1977 law, also must pursue maximum sustainable employment — generally view as an unemployment rate of 5% to 6%. “The Fed’s dual mandate policy has failed,” Pence said. “For a record 18th straight month the nation’s unemployment rate is at or above 9.4 percent. It’s time for the Fed to be solely focused on price stability and not the recently announced QE2 which will monetize our debt and trigger inflation.”

Corker Calls for Dropping Fed Mandate on Jobs - Sen. Bob Corker (R., Tenn.) called Tuesday for a narrowing of the Federal Reserve’s focus to price stability, the latest attempt by a Republican to alter the central bank’s mandate. A day after holding a long meeting with Fed Chairman Ben Bernanke, Corker said the central bank’s “overly broad dual mandate” should be changed so that full employment will no longer be its responsibility. “The Federal Reserve is not seeking a change to its statutory mandate. The dual mandate is appropriate,” said Michelle Smith, spokeswoman at the Fed.

Fed Criticism Expands to Congress - In addition to prominent economists and former government officials, national legislators are stepping up to warn about the Fed’s risky monetary policy experiment. The Fed’s quantitative easing program has a significant risk of causing uncontrollable inflation as a byproduct of its intended goal of boosting economic growth and lowering unemployment. Two influential legislators, Tennessee Senator Bob Corker and Indiana Congressman Mike Pence are calling for reforming the Fed to limit its incentive to engage in risky practices. At a press conference Tuesday, Sen. Bob Corker, R-Tenn. and Rep. Mike Pence, R-Ind. called for Congress to change the Fed's "dual mandate" that now requires it to promote both price stability and full employment. A bill introduced by Pence on Tuesday would have the Fed focus only on keeping inflation low, and not worry about reducing unemployment.

GOP to Jobless: Drop Dead - "You shall not press down upon the brow of labor this crown of thorns," bellowed William Jennings Bryan as he brought the convention to its feet. "You shall not crucify mankind upon the cross of gold." The world has supposedly learned a thing or two about economics since Bryan's day, including the limits of clinging mindlessly to hard money during depressions and bouts of price deflation. But you'd never know it listening to the newly empowered and emboldened Republicans who have returned to Washington determined not just to reduce government's role in the economy, but to thoroughly emasculate it.  Their latest target is the Federal Reserve, whose sin seems to be that it has taken seriously its dual mandate to maintain price stability (that is, to prevent inflationary or deflationary spirals from taking hold) while encouraging full employment. Over the summer, when it became clear to Fed officials that their policy of zero interest rates might not be sufficient to stop prices from falling and unemployment from rising, they began laying out publicly the justification for injecting yet more money into the economy by buying $600 billion of longer-term Treasury bonds.

Bernanke Seeks to Reassure Senators - Federal Reserve Chairman Ben Bernanke sought to assure senators Wednesday there was “zero attempt” by the Fed to manipulate the dollar through its controversial bond-purchase program, a U.S. senator said. Sen. Bob Corker (R., Tenn.) spoke with reporters after a closed meeting in the U.S. Capitol with Bernanke and members of the Senate Banking Committee. Bernanke was briefing U.S. senators on the central bank’s recent plan to buy $600 billion in U.S. Treasurys in an effort to boost a weak economy. According to Sen. Richard Shelby (R., Ala.), Bernanke told the group the bond-purchase program would create between 700,000 and 1 million jobs over the next two years. The meeting came after Republican lawmakers Tuesday put forward a bill that would narrow the Fed’s focus to price stability and take away its other objective of full employment. Republican politicians and economists have been sharply critical of the Fed’s plan, saying it could spur inflation and hurt the U.S. dollar.

Bernanke Makes Case to Senators - The Fed chairman denied the U.S. was manipulating the currency through its plan to purchase $600 billion of U.S. Treasury bonds and pointed to research by the Federal Reserve Bank of Boston which estimated the program could create 700,000 to one million jobs over two years. Sen. Richard Shelby, an Alabama Republican, said he "wasn't persuaded" and noted that "even some Fed officials have doubts" about the central bank program. Republican lawmakers said in a letter to Mr. Bernanke released Wednesday that the Fed's move "introduces significant uncertainty regarding the future strength of the dollar and could result…in hard-to-control, long-term inflation."

Gesture politics and the Fed mandate - The proposal from Bob Corker and Mike Pence to abolish the dual mandate is pure gesture politics. It probably won’t even become a bill; if it does become a bill it won’t become law; and even if it does become law it won’t actually change what the Fed does. What’s more, Corker and Pence simply don’t make any sense to the reality-based community. For instance, Corker wants the Fed to be “focusing singularly on maintaining the value of the dollar,” which sounds for all the world like a third mandate to replace or go alongside the inflation and employment mandates. What happens, for instance, if inflation is low and the dollar is falling? Or if inflation is high and the dollar is rising? Meanwhile, Pence is declaring that QE2 “will monetize our debt and trigger inflation,” which is kinda the whole point of the exercise, since the Fed is worried that inflation is too low. Giving the Fed a simple inflation target would only make it easier to justify this kind of action when inflation is low and falling.

The politics of QE2 - Allan Sloan has a good point today: by implementing QE2, Ben Bernanke has become a politician. It’s an important development: for reasons I don’t fully understand, the debate over QE2 has divided along party-political lines, with the Republicans lining up against it and the Democrats attacking them. Globally, too, as we saw in Seoul, the QE2 debate is conducted at summit level, and this time the dividing lines are even starker: it’s essentially the U.S. vs the world. Interestingly, this is one of those old-fashioned technocrat vs technocrat policy debates, in contrast to the technocrat vs populist debates which seem to have taken over far too much airtime of late. But it’s just as shrill. And as Sloan says, it does the venerable Fed no favors to find itself on one side of a debate generating so much heat and so little light: Bernanke “was already making a high-stakes economic bet with QE2,” he says, “and now it’s a political bet, as well”. If QE2 doesn’t work — Sloan raises the specter that it “could imperil the dollar and our financial system” — then it’s not just the economy which will be harmed, but also the Fed’s long-term credibility and pre-eminence. In fact, the politics of QE2 are already hobbling the Fed’s freedom of movement, as Neil Irwin explains:

The politicization of U.S. monetary policy - The FOMC’s move to resume large-scale asset purchases (LSAPs) was a controversial one, inside as well as outside the Committee.  We remain steadfast in our view that the Fed will stay the course on its LSAPs plans and will not be dissuaded by outside pressure. That’s what independent central banking is about! What is disturbing about recent developments is the politicization of monetary policy. Notable Republican politicians have teamed up with a handful of mostly Republican economists to criticize the Fed’s actions in a politically-charged manner.  While the Fed’s move is controversial, that controversy should not be split across party lines.  It appears that the President’s defense of the Fed’s actions, in response to the foreign backlash, triggered an automatic and reflexive reaction among some Republicans: If the President supports Fed policy, they must oppose it. Being partisan would undermine the credibility of our policy analysis. We fundamentally want to maintain a reputation for objectivity, not partisanship.  We were particularly troubled by the open letter to the Chairman, signed by a handful of mostly Republican-leaning economists.  For our part, we will continue to study monetary policy issues in a dispassionate way, hopefully contributing to the serious work that needs to be done.

The Federal Reserve: The Comic Book - The Federal Reserve has been getting sucked into the political fray lately. President Obama defended the Fed on his Asia trip last week; a group of economists (most of them affiliated with Republican policies) will run ads attacking the Fed this week. That's not where the Fed likes to be. In fact, if the Fed created a comic book, it might cast itself as a superhero who needs to be "free of short term political pressure" (and has awesome abs). Oh, right: The Fed already did that.  That's a panel from "The Story of Monetary Policy," a comic book the New York Fed released a few years back. (If you wanted to update the panel for the current economic moment, you could substitute "deflation" for "inflation.") The book is one in a series from the Fed; other titles include "The Story of Banks," "The Story of Foreign Trade and Exchange," and, perhaps inevitably, "The Story of the Federal Reserve System."

Merchants of Misery - Paul Krugman - The attack on the Fed for having the temerity to actually try to do something about the economy continues. Now Republican politicians are pointing out that the Fed has failed to reduce unemployment — and therefore, it should no longer even try to do anything about unemployment, and focus only on price stability. And this makes sense because ….? For once, I’m being outdone in the cynicism department here: Stan Collender predicted all this back in August, on the grounds that Republicans would oppose anything that might help the economy on Obama’s watch. That is, they’re opposing QE not on the grounds that it won’t work, but because they’re afraid that it will. And the silence from conservative economists who know better is deafening.

Axis of Depression, by Paul Krugman: What do the government of China, the government of Germany and the Republican Party have in common? They’re all trying to bully the Federal Reserve into calling off its efforts to create jobs. And the motives of all three are highly suspect. ...It’s no mystery why China and Germany are on the warpath against the Fed. Both nations are accustomed to running huge trade surpluses. But for some countries to run trade surpluses, others must run trade deficits — and, for years, that has meant us. The Fed’s expansionary policies, however, have the side effect of somewhat weakening the dollar, making U.S. goods more competitive, and paving the way for a smaller U.S. deficit. And the Chinese and Germans don’t want to see that happen. For the Chinese government, by the way, attacking the Fed has the additional benefit of shifting attention away from its own currency manipulation, which keeps China’s currency artificially weak — precisely the sin China falsely accuses America of committing.But why are Republicans joining in this attack? Mr. Bernanke and his colleagues seem stunned to find themselves in the cross hairs.

The Axis Of Depression? - Paul Krugman is making an enemies list. Any person, group or country who opposes QE2 is also opposed to an economic recovery in the United States. Krugman's enemies are all members of his Axis of Depression. To really understand what Paul is up to here, we need to review a little bit of history. We should recall that during World War II, our enemies Germany, Italy and Japan were referred to as the Axis Powers, or the Axis Alliance. You know—Nazis exterminating Jews, the Japanese Yellow Peril, and Italian Fascists. In more recent times, this truly evil group was joined by another axis, W's Axis of Evil, which included Iraq, Iran and North Korea. This latter group of baby-killers does not live up to the standards set by the first group, but we now know what "axis" means, or more importantly, what it implies. And so does Paul Krugman. Our new axis includes Germany, which fits in perfectly because not only do they run a trade surplus, but they also used to be Nazis! And China? They have a huge trade surplus too and, well, aren't they still Communists? They sure are! And don't forget Tiananmen Square. So, they're also a very good fit. And Republicans? I'll let Paul explain—

Senate Panel Backs Diamond for Fed Board - The U.S. Senate Banking Committee on Tuesday voted 16-7 to approve Peter Diamond’s nomination to be a member of the Federal Reserve Board of governors in a second attempt to move forward his stalled candidacy. The panel had approved Diamond’s nomination in July with a 16-7 vote. But the Massachusetts Institute of Technology economist was held back during the full Senate vote in late September due to opposition from some Republican senators, who argued his economic policy experience was too limited to join the central bank. Just a few weeks later, Diamond won the Nobel Prize with two other economists for their groundbreaking research attempting to explain why unemployment remains so high in the U.S. and other advanced economies.

Ron Paul set to hammer Federal Reserve - Change is about to come to monetary policy on Capitol Hill, but it might not be the type of change President Obama or Federal Reserve Chairman Ben Bernanke have in mind.  Rep. Ron Paul, R-Texas, a strong critic of fiat monetary policies, is scheduled as the ranking member to become in January the chairman of the House Financial Services Subcommittee on Domestic Monetary Policy and Technology, commonly known as the "House monetary subcommittee."  Known for his outspoken criticism of the Federal Reserve and for his determination to return the U.S. dollar to some form of a gold standard, Paul, as chair of the House monetary subcommittee, will have a position of authority from which to hold a serious and robust public debate about decades of government monetary and fiscal policy.  In an exclusive interview, WND asked Paul what he plans to do once he becomes chairman of the panel.  "First and foremost, I want the subcommittee to actually begin talking about monetary policy," Paul said. "The Federal Reserve has insisted that Congress has no role in monetary policy. But that's not what the Constitution says."

Fed’s Plosser: QE2 Benefits May Not Outweigh Costs - The benefits of the Federal Reserve’s plan to buy $600 billion in government bonds in an effort to lift the economy may not be enough to outweigh the costs, Federal Reserve Bank of Philadelphia President Charles Plosser said Thursday. Plosser had already expressed doubts about the Fed’s bond purchases, known as quantitative easing.  Fears of deflation that some of his Fed colleagues have expressed are exaggerated, Plosser said. Inflation could be the real problem once the money the central bank has injected into the financial system starts to flow back to the economy, he said. “The fire hasn’t been lit yet, but there’s plenty of kindling,” Plosser said about the risk of inflation. “When it comes, it could burn very quickly,” he warned.

Fed’s Lacker Sees Inflation Risk as Jobless Rate Remains High - The U.S. Federal Reserve shouldn’t wait too long to tighten monetary policy, even if unemployment remains historically high, a top Fed official said Sunday. In a speech to economics teachers, Federal Reserve Bank of Richmond President Jeffrey M. Lacker said he expects progress will be slow in getting the unemployment rate down. The U.S. jobless rate has hovered for months between 9.5 and 10%. Lacker said that while full employment remains a long-term objective for the Fed, efforts to stimulate the economy shouldn’t come at the expense of acting when needed to head off inflation.

Bernanke: Fed Program Could Help Create 1 Million Jobs - The Federal Reserve's efforts to stimulate the economy could lead to the creation of as many as 1 million jobs, Fed chairman Ben Bernanke said, according to Senator Richard Shelby (R - Alabama), Bloomberg reports.  The quantitative easing program, in which the Fed will buy up to $600 billion of U.S. government debt from clients including the nation's biggest banks, has come under fire in recent weeks, as government figures and civilians have subjected the Fed to an unusual amount of criticism.  This week, Republican leaders in Congress said they wanted to strip the Fed of its goal of fostering "maximum employment," leaving it with only its responsibility to oversee "price stability." But for now, at least, promoting employment remains one of Bernanke's official goals. And according to Bloomberg's report, he's confident the monetary policy efforts will encourage job creation

Why not more easing? - MINNEAPOLIS Fed President Narayana Kocherlakota raised eyebrows in August when he said: Of course, the key question is: How much of the current unemployment rate is really due to mismatch, as opposed to conditions that the Fed can readily ameliorate? The answer seems to be a lot. I mentioned that the relationship between unemployment and job openings was stable from December 2000 through June 2008. Were that stable relationship still in place today, and given the current job opening rate of 2.2 percent, we would have an unemployment rate of closer to 6.5 percent, not 9.5 percent. Most of the existing unemployment represents mismatch that is not readily amenable to monetary policy. This statement has contributed to the belief that the Fed may not be able to maintain its programme of new easing in 2011, when several QE-sceptics, including Mr Kocherlakota, will become voting members of the Federal Open Market Committee. But perhaps this concern is overdone:

Geithner Defends Fed’s Mandate To Seek Full Employment - U.S. Treasury Secretary Timothy Geithner on Friday said the Obama administration would not support a move to strip the Federal Reserve of its mandate to seek full employment. A top House Republican, Rep. Mike Pence (R., Ind.), introduced a bill this week that would scale back the Fed’s dual mandate of full employment and stable prices. The bill would focus the Fed on fighting inflation. “The Congress did a very thoughtful job, very careful job of setting up this independent central bank with that dual mandate. That has served the country very well over time,” Geithner said in a television interview with Bloomberg News. Geithner also chastised lawmakers for politicizing the Fed’s actions. “It is very important to keep politics out of monetary policy,” he said.

Video: Ben Bernanke, bubble blower

Jeffrey Frankel on QE2, Inflation Hysteria and Actual Facts - Recalling President Reagan's statement, "Facts are stupid things", it's no surprise that the disinformation campaign arguing that the Fed has been pressured into engineering a bout of high inflation continues. Jeffrey Frankel helps bring some facts to the table. From "The pot again calls the kettle red: Republicans, Democrats, the Fed and QE2". ...If the National Journal and Wall Street Journal are right that the Republicans are trying to stake out a position that Democrats are pursuing inflationary monetary policy, they are on very shaky ground.

Inflation! - BEFORE the headlines get out of hand, a brief public service announcement—rich world inflation is not a problem. Yes, headline inflation in the euro zone ticked up from 1.8% in September to 1.9% in October. But prices were flat in most of the big economies; annual inflation held at 1.3% in Germany, 1.4% in the Netherlands, and 1.8% in France. Excluding energy, annual inflation was also flat for the euro zone as a whole, standing pat at 1.2%. In America, core producer prices fell 0.6% in October. Year-over-year, core prices were up just 1.4%, down from September's 1.5% rise. As of Monday night, markets were signalling 10-year inflation expectations in America of 2.2%. Across the rich world, there is a great deal of economic slack, which will place strong downward pressure on prices over the next few years. Prices have in some cases been trending up due to rises in food and energy costs. This is largely due to rapidly growing demand in overheating emerging markets (where inflation is a problem).

Inflation: Core CPI, Median CPI, 16% trimmed-mean CPI all below 1% YoY -  In addition to the CPI release this morning from the BLS, the Cleveland Fed released the median CPI and the trimmed-mean CPI:  According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.1% (1.1% annualized rate) in October. The 16% trimmed-mean Consumer Price Index was virtually unchanged at 0.0% (0.6% annualized rate) during the month.  ...Over the last 12 months, the median CPI rose 0.5%, the trimmed-mean CPI rose 0.8%, the CPI rose 1.2%, and the CPI less food and energy rose 0.6% So these three measures: core CPI, median CPI and trimmed-mean CPI, all increased less than 1% over the last 12 months. The indexes for rent and owners' equivalent rent both increased in October. For the core CPI, the BLS noted:  Over the last 12 months, the index for all items less food and energy has risen 0.6 percent, the smallest 12-month increase in the history of the index, which dates to 1957. This graph shows these three measure of inflation on a year-over-year basis.  They all show that inflation has been falling, and that measured inflation is up less than 1% year-over-year.

Disinflation Continues - Krugman - As Catherine Rampell points out, this is the lowest level of core inflation ever. But I have a question here: why do economic forecasters keep predicting a near-time rise in core inflation, even though they are also predicting high unemployment? The Survey of Professional Forecasters now predicts average unemployment of 8.7 percent in 2012, which would seem to be a recipe for continuing disinflation and quite possibly deflation; but the same forecasters predict a noticeable rise in core inflation over the next two years: I don’t really understand this, except as a fundamental unwillingness to face up to the Nipponization of the US economy.

Record Low for Inflation - Score one for the Federal Reserve, which some economists have accused of jumping the gun on deflation worries. According to a government report released today, core inflation — that is, the change in the cost of a basket of consumer goods, excepting the volatile categories of food and energy — was at its lowest level on record last month.  Core inflation was at zero percent for the third month in a row, and the year-over-year change, at 0.6 percent, registered its lowest measure since the government began collecting such data in 1957. Now, since core prices are still higher than they were last year, deflation of course has not materialized. But the downward trend does seem to bolster the case for worrying about negative price changes. “Core inflation junkies (including the Fed leadership) will no doubt cite the extremely low levels of core C.P.I. as a powerful piece to defend the QE2 policy,” wrote Jay Feldman, director economics at Credit Suisse, in a note to clients

Not-so-balanced risks when it comes to inflation - One more posts on the inflation outlook in the US related to our earlier post. With the release of the last CPI data from BLS, we continue to see a downward trend in inflation. In particular, we have seen the smallest annual change in core inflation since 1957. This is a good opportunity to reproduce the chart below (via Mark Thoma, original source San Francisco Fed). It compares the evolution of core inflation in the US until September 2010 with the evolution of core inflation in Japan in the months that preceded deflation. Quite similar so far. The US is today where Japan was in mid 1995.

A little Fed perspective - The Fed is concerned that inflation is too low—it's been quite clear about this since Ben Bernanke's August speech in Jackson Hole—and that falling inflation is undermining recovery. And indeed, both underlying inflation and inflation expectations were falling from late April until Mr Bernanke first announced his worries in August. So one clear way to assess the success or failure of the policy would be to watch inflation expectations. And we have observed a rise back to more normal levels since the Fed began hinting at new easing in late August. This is basic stuff. And my colleague Greg Ip explained this to Mr Salmon in an interview published at Mr Salmon's blog. But it seems not to have registered. The latest line of attack seems to be that QE2 is creating a dangerous stock market bubble. Karl Smith makes some sound points regarding why the rally since August is a rational and healthy response to new easing. But let's also put this dangerous rally in perspective. The S&P's latest high was just 1.4% above the level the index hit in late April—right before European crisis sent markets into a summer-long tailspin.

What the Fed is fighting - THE Bureau of Labour Statistics just released its October consumer price index data. Here's a chart of the year-over-year change in core prices: In the twelve months to October, core consumer prices rose 0.6%. That's the smallest increase in the history of the index, which began in 1957. That's what the Fed is trying to change, and that's what you need to keep in mind when you hear people warning about runaway inflation.

After the Fed's Action, Watching Inflation's Trajectory - THE core rate of inflation fell to a record low in the United States last month, rekindling fears of deflation and warnings that the Federal Reserve might have to take even more aggressive steps to keep inflation as high as it wants it to be.  “In the short run, disinflationary forces in Western economies, especially the U.S., appear too powerful to be overwhelmed by the recent loosening of monetary policy,”  Since the collapse of the housing market in the United States and the beginning of the global financial crisis, the Federal Reserve has made avoiding deflation a major priority, recalling the experience of Japan after its bubble burst in the early 1990s. The Fed has set an annual inflation target of 2 percent or a little lower, but is not getting it. The latest figures, released this week, showed that overall inflation in consumer prices was 1.2 percent in the 12 months through October, while the core inflation rate — excluding food and energy — rose just 0.6 percent. The previous low for that index, of 0.7 percent, came in the 12 months through February 1961, when the economy was in recession.

How Hyperinflation Will Happen In America - The Too Big To Fail banks will play a crucial part in this game. See, the problem with the American Zombies is, they weren’t nationalized. They got the best bits of nationalization—total liquidity, suspension of accounting and regulatory rules—but they still get to act under their own volition, and in their own best interest. Hence their obscene bonuses, paid out in the teeth of their practical bankruptcy. Hence their lack of lending into the weakened economy. Hence their hoarding of bailout monies, and predatory business practices. They’ve understood that, to get that sweet bail-out money (and those yummy bonuses), they have had to play the Fed’s game and buy up Treasuries, and thereby help disguise the monetization of the fiscal debt that has been going on since the Fed began purchasing the toxic assets from their balance sheets in 2008.

SF Fed on Inflation, or better, the Lack of Inflation - Great speech by John C. Williams, Executive Vice President and Director of Research, Federal Reserve Bank of San Francisco, Presentation to the Seattle Community Development Roundtable. I’d recommend reading all of it, but there’s a section on inflation and QEII (my bold): I’d like to turn now to inflation, or, I should say, the lack of inflation.  The measure of inflation we follow most closely is the core personal consumption expenditures price index.  These prices have been rising at a 0.9 percent rate so far this year.  This is the lowest nine-month inflation rate recorded in the over 50 years that this statistic has been compiled.  Our forecast is that inflation will come in about 1 percent for the year as a whole and stay at that rate next year.  That’s about 1½ percentage points below where it was at the start of the recession and well below the level of around 2 percent that most Fed policymakers have said is consistent with stable prices. Mike here, quick break. .  Inflation is much lower than it was before the recession.  It’s only at 1% and will be that rate next year as well.

About that Runaway Inflation The Fed is Creating - I am having a hard time finding it when I look to inflation expectations.  Here is the average annual expected inflation rate over the next five years implied the spread between nominal and real yields on treasury securities: Note that most of the pick up in expected inflation occurs during October when Fed official were talking up QE2. Since then inflation expectations have not exploded but drifted around where they had been, around 1.6%.  It is also worth noting in this figure that inflation expectations were steadily heading down for most of the year.  QE2 has reversed that, but has yet to push inflation expectations up to the 2.0% value the Fed would like to see it. Contrary to the rhetoric, then, QE2 is not the great inflation creating machine some claim it is. And just to be clear, it is not inflation per se that the Fed or supporters of QE2 ultimately want.  What they really want is to increase aggregate spending.  Raising inflation expectations would do that as I explain here.  If only the Fed would adopt a nominal GDP level target many of these problems would dissappear

"Record Low in US Inflation Expectations" - Via Money Supply at the Financial Times: Record low in US inflation expectations The latest Cleveland Fed estimates of inflation expectations are out: Expected inflation over every time horizon longer than six years is now at its record low in the period since 1982 that the series covers. Expected inflation over the next ten years is now down to 1.5 per cent. The Cleveland Fed index is not the last word on inflation expectations but it is certainly reason to think that those QE2 = hyperinflation fears are somewhat misplaced…

How to restore confidence in the US economy without inflating a new asset market bubble - QE is widely perceived to be the same thing as increasing the money supply. But it is not. Mr Bernanke has argued that the first round of QE was effective because it increased stock market wealth. That is an argument I have made in previous opinion pieces in the FT and two recent books. When people feel richer, they spend more. That creates jobs. But the current problem is not that the stock market is undervalued. The Dow is now back at the level it attained immediately before the 2008 crisis. The problem is that investors are fleeing from risk and are demanding safe assets. The Fed is uniquely positioned to provide a safe haven for investors by buying risky securities from the public and replacing them with interest bearing deposits at the Fed. What kind of risky assets should the Fed buy? Mr Bernanke plans to purchase treasury bonds. The Bernanke plan could prove costly when inflation reappears because the price of treasury bonds will fall when interest rates rise. And when the Fed loses money, its political independence will be compromised. That is why a better plan would be to buy stocks. This policy would provide a more effective exit strategy, since, when inflation reappears, dividends and stock prices will rise and rather than lose money, the Fed will stand to make substantial gains.

Stephen Roach: US cannot handle the liquidity provided by Fed - Stephen Roach argues that the U.S. is not equipped to turn the Fed’s liquidity into domestic demand so the liquidity provided by quantitative easing will simply leak out abroad to form asset bubbles somewhere else. He is principally concerned with Asia here and suggests capital controls are one route to deal with this problem. Of course, the same is also true for Latin American countries like Chile or Brazil as well. Ultimately, for Roach this is about Asian countries moving away from a mercantilist economic policy toward one which is more driven by domestic consumption demand. (video embedded below)

Further Evidence of An Excess Money Demand Problem - In case there were any doubts we have this from CBS MoneyWatch: The dividend push comes as companies sit on an ever-growing pile of cash, with non-financial companies in the S&P 500 holding $1 trillion in cash or like assets at the end of the second quarter, according to Banc of America Securities LLC analyst Jeffrey Rosenberg. By one estimate, that cash level could rise to $2 trillion by the end of the year.  And this from  Economix“Not only are we seeing a tremendous V-shaped recovery in corporate profits, but we are in fact seeing the biggest corporate profit recovery ever,” said Joseph A. LaVorgna, the chief United States economist at Deutsche Bank. “That means that the equity market is dirt cheap. That also means that companies have more money than they know what to do with.” Meanwhile,.... unemployment rate is still stuck at 9.6 percent.Of course the best evidence for excess money demand is the sustained decline in the velocity of money:

Philly Fed: Forecasters still catching up - From the Philly Fed: Forecasters Predict Further Slowdown in Economic Recovery The pace of recovery in output and employment in the U.S. economy looks a little slower now than it did three months ago, according to 43 forecasters surveyed by the Federal Reserve Bank of Philadelphia. The panel expects real GDP to grow at an annual rate of 2.2 percent this quarter, down from the previous estimate of 2.8 percent. [CR Note: I'll take the under for Q4] The forecasters predict real GDP will grow 2.5 percent in 2011, 2.9 percent in 2012, and 3.0 percent in 2013. The forecasters also predict weaker recovery in the labor market. Unemployment is projected to be an annual average of 9.7 percent in 2010, before falling to 9.3 percent in 2011, 8.7 percent in 2012, and 7.9 percent in 2013. These estimates are higher than the projections in the last survey.

Stiff headwinds - THE Philadelphia Fed has released the results of its fourth quarter survey of 43 economic forecasters. It's ugly: The pace of recovery in output and employment in the U.S. economy looks a little slower now than it did three months ago...The panel expects real GDP to grow at an annual rate of 2.2 percent this quarter, down from the previous estimate of 2.8 percent. On an annual-average over annual-average basis, the forecasters predict slower real GDP growth in 2010, 2011, and 2012. However, some of that downward revision will be compensated with a stronger real GDP growth in 2013. The forecasters see real GDP growing 2.7 percent in 2010, down from their prediction of 2.9 percent in the last survey. The forecasters predict real GDP will grow 2.5 percent in 2011, 2.9 percent in 2012, and 3.0 percent in 2013. The forecasters also predict weaker recovery in the labor market. Unemployment is projected to be an annual average of 9.7 percent in 2010, before falling to 9.3 percent in 2011, 8.7 percent in 2012, and 7.9 percent in 2013. These estimates are higher than the projections in the last survey. Click through for more details.

Fed Manufacturing Surveys and ISM Manufacturing Index - Earlier this week, the NY Fed and the Philly Fed manufacturing surveys were released. The readings couldn't have been more different, with the NY Fed survey showing "conditions deteriorated", and the Philly Fed showing activity improved sharply: The Empire State Manufacturing Survey indicates that conditions deteriorated in November for New York State manufacturers. For the first time since mid-2009, the general business conditions index fell below zero, declining 27 points to -11.1. The new orders index plummeted 37 points to -24.4, and the shipments index also fell below zero. And the Philly Fed:  The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, increased from a reading of 1.0 in October to 22.5 in November. This is the highest reading in the index since last December. Indexes for new orders and shipments also improved this month, and each index increased 15 points. Usually these two surveys are fairly consistent, and this is reminder not to make too much of any one data point

U.S. Economy in 'Slow Recovery,' BofA CEO Moynihan Says - The U.S. economy is in a slow rebound as consumer spending and commercial lending improve, Bank of America Corp. Chief Executive Officer Brian T. Moynihan said today.  “Everything we see points to a continued recovery, albeit a slow recovery,” Moynihan said during a conference held by the lender in New York. “We continue to see delinquencies improve in all our products across the board.” Commercial lending is starting to turn around and consumers are spending more on leisure, he said.

U.S. May Be Headed for Downward Spiral, Says Pulitzer Prize-Winning Journalist - Recovery has been sluggish, but some would argue that things are starting to look up as we head into this holiday season. Pulitzer Prize-winning journalist David Cay Johnston, however, says we may not be out of the woods just yet. Johnson thinks there is room for our economic situation to get much worse before it gets better.  He reasons that this country is plagued by too many overvalued assets, chronic unemployment and lots of under-employment -- those who have given up looking for work or are working part-time but desire full-time employment. So if "worse" should come to pass, what might that look like?  Johnston says we can expect to see more people showing up at food banks, applying for food stamps, and being kicked out of their homes. In order to course correct, Johnston says we need to focus on the future by encouraging entrepreneurs to innovate and to get “productive economic activity [back] here in the United States.”

Economic View - When the Economy Needs a Brave and Smiley Face… The Federal Reserve, pondering what to do to stimulate the economy, has a number of tools at its disposal. But if it could just convince Americans that it was committed to monetary expansion and economic growth, it would help the economy pick up speed.  Yet that is easier said than done. Here’s the problem: The economy needs help, but monetary policy, which is the Fed’s responsibility, has not been very expansionary. This is true even though the Fed has increased the monetary base enormously since the onset of the financial crisis.  How can this be? Supplying more money did not actually result in enough additional spending. The debilitating financial shock of the last few years convinced many consumers and businesses that they needed to save more. So they are holding on to much of the new money.  Given this problem, there is a logical and seemingly simple move available to the Fed: just make people believe that it is seriously committed to increasing the rate of inflation. Traditionally, the Fed has focused on restraining inflation, not stoking it. But these are unusual times.  If the Fed promises to keep increasing the money supply until prices rise by, say, 3 percent a year, people should eventually start spending. Otherwise, if they just held the money, it would be worth 3 percent less each year.

ADB official: appropriate to look at currency basket (Reuters) - The world should examine whether using a basket of currencies is more appropriate than the current system with the U.S. dollar as the single reserve currency, a top Asian Development Bank official said on Monday. "The economic centre of gravity is shifting and it is shifting to Asia. So we have to think whether in that context, a single currency serving as a reserve currency is appropriate," said Rajat Nag, managing director general of the ADB. Nag did not say which currencies might be in a proposed basket but World Bank President Robert Zoellick has suggested a cooperative monetary system including the dollar, the euro, the yen, the pound sterling and the yuan.

China Assails Monetary Easing, Citing Inflation, Bubble Risks -China renewed an attack on quantitative easing, citing the risk of increased prices in emerging economies, a day after the Group of 20 nations said the markets can adopt regulatory steps to cope. China “doesn’t support” the monetary easing that causes “imported” inflation in developing countries, Commerce Minister Chen Deming told a forum today in Macau, a Chinese special autonomous region. The capital inflows increase the risk of “asset bubbles,” Jin Zhongxia, deputy director general of the international department at the People’s Bank of China, said at the same forum. “Major reserve-currency issuing countries excessively print money to get out of their own economic difficulties, posing a policy dilemma for emerging economies,” Jin said in Macau today, without naming any countries. “That will impose greater pressure on capital inflows, bigger bubbles in asset markets and inflationary pressure.” Capital flows into emerging markets are running at $575 billion a year, 20 percent higher than before the world financial crisis, Goldman Sachs Group Inc. said in September. The U.S. dollar has weakened over the past three months against all 16 major market currencies tracked by Bloomberg.

Bernanke Happy-Slaps China on Global Imbalances - There's a new Bernanke speech that he will deliver tomorrow at a central banker's shindig in Frankfurt that's sure to garner a lot of comment as it focuses on very topical global economic imbalances. Bernanke is certainly no stranger to coining memorable phrases such as the "global saving glut," and he may have a brand new bag here with his idea of a "two-speed recovery." My summary?

    • The US is pursuing appropriately accommodative monetary policies given its situation;
    • Emerging economies complain about capital inflows negatively affecting their economies, but it's a natural manifestation of their positive return differentials and higher growth rates;
    • Certain developing countries (that's you, China) exacerbate these inflows by intervening to keep their currency weak, making speculative monies enter in the expectation of future revaluation;
    • Remedying global economic imbalances will be facilitated by crisis-hit developed economies running accommodative policies and fast-growing developing ones relenting on massaging exchange rates;

China official suggests wider use of yuan: report — China should reduce its dependence on international reserve currencies, which have contributed to an "unstable" world monetary system, a central bank official was quoted Monday as saying. Jin Zhongxia, deputy director-general of the People's Bank of China's international department, told a weekend forum that wider use of the yuan currency to settle accounts would help cut risks, the state-run China Daily reported. "The existing international monetary system, centered on a small number of reserve currencies, is quite unstable," Jin was quoted as saying. Jin expressed concerns about the dollar, whose value has been falling for three months, and US Federal Reserve moves to buy 600 billion dollars of government bonds to boost domestic growth, which could further drive down the dollar. Over-printing of reserve currencies "places emerging economies in a dilemma,"

Thailand calls on Asia to use yuan in trade - Prime Minister Abhisit Vejjajiva, fearful of the effects of the soaring baht due to massive capital inflows, has proposed the use of the Chinese yuan as a major regional trading currency. "The G20 did not make any progress on the matter and it is difficult to get the United States and China to express their clear stances on the issue. But what we can do is try to cooperate in the region and reduce the impact from currency volatility," Mr Abhisit said. Only vague "indicative guidelines" were set for measuring imbalances between their multi-speed economies. Leaders called a timeout to let tempers cool and left details to be discussed in the first half of next year. Mr Abhisit echoed a call made by the Asian Development Bank (ADB) to use China's yuan as a major trading currency in the region to reduce the impact of currency volatility, especially linked to the weakening of the US dollar. He said he was the one who proposed the idea to the ADB.

Scrap dollar as sole reserve currency: U.N. report (Reuters) - A new United Nations report released on Tuesday calls for abandoning the U.S. dollar as the main global reserve currency, saying it has been unable to safeguard value. But several European officials attending a high-level meeting of the U.N. Economic and Social Council countered by saying that the market, not politicians, would determine what currencies countries would keep on hand for reserves. "The dollar has proved not to be a stable store of value, which is a requisite for a stable reserve currency," the U.N. World Economic and Social Survey 2010 said. The report says that developing countries have been hit by the U.S. dollar's loss of value in recent years. "Motivated in part by needs for self-insurance against volatility in commodity markets and capital flows, many developing countries accumulated vast amounts of such (U.S. dollar) reserves during the 2000s," it said. The report supports replacing the dollar with the International Monetary Fund's special drawing rights (SDRs), an international reserve asset that is used as a unit of payment on IMF loans and is made up of a basket of currencies.

Dollar to Become World's 'Weakest Currency,' JPMorgan Predicts  -- The dollar may fall below 75 yen next year as it becomes the world’s “weakest currency” due to the Federal Reserve’s monetary-easing program, according to JPMorgan & Chase Co. The U.S. central bank, along with those in Japan and Europe, will keep interest rates at record lows in 2011 as they seek to boost economic growth, said Tohru Sasaki, head of Japanese rates and foreign-exchange research at the second-largest U.S. bank by assets. U.S. policy makers may take additional easing steps following the $600 billion bond-purchase program announced this month depending on inflation and the labor market, he said. “The U.S. has the world’s largest current-account deficit but keeps interest rates at virtually zero,” Sasaki said at a forum in Tokyo yesterday. “The dollar can’t avoid the status as the weakest currency.”

Geithner Acknowledges Damage To U.S. Credibility Internationally - Treasury Secretary Timothy Geithner says both the U.S. and the Obama administration are in damage control mode. Speaking to a gathering of corporate executives in Washington, Geithner said the economic crisis during the last two years “caused a huge amount of damage for [the U.S.'] crebility” internationally, and that “it’s going to take us a while to dig out” of it. “The most important thing the U.S. can do for the world is to make sure we’re growing out of this this mess–we’re repairing the damage caused by this crisis–as quickly as we can.”

Just how does policy work? - Atlanta Fed's macroblog - In the immediate aftermath of the Federal Open Market Committee's November 3 decision to expand its net asset positions with an additional $600 billion in Treasury purchases, a theme emerged among the commentariat: the policy's aim, as the story goes, is to engage in competitive devaluation of the dollar, juicing the economy by prompting greater spending by foreigners via a cheapened greenback. Earlier this week, Atlanta Fed President Dennis Lockhart provided his perspective:"… I don't think it is out of line to state clearly that, as I see it, there is no monetary policy intent to engineer specific values—or even a direction—for the dollar. In other words, this policy was not undertaken to prompt dollar depreciation."Of course, the value of the dollar against a broad basket of currencies did fall in the aftermath of Chairman Bernanke's comments at the Kansas City Fed's August Economic Policy Symposium and continued to fall through the latest meeting. While it is not appropriate for me to comment on what the value of the dollar should be, I believe it is appropriate to provide some perspective on how we think about dollar depreciation.

Central Bankers Give In, And Discuss The Dollar - A sampling of recent Fed talk finds them on the defensive about this issue, pushing back against notions that their policies are aimed at weakening the U.S. currency. “We’re not trying to push the dollar to any particular level,” Federal Reserve Bank of New York President William Dudley told CNBC Tuesday. “We don’t have a view about where … the dollar should go,” he said, in an interview that said overseas leaders should be grateful for the U.S. pursuing a policy that will return the nation to health. Newly installed Fed vice chair, Janet Yellen, told the Wall Street Journal this week the Fed isn’t trying “to push down the dollar” or to start a currency war, as some overseas officials have suggested. Meanwhile, Boston Fed President Eric Rosengren said Wednesday that while the Fed isn’t trying to depress the dollar per se, textbook economics would suggest that “a modest currency depreciation is the normal consequence of easing monetary policy.” Minneapolis Fed President Narayana Kocherlakota said Thursday he doesn’t see “big effects” on the dollar from current Fed policy, in a speech where he offered support for the bond-buying program.

What's Really Behind Bernanke's Easing? -Mr. Bernanke claimed earlier this month in a Washington Post op-ed that "higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending." But, as Mr. Bernanke must know, the Japanese have been trying to influence their stock market for 20 years, with little effect on their economy. It is also unlikely, as some claim, that the Fed chairman is whipping up a stealth stimulus or orchestrating a currency devaluation. He knows these have been tried and are more likely to destroy jobs than create them. I have a different explanation for the Fed's latest easing program: Without another $600 billion floating through the economy, Mr. Bernanke must believe that real estate (residential and commercial) would quickly drop, endangering banks.The 2009 quantitative easing lowered mortgage rates and helped home prices rise for a while. But last month housing starts plunged almost 12%. And in September, according to Core-Logic, home prices dropped 2.8% from 2009. Commercial real estate values are driven by job-creation and vacancy rates, both of which are heading the wrong way.

Bernanke To Banks: Unwind Your Carry-Trades NOW - Markets are presently agonizing over QE2, wondering what Chairman Bernanke is thinking.  After all, what can $600 billion in purchases of long term treasuries over the next 3 quarters possibly do to stimulate the economy?  The reason for the confusion is that the market is pondering the wrong question.  QE2 is a convenient disguise for what is really going on.  The Fed is owned by the banks and is run first and foremost, in their interest.  When the financial crisis left banks insolvent, the Treasury stepped in with the TARP program to take care of the immediate capital shortfall.  It was the Fed, however, which provided the longer term solution, a rebuilding of the banks’ capital base through internal growth and to provide the earnings needed to offset additional unrecognized mortgage foreclosure losses. The Fed’s solution was to drop its short term lending rate to near zero, thereby allowing banks to borrow at this rate and invest the proceeds in long term treasuries paying 3% to 4%.  Leverage that 5 or 10 times and you get a 20% to 30% rate of return with zero credit risk (this is what is referred to as the carry trade.)

Currency Wars are a Sideshow! It’s the Bankers WHO are Waging War Against the People of the Planet... The central banks first fool you into believing they are a branch of the government, when in fact they are privately owned and have subverted the power of money creation from Congress. They have saturated the entire population of the United States with debt. They have saturated businesses with debt and allowed those with the greatest leverage to consolidate into unruly and totally controlling behemoths. They have saturated all levels of government including towns, cities, counties, states, and the real Federal Government. Once saturated with debt and left with an economy that’s failing, they seek more in the way of bailouts and money devaluation from the same populace who is already saturated many times over – the same people are responsible for all those debts!They have also saturated many of the world’s mature economies in the same exact manner – same few sick narcissists. Only they do so under a different name – that of the IMF, BIS, or “World Bank.” These institutions are in fact NOT legal entities, they have not been authorized by Congress or by the People of the United States (or any other country), yet we allow our tax dollars to be given to these bankers who lever up the entire globe, conduct their business in secret, perform secret currency and gold swaps, produce money from nothing but require repayment in gold.

How to Make the Dollar Sound Again - BY disclosing a plan to conjure $600 billion to support the sagging economy, the Federal Reserve affirmed the interesting fact that dollars can be conjured. In the digital age, you don’t even need a printing press. This was on Nov. 3. A general uproar ensued, with the dollar exchange rate weakening and the price of gold surging. And when, last Monday, the president of the World Bank suggested, almost diffidently, that there might be a place for gold in today’s international monetary arrangements, you could hear a pin drop.  Let the economists gasp: The classical gold standard, the one that was in place from 1880 to 1914, is what the world needs now. In its utility, economy and elegance, there has never been a monetary system like it.

On Printing Money and Debasing The Currency - “The issue of the renminbi is one that is an irritant not just to the United States, but is an irritant to a lot of China’s trading partners and those who are competing with China to sell goods around the world. It is undervalued. And China spends enormous amounts of money intervening in the market to keep it undervalued.” -Barack Obama at the closing of the recent G-20 meeting in Seoul If I asked any Federal Reserve or Treasury official, "would you prefer the US dollar to be higher or lower against China’s currency?" what do you think the answer would be. How about this question: "If you could snap your fingers and depreciate or appreciate the US dollar against a basket of currencies, which would you prefer to do?" Here’ s another one: Would you mind it if the EURUSD rate settled back toward purchasing power parity, which would have the dollar rising some 20% against the euro?  Do I have to get the Nicholson clip out again? Tim Geithner is fooling no one when he says the US is not trying to weaken the dollar. Of course it is.

Options Showing Quantitative Easing Working Before It Begins - Federal Reserve Chairman Ben S. Bernanke’s $600 billion plan to spark inflation in the U.S. economy is already showing signs of succeeding, if the market for bond options is any indication. As the central bank starts a second round of purchases of Treasuries through its so-called quantitative-easing policy, investors are paying eight times more than in April for options on interest-rate swaps that protect against rising yields relative to those that bet on them falling, according to Barclays Plc data. Bonds that compensate for higher consumer prices also show heightened inflation expectations

Is QE2 already working? - Bloomberg’s Liz McCormick has an interesting take on QE: “Options Showing Quantitative Easing Working Before It Begins” is the headline on her piece, which concentrates on an obscure indicator known as “payer skew.” Payer skew is an indicator which goes up when bond yields are rising, and goes down when they’re falling. When payer skew is high, as it is now, it’s an indication that markets see more risk that bond yields are going to continue to rise than they see risk that yields will fall. But it’s a stretch, I think, to conclude that the rise in payer skew means that QE is working. And it certainly can’t be working before it even begins. After all, QE2 has already begun, with the purchase on Friday of more than $6 billion in bonds maturing between 2014 and 2016. It seems to me that what we’re seeing in the payer skew numbers is the downside of QE, rather than its intended consequence. The stated aim of QE, after all, is to bring down long-term interest rates, and that isn’t happening at all: Yields on 10-year Treasuries, a benchmark for everything from corporate bonds to mortgage rates rose last week by the most since December, surging 26 basis points, or 0.26 percentage point, to 2.79 percent.

Bernanke's 'Cheap Money' Spurs Corporate Investment Outside U.S. (Bloomberg) -- Southern Copper Corp., a Phoenix- based mining company that boasts some of the industry's largest copper reserves, plans to invest $800 million this year in projects such as a new smelter and a more efficient natural-gas furnace. Such spending sounds like just what the Federal Reserve had in mind in 2008 when it cut interest rates to near zero and started buying $1.7 trillion in securities to spur job growth. Yet Southern Copper, which raised $1.5 billion in an April debt offering, will use that money at its mines in Mexico and Peru, not the U.S., said Juan Rebolledo, spokesman for parent Grupo Mexico SAB de CV of Mexico City. Southern Copper's plans illustrate why the Fed's second round of bond buying may not reduce unemployment, which has stalled near a 26-year high. Chairman Ben S. Bernanke and his colleagues appear to be fueling a foreign-investment surge, underscoring the difficulty of stimulating the economy through monetary policy with interest rates already near record lows. U.S. corporations have issued more than $1.07 trillion in debt so far this year, according to data compiled by Bloomberg. Foreign companies also are tapping U.S. markets for cheap cash, selling $605.9 billion in debt through Nov. 15 compared with $371.8 billion for all of 2007, before the Fed cut the overnight bank-lending rate to a range of zero to 0.25 percent.

Bernanke Clips the People's Coin - From Bakersfield to Burma - In his Washington Post commentary, Bernanke never mentioned the dollar, the currency that is being aggressively depreciated by the Federal Reserve. In the Post, Bernanke resorted to "price stability," a deceptive phrase invented to justify inflating prices, in the present instance, by 2% a year. No Federal Reserve chairman before Bernanke claimed he needed to inflate prices to prevent them from deflating. Congress has not addressed this new coin-clipping mandate of the Fed, nor will it. Bernanke could declare tomorrow that a 5% annual currency debasement is necessary for price stability. This, too, would be met by silence. What is the point of paying the House of Representatives since it does not represent? Depreciation of the dollar at home is handcuffed to depreciation of the dollar against other currencies. (This is a "competitive devaluation" in which most countries are participating, but the U.S. is the most assertive aggressor.) Even before the Fed’s announcement of QE2 on November 3, denouncements from overseas warned Bernanke he was about to rouse a new round of anti-Americanism.

The US Federal Reserve is on the brink of insolvency (not!) Yesterday, parachute gangs from the ECB and the IMF were being dropped into various EMU nations whose only problem is that they are members of an unworkable monetary system and happened to get hit by a major demand shock. Today the IMF cavalry are apparently heading to Dublin for a “short, focused consultation”. Conclusion: Ireland is being invaded by hostile forces. I also read rumours overnight that Germans are refusing Euro notes not printed in the Bundesland. It is probably an outright lie of a similar quality to the many being spread by the deficit terrorists seeking to regain their “credibility” (an impossible mission) any way they can. In this context I get many E-mails from people each week telling me that I do not understand that the latest decision by the US Federal Reserve Bank “to flood the world with printed money” is putting it on the brink of insolvency! I also read that in a Bloomberg Business Week feature article today. And people believe this stuff. It is as much a lie as the fallacious stories recently about the US President’s Asian travel costs which the right-wing in the US perpetuated without scrutiny (see this analysis to see how this lie began). Anyway, rest easy … the US Federal Reserve cannot go broke

Fed buys $7.9 bln in bonds; Treasurys stay down -- The Federal Reserve Bank of New York bought $7.923 billion in Treasury bonds on Monday, its second operation as the central bank engages in a second round of quantitative easing to support lending and spending. The amount includes purchases to be made under a previous program to reinvest cash from its maturing mortgage-related holdings back into Treasurys. Dealers offered to sell the Fed $28.005 billion. The Fed had said it would buy $7 billion to $9 billion in debt maturing from 2016 to 2017. After the announcement, the broader bond market pared its decline. Yields on 10-year notes, which move inversely to prices, rose 4 basis points to 2.83%.

QE2 Is Equivalent to Issuing Treasury Bills - Randall Wray shows that quantitative easing will be ineffective except to the degree it can induce a shift in private portfolio preferences. He uses a recent post by hedge fund manager Warren Mosler to demonstrate that QE is the equivalent of issuing Treasury bills instead of bonds. Earlier posts making similar arguments are On Liquidity Traps and Quantitative Easing and Amateur Hour at the Federal Reserve. Ultimately, one can influence the price or the quantity of something, but not both. And the Fed has decided to influence quantity when its stated aim is to influence price. Also see MMT: Market discipline for fiscal imprudence and the term structure of interest rates for a longer discussion of the expectations theory of interest rates that Professor Wray mentions below

China shouldn't add to US treasury holdings: CIC exec – China cannot avoid buying assets priced in US dollars but should not increase its holdings of US treasuries, the Hong Kong chairman of China's sovereign wealth fund said in remarks published on Thursday.  Lawrence Lau, a former Stanford University professor who was recently appointed to run China Investment Corp's first Hong Kong office, said that since Hong Kong, Japan and South Korea all had sizable holdings of US treasuries, the repercussions of a large sell-off would be inconceivable. His comments were reported in the China Securities Journal. Many economists have dismissed suggestions that Beijing may sell some of its vast stock of US treasuries and cut its exposure to dollars. Mr Lau, speaking at an economic forum in Hong Kong, said he believed that within five years the yuan, also known as the renminbi, would be a fully convertible currency and that trade amongst China's Asian peers would be gradually carried out in renminbi.

Bernanke Faults China for ‘Persistent Imbalances’ - Ben S. Bernanke plans to argue Friday that currency undervaluation by China and other emerging markets is at the root of “persistent imbalances” in trade that “represent a growing financial and economic risk.” For the last two weeks, the Fed has been criticized for its Nov. 3 decision to inject $600 billion into the banking system through next June, resuming an effort to lower long-term interest rates. Mr. Bernanke’s speech argues that unemployment in the United States is at “unacceptable” levels, and gingerly wades into the fiscal policy debate roiling Washington.“In general terms, a fiscal program that combines near-term measures to enhance growth and strong, confidence-inducing steps to reduce longer-term structural deficits would be an important complement to the policies of the Federal Reserve,” Mr. Bernanke will say. Mr. Bernanke’s remarks amount to an endorsement of crucial elements of President Obama’s economic approach. But that endorsement could further stoke criticism by Congressional Republicans, who say the Fed is defying voters’ skepticism about large-scale government intervention in the economy and setting the stage for inflation later, and by foreign officials, who fear the Fed is trying to weaken the dollar to make American exports more competitive.

Bernanke Translated - In remarks prepared for delivery in Frankfurt Friday morning, and released by the Federal Reserve Thursday night in Washington, Fed Chairman Ben Bernanke mounted his most detailed defense against charges that the Fed is deliberately cheapening the dollar by printing $600 billion to buy U.S. Treasurys and tried to point the finger at China’s reluctance to let its currency rise faster. Mr. Bernanke spoke in the language of a Princeton University economist, which he used to be, and avoided quotable phrases like Alan Greenspan’s 1996 warning of “irrational exuberance” or Brazilian finance minister Guido Mantega’s more recent talk of a “currency war.”

Bernanke Seeks New "International Monetary System", Accuses China of Currency Intervention, Warns of Rising Unemployment and "End of Tepid US Recovery - In speeches before a European Central Bank conference in Frankfurt, Ben Bernanke went on an unprecedented attack, accusing China of throwing a monkey wrench into the global recovery, blaming China for slow global growth and a potential "End to the Tepid U.S. Recovery". He also said "The current international monetary has a structural flaw" calling on the "global community, over time, to devise an international monetary system that more consistently aligns the interests of individual countries with the interests of the global economy as a whole." Finally, he put up a misguided defense of Quantitative Easing that is sure to not go over well in the global community. If Bernanke was trying to spook the markets, provoke China, cause a currency war, and get Congress to launch an extremely foolish set of tariffs, he would have been hard pressed to deliver a more powerful speech.

America Is Not A Serious Enterprise - The United States is broke, insolvent, bankrupt. We can not pay our current debts—all our creditors know this—but must borrow more and more to keep the scam going. The "benign" Ponzi Scheme of funding current needs out of future ecomic growth is now over. Those who have purchased our bonds now require some signs that the United States is a serious enterprise. Those policies should include but not be limited to the following—

    • The Fed must raise interest rates
    • The Fed must rollback QE2
    • The federal government must pass and stick to a serious deficit reduction plan

Debt, deleveraging, and the liquidity trap: A new model - VoxEU - Krugman - Debt is the crux of advanced economies’ current policy debates. Some argue for fiscal expansion to avoid recession and deflation. Others claim that you can’t solve a debt-created problem with more debt. This column explains the core logic of a new model by Eggertsson and Krugman in which debt shocks and policy reactions can be examined. Relying on heterogeneous agents, the model naturally produces the paradox of thrift but also finds new supply-side paradoxes, those of toil and flexibility. The model suggests that most economists have been misthinking the issues and that actual policy in the US and EU is misguided.

Debt: Bringing (Some) Economists Together While Tearing the Nation Apart - Minsky, Koo and Krugman aren’t names that often appear together. The former is late economist Hyman Minsky, whose now-famous “financial instability hypothesis” garnered little attention before his death in 1996. Next is Richard Koo, chief economist at Nomura Research Institute, well-known for diagnosing Japan’s economy as being in a “balance sheet recession.” Finally there is famous (or, perhaps, infamous) Nobel prize-winning American economist Paul Krugman. The subject of debt has now brought the trio together, along with New York Federal Reserve economist Gauti Eggertsson and the celebrated late economist Irving Fisher. The results are in a new paper, “Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo approach,” written by Mr. Krugman and Mr. Eggertsson. The authors find that incorporating an overhang of debt into today’s popular econometric models — something that had previously gone missing — helps explain the Great Depression, Japan’s “lost decade” (now, the authors note, in its 18th year), and the current malaise in the U.S.

Some thoughts on the Gauti Eggertsson & Paul Krugman paper - Nick Rowe - It's an interesting paper (pdf). It's a very standard New Keynesian macro model with one twist. It's a twist worth doing. There are two types of people: the impatient, who borrow from; the patient. And there's an exogenous limit to the debt the impatient are allowed to accumulate.It's a math model, of course. I'm not going to stick literally to the assumptions of the model, because many of those assumptions were made to make the math simple, and aren't really central. Here's my reading.

Krugman and Eggertsson - The paper straight forward and compelling. It essentially models the discussion we’ve been having on the blogs and outlines why monetary and fiscal policy are compelling at the zero lower bound. The core difference from the basic model is of course that some people are forced in the short run to pay down debts. The paper doesn’t say a lot about how or why and at this stage that’s useful since there is more disagreement about how this comes about than that something like that exists.  My forecast at the outset of the crisis was that impatient households were going to be cut-off and that this would produce the liquidity constraints. I would ask for a show hands from the audience as to how many people were saving. Then I would ask,  “well how then can the savings rate be zero? Someone must be constantly dis-saving. That person just got their credit card cut up.” However, from watching the crisis unfold I would say there seems to be a significant amount of repaying going on as well. In any case the point is that some segment of the populace that is liquidity constrained and that’s the driver.

Explaining Why Our World Turned Upside Down - Krugman believes part of his problem is that there’s not been a full explanation of the ‘debt can solve debt’ point of view.  What he lacked was an academic underpinning–a more rigorous explanation.  In an academic paper released yesterday, Krugman and NY Fed economist Guati Eggertsson, have provided a more rigorous explanation.   An informal summary is available at the Vox EU economic website. Basically, the paper argues that who owes the debt matters.  If a large proportion of the private sector suddenly decides it must deleverage, then that surge in savings must be countered by someone spending more in proportion.  Otherwise the nation plunges into an economic tailspin.   That ‘someone’ is the government.  And that spending creates government debt;  Debt which will disappear when the private sector has sufficiently repaired its balance sheet and the economy recovers.  Ergo: Debt creation in the form of more government spending is the tonic that ‘cures’ private sector deleveraging.

US Could Face Loss Of Confidence If Debt Left Untackled-Panel Chairmen - The co-chairmen of a deficit commission established by the White House warned Wednesday the U.S. could soon face a sovereign debt crisis as drastic as those facing Greece and Ireland unless firm action is taken to tackle the country's fiscal imbalances. Speaking to reporters after another day of meeting with most of the 18 members of the bipartisan commission, Democrat Erskine Bowles and Republican Alan Simpson painted a dire scenario if the country doesn't start to rein in federal spending. "I promise you if we don't do something soon, the markets are going to punish us, and punish this country severely," said Bowles, a former Clinton White House chief of staff. "We could be a second-rate power before you know it." Simpson, a former senator from Wyoming, agreed, saying when the financial markets lose confidence in the U.S., it would happen quickly and be dire.

$14 Trillion in Debt - Why You Should Care (CSB) The government will collect $2.3 trillion in taxes this year. That's well short of the $3.6 trillion it will spend. Fifty-five percent of that spending will go to mandatory expenses like social security, Medicare and Medicaid; 43 percent is called discretionary spending. That's money Congress controls and allocates to more than two dozen government departments. Two percent of the budget goes to Congressional pet-projects or earmarks. "Everybody wants to cut the budget," Schieffer says. "They just don't want to cut the budget that affects their constituents." Over the last 40 years, the U.S. has stayed out of the red just four times. This year's budget deficit will be the biggest ever: $1.5 trillion. Digging ourselves out requires tough choices.

The NYT’s Apocalypse: $1 Trillion a Year in Interest on the National Debt - "Elections come and go, but the United States is still careening toward bankruptcy. By 2020, the U.S. will be spending $1 trillion a year just to pay the interest on the national debt. Sometime between now and then the catastrophe will come. It will come with amazing swiftness. The bond markets are with you until the second they are against you. When the psychology shifts and the fiscal crisis happens, the shock will be grievous: national humiliation, diminished power in the world, drastic cuts and spreading pain."  I still like the biblical version with the four horseman and the rivers flowing upstream, but hey, it's the oped page of the NYT.. Anyhow, let's take a closer look at Mr. Brook's apocalypse. Well, first it is probably worth noting that Brooks is somewhat more pessimistic on this score than the Congressional Budget Office (CBO), which puts interest in 2020 at $916 billion. How scary is that? Let's get out the GDP projections. CBO tells us that GDP will be $22.5 trillion in 2020. This means that Mr. Brooks' scary interest burden will be equal to about 4.1 percent of GDP. The interest burden peaked at 3.3 percent of GDP in 1991, so we would not be in hugely different territory than we were during the Bush I presidency.

GAO: Unchecked Debt Could Prove ‘Disruptive and Destabilizing’ - In its fall update of its 2010 “long-term fiscal outlook” released on Monday, the GAO says “with the passage of time the window to address the long-term challenge narrows and the magnitude of the required change grows.” It says, among other things, that the long-term fiscal pressures on the government “are driven on the spending side largely by rising health care costs and an aging population.” The GAO does two long-term debt projections. One is called the “baseline extended,” and the second – a more dire projection – is called “alternative.” The GAO says the recently passed health care overhaul actually improves the forecast in its “baseline extended” projection because it “assumes full implementation and effectiveness of cost control provisions.” But it points out that several groups expect a breakdown in these controls after 2020. Even in this scenario “debt increases continuously in future years, surpassing the historical high in the mid-2030s.

The Problem - Krugman -The situation: over the past decade, households ran up what is almost universally regarded as an excessive amount of debt — shown here for the United States, but also in the UK, Spain, and elsewhere. They are now being forced to pay down that debt by cutting spending. The question is, what will replace their spending? We’re told that we can’t have fiscal expansion, because that’s Big Government. And now we’re being told that we can’t have monetary expansion, which might induce businesses and low-debt consumers to spend more, because that’s debasing the dollar. Oh, and while we’re on that, we can’t allow the dollar to fall, which might help exports. So, what? Yes, corporations are sitting on lots of cash — but why should they expand capacity when weak consumer demand means they aren’t using the capacity they have?  I really don’t understand the logic of the liquidationists here. But then, I don’t think logic has much to do with it.

Ride, Bernanke, Ride - Krugman - In a speech Friday, Ben Bernanke asked for some help in the form of expansionary fiscal policy: Monetary policy is working in support of both economic recovery and price stability, but there are limits to what can be achieved by the central bank alone. The Federal Reserve is nonpartisan and does not make recommendations regarding specific tax and spending programs. However, in general terms, a fiscal program that combines near-term measures to enhance growth with strong, confidence-inducing steps to reduce longer-term structural deficits would be an important complement to the policies of the Federal Reserve. OK, but what he really should have asked for was near-term measures to enhance growth and a pony. Seriously: there’s nothing wrong with what Bernanke said, but the time when saying it might have done some good was maybe a year ago. Now there’s no chance whatsoever of getting more stimulus through Congress.

America's deficit: Confronting the monster | The Economist… BARACK OBAMA and his Republican opponents have spent much of the past month sniping at each other, but on November 15th they suddenly found themselves agreeing. Mitch McConnell, the leader of the Senate Republicans, called for a ban on earmarks, the pet projects politicians like to pop into spending bills. Mr Obama, who also wants a curb on them, quickly applauded.A cynic would say that such agreement was easy, since the stakes are so low. Earmarks attract plenty of bad press, but the money is trivial—less than 0.5% of federal spending. On the more pressing question of how to close America’s gaping deficits, Democrats and Republicans remain far apart. Only a week before, the chairmen of a bipartisan commission set up by Mr Obama in February to find ways to get the deficit down floated a proposal focused on cutting spending. Republicans liked this, but Nancy Pelosi, the Democrats’ leader in the House of Representatives, called the idea “simply unacceptable”.  This sound and fury, however, may signify something important. The two sides are no longer arguing over whose taxes to cut or which entitlements to expand, but whose taxes will rise and which entitlements will shrink.

Speak softly and carry a big chainsaw - The scale of America’s fiscal problem depends on how far ahead you look. Today’s deficit, running at 9% of GDP, is huge. Federal debt held by the public has shot up to 62% of GDP, the highest it has been in over 50 years. But that is largely thanks to the economy’s woes. If growth recovers, the hole left by years of serial tax-cutting and overspending can be plugged: you need to find spending cuts or tax increases equal only to 2% of GDP to stabilise federal debt by 2015. But look farther ahead and a much bigger gap appears, as an ageing population needs ever more pensions and health care. Such “entitlements” will double the federal debt by 2027; and the number keeps on rising after then. The figures for state and local debt are scary too. The solution should start with an agreement between Mr Obama and Congress on a target for a manageable level of publicly held federal debt: say, 60% of GDP by 2020. They should also agree on the broad balance between lower spending and higher taxes to achieve this. This newspaper believes that the lion’s share of the adjustment should come on the spending side. Entitlements are at the root of the problem and need to be trimmed, and research has shown that although spending cuts weigh on growth in the short run, they hurt less than higher taxes.

The Economist Magazine on Doing the Seemingly Impossible - This week’s (Nov. 20th) Economist magazine is devoted to the issue of deficit reduction in the U.S. federal budget–or as they put it in the title of their “leader” story, how to “speak softly and carry a big chainsaw.” The editors make the point that deficit reduction isn’t hard in mathematical theory, but it seems near impossible in political practice–at this moment, at least.  But they end their assessment on a somewhat optimistic note, not very different from my feelings on the prospects for changing course: Devising a plan that reduces the deficit, and eventually the debt, to a manageable size is relatively easy. Getting politicians to agree to it is a different thing. The bitter divide between the parties means that politicians pay a high price for consorting with the enemy. So Democrats cling to entitlements, and Republicans live in fear of losing their next party nomination to a tea-party activist if they bend on taxes. Even the president’s own bipartisan commission can’t agree on what to do.

Budget Puzzle: You Fix the Budget - NYTimes Interactive Feature - Today, you’re in charge of the nation’s finances. Some of your options have more short-term savings and some have more long-term savings. When you have closed the budget gaps for both 2015 and 2030, you are done. Make your own plan, then share it online.
Related Article | Behind The Times’s Deficit Project | Printable PDF Version | Room for Debate: 16 Ways to Cut the Deficit

NY Times: OK, You Fix the Budget - In this morning’s New York Times, this fun(?) deficit-reduction exercise constructed by David Leonhardt with the help of many of my budget-world friends (see credits/sources here).  The goal?  Reduce the 2030 deficit by $1.345 trillion–or $1,345 billion.  (If we were to succeed, we would not eliminate the deficit, but we’d at least get it down to an economically sustainable level of 3 percent of GDP.)  So David gives us an empty grid with 1,345 squares, each representing, oh, a mere billion dollars, and a bunch of fiscal policy options on both the spending side and revenue side of the federal budget for you to come up with your own favorite (or rather, least detested) ways to fill up the grid. Why the year 2030–rather than the President’s fiscal commission’s “medium-term” goal of getting the deficit down to 3 percent of GDP by 2015?  And why so many painful choices regarding major tax and spending programs in the budget?

The NYT’s attempt to fix the budget - In the wake of his excellent rent-vs-buy calculator, David Leonhardt has helped create another interactive tool, this one called “You Fix the Budget“. He writes: The New York Times has conducted its own analysis of the federal budget, but with a different final product. Rather than making recommendations, we are laying out a menu of major options, so that readers can come up with their own plan. We have received help along the way from the deficit panel, from Congressional and White House aides and from liberal, conservative and centrist budget analysts. It’s a good idea in theory, and I even played the game myself, solving the deficit with a mixture of 69% tax increases and 31% spending cuts. Still, I’m not a huge fan of the way it’s been executed in practice of the way that the NYT makes it both too easy and too difficult to “win” the game.

The How and When of Deficit Cutting - Barry Ritholtz of The Big Picture blog completed our deficit-cutting puzzle, and his full list of preferred policies appears below. By e-mail, he added this important caveat: “Of course, this would cause another recession if we did this now.” Too often, the debate over the deficit sounds like a debate over whether the deficit should be reduced. One side that finds any discussion of deficits inappropriate when the unemployment rate is 9.6 percent and another side wants to start cutting the deficit right now. Those are not the only choices. In the near term, with the economy so weak and so many people out of work, we can cut taxes and raise spending, especially in areas like infrastructure and education that can lift future economic growth. The truth is, even another $100 billion of near-term spending will have only a minor effect on the deficit in future decades. But in the long term, we have little choice but to raise taxes and cut spending. Much of those spending cuts will need to apply to entitlement programs and above all, to Medicare, which is the big budget problem. Entitlement changes are usually phased in gradually, to give people time to respond (and to make them more politically palatable).

How Wrong can Right be? - I did slightly better than Tim Haab, coming in with about $2080 bn saved! It surprises me to a great degree, because the Options offered came nowhere close to what I would advise. I would first propose expandable Income Tax rates–same percentages, but with higher Income divisions. I would call for a Transactions Tax on Market transactions equal to 1% of the total amount of trade. I would advise a higher Step-Off level of taxation, but insist that the Estate Tax be 35% above that level with no Exemptions. I would split the Wealth, and state that any bequest over $100 million will be taxed 100%; Will-writers will be advised to spread out their dispersions. Capital Gains would be taxed as ordinary Income with ordinary Income rates, beyond a $10,000 per year deduction for each Taxpayer–twice this amount for Joint filings of married couples. The mortgage tax credit would be a set amount of $5000 per household, with proof of payment required. Churches, Charities, and Foundations will be taxed at residual rates, by the amount by percentage of Income which did not go to charitable or academic research; if only 30% of Income went to fund these operations, then the tax rate will be 70%; if 70% of such funds were used for the purposes proclaimed, then the tax rate would be 30%.

Soaking the Rich, Cutting the Deficit - Felix Salmon of Reuters says that The Times’s deficit puzzle did not let him tax the rich as much as he would have liked. In general, the NYT options on both the spending-cut and the tax-hike side tend to hit the poor and the middle classes more drastically than the rich; what’s missing here is the option to implement something much more progressive, in both senses of the word. As we noted in Sunday’s newspaper, the puzzle obviously does not contain every possible option for cutting the deficit. There are dozens of potential options for each subcategory; taxes can be set at different rates with different thresholds, for example, and Medicare and Social Security each could be changed in many ways. Partly for the sake of clarity, we limited our list to a handful of possibilities within each category. Immediate political feasibility was not a requirement – if it had been, our list would have been extremely short and you probably wouldn’t have been able to fix the deficit with the available options. But eventual political likelihood did affect our decisions.

Economics Offers Tactics, Not Strategy – Glaeser - Last week, the two chairmen of President Obama’s bipartisan deficit reduction panel produced an eminently sensible preliminary report that was greeted with derision from both left and right. On Sunday, The New York Times invited everyone to weigh in, posting a deficit puzzle that lets you play budget czar, making spending cuts and tax increases in an attempt to wipe out the deficit by 2040. Solving the puzzle is a great exercise in fiscal realism, forcing us to recognize that there is no way to balance the budget with significant tax increases or cuts to either entitlements or military spending. The puzzle’s author, David Leonhardt, asked the five outside economists who contribute each week to Economix if they would like to explain how they would solve the puzzle, noting that some readers had written to The Times to say there were interested in knowing what we thought. I declined the offer, because the solutions to the budget problem won’t come from the technical expertise of economists but from moral and strategic decisions made by voters and their elected representatives.

Plotting Public Policy Strategy without Economics? - Maxine Udall - In my last blog, I suggested that technical solutions to economic problems compete, not just on technical grounds, but on moral grounds. For this reason, economists must learn, if not to make the moral case for technical approaches, to at least understand and communicate the moral ramifications of those approaches. The traditional view shared by many if not most economists was offered by Edward Glaeser in a recent blog. On that view, competition among public policy strategies is resolved, not by economists weighing technical considerations, but in the political sphere. Glaeser goes on to profess normative ignorance: How would an economist know whether it is wiser to cut military spending or raise taxes? How could we expect someone who is not trained in economics to be able to judge these things? We certainly wouldn't want only economists deciding these things, but it's equally frightening to think of "society as a whole" making these decisions without understanding some economics. Surely that's not what Glaeser meant, yet he says. These choices reflect politics and philosophy more than the economics. Only when those choices are made does economics weigh in. Really? Just politics and philosophy? Guns and butter is politics and philosophy, not economics?

Four budget calculators, one story - The New York Times' deficit-reduction calculator is worth playing around with, though the Center for a Responsible Federal Budget's calculator is more comprehensive, and the calculator from the Center for Economic and Policy Research works harder to include policies that are too often left out of the mainstream debate. But they're all good, clean fun, and they all make the same basic point: It's the health-care system, stupid. In the Times' calculator, the single biggest thing you can do is add a "magic asterisk" to the health-care system. We don't know how exactly we're going to hold Medicare's spending growth to GDP+1%, but if we manage it, we'll save $560 billion by 2030. No other option in their calculator -- and no other option in the Simpson-Bowles report -- is even close to those savings. If we get that growth rate, or something close to it, we can get the budget into balance. If we can't, well, we can't. It's really as simple as that. In some ways, my favorite budget calculator is an older one released by the Center for Economic and Policy Research. This calculator doesn't give you any viable choices. Instead it allows you to plug in the per-capita health-care spending of other countries and then see what happens to our deficit. I've looked at this dozens of times, and I still find it startling: If we spent what high-performing, fully universal systems like France and Germany spend, we'd have no budget deficit.

Cleaning Up the Tax Code and 15 Other Ways to Cut the Deficit - In conjunction with its new deficit option game, the New York Times asked 16 budgeteers to write-up ideas for reducing the deficit. My assignment was to explain the rationale for reducing tax expenditures–the exclusions, exemptions, deductions, and credits that complicate the code and dramatically reduce the revenue that it raises: The Office of Management and Budget has identified more than 170 such tax expenditures (these provisions are called “expenditures” because they essentially run spending programs through the tax code). The deductibility of state and local taxes, for example, runs almost $70 billion each year. Favorable tax treatment for life insurance savings is about $23 billion. Credits for alcohol-based fuels total almost $9 billion. And dozens of rifle-shot provisions benefit narrow interests, such as special tax rules for NASCAR venues. In total, individual and corporate tax expenditures reduce revenues by more than $1 trillion each year. Congress should revisit each tax break to see if it produces sufficient economic and social benefits to justify its budgetary cost. Some provisions should make the grade (the earned income tax credit, for example). But many others should be restructured or cast into the dustbin of history.

An Idea So Crazy It Just Might Work - The New York Times has been getting a lot of attention for its budget calculator the last few days. So here's the idea. We get the Congressional Budget Office to set up an official deficit simulation model. It's in a secret room in the Capitol on one computer with no connection to the outside world. Access to the room and the computer can only be gotten by use of the card that all House members use to register their votes. Every House member is given a deadline to play the simulation or their input will be ignored. They can do the simulation any way they want, but at the end of the day ANY PROVISION GETTING MORE THAN 50 PERCENT IS DEEMED TO HAVE PASSED THE HOUSE. Whether any of it will pass the Senate is another matter. But maybe it would be a start.

Deficit Reduction Plan Would Imperil Health Care Reform - President Obama has been studiously mum about the proposals laid out Wednesday by his fiscal commission's co-chairs, Erskine Bowles and Alan Simpson. In fact, he urged critics of the report to hold their fire for now.  "Before anybody starts shooting down proposals, I think we need to listen, we need to gather up all the facts, I think we have to be straight with the American people," he said. But would he be so blasé if he knew that the draft, as written, would require scrapping or destroying his signature health care law? That's the view of prominent economists who've examined both the Simpson-Bowles plan and the health care law. Wednesday's plan calls for strict limits on federal health spending and the amount of revenue the government can collect via taxation. But the Affordable Care Act expands insurance coverage by increasing both taxes and spending and, with health care costs soaring, it would have a hard time meeting the commissioners' requirements

Bowles-Simpson Plan Commendably Puts Everything on the Table But Has Major Deficiencies Because It Lacks an Appropriate Balance Between Program Cuts and Revenue Increases - Unfortunately, the plan does not represent a truly balanced approach to bringing deficits under control. The co-chairs — former Clinton White House Chief of Staff Erskine Bowles and former Republican Senator Alan Simpson — describe a real problem of deficits and debt that will grow to unsustainable levels, and they propose a number of policy changes that should be part of any serious debate on the budget. Yet, as a whole, their package falls far short of an appropriate or equitable plan for the federal budget in the years and decades ahead, as a careful analysis of it shows.

Black Smoke Rises From Bowles-Simpson - Based on the overreaction to the draft proposal released last week by deficit reduction commission Co-chairmen Erskine Bowles and Alan Simpson, it’s hard not to conclude that they weren’t prepared for — or thought it was beyond their responsibility to deal with — the absolutely predictable, instantaneously negative response and that the commission is in deep trouble.The story was that Bowles and Simpson were worried that members of the National Commission on Fiscal Responsibility and Reform would leak parts of the draft and severely hurt the chances of writing a plan the majority on the panel could support. Rather than allow that to happen, the co-chairmen decided to reveal the whole plan in a hastily arranged news conference. We now know, of course, that the move was anything but successful. Indeed, the harsh criticism that the proposal immediately received was significantly magnified because it was formally released at a news conference, which generated more media coverage than it otherwise would have received

The Deficit Commission's Plan for Personal Income Taxes - On 10 November 2010, Erskine Bowles and Alan Simpson, the co-chairs of President Obama's blue-ribbon deficit reduction commission (whose work we've commented upon recently), released a document with their suggestions for getting the U.S. federal government's annual budget deficits back under control. We were especially intrigued by one of their proposals to completely revamp the entire U.S. income tax system, in which they would eliminate all deductions and tax credits while setting just three tax brackets for all income-earning Americans: 8%, 14% and 23%. In doing that, they set a basic floor beneath these individual income tax rates, for which these tax rates would need to rise in order to still collect a particular amount of taxes while providing deductions and tax credits for politically-favored individuals. Such as families with children through the Child Tax Credit, poor, working Americans through the Earned Income Tax Credit or homeowners through the Mortgage Interest Tax deduction, to name three very popular deductions and tax credits in the current tax code.  But can that work? How much money would the federal government collect under such a scheme? And what would an individual's income taxes look like if such a plan actually became law?

Bowles-Simpson Deficit Plan Would Hike Taxes Across-The-Board - Critics of the deficit reduction plan offered by the co-chairs of President Obama’s fiscal commission have blasted it for being both a tax hike (bad if you’re a conservative) or a tax cut for the wealthy (bad if you’re a liberal). So which is it?  The Tax Policy Center has taken a preliminary look at one version of the tax plan offered by Erskine Bowles and Alan Simpson. And Paul Krugman & friends can rest easy. The Bowles-Simpson proposal is indeed an across-the-board tax increase-- and a fairly progressive one at that. In 2015, the lowest earners would face an average cut in their after-tax income of 3.4 percent or about $400. Middle-income households (those earning an average of about $60,000) would see their after-tax incomes fall by 4 percent or about $1,900. On the other end of the economic food chain, the top one percent of earners (who earn an average of about $2 million) would lose about $77,000 (5.3 percent) while the top 0.1 percent would see their after-tax incomes cut by nearly 8 percent, or close to $500,000.

Tax Policy Center: Deficit Panel Plan Would Hit Higher Earners Harder- A new analysis by the nonpartisan Tax Policy Center suggests that tax proposals contained in the Bowles-Simpson deficit-reduction plan likely would hit higher earners somewhat harder than regular folks, at least on paper.  The draft deficit plan was released last week by Erskine Bowles and Alan Simpson, co-chairmen of President Barack Obama’s fiscal responsibility panel.  The analysis by the Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute, somewhat undercuts fears of liberals that the plan would inordinately hurt middle-income people.  “Paul Krugman and friends can rest easy,” writes TPC blogger Howard Gleckman. “The Bowles-Simpson proposal is indeed an across-the-board tax increase– and a fairly progressive one at that,” meaning it hits higher earners harder.

Yep, It's Regressive - Krugman - Jon Chait takes another look at Bowles-Simpson, this time with numbers from the Tax Policy Center, and is disillusioned. As I surmised, it redistributes income upward: the bottom 80 percent of families would pay higher taxes than they did in the Clinton years, while the top 20 percent — and especially the top 5 percent — would pay less; not what you’d call shared sacrifice. The only twist here is that the ultra-rich, the top 0.1 percent, who get a lot of their income from dividends and capital gains, would be hit by having these gains taxed as ordinary income. Even so, they would face a smaller tax increase than the bottom 60 percent. This wasn’t the plan we’ve been looking for; on taxes, what on earth were they thinking?

The Fiscal Commission -- Failure on Multiple Levels - Stan does a fine job of analyzing how the Bowles-Simpson plan may actually set back efforts to trim long-term deficits.  Brad DeLong is correct when he describes this commission as an "unforced error" by the Obama administration.  At the level of presidential policy and the specific direction of the commission, these are failures primarily in the choice of strategy and tactics rather than failures in defining the objectives. In a very interesting post last Thursday at Economix, "On the Deficit Commission, a Failure of Will and Not Ideas," Catherinie Rampell wrote: So why are we still in the same mess? Because the country’s budget woes are not a failure of wonkish ingenuity, but a failure of political willpower.

Deficit Panel Ignores $153 Trillion Hole: Laurence Kotlikoff (Bloomberg) -- The bipartisan National Commission on Fiscal Responsibility and Reform, led by former U.S. Senator Alan Simpson and former chief of staff to President Bill Clinton, Erskine Bowles, spent nine months studying the nation’s long-term fiscal policy and devising a plan that purports to keep the country from going broke. Speaker of the House Nancy Pelosi must have spent all of nine seconds reviewing the panel’s draft proposal before declaring it “simply unacceptable.” I think Pelosi’s right, but for different reasons.

Americans Skeptical of Deficit Plan - A new Wall Street Journal/NBC News poll shows Americans skeptical of deficit-cutting proposals laid out by the chairmen of a commission appointed by the White House. In the survey, 57% of respondents said they were uncomfortable with gradually raising the Social Security retirement age to 69 over the next 60 years. Some 41% said they were somewhat or very comfortable with the idea. Roughly 70% were uncomfortable with making cuts to programs such as Medicare, Social Security and defense in order to reduce the deficit, with 27% saying they were comfortable. And nearly 60% said they were uncomfortable with raising tax revenue through such measures as boosting the gasoline tax, limiting deductions on many home mortgages and altering corporate taxation. Nearly 40% said they were comfortable with those ideas.

The Deficit Dilemma and Obama's Budget - The stubbornly high unemployment rate is our economy's top problem today, but our exploding national debt is the more serious problem for the future. The recent proposal by Erskine Bowles and Alan Simpson, the chairmen of the bipartisan National Commission on Fiscal Responsibility and Reform, shows how difficult it will be to cut deficits and slow the growth of the national debt.  Even with its favorable assumptions and wide-ranging deficit-reduction measures, their proposal would still leave the national debt in 2020 at the same unprecedented level it is today—equal to more than 60% of GDP.

One Way to Trim Deficit - Cultivate Growth - NYTimes - We look back on the late 1990s as a rare time when the federal government ran budget surpluses. We tend to forget that those surpluses came as a surprise to almost everybody.  As late as 1998, the Congressional Budget Office was predicting a deficit for 1999. In fact, Washington ran its biggest surplus in five decades. What happened? Above all, economic growth. And that may be a big part of the answer to our current problems.  Yes, the government became more fiscally conservative in the 1990s. Both President George H. W. Bush (who doesn’t get enough credit) and President Bill Clinton, working with Congress, raised taxes to attack the 1980s deficits. But those tax increases were the second most important reason for the surpluses that followed. The most important was the fact that the economy grew more rapidly than expected. The faster growth pushed up incomes and caused more tax revenue to flow into the Treasury.

The Bipartisan Policy Center’s Bold, Controversial Stab at the Deficit and Tax Reform - Today, the privately-funded Bipartisan Policy Center (BPC) released its own far-reaching fiscal proposal. Like the plan offered last week by Erskine Bowles and Alan Simpson, the co-chairs of President Obama’s Deficit Commission, this heavyweight task force aims to both slash the deficit and dramatically reform the Tax Code. The 19-member BPC group was chaired by former Republican Senate Budget Committee Chair Pete Domenici and Alice Rivlin, who has served as vice-chair of the Federal Reserve, founding director of the Congressional Budget Office, and director of the Office of Management and Budget in the Clinton Administration.  I’ll leave it to others to analyze its spending proposals. On the tax side, the BPC plan is at least as sweeping as Bowles and Simpson-- who were themselves exceedingly ambitious.  Recognizing the continued slow economic recovery, this deficit reduction plan actually starts with a tax cut—a 2011 payroll tax holiday. The fun starts after that.

Rivlin Budget Proposal to Cut Tax Rates, Include ‘Consumption Tax’ - Alice Rivlin

, a Democrat and top budget expert, gave concrete clues on Tuesday what a deficit-reduction proposal she is co-authoring with former Sen. Pete Domenici (R., N.M.) will look like when it is released tomorrow. Speaking at the Wall Street Journal’s CEO Council in Washington, Ms. Rivlin said the proposal would have a “much simpler, lower [tax] rate, broader base income-tax and corporate income tax with a considerably lower corporate tax rate that will bring us back into the range that other countries are in.” She also said the proposal would “phase in a broad-based consumption tax.” She said the consumption tax is “not politically popular, but at some point we’re going to have to do it.”

Fiscally-Responsible Deficit Spending Need Not Be An Oxymoron - The Bipartisan Policy Center’s (BPC) debt reduction plan was unveiled on Wednesday morning and is a good example of why pursuit of “fiscal responsibility” need not be in conflict with other economic goals, contrary to how opponents of fiscal hawkish policies like to portray them. First, additional deficit spending can be fiscally responsible. How is that not an oxymoron?  Because the fiscal outlook is only unsustainable if the debt grows faster than the economy.  There are two variables in that comparison, both affected by policy choices.  The debt grows each year by the size of the annual deficit, the difference between spending and revenues.  But how the particular spending and revenue policies affect economic activity in turn affect how fast the economy grows.  In other words, exactly how we spend and how we tax matters beyond how much we are spending and how much we are taxing (collecting in revenue), in determining what is winning this race between the debt and the economy. In Wednesday’s New York Times, David Leonhardt makes the point that all else constant, a stronger economy reduces the budget deficit–that “one way to trim [the] deficit” is to “cultivate growth.”  In an economy with high unemployment, even deficit-financed policies can produce an economic benefit (greater economic activity with more income to tax and less need for government safety net spending) that outweighs the economic cost

Taxing Soda to Close the Deficit - The second bipartisan panel to issue a big deficit report has come out in favor of a tax on soda and other sweetened beverages. The panel — chaired by former Senator Pete Domenici, a Republican, and Alice Rivlin, a Democrat and former White House budget director — said a soda tax would “help reduce long-term health care spending to treat obesity-related illnesses – including diabetes, heart disease, cancer, and stroke.” The tax would be “an excise tax on the manufacture and importation of beverages sweetened with sugar or high-fructose corn syrup.” The tax would raise more than $15 billion in 2015, the panel estimated — similar to the amount of savings the government might get from eliminating all earmarks.

SSA Scoring of Rivlin-Domenici - Well it is out and I have a copy. And no doubt in short order it will be up at the following web-page:  but as of 10:43 AM PST it wasn't. Because just like the SSA score of the Chairmen's proposal there is a lag between release and web publication. I'll extract some tables and publish them in a future post but the results are very similar to the Simpson-Bowles Plan with the bottom line being a 75 year improvement in actuarial balance of 2.48% in the face of a current imbalance of 2.01%, that is there is a certain amount of over-kill if the problem is considered simply as one of solvency. For now I will leave you with this simple graphic from the score.

Second Panel Calls for Cutting Military Spending - A bipartisan group of budget experts called Wednesday for steep cuts in future military spending, just as leaders of a presidential debt-reduction commission proposed last week.  Taken together, the reports are likely to intensify pressure to reduce Pentagon spending and cancel troubled weapons programs as part of a broad effort to reduce federal budget deficits.  But the proposals, which would cut back on expensive planes like the F-35 fighter and the V-22 Osprey, represent only the start of what could be a long debate. And it is already clear that many of the suggestions will be hotly disputed in Congress.  The plan released Wednesday included a five-year freeze on Pentagon spending, along with sweeping changes in taxes and other federal programs, to reduce projected deficits by $5.9 trillion through 2020. It was prepared by a group led by former Senator Pete V. Domenici of New Mexico, who was the senior Republican on the Senate Budget Committee for more than a quarter-century, and Alice M. Rivlin, who served both Congress and then-President Bill Clinton as a budget director.  Their proposal would freeze the Pentagon’s spending, which tops $700 billion a year, at this year’s levels from fiscal 2012 through 2016.

Deficit Politics - Ryan Avent wonders why the deficit has become such a big deal suddenly. Maybe it's because the bond market is panicking? Nope. The bond market is quite calm at the moment. Then maybe it's because the public is panicking? Apparently not, according to survey data anyway: It actually looks as though the public doesn't care about the deficit either, at least relative to the state of the general economy. So why is the deficit such a big issue right now, at least in Washington? The short answer is that President Obama has given the press a nice news peg in the form of the impending release of a report from his deficit reduction commission. Another question, then, is why the president felt the need to appoint a deficit reduction commission. And the answer there is some combination of "the deficit actually needs to be addressed" and "the president felt there was a political weakness that needed defending". Why the president felt a weakness on deficits is another, mysterious issue. Leaving aside whether it was a good or bad idea, the deficit commission was a response to deficit hysteria, not the cause of it. And I don't think it was all that mysterious, either: it was basically a response to an excellent political game played by Republicans.

Deficits? Apparently Nobody Really Cares. Huh? - I’ve got to be honest about this stuff.  I don’t get it.  I stood at the polls and much of what I heard that day was directed at government spending.  It was too much, was the general opinion.  We are passing on too much debt to our children was the theme.  And it was a theme the Republicans had been projecting effectively for months over the TV. Even I believed all those people believed what they were talking about.  So along comes a CBS poll conducted after the election.  Among the results was that economy/jobs was the top priority, ranking above 50% no matter what the voter affiliation.   Health care was at 14%.  Deficits and just about anything else you can name off the top of your head were all ranked in the single digits! Anyway, here’s Steve Benen’s take over at the Washington Monthly.

When will voters care about the deficit? - A LOT of folks in Washington are busying themselves talking about America's federal deficit and debt issues. The deficit has obviously been forced to the front page by the sense that bond markets have had it with America's borrowing:  Come to think of it, markets don't seem that frightened of American debt, do they? But of course, public outrage over government red ink is also driving the issue to the forefront: Huh. It actually looks as though the public doesn't care about the deficit either, at least relative to the state of the general economy. So why is the deficit such a big issue right now, at least in Washington?  The short answer is that President Obama has given the press a nice news peg in the form of the impending release of a report from his deficit reduction commission. Another question, then, is why the president felt the need to appoint a deficit reduction commission.

Stray Thoughts on the Deficit Politics - Deficit reduction is almost always a matter of the politics of blame avoidance. While deficit reduction as a general matter may be popular, the specific cuts or tax increases that it requires are rarely popular, and usually attract the ire of concentrated, mobilized groups. Those groups, and the diffuse populations whose benefits are cut or taxes are raised, will want to punish those responsible for damaging their settled expectations for government action. Consequently, deficit reduction almost always requires cutting what Douglas Arnold called the “traceability chain” between the actions of specific members of Congress and the impacts those actions have on citizens and groups. The “American way” of doing so requires cross-party deals, which make it difficult for citizens to detect who was responsible for the actions they disliked. This is not only a characteristic American pattern, but also characterizes, for instance, the politics of pension reforms in most of the world—they generally turn out to be cross-party conspiracies against the voters. I should note that the condition that are most propitious for cross-party deals is divided government, when each party has sufficient institutional control to protect itself against the risk of being “bait and switched.” We did not have that in the last Congress, but we will have it in the next.

Greenspan: High US deficits could spark bond crisis (Reuters) - The United States must move to rein in its massive budget deficits or it faces the risk of a bond market crisis, Alan Greenspan said on Sunday. "We've got to resolve this issue," Greenspan said of the ballooning U.S. debt levels. He spoke about the issue as a panel, chaired by former White House chief of staff Erskine Bowles and former U.S. Senator Alan Simpson, is due to deliver a report on debt and deficits by Dec. 1. A draft report made public last week offered a series of politically tough tax and spending choices that would seek to reduce the debt by $4 trillion by 2020. The report received a lukewarm reception from some politicians and outright condemnation by others, including House of Representatives Speaker Nancy Pelosi, who pronounced the ideas "simply unacceptable."Greenspan, who spoke on NBC's "Meet the Press," said he believed "something equivalent to what Bowles and Simpson put out is going to be approved by Congress. But the only question is whether it is before or after a crisis in the bond market."

The crisis of 2011 – in 2010? — Crooked Timber - Back in July, no one seemed to be talking about a shutdown of the US government following the Dems loss of control of the House. Now the only question is – when? David Dayen at FDL says it could be as soon as December. Among those looking forward to the shutdown, the most notable, for a variety of reasons is Alan Simpson. Obama must really be feeling the gratitude there. There’s still a chance that the Dems can manage a pre-emptive capitulation/collaboration so massive that some on the other side will be willing to cash in their gains without taking the risk of a shutdown. I imagine that would entail, at a minimum, full extension of the Bush tax cuts, effective repeal of the health care bill, no more money for the unemployed, Social Security ‘reform’ and a bunch of spending cuts directed at the tribal demons of the Tea Party. Of those, health care is the only one where I can see the White House taking a stand. I’m less clear about the priorities of the Congressional Dems.

Boehner Warns GOP on Debt Ceiling - Raising the debt ceiling is shaping up as a difficult early vote for the new House GOP majority. Many of the new Republican lawmakers harshly criticized their Democratic opponents during the campaign for voting to raise the limit in the past, citing it as an example of the Democrats’ recklessness with federal tax dollars. But on Thursday, Minority Leader John Boehner (R., Ohio) said he’s been talking to the newly elected GOP lawmakers about the need to raise the federal debt ceiling when it comes up early next year. “I’ve made it pretty clear to them that as we get into next year, it’s pretty clear that Congress is going to have to deal with this,” Mr. Boehner, who is slated to become House speaker in January, told reporters. “We’re going to have to deal with it as adults,” he said, in what apparently are his most explicit comments to date. “Whether we like it or not, the federal government has obligations and we have obligations on our part.”

Steve Teles: Don't Expect The GOP To Agree On A Deficit Reduction Deal Next Year, Or The Year After - In a well-reasoned post worthy of the outstanding academic he is, Steve Teles of Johns Hopkins says it's hard to conclude that congressional Republicans will be able to agree on a deficit reduction deal the next two years. I find it hard to disagree with this thinking.  Here's the money quote: The likely scenario, therefore, is that Republicans will find some reason not to enter into negotiations with the Democrats (most likely the hope of getting a 100% spending cut solution as of 2013), and nothing will get done.

Ezra Klein - What causes deficits? - James Fallows posts a table created by Chuck Spinney that shows -- or attempts to show -- the change in debt under different types of administrations. There's important information in there -- notably that tax cuts do, indeed, increase the deficit. But to understand why deficits happen, I'd direct people to this mega-chart that The Post's Alicia Parlapiano made: It compares GDP growth, deficits and control of both the Congress and the White House, and gives you a more comprehensive idea of what's going on: Basically, deficits happen when recessions happen. Anytime GDP shrinks, deficits explode. Sustained growth, by contrast, tends to bring the budget into balance. That's not to say policy doesn't matter. If you put $4 trillion of tax cuts on the deficit, you need a whole lot of growth to make that back up. But policy -- and even control of the White House -- matters a lot less than the economy does.

Dean Baker: The Deficit is the Wrong Problem (video) “It's the wrong answer to not a problem," says Dean Baker of the report out last week from the leaders of Obama's deficit commission, Erskine Bowles and Alan Simpson. The report, which recommends massive cuts across the budget, most significantly to Social Security and health care programs, has been roundly criticized by progressives for its targeting, but Dean notes that the biggest problem with it is that without the health care crisis we still have, we wouldn't have deficits in the first place. He joins us via Skype from Washington, D.C. to talk about the commission, the latest action by the Fed, and what can really be done to balance the budget--and why we should be much more focused on creating jobs and really reforming health care than on slashing programs that benefit us all.

Guns, Butter, and Bonuses (Money, Deficits, And MMT) 1 of 2 - As we sink into economic depression, everywhere we hear the deficit and public debt crisis alarms summoning us to cut spending, raise taxes (on the non-rich, while those for the rich are cut further), “sacrifice”. This sacrifice is never to be undertaken by those who have already monopolized the vast majority of the wealth of the country. The top 1% of the rich hoard one third of America’s wealth. The top 10% has extracted two thirds. Yet all the calls for “austerity” fall on the lower cohorts, and the lower on the wealth and income scale one is, the more onerous the burden. This is as clear as class war and civil war can get short of the actual shooting. The question, as in every other case where then non-rich act against their own interests, is why are so many people going along with this scam that there’s such a thing as a “deficit problem”? It’s manifest that no one among the elites actually believes this. Everyone, without exception, of whatever nominal politics, implicitly agrees that this government, sovereign in its own currency, spending in a Depression economy, can spend as much as it wants, at will.

Experts weigh in: Can the economy be saved? - latimes - It has been more than two years since the financial and economic crash of 2008. Since then, many things have improved, and the U.S. economy is officially out of recession. But many Americans are still hurting. Unemployment remains high, and the housing market is far from settled. We invited economists and other astute financial observers from across the political spectrum to suggest what, if anything, the government should do to stimulate the economy.

How to Fix the Economy: Short-Term Version and Long-Term Version - Just by coincidence, I have articles in both the New York Times and Los Angeles Times today dealing with different aspects of our economic problem. The LA Times asked me and a bunch of people far more distinguished than myself what could be done to stimulate growth in 300 words. Although I think there is a case for further fiscal stimulus, I didn't see any point in saying so since the political chances of that were zero even before Republicans won control of the House. So I suggested some ideas for the Federal Reserve, because it is really the only game in town. The New York Times also had a symposium with me and some others far more knowledgeable than me. But our assignment was what to do about the long-term debt problem in 250 words. I reiterated my belief that significantly higher revenues will be necessary to a permanent solution and that a value-added tax would be the best way to raise those revenues. All of the contributions to these symposiums are worth reading. I reprint mine below.

Revisiting a Republican Deficit Plan - In the last week, two different bipartisan groups have released their plans for reducing the deficit, and a liberal coalition in Washington will soon do the same. Arguably the first in this spate of deficit plans came from Representative Paul Ryan, the Wisconsin Republican now in line to become chairman of the House Budget Committee. In 2008, Mr. Ryan released a deficit proposal that had an overhaul of Medicare at its core. (He introduced a revised version early this year.) In the Ryan plan, Medicare would remain as it as was for anyone currently 55 or older. For everyone else, the system would no longer be an open-ended one in which the government paid for unlimited medical care. Instead, the government would give people over 65 a voucher with which they could buy a private insurance plan. The vouchers would be worth significantly less than Medicare as it is currently constituted. In part, the depth of the cut is a reflection of Mr. Ryan’s desire to keep taxes equal to only 19 percent of gross domestic product (compared with 21 percent in the recent Bowles-Simpson plan, for instance).

Spending Worries Put Jobless Benefits at Risk - Congress is unlikely to agree to extend jobless benefits for two million unemployed workers by the time the program begins to lapse in two weeks, as lawmakers struggle with a packed lame-duck session and voter antipathy toward government spending.  But cutting off benefits could drag on a fragile economic recovery by reducing consumer spending, economists say, and Democrats are looking for a compromise that could put the program back on track before Christmas. The program, which provides aid for up to 99 weeks after workers are laid off, has been extended seven times during the economic downturn. Last summer when Congress extended it, the battle was so pitched that benefits lapsed for over a month.

Jobless benefits cost so far: $319 billion -- Unemployed Americans have collected $319 billion in jobless benefits over the past three years due to the federal government's unprecedented response to the Great Recession, according to a CNNMoney analysis of federal records. The cost of such benefits will be central to the heated debate in Congress in coming weeks over whether to extend this safety net for the fifth time this year. Lawmakers must act by Nov. 30 or two million people will start losing extended benefits next month.  The federal government has already footed $109 billion of the bill, and lawmakers are super-sensitive to adding further to the deficit. But advocates are turning up the pressure to extend the deadline to file for federal benefits.

Unemployment Insurance Benefits and Family Income - CBO Director's Blog - The unemployment rate averaged 9.3 percent in 2009, more than double what it was in 2007 and the highest it had been since 1983. In 2009, nearly one in four people (including children) lived in a family in which at least one family member was unemployed at some time during the year. Among people living in a family with income below the poverty threshold, one in three lived in a family in which at least one person was unemployed at some point. The unemployment insurance (UI) program provides a weekly benefit to qualified workers who lose their job and are actively seeking work. The amount of that benefit is based in part on a worker’s past earnings. Outlays for UI benefits totaled $120 billion in fiscal year 2009, a substantial increase over the amount two years earlier, which was $33 billion. Spending on UI benefits in fiscal year 2010 was even higher than in fiscal year 2009, totaling nearly $160 billion, and CBO projects that under current law, such spending in fiscal year 2011 will be $93 billion. CBO examined the role of UI benefits in supporting the income of families in which at least one person was unemployed at some point in 2009. The analysis addressed how that role varied with the amount of family income and the number of weeks of unemployment for all family members. CBO also examined how the poverty rate and related indicators of financial hardship would have differed in the absence of the UI program. Although CBO’s calculations are based on data about individual people, the results are presented in terms of families, both to focus on the effects on families and for ease of exposition.

America’s Financial Problem? We Don’t Like To Pay For Our Benefits. - Let’s be honest here.  As a people we really don’t like to pay our bills.  We want all those important benefits, particularly the ones enjoyed in retirement like Social Security and Medicare, but we refuse to acknowledge the undeniable truth that we don’t pay the bills. And let’s also acknowledge that we can certainly afford to pay the bills.  Here’s a chart ranking most developed country’s share of GDP taken up by total taxes.  From a New York Times article by Uwe Reinhardt.  So we can certainly afford to pay for the benefits.   What we may not be able to afford, however, if we ever really do decide to cover our bills instead of running up deficits, is our immense defense budget. But enough of the argument that ‘we can’t afford’ Social Security, or Medicare, or Medicaid.  That’s nonsense.  What we can’t afford is our self denial.

Public Spending on Infrastructure - CBO Director's Blog - The nation’s transportation and water infrastructure—its highways, airports, water supply systems, wastewater treatment plants, and other facilities—plays a vital role in the economy. Private commercial activities and the daily lives of individuals depend on that physical infrastructure, which is provided by all levels of government in the United States. In fiscal year 2007—the most recent year for which data on combined spending by the federal government and by state and local governments are available—total public spending for transportation and water infrastructure was $356 billion, or 2.4 percent of the nation’s economic output. Concerns about the nation’s infrastructure have prompted calls for greater spending. The Congress is considering the funding level for the next several years for federal infrastructure programs, such as highways, mass transit, and aviation. In response to a request from the Senate Finance Committee, CBO prepared a study that analyzes recent developments in spending on transportation and water infrastructure, trends in spending for capital and for operations and maintenance, and the rationale for public spending on infrastructure. This study updates a previous report CBO published in August 2007, Trends in Public Spending on Transportation and Water Infrastructure, 1956 to 2004.

Criticizing Those Who Criticize Earmarks - As David Herszenhorn in the New York Times and Philip Rucker in The Washington Post have reported the past few days, it looks like earmarks are going to be one of the big budget topics this week as the GOP caucuses in the House and Senate both debate whether to ban their use.Let me make it clear that I'm not a fan of earmarks.  But I'm less of a fan of those who demand that they be eliminated because doing so will cut spending.  As I've said before...eliminating earmarks absolutely doesn't reduce spending.  All it does is change the place where the spending decision is made from the legislative to the executive branch. Suppose, example, that Congress passes an appropriation for $100 to encourage blogging and designates, that is, earmarks, $10 of that amount for Capital Gains and Games.  Eliminating the earmark -- the amount relating to CG&G -- still leaves the appropriation at $100.  The only thing that would change is that employees at the U.S. Department of Blogging would determine which blogs would get the funds instead of a member of the House or Senate on the Blogging Committee.

Obama panel probes stimulus waste -- at Ritz Carlton - Members of a key panel created by the American Recovery and Reinvestment Act, better known as the stimulus bill, have scheduled a meeting on November 22 to consider ways to prevent "fraud, waste, and abuse of Recovery Act funds." The meeting will be held at the super-luxe Ritz Carlton Hotel in Phoenix, Arizona.  The group is the Recovery Independent Advisory Panel, a sub-committee of the larger Recovery Accountability and Transparency board (sometimes known as the RAT board). The stimulus bill set up the Recovery Independent Advisory Panel, or RIAP, to make recommendations to identify and prevent waste of the bill's $814 billion in stimulus spending.

To A Wonk With A Keyboard Everything Looks Like Fiscal Policy - In the early 90s we had some uncertainty. Indeed, we had a health care proposal on the table though not signed into law. We also significant tax increase, though it was designed to pay down the deficit. Maybe that uncertainty didn’t count because it was Rubinomic uncertainty.  However, show of hands – how many people think that the collapse of the World Trade Center promoted uncertainty. Anyone? Anyone? Indeed, it looks like we even might be able to discern something in retail sales around that time. Though this was of course in the wake of the Dot-Com bubble burst, the end of years of government surplus, the initiation of two wars and of course massive corporate finance scandals. So, its to know exactly how much was 9/11. Now compare that to what we just experienced.There were many people who in the wake of 9/11 thought America might be besieged with all manner of attacks. There was an anthrax scare. There was talk of dirty bombs. There was even speculation of attacks using full scale chemical or nuclear weapons. In terms of its affect on the economy, however, all of that was miniscule compared to massive contraction in credit we saw after the fall of Lehman.

Fixing The US Budget – Straightforward Or The Hardest Problem On Earth? - Simon Johnson - The conventional wisdom is that we face a serious budget problem, ballooning debt and political deadlock that prevents any semblance of progress either in the short term or over the next 20 years. “The sky is falling — cut everyone’s wages, slash Social Security, buy gold!” summarizes the mood of this midterm moment. But step back and look at American public finances from any angle and the picture is very different. We have a simple economic problem — we need to fix our tax system, irrespective of how much revenue we want from it. And we continue to face the central American political problem of the last 200 years: how much inequality are we willing to accept as reasonable and fair? The key technical point is this: our tax system stinks. That much you have probably figured out — think back to how you felt on April 15 — but most likely you only encounter the tip of the iceberg (unless you are a tax professional). In terms of what we tax and how we tax it, almost every dimension of government revenue feels as if it were cobbled together in the early 20th century (which it was) and never properly modernized.

Ever Wonder Why The Federal Budget Is An Emotional Rather Than A Rational Issue? -  According to a nationwide poll taken a week or so after the election that was released yesterday by the Pew Research Center for the People and the Press: Overall, 39% of the public knows that the government spends more on national defense than on education, Medicare or interest on the national debt. About one-in-four (23%) say the government spends more on interest payments and 15% say Medicare is the largest expenditure of these four alternatives. Government accounting estimates indicate that the government spends about twice as much on defense as on Medicare, and more than four times as much on defense as on interest on the debt. The poll has lots of interesting cross-tab findings that are worth a few minutes of your time.

Shorting Fiscal Consolidation, by Robert J. Shiller - Real long-term interest rates – that is, interest rates on inflation-protected bonds – have fallen to historic lows in much of the world. This is an economic fact of fundamental significance, for the real long-term interest rate is a direct measure of the cost of borrowing... – and its levels now fly in the face of all the talk about the need to slash government deficits.  Long-term inflation-indexed bond yields have fallen to around 1% a year, or less, in the United States, Canada, the United Kingdom, and the eurozone. Surely, governments’ levels of long-term investment in infrastructure, education, and research should be much higher now than they were five or ten years ago, when long-term real interest rates were roughly twice as high. The payoffs of such investments are, if anything, higher than they were then, given that many countries still have relatively weak economies that need stimulating. It is strange that so many governments are now emphasizing fiscal consolidation, when they should be increasing their borrowing to take advantage of rock-bottom real interest rates. This would be an opportune time for governments to issue more inflation-indexed debt, to begin issuing it, or to issue nominal GDP-linked debt, which is analogous to it.

Bowles-Simpson Deficit Plan Taxes Health Insurance, But Would We Owe Payroll Tax Too? - One of the most dramatic elements of the tax reform plan offered by the chairs of President Obama’s deficit commission, Erskine Bowles and Alan Simpson, was their proposal to eliminate tax breaks for employer-sponsored health insurance, contributions to retirement plans, and other employee benefits. When the Tax Policy Center did its first analysis of that proposal on November 16, our modelers assumed (perfectly reasonably) that if these benefits were now subject to income tax, workers would have to pay Social Security and Medicare payroll taxes on them as well.   But after we published our analysis, the Bowles-Simpson staff told us they did not intend to hit workers with payroll tax on this income as well. So TPC has run a new distributional analysis for the Bowles-Simpson plan without those extra payroll taxes. It turns out that everyone still pays more tax on average, but less, of course, than if they were hit with bigger payroll taxes.

Questioning a Payroll Tax Holiday - Pete Domenici and Alice Rivlin have proposed a one-year payroll tax holiday to stimulate the economy. I have previously explained why I think monkeying around with the payroll tax is a dreadful idea and won't repeat my argument here. Today, I just want to ask one question: What are the odds that Republicans will ever allow this one-year tax holiday to expire? They wrote the Bush tax cuts with explicit expiration dates and then when it came time for the law they wrote to take effect exactly as they wrote it, they said any failure to extend them permanently would constitute the biggest tax increase in history. Sadly, Obama allowed himself to fall into the Republican trap, but that's another story. My point is that if allowing the Bush tax cuts to expire is the biggest tax increase in history, one that Republicans claim would decimate a still-fragile economy, then surely expiration of a payroll tax holiday would also constitute a massive tax increase on the working people of America. And what are the odds that the economy won't still be fragile a year from now? Zero, I would say.

Tax cuts and deficit commissions - The game continues, as Republicans hold out for tax cuts for the wealthy (who are garnering increasing amounts of the total income) and various "deficit commissions" put out austerity plans that all call for cutting Social Security benefits and Medicare benefits. Alice Rivlin, who spoke here at my campus some time ago, seemed clearly to have cutting Social Security and Medicare in mind even then.  See Alice Rivlin on Financial Reform and Deficits, ataxingmatter.  She is now "trying to stir a debate" about a national sales tax, according to Bloomberg.  Przybyla, Rivlin Proposes 6.5% National Sales Tax as Part of Deficit-Reduction Plan, Nov. 17, 2010.  See also Jackie Calmes, New Deficit Reduction Plan from Bipartisan Group.Now Rivlin is one of those Clintonites who is a right-center Democrat and, like so many of the Clinton and Obama advisers, close to the banking elite as a former Federal Reserve vice chairperson.  She claims her plan would be good for the country, but it isn't so clear to me.  Growth for growth's sake, we learn, doesn't work very well.

Why I Would Raise Taxes - The “You Fix the Budget” project offered by The New York Times on Sunday was an engaging exercise. It forced me to think more precisely about the loose terms “spending cuts” and “tax increases,” the highly abstract level below which our debate on fiscal policy rarely dares descend. (Others have also weighed in with their own proposals.) I worked with the numbers given in the exercise, which stays away from more radical ideas, like switching wholly or partly from an income tax to a consumption tax or the proposal by Representative Paul Ryan, Republican of Wisconsin, to convert Medicare from a defined benefit to a defined contribution plan. Someone else might set up the exercise somewhat differently, with different policy targets and different estimates of projected budget savings. That said, I found the exercise highly instructive and wish every voter took the time to complete it.

Death Panels and Sales Taxes - Krugman - I said something deliberately provocative on This Week, so I think I’d better clarify what I meant. So, what I said is that the eventual resolution of the deficit problem both will and should rely on “death panels and sales taxes”. What I meant is that (a) health care costs will have to be controlled, which will surely require having Medicare and Medicaid decide what they’re willing to pay for — not really death panels, of course, but consideration of medical effectiveness and, at some point, how much we’re willing to spend for extreme care (b) we’ll need more revenue — several percent of GDP — which might most plausibly come from a value-added tax And if we do those two things, we’re most of the way toward a sustainable budget. By the way, I’ve said this before.  Now, you may declare that this is politically impossible. But medical costs must be controlled somehow, or nothing works. And is a modest VAT really so much more implausible than ending the mortgage interest deduction?

Why I'm Soft On Sales Taxes - Paul Krugman - There’s a lot of backlash against the new Rivlin-Domenici proposal for suggesting a significant VAT — and people are right, sales taxes are regressive taxes. But while I haven’t had time to evaluate the whole thing, the sales tax itself isn’t a killing point in my view. Why? Because we know that countries with strong social safety nets generally rely a lot on consumption taxes: Source. More generally, it does seem that countries with strong welfare states have less progressive tax systems than those with weak safety nets; see this, from the Luxembourg Income Study (pdf). And there’s a substantial literature suggesting that this is no accident: that in the United States, because we don’t have a national sales tax, politics ends up being about tax brackets, which in the end can’t do much to reduce inequality, while in Europe you have broad-based taxes, and politics ends up being about who gets helped, which matters much more, especially for the less fortunate.

Krugman: Austerity-Lite - I don’t intend to start in again on the pernicious Paul Krugman, and I’m not going to write another long post on the likes of him. I just wanted to point out another example of the standard Krugman ploy, this time in his post, Why I’m Soft on Sales Taxes. Consider (as Krugman invites us to) a country like Sweden or Denmark which started out with a more socialistic mindset, always maintained a strong safety net, and always had consumption taxes as a major part of the revenue mix. There’s obviously no comparison between that and imposing a massive, alien sales tax on a country where the safety net is being shredded, and where the mentality is a Hobbesian shooting gallery. Under those circumstances such a tax would be viciously regressive. Yet Krugman is now taking the lead in calling for such taxes. So read our lips. No Taxes for the Non-Rich.

New Deficit Reduction Proposal Includes a VAT - Hot on the heels of the Bowles-Simpson deficit plan released last week, a group at the Bipartisan Policy Center released its own proposal today to address the United States' growing national debt. The plan from the BPC Debt Reduction task force, headed by former CBO director Alice Rivlin and former Senator Pete Domenici (R-NM) would cut federal spending in many areas, and would dramatically simplify the federal income tax by lowering rates, eliminating most itemized deductions and replacing others with simplified tax credits, and reducing the number of income tax brackets. In what is sure to be a controversial proposal, the plan calls for making up some of this lost revenue by imposing what it calls a "Deficit Reduction Sales Tax" - in other words, a national sales tax imposed on top of existing state and local sales taxes. According to the document released by BPC, the VAT would be phased in over two years, beginning with a 3% rate in 2012 and a 6.5% rate for 2013 and beyond. Fortunately, the Tax Foundation has recently released a VAT calculator that allows people to see how this sales tax could affect their household finances. The calculator is highly customizable, allowing users to pick both the tax rate and define the tax base as a percentage of GDP. The user can enter in the values for BPC's proposed VAT: a 6.5% rate on a tax base of 29% of GDP, and then enter his or her own financial information - the calculator estimates consumption in 21 broad categories and calculates the VAT burden accordingly.

Why Our Tax Code? - This issue comes up occasionally in my tax class, where I have a long-running but mostly silent debate with my professor. When he asked why we have some quirk in the tax code (I forget which), I said, “It’s a political economy thing: it benefits rich people, and they have more political power.” He said something like, “Maybe, but that argument proves too much, because the rich do pay taxes, and if they really called all the shots they wouldn’t pay any taxes.” Which is a reasonable point, so I’ve mainly let the issue lie.  But if you are the rich people in a democratic society where most people believe in reduced inequality, what kind of tax code do you want? You want to start with an overall progressive structure (so the people won’t revolt), and then you want a boatload of exceptions to that structure that (a) favor the rich and (b) can be individually defended on plausible (and sometimes even reasonable) grounds. Which is what we’ve got:

    • Mortgage interest tax deduction
    • State and local (property) tax deduction
    • Charitable deduction
    • Lower rates for capital gains and dividends
    • Exclusion (or tax deferral) for retirement and educational savings accounts
    • Exclusion of capital gains on home sales
    • Ability to donate appreciated assets to charity and deduct appreciated value without paying tax on appreciation

Re-examining the mortgage interest deduction - One of the positive effects of the deficit commission report is the way that it has brought the stupid mortgage-interest exemption back into the spotlight. David Kocieniewski’s article in the NYT is very good, although I don’t understand why simple statements of fact have to be attributed to anonymous “experts” or “economists”: In my ideal world, Kocieniewski would also have mentioned the substantial downsides of high homeownership rates, as well as the experience of the UK, which abolished mortgage-interest tax relief in 2000, only to see house prices skyrocket afterwards. But the broad thrust of Kocieniewski’s article is clear: the mortgage-interest deduction costs $131 billion a year, none of which goes to renters or to people who have paid off their mortgage, and all of which goes to people in the top 1/3 of the income distribution. There’s nothing fair about it at all, and in these straitened fiscal times, we’ve surely reached the point at which we have to abolish it somehow.

A reform both parties should love - Yet last week’s eminently sensible preliminary report of the bipartisan National Commission on Fiscal Responsibility and Reform seems to have brought forth not careful consideration but flights of fury. In particular, the possibility of reforming the home mortgage interest deduction has generated a torrent of ire. While one option mentioned by the report was to eliminate all tax deductions and credits, the more detailed Wyden-Gregg option is to limit the mortgage deduction to exclude second homes, home equity lines, and mortgages over $500,000. Lowering the upper limit on the home mortgage interest deduction should appeal to progressives, who want less largess for the wealthy, and to small-government conservatives, who dislike public paternalism. Unfortunately, the demons of discord seem to have prevented either group from embracing the reform.

Why is Congress protecting a tax code that benefits the rich? - It's a strange populism that denounces Wall Street in one breath and, in the next, shouts down tax changes that would treat the financiers' incomes like those of everyday folks.  But that pro-billionaire version of populism seems to have won big in the midterm elections. And it probably means the demise of a congressional effort to strike down one of the most outrageous provisions of our messed-up tax code, which is the special treatment of "carried-interest" compensation that's paid to many investment fund managers.  This loophole is so unfair that it gets criticized even by some of the tycoons who have benefited from it, such as former Treasury secretary Robert Rubin and other prominent investors I've queried. Basically, it taxes the money paid to managers of private-equity funds and similar partnerships at 15 percent, as if it were risk capital, rather than at ordinary income rates of 35 percent. (I'm assuming that the neopopulist Congress will balk at letting that rate rise to its old, pre-Bush level of 38 percent.)

Time to tax the rich -The final two years of the George H.W. Bush presidency brought a creeping recession, with an unemployment rate that increased from 5.6% in 1990 to 7.5% in 1992. In June 1992, just five months before the elections, the rate reached 7.8%, and Bush lost his reelection bid ("It's the economy, stupid"). What did the new president do about the economy? President Clinton in 1993 proposed to raise the highest marginal tax rate immediately from 31% to 39.6%. In a Wall Street Journal article, Martin Feldstein, the former chief economic advisor to President Reagan and then as well as now a professor of economics at Harvard, opined that "Mr. Clinton's proposal to raise the marginal tax rates of high-income individuals would hurt incentives, weaken the economy and waste investment dollars." This was, of course, a reincarnation of the GOP's trickle-down theory — tax cuts for the rich would eventually benefit the middle and lower classes. The tax increase passed by only the narrowest of margins. In the House the vote was 218 to 216, while in the Senate the increase passed with a tie-breaking vote by Vice President Al Gore. And what were the consequences? In the seven years that followed, the unemployment rate decreased steadily, every single year, until it reached 4% in 2000.

Schakowsky Proposes Alternate Budget Plan: Save Social Security, Tax Millionaires - After the National Commission on Fiscal Responsibility and Reform released a polarizing deficit reduction proposal on November 10, Rep. Jan Schakowsky (D-Illinois) did not hesitate in expressing her disapproval. "This is not a package I could support," she said at the time. On Monday, Schakowsky, who also serves on the commission, released her own proposal, which contrasts significantly with the plan compiled by commission co-chairs Alan Simpson and Erskine Bowles. Most notably, Schakowsky's plan approximates a $426.95 billion reduction, a higher figure than the $250 billion target President Obama recommended to the commission. The Bowles-Simpson proposal had a final reduction amount of $200.3 billion over the same time period. "Fixing the Federal deficit is not an end in itself," Schakowsky said in a statement. "The goal of budget policy should be to assure long-term, widely shared economic growth." Schakowsky's proposal also sharply differs from the Bowles-Simpson plan by avoiding cuts to Social Security, which she said is unrelated to the country's poor economy.

Were the Bush Tax Cuts Good for Growth? - Liz Peek at congratulates me for writing about the importance of economic growth. So in the spirit of maximizing growth, I want to pose a question: Why should we believe that extending the Bush tax cuts will provide a big lift to growth?Those tax cuts passed in 2001 amid big promises about what they would do for the economy. What followed? The decade with the slowest average annual growth since World War II. Amazingly, that statement is true even if you forget about the Great Recession and simply look at 2001-7.The competition for slowest growth is not even close, either. Growth from 2001 to 2007 averaged 2.39 percent a year (and growth from 2001 through the third quarter of 2010 averaged 1.66 percent). The decade with the second-worst showing for growth was 1971 to 1980 — the dreaded 1970s — but it still had 3.21 percent average growth. The picture does not change if you instead look at five-year periods. Here’s a chart ranking five-year periods over the past 50 years, in descending order of average annual growth:

The World as He Finds It, by Paul Krugman, Commentary, NY Times: On Wednesday David Axelrod, President Obama’s top political adviser, appeared to signal that the White House was ready to cave on tax cuts — to give in to Republican demands that tax cuts be extended for the wealthy as well as the middle class. “We have to deal with the world as we find it,” he declared. The obvious point is the contrast between the administration’s current whipped-dog demeanor and Mr. Obama’s soaring rhetoric as a candidate. How did we get from “We are the ones we’ve been waiting for” to here? But the bitter irony goes deeper than that: the main reason Mr. Obama finds himself in this situation is that two years ago he was not, in fact, prepared to deal with the world as he was going to find it. And it seems as if he still isn’t.  This promise of transcendence may have been good general election politics, although even that is questionable:  But the real question was whether Mr. Obama could change his tune when he ran into the partisan firestorm everyone who remembered the 1990s knew was coming. He could do uplift — but could he fight? So far the answer has been no.

Dems Frustrated With White House Over Tax Cuts - Senate Democrats remain divided on how to move forward on extension of the 2001 and 2003 Bush-era tax cuts, and some are pointing the finger of blame at the White House, frustrated at what they see is a lack of guidance or ambiguous guidance coming from the president and his top aides. From a post-election news conference to a "60 Minutes" interview to comments from senior White House adviser David Axelrod, Democrats are scratching their heads trying to figure out what the leader of their party really wants them to do. "The players on the field want a game plan," said one senior Democratic congressional aide who requested anonymity to be candid about caucus sentiment. "There's an increasing frustration from members that there is not a plan...There is just tremendous frustration. I mean, where are they?" The aide noted that Senate Democrats, meeting behind closed doors Wednesday and most likely Thursday, intend to discuss the tax cuts, but there is one notable absence. "Where is the White House? There's no one here talking to us today or tomorrow," the aide fumed, noting that former White House Chief of Staff Rahm Emanuel would have been here. "Geithner says it's quote quite likely that we'll get this done. That sounds nice, I could say that, too, but what do they want done?"

Mr. Obama's Most Recent "2%" Sellout is his Worst Yet - Now that President Obama is almost celebrating his willingness to renew the tax cuts enacted under George Bush for the super-rich ten years ago, it is time for Democrats to ask themselves how strongly they are willing to oppose an administration that looks increasingly like Bush-Cheney III. Is this what they expected by his promise of an end to partisan politics? It is a reflection of how one-sided today’s class war has become that Warren Buffet has quipped that “his” side is winning without a real fight being waged. No gauntlet has been thrown down over the trial balloon that the president and his advisor David Axelrod have sent up over the past two weeks to extend the Bush tax cuts for the wealthiest 2% for “just” two more years. For all practical purposes the euphemism “two years” means forever – at least, long enough to let the super-rich siphon off enough more money to bankroll enough more Republicans to be elected to make the tax cuts permanent.

Dear Mr. President - There have been (admittedly unclear) indications from your administration that you may accede to the Republicans’ demand to extend the Bush tax cuts for everyone.  I urge you not to do this. The question is: Is it better to extend the tax cuts for everyone or for no one? The answer is to extend them for no one. The Bush tax cuts have always overwhelmingly benefited the rich, not the middle class, and that is no less true today than when they were enacted. They were bad policy then and they are bad policy today. Extending the tax cuts would dramatically enrich the wealthy relative to everyone else. 65.5 percent of the total benefit would go to the top quintile by income, 26.8 percent to the top 1 percent, and 14.7 percent to the top 0.1 percent.*

What Would You Do With $67 Billion? - A major item on the remaining agenda of the 111th Congress is the extension of some or all of the expiring Bush-era tax cuts. As Congress deliberates, unemployment remains high, job creation is weak, and revenues are scarce. At the same time, emergency federal unemployment benefits are set to expire on November 30, and an estimated 2 million Americans will lose benefits in December (Riordan et al. 2010). If in the midst of these challenges Congress decides to extend the Bush tax cuts for the wealthy (individuals making above $200,000 or joint-filers making above $250,000 per year) for the next two years, it will be giving $66.8 billion to a group whose incomes have seen the strongest growth over recent decades and who will put relatively little of it back into the economy. At a time when millions are unemployed, revenues are tight, and the economy needs spending that will most improve the economic and budgetary outlook, there are better ways to invest $66.8 billion. Read Briefing Paper #285

I am getting outright Rude - I will be the Dirty Old Man in the scenario, and state that this is not only true, but what should occur. We need higher taxes, and more on the order of 26%, than on the order of 10%. Our dear President and Congress should grow a Pair, and start to straighten out the Mess. There are a number of reasons for that Statement, and I will try to explain; forever engendering the anger of Conservatives and Business. I will want to present the ideation that Government makes a poor Consumer of Last Resort, and Congress and President should be enticed to spend much less, which they will not do unless Taxpayers are actually pressured by taxation.

Millionaires to Obama: Tax us - Anti-tax activists everywhere have been loudly arguing for an extension of George W. Bush-era tax cuts for the wealthiest Americans in the United States.  Now a group of millionaires is arguing the opposite. More than 40 of the nation's millionaires have joined Patriotic Millionaires for Fiscal Strength to ask President Obama to discontinue the tax breaks established for them during the Bush administration, as Salon reports. "For the fiscal health of our nation and the well-being of our fellow citizens, we ask that you allow tax cuts on incomes over $1,000,000 to expire at the end of this year as scheduled," their website states. "We make this request as loyal citizens who now or in the past earned an income of $1,000,000 per year or more."

Your Congressperson Got Richer Last Year. You Did Not - From 2008 to 2009, the median household net worth for a member of Congress went up 19 percent. During the same time, the national median plummeted by 15 percent. This is known as a plutocracy. The congressional figures were released yesterday by the Center for Responsive Politics, which tallied them from financial disclosure reports filed by members of Congress. The nationwide figures come from the Federal Reserve. Bottom line—members of Congress have weathered the economic catastrophe just fine, and by 2009, the year the recession ended, their median net worth had rocketed to 122 percent of where it stood in 2004. The median regular household, by contrast, was still underwater last year compared to where it stood in 2004, down 10 percent.  The median net worth for a member of Congress last year was $908,255; the median household net worth was $84,000. (The figures on the chart above are adjusted for inflation.) Nearly one out of two members of the House and Senate are millionaires.

Four possible deals on the Bush tax cuts - The Bush tax cuts will not be permanently extended. But they -- or at least some of them -- will be temporarily extended. That we don't know which ones, or for how long, should embarrass Congress and the White House. The expiration date for the tax cuts was set into law 10 years ago. Congress shouldn't still be scrambling to figure this out with less than 50 days to go.  But it is. And it's the Democrats -- as they still control both houses of Congress and the presidency -- who deserve the blame. They still have not settled on a policy or strategy for extending the Bush tax cuts. They waited until after the election, which weakened their hand. And they've been unable to get their members on the same page, which has kept them from messaging the issue to the country or forcing Republicans to the negotiating table. Which is a shame, because even an extension of the tax cuts is a much-needed legislative opportunity for a reeling party that desperately needs some political and procedural leverage over the Republicans. Democrats being Democrats, it's entirely possible that they'll take neither, and simply extend the tax cuts outright. But talks with informed sources both on and off the Hill revealed not just a lot of frustration with the possibility of that outcome, but a lot of sensible ideas for negotiating something better. So here are four concessions that Democrats should be looking to get out of the resolution:

What Congress does—or doesn't do—about the Bush tax cuts and how it will affect you. - What is everyone bickering over? What does it mean for "middle-class Americans," the group every side is supposedly looking out for? Is Congress really raising taxes? Here, as a public service, are answers to these questions. Last question first: Congress isn't really raising taxes. At least this Congress isn't. The 107th and 108th, back in the early aughts, passed this tax hike as part of a tax-cut bill. (Stay with me; it gets better.) Republicans wanted big, permanent tax cuts but lacked the votes to get them through the Senate. So they passed the two bills slashing taxes using the budget reconciliation process, which allows the party in power to avoid filibusters. Then they had to deal with something called the "Byrd rule," which lets senators block reconciliation legislation if it results in an increase in the deficit 10 years after its passage. Republicans handled that problem by simply writing an expiration date into the law: Jan. 1, 2011. The thinking was that no future Congress would dare allow taxes to go back up, and so these temporary cuts were really permanent.

New and Improved: Tax Calculator 2.0 - In response to your comments, the Tax Policy Center has revised its tax calculator. The calculator’s popularity and use have more than pleased us but comments and questions induced us to begin updating it almost immediately after its rollout. TC2.0 incorporates three major changes. Now users will be able to:
• Simulate either 2010 or 2011 taxes—compare tax changes against tax law for either year.
• Turn the AMT patch on or off—continue the temporarily higher exemptions for the alternative minimum tax or use their lower permanent values.
• Estimate the impact of tax law changes on five built-in income levels. In addition to incomes approximating the 20th percentile, median, and 80th percentile for each of our six representative households, we’ve added two higher incomes representing the top 1 percent and the top 1/10 percent of each type of household with sources of income and itemized deductions consistent with those incomes

Bush-era tax deal Could Include Jobless Benefits - (Reuters) - A deal on a temporary extension of the Bush-era tax rates could emerge that would also renew unemployment benefits for 2 million Americans about to lose them, top lawmakers said on Tuesday. A senior Republican in the House of Representatives said he could back extending jobless benefits, favored by Democrats like House Speaker Nancy Pelosi, in exchange for an extension of all Bush-era tax cuts, including for the wealthiest groups. "What we're going to do is sit down and talk with Mrs. Pelosi," Representative Pete Sessions, a Republican in leadership, told Reuters as he left a meeting of House Republicans. "I see nothing wrong with her winning as long as the American people do." Jobless benefits for 800,000 Americans will expire on Nov. 30 if Congress fails to act. Two million in total would lose benefits by the end of December.

Jobless Benefits to Expire as Congress Debates Tax - Jobless benefits will run out for 2 million people during the holiday season unless they are renewed by a Congress that's focusing more attention on a quarrel over preserving tax cuts for people making more than $200,000 a year. It's looking iffy at best whether Congress will renew jobless benefits averaging $310 per week nationwide that are presently claimed by almost 5 million people who have been out of work for more than six months. An extension of jobless benefits enacted this summer expires Dec. 1, and on Thursday, a bill to extend them for three months failed in the House. Democrats brought the bill to the floor under fast-track rules that required a two-thirds vote to pass. Republicans opposed the legislation because they were denied a chance to attach spending cuts, so the measure fell despite winning a 258-154 majority.

Why the Lame Duck Congress Must Extend Jobless Benefits For Hard-hit Families But Not Tax Cuts For the Rich - America's long-term unemployed -- an estimated 4 million or more -- constitute the single newest and biggest social problem facing America. Now their unemployment benefits are about to run out, and the lame-duck Congress may not have the votes to extend them. (You can forget about the next Congress.) The long-term unemployed can't get work because there are still five people needing work for every job opening.  Without enough money in their pockets, they and their families can't pay their mortgages, which keeps fueling the mortgage crisis. Nor can they replace worn-out cars and clothing, or buy much of anything else, which is a drag on the economy.  Republicans and many blue-dog Dems say we can’t afford another extension. But these are many of the same people who say we should extend the Bush tax cuts for the wealthy for at least another two years. Extending the Bush tax cuts for the top 1 percent would cost an estimated $120 billion over the next two years. That’s more than another unemployment benefit extension would cost. The unemployed need the money. The rich don’t.

Who Will Stand Up to the Superrich? - They were not on the ballot, and most of them are not household names. Unlike Whitman and the other defeated self-financing candidates, they are all but certain to cash in on the Nov. 2 results. There’s no one in Washington in either party with the fortitude to try to stop them from grabbing anything that’s not nailed down.  The Americans I’m talking about are not just those shadowy anonymous corporate campaign contributors who flooded this campaign. No less triumphant were those individuals at the apex of the economic pyramid — the superrich who have gotten spectacularly richer over the last four decades while their fellow citizens either treaded water or lost ground. The top 1 percent of American earners took in 23.5 percent of the nation’s pretax income in 2007 — up from less than 9 percent in 1976. During the boom years of 2002 to 2007, that top 1 percent’s pretax income increased an extraordinary 10 percent every year. But the boom proved an exclusive affair: in that same period, the median income for non-elderly American households went down and the poverty rate rose.

A lame and spineless duck? - The lame-duck session of Congress that kicks off this week will test whether Democrats have spines made of Play-Doh and whether President Obama has decided to pretend that capitulation is conciliation.  Congress faces an enormous amount of unfinished business, largely because of successful GOP obstruction tactics during the regular session. Republican senators who declare themselves moderate helped block action on important bills, objecting to provisions they didn't like or to Democratic procedural maneuvers.  One of the bills blocked was the Disclose Act, designed to end the scandal of secret money in election campaigns. If this year's contests prove anything, it's that voters should have the right to know which millionaires, corporations and special interests are flooding the airwaves with attack ads on behalf of candidates...

The levelling-off in OTC derivatives - Fresh from the Bank for International Settlements – lots and lots of derivatives statistics. And according to the central bank’s bank, growth in the OTC derivatives market has rather slowed. Positions went up in the three years since their last Triennial survey (+15 per cent, or 5 per cent annualised) to $583,000bn, but that’s nothing compared to growth in the previous (2004-2007 period) or 131 per cent, or 32 per cent a year. The notional amounts outstanding shown below: It seems the market has yet to recover from the financial crisis. The Triennial results are, according to BIS, the result of a surge in positions until June 2008, followed by a decline after that. However, in one area there has been a pick-up — gross values. Growth in gross market values, which BIS says provide a measure of the counterparty risk of these positions at prevailing market prices (or the current cost of entering equivalent trades), went up by 122 per cent to $25,000bn at the end of June 2010 . Compare that with growth of just 74 per cent during the previous period

Too Big To Be Governed? - With its high-profile leader and easily understood mandate, the Consumer Financial Protection Bureau is also likely to be an exception to the rule that implementing Dodd-Frank will be an arcane and obscure process dominated by insiders. On most fronts, Wall Street's legions of lawyers and lobbyists will have home-court advantage. The stakes could hardly be higher -- they involve not just whether we avert the next financial collapse but whether the banking system can be restored to its proper role of financing the rest of the economy rather than just enriching itself. To keep the legislation moving and to get it to the president's desk, Congress in many cases compromised by punting on tough choices and leaving them to the executive branch. The Federal Deposit Insurance Corporation alone, for example, must conduct 44 separate rule-making exercises, according to Chair Sheila Bair. In rule-making, regulators solicit comments, draft provisional rules, take more comments, and then issue final rules. Formally, the process is admirably transparent, but transparency doesn't solve the gross asymmetry of influence and expertise. "We've instructed the several agencies to issue rules, and they're overwhelmed," says a senior aide to one of the legislators who wrote the bill. "Every lawyer in town is on the payroll of one bank or another. There is a huge imbalance of resources combined with the capacity of banks to clog the regulatory machinery."

No honeymoon for Elizabeth Warren - Last week, American Banker reported that an assault on the not-yet-functional Consumer Financial Protection Bureau is already underway. Rep. Scott Garrett, who hopes to chair the capital markets subcommittee, took a hard-line stance Wednesday, calling on the administration to dismantle the new consumer bureau before it is even started. "We don't need a CFPB," he said. "That would be a great first step for this administration if they want to start showing how they are willing to work with us, to say that, 'We recognize the failure that this doesn't do anything to address the problems so let's start unwinding that.'" Spencer Bachus, in line to take over the House Financial Services committee, has already signaled his intentions to tinker with the CFPB's funding. Under Dodd-Frank, the CFPB receives its funding from the Federal Reserve, thus insulating it from congressional pressure. Bachus wants to make CFPB's funding part of the regular congressional appropriations process -- so he can exert pressure on it.

Elizabeth Warren: Plenty of Power - Just how much muscle the new Consumer Financial Protection bureau and its temporary leader, Elizabeth Warren, have before it gets its full powers and a permanent director next year is a matter of some angst in Washington and on Wall Street. On Thursday, a key Treasury official said that Ms. Warren and her fledgling bureau have quite a bit of authority – including the ability to start the rule-writing process. The bureau can engage undertake studies, solicit feedback from the public “and I think even putting out proposals,” Treasury’s General Counsel George Madison said. The bureau’s current power does not, however, extend to issuing final rules, he said. Treasury Secretary Timothy Geithner has set July 21, 2011, as the date the consumer agency will receive all of the consumer protection authority from existing federal regulators, making that the target for having the bureau up and running at full speed.

Battle With Bondholders Looms After G-20 Agrees on Basel Rules - The next hurdle to bank reform is looming after U.S. President Barack Obama and other Group of 20 leaders endorsed the Basel Committee on Banking Supervision’s new rules in South Korea last week: the bond market.  Regulators worldwide, seeking to protect taxpayers from having to foot the bill for future bank bailouts and to cushion big lenders in times of stress, will now turn their attention to preventing the collapse of systemically important financial firms. Among the tools they’re considering are capital instruments that would force investors in bank debt to bear the cost of a bailout by slashing the value of their bonds or converting them to equity in a crisis.  That doesn’t sit well with buyers of senior bank bonds who prize the certainty they’ll be repaid in full. The 201 members of Morgan Stanley Capital International’s World Banks Index need investors to help refinance $3 trillion of bonds coming due by the end of next year, according to data compiled by Bloomberg.

Fraud and Complicity Are Now the Lifeblood of the Status Quo (Banality of Financial Evil, Part 2) The status quo would collapse were systemic fraud and complicity banished. Rather than the acts of evil conspirators, they have become the foundation of the U.S. economy and financial system. Though fraud and complicity are presented in the mainstream media as isolated conspiracies outside the status quo, the truth is that the status quo is now entirely dependent on fraud and complicity for its very survival. Every level of the status quo would immediately implode were fraud and complicity suddenly withdrawn from the system.  How is this true? let me count the ways.

Why the government profiting from the bailout is a bad thing - I want to follow Karl’s comments about bailouts with some scattered thoughts of my own. If I read him correctly, I think he is arguing that bailouts with risk taking are a second best outcome, and that we can’t have both risk taking and no bailouts unless we want financial panics as well. One response to his argument that bailouts are needed because we want firms to take risks is to point out that risk taking is important in all industries, and so we should have bailouts in manufacturing and retail industries to encourage more risk taking? No matter how necessary bailouts are at some points in time we want them to be costly both for those being bailed out and for those doing the bailing. Long in the future when the economy is back at full employment, the argument that “we bailed out banks before and made money on it” or “we bailed out G.M. before and made money on it” will be more salient than today’s popular anti-bailout sentiments are. It is an easy debate point that I am afraid will stand the test of time whereas the popular backlash will fade into memory.

Pretty Good for Government Work, by Warren Buffett - Just over two years ago, in September 2008, our country faced an economic meltdown. Fannie Mae and Freddie Mac, the pillars that supported our mortgage system, had been forced into conservatorship. Several of our largest commercial banks were teetering. One of Wall Street’s giant investment banks had gone bankrupt, and the remaining three were poised to follow. A.I.G., the world’s most famous insurer, was at death’s door.  Many of our largest industrial companies, dependent on commercial paper financing that had disappeared, were weeks away from exhausting their cash resources. Indeed, all of corporate America’s dominoes were lined up, ready to topple at lightning speed. My own company, Berkshire Hathaway, might have been the last to fall, but that distinction provided little solace.  Nor was it just business that was in peril: 300 million Americans were in the domino line as well. Just days before, the jobs, income, 401(k)’s and money-market funds of these citizens had seemed secure. Then, virtually overnight, everything began to turn into pumpkins and mice. There was no hiding place. A destructive economic force unlike any seen for generations had been unleashed.

Warren Buffett in bizarre NYTimes opinion: Thanks for the bailouts, suckers! - Warren Buffett writes a bizarre opinion in Wednesday’s New York Times, thanking Uncle Sam for all the bailouts. Free money to Fannie Mae and Freddie Mac! Free money to AIG! Send that money–100% on the dollar–in the billions over to Goldman Sachs, and over to me, Warren Buffett! Thanks, Uncle Sugar!  What a joke! These people should be in jail! Bernanke said under oath that he wouldn’t monetize the debt–and he just monetized the debt, printing almost a trillion worthless bucks. Hank Paulson made frequent calls to his banker friends during the worst of the crisis, tipping them off to what the government would do. Tim Geithner helped Lehman Brothers disguise the debts on its balance sheets, wiping me (a duped shareholder) clean. What a joke! These people should be in jail! Bernanke said under oath that he wouldn’t monetize the debt–and he just monetized the debt, printing almost a trillion worthless bucks. Hank Paulson made frequent calls to his banker friends during the worst of the crisis, tipping them off to what the government would do. Tim Geithner helped Lehman Brothers disguise the debts on its balance sheets, wiping me (a duped shareholder) clean.

Stockman Savages Buffett Op-Ed, Bailout Canards - Yves Smith - One of the annoying and persistent Big Lies of the financial crisis is that the rescues were a really good thing because they saved the world as we know it. That argument is dubious for a host of reasons: the world as we know it is the very same one that went off a cliff, so we seem to be committing ourselves to the financial markets version of Groundhog Day; the choice was not between rescue and no rescue, but the type of rescue the officialdom implemented and other forms of intervention. At Minyanville former Reagan budget director David Stockman eviscerates a New York Times op-ed by Warren Buffett in which the Shill of Omaha contends that the seize-up of the commercial paper markets in September 2008 been allowed to persist, it would have represented a comet-wiping-out-the-dinosaurs level event as far as ordinary Americans were concerned. Key excerpts: If Warren Buffett wants to tarnish his golden years emitting the gushing drivel that appears in today’s New York Times, he has undoubtedly earned the privilege. But even ex cathedra pronouncements by the Oracle of Omaha are not exempt from the test of factual accuracy. Specifically, his claim that “many of our largest industrial companies, dependent upon commercial paper financing that had disappeared, were weeks away from exhausting their cash resources” is unadulterated urban legend. Nothing remotely close to this ever happened….

Does the SEC have teeth after all? - The SEC is all over the news today. It’s investigating Citigroup! It’s examining Charles Schwab, over the YieldPlus fiasco which we thought was settled but wasn’t! And, of course, in conjunction with Andrew Cuomo, it’s coming down on Steve Rattner like a ton of bricks: The two lawsuits seek at least $26 million from Rattner and his immediate lifetime ban from the securities industry in New York… “Steve Rattner was willing to do whatever it took to get his hands on pension fund money including paying kickbacks, orchestrating a movie deal, and funneling campaign contributions,” said Attorney General Cuomo. “Through these lawsuits, we will recover his ill gotten gains and hold Rattner accountable.” Technically it’s Cuomo who’s bringing the suits, while the SEC is announcing a $6.2 million civil settlement with Rattner, timed beautifully to coincide with the first day of trading in GM shares. But what seems clear is that the SEC, egged on by the likes of Cuomo and emboldened by its success in extracting half a billion dollars from Goldman Sachs over the Abacus affair, has started to grow some teeth for the first time in living memory.

U.S. in Vast Insider Trading Probe - Federal authorities, capping a three-year investigation, are preparing insider-trading charges that could ensnare consultants, investment bankers, hedge-fund and mutual-fund traders and analysts across the nation, according to people familiar with the matter. The criminal and civil probes, which authorities say could eclipse the impact on the financial industry of any previous such investigation, are examining whether multiple insider-trading rings reaped illegal profits totaling tens of millions of dollars, the people say. Some charges could be brought before year-end, they say.  The investigations, if they bear fruit, have the potential to expose a culture of pervasive insider trading in U.S. financial markets, including new ways non-public information is passed to traders through experts tied to specific industries or companies, federal authorities say.

Mirabile Dictu: SEC Finally Going After Business of Selling Inside Information - Yves Smith - Yours truly has complained off and on over the years about “consulting” and “research” firms whose entire business model revolves around the procurement and sale of inside information. These companies solicit consultants, who in the vast majority of cases are employees of major corporations, to provide insight into what is going on at their employer’s operations. These vendors are generally smart enough to make their consultants sign various waivers, which have the effect of shifting liability on to the hapless chump paid a couple of hundred dollars an hour for an hour or two for information worth vastly more than than. They are effectively exploiting the contract worker’s lack of understanding of the finer points of SEC regulations and corporate policy. We first wrote about this abuse with weeks of starting this blog, in January 2007, when a Wall Street Journal investigation of the biggest player in this space, Gerson Lerman, led to an investigation by the New York attorney general, Eliot Spitzer (the SEC reportedly had investigations underway, although it was not clear whether Gerson Lerman was a focus). The two paragraphs from this January 2007 post are extracted from a contemporaneous Wall Street Journal piece, the balance is our commentary:

Financial Crisis Not Over Yet - This weekend served up a heaping helping of my entire personal stew of economic nightmares.  All of these are trouble spots for the world economy. Throw in Eastern Europe and hot money flows into developing countries and you've got an even half dozen shocks that could send us into another tailspin. Hopefully none of them will happen. But all it would take is for one or two of them to unfold badly. Keep your fingers crossed. So here it is, your global economic news for the weekend:

Fed Requires Test for Banks Before Restoring Dividend - The Federal Reserve will require big banks to undergo a new round of stress tests — this time, to determine if they are sound enough to begin raising their stock dividends.  The announcement from the Fed, made Wednesday, came after banks pressured regulators for months to let financial companies restore dividends. The dividends were reduced sharply after the federal rescue of the financial system.  The Fed will require the 19 financial institutions that underwent stress tests during the financial crisis to undergo new reviews. As part of the exam, they must submit capital plans by Jan. 7 that show their ability to withstand losses under “adverse” economic conditions over the next two years.

Fed Announces New Stress Tests for Biggest Banks - The Federal Reserve just issued notice that the 19 banks that were subject to stress tests in May of 2009 will have to perform another round of stress testing. Officially, the new stress tests are only mandatory for banks that plan to increase their dividend or conduct stock repurchases. But the Fed makes it pretty clear that all 19 banks should submit “comprehensive capital plans” by January 7 of next year. “SCAP BHCs are encouraged to have their capital plans filed by January 7, 2011, irrespective of whether they intend to undertake any capital distributions,” the Fed writes.

Unofficial Problem Bank list increases to 903 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Nov 19, 2010. Changes and comments from surferdude808:  As anticipated, the Unofficial Problem Bank List rose above 900 as the OCC released its actions through the middle of October 2010 today. Net additions were 5 institutions, which pushed the list total to 903. Assets increased this week by $1.13 billion pushing the aggregate total to $419.6 billion.There were four removals this week including the three failures

Paychecks for CEOs Climb - The chief executives of the largest U.S. public companies enjoyed bigger paydays in their latest fiscal year, as share prices recovered and profits soared amid the country's slow emergence from recession. At these 456 companies, the median pretax value of CEO salaries, bonuses and long-term incentives, such as grants of stock and stock options, rose by 3% to $7.23 million, according to an analysis of their latest proxy filings for The Wall Street Journal by consulting firm Hay Group.The results differ markedly from the April analysis, which covered 200 such companies and found median total direct compensation had dropped 0.9%.

Investors Bankroll Lawsuits to Profit From Payouts - Large banks, hedge funds and private investors hungry for new and lucrative opportunities are bankrolling other people’s lawsuits, pumping hundreds of millions of dollars into medical malpractice claims, divorce battles and class actions against corporations — all in the hope of sharing in the potential winnings.  The loans are propelling large and prominent cases. Lenders including Counsel Financial, a Buffalo company financed by Citigroup, provided $35 million for the lawsuits brought by ground zero workers that were settled tentatively in June for $712.5 million. The lenders earned about $11 million.  Most investments are in the smaller cases that fill court dockets. Total investments in lawsuits at any given time now exceed $1 billion, several industry participants estimated. Although no figures are available on the number of lawsuits supported by lenders, public records from one state, New York, show that over the last decade, more than 250 law firms borrowed on pending cases, often repeatedly.

Consumer Reports: BBB accused of giving higher scores to dues-paying businesses - The Better Business Bureau's system of rating companies is being criticized by the Connecticut Attorney General's as being not much better than a "pay-to-play" scheme that rewards companies that pay BBB dues with higher scores - and punishes those that don't with lower ones. And tonight, an ABC News investigation that airs on 20/20 looks deeper into those allegations. The ABC investigation describes a group of Los Angeles business owners who - unhappy with the BBB -tried to prove just that. After paying $425 to the Better Business Bureau the owners were able to obtain an A minus grade for a non-existent company called Hamas, named after the Middle Eastern terror group.

Bailouts, Reframed as ‘Orderly Resolutions’, by Robert Shiller - Distasteful as it may seem, we need to prepare for the next financial crisis, which, of course, will arrive eventually. Right now, though, people are so angry about the recent bailouts of Wall Street that the government may not be able to use the same playbook again. The criticism has emphasized the trillions of taxpayer dollars that the bailouts put at risk. But, in fact, the realized losses were minuscule when compared with the widespread suffering they averted. ... TARP may have prevented many trillions of dollars of losses in gross domestic product. Our principal hope for dealing with the next big crisis is the Dodd-Frank Act... It calls for bailouts of a sort, but has reframed them so they may look better to taxpayers. Now they will be called “orderly resolutions.” Psychologists tell us that subtle changes in framing can bring major changes in perception. In essence, Dodd-Frank is asking the F.D.I.C. to do much the same thing for a wide spectrum of financial companies as it has done with traditional banks

Robert Shiller Advocates and Engages in NewSpeak and Dubious Analysis in NYT Piece - Yves Smith - As an article in today’s New York Times makes clear, Robert Shiller has joined a group of behavioral economists that are advocating the use of propaganda and the sublter forms of manipulation of the public that Walter Lippmann famously called “the manufacture of consent.” In one sense, this ugly development is coming full circle. Lippmann and the so-called father of the pubilc relations industry, Eddie Bernays, were both members of the Creel Commission, which in a remarkably short period of time, turned a pacifist US into a nation eager to attack bloodthirsty, baby-bayonting Germans in the Great War.  It’s ironic and a bit sad that Shiller penned this appalling New York Times piece. He was one of the few economists to warn of the dangers of the housing bubble. Yet now he seems to be siding with some of the most questionable impulses of his discipline, namely, a clumsy effort at sleight of hand to defend a dubious orthodoxy. In other words, the article, which defends the manipulation of public opinion, also contains crude bits of propagandizing. This is the second paragraph of Shiller’s article, “Bailouts, Reframed as ‘Orderly Resolutions’,“: The criticism has emphasized the trillions of taxpayer dollars that the bailouts put at risk. But, in fact, the realized losses were minuscule when compared with the widespread suffering they averted. The net losses of the $700 billion Troubled Asset Relief Program, for example, which ran from October 2008 to October 2010, amounted to only $30 billion by the latest estimate. Yet TARP may have prevented many trillions of dollars of losses in gross domestic product.  Let’s count the intellectually dishonest arguments here:

'Robo-Signer' Foreclosure Scandal May Threaten Fundamental Financial Stability, Government Watchdog Warns - The ongoing "turmoil" roiling megabanks and their faulty home foreclosure practices may represent deeper, more systemic problems regarding the origination, transfer and ownership of millions of mortgages, potentially putting Wall Street on the hook for billions of dollars in unexpected losses and threatening to undermine "the very financial stability that the Troubled Asset Relief Program was designed to protect," a government watchdog warns in a new report. Recent revelations regarding mortgage companies' use of "robo-signers" when processing foreclosure documents "may have concealed much deeper problems in the mortgage market," according to the Tuesday report by the Congressional Oversight Panel, an office formed to keep tabs on the bailout. Disclosures by big banks that they employed people whose sole job was to essentially rubber-stamp foreclosure documents without reading them or verifying basic facts led firms like JPMorgan Chase, Wells Fargo and Bank of America to halt home repossessions beginning in late summer and early fall.

State AGs And Banks Prepare Fraudclosure Settlement, Bailout Number Two For BofA Imminent - CNBC's Diana Olick reports that the investigation into the biggest financial fraud in recent history is about to be shelved: the reason, state AGs are nearing a settlement with banks, which will slap a few wrists, will see banks put some lunch money in a settlement fund, will result in some principal reductions, and everything will be well again, as banker bonuses surpass 2009 levels (as noted previously). Retroactively in perpetuity. In other news, state sponsored fraud in America is alive and well. Update: don't spend that bonus money on the January edition Perfect 10s just yet. In what seems to be a day of relentless newsflow, we have just learned via Charlie Gasparino and Fox Biz, that Phil Angelides is launching his own probe into the mortgage market. Then again, all this means is that BofA will need to spend a few million extra dollars to bribe the key people in this latest development, and then everything shall be well again.

Blind Trust - The mortgage mess isn't going away. Loans, sold as many as 12 times before ending up in a complex security or on a financial institution's balance sheet, have been found with key legal paperwork misplaced or incorrectly transferred. If you've followed the issue, you know documentation problems prevent mortgage servicers from foreclosing on homes: They lack proof of their legal right to do so. It's a symptom of underlying irregularities, not the end of the story. The infamous "robo-signer," who approved 400 foreclosure filings a day without determining their validity, helped reveal these problems, but they appear to go much deeper.  The observer most well positioned to see what was happening with the servicing industry was the U.S. Treasury, which administered HAMP -- the Home Affordable Modification Program -- an anti-foreclosure initiative that paid servicers to craft sustainable loan modifications according to government standards. Today, Treasury maintains that the foreclosure fiasco won't affect HAMP or the government's efforts to maintain financial stability, but independent experts, government oversight committees, and the experience of borrowers on the ground suggest that the administration needs to ramp up its response.

Get Ready for the Great MERS Whitewash Bill - CNBC - When Congress comes back into session next week, it may consider measures intended to bolster the legal status of a controversial bank owned electronic mortgage registration system that contains three out of every five mortgages in the country.  The system is known as MERS, the acronym for a private company called Mortgage Electronic Registry Systems. Set up by banks in the 1997, MERS is a system for tracking ownership of home loans as they move from mortgage originator through the financial pipeline to the trusts set up when mortgage securities are sold.  The system has come under scrutiny by critics who charge MERS with facilitating slipshod practices. Recently, lawyers have filed lawsuits claiming that banks owe states billions of dollars for mortgage recording fees they avoided by using MERS.  If courts rule against MERS, the damage could be catastrophic. Here’s how the AP tallies up the potential damage:

Will MERS Exam Be a Whitewash? - - Yves Smith - The Wall Street Journal real estate blog reports that Federal banking regulators will conduct an examination of MERS, the electronic mortgage and servicing rights data service (hat tip ForeclosureHamlet). As much as scrutiny of MERS is very much in order, it remains an open question as to whether this effort is serious.  One impetus for this review is an article by Chris Peterson, which was very critical of MERS’ inconsistent roles. For instance, the manner in which MERS registers mortgages in local courthouses is problematic: MERS’s rights vis-à-vis mortgages registered on the MERSCORP database have created a conundrum for courts, borrowers, and foreclosure attorneys. In boilerplate security agreements included in mortgages and deeds of trust around the country, lenders include this clause: “MERS” is Mortgage Electronic Registration Systems, Inc. MERS is a separate corporation that is acting solely as nominee for Lender and Lender’s successors and assigns. On the one hand, MERS purports to be acting as a nominee—a form of an agent. On the other hand, it also is claiming to be an actual mortgagee, which is to say an owner of the real property right to foreclose upon the security interest. It is axiomatic that a company cannot be both an agent and a principal with respect to the same right.  In litigation all across the country, attorneys representing MERS frequently take inconsistent positions on the legal status of the company, depending on the legal issue at hand.

Are Obama and Congress Set To Screw American Counties, Homeowners and Give Wall Street Mortgage Banksters a Retroactive Immunity Bailout? - There are rapidly emerging signs the Obama Administration and Congress may be actively, quickly and covertly working furiously on a plan to retroactively legitimize and ratify the shoddy, fraudulent and non-conforming conduct by MERS on literally millions of mortgages. From CNBC: When Congress comes back into session next week, it may consider measures intended to bolster the legal status of a controversial bank owned electronic mortgage registration system that contains three out of every five mortgages in the country. The system is known as MERS, the acronym for a private company called Mortgage Electronic Registry Systems. Set up by banks in the 1997, MERS is a system for tracking ownership of home loans as they move from mortgage originator through the financial pipeline to the trusts set up when mortgage securities are sold. Just to make clear the implications of this craven action, the White House and Congress are conspiring to give a get out of jail free bailout card to the biggest banks and finance companies in the country to cover up and mask their illegal behavior and behavior that did not conform with state, county and local laws throughout the United States. On at least sixty (60%) percent of the existing mortgages in America

House Tries To Bailout Foreclosure Fraudsters, Again - A month ago, President Barack Obama vetoed a bill that would have made it far more difficult for borrowers to prove that banks were engaging in foreclosure fraud. The bill was a complex, highly technical bailout for megabanks that have defrauded millions of borrowers, flaunted the rule of law and and driven our economy off a cliff. The legislation passed both houses of Congress quietly and without much attention, but once consumer advocates sounded the alarm, Obama rejected the legislation, and the bill appeared dead. Not anymore. Despite widespread public anger and presidential rejection, the House will vote on the issue again today in an attempt to override Obama’s veto. The legislation was reintroduced by Rep. Bobby Scott, D-Va. The bill would require every state to accept notary signatures from any other state. This essentially defeats the purpose of notarization itself, since a notary is supposed to attest to having first-hand knowledge of a specific case. If two parties sign a mortgage contract in Ohio, a notary from New York probably wasn’t there to watch it happen.

HR 3808 Interstate Recognition of Notarization Concerns Appear Overblown - Yves Smith - Given the ability of banks to muscle through all sorts of favorable legislation, there was good reason to be concerned about the sudden reappearance of HR 3808, the Interstate Recognition of Notarization Act. While this measure has been long sought by trial lawyers, many observers were understandibly concerned that this measure might serve to be a “get out of liability free” card for robo signing banks, particularly given that there had been no legal analysis of the measure. And this was far from conspiracy thinking; the Ohio secretary of state took a particularly dim view of the sudden effort to pass this measure. The good news is, per a source on the Hill firmly in the anti-bank camp, that this move is strictly procedural, an objection to Obama’s use of the so-called pocket veto rather than an effort to revive the measure. From a Constitutional perspective, a pocket veto is not a legitimate action, but it can’t be overridden by Congress. The House vote is effectively a complaint, tantamount to, “We accept your veto of this bill, but it’s not a pocket veto because those don’t exist.”

The Most Cost-Effective, Shadow Bailout of Wall Street: $30M - There’s currently a shadow bailout of Wall Street coming down the road, a complete steal for the low, low price of $30 million dollars. (Remember “millions”? it’s been a while since I’ve heard the “m” word.) But for the low, low price of avoiding allocating a simple $30 million dollars Congress is looking to give Wall Street a massive amount of space to run wild.  And the new Republicans might be leading the charge. What am I talking about? As Dave Dayen has written, the new Dodd-Frank Bill authorized, but did not appropriate, $35 million dollars for legal services for homeowners. And as Diane Thompson of the National Consumer Law Center said, “All of the robo-signing allegations were only discovered, brought to light by aggressive, competent attorneys working very diligently to represent their clients. Homeowners cannot negotiate these kinds of issues without lawyers. Low-income homeowners particularly need the lawyers… we urgently need that funding.” I’ve heard from people I trust in the field the only thing that can hold Wall Street in check is keeping legal pressure in the courts on them with this foreclosure crisis. And if this $35 million dollar isn’t allocated any number of front line legal aid groups will have to slow down or shut down their operations..

The Fed’s New Foreclosure Predator Bailout - Despite escalating outrage over rampant foreclosure fraud, the Federal Reserve now appears ready to eviscerate a key mortgage regulation in an effort to spare banks the losses from their own wrongdoing. Even as bank executives preposterously claim to have wronged nobody in the foreclosure process, they’re pushing hard to unwind the only serious federal rule that protects borrowers from predatory loans and improper foreclosures. As if the last decade of abuse wasn’t bad enough, banks are once again mobilizing to screw borrowers in the pursuit of epic bonuses. And once again, it appears that the Federal Reserve has become an accomplice to this nationwide mortgage scam.

Fed’s Raskin says mortgage servicing business model needs reworking - The mortgage servicing business model caused the whole industry to collapse, according to Sarah Raskin, a member of the Federal Reserve Board of Governors. She spoke in Boston Friday at the Consumer Rights Litigation Conference hosted by the National Consumer Law Center. Raskin told conference attendees that the problem started when the servicing industry switched from being an "originate-to-hold" system to an "originate-to-distribute" system. Before securitization became commonplace, she said, it was much more likely for a mortgage to be serviced by the same entity that originated it. Now, that is not the case. Raskin described the emergence of third-party servicers to service loans on behalf of the securitization trusts. The trusts were supposed to be passive and leave the management of individual loans to the servicer. This model was insufficient, however, because the two entities never worked out a payment plan structure to deal with bulk loans. "Unfortunately, as we are seeing now, there are also dramatically significant drawbacks to this model," "Third-party servicers earn money through annual servicing fees, a myriad of other fees, and on float interest, and they maximize profits by keeping their costs down, streamlining processes wherever possible, and by buying servicing rights on pools of loans that they hope will require little hands-on work."

Fed's Duke on Foreclosure documentation issues - From Fed Governor Elizabeth Duke: Foreclosure documentation issues. She didn't provide any specifics although she noted that the report will be published early next year. She also mentioned some foreclosure data:  The Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), the Federal Deposit Insurance Corporation (FDIC), and the Federal Reserve are conducting an in-depth review of practices at the largest mortgage servicing operations. ... The regulators expect the initial on-site portion of our work to be completed this year and currently plan to publish a summary overview of industry-wide practices in early 2011. Duke discusses some of the potential risks from foreclosure issues, and she noted the Fed expects the number of foreclosures will stay elevated for several years: 

Elizabeth Duke on Foreclosures and Documentation Issues - Federal Reserve Board Governor Elizabeth A. Duke will present the following testimony today (November 18, 2010) before the House Financial Services Subcommittee on Housing and Community Services.  Duke will testify with unusual specificity regarding the problems with proper legal process in foreclosure proceedings and in giving specific numbers about the expected continued high level of foreclosures for 2011 and 2012.  Highlights include the projection that 2010 will see 2.25 million foreclosure filings, while 2011 and 2012 will produce an additional 4 million filings, equally divided between the two years.  This article contains the entire testimony transcript. Duke will specifically address risks in the current situation to consumers, financial institutions, the financial system, mortgage markets and the housing market.  She also will give a complete review of the foreclosure process and the difficulties that need to be sorted out.  This is as complete a review of the problem by a high level official in the Federal reserve or the government as I have seen.  For further background, see the Yves Smith review of The Mortgage Mess.  Additional comments by this author are available at Seeking Alpha and Credit Writedowns.

Top Fed Official On Government's Foreclosure Prevention Efforts: 'Three Years Of Failed Policies' - One of the Federal Reserve's top economists denounced the Obama administration's approach to stemming the growing foreclosure crisis, saying it's part of "three years of failed policies" intended to help homeowners avoid losing their homes. "We can't prevent millions of foreclosures using the tools people are currently using," Paul S. Willen, a senior economist and policy adviser in the research department of the Federal Reserve Bank of Boston, said Monday during a mortgage and housing finance conference held at the Federal Deposit Insurance Corporation in Arlington, Va. Those tools -- government programs that did little to change the fundamental incentives driving mortgage companies, lenders and investors -- have been "the roadmap for three years of failed policies," said Willen, an expert in household finances and home mortgages. "The lenders foreclosed on borrowers because it's in their financial interest to do it. Modification is an expensive and ineffective medicine," he added.

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

Rumors of Negotiations on Settlement of 50 State Attorney General Foreclosure Probe - Yves Smith - Two media outlets tonight, Reuters and a Washington Post blog post, discussed the idea of a relatively quick settlement of the probe by 50 state attorneys general into robo signing and other foreclosure-related abuses.  What is interesting is the timing of these sightings, which came the same day of the release of the Congressional Oversight Panel report on servicing and securitization, the promised American Securitization Forum defense of securitization industry practices, and Senate Banking Committee hearings on foreclosures and securitization.  The sudden, albeit small, flurry of “settlement talks are on” reports on the attorney general front bears all the hallmarks of a banking industry trial balloon being hyped as something further along to try to create the impression that the mess is on its way to being resolved on terms not terribly painful to banks.. CNBC reported that Iowa attorney general Tom Miller was nearing a settlement of the 50 state probe (we noted yesterday that CNBC ran a credulity-straining report on MERS, so it seems to be the preferred outlet for bank PR these days). But when Reuters contacted Miller’s office, they disputed this account.

Don't underestimate foreclosure crisis, watchdog to warn - A congressional oversight panel is set to warn on Tuesday that a widespread problem of flawed and fraudulent foreclosure paperwork could upend the housing market and undermine the nation's financial stability, just as the issue is coming under greater scrutiny this week in Washington.  The report, issued by the Congressional Oversight Panel, which monitors the government's bailout program, marks the first time a federal watchdog has weighed in on the nationwide foreclosure mess.  The panel echoed concerns raised by consumer advocates and financial analysts, who have said that although the consequences of the foreclosure debacle remain unclear, the problems could throw into doubt the ownership not only of foreclosed properties but also the millions of ordinary mortgages that were pooled and traded by investors around the world.

Congressional Oversight Panel Takes Tough Stand on Mortgage Documentation Problems - Yves Smith - The spectacle of Senators in Tuesday’s banking committee hearings on the mortgage largely siding with articulate, fact-driven critics of the mortgage securitization is a sign that financial services industry misdirection and lame excuses are wearing thin. But far more devastating is the contrast between the long-promised American Securitization Forum paper on mortgage transfers, versus the Congressional Oversight Panel report on the broader issue of mortgage documentation. A securitization lawyer called me to say he’d gotten calls from investors as soon as the ASF report was out. He said they were surprised at how weak the paper was, and complained that it did nothing to alleviate investor concerns. In other words, this is pretty much the same argument that the industry has offered from the outset. There is no mention of the conflicts between the actual steps taken versus. those required by the PSA, no discussion of post closing transfers. There are some citations where courts supposedly held the PSA was a sufficient “assignment” of the mortgage loans to make up for any other transfer failings; I’ll have to read them to see how narrow they are.

Foreclosure Mess Could Threaten Banks, Report (NPR) The disarray stemming from flawed foreclosure documents could threaten major banks with billions of dollars in losses, deepen the disruption in the housing market and hurt the government's effort to keep people in their homes, according to a new report from a congressional watchdog. Revelations that several big mortgage issuers sped through thousands of home foreclosures without properly checking paperwork already has raised alarm in Washington. If the irregularities are widespread, the consequences could be severe, the Congressional Oversight Panel said in a report issued Tuesday. The full impact is still is unclear, the report cautions. Employees or contractors of several major banks have testified in court cases that they signed, and in some cases backdated, thousands of certifying documents for home seizures. Financial firms that service a total $6.4 trillion in mortgages are involved, according to the new report. Big banks including Bank of America Corp., JPMorgan Chase & Co. and Ally Financial Inc.'s GMAC Mortgage have suspended foreclosures at some point because of flawed documents.

The three monkeys of mortgage bonds - Have you forgotten about the mortgage-bond scandal yet? I’m sure a lot of bankers are hoping that you have. But Adam Levitin hasn’t, and his written testimony today to the House Financial Services Committee is well worth reading in full. He concludes: The foreclosure process is beset with problems ranging from procedural defects that can be readily cured to outright fraud to the potential failure of the entire private label mortgage securitization system… In the worst case scenario, there is systemic risk, as there could be a complete failure of loan transfers in private-label securitization deals in recent years, resulting in trillions of dollars of rescission claims against major financial institutions. This would trigger a wholesale financial crisis…

Senate Hearing on Foreclosure Mess Goes Badly for Banks - Yves Smith - Tuesday, we saw a refreshing and badly needed contrast to that stereotype in the form of a comparatively short (less than three hour) hearing by the Senate Banking Committee on the foreclosure/securitization crisis. The senators were informed, engaged, and well versed in most of the issues. The rushed timetable also helped, for instead of having the witnesses read their prepared testimony, each had to give a shorter summary, which gave the hearings a sense of urgency and meant most of the hearing time was spent on questions from the committee members. What was striking was the contrast between the representatives of the banking industry, namely Barbara Desoer of Bank of America, David Lowman of Chase, and R.K. Arnold of MERS, versus the critics, who were Tom Miller, the Iowa attorney general, Adam Levitin, Georgetown law professor, and Diane E. Thompson of the National Consumer Law Center.  I strongly recommend you watch the hearings, they were very instructive and even entertaining at points (several Senators gave long form reports of how badly their constituents were being treated by banks). Even Richard Shelby had his moments.Or you can read the liveblogs at FireDogLake by David Dayen and emptywheel

Countrywide Routinely Failed to Send Key Docs to MBS Trustees, B of A Employee Says - Countrywide, the mortgage giant that's now part of Bank of America Corp., routinely didn't bother to transfer essential documents for loans sold to investors, an employee testified. The testimony — which a New Jersey bankruptcy judge cited in dismissing a B of A claim against a debtor — could complicate attempts by the company to foreclose on soured loans that Countrywide originated. . Max Gardner, a North Carolina consumer bankruptcy lawyer who was not involved in the case, called the testimony "a major problem" for B of A, which acquired Countrywide ... in 2008. "These original notes were supposed to be transferred and delivered all the way up the line and for this witness to admit they were never transferred is pretty amazing," Gardner said. "I've never see this admitted anywhere." Whether a servicer or investor has the standing to foreclose on a borrower has become a major issue... Adam Levitin, an associate law professor at Georgetown University, said in Congressional testimony Nov. 16 that ... "If the notes and mortgages were not transferred to the trust, then the trust lacks standing to foreclose".

Do Mortgage Servicers Even Understand Their Own Business? - There was one particularly enlightening moment from the hearing on foreclosures, modifications, and servicing.    Rep. Brad Miller (D-NC) asked a panel with some 5 servicing executives on it why it makes sense for a servicer to be affiliated with either a loan originator, a loan securitizer, or a trustee.   He might have been speaking Klingon to these executives.  They stared blankly at him like he was asking them something that was far beyond their comprehension.  None of them had a real answer for him,. This wasn't a case of the servicers not wanting to speak an uncomfortable truth.  There are perfectly legitimate reasons to bundle origination and servicing, for example--servicing is countercylical to origination (this is hardly news; banks' 10-Ks state as much).  Instead, this was a case of silence from ignorance.   I was rather stunned to realize that a bunch of senior servicing executives clearly had no understanding of their own industry and that they had probably never given it any thought. If top servicing executives don't understand basic things about their own industry, why are we listening to them about anything? 

Rep. Brad Miller: “Protecting bank solvency has been a goal of Treasury that I do not share” - One of the more amusing moments of yesterday’s House Financial Services Committee hearings on foreclosure fraud was when the representatives for the loan servicers were asked why they were subsidiaries of the large financial institutions. The link between the servicers and the big banks, mainly caused by a series of mergers, leads to all kinds of conflicts of interest, because it inevitably pairs them up with the originator or trustee of the loan. The servicers had no real answer to this question. Finally, the Wells Fargo representative claimed that it was for “customer convenience,” because some customers had their mortgage and their checking accounts at the same bank.Everyone’s jaw dropped in the hearing room. Now Miller is out with a letter (I’ve placed it below), signed by all the top leaders of the House Financial Services Committee, that seriously ratchets up the demands on the Financial Stability Oversight Council. Among other things, it asks the FSOC to use its authority under Dodd-Frank to force the large financial institutions to divest from the loan servicers.

A Day After Schooling Banksters, “New Documents” Comes to Light in Waters Ethics Case - Forgive me a tinfoil hat moment here. Yesterday, Maxine Waters chaired the House Financial Services Committee hearing on foreclosure fraud, and very effectively called out both the regulators who have stood mute in the midst of this crisis, and the big bank servicers who have been actively harmful to their customers. She proved herself to know the issues facing foreclosure victims more than practically anyone else in Congress.A day later, her hearing with the House Ethics Committee was postponed indefinitely, due to the discovery of new documents in the case.

On Bank of America’s Loan-by-Loan Fight in Putbacks - Yves Smith - Overhyped attacks on authority (and unfortunately for us all, banks are very much part of the officialdom) backfire. They allow the defenders of the orthodoxy to paint critics as hysterical, reckless, and ill informed. As a result, the best chance for reining in the industry is to make charges that stick. One area where the case against banks is exaggerated is non-GSE mortgage putback actions. In very simple terms, the servicer on a securitization, on behalf of the trust, has an obligation to “put back”, as in return to the originator, loans that are in violation of the representations and warranties made in the securitization agreement. There is a big difference between putback provisions on GSE paper, where Freddie and Fannie have strong rights to insist on putbacks, versus in so-called non-GSE (aka “private label”) deals, where the investors have very limited authority. Despite this disparity, the ongoing GSE putbacks have gotten comparatively little attention in the media, while a flurry of cases filed by the monoline insurers (who have fewer obstacles to overcome in these cases than bond investors) and a letter sent to Bank of America by Pimco, BlackRock, and the New York Fed, among others, that appears to be laying the ground for a putback action have gotten a great deal of attention.

Homeowners Accuse Chase of Perjury in Senate Banking Committee Hearings - Yves Smith - (video) As mentioned here earlier, there was a wee bit of excitement in the Senate Banking Committee on the foreclosure crisis yesterday. Enjoy!

They really did know the loans were bad…A firm which few know of – Clayton holdings—will likely soon be at the center of a wide variety of lawsuits and individual complaints. Clayton’s job was to validate the innards of mortgage backed securities (MBS) when made available for sale. The typical setup would have an issuer of a MBS call Clayton and ask them to take a 10 percent sample of the loans, and evaluate whether the loans met the portfolio criteria (had documents been filed, credit scores as reported, etc.). If the loans were incorrect, they could either be taken from the pool and replaced with a good one, an exception made, or a substitute placed into the sample and evaluated instead. Clayton holdings staff testified last month that 255,802 mortgages out of 911,000 evaluated did not meet portfolio screening criteria. The bank underwriters waived more than 100,000 of them (>39%); that is, even though the mortgages failed the criteria, the banks included them in the MBS pools anyway.

Senate, House Hearings on Foreclosure Fraud Cast Doubt on Deadbeat Borrower Meme - Yves Smith - On Thursday, the housing subcommittee of the House Financial Services Committee held hearings on robo signing, documentation, and servicing issues. This session was a companion to the Senate Banking Committee hearings on the same topic earlier in the week.  There were some notable differences between the two forums. The House group overall was less well prepared; I’m told that’s due to the fact that Representatives have far fewer policy staffers than Senators. There was also a higher proportion of participating members predisposed towards banks in the House hearings. Nevertheless, the sessions made a major dent in some key bank talking points, the biggest being their assertion that all of the foreclosures made are warranted, and therefore the foreclosure problems are mere paperwork issues. Some exchanges were effective. Maxine Waters, who chaired the session, grilled the regulators on whether they had fined or imposed sanctions on any banks. She was forced to become prosecutorial when every single regulator present refused to provide simple a simple yes/no answer as requested. One of the less evasive interactions was with OCC acting chairman John Walsh:

Mortgage Bubble Blamed, Ludicrously, on the Government - Matt Taibbi - The bullshit train just keeps rolling on. In the ongoing effort to rewrite history and deflect blame from Wall Street for the financial crisis, former U.S. Treasury official and current American Enterprise Institute swine Peter Wallison has issued a lengthy analysis of the mortgage bubble that, surprise, surprise, lays the blame for the crash at the feet of government efforts to expand home ownership to "those who normally would not qualify." The Washington Times piece about the Wallison study includes the following coda near the top. The emphasis here is mine: "Without waiting for the evidence, many in the political class, particularly those on the left, bought into the argument that the financial crisis was caused by greed."

More Mortgage Securitization Industry Propaganda Via New York Times, SIFMA - Yves Smith - On the eve of Senate Banking Committee hearings into mortgage securitizations and the release of a Congressional Oversight Panel report covering the same terrain, the mortgage securitization industry has a full bore pushback underway. A story in the New York Times bears all the hallmarks of being a PR plant. Remember the sympathetic New York Times article about health care lobbyist Karen Ignagni while the health care reform debate was in progress? This time, the “woman who humanizes a supposedly misunderstood industry” ploy goes downscale with tonight’s New York Times piece, “Voices of Foreclosure Speak Daily About Desperation and Misery.” The article’s central actor is Bank of America servicier call center operator Brenda Seymore, who is presented as saving a single borrower from foreclosure, at least for now. Wow! What a cause for celebration!

This Week’s Developments in Foreclosure Fraud - Of far more news value will be the developments this week on foreclosure fraud, only one of which involves the Congress. Until now, the federal government has been loath to even comment on the routine practice of document fraud in foreclosure cases (we’re going with a 95% error rate), and the underlying chain of title problems that could prevent the banks from having standing to foreclose in millions of cases. But you get the sense that the dam is breaking. The Congressional Oversight Panel held an extraordinary hearing on foreclosure mitigation programs like HAMP and the document fraud issue a few weeks ago. They will produce a report this week that is likely to be unsparing about the potential systemic risk involved in the chain of title issues, which Damon Silvers accurately explained at the hearing. In addition to the document fraud, the COP report could include information about servicer maladministration, the MERS system and a whole host of other irregularities. When it drops I’ll certainly bring it to you. Federal Reserve Governors have started to speak out about this as well. Last week, Sarah Bloom Raskin, the newest member of the Board of Governors, spoke at the National Consumer Law Center and blasted the mortgage servicing industry

More Evidence That Mortgage Loans Were Not Properly Conveyed to Securitization Trusts - Yves Smith - We’ve described in various posts how evidence is growing that the participants in mortgage securitizations sometime early in this century appear to have ignored the requirements of a variety of laws and their own contracts. We believe the most serious and difficult to remedy problem results when the parties involved in the creation of a mortgage securitization failed to take the steps necessary to convey the loans to the legal entity, a trust, which was set up to hold them. As we wrote: the pooling and servicing agreement, which governs who does what when in a mortgage securitization, requires the note (the borrower IOU) to be endorsed (just like a check, signed by one party over to the next), showing the full chain of title. The minimum conveyance chain in recent vintage transactions is A (originator) => B (sponsor) => C (depositor) => D (trust). The proper conveyance of the note is crucial, since the mortgage, which is the lien, is a mere accessory to the note and can be enforced only by the proper note holder (the legalese is “real party of interest”). The investors in the mortgage securitization relied upon certifications by the trustee for the trust at and post closing that the trust did indeed have the assets that the investors were told it possessed. All these steps had to be accomplished by a particular date, which was generally no later than ninety days after the trust closed. And all the assets conveyed to the trust had to be “performing”, meaning the borrower was current on his payments.  The evidence that the deal creators violated these stipulation is widespread.

Just When You Thought You Knew Something About Mortgage Securitizations | zero hedge - This diagram is extremely complex and shows that the miscellaneous proceeds specified in the security instrument (and in the SEC Filings) should be applied to the sums secured by the obligation upon the event of a loss in value of the property, whether or not then due, with the remainder, if any, returned to the borrower. This document combines UCC 3-602(a), UCC 9-315, UCC 9-336, UCC 2-609, and UCC 3-501 together with NY Code Section 4545 and the SEC Filings to show that the miscellaneous proceeds can be applied to the borrowers obligation. The following flow chart reverse engineers the mortgage on the Ekstrom family residence. It took Dan over one year to take it this far and it clearly demonstrates what happens when there are too many lawyers being manufactured.

Videos: Depositions of Alleged Robo-Signers from Nationwide Title Clearing - Over the past several years, Bryan Bly, Crystal Moore and Dhurata Doko have signed thousands of mortgage assignments as vice presidents of Citi Residential and other major lenders. Yet when asked in a recent deposition what a mortgage assignment is, Bly replied: "I’m really not sure." Moore, meanwhile, defined a promissory note as something "that says the interest rate and stuff like that on it.” And Doko, a native of Albania who speaks shaky English, expressed befuddlement at the whole idea of loaning someone money to buy a house. "We don’t do mortgages in my country,” she said. Bly, Moore and Doko work for Nationwide Title Clearing, a Pinellas County company that found itself in an unwelcome spotlight this week when video depositions they gave in a foreclosure case popped up on YouTube and AOL.

Florida Court Case Finds Robo Signing Not Enough to Stop Foreclosure -  Yves Smith  - We’re a little puzzled at the attention a Florida robo-signing case has garnered. A plaintiff tried arguing that robo signing alone constituted a reason to dismiss a foreclosure. That’s such a stretch that it is no wonder a judge decided against the borrower argument.  Mind you, we thing robo signing is serious because it is a fraud on the court and will almost assuredly be more complicated to clean up than the banks would have you believe. But the presence of a robo signer in and of itself is very unlikely to do much for the cause for an individual homeowner. The real implications are twofold. First is that the cost and hassle of banks straightening out this mess are serious. Not only will they have to spend more on foreclosures going forward, not merely getting proper signatures and notarizations, but also verfying the accuracy of the underlying information. And the state of Ohio is on a warpath, seeking to impose $25,000 fines for each improper affidavit. Second, some judges may make servicers start cases from scratch where a false affidavit has been submitted. When banks find errors, as Bank of America has, what will the judge do? HousingWire gives a report on this Florida case...

Last Word Segment on Servicer Abuses - Video -The MSNBC show Last Word had a segment on servicer abuses in foreclosures. It’s good to see this issue start to get traction in the MSM.

Am I paying for my house or the Brooklyn Bridge? - The foreclosure mess has raised new tough questions. We once again seem back to distributional issues. If a foreclosure is in question for a homeowner that has not been paying and a bank that has no good proof of its ownership, what should happen to the house?

  • 1. The bank should get it because a homeowner that fails to pay should forfeit his/her collateral. Morally, why should this deadbeat get an asset for free? Particularly if the whole thing was stirred up by a lawyer. (See the WSJ article on this).
  • 2. We should work through the mess in the courts to determine the validity of the individual case. No one should lose their home based on falsified documents. Careful determination ownership is important.
  • 3.  I have a new suggestion:Any payments that the homeowner made to the bank, the one with no evidence of ownership, should be placed into a third party escrow account.

Foreclosure class actions pile up against banks -- Foreclosure-fraud class action lawsuits are starting to pile up against major banks across the U.S., threatening a besieged industry with billions more in potential losses. Bank executives are swarming Capitol Hill this week to defend themselves against multiple foreclosure-related investigations, including one by all 50 state attorneys general. Talks are under way in that probe in hopes of reaching a settlement, but that wouldn't extinguish the mounting threat of an avalanche of class actions. The class actions, which could be expanded nationally, seek damages for homeowners whose properties were illegally foreclosed upon by banks using fraudulent documents. Suits have been filed in Maryland, New Jersey and Massachusetts that target Bank of America Corp., Wells Fargo & Co., HSBC PLC and JPMorgan Chase & Co. In Florida and Maine, Ally Financial, formerly known as GMAC Mortgage, is also being targeted. Perhaps an even bigger threat are the lawsuits that contend the banks' foreclosure machinery amounted to a racketeering enterprise. One such case, an Indiana lawsuit against Bank of America, was filed under civil Racketeering Influenced and Corrupt Organizations or RICO laws, which allow damages to be tripled.

Sheriff Who Refused To Evict Foreclosed Homeowners Forced To Resume — An Illinois sheriff who halted foreclosure evictions last month because some bank employees weren't following the proper procedures said Friday he's been forced to order his deputies to carry them out, but he will continue investigating the matter and could charge banks and their employees with crimes. Cook County Sheriff Tom Dart said he is only ordering evictions to resume because county prosecutors told him that he was legally bound to carry out foreclosure eviction orders signed by a judge."For the people who have been involved with this and think now that because the (Cook County) State's Attorney's office has ordered me to go ahead with the evictions that everything's fine . . . No, we are going to be looking at you for criminal violations," Dart said. "You may have got through one storm now, the other one is coming."Dart singled out Bank of America, JP Morgan Chase and GMAC/Ally Financial last month for problems with eviction notices.

Homeowners Get The Boot For Bad Paperwork While Banks Get Millions For Same - Mortgage companies enrolled in the Obama administration's signature foreclosure-prevention initiative may be receiving taxpayer funds despite not having a legal right to the home or to the mortgage, a top Treasury Department official revealed Wednesday. But despite faulty or missing paperwork, the Obama administration allows mortgage companies to boot homeowners from the program, sticking the borrowers with massive bills that often leave them worse off. During an oversight hearing, Phyllis Caldwell, Treasury's housing rescue chief, acknowledged during questioning that Treasury doesn't know whether mortgage companies and the owners of mortgages are receiving public money under "false pretenses." Treasury is investigating, she said. The contradiction highlights what many critics of the past two administrations' policies have claimed for some time: they exert overwhelming force when it comes to saving financial institutions, but merely modest assistance when it comes to distressed homeowners.

Foreclosure Fix Is Seen as Distant - Changing the face of foreclosure in America will take some time, several state attorneys general said Wednesday, cautioning that an agreement with major lenders over revamped foreclosure practices was not imminent.  Ever since the law enforcement officials from all 50 states signed on last month to a highly publicized investigation of big mortgage lenders, there has been a public tug of war.  The banks, who have been subjected to bad publicity, have played down the investigation and want to see it end as quickly as possible. The state attorneys general, however, say that there is an opportunity to fundamentally change the way banks deal with defaulting borrowers so that more people can stay in their homes by modifying their mortgages, and that they will take the time needed.  “The large banks say they are doing everything they can to avoid foreclosure, but that is not the reality on the ground,” . “The question is, Why?”

Extend and Pretend: A 40 Year, 2% Loan Mod - Yves Smith - Banks are going to qiuite some lengths to avoid doing principal mods. I’d love to know how Bank of America will book this loan versus the it one currently has. Lawyers for borrowers have been pushing principal mods when the bank is having trouble proving standing and is suddenly very willing to negotiate. But deals are confidential, so I have not gotten any reports as to success.Comments from the reader who passed this along: This is a BAC mode from 10/8. Note that there is only a two week window to execute this. Note the terms. Deferral of a portion of the principal. FOURTY YEAR MATURITY. 2% interest. This is one hell of a mod. I wonder if this was cooked up as this loan has a Doc problem behind it. The mod would eliminate all the paperwork issues. I also wonder how this new loan will be accounted for. I can’t tell if this is in a pool or actually owned by BAC. But if it is going on someone’s books at par then the whole thing is just a scam. This is not a loan. It is a patch to gloss over accounting and regulatory problems. Bank of America October 2008 Mortgage Modification

Banks walk away from houses - What could be worse than a foreclosure? An Un-foreclosure (HT: Columbus Dispatch) also known as a dropped foreclosure or a bank walkaway. Although exact statistics are hard to come by, the un-foreclosure is apparently become very common in Ohio, Michigan and Indiana. At some point the bank decides the economics of taking title do not justify further action, and walks away. The mortgage servicer forecloses on the property and evicts the former owners, but then fails to take title to the property, leaving the property in limbo. No owner equals no property taxes paid, no insurance, and probably no maintenance. The property is left to rot, damaging the neighborhood. Ironically, due to the failure of the bank to take title, the former owner may still be on the hook for property taxes, and not know it.

Prime U.S. Mortgage Foreclosures Hit Record as Unemployment Hurts Finances - Foreclosures on prime fixed-rate mortgages in the U.S. jumped to a record in the third quarter as unemployment strained household budgets of the most credit- worthy borrowers. The inventory of homes in foreclosure financed by prime fixed-rate loans rose to 2.45 percent from 2.36 percent in the previous three months, the Mortgage Bankers Association said in a report today. New foreclosures rose to 0.93 percent from 0.71 percent. Both numbers were the highest in the 12 years since the Washington-based trade group started tracking the categories. Homeowners are falling behind on their mortgage payments as job cuts make it difficult for them to pay bills, according to Michael Fratantoni, the Mortgage Bankers Association’s vice president of research and economics.

LPS: More Than 7M Mortgages Are Delinquent or in Foreclosure - There are 7,043,000 mortgages in the United States that are at least 30 days past due or in the process of foreclosure, according to Lender Processing Services (LPS). The company provided the media with a sneak peek at its October month-end mortgage performance data this week. The numbers show the nation’s delinquency rate was virtually unchanged from the previous month’s reading, but foreclosures are on the rise. Of the more than 7 million home loans in the country going unpaid, 2,090,000 have been referred to an attorney for foreclosure, LPS says. Another 4,953,000 are 30 or more days delinquent but not yet in foreclosure, with 2,238,000 of these at least 90 days overdue. Based on LPS’ calculations, the nation’s total mortgage delinquency rate – which includes loans at least a month past due but not yet pushed to foreclosure – stood at 9.29 percent as of the end of October.

So Who Benefits From Protracted Foreclosures? Servicers! - Yves Smith - One of the many themes being used to cultivate class warfare in foreclosure-land is the idea that people who are losing their homes are getting an unfair break. Many of them have learned that banks are moving very slowly on foreclosures and so they stay put until the sheriff evicts them. So borrowers getting to live rent free until they are told to depart is hardly their fault; the timing is entirely under the bank’s control. And this extra time is no freebie: banks can and do seek deficiency judgments when the proceeds from the home sale fall short of the mortgage balance I had long thought that the big reason banks were moving slowly was that once they seized the property, they would be liable for real estate taxes and upkeep, which could be quite a cash flow drain if a local market already had too much housing inventory and the sales process could be expected to be slow. But there may be more obvious incentives.  Kate Berry, in an American Banker story, reports that servicer profits are very much correlated with how long a mortgage loan stays in the securitization trust. Industry experts contend that longer holding periods allow the servicer to tack on more fees, which is to the detriment of investors.

MBA National Delinquency Survey: Delinquency rate declines in Q3 - The MBA reports that 13.52 percent of mortgage loans were either one payment delinquent or in the foreclosure process in Q3 2010 (seasonally adjusted). This is down from 14.42 percent in Q2 2010. From the MBA: Delinquencies and Loans in Foreclosure Decrease, but Foreclosure Starts Rise in Latest MBA National Delinquency Survey. The delinquency rate for mortgage loans on one-to-four-unit residential properties decreased to a seasonally adjusted rate of 9.13 percent of all loans outstanding as of the end of the third quarter of 2010. The percentage of loans in the foreclosure process at the end of the third quarter was 4.39 percent. Most of the decline in the overall delinquency rate was in the seriously delinquent categories (90+ days or in foreclosure process). Part of the reason is lenders were being more aggressive in foreclosing in Q3 (before the foreclosure pause), and there was a surge in REO inventory (real estate owned). Some of the decline was probably related to modifications too. The following graph shows the percent of loans delinquent by days past due. Loans 30 days delinquent decreased to 3.36%. This is slightly below the average levels of the last 2 years, but still high. Delinquent loans in the 60 day bucket decreased to 1.44% - the lowest since Q2 2008.

Foreclosures Decline Significantly In October Due To Documentation Issues - Home repossessions and foreclosure sales fell significantly in October due to delays in foreclosure proceedings caused by the foreclosure scandal. While banks pause to resolve their documentation issues, ForeclosureRadar warns of the rise of unethical consultants who promise to overturn foreclosures for individuals who have lost their home. See the following article from HousingWire for more on this.

Home Prices Fall in Half of Major Metros on Post-Credit Sales Declines - Residential property values dropped in 76 of the 155 metropolitan areas tracked by the National Association of Realtors (NAR) during the third quarter, following a sharp decline in home sales after the federal government’s homebuyer tax credit passed. Seventy-seven metro areas held their ground in the post-tax credit months and recorded higher median prices on existing single-family homes compared to the third quarter of 2009, while two metros saw no change in median home prices from a year ago.  NAR says that the latest numbers point to an improving value picture when you consider that this time last year, only 30 metropolitan areas tracked by the trade group experienced annual price gains.  According to NAR’s quarterly study of metro home prices, the national median existing single-family price was little changed in the third quarter at $177,900, down 0.2 percent from $178,200 in the third quarter of 2009.  Lawrence Yun, NAR’s chief economist, says relatively flat home prices have been the hallmark of the 2010 housing market. “Even with swings in home sales, prices this year have been changing very little from year-ago readings. Areas with some larger swings in home price reflect the degree of distressed sales in those markets,” he said.

CoreLogic: House Prices declined 1.8% in September - CoreLogic reports the year-over-year change. The headline for this post is for the change from August 2010 to September 2010. The CoreLogic HPI is a three month weighted average of July, August, and September and is not seasonally adjusted (NSA). From CoreLogic: September Home Prices Declined 2.79 Percent Year Over Year CoreLogic ... today released today released its September Home Price Index (HPI) that shows that home prices in the U.S. declined for the second month in a row after rising slightly for the first seven months of the year. According to the CoreLogic HPI, national home prices, including distressed sales, declined 2.79 percent in September 2010 compared to September 2009 and declined by 1.08 percent [revised] in August 2010 compared to August 2009. Excluding distressed sales, year-over-year prices declined .73 percent in September 2010.. ...This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100. The index is down 2.8% over the last year, and off 29.2% from the peak.  The index is 3.9% above the low set in March 2009, and I expect to see a new post-bubble low for this index later this year or early in 2011.

US Housing Market Will Struggle in 2011: Poll (CNBC) The U.S. housing market will stagnate next year as a steady stream of foreclosures and nagging joblessness sap the demand needed to mop up an excess of homes on the market, according to a Reuters poll.  While a housing recovery will be sustained, home prices, which have plunged by about a third since their 2006 peak, will barely rise next year. Medians from the poll showed a mere 1.1 percent rise in 2010 and 1.0 percent in 2011.  Expectations for next year haven't budged from the August poll, and won't even keep up with the expected 1.6 percent rise in the consumer price index next year.  Expectations for a stable year will provide little joy for the 11 million Americans who now owe their banks more than their home is worth, preventing them from refinancing their loan or buying a new house without coming up with more cash.

  S&P predicts more home price declines through 2011 - Standard & Poor's analysts believe home prices will drop between 7% and 10% through 2011, erasing any improvements prices have recently made. Home sales, which plummeted after the homebuyer tax credit expired in April have continued to lag. Pending home sales, which preclude existing home sale data, dipped 1.8% in September before the market goes into a winter many expect to be bleaker than usual. With this lack of demand, inventories should grow, according to S&P, while prices drop."Low mortgage rates will likely continue to encourage refinancing, but their influence on home buying activities has been limited due to the weak housing market and a lack of demand," According to the S&P/Case-Shiller Home Price Index, prices did increase 1.7% from a year ago in the 20-city index and 2.6% in the 10-city index. But in August alone, those indices fell 0.2% and 0.1% respectively. Home prices declined in 15 of the 20 metro areas.

S&P predicts house prices to fall another 7% to 10% through 2011 - From Jon Prior at HousingWire: S&P predicts more home price declines through 2011 Standard & Poor's analysts believe home prices will drop between 7% and 10% through 2011 ... "Low mortgage rates ...influence on home buying activities has been limited due to the weak housing market and a lack of demand," S&P credit analyst Erkan Erturk said. ... Prices will continue to be pressed down as long as the market works through a backlog of distressed properties that remains elevated. The following graph shows existing home months-of-supply (left axis), and Case-Shiller composite 20 house prices (right axis, inverted).

Housing Starts decline in October - Total housing starts were at 519 thousand (SAAR) in October, down 11.7% from the revised September rate of 588 thousand, and just up 9% from the all time record low in April 2009 of 477 thousand (the lowest level since the Census Bureau began tracking housing starts in 1959).  Most of the decline this month was due to multi-family starts (after two strong months). Single-family starts decreased 1.1% to 436 thousand in October. This is 21% above the record low in January 2009 (360 thousand). The second graph shows total and single unit starts since 1968. This shows the huge collapse following the housing bubble, and that housing starts have mostly been moving sideways for almost two years - with a slight up and down over the last six months due to the home buyer tax credit. Here is the Census Bureau report on housing Permits, Starts and Completions.

Residential Building Remains in Depression - A few months ago, pundits found green shoots growing in apartment building permit approvals amidst generally terrible overall residential  housing data.  In October 2010, apartment building permit data still has not gained traction, and overall building permit data remains anemic.  The headlines from the U.S. Census Bureau: Privately-owned housing units authorized by building permits in October were at a seasonally adjusted annual rate of 550,000. This is 0.5 percent (±3.0%)* above the revised September rate of 547,000, but is 4.5 percent (±3.1%) below the October 2009 estimate of 576,000.  Single-family authorizations in October were at a rate of 406,000; this is 1.0 percent (±1.3%)* above the revised September figure of 402,000. Authorizations of units in buildings with five units or more were at a rate of 121,000 in October. Privately-owned housing starts in October were at a seasonally adjusted annual rate of 519,000. This is 11.7 percent (±8.6%) below the revised September estimate of 588,000 and is 1.9 percent (±9.6%)* below the October 2009 rate of 529,000.  Single-family housing starts in October were at a rate of 436,000; this is 1.1 percent (±8.6%)* below the revised September figure of 441,000. The October rate for units in buildings with five units or more was 74,000.

Study: Amid housing slump, home sizes shrink - The median American home size has dropped to 2,100 square feet -- down from 2,300 at the peak of the housing boom in 2007 -- according to a study by, a real estate website. Each year, Builder magazine designs a concept home to reflect the current state of the market.  This year, the "Home for the New Economy" is just 1700 square feet. In part, the downsizing trend is a product of necessity.  During the years of the housing boom, many home expansions were financed through home re-financing deals.  Now that home loans have frozen up, people are less likely to be able to afford building that new game-room they'd been wanting.

DataQuick: SoCal Home Sales off 24.3% from October 2009 - From DataQuick: Southland Home Sales Fall, Prices Flat Southern California home sales dropped in October to their lowest level in three years amid doubts about the drawn-out market recovery, tight mortgage lending policies and expired government incentives. A total of 16,744 new and resale homes sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month. That was down 7.4 percent from 18,091 in September, and down 24.3 percent from 22,132 for October 2009, according to MDA DataQuick of San Diego.... Foreclosure resales accounted for 34.7 percent of the resale market last month, up from a revised 33.6 percent in September and down from 40.4 percent a year ago.

Gas taxes and housing markets - One of the political obstacles to a gas tax is that it will disproportionately harm residents of rural and suburban areas relative to cities.  City residents who take public transport won’t be directly affected by gas taxes. Furthermore, in the city public transportation is a possible substitute for driving, so that even city residents who drive now will often have the choice of an alternative mode when gas prices go up. In contrast the only way rural and suburban residents can usually mitigate the effects of higher gas prices is to change their behavior in usually costly ways, like finding a new job, moving, or purchasing a higher mpg vehicle. As a result of this disparate impact on transportation costs for city versus rural and suburban residents, one possible long run result is that people will respond to higher gas prices by moving to the city from rural areas and suburbs. This raises the question of how this will affect housing markets in these areas. A new paper sheds some light on that issue.

Q3: Quarterly Housing Starts and Unemployment - This week the Census Bureau released the "Quarterly Starts and Completions by Purpose and Design" report for Q3 2010. Although this data is Not Seasonally Adjusted (NSA), it shows the trends for several key housing categories. This graph shows the NSA quarterly intent for four start categories since 1975: single family built for sale, owner built (includes contractor built for owner), starts built for rent, and condos built for sale. The number of units built for rent increased sharply in Q3. Although still fairly low, there were 40 thousand rental units started in Q3 2010, almost double the 22 thousand started in Q3 2009.. This increase in construction will help a little with employment. The number of condo units started doubled from last year too - but from close to zero (from 5 thousand in Q3 2009 to 6 thousand last quarter). The largest category - starts of single family units, built for sale - decreased to 75,000 in Q3 from 92,000 in Q2. Some of this was seasonal, and some was related to end of the tax credit. Starts of owner built units declined in Q3 too.This graph shows single family housing starts and the unemployment rate (inverted) through October. Note: Of course there are many other factors too, but housing is a key sector.

Retail Sales Jump on Auto Strength - Retail sales rose 1.2% last month, the Commerce Department said Monday. Economists surveyed by Dow Jones Newswires had projected sales would climb by 0.8%. The increase was the biggest since March and the fourth in a row. September sales rose 0.7%, revised up from a previously estimated 0.6% increase. The strong gain is important for the economic recovery. Consumer spending makes up most of gross domestic product, which is the broad measure of U.S. economic activity. GDP in the third quarter grew a modest 2.0%, supported by a solid but not very big gain in consumer spending. Consumers have been frugal, restrained by a U.S. unemployment rate of 9.6%. Still, the latest government data show nonfarm payrolls rose by a greater-than-expected 151,000 jobs in October, a sign of improving labor conditions that, if sustained, could lead to stronger spending and economic growth.

Our Economy Is Melting Down And There's Nothing We Can Do About It - I'm sure most Americans are just cruising right along, watching football as they always do, oblivious to the danger all around them. But if you're paying attention, you've got to be very, very worried at this juncture. We are being bombarded with bad news everyday. Our economy is being held together with duct tape and Elmer's glue. And the news from Europe and Asia isn't so good either. How long can this go on? Here are some items on my current list. Although I will write at greater length about these subjects in the coming weeks and months, I'll just provide short summaries today.

Descending The Debt Mountain - The central fact about our economy today is the huge mountain of debt Americans households accumulated over the last three decades, but especially in the last ten years. What goes up must come down, and thus we have entered what A. Gary Shilling calls The Age Of Deleveraging. The first graph shows the debt mountain and where we stand in our descent.  Household debt was "only" $4.6 trillion in 1999:Q1 but had risen to $12.5 trillion by the third quarter of 2008. Since we attained the mountain's peak, Americans have been able to shave off $900 billion off the debt pile, which tells us we have a long, long way to go. You can easily see in the graph that the rate of debt accumulation is higher than the rate of debt shedding. There is no getting around this—we will not have a "normal" economy based on savings and investment for a very long time, all other things being equal (which they are not).

Fear not hyperinflation - Labour department figures showed on Wednesday that the “core” consumer price index, measuring prices for US goods and services excluding food and energy, rose just 0.6 per cent year on year in October. That was weaker than economists had expected and marked the smallest such increase since records began in 1957. The full story is here.

Industrial Production, Capacity Utilization Flat in October - From the Fed: Industrial production and Capacity Utilization Industrial production was unchanged in October after having fallen 0.2 percent in September. ... The capacity utilization rate for total industry was flat at 74.8 percent, a rate 6.6 percentage points above the low in June 2009 and 5.8 percentage points below its average from 1972 to 2009. This graph shows Capacity Utilization. This series is up 9.7% from the record low set in June 2009 (the series starts in 1967). Capacity utilization at 74.8% is still far below normal - and well below the pre-recession levels of 81.2% in November 2007. The second graph shows industrial production since 1967. Industrial production was unchanged in October, and production is still 7.3% below the pre-recession levels at the end of 2007. This was below consensus expectations of a 0.3% increase in Industrial Production, and an increase to 74.9% for Capacity Utilization.

Misc: NY Manufacturing conditions "deteriorate", Business Inventories Increase - From the NY Fed:  For the first time since mid-2009, the general business conditions index fell below zero, declining 27 points to -11.1. The new orders index plummeted 37 points to -24.4, and the shipments index also fell below zero. The indexes for both prices paid and prices received declined, with the latter falling into negative territory. The index for number of employees remained above zero but was well below its October level, and the average workweek index dropped to -13.0. And from the Census Bureau: September 2010 Manufacturing and Trade Inventories and Sales report Inventories. Manufacturers’ and trade inventories, adjusted for seasonal variations but not for price changes, were estimated at an end-of-month level of $1,402.9 billion, up 0.9 percent (±0.1%) from August 2010 and up 6.3 percent (±0.4%) from September 2009.

NY Fed Manufacturing Survey: New Orders Index Plummets 37 Points to -24.4, Sharpest Drop Since September 2001; Prices Received Negative - Inquiring minds are investigating the November Empire State Manufacturing Survey for clues about manufacturing and the state of the economy.  The Empire State Manufacturing Survey indicates that conditions deteriorated in November for New York State manufacturers. For the first time since mid-2009, the general business conditions index fell below zero, declining 27 points to -11.1. The new orders index plummeted 37 points to -24.4, and the shipments index also fell below zero. The indexes for both prices paid and prices received declined, with the latter falling into negative territory. The index for number of employees remained above zero but was well below its October level, and the average workweek index dropped to -13.0.The general business conditions index fell below zero for the first time since July of 2009, dropping a steep 27 points to -11.1—an indication that, on balance, conditions had worsened over the month.

Will the Rebound in Capital Spending Continue? - Along with all the other things that fell sharply during the recession, spending on capital equipment in the U.S. took a heavy hit. But over the past year, it’s rebounded strongly. The question: Will capital spending growth stay strong? Or will it peter out? New research from International Monetary Fund economists suggests the former. The economists predict that spending on equipment and software will grow at an average annual rate of 10% through 2012, contributing about 0.8 percentage points a year to gross domestic product. After that, they expect spending will drop back to its long run average of about 4%. Given how far capital spending fell, that forecast is not quite as rosy as it may seem. Even though the level of spending is approaching where it was in early 2008, most economists reckon that companies haven’t spent enough to even replace all the equipment that wore out since then. This despite massive amounts of cash on company balance sheets. A healthy level of capital spending — like a healthy level of employment — would be much, much higher than it is now.

Wow -- Check Out How Blatantly Our Government Misled Us With the October Jobs Numbers! - Remember last Friday's payrolls numbers -- the ones that blew away expectations about the number of jobs created and got everyone talking about recovery again? Well, even at the time those payroll numbers were confusing, because the other part of the jobs report -- the "household survey" -- showed yet another crappy number. But by pointing to the crappy household number and ignoring the payroll number, the bears seemed to be trying to make lemons out of lemonade. But it turns out that there was a simple reason why the payroll numbers looked so good -- a reason that had nothing to do with underlying strength of the jobs market. What was that reason? The government changed the "seasonal adjustment" it made to the payroll numbers -- and, in so doing, boosted the number of "jobs" created in October by 100,000.

Philly Fed Survey of Economists Sees Unemployment Rate Still Near 8% in 2013 - Economists in a long-running survey from the Federal Reserve Bank of Philadelphia have cut their estimates of growth and see high rates of unemployment enduring for years to come. According to the bank’s fourth-quarter Survey of Professional Forecasters, economists have marked down nearly every important barometer of economic performance. If the analysts in the survey are right, it suggests a very difficult period lies ahead for the American economy, and it calls into question what the Fed can achieve with its recent decision to buy nearly $1 trillion in Treasury debt into the middle of the next year. About the only positive signs in the report were economists’ lowering of their estimates of a double-dip recession–they now see an 11% chance of a negative quarter, compared with 16.8% in last quarter’s survey–and forecasters’ confidence the U.S. economy will not suffer from a bout of price deflation. Otherwise, the tale was grim. Forecasters trimmed estimates of growth in the current quarter to 2.2% from last period’s estimate of 2.8%. Forecasts of growth over coming years also got a trim– 2011 is seen coming in at a 2.5% gain, while 2012 is seen at 2.9%, down from the last projection of 3.6%. Only 2013 got a bump, from the third-quarter estimate of 2.6%, to 3%.

Middle class downsizes as its jobs vanish, move away - The good-paying, predominantly white-collar jobs that once sustained many American communities are disappearing at an alarming pace, keeping the unemployment rate stubbornly high despite the end of the Great Recession. More troubling, these jobs in accounting, financial analysis, commercial printing and a broad array of other mostly white-collar occupations are unlikely to come back, experts predict. There isn't a single cause. Some of it is explained by changing technology, some of it is the result of automation. Sending well-paying jobs to low-cost centers abroad is another big part of the story. So is global competition from emerging economies such as China and India.The result is the same in all cases, however. Jobs that paid well, required skills and produced vital communities are going away and aren't being replaced by anything comparable. "Unfortunately, the evidence is that you see a form of downward mobility of workers who are displaced from middle-skilled, stable career occupations,"

Will it ever get better? - But the difference between the two kinds of unemployment is important because each has distinct policy implications. Cyclical unemployment results from low demand and can be easily remedied (or created) by monetary or fiscal policy. Structural unemployment tends to be caused by deeper, underlying, supply-side issues, and is much harder for policy to change. Clearly nothing is permanent, but the current structural rate of unemployment need not hold over the long term. It is also often called NIARU (non-accelerating inflation rate of unemployment), or the rate of unemployment that would hold if we had stable inflation. It tends to be a medium-term variable, and it may last a few to several years depending on what factors are driving it and how quickly the economy adjusts. It reflects various fundamentals in the economy: wage rigidities, tariffs, distortionary taxes, a mismatch between the skills the market demands and the skills the market supplies, or an immobile labour supply.

Wage Rigidities and Jobless Recoveries - I recently attended an interesting conference hosted by the Atlanta Fed on Employment and the Business Cycle, where I had the pleasure of discussing this paper by Rob Shimer: Wage Rigidities and Jobless Recoveries. This was a fun paper to read, and I learned something new and interesting.  The backdrop for the paper is, of course, the recent financial crisis and associated recession. The level of GDP has essentially recovered its pre-recession level, while employment appears not to have recovered at all--these joint dynamics are referred to as a  "jobless recovery."  The hypothesis Shimer puts forth is this: [1] there was a shock (or shocks) that led to an evaporation in the value of the economy's capital stock; and [2] real wage growth is "sticky" in the sense that it appears insensitive to macro shocks.The type of evidence that lends some support for this latter hypothesis is displayed in the following diagram.

Structural Unemployment Arguments Lose Again - One reason I’ve been watching the so-called “structural unemployment” debate so closely is the result of recent trends in moving rates between states and within counties. If you go to the Census Webpage here you can get data from the CPS on mobility rates (here’s a historical pdf). And if you chart out the percent of total movers, movers who move in-between states, and movers who move within the same county, you see this:  The quick read was that everyone, post bubble-popping, was abandoning their properties and moving across the town to live with their parents and friends while looking for a new local job to save their house, a house they couldn’t sell because they were underwater.  Also that this collapse in state mobility was going to be a “structural” problem for the recovery.  Or at least it was something I considered, which is why this blog spends a lot of time thinking about the relationship between unemployment and housing variables like being underwater and foreclosures (see: our review of an IMF study on this, and foreclosures and state budgets, for instance).

H-1B visa data: Visual and interactive tools - Map: Concentrations of 2009 H-1B visa applications for tech jobs. The map below shows the concentration of H-1B visa requests for computer-related jobs by geographic area. Data is based on Labor Condition Applications (LCA) filed in 2009 (the most recent data available online) for jobs in 11 tech categories, such as computer and information systems manager, computer programmer and computer software engineer. If multiple locations are listed, only the first is mapped.

U.S. Postal Service on the Verge of Going Broke? (ABC News Video) It's the biggest civilian employer after Walmart, but apparently the U.S. Postal Service is not too big to fail. Today, the Postal Service said that without Congressional action, it could be bankrupt by the end of next year.  "We will continue our relentless efforts to innovate and improve efficiency. However, the need for changes to legislation, regulations and labor contracts has never been more obvious," Postal Service Chief Financial Officer Joe Corbett said in a statement.  Could it really be that the second oldest agency in America, created by Benjamin Franklin to help bind the nation together, is in danger of going out of business?

Are Government Employees Overpaid? Still No. - Something that is strongly implied in the Bowles-Simpson chairman’s mark is that government employees are overpaid (see here). The evidence from any number of sources is that this is completely false, even when you include benefits and control for everything imaginable. Reihan Salam brought up a corollary argument, Andrew Bigg’s argument that you have to include unfunded benefit liabilities in these comparisons.   This argument was taken apart months ago by the National Institute on Retirement, so let’s review that. To get there, I’m going to first run through EPI’s Debunking the Myth of the Overcompensated Public Employee (pdf), a pretty fantastic paper.  Lots of people have also done this research at the state level.  Jeffrey Thompson and John Schmitt of CEPR for New England, California from the Center on Wage and Employment Dynamics at the University of California-Berkeley, etc. We can break the entire argument about government employee compensation in three steps.

Older Job-Seekers More Willing to Take a Pay Cut - We recently wrote about the latest survey report on displaced workers from Heldrich Center for Workforce Development at Rutgers. Now the Sloan Center on Aging and Work of Boston College has drilled down deeper into the data to investigate the differences between older and younger unemployed workers, given that older workers have tremendous trouble finding re-employment once they have become displaced. This chart from the report is particularly interesting. It shows responses to a question about how jobless workers should adapt to a tough job market:  Workers over and under age 55 years were equally likely to say they have “thought seriously about changing careers.” About 69 percent of each group said this was the case. On the other hand, older workers are less likely to say they are able to move for a job; less than a quarter (23 percent) of workers over 55 said they could move, whereas just over a third (35 percent) of their younger counterparts could do so.

Unions Yield on Two-Tier Wage Scales to Preserve Jobs - Organized labor appears to be losing an important battle in the Great Recession. Even at manufacturing companies that are profitable, union workers are reluctantly agreeing to tiered contracts that create two levels of pay.  In years past, two-tiered systems were used to drive down costs in hard times, but mainly at companies already in trouble. And those arrangements, at the insistence of the unions, were designed, in most cases, to expire in a few years.  Now, the managers of some marquee companies are aiming to make this concession permanent. Though union officials said they could not readily supply data on the practice, managers have been trying to achieve this for 30 years, with limited results. The recent auto crisis brought a two-tier system to General Motors and Chrysler. Delphi, the big parts maker, also has one now. Caterpillar, back in 2006, signed such a contract with the United Automobile Workers. At G.M., Chrysler, Delphi and Caterpillar, the wages will not be snapping back.  Nor will that happen for workers at three big manufacturers here in southeastern Wisconsin These employers — Harley-Davidson, Mercury Marine and Kohler — have all but succeeded in the last year or so in erecting two-tier systems that could last well into a recovery.

Shocking State Fair Scandal, Wage Theft Epidemic, Spur Nationwide Protests - Activists in more than 30 cities, organized by Interfaith Workers Justice and backed by labor groups, are staging a National Day of Action Against Wage Theft on November 18. " As the crisis for working families in the economy has deepened, so too has the crisis of wage theft," says Interfaith Worker Justice (IWJ) Executive Director Kim Bobo, perhaps the country's leading reformer addressing the ongoing scandal. As much as $19 billion is stolen from American workers annually in unpaid overtime and minimum wage violations and, in some cases, through the human trafficking of legal immigrant workers. The latest case to come to light involves alleged horrendous conditions for immigrant workers reportedly hoodwinked in Mexico by a food services contractor for the New York State Fair and kept in near-slavery conditions of $2 an hour.

Have casinos contributed to rising bankruptcy rates? - This paper examines the relationship between casino gambling and bankruptcy rates in U.S. counties using a panel of U.S. county-level data from 1990 through 2005. We contribute to the literature in several ways, perhaps most notably by examining the possibility that the effect of a casino on bankruptcy may differ over the casino’s lifespan. Results confirm this possibility, indicating that the impact of casinos on bankruptcy follows a “U-shaped” curve over the life of the casino. More specifically, regression analysis indicates the existence of a casino in a county increases the bankruptcy rate by more than 9% in the first year of operation. The percentage of additional bankruptcies then decreases through the third year after the casino opens. Bankruptcy rates in casino counties then slightly fall below that of non-casino counties during the fourth through seventh years after opening, increasing once again in the eighth year and thereafter. This cycle corresponds closely to the 6 year statute of limitations period applicable to Chapter 7 bankruptcies.

Beyond a Jobless Recovery - This article explores the issue of a "Jobless Recovery" mainly from a heterodox economic perspective. It emphasizes the implications of ideas by Marshall Brain and others that improvements in robotics, automation, design, and voluntary social networks are fundamentally changing the structure of the economic landscape. It outlines towards the end four major alternatives to mainstream economic practice (a basic income, a gift economy, stronger local subsistence economies, and resource-based planning). These alternatives could be used in combination to address what, even as far back as 1964, has been described as a breaking "income-through-jobs link". This link between jobs and income is breaking because of the declining value of most paid human labor relative to capital investments in automation and better design. Or, as is now the case, the value of paid human labor like at some newspapers or universities is also declining relative to the output of voluntary social networks such as for digital content production (like represented by this document). It is suggested that we will need to fundamentally reevaluate our economic theories and practices to adjust to these new realities emerging from exponential trends in technology and society.

Unemployment insurance sent $319 billion to the jobless… Unemployed Americans have collected $319 billion in jobless benefits over the past three years due to the federal government's unprecedented response to the Great Recession, according to a CNNMoney analysis of federal records.  The cost of such benefits will be central to the heated debate in Congress in coming weeks over whether to extend this safety net for the fifth time this year. Lawmakers must act by Nov. 30 or two million people will start losing extended benefits next month. The federal government has already footed $109 billion of the bill, and lawmakers are super-sensitive to adding further to the deficit. But advocates are turning up the pressure to extend the deadline to file for federal benefits. Regardless of what Congress does, employers big and small will be paying the tab for years to come.

How Does Unemployment Insurance Affect the Economy? - This week’s report from the Congressional Budget Office (CBO) details the importance of unemployment insurance in relieving hardship for unemployed workers and their families, as we discussed in the previous post in this series.  Unemployment insurance “adds to overall demand and raises employment over what it otherwise would have been during periods of economic weakness,” CBO found. A new report commissioned by the Department of Labor during the Bush Administration reinforces CBO’s conclusion.  It found that in the depths of the recession, federal emergency unemployment benefits — which will expire November 30 unless Congress renews them — boosted employment by about 750,000 jobs.  (Regular, state-funded unemployment benefits boosted employment by an additional 1 million jobs.) CBO ranks assistance for unemployed workers as the most effective policy for generating economic growth and creating jobs among the 11 spending and tax measures it evaluated recently.  Mark Zandi, Chief Economist of Moody’s Analytics, estimates that each dollar of unemployment benefits generates about $1.60 in new economic activity in the first year.  Only an increase in food stamp benefits, which Zandi estimates generates roughly $1.70 of GDP for each dollar of cost, has greater bang for the buck.

Unemployment extensions end soon - NELP (National Employment Law Project) notes: For administrative reasons, states need to shut down their extended unemployment programs in advance of the federal government’s Nov. 30 cut-off. NELP estimates that 800,000 people will lose unemployment benefits in the coming weeks and 2 million workers will lose their benefits by December if Congress fails to act. The Columbus Dispatch puts the ending of benefits another way: Nearly 40 percent of Ohioans receiving jobless benefits will exhaust their unemployment by the end of December unless Congress agrees to continue funding extended benefits. Main Street Alliance small business owners write: “Get a job – any job. Don’t wait for a good one, take anything you can get.” So goes the refrain. But that advice denies the reality of this recession and its impact on the job market. And it obscures the realities of how employers go about hiring people. There simply aren’t enough jobs out there for the vast majority of the unemployed.

Unemployment insurance: Cold comfort | The Economist - AFTER a summer of idling, America’s job-creation machine spluttered back into life in October. The economy added 151,000 jobs last month, its best performance since May. Private job growth rose even more, by 159,000, compensating for a continued decline in government payrolls. But the October surge was not enough to bring down America’s 9.6% unemployment rate. As a result, it looks as though severe joblessness will outlive the programmes intended to address it. America’s recession, a post-war record in terms of length and depth, has left the country with unprecedented long-term unemployment. In October 6.2m people were listed as having been out of work for more than six months, and the average duration of unemployment now stands at 34 weeks, well above the previous post-war record of 20.5 weeks. Government unemployment benefits keep up living standards among the jobless, and so help stabilise a weak economy by bolstering consumer demand. But America’s unemployment-insurance system can no longer cope with a problem of this size.

Optimal unemployment insurance - This paper analyzes optimal unemployment insurance over the business cycle in a search model in which unemployment stems from matching frictions (in booms) and job rationing (in recessions). Job rationing during recessions introduces two novel effects ignored in previous studies of optimal unemployment insurance. First, job-search efforts have little effect on aggregate unemployment because the number of jobs available is limited, independently of matching frictions. Second, while job-search efforts increase the individual probability of finding a job, they create a negative externality by reducing other jobseekers’ probability of finding one of the few available jobs. Both effects are captured by the positive and countercyclical wedge between micro-elasticity and macro-elasticity of unemployment with respect to net rewards from work. We derive a simple optimal unemployment insurance formula expressed in terms of those two elasticities and risk aversion.

Unemployment benefits cutoff: Idled workers need a hand - Washington is poised to stop providing extended unemployment benefits despite the huge number of laid-off workers, the paucity of job openings, the high rate of underemployment in every sector of the economy and stubbornly slow economic growth. That's because Republicans in the Senate insist that, unlike the hefty tax cuts they covet for the wealthy, the comparatively slender subsidies for the unemployed must not be financed with borrowed money. This penuriousness is not just hypocritical, it's bad economics. The current federal program, which offers up to 73 extra weeks of unemployment benefits to idled workers, is due to expire Nov. 30. If it does, about 2 million unemployed people will have their benefits cut off in December — 411,000 of them in California. Their prospects for finding work remain unusually dim; according to the Bureau of Labor Statistics, there are still five job hunters for every opening. Unemployment insurance not only helps keep individuals afloat after they're laid off, it counteracts an economic downturn. As economists at the Congressional Budget Office and elsewhere have noted, providing unemployment benefits is a particularly effective economic stimulus because idled workers are likely to spend their benefits rather than save them.

It's the Right Thing to Do and Good Medicine for the Economy - Unemployment insurance benefits to individuals who have been out of work for at least six months will expire on November 30. Congress should continue these benefits because they pump demand into the economy and help unemployed workers and their families. Congress should also commit to this policy until the unemployment rate comes back down. This is a far better way to help our economy and our workers recover from the Great Recession than to ask the American people to borrow $830 billion to give tax breaks to the richest 2 percent of Americans.  These benefits provide critical assistance to unemployed individuals and their families while they find a new job. They kept 3.3 million people out of poverty in 2009, and they enable those out of work to keep putting food on the table and pay their bills. There’s a strong economic case for continuing these benefits, too. Unemployment benefits are one of the most effective and efficient ways to boost demand, which is exactly what our economy needs right now. Economists estimate that the economy grows by $1.61 for every dollar spent on unemployment benefits because recipients typically spend all of their benefit payments quickly.

Car Breaks Down, Shows The Importance of Extending Unemployment Benefits…When everyday economists sit and think about people who are unemployed, what they model is the idea that someone calls you everyday and offers you a job with a random salary, and whether or not you accept that offer depends on how much you like sitting around watching TV.  Those who put some thought into it might go as far to note that you answering the phone cuts into your “leisure” time, and your “leisure” time might be inversely proportional to how much you look for a job. This is why an economist like Casey Mulligan can write that unemployment insurance is “making this the year [the unemployed] coach junior’s baseball team” instead of, as Annie Lowrey found at TWI, the year of mental illness and suicide from the displacement that comes with being out of the workforce. And what’s never mentioned by economists is that sometimes you have to, ya know, drive your car to go get a job, they don’t just magically call.  And sometimes that car breaks down, or it needs gasoline, or it needs regular payments in order to get and then show up for a job. Here’s Arthur Delaney with a sad story

In 17.4 million US households, someone goes hungry: study - Some 17.4 million US households struggled to get enough food to eat last year because money was tight, the US Department of Agriculture said Monday. In more than a third of those households -- around one in eight US homes -- at least one person did not get enough to eat at some time during the year and normal eating patterns were disrupted. Hardest hit by hunger were urban households with children headed by single parents and African American and Hispanic households, the USDA said in a report.

17.4 million U.S. families went hungry at some point in 2009 - About 15% of U.S. households — 17.4 million families — lacked enough money to feed themselves at some point last year, according to a new U.S. Department of Agriculture report. Released Monday, the study also found that 6.8 million of these households — with as many as 1 million children — had ongoing financial problems that forced them to miss meals regularly. The number of these "food insecure" homes, or households that had a tough time providing enough food for their members, stayed somewhat steady from 2008 to 2009. But that number was more than triple compared with 2006, before the recession brought double-digit unemployment. The findings were from a survey of 46,000 households about hunger-related issues, including whether family members were able to pay for balanced meals, skipping meals or running low on or out of food and unable to restock because of financial constraints.

This Raging Fire - NYTimes - We know by now, of course, that the situation is grave. We know that more than a third of black children live in poverty; that more than 70 percent are born to unwed mothers; that by the time they reach their mid-30s, a majority of black men without a high school diploma has spent time in prison. We know all this, but no one seems to know how to turn things around. No one has been able to stop this steady plunge of young black Americans into a socioeconomic abyss. Now comes a report from the Council of the Great City Schools that ought to grab the attention of anyone who cares about black youngsters, starting with those parents who have shortchanged their children on a scale so monstrous that it is difficult to fully grasp.

Stoller: A Debtcropper Society - A lot of people forget that having debt you can’t pay back really sucks. Debt is not just a credit instrument, it is an instrument of political and economic control. It’s actually baked into our culture. The phrase ‘the man’, as in ‘fight the man’, referred originally to creditors. ‘The man’ in the 19th century stood for ‘furnishing man’, the merchant that sold 19th century sharecroppers and Southern farmers their supplies for the year, usually on credit. Farmers, often illiterate and certainly unable to understand the arrangements into which they were entering, were charged interest rates of 80-100 percent a year, with a lien places on their crops.  At the end of a year, due to deflation and usury, farmers usually owed more than they started the year owing.   Today, the debts do not involve liens against crops. People in modern America carry student loans, credit card debt, and mortgages. All of these are hard to pay back, often bringing with them impenetrable contracts and illegal fees. Credit card debt is difficult to discharge in bankruptcy and a default on a home loan can leave you homeless. A student loan debt is literally a claim against a life — you cannot discharge it in bankruptcy, and if you die, your parents are obligated to pay it. If the banks have their way, mortgages and deficiency judgments will follow you around forever, as they do in Spain.

A Hedge Fund Republic? - Earlier this month, I offended a number of readers with a column suggesting that if you want to see rapacious income inequality, you no longer need to visit a banana republic. You can just look around.  My point was that the wealthiest plutocrats now actually control a greater share of the pie in the United States than in historically unstable countries like Nicaragua, Venezuela and Guyana. But readers protested that this was glib and unfair, and after reviewing the evidence I regretfully confess that they have a point.  That’s right: I may have wronged the banana republics.  You see, some Latin Americans were indignant at what they saw as an invidious and hurtful comparison. The truth is that Latin America has matured and become more equal in recent decades, even as the distribution in the United States has become steadily more unequal.

Low incomes make poor more conservative, study finds - New research findings add complexity to the basic assumption that humans act in their own economic self-interest. By analyzing hundreds of survey questions from 1952 to 2006, Peter Enns, assistant professor of government, and Nathan Kelly of the University of Tennessee found that as inequality rises, low income individuals' attitudes toward redistribution become more conservative. Their paper appears in the October issue of the American Journal of Political Science. "It's a bit of a conundrum," Enns admits. The researchers also examined public opinion data on the question: Should government increase spending on welfare, keep it the same or decrease it? "As inequality rose, the high- and low-income respondents on average become less supportive of spending on welfare," Enns said. "And this is not because low-income people are unaware of inequality; our results show they are more aware of it than most people."Previous economic models predicted that low-income individuals will consistently support government redistribution. "If anything, when inequality rises, low-income people should become more supportive, and that's not what we observe in the data,"

Unemployment benefits to expire for 200000 New Yorkers unless Congress acts - Laid-off workers who face losing benefits if Congress doesn't act are those who began receiving state unemployment checks after June 1, a group that includes more than 200,000 New Yorkers. States provide unemployed workers with 26 weeks of regular benefits. (In New York, the maximum weekly benefit is $405.) During the recession the federal government stepped in to make sure laid-off workers were taken care of when their state benefits ran out. Two federal programs, kept alive through periodic renewals, have provided the unemployed with benefits ranging from 34 more weeks to 77 more weeks. For New Yorkers, the programs extended benefits by 67 weeks. The Obama administration wants to extend the programs for a year at a cost of about $60 billion, but many congressional Republicans oppose the idea because it would add to the deficit.

Texas Borrows $1.2 Billion to Repay US for Jobless Benefits: Muni Credit - The Texas Workforce Commission, which administers the state’s unemployment insurance program, estimated it could borrow at 3 percent, compared with the 4.5 percent it expected the government to charge, according to estimates in September as the sale was being prepared. More than half of U.S. states have run out of money in their unemployment trust funds, financed by payroll taxes, because of soaring joblessness in the recession that began almost three years ago. They have borrowed $40.9 billion from the federal government, which has been providing the cash, without charging interest, under the economic stimulus plan enacted after President Barack Obama took office

Texas taxpayer burden reaches $60.8 billion, a per-taxpayer debt of $8900 - An ever-increasing retirement benefit debt and insufficient tax collection are largely responsible for a current $60.8 billion burden on the taxpayers of Texas, according to a study released today by the Institute for Truth in Accounting. Using the state Comptroller's financial report for fiscal year 2009, the institute determined in its Financial State of the State for Texas that state accountants keep $51.5 billion in retirement liabilities off the books. In all, the study says the state actually has on hand $54.5 billion in assets with which to pay bills totaling $115 billion, leaving the $60.8 billion burden. Divided among taxpayers, each of us would need to contribute $8,900 to truly balance the state's books. This imbalance is created by taking the past costs of retirement and health care benefits for state employees and teachers and pushing them into the future, Sheila Weinberg, founder and CEO of the Northbrook, Ill.-based non-profit institute, said. Plummeting stocks and a wobbly economy eroded the value of retirement system assets, not only in Texas but across the country.

States Raise Payroll Taxes to Repay Federal Unemployment Loans… Thirty one states, their unemployment-insurance funds empty, have borrowed nearly $41 billion from the federal government. California alone has borrowed nearly $8.8 billion as of mid-November, according to the Labor Department. As states try to replenish the funds and begin to repay the loans, employers are facing increases in both state and federal payroll taxes, a potential barrier to new hiring. "Employers were hit with these adjustments quite a bit last year," said Richard Hobbie, executive director for the National Association of State Workforce Agencies. A National Employment Law Project analysis found 41 states increased unemployment-insurance payroll taxes this year by an average of nearly 33.9%. The largest was a 168.5% boost from 2009 in Hawaii.

Low-tax states will gain seats, high-tax states will lose them - Migration from high-tax states to states with lower taxes and less government spending will dramatically alter the composition of future Congresses, according to a study by Americans for Tax Reform Eight states are projected to gain at least one congressional seat under reapportionment following the 2010 Census: Texas (four seats), Florida (two seats), Arizona, Georgia, Nevada, South Carolina, Utah and Washington (one seat each). Their average top state personal income tax rate: 2.8 percent. By contrast, New York and Ohio are likely to lose two seats each, while Illinois, Iowa, Louisiana, Massachusetts, Michigan, Missouri, New Jersey, and Pennsylvania will be down one apiece. The average top state personal income tax rate in these loser states: 6.05 percent.

Nevada's Economy Shrank Fastest Last Year - Not only has it overtaken Michigan as the state with the highest unemployment rate, a new Commerce Department report also finds that the Silver State’s economy plummeted the most last year of any state. Nevada’s gross domestic product shrank by 6.4 percent in 2009, nearly three times the nationwide decline of 2.1 percent. In total, inflation-adjusted gross domestic product fell in 38 states in 2009. Among the minority of states that grew, Oklahoma came out on top, with output increasing by 6.6 percent last year. The largest contributor to growth in Oklahoma was mining. The report also found that per-capita inflation-adjusted output was highest in Delaware, at $62,080, 48 percent above the national average. That measure was lowest in Mississippi, at $29,634 per person, or 29 percent below the national average.

Resource-Rich States Weathered 2009 Better - State economies that revolve around mining, agriculture and other natural resource industries led the nation in state gross domestic product last year, according to a report from the Commerce Department on Thursday. Real GDP declined in 38 states in 2009, with the worst declines among states that have a heavy concentration in manufacturing and construction jobs. Growth was flat in two states while ten states and the District of Columbia saw increases. Nevada, an epicenter of the housing bust, saw the largest decline in state 2009 GDP, 6.4%. Michigan (5.2%), New York (4.3%), Arizona (3.9%) and Indiana (3.5%) were among those with the largest declines in GDP. The nation, by contrast, saw GDP decline 2.1% in 2009, even though the recession officially ended in June of that year. Some notable exceptions included states that have a heavy concentration of extraction-related industries like mining. Oklahoma led the nation in GDP growth last year, with 6.6% growth with the largest contribution coming from the mining sector. Mining was also a big contributor to growth in Wyoming (5.4% growth) and Louisiana (2.5%).

Bad timing: California seeks bond buyers amid rout in muni market…Yet another way the California Legislature has stuck it to taxpayers: The long delay on a budget agreement this year also delayed the state’s plans to raise cash in the municipal bond market. Now, Treasurer Bill Lockyer is trying to get investors to buy $14 billion in debt amid a broad sell-off in the bond market overall, and the worst sell-off in many tax-free muni bonds since the financial crash of late-2008. That will mean higher interest rates on the debt than the state would have paid two months ago. Lockyer on Monday launched the biggest portion of the debt sale: a $10-billion offering of short-term revenue anticipation notes, or RANs. The two series of notes, one maturing May 25, 2011 and the other June 28, will raise cash for the state to tide it over until tax revenue arrives in winter and spring. The brokerages selling the RANs for the state are taking orders from individual investors on Monday and Tuesday. Lockyer’s office said late Monday that initial orders totaled $4.4 billion, or 44% of the total offering.That was weaker demand than the state saw on the first day of the September 2009 RAN sale, when initial orders totaled $5.4 billion, or 61% of what was an $8.8-billion-total offering.

Tax-Exempts Tumble as California Sells $10 Billion - Yields on top-rated 10-year municipal bonds had their biggest one-day rise since March as interest rates on U.S. Treasuries soared and California led states and local governments issuing $16.1 billion this week, the largest borrowing in at least seven years.  Investors are dumping municipal bonds along with Treasuries, whose prices fell for a third day, sending 30-year yields to the highest since May. Government bond yields rose after a group including former Republican officials and economists urged the Federal Reserve to rethink buying hundreds of billions of dollars in U.S. debt and a report on retail sales showed quickening economic growth.  “There’s consternation on the street about the Fed doing a $600 billion purchase and starting inflation,”

California Will Default On Its Debt, Says Chris Whalen (Tech Ticker Video) Municipal bonds have plummeted in recent days, as investors have suddenly focused on huge state and city budget deficits that there's no easy way to fix. Nowhere has this collapse been more visible than California, which faces a massive $25 billion shortfall and red ink for as far as the eye can see. After years in which every looming financial crisis has been met with a government bailout, you might think that the same solution awaits California, as well as all the other states that have huge obligations that they can't afford to meet. But this time that may not happen, says Chris Whalen, a financial industry analyst and Managing Director of Institutional Risk Analytics. In fact, Whalen thinks that California will default on its debt--hammering all the pension funds and other investors who have loaded up on apparently safe state bonds.

Full Year of Muni Gains Wiped Out in 2 Weeks; California in Shambles, Philadelphia Downgraded; Issuance Soars; Horrid Muni Risk-Reward Setup - A full year of municipal bond gains went up in smoke in the past two weeks. Worse yet, it's highly likely more blood is coming as issuance soars amid decreased demand from investors. A Moody's downgrade of Philadelphia, a complete mess in California, and a looming city bankruptcy in Michigan all weigh on the sector. Bloomberg reports Philadelphia Bond Rating Cut to A2 by Moody’s on Fiscal Weakness Philadelphia’s credit rating was reduced to A2 from A1 by Moody’s Investors Service, which said the sixth most-populous U.S. city is financially weak and has limited budget options. The downgrade, to the firm’s sixth-highest investment grade, affects $3.8 billion of general obligation bonds and similar debt. The outlook for the city of 1.5 million is stable, according to Moody’s.

What’s Wrong With Muni Bonds? Everything - The litany of woes in the muni bond world finally caught up with the muni bond market this week.  Like a South Carolina Waffle House at 4 in the morning, ugliness was all around. The selling got especially ugly on Friday when Ireland default talk pushed California muni bond closed-ends off a cliff.  Many of the negatives for municipalities have been well-documented and discussed for years, but now people have decided to pay attention. Some of the lowlights for the muni market according to the New York Times: "Concern over the increasingly strained finances of states and cities and a growing backlog of new bonds for sale..." "For months, some on Wall Street have warned that indebted states and cities might face a crisis akin to the one that brought Greece to its knees." And there's more where that came from.  Muni bonds were very much a part of the chase for yield.  Wealthy people, concerned with the Bush tax cuts being sunsetted in 2011, had jacked up all the traditional non-taxable munis as they became scarcer due to an increase in taxable muni issuance.

California Bond Woe Bodes Ill for States - America's strapped states and cities took another hit Wednesday, with California seeing tepid demand for its latest bond sale and other governments pulling about $700 million worth of borrowing deals this week as investors continued stepping away from the municipal bond market. The normally staid market has grown volatile the past week, posting its sharpest selloff in nearly two years, as investors demand higher interest rates to buy paper issued by states, cities and counties to finance their operations. Localities have been hammered by a drop in tax revenue amid the downturn—and unlike the federal government, most are barred constitutionally from running deficits.

Some thoughts on the muni market - My opinion, for whatever it is worth to you, is that there are a handful of factors – mostly unrelated to the relative creditworthiness of muni issuers – that have provoked this correction. These factors are related, and they will likely contribute to volatility going into next year. The first, obviously, is a supply glut. The pending expiration of the Build America Bond (BAB) program has pulled supply forward, and this is going to seesaw over the next several weeks. Since the BAB program was initiated, most issuers have structured their new issues with the sense that they will go to either the tax-exempt or taxable market, whichever is more advantageous at the time. It has been almost completely a supply management game since the market for these bonds was established and munis became truly bifurcated. By allowing muni issuers to sell taxable bonds, the BAB program opened the market up to investors like pensions and foreign investors, who otherwise would not benefit from a tax exemption on the interest income on the bonds and would find tax-exempt yields unappetizing. This program has relieved the supply pressure on the market for essentially two years now, keeping interest rates low.

State's projected deficit swells to $5.7 billion — Tax collections are falling, the state’s budget deficit is rising and state lawmakers may be forced to hold a special session to deal with it all. On Thursday, the state’s chief economist predicted the state will collect $1.2 billion less in tax revenues through mid-2013, punching a big hole in the current budget and a gaping one in the next.  Most of that predicted drop is because of a slower-than-hoped recovery of the economy, said economist Arun Raha, executive director of the Economic and Revenue Forecast Council. About a quarter of the total is the stream of revenues wiped out by voters when they passed Initiative 1107 to repeal taxes on candy, gum, bottled water and soda pop.

Wash. tax collections fall again, deficit swells - Washington state tax collections are down again, swelling the budget deficit by more than $1 billion over the next two-and-a-half years as lawmakers grapple with recent voter rejection of higher taxes. Thursday's state revenue forecast from chief economist Arun Raha adds another $385 million to the hole in the current year's state budget, which runs through June 2011. Gov. Chris Gregoire already has ordered spending cuts to address that problem, but her actions won't be enough to fill the additional budget gap. Gregoire has limited ability to adjust the budget without help from the Legislature, but she could call lawmakers into a special session to fix the shortfall. The revenue forecast also says Washington will collect about $810 million less than previously hoped for the next state budget, which lawmakers will write in the 2011 legislative session. The 2011-2013 deficit is now pegged at about $5.7 billion out of a roughly $33 billion general fund

Mississippi Governor Spreads the Pain in Proposed Budget Cuts - Entering his last year in office and mulling a run for president, Gov. Haley Barbour proposed to shore up a $700 million deficit with controversial budget-cutting initiatives, such as rolling back Medicaid reimbursement rates and freezing annual pay raises for K-12 teachers. "I do not intend to leave my successor financially in the type of budget shape I was in when I came here," Barbour said Monday. Barbour also wants to slash funds for public libraries and public television and gut state funding for community college sports, saying local governments and voluntary student fees could make up that $3 million. He suggested performance-based funding for higher education and the consolidation of administrative services at all levels.

Loss of Stimulus Cash to Hurt State - For the past two years, finance experts as well as some politicians have warned that once the generosity of the 2009 American Recovery and Reinvestment Act winds down, New York would face even worse budget problems. That's because the stimulus money acted as a crutch that allowed the state's two major expenses, education and Medicaid, to grow despite the recession.With the stimulus ending next summer, those rising costs will have to come from state taxpayers -- unless cuts are made. "We're losing federal spending, which supports state spending," warned Budget Director Robert Megna, who gathered with other officials on Monday for their annual Quick Start meeting, which provides one of the first formal looks at the coming budget year.

New York State's Budget Gap May Reach $1 Billion, Deputy Comptroller Says (Bloomberg) -- Positions in foreign-exchange derivatives contracts increased by 8 percent in the first half of 2010, according to the Bank for International Settlements. The amount outstanding in U.S. dollar-denominated contracts increased by 11 percent and euro contracts dropped by 2 percent, while Swiss franc contracts increased by 23 percent, the Basel, Switzerland-based BIS, which touts itself as the central banks’ bank, said in an e-mailed statement today. The value of non- dollar denominated contracts may have been distorted by fluctuations in exchange rates against the dollar, the BIS said. “Changes in the size of positions of other currencies are more difficult to interpret, but there are reasons to believe that strong underlying growth was offset by valuation effects due to exchange-rate depreciation,” the statement said.

New York City Mayor Michael Bloomberg is set to order layoffs for thousands of city workers, close fire houses at night -  (WABC) -- New York City Mayor Michael Bloomberg is set to order thousands of layoffs and cuts to all city agencies.  The layoffs, along with service cuts, are meant to close a budget deficit for next year now pegged at almost $3.3 billion.  Some job cuts will be done through attrition, but services for seniors are expected to take a hit, along with libraries and cultural centers. Every agency is expected to see cuts, except there will be no layoffs for the NYPD or FDNY. The cuts will be at least $1.5 billion over the next 18 months.  Bloomberg will once again propose firehouse closings, this time closing 20 fire companies at night.

New York City Will Cut Workforce by 10000 to Narrow $3.3 Billion Deficit New York City, facing a $3.3 billion deficit in next year’s budget, will cut its workforce by more than 10,000 over the next year-and-a-half, Mayor Michael Bloomberg’s budget office reported. More than 6,200 workers will be fired, and the remaining cuts will be accomplished by attrition, the mayor’s office said today in a report. The city, which employs more than 300,000 people, will reduce the number of workers by 2,100 in the current fiscal year, which ends June 30, and by about 8,200 in fiscal 2012, the mayor’s office said

Preckwinkle orders 21% Cook County spending cuts - Facing what she said is a half-billion-dollar deficit, incoming Cook County Board President Toni Preckwinkle Thursday ordered county officials to cut their budgets a whopping 21% in fiscal 2011.  In a press conference after an unusual meeting of all elected countywide officials, Ms. Preckwinkle said she expects independently elected officials like Sheriff Tom Dart and County Clerk David Orr will cooperate with her "challenge" to them. But she made it clear she intends to get what she wants.  "I made it abundantly clear that no one would be absolved from making cuts, and no one would be alone in making cuts," the president-elect said. "We don't have a choice."

Rust Belt Cities Demolish Homes Amid Mortgage Defaults (Bloomberg video) -- Cities across the Rust Belt, saddled with abandoned properties under their control as owners stop paying taxes, are choosing to tear down some buildings rather than sell them as residents move to the suburbs and steel, automotive and manufacturing jobs disappear.

Reimagining Detroit as Grow Town - Over the last six decades, the city of Detroit has lost half its population, shrinking from more than 1.85 million people in 1950 to just 912,000 in 2008. The population plunge has left vacant vast tracts of land that some in the city want to see used for growing food. Hundreds of community gardens have sprung up throughout the urban core, and several large-scale farms have been proposed within the city limits. The potential of the vacant land for food production is significant, according to a new study by Michigan State University researchers. It found that turning vacant publicly owned parcels into farms and community gardens could meet a majority of residents’ fruit and vegetable needs. Using intensive cultivation techniques and greenhouses to extend the growing season, this land could provide them with more than 75 percent of their fresh vegetables and 40 percent of their non-tropical fresh fruits, researchers found. The fruit and vegetable consumption rates were based on national averages.

Bobb asks state to free $400 million to help schools - Emergency Financial Manager Robert Bobb wants the Michigan Legislature to free up $400 million to help mend the deficits of Detroit Public Schools and 40 other districts, but the proposed plan hasn't garnered any sponsors yet in Lansing.  Under draft legislation Bobb submitted to the state Monday, the state would sell off part of future tobacco settlement payments and districts in deficit could tap into that money in exchange for promising financial and academic reforms, including eliminating teacher seniority.  Without the financial assistance, Bobb said DPS — steeped in a $327 million deficit —would have to implement more "draconian cuts" such as reducing the number of schools by half, increasing class sizes to 62 in high schools and boosting fees to play sports, according to documents submitted to the state

De-legitimizing public education - The quality of American education is going to get worse. Count on it. And contrary to the conventional wisdom, the main reason isn’t going to be the loss of funding accompanying economic hard times. Follow along and I’ll explain:

  • Step One: Start with what was once a relatively simple educational system. (For me, it was a one-room school with 16 or so kids ranging in age from about 6 to 15, and a teacher who, it was taken for granted by the community, was a professional who knew what she was doing.)
  • Step Two: Close the school, build a big one, buy school buses, open a district office, and hire administrators to tell teachers what they can and can’t do.
  • Step Three: When problems with the new, more complicated system develop, expand the administrative pyramid, with each successive layer of authority knowing less about educating than the layer below it.
  • Step Four: As problems escalate, expand the bureaucracy, moving decision-making ever higher up the pyramid until state and then federal politicians make all the important calls.
  • Step Five: Give corporate America - the Gates, Broads, Waltons, etc. - control of the politicians who control the bureaucracy that controls the administrators who control the teachers.
  • Step Six: Pay no attention as the rich who, enamored of market forces, in love with the idea of privatizing schools, and attracted by the half-trillion dollars a year America spends on education, use the media to destroy confidence in public education.
  • Step Seven: As a confidence-destroying strategy, zero in on teachers. Say that they hate change and played a major role in the de-industrialization of America and the decline of the American Empire.
  • Step Eight: As the de-professionalization of teaching and the down-grading of teachers progress, point to the resultant poor school performance as proof of the need for centralized control of education. So, what’s next?

The Shadow Scholar - Editor's note: Ed Dante is a pseudonym for a writer who lives on the East Coast. Through a literary agent, he approached The Chronicle wanting to tell the story of how he makes a living writing papers for a custom-essay company and to describe the extent of student cheating he has observed. In the course of editing his article, The Chronicle reviewed correspondence Dante had with clients and some of the papers he had been paid to write. In the article published here, some details of the assignment he describes have been altered to protect the identity of the student.

UC approves 8 percent tuition hike  -- University of California leaders on Thursday approved an 8 percent tuition hike that will cost each student up to $823 next year.  Five of the 20 regents voted against the measure during the meeting at UC San Francisco's Mission Bay campus. Several regents repeated a mantra that has become common in recent years: They have no choice but to raise tuition. The 2011 hike will bring undergraduate tuition to $11,124 per year starting next fall. The 10-campus UC system, with more than 220,000 students, needs about $1 billion more per year to sustain itself, said Vice President Patrick Lenz, who added that the gap will rise to nearly $5 billion by 2020 unless the university takes drastic measures.

Columbia, Yale, Penn Presidents’ Pay Topped $1 Million in 2008, Study Says – Columbia University President Lee Bollinger was the Ivy League’s highest-paid president in 2008 at $1.75 million in total compensation, as 30 college leaders received more than $1 million in pay. Yale University and the University of Pennsylvania joined Columbia as Ivy League schools paying their top executive more than $1 million, according to the Chronicle of Higher Education. The paper yesterday published a study of pay for presidents of 448 private, nonprofit U.S. colleges and universities.  The number of presidents making more than $1 million a year rose from 23 in 2007. None was making that much as recently as 2004, according to the Chronicle.

Fully funded Kansas pensions remain decades away, execs say  - Plugging a $7.7 billion hole in future Kansas pension benefits may take decades, even with some additional funding legislators may consider when they reconvene in January, state pension trustees heard Thursday. Fixing the growing underfunding problem may take even longer if, as the trustees are mulling, investment targets for the $13.5 billion group of state pension funds are adjusted downward to reflect market changes. Members of the board of the Kansas Public Employees Retirement System heard a series of reports at their monthly meeting indicating that even if incoming legislators vote for a package of increased contributions from both state employers and from workers that was considered, but rejected, last spring, pension funds for state teachers likely won't reach a professional standard minimally adequate 80 percent funded level until at least 2018. Full funding may not be possible for years after that.

Stanford report says local pension systems $200 billion short - The Stanford University research team that shocked Sacramento this year by declaring that the state's three pension systems are more than $400 billion underfunded has struck again, saying local government pension systems are nearly $200 billion short. The Stanford Institute for Economic Policy Research team, headed by former Democratic Assemblyman Joe Nation, applied the same standard to the local funds as it did to the state's three large systems - a risk-free "discount rate" of about 4 percent on future pension fund earnings. All public funds now use rates that are nearly twice as large, but that understates future liability, say critics, who include outgoing Gov. Arnold Schwarzenegger. By using unrealistically high assumptions of future earnings, Schwarzenegger and other critics say, the funds are misleading employees and government policy makers about the future costs of pensions. The most recent contracts negotiated with state employee unions by the Schwarzenegger administration included lowering pension guarantees to future employees

NYC May Cut Assumed Return Rate on Pensions, Liu Says  (Bloomberg) -- New York City may reduce the assumed return on its $100.5 billion of pension investments from the current 8 percent rate, Comptroller John Liu said today. The move would increase the amount of money the city must contribute to its five public retirement plans even as it faces a $2.4 billion budget deficit next year, Liu said after a speech at the Union League Club in Manhattan. The city’s pension costs are expected to rise more than 15 percent next year, to $8.3 billion, budget director Mark Page said today. That’s about 20 percent of municipal tax revenue, he said.  “The city has maintained an 8 percent assumed rate for a long time,” Liu said. “It’s fair to say that the assumption will be lowered at some point.”

Oklahoma's Pension Problem - Oklahoma's number one financial problem is getting worse. One of the state's public pension funds is now close to 10 billion dollars in the red.  The Oklahoma Teachers Retirement Fund has an unfunded liability that is close to 10 billion dollars and the deficit is growing. It could put thousands of teachers retirements in jeopardy. "Actually, the older I get the more concerned I become because it becomes a bigger and bigger issue," Churchill said. State leaders agree, it is becoming a bigger issue, and one that can no longer be ignored. "Right now this is the biggest problem we are facing by far," said State Treasurer Scott Meacham

PBGC deficit grows to $23 billion — The government's pension insurer said its deficit widened to $23 billion in its budget year that ended Sept. 30. The Pension Benefit Guaranty Corp. said its total obligations increased by $11.5 billion. The PBGC has $79.5 billion in combined assets to cover obligations that total $102.5 billion. The combined deficit, $23 billion, is an increase from $22 billion in 2009. In total, PBGC paid about $5.6 billion in benefits owed to retirees and their surviving beneficiaries, because their pension plans could not last year. PBGC said: "This financial position is the result of inadequate plan funding and misfortunes that have befallen plan sponsors. In part, it is a result of the fact that the premiums PBGC charges are insufficient to pay for all the benefits that PBGC insures, and other factors."

Brave Sir Alan vs Sir Sniveling NewDeal: Orszag Frames Social Security - And by 'framing' I mean as in Film Noir gangster movies rather than Lakoffian terms. Peter Orszag has made quite a stir with a couple of Op-Eds this last weekend of which the most recent was Safer Social Security in which he cleverly indicts and then sentences Social Security with the following: Nevertheless, Social Security does face an actuarial deficit. Current projections suggest that, after 2037, benefits would need to be reduced by more than 20 percent to match revenue. Measured over the next 75 years, the deficit in Social Security is expected to amount to 0.7 percent of the economy — not a huge amount, but a deficit nonetheless. So it would be desirable to put the system on sounder financial footing. Well this is going to take a whole lot of unpacking, and the only question is where to start. And a prosaic answer is 'Under the fold'.

We Don't Need Your Help "Saving" Social Security - In Sunday's New York Times, President Obama's former budget director, Peter Orszag, praised Obama's off-the-rails Fiscal Commission for tackling Social Security, saying the co-chairs' plan to slash benefits in response to a modest and distant shortfall was better than privatization. Orszag's caveat was that he'd prefer to meet halfway on benefit cuts and revenue increases rather than relying mostly on benefit cuts, as conservative Democrat Erskine Bowles and very conservative Republican Alan Simpson propose. For those fooled into believing that the midpoint between the two parties must be a reasonable compromise, it's important to recognize that Democrats seem to now prefer to compromise in advance, whereas Republicans stake out extreme bargaining positions like privatization knowing most voters aren't paying attention and don't view these as credible threats. And while Republicans maintain party discipline by purging moderates, Democrats stifle their base by defining the range of "serious discussion" to exclude anything that isn't already a compromise. Hence, in a related column two weeks ago, Orszag accused the left of "strident opposition to any serious discussion of Social Security reform," because they weren't willing to meet the Republicans halfway to Mars.

The Ides of November - We expected to see an all-out assault on Social Security and progressive taxation in November, and we expected it to come under the banner of "deficit reduction." That was always the plan: Wait until after the election, when a lame-duck Congress could pass the preferred policies with the least political blowback. Then release a flurry of like-minded proposals and supportive editorials to create the illusion of consensus, capped by a coordinated media blitz to pressure the President and Congress into accepting them. But even we, battle-hardened as we like to think we are, didn't expect the assault to be so coordinated, so widespread, or so aggressive. The number of like-minded reports released this month is greater than we expected, the ad buys are larger, and the range of ideas is narrower. And more journalists are carrying water for this campaign than we expected. All of this is being done to serve an anti-government, anti-Social Security, anti-tax agenda whose ideas are both unpopular and impractical. Nevertheless, the media's greeted then with a tidal wave of nearly-unanimous praise (some of of which can even be found on the editorial page.)

Ky. gov looks to Private Sector to Manage Medicaid - Despite lavish spending by a Medicaid contractor, Gov. Steve Beshear said Monday he wants to enlist more private-sector businesses and groups to manage portions of the state program that provides medical care for more than 815,000 poor and disabled Kentuckians. Beshear told reporters at a Capitol news conference that contracting with private managed-care organizations could help plug a $100 million deficit in the Medicaid program and prevent cuts to medical services that other states have implemented. Beshear's proposal came a week after the release of a state audit that found Passport Health Plan, a Medicaid contractor serving the Louisville area, had spent heavily on luxury hotels, meals, salaries and lobbying over the past three years.

Medicaid Asking for More Money for this Year and Next - Steady increased demand and a sharp decrease in federal funding are contributing to a more than $200 million shortfall in funding for Idaho’s Medicaid program during the next two years. Idaho could be looking at drastic cuts in health services to balance its Medicaid budget, according to the Department of Health and Welfare (DHW). Medicaid is facing a projected $42.3 million shortfall for the current budget year, which ends in June, and a $171.6 million shortfall for the next budget year. DHW, which manages the state’s Medicaid program, has found $36 million in cost savings, but a drop in the federal match for Medicaid funding is creating the gap in funding. About one in every seven Idahoans is on Medicaid, which provides health services to children and adults who are low-income families, have a disability, are elderly, or are pregnant. The federal government pays for most of Medicaid in Idaho. However, the 2009 stimulus package put the federal government on the hook for a larger share of the Medicaid bill, but that provision will expire next June.

States left without Easy Answers on Medicaid - Facing steep budget shortfalls and growing Medicaid rolls, some states probably must seek federal relief to lower eligibility thresholds, leaving millions without coverage. Medicaid is the means-tested health care program jointly funded by the federal and state governments.  The program, which accounts for between 20 and 25 percent of most state budgets and serves more than 50 million people, saw enrollment hit record highs in 2010 while most government programs and services experienced reductions in the wake of the recession. The program is expected to increase 5.4 percent next year, marking a 20 percent increase the last three years, according to a recent study by the National Association of State Budget Officers.

Doctors: Congress should Act Fast on Medicare Pay -- Just back from recess, Congress is staring at a deadline that will result in a dramatic cut in Medicare payments to doctors if no action is taken. Lawmakers have implemented the so-called "doc fix" 10 times in the past eight years, four times this year alone. But what has become a routine event still attracts a swarm of lobbyists. The American Medical Association (AMA) is planning to flood Congressional phone lines and take out ads in Washington newspapers Wednesday in hopes of pressuring lawmakers to move quickly on the fix. "Everyone in Congress knows that this cut will cause problems for seniors, and the AMA is working to turn that concern into action before time runs out this month," AMA President Cecil Wilson said in a statement.

Seniors, entitlements, and the midterms -Why were seniors so furious with the Democrats? The weak economy and the huge deficits didn’t help, but retirees have actually been hit less hard by the financial crisis than other Americans. The real sticking point was health-care reform, which the elderly didn’t like from the start. While the Affordable Care Act was being debated, most seniors opposed it, and even after the law was passed Gallup found that sixty per cent of them thought it was bad. You sometimes hear (generally from Republicans) that the health-care bill is wildly unpopular. The truth is that, in every age group but one—seniors—a plurality of voters want to keep the bill intact. Misinformation about “death panels” and so on had something to do with seniors’ hostility. But the real reason is that it feels to them as if health-care reform will come at their expense, since the new law will slow the growth in Medicare spending over the next decade. It won’t actually cut current spending, as Republicans claimed in campaign ads, but between now and 2019 total Medicare outlays will be half a trillion dollars less than previously projected. Never mind that this number includes cost savings from more efficient care, or that the bill has a host of provisions that benefit seniors—most notably the closing of the infamous drug-benefit “doughnut hole,” which had left people responsible for thousands of dollars in prescription-drug costs. The idea that the government might try to restrain Medicare spending was enough to turn seniors against the bill.

Medicare's 23% Doctor Pay Cuts to Be Delayed as Senate Seeks Longer Fix - A one-month deal to delay a 23 percent reduction to doctors’ Medicare pay rates will buy more time for U.S. lawmakers who are seeking to hold off future cuts.  Medicare, the U.S. government health insurance program for the elderly and disabled, has cost control formulas that demand the rate cuts. Senator Max Baucus, a Montana Democrat who chairs the Senate Finance Committee, and Senator Charles Grassley of Iowa, the committee’s senior Republican, reached an agreement that will postpone the doctor pay cut until Jan. 1 from Dec. 1.  Physicians may withdraw from Medicare if the scheduled cuts are imposed, the Chicago-based American Medical Association said in a Nov. 15 statement on its web site. Baucus and Grassley said they are working on a one-year solution to provide certainty to doctors and patients concerned the one-month delay is just a temporary reprieve.

Medicare After Obama - Playing around with the NYT’s deficit calculator I came up with a plan that involves raising the eligibility age for Medicare.  I’m a bleeding heart, at heart, and don’t like the idea of any kind of cut on social welfare expenditures. But within the realm of reductions in social outlay, I think it’s surprising and upsetting that we don’t hear more about this option. Instead, everyone seems to want to raise the eligibility age for Social Security. This makes little sense to me for two reasons. One is that seniors can buy healthcare with money if they want to but can’t sell Medicare benefits in exchange for food or whatever. I’m not of the school of thought that believes cash benefits are always superior to in-kind benefits. But the merits of in-kind benefits, if any, are normally paternalistic in nature. And there’s really no reason to be paternalistic about senior citizens. Whatever total quantity of money we decide to dedicate to retirees, the retirees themselves should decide whether that money is used to buy hip replacements or presents for grandkids or whatever.

Medicare Patients Often Harmed in Hospitals, Study Says… One of every seven Medicare beneficiaries who is hospitalized is harmed as a result of problems with the medical care there, according to a new study from the Office of Inspector General for the Department of Health and Human Services. The study said unexpected adverse events added at least $4.4 billion a year to government health costs and contributed to the deaths of about 180,000 patients a year.  In a single month, October 2008, the report estimated that some 134,000 Medicare patients experienced at least one adverse event, ranging from a temporary health setback to death, during a hospital stay. It said 44 percent of them were “clearly or likely preventable.”  That study cited hospital infections as a major source of problems, but the inspector general’s report found other events to be more common. The most frequent problems classified as adverse events, it said, were those related to medication, like excessive bleeding, followed by those related to patient care, like intravenous fluid overload, and those related to surgery and to infection.  The most serious events, like surgery on the wrong patient, amounted to less than 1 percent of the events tallied. Those are known as “never events” — the National Quality Forum, a leading nonprofit group, said they “should never occur in a health care setting.”

Rep. Ryan on His Medicare Plan - The following was submitted by Representative Paul Ryan, Republican of Wisconsin. More on Mr. Ryan’s plan to change Medicare and reduce the deficit is here. For Medicare to meet its mission in the 21st century, this critical 20th-century program must be secured for current and future seniors. Medicare’s open-ended, fee-for-service model distorts the health care market, inflates costs and invites fraud and abuse. With tens of trillions of dollars in unfunded promises, Medicare is on an unsustainable trajectory, and yet ‘do-nothing’ politicians irresponsibly insist the program remain on autopilot.  In order to make good on Medicare’s promise, I’ve put forward reforms that offer future seniors the same health coverage options I enjoy as a member of Congress. My reform plan makes no changes for those 55 and older, as efforts to save this program ought not disrupt benefits for those in and near retirement. For those now under the age of 55, Medicare would provide seniors with a payment, a list of Medicare-approved coverage options and the ability to choose a plan that works best for them. The Medicare payment would be adjusted so that the wealthy receive a lower subsidy, the sick would receive a higher payment if their conditions worsen, and lower-income seniors would receive additional assistance to cover out-of-pocket costs.

Obamaromneycare: “Reform” vs. the People - There’s been endless nonsense about how Obama’s health racket bailout was some kind of “great progressive achievement”, or a significant step forward. Or even a step forward at all. But the fact is that health insurance is conceptually incoherent to begin with, while introducing profiteering into the mix simply renders policy incoherency criminal. The goal of an insurer is to collect premiums but minimize payouts. It’s in a direct conflict of interest with the health care system, whose goal is supposed to be the maximization of health. There can be different visions of what maximizing health really means, but all of them are contradicted by the corporate insurer imperative. Paying for health care is definitely a core government function. (Much more so than the expansive notion of “contract” enforcement beloved of so-called libertarians.) By definition, a health care system which contains profiteering on the payer side* is a broken system. So by definition reform must involve purging this profit motive. Reform has to mean Single Payer. These are synonyms.

Health Insurers Gave $86 Million to Fight Health Law - Health insurers last year gave the U.S. Chamber of Commerce $86.2 million that was used to oppose the health-care overhaul law, according to tax records and people familiar with the donation. The insurance lobby, whose members include Minnetonka, Minnesota-based UnitedHealth Group Inc. and Cigna Corp. of Philadelphia, gave the money to the Chamber in 2009 as Democrats increased criticism of the industry, according to a person who requested anonymity because laws don’t require identifying funding sources. The Chamber got the money from the America’s Health Insurance Plans as the industry urged Congress to drop a plan to create a competing government-run insurance plan.

Freshman GOPer: Hey, Where’s My Health Care? - Maryland physician Andy Harris (R) just soundly defeated Frank Kratovil, one of the most endangered Democrats on Capitol Hill going into the November election. And he did it in large part by railing against 'Obamacare' and pledging to repeal Health Care Reform. But when he showed on Capitol Hill today for an orientation for incoming members of Congress and their staffs, he had a different question: Where's my government health care? According to Glenn Thrush of Politico, Harris created a stir at the orientation meeting by demanding to know why he had to wait a month after he was sworn in in January for his government-subsidized health care to kick in. After responding in a huff, he even asked if there was some way he could buy into the government care in advance, seemingly thinking there might be a government program similar to the so-called 'public option' championed by progressive Democrats in 2009

Government meddles with Medicare payments - This, from Julie Appleby of Kaiser Heath News, really is not surprising, but it is disappointing: In a surprising move, the Obama administration will extend special bonus payments meant to reward top-performing Medicare Advantage insurers to those that score only average ratings. The three-year plan goes beyond what the health law called for in creating the bonuses. The law says bonuses, which start in 2012, would go to insurers that scored at least four out of five “stars” on a set of quality measurements. There are several things not to like about this. First, high quality won’t be achieved by paying for mediocrity. Second, the cuts to MA were part of the funding for expansion of health insurance. That they’re unraveling is both a cost issue and a political one. Opponents of the ACA said that the assumed savings from Medicare is not believable. Congress or CMS always gives it away, they claimed, and will again.  Even if this only gives back a tiny fraction of the savings expected from Medicare, it just looks bad and gives critics of the health reform law ammunition. Third, it’s just another piece of evidence that administrative pricing doesn’t work. Give administrators the authority to fiddle with payments and they’re too heavily influenced by those getting paid.

What will insurance in the exchanges look like? -  I was talking with some very nice insurance company executives and managers yesterday, and asked them about what they might offer in the exchanges.  It’s worth sharing some thoughts. The media, and thus the country, are fixated on the politics at a national level.  I’ve argued before that’s missing the point, as much of this will happen at a state level.  But I think we have spent far too much time discussing repealing or defunding the bill, and not nearly enough on what still needs to be done. For instance, we just told millions of people that they can go to the exchanges in 2014 and buy insurance.  There won’t be any lifetime or annual limits.  There won’t be denials for pre-existing conditions.  There won’t be any surcharges for having such conditions.  And it’s going to be “reasonably” priced. I asked what insurance companies might offer under those conditions.  After all, if it were really that easy to offer comprehensive insurance at a real discount, someone would already do it.

Haves, Have-Nots and Health Care - Aaron Carroll, a professor of pediatrics at Indiana University School of Medicine, has a post on the Incidental Economist blog about access to medical care. Dr. Carroll highlights data from the journal Health Affairs that shows that even households with above-average income often struggle to afford the medical care they want. He writes: It’s not just that more people in the U.S. report access issues because of cost than any other country. It’s that even those with “above average” incomes experience these barriers. In fact, more people with “above average” incomes in the U.S. experience cost-related access issues than people with “below average” incomes in seven of the other 10 countries. It’s not just that our poorer citizens can’t afford the care; our wealthier citizens can’t either.Here’s his graph:Earlier this year, Dr. Carroll wrote a series of posts for Incidental Economist evaluating the quality of care in the United States, versus other countries. His conclusion is that we do some well in some areas and not well at all in others.

The Austerity Mechanism of the Health Racket Bailout - Obamacare is meant to be a bailout for the health insurance rackets and an austerity bill wrapped up in one. It’s design is fundamentally simple: Redistribute wealth from the people to the insurance rackets. (It also preserves and enhances many other rents like those of the drug racket, but the main goal is to officially entrench the insurance sector.)  In principle, the goal of health insurance is to sell a policy and extract premiums but not pay for treatment. That’s the business model, and no rational insurance cadre would seek anything different. In the same way, anyone who supports the existence of the health insurance companies at all, let alone supports this bill which radically aggrandizes them, ratifies this goal. (It is of course completely irrational for anyone who doesn’t profiteer in this way to support this goal.) Anyone who rejects that goal has to reject the rackets’ existence, desire their eradication, and demand Single Payer.

Insurers Test Data Profiles to Identify Risky Clients - Life insurers are testing an intensely personal new use for the vast dossiers of data being amassed about Americans: predicting people's longevity.  Insurers have long used blood and urine tests to assess people's health—a costly process. Today, however, data-gathering companies have such extensive files on most U.S. consumers—online shopping details, catalog purchases, magazine subscriptions, leisure activities and information from social-networking sites—that some insurers are exploring whether data can reveal nearly as much about a person as a lab analysis of their bodily fluids.

Food Tyranny Bill: Imminent Cloture Vote - The Senate’s Food Tyranny bill, S.510, which I wrote about recently in a two-part post (part 1 and part 2), and in several earlier posts, is slated to get a cloture vote this week. (Any remotely decent piece of legislation, these vile Democrats can’t do it. But for this, Reid will rouse himself to seek cloture.) While I don’t normally have any confidence in the sign a petition/ call your senator thing, the fact is that this isn’t the banks we’re dealing with, and public pressure could possibly make a difference. So here’s the Farm-to-Consumer petition page, and here’s the Congressional site. For the rest, I’ll excerpt from the Food Freedom alert:

Food insecurity in the United States remains at record high levels - USDA reported today that about 17 million households (or 14.7% of all U.S. households) were food insecure in 2009.  This level equals the record high level set the previous year, in the midst of recession. Washington Post coverage today discussed the role of the economy and federal food assistance programs in influencing food insecurity: "It's a considerable reflection of what is going on in the economy," said Kevin Concannon, USDA under secretary for food, nutrition and consumer services....  Concannon said he was somewhat hopeful since the number of families suffering from hunger and nutrition problems stabilized last year even though the population of unemployed Americans rose from 9 million in 2008 to 14 million in 2009.Participation in the Supplemental Nutrition Assistance Program (SNAP) has been increasing rapidly in the past two years.  Average monthly participation in this leading anti-hunger program, formerly known as the Food Stamp Program, was 33 million people in 2009, up more than 5 million from the preceding year.  However, increased SNAP participation itself reflects increased economic hardship and does not necessarily mean reduced food insecurity and hunger.  In the most recent USDA food insecurity report, the rate of household food insecurity was 55% among SNAP participants, but only 31% of low-income non-participants.

As hunger persists in America, food security might be harder to achieve - About 15% of U.S. households, 17.4 million families, lacked enough money to feed themselves at one point last year; in California just over 14% of households suffered from “food insecurity” at one point during 2009. In the richest country in the world this large of a number of households that are wanting for food is never acceptable, but the problem is stabilizing somewhat as the economy limps toward a recovery—but there are bigger issues in the immediate future, most of them based on the funding of government programs, from food stamps to Medicare, that act as a vital safety net for the poorest and hungriest Americans. A federal law that covers the country’s school meals program is awaiting reauthorization from either a lame duck Congress or a new Republican majority hostile to these kinds of spending programs; stimulus money went to prop up food stamps last year and that extra funding is petering out; and budget cuts, both at the federal and state levels, threaten all kinds of nutritional sustenance programs. Even as the economy gets a little better might more Americans be going hungry?

Agriculture and the IEA's World Energy Outlook 2010 Report – Kalpa - The annually released "World Energy Outlook" 2010 by the OECD/IEA issued the following statements predicting changes in fossil fuel use and production from now through 2035. [pdf] The report's implications for industrialized agriculture "as we know it" are immense. Policy makers need to take heed and start making appropriate long term plans for a changed future in farming which reduces the use of fossil fuel inputs. Farming methods, crop choices, government subsidization goals, farm sizes, and economics all need to be redirected appropriately. The frivolity and overproduction practices of today will by necessity, need to be removed from the system.

Higher food prices likely: UN food agency - Prices of wheat and other staples have risen "alarmingly" over the past year, a UN report said today, acknowledging fears of a repeat of the 2008 food crisis when a spike in the price of bread led to deadly riots in some countries. Further increases were likely unless production of major food crops increases significantly in 2011, the Rome-based Food and Agriculture Organisation said, warning that international food import bills could pass the $1 trillion mark in 2010. "With the pressure on world prices of most commodities not abating, the international community must remain vigilant against further supply shocks in 2011 and be prepared," the agency said in its Food Outlook.

Climate change and disease will spark new food crisis, says UN - A food crisis could overtake the world in 2011, according to the Food and Agriculture Organisation, an agency of the United Nations.  Climate change, speculation, competing uses such as biofuels and soaring demand from emerging markets in East Asia are the factors that will push global food prices sharply higher next year, claims the FAO.  The FAO warns the world to "be prepared" for more price hikes and volatility if production and stocks do not respond. Price hikes of 41 per cent in wheat, 47 per cent in maize and a third in sugar are foreseen by the FAO. The last time that happened it sparked riots from Mexico to Indonesia.  In its latest Food Outlook the FAO says that the prices of many staple crops will rise by up to half next year, with many returning to the peaks seen during the food crisis of 2008, or even exceeding them in some cases. Apart from driving inflation higher in Britain and the rest of the Western world, another bout of food price hyperinflation has grim implications for the poorest people on the planet, even now hardly able to afford to feed themselves.

Food Inflation: Less than Meets the Eye – Morgan Stanley - Soaring commodity food prices will lift inflation...  Commodity food prices are soaring and will soon start to push up food costs for consumers: For example, prices for feedgrains like corn, wheat and soybeans are up anywhere from 20-65% (not annualized) over the past six months, while prices for imported foods like coffee and sugar have jumped by 60% over the same period.  Those increases are only beginning to show up in the popular price gauges.  Indeed, through September, producer prices at the crude and intermediate processing stages rose by 6.9% and 3.8%, respectively, and finished producer food quotes actually declined by 1.4%.  That will soon change, of course, as those price hikes work their way through the processing pipeline....but only modestly.  But the translation from these commodity food price hikes to those at the retail level will be much smaller - adding perhaps 2-3% to food inflation.  Given the low starting point, food inflation will likely run at a bit more than 2-3% in 2011.  As discussed below, several factors mute the translation and pass-through.  While the expected rise in food inflation is a big change from the 1-1.5% we expect this year, the direct impact on overall inflation will only amount to 0.2-0.3%, reflecting the small share of food in consumer budgets (7.8% for food and beverages at home, and about 13% including restaurant meals).  It's worth noting that those shares have declined radically from the stagflationary 1970s, when they were 15.3% and 21.3%, respectively.

Are high food prices good or bad for poverty? - It depends on whether the poor are selling or buying, of course. High food prices benefit poor farmers who are net food sellers, and hurt poor food consumers in urban areas. Low food prices have the opposite effects. In each case, the net effect on poverty depends on the balance between these two effects. But you would hardly know it from reading what NGOs and international organizations have produced on the topic. (For my past instances of blowing off steam on the subject, see this and this.)  As Johan F.M. Swinnen notes in a new essay these basic principles are well known, [yet] we do not find them reflected in most arguments put forward in the food policy debate. For example, there has been hardly any mentioning of the benefits of low food prices for urban consumers and net consuming rural households during the pre-2006 low price era, and there has been very little emphasis in more recent statements on the benefits for producers in poor countries from high food prices.

The plough and the veil - Why do some cultures encourage women to work, while others prefer they stay secluded in the home? Why do women in Africa command a bride price for their hand in marriage, while in northern India it is the bride’s family who must pay a dowry to the groom? Why are women secluded in the home in many Islamic countries, but not in Africa? Why is there the same contrast between female seclusion in northern India and not in southern India? Why are sons so intensely preferred to daughters in China? A new paper presented yesterday at NYU: It’s all about the plough.

Oil Output Likely Peaked in 2006, Will Be Replaced by Biofuels, IEA Says - Global production of crude probably peaked in 2006, and increasing demand will have to be met from more-difficult-to-extract forms of oil such as tar sands, International Energy Agency Chief Economist Fatih Birol said.  “The age of cheap oil is over,” Birol said at a conference in Madrid today. Global energy use is set to increase by 36 percent over the next 25 years as developing countries raise the standard of living of their citizens by boosting demand for transport, air- conditioning and electronic goods, the IEA estimates.  China, which is forecast to overtake the U.S. as the world’s biggest user of electricity in 2012, will see its energy use rise by 75 percent, the IEA says.

U.S.-Produced subsidized ethanol exports are at a record , the FT reports - U.S.-produced ethanol, subsidized by the federal government as an alternative to foreign oil, is being exported in record quantities, the Financial Times reported. A U.S. tax credit to companies that blend ethanol with petrol expires at the end of the year, the newspaper said. Government figures last week showed that 251 million gallons of fuel ethanol, mostly refined from corn, were exported in the first nine months of the year, more than double the total in 2009; actual exports may have been higher, since ethanol mixed with gasoline before shipment isn’t counted, the FT said.

U.S. Wholesale Prices Rise, Led by Gasoline -— Wholesale prices rose in October for the fourth consecutive month because of higher gasoline costs, but there was little sign of inflation as the cost of food, cars and computers all fell.  The Labor Department said Tuesday that the Producer Price Index rose 0.4 percent last month, the same increase as in September and August. Wall Street analysts had expected a larger increase. The index is up by 4.3 percent in the past 12 months.  But excluding the volatile food and energy categories, the so-called core index fell by 0.6 percent, the most in more than four years. That decline was driven by falling prices for new cars and trucks.  The report, which measures prices on goods before they reach the consumer, showed that companies have little ability to pass on the higher costs they are paying for grains and other commodities. Food prices fell slightly, confounding economists’ expectations that they would rise due to higher costs for corn, soybeans and sugar.

Modern insecticides’ devastating effects - Like DDT before it, a new class of insecticides known as neonicotinoids is believed to be causing drastic population declines in bird species. It is so effective at killing insects, that it has deprived birds of their basic food. Some scientists also believe they are behind the decline in bee populations in Europe and the United States known as honey-bee Colony Collapse Disorder. Neonicotinoids, which are part of the nicotine family, are essentially glued to plant seeds, and infiltrate the entire plant. Any bug that eats the plant is immediately infected. The toxin attacks the central nervous system and causes a quick death. It is much less toxic to other animals because the chemical blocks a specific neural pathway found more commonly in insects. Henk Tennekes, researcher at the Experimental Toxicology Services in Zutphen, the Netherlands, has linked the use of neonicotinoids to declines in bird populations in his recent book, The Systemic Insecticides: A Disaster in the Making. Tennekes said, “The evidence shows that the bird species suffering massive declines since the 1990s rely on insects for their diet.”

Simmering Water War: How New Power Plants Will Suck Our Water Sources Dry - Here in my home state of Texas, we're suffering from withdrawal pains. This isn't caused by our addiction to alcohol or drugs--but to plain water. And to make our pain worse, it's not the people of Texas who are hooked on a destructive water habit--it's the boneheaded executives and greed-headed investors in coal-fired and nuclear-powered plants that generate electricity. And don't laugh at Texas, for the same corporate addiction might be draining the fresh water supplies where you live. Question: which uses more water--your washing machine chugging out one load of laundry, or the power plant that provides the few kilowatts of electricity to heat the water for that one load? No contest. The power plant uses as much as 10 times more water to make the electricity than you use to fill your machine.

India needs to stop free supply of water: Montek - India needs to end the free supply of water to resolve a water crisis the country is facing, representatives from both the government and the private sector said at the World Economic Forum’s India Economic Summit in New Delhi on Sunday. Planning Commission deputy chairman Montek Singh Ahluwalia said the water crisis was a more serious problem than the energy crisis.“If water is a scarce resource, it will have to be priced,” Ahluwalia said, identifying pricing as the main issue in dealing with India’s water problem.Poorer people could receive a subsidy from the government or the rich could cross-subsidize their consumption, he said. The important thing, he added, is to use price as a signal to impress upon consumers the fact that water is a scarce resource.

Rooting Out CO2: Scientists Isolate a Gene That Boosts Plant Root Growth - Changes to a single gene in a model organism in plant biology, Arabidopsis thaliana, have been found to promote faster-growing and larger root systems—an application that could help researchers engineer bigger, better crops capable of sequestering more atmospheric carbon. The gene and its operations are described in the November 11 issue of the journal Cell. Bigger root systems mean more climate-warming carbon could essentially be buried, because plants build their roots using atmospheric carbon. From the roots, carbon can be transferred into soil where it can remain for millennia. Plants engineered to have bigger root systems could also help address food shortages and aid in efforts to grow crops in a warmer, drier climate. Evidence suggests that plants with larger root systems are more drought-resistant.

Wind energy and solar power subsidies face uncertainty -- After years of rapid growth and darling status among many in Washington, the future of the American renewable energy industry is uncertain. That's because the government cash it has come to rely on may dry up on Dec. 31.  Before the Great Recession, renewable energy developments were helped by a tax credit, worth generally 30% of the cost of the project. When the recession hit, the stimulus package replaced those tax credits with direct cash grants of similar value. Cash is considered more beneficial than credit to the industry. So far, the government has handed out about $5.4 billion, according to the Energy Department. If they're allowed to expire, incentives for renewable energy will revert to the old tax credits. The wind industry is already hurting -- even with the cash.

Energy Secretary Chu in Sprint to Put Stimulus to Work on Renewable Innovations - Chu's nearly two years as energy secretary have been a sprint of sorts. Until last year, the department spent most of its time and its $26 billion budget as caretaker of the nation's nuclear waste and weapons stockpile. But with rising concerns about climate change and the nation's economy hanging on a precipice, Chu was effectively made the green-energy czar. The stimulus bill gave the agency an extra $36 billion for grants and low-interest loans to jump-start new technologies and greater energy efficiency.  It isn't easy to foster innovation or choose economic winners; many policymakers say government shouldn't even try and that there are better ways to create jobs. But President Obama, egged on by Chu and others, thinks that money can lay the seeds for a more competitive, energy-efficient economy.  Chu has been in a hurry to get the stimulus money out the door. The sense of urgency is something he has tried to infuse in others. One day in 2009, after biking to the office, he met with a handful of top officials awaiting their swearing-in ceremony.

Interior Department OKs Second Large Solar Project on Nevada Public Lands -  The U.S. Department of the Interior (DOI) on November 15 approved the second large-scale solar energy project on U.S. public lands in Nevada. The Amargosa Farm Road Solar Project, a 500-megawatt (MW) facility, will provide electricity to about 150,000 homes. The project, an initiative of Solar Millennium LLC, is expected to create 1,300 construction jobs and up to 200 permanent operation jobs. Last month, DOI green lighted the first solar energy project on U.S. public lands in Nevada, First Solar’s Silver State North Solar Project, a 50-megawatt facility to be built in the Ivanpah Valley, 40 miles south of Las Vegas. The Amargosa Farm Road Solar Project will employ concentrating solar power technology that will include two 250-megawatt parabolic trough power plants equipped with thermal energy storage capability. The project will be located in the Amargosa Valley on 4,350 acres of public lands managed by the Bureau of Land Management (BLM). The project has undergone extensive environmental review, officials said. BLM, the U.S. Fish and Wildlife Service, and the National Park Service worked closely with Solar Millennium to develop an innovative mitigation plan for water use that can serve as a model for future solar projects.

Companies Tapping the Tides in Quest for Renewable Energy - Tapping the tides is the latest niche in the search for affordable, renewable energy. Widespread use may be years off, but advocates say tides and other hydrokinetic systems, from ocean waves to free-flowing rivers, ultimately could meet up to 10% of America's electric power needs — more than hydropower dams now supply. Pilot projects or studies are underway in Washington's Puget Sound, in Alaska's Cook Inlet, off the coasts of Florida, California, Oregon and Hawaii, in New York City's East River, along the Mississippi River and elsewhere. "These are coastal resources, and most people live along the coasts," said Hoyt Battey, a water power expert at the U.S. Energy Department. "When you're talking about providing half the power of Alaska or Hawaii, or half the power of New York, that's significant."

As Glaciers Melt, Science Seeks Data on Rising Seas - As a result of recent calculations that take the changes into account, many scientists now say that sea level is likely to rise perhaps three feet by 2100 — an increase that, should it come to pass, would pose a threat to coastal regions the world over.  And the calculations suggest that the rise could conceivably exceed six feet, which would put thousands of square miles of the American coastline under water and would probably displace tens of millions of people in Asia.  The scientists say that a rise of even three feet would inundate low-lying lands in many countries, rendering some areas uninhabitable. It would cause coastal flooding of the sort that now happens once or twice a century to occur every few years. It would cause much faster erosion of beaches, barrier islands and marshes. It would contaminate fresh water supplies with salt.  In the United States, parts of the East Coast and Gulf Coast would be hit hard. In New York, coastal flooding could become routine, with large parts of Queens and Brooklyn especially vulnerable. About 15 percent of the urbanized land in the Miami region could be inundated. The ocean could encroach more than a mile inland in parts of North Carolina.

Coastal studies experts: “For coastal management purposes, a [sea level] rise of 7 feet (2 meters) should be utilized for planning major infrastructure” - Front-page NY Times piece on sea level rise gets it mostly right - The New York Times has a splashy front-page story on some of the latest research on sea level rise today.  The graphics above make clear the paper gets a big part of the story right — the latest science says we are facing 3 to 6 feet of sea level rise this century. Kudos to the NYT for featuring such an important story.  Given that serious federal climate action is unlikely for years if not a decade or more, it is more incumbent on the media than ever to explain to the public what’s coming. The story has its flaws, though.  For some reason the media — and many scientists — seem constitutionally incapable of explaining that inaction makes things much worse, that inaction greatly increases the chances of the worst impacts.  The NYT has usefully cited the work of Rahmstorf, but somewhat simplified and hence sanitized his graph:

Ocean waves getting bigger, and stronger; Rogue waves challenge pilots; experts differ on whether climate change is the cause - Using buoy data and models based on wind patterns, scientists say that the waves off the coast of the Pacific Northwest and along the Atlantic seaboard from West Palm Beach, Fla., to Cape Hatteras, N.C., are steadily increasing in size. And, at least in the Northwest, the larger waves are considered more of a threat to coastal communities and beaches than the rise in sea level accompanying global warming is. Similar increases in wave height have been noticed in the North Atlantic off England.Unclear is whether the number and height of "rogue" waves beyond the continental shelf have increased. The existence of such freak waves, which can reach 100 feet or more in height and can swamp a large ship in seconds, wasn't proved until 2004, when European satellites equipped with radar detected 10 of them during a three-week period. According to some estimates, two merchant ships a month disappear without a trace, thought to be victims of rogue waves.

Global Warming to Bring More Intense Storms to Northern Hemisphere in Winter and Southern Hemisphere Year Round - Weather systems in the Southern and Northern hemispheres will respond differently to global warming, according to an MIT atmospheric scientist’s analysis that suggests the warming of the planet will affect the availability of energy to fuel extratropical storms, or large-scale weather systems that occur at Earth’s middle latitudes. The resulting changes will depend on the hemisphere and season, the study found. More intense storms will occur in the Southern Hemisphere throughout the year, whereas in the Northern Hemisphere, the change in storminess will depend on the season — with more intense storms occurring in the winter and weaker storms in the summer. The responses are different because even though the atmosphere will get warmer and more humid due to global warming, not all of the increased energy of the atmosphere will be available to power extratropical storms. It turns out that the changes in available energy depend on the hemisphere and season, according to the study, published in the Proceedings of the National Academy of Sciences.

Troposphere is warming too, decades of data show (Reuters) – Not only is Earth’s surface warming, but the troposphere — the lowest level of the atmosphere, where weather occurs — is heating up too, U.S. and British meteorologists reported on Monday. In a review of four decades of data on troposphere temperatures, the scientists found that warming in this key atmospheric layer was occurring, just as many researchers expected it would as more greenhouse gases built up and trapped heat close to the Earth. This study aims to put to rest a controversy that began 20 years ago, when a 1990 scientific report based on satellite observations raised questions about whether the troposphere was warming, even as Earth’s surface temperatures climbed. The original discrepancy between what the climate models predicted and what satellites and weather balloons measured had to do with how the observations were made, according to Dian Seidel, research meteorologist for the U.S. National Oceanic and Atmospheric Administration.

A Call to Action on Ocean Acidity - States bordering water bodies that are becoming more acidic from the absorption of carbon dioxide should list them as impaired under the Clean Water Act, the Environmental Protection Agency declared in a memo this week. Carbon dioxide emissions are considered a threat not only because of their heat-trapping properties in the atmosphere but also because of their ability to change ocean chemistry. The world’s oceans act as a sponge for carbon dioxide, and as the gas dissolves in seawater, it changes into carbonic acid. More acidic seawater harms shellfish by inhibiting shell formation, a problem already observed at oyster farms along the Washington State coast. Ocean acidification is also seen as a major threat to the world’s coral reefs.

The Real Deal: The Source Of Hopelessness The day after 9-11, a person whom I respect and care about a great deal said to me, "George Bush was anointed by God for a time such as this." He then asked me what I thought. I said that I thought that the Bush family was anointed by financial fraud, narcotics trafficking, and pedophilia. Stunned, he said, "If that is true, then it's hopeless." Last week I had dinner with a wonderful couple -- activists in the San Francisco Bay Area-- and the woman told me how wonderful she thought Al Gore's documentary An Inconvenient Truth was. She then asked for my opinion. When I gave it, she said, "If that is true, then it's hopeless."  In order to respond to the problem of global warming, it is necessary to look at the ways that we as citizens support criminal activity by our government and how we as consumers, depositors and investors support the private banking, corporate and investment interests that run our government in this manner. This is easier said than done. When we ‘get it’ – i.e., that we have to withdraw from a co-dependent relationship with organized crime in order to save and rebuild our world – we can find ourselves struggling to envision the system-wide actions that are needed and feeling overwhelmed by the task of determining how to go about them personally and in collaboration with others.  My nickname for our current economic system is “The Tapeworm.”

Wind whisks lead across the Pacific Ocean to California. - A new study finds lead from Asia in California air samples, providing evidence that wind can transport airborne pollutants across continents and oceans. This new research is further proof that air pollution is a global issue and needs international cooperation to reduce environmental and health impacts. Approximately one-third of the lead found in the air samples taken from sites in the San Francisco Bay area originated in Asia, but the fraction varied by season and weather patterns. It is likely that other contaminants originating in Asia may reach the U.S. in the same way. This study focused on migration of pollutants over the Pacific Ocean, but similar scenarios are undoubtedly going on worldwide simply because air currents move globally, crossing international borders. The results highlight the fact that airborne pollution is really an international issue that cannot be tackled exclusively by individual countries.

Arnold Schwarzenegger Demands Action At Final Climate Summit - At the opening of his third and last climate summit, Schwarzenegger said leaders could learn from California's example as an environmental pioneer. "I know that together we can usher in a new era and build a cleaner and brighter, more prosperous future, so I say: let's do it," Schwarzengger told the summit at the University of California at Davis. The two-day summit is one of his final opportunities to shore up his reputation as California's green governor. His successor, Democrat Jerry Brown, takes over in January. Schwarzenegger plans to drive home the message tomorrow with the launch of his R20 partnership of regional and business leaders, which aims to function like a financial matchmaking service, finding investors from the World Bank and private corporations for renewable energy projects in developing countries.

Bloomberg calls for carbon tax - New York Mayor Michael Bloomberg said Tuesday that he’s in favor of a carbon tax –- a view not shared by many political leaders of either party in Washington. Bloomberg, speaking to a group of chief executives at the Wall Street Journal CEO Council, said the U.S. needs to reduce its dependence on foreign oil if “you want to stop sending your money to…terrorists.” The answer: “We need a carbon tax,” he said. Bloomberg, an independent, criticized the now-moribund Democratic proposal to develop a nationwide “cap and trade” system for limiting U.S. carbon dioxide emissions by requiring companies to buy tradeable permits for the right to emit greenhouse gases under a steadily declining economy wide cap. “Cap and trade is filled with so many special interests,” he said.

Defining Success for Climate Negotiations in Cancun - International climate negotiations will continue in Cancun, Mexico, during the first two weeks of December, 2010.  These will be the Sixteenth Conference of the Parties (COP-16) of the United Nations Framework Convention on Climate Change (UNFCCC).  The key challenge is to continue the process of constructing a sound foundation for meaningful, long-term global action, not necessarily some notion of immediate, highly-visible triumph.  Some of the gloom-and-doom predictions we’ve been hearing about these upcoming negotiations are therefore misguided, because they are based upon unreasonable – and fundamentally inappropriate – expectations (despite the fact that expectations have been lowered dramatically since COP-15 in Copenhagen last year). Why do I say that the best goal for the Cancun climate talks is to make real progress on a sound foundation for meaningful, long-term global action, not some notion of immediate triumph?  This is because of some basic scientific and economic realities.

From the Vault: Still a long road ahead for U.S. energy efforts - The real power to influence events in a free society does not lie merely in winning arguments or in freedom to yak about things. The most potent power is the PHYSICAL RESPONSE of a responsible people to immediate needs and problems. We need that kind of response now. It is a bit absurd to talk in terms of being "willing" or not willing "to cope with the energy crisis" ... We WILL "cope with the energy shortage" whether we agree or not, and whether we like it or not. We really don't have a choice ... Society must look with contempt upon those who treat this problem with words and refuse to do their part UNLESS FORCED ... Only when the "energy hog" is recognized by all around him as a real jerk and a threat to all our security ... will we work our way out of this problem.

Sixty Lame Minutes - So, last night CBS hauled Aubrey McClendon, CEO of Chesapeake Energy, on board their flagship Sunday infotainment vehicle, 60 Minutes, to blow a mighty wind up America's ass (as they say in professional PR circles).   McClendon told the credulous Leslie Stahl and the huge viewing audience that America "has two Saudi Arabia's of gas." Now, you know immediately that at least half the viewers misconstrued this statement to mean that we have two Saudi Arabia's of gasoline. Translation: don't worry none about driving anywhere you like, or having to get some tiny little pansy-ass hybrid whatchamacallit car to do it in, and especially don't pay no attention to them "green" sumbitches on the sidelines trying to sell you some kind of peak oil story....     First of all, they are talking about methane gas, not liquid gasoline or oil. There are large deposits of methane gas locked into shale deposits roughly following the Appalachian mountain chain & hot spots out west. It's hard to get at. You have to basically blow up the shale rock deep underground with high pressure water that is loaded up with chemicals and sand particles to keep the rock fragments separated once they are blown apart. Chesapeake Energy specializes in this rock fracturing (or "fracking") method for drilling. You can get gas out of the ground this way. The question is how much, over what time period, at what cost.

The Shale Gas Shell Game - With the election frenzy behind us, and the Fed printing money like there's no tomorrow, it seems like a good time to return to the shale gas "boom" in the Marcellus. You will recall that shale gas production, not only in Pennsylvania but elsewhere in the lower 48, Canada and all over the world, is going to provide us with far more energy over the next 250 years than we could ever figure out what to do with. In Shale Gas Shenanigans, I questioned whether development (in the Marcellus and elsewhere in the U.S.) was economic with natural gas prices well below $5/MMBtu. I concluded that it was not, but that didn't matter to the smaller operators like Range Resources, EQT and Atlas drilling in Pennsylvania— These shale gas producers are an asset play. And this outcome obviously benefits the Wall Street banks who lend them money. Indeed, this is their exit strategy from the unprofitable drilling treadmill they are currently on. If shale gas production can be said to be in a bubble, this is where that bubble lies. And the strategy is working!

Fuel Economy Fleetwide in U.S. at Record Levels - The EPA is tasked in part with getting the automotive industry in the U.S. to meet standards on fuel economy. The goal of the standards is to not only reduce the nations need for foreign oil, but to reduce the amount of pollution that is produced by cars that burn more fuel. According to the EPA, the fuel economy in the overall vehicle fleet in the U.S. during 2009 hit a record high. The overall fuel economy has increased 1.4 mpg to 22.4 mpg, the highest overall fuel economy rating in the U.S. since the EPA starter tracking fuel economy overall line 1975. The overall fleetwide average fuel economy for 2010 year model vehicles is expected to grow to 22.5mpg.

Oil Pushes Up Wholesale Prices - U.S. producer prices rose less than expected in October and underlying wholesale prices posted the biggest decline since July 2006, indicating disinflation pressures remain in the economy. The index of producer prices, which measures how much manufacturers and wholesalers pay for goods and materials, rose a seasonally adjusted 0.4% for finished goods last month from September on the back of higher energy prices, the Labor Department said Tuesday. Stripping out more-volatile food and energy prices, however, wholesale prices fell by 0.6% in October, the sharpest drop in more than four years. There were big price declines for light motor trucks and passenger cars. Measures of inflation have continued to slow in recent months, especially those net of food and energy items that are closely watched by the Federal Reserve. Increasingly slow underlying inflation readings -- the core personal consumption expenditure rose just 1.2% in September --- are a key reason behind the Fed's move to try and stimulate a weak economy via large-scale buying of Treasury securities.

Oil Attacks In Nigeria Show New Militancy - An armed attack and kidnapping on a Nigerian oil facility owned by Exxon Mobil Corp. disrupted production Monday, providing the latest sign of how a fraying government amnesty deal with militants has posed fresh risks for energy companies operating in the oil-rich nation. Gunmen in five skiffs with powerful motors attacked Exxon Mobil's Oso platform late Sunday, according to a security executive who works in the area and had seen an internal report on the incident. They boarded the platform and "conducted a room-to-room search. Crew and staff were beaten and robbed, the power supply was cut and communications were damaged," according to the security executive. …Exxon declined to say how the attack would affect output at one of Nigeria's biggest oil fields. It suspended Oso's production as a "precautionary measure," the company said in a statement. The field can produce the equivalent of 100,000 barrels of oil a day—as much as 5% of the country's daily output.

Arctic Drilling Poses Untold Risks, Study Concludes - As soon as the moratorium on deep sea oil and gas drilling was lifted, my colleague Cliff Krauss reported last week, Royal Dutch Shell began lobbying eagerly to get final approval for its long-delayed plans for exploratory drilling in Alaska’s Beaufort Sea. The petro-giant is paying for national advertising as part of a campaign to convince the public and the government that it is taking safety precautions that would prevent the kind of catastrophe that unfolded in the gulf from happening in the Arctic. Yet the Arctic is well known to be more fragile ecologically than the gulf. And on Thursday, the Pew Environment Group released a detailed report brimming with charts and maps that explores the question of how well the government and industry would be equipped to deal with a blowout and spill there. The report concludes, not so well. And here are some word-for-word highlights on why:

Turning tar sands into oil - Thick as tar, loaded with sand, some of the world's future sources of oil are so heavy they can be more easily mined than pumped. Huge, tarlike deposits in Canada and Venezuela will be critical over the next 50 years to the supply of liquid fuels as the world's production of easily pumped oil plummets. Yet, turning this nonconventional oil source into synthetic oil is not likely to be the solution to our energy crisis, as some claim. Canada is no Saudi Arabia. Still, such synthetic oil, which also can be made from coal and natural gas, could provide a critical bridge to an era of new technologies, cleaner fuels and lower-energy lifestyles. But it won't be easy.

Energy, and Plenty of It, for Decades to Come - NYTimes - THREE summers ago, the world’s supertankers were racing across the oceans as fast as they could to deliver oil to markets growing increasingly thirsty for energy. Americans were grumbling about paying as much as $4 a gallon for gasoline, as the price of crude oil leapt to $147 a barrel. Natural gas prices were vaulting too, sending home electricity bills soaring.  A book making the rounds at the time, “Twilight in the Desert,” by Matthew R. Simmons, seemed to sum up the conventional wisdom: the age of cheap, plentiful oil and gas was over. “Sooner or later, the worldwide use of oil must peak,” the book concluded, “because oil, like the other two fossil fuels, coal and natural gas, is nonrenewable.”  But no sooner did the demand-and-supply equation shift out of kilter than it swung back into something more palatable and familiar. Just as it seemed that the world was running on fumes, giant oil fields were discovered off the coasts of Brazil and Africa, and Canadian oil sands projects expanded so fast, they now provide North America with more oil than Saudi Arabia. In addition, the United States has increased domestic oil production for the first time in a generation.

Oil Shock Warning for UK Government -The cost of food, heating, travel and retail goods will all rise if there is not a ‘strong and coordinated response’ from government to act against rising oil prices, an industry group has warned.  The report from a group including Richard Branson’s Virgin, Kingfisher and Stagecoach Group calls for a ‘contingency plan’ to address the risk of Peak Oil – the point at which oil production plateaus and then drops.  The Industry Taskforce on Peak Oil & Energy Security says ‘we are running out of time’ to protect the UK economy and make the necessary switch to sustainable energy sources. It has previously warned that peak oil could come potentially by 2015.  There were reports in the summer that ministers are canvassing industry opinion about future energy supplies; the government has repeatedly said that the matter is ‘under review’. It concludes that the loss of the Macondo well’s output was of little significance for overall output, but that deepwater offshore production will play a significant role in oil production, accounting for 29% of new capacity by 2015.

Is ‘Peak Oil’ Behind Us? - Peak oil is not just here — it’s behind us already. That’s the conclusion of the International Energy Agency, the Paris-based organization that provides energy analysis to 28 industrialized nations. According to a projection in the agency’s latest annual report, released last week, production of conventional crude oil — the black liquid stuff that rigs pump out of the ground — probably topped out for good in 2006, at about 70 million barrels per day. Production from currently producing oil fields will drop sharply in coming decades, the report suggests. The agency does not see energy doom on the horizon, however. By its estimation, after a short dip in production, crude production will reach an “undulating plateau” of about 68 million barrels per day between 2020 and 2035.  Yet strong demand growth from China, which the report estimates is now the world’s largest energy user, and elsewhere will require liquid energy supplies to not just hold steady, but to climb by more than 20 percent.

Oil expected to run out long before new fuels developed - The world will run out of oil around 100 years before replacement energy sources are available, if oil use and development of new fuels continue at the current pace, a U.S. study warns.  Researchers at the University of California, Davis (UC-Davis) used the current share prices of oil companies and alternative energy companies to predict when replacement fuels will be ready to fill the gap left when oil runs dry. And the study's findings weren't very good for the oil-hungry world. If the world's oil reserves were the 1.332 trillion barrels estimated in 2008 and oil consumption stood at 85.22 million barrels a day and growing yearly at 1.3 per cent, oil would be depleted by 2041, says the study published online last week by Environmental Science and Technology.

The Status Quo's Fundamental Paradigms Are Broken - The paradigms which undergird the global status quo are broken; doing more of the same (the current strategy) will not fix them. Studies have shown that when presented with factual evidence that their core beliefs are wrong, humans respond by clinging even more tightly to their fallacious beliefs.  I think that is precisely the reaction of the global Status Quo. Here is a typical presentation of the Status Quo's faith in the "China Story" that China's growth can and will continue unimpeded for decades to come: The Game Changer (China).  Elizabeth C. Economy is a well-informed, insightful analyst. Yet she presumes that China can grow like a tree to the sky and that its consumption of oil and other resources can likewise double every few years forever.  There is not one word in this long essay which even hints at the possibility that constraints in the real world might hinder China's vast ambitions and appetites for "the good life" of middle-class consumption for its 1.2 billion citizens.

Interview with Chris Martenson: "Prepare for peak oil while there is time." ASPO peak oil conference held in Washington was an unique opportunity to meet Dr. Chris Martenson. Chris is devoted to finances, economics, energy and environment and connects together these separate fields. He says that the next 20 years will be very different from the last 20 years. Peak oil “will change everything” and there is never too soon for preparations. The key is resilience, self-dependency and versatility. He is an optimist and believes that many people will survive peak oil happily – if they prepare themselves. As all people researching peak oil and its impacts, he advises people to get out of debt.

Chris on Max Keiser: Peak Oil Is About to Collide with Our Debt Crisis - Chris was recently interviewed by Max Keiser for his On The Edge program. The videos of this discussion were released over the weekend and are available for viewing below. The interview starts with a look at the extreme debt levels of OECD nations and the probable (and painful) repercussions they will have for the global economy. Chris spends time explaining the contradiction of how, even though we're now 'technically' experiencing deflation as this debt is being unwound, prices are rising - due to growing loss of faith in the underlying fiat currencies.

As Things Fell Apart, Nobody Paid Attention - There are consequences to every action. There are also consequences to every inaction. Over the next decade Americans will experience the dire consequences of inaction. The implications of peak cheap oil have been apparent for decades. The Department of Energy was created in 1977. The Department of Energy’s overarching mission was to advance the national, economic, and energy security of the United States. In 1970, the U.S. imported only 24% of its oil. There were 108 million motor vehicles in the U.S., or .53 vehicles per person in the U.S. Today, the U.S. imports 70% of its oil and there are 260 million vehicles, or .84 vehicles per person. The land of the delusional has no inkling that their lives of happy motoring are winding down. The vast majority of Americans believe that oil is abundant and limitless. Their leaders have lied to them. They will be completely blindsided by the coming age of hardship.

Straight Talk with James Howard Kunstler: "The World is Going to Get Rounder and Bigger Again" - This week's Straight Talk contributor is James Howard Kunstler, author and social critic. His better-known works include The Long Emergency, in which he argues that declining oil production will result in the decline of modern industrialized society and compel Americans to return to smaller-scale, localized, semi-agrarian communities; World Made By Hand and its sequel, The Witch of Hebron, all published by The Atlantic Monthly Press. He writes a weekly blog is also a leading proponent of the movement known as "New Urbanism."

Auto Industry Fears Rare Earth Supply Squeeze (Reuters) - Car industry experts foresee problems if exports of rare earth metals from China needed for car production are threatened, they told the Reuters Global Autos Summit, as data showed 2010 Chinese imports could dry up. Rare earth metals like neodymium are used in the powerful magnets in electric motors for cars. China produces 97 percent of the world's rare earth metals, which are also used in the production of other high-tech and defense products. Rare earth mineral exports from China could dry up for the rest of the year, according to data cited by China's Ministry of Commerce on Tuesday. Rare earths are used in rechargeable batteries for electric and hybrid cars, including Toyota's (7203.T) popular Prius hybrid. "I think it's a huge problem because those metals are used for electric motors. Any car with an electric motor will use these rare earth metals,"

Rare-earth Crisis Sparks Quest for Alternative Motors - Japanese motor manufacturers are scrambling for motor technologies that do not need rare earth metals, following a crisis in which China, which produces 95–97% of the world’s rare earths, cut off supplies to Japan and limited supplies to other countries. The materials (shown below)  – which include neodymium, dysprosium and yttrium – are needed for a wide range of applications, from electric vehicles and wind turbines, to computer hard drives and mobile phones. In recent years, China has come to dominate the global market for rare earths by undercutting producers in other countries, thus forcing them out of the market. In recent months, however, it has raised the prices of some of its rare earth materials nine-fold.

CNOOC, Chesapeake close Eagle Ford shale deal - Chesapeake Energy Corp. (NYSE: CHK) and CNOOC Ltd. have closed on the project cooperation that gives CNOOC International Ltd. a 33.3% undivided interest in Chesapeake's 600,000 net oil and natural gas leasehold acres in the Eagle Ford Shale in South Texas.  CNOOC paid $1.08 billion in cash, plus an additional $40 million payment adjustment at closing. CNOOC Ltd. will fund 75% of Chesapeake's share of drilling and completion costs up to $1.08 billion, which Chesapeake expects to occur by year-end 2012.  Chesapeake’s deal with CNOOC in the Eagle Ford shale was announced in October.

Gap, Wal-Mart Clothing Costs Rise on `Terrifying' Cotton Prices - Gap Inc., J.C. Penney Co. and other U.S. retailers may have to pay Chinese suppliers as much as 30 percent more for clothes as surging cotton prices boost costs.  “It’s a little terrifying to deal with cotton suppliers now,” said Vicky Wu, a sales manager at Suzhou Unitedtex Enterprise Ltd., a closely held, Jiangsu province-based clothes maker that counts Gap and J.C. Penney among its clients.  Cotton futures in China have surged more than 70 percent this year and were at a record earlier as the global economy emerged from recession, allowing people to spend more on clothes. Production of the fiber in China, the world’s biggest user and importer, is forecast to lag behind demand for a 12th year, cutting its stockpile to the smallest since 1995, according to the U.S. Department of Agriculture.

Cotton price, an everyday threat to textile industry - Cotton prices in China escalate almost on a daily basis, scaring out the textile and garment industry, which have the fiber as a core crude material, according to reports from the People's Daily Monday.Only from September to the beginning of November, prices were adjusted about 70 percent, from 18,000 yuan ($2,707) to 30,000 yuan ($4,512) per ton.  Hiking prices inevitably trigger a domino effect: Yarn prices – which have doubled, fabrics and cotton cloths follow the trend in varied degrees. "It simply jumps in such a way that we can't help but to fear taking orders," said Yang Hua, manager of a textile company in Nantong, Jiangsu Province.

Food Price Controls in China As Inflation Becomes Issue - I caught this at the bottom of Andy Lees’ morning note: China – To limit inflation China will impose price controls on food according to the NDRC, and will severely punish anyone found speculating on corn or cotton. “The policies that are being considered aim to contain the momentum and will be delivered in combination as a one-two punch”. The Chinese Daily says that one of the measures being considered is to give mayors the responsibility for a basket of food items, but it does not elaborate whether this means setting the price on a basket of goods or whether it means a kind of rationing. I think realistically, given the Lewis Point this is something we have to get used to as it is clearly going to be harder to maintain economic growth without inflationary pressures.

China Plans Price Controls to Tackle Food Inflation China will unveil food price controls and crack down on speculation in agricultural commodities to contain inflationary pressure that its central bank governor highlighted as a risk on Tuesday. With consumer prices rising at their fastest pace in more than two years, the National Development and Reform Commission, the country’s top planning agency, is preparing a “one-two punch” of actions to rein in food costs, official media reported. Such direct intervention would mark an escalation of the government’s efforts to tame inflation and underline its worries over the rapid run-up in food prices. Possible steps include price controls, subsidies for shoppers, a crackdown on hoarding and price gouging as well as a system whereby mayors are made responsible for a basket of food items, the China Securities Journal reported.

Swan Songs - Paul Krugman - I read the news today: China is considering price controls to rein in surging inflation. Can we talk, again, about the utter craziness of China’s currency policy? The best way to think about this sort of thing remains the Swan diagram, a half-century-old creation of the Australian economist Trevor Swan. He pointed out that, at minimum, economic policy has two instruments and two goals: the exchange rate and measures that affect domestic demand, on one side, and a sustainable balance of payments position and full employment without inflation, on the other. He then argued that you can usefully look at the state of an economy to get some idea of which policies are out of line —  And I have, as you see, written in two major economies. Clearly — clearly! — China has an undervalued currency; you can tell this not simply from the fact that it has a trade surplus, but from the fact that it’s fighting inflation. The United States, which is fighting unemployment while suffering a large trade deficit, is in exactly the opposite situation — which is why it’s ludicrous to suggest that US QE and Chinese currency manipulation are equivalent. And now China is considering price controls to help it maintain its undervalued currency. Bizarre, and disastrous for all of us.

Big Mac alert! - HERE at HQ, the alarms that sound whenever the price of a Big Mac rises anywhere in the world have been clanging away this morning: More inflation warnings on Wednesday in China, this time from a highly symbolic source. The price of a Big Mac has risen from Rmb14 to Rmb15 at the branch of McDonald’s around the corner from the FT’s Beijing bureau - part of an across-the-board price hike that the US fast food chain blamed on rising costs of ingredients - even if that is still less than two-thirds of the price of a Big Mac in the US. Why has the price of a Big Mac gone up? Why, indeed, are many prices in China going up? You can see the main reason at right. According to our latest Big Mac index, the RMB is undervalued by 40%:  Markets have been signalling for years that the Chinese currency really ought to appreciate. If the adjustment isn't made through the nominal exchange rate, then it will occur through the real exchange rate, via increases in the price level.

China Takes Moves to Curb Inflation - The Chinese central bank on Friday raised capital reserve requirements for its banks for the fifth time this year in order to “appropriately control” credit and liquidity. Meanwhile, the Hong Kong government significantly raised the stamp duty on residential property transactions to damp property speculation. The People’s Bank of China said the proportion of deposits to be set aside by banks should increase by 50 basis points to 18.5 per cent for large banks, the highest level ever. The widely expected move comes on the heels of figures that showed consumer price inflation in China jumped last month to 4.4 per cent – well above the government’s target of 3 per cent – amid sharp rises in the price of some foods.

If China were to let its currency float, commodity prices would soar - But this would be a good thing. Krugman says China's currency is clearly undervalued.  Clearly, he's right.  And this is hurting China, hurting the US, and hurting the whole world's economy.  China could solve their inflation problems without curbing growth by simply letting their currency float.  And their proposed price controls could make things a lot worse. Now, if China were to abandon these destructive policies, I think it's also clear that commodity prices would soar, at least as measured in dollars.  (Prices would fall in Renminbi, and perhaps other currencies.)  This would likely elicit howls from some who might fear that rising oil prices would stifle domestic recovery.  But I think those fears would be misplaced.  Because while oil and other commodity prices would rise, so would foreign and domestic demand for goods produced in the U.S.  This would stimulate our economy and push us back toward full employment and capacity utilization.  That is, commodity prices would rise due to a demand shock, which is quite unlike the supply shocks prevalent in our history.

China Wins 100 C919 Orders, Breaks Airbus-Boeing Grip .- Commercial Aircraft Corp. of China announced its first 100 C919 passenger-plane orders, breaking Airbus SAS and Boeing Co.’s stranglehold on the world’s second- largest market for new aircraft. General Electric Co.’s leasing arm and China’s big three domestic airlines were among the customers for the 168-seat plane, state-controlled Comac said in a statement issued at the Zhuhai air show in southern China today. It didn’t say how many aircraft each customer ordered. The development of the nation’s first large passenger aircraft could damp sales for overseas planemakers in China, which may need $480 billion worth of aircraft by 2029, according to Boeing. Comac expects to sell more than 2,000 C919s worldwide over 20 years in competition with Boeing’s 737 and Airbus’s A320, the aircraft-makers’ most popular models.

China May Surpass U.S. by 2020 in `Super Cycle,' Standard Chartered Says - China will overtake the U.S. to become the world’s largest economy by 2020, helped by faster expansion and an appreciation of its currency, according to Standard Chartered Plc.  “We believe that the world is in a ‘super-cycle’ of sustained high growth,” economists led by Gerard Lyons said in a report published today. “The scale of change over the next 20 years will be enormous.”  China’s economy will be twice as large as the U.S.’s by 2030 and account for 24 percent of global output, up from 9 percent today, Lyons said in the 152-page Super-Cycle Report. India will surpass Japan to be the third-biggest economy in the next decade, according to the report. Goldman Sachs Group Inc. estimates China will overtake the U.S. by 2027.  The world may be experiencing its third “super-cycle,” which is defined as “a period of historically high global growth, lasting a generation or more, driven by increasing trade, high rates of investment, urbanization and technological innovation, characterized by the emergence of large, new economies, first seen in high catch-up growth rates across the emerging world,”

"China's growing economy, by the numbers" gets the numbers wrong (or, at the least, misleads) - For some reason I was watching ABC News last night instead of ESPN and got sucked into this: This week, "World News with Diane Sawyer" broadcasts from China to answer some questions about the country's staggering economic growth -- 10 percent in one year. Towards the end, right before Tom Friedman, ABC News made the silly mistake of extrapolating aggregate GDP growth rates over time and showed the Chinese economy overtaking the U.S. in terms of aggregate GDP (at the right, Chinese GDP is in red). The implication is that the Chinese people will be better off as a result. There are two problems with this analysis. First, living conditions are best measured with GDP per capita. As the first part of this video shows, China's population growth is much faster than the U.S.'s. Since GDP is equal to GDP per capita times population, increasing population is fueling that 10% growth rate. More people doesn't necessarily mean the people are better off.

What happens if Chinese growth slows - Last week I suggested that slowly the consensus is shifting towards a recognition that Chinese growth may slow sharply in the next few years.  When I discuss this prospect with analysts and investors, however, they almost always worry about two things.  First, since China represents the largest component of global growth, it seems reasonable to expect that a sharp slowdown in China will also mean a sharp slowdown in global growth.  Slowing Chinese growth, in other words, should be terrible for the world.  Secondly, if growth does slow sharply, this should cause an equally sharp rise in social instability and, with it, rising political instability. I disagree with both claims — not that they are necessarily wrong but rather that they are not obviously true, and depend heavily on the way China rebalances.  To see why it is worth considering what happened to Japan in the past two decades.

Quantitative Easing, Here and There - I've been surprised to find that there's a considerable amount of outrage among the people I talk to about our quantitative easing program.  I knew China was upset, but I had not appreciated how much this would filter down to ordinary people who do not, say, work for the trade ministry or the central bank. Don't we understand that as the holder of the world reserve currency, we have a special responsibility not to cause inflation elsewhere?  The anger doesn't seem especially realistic.  The Chinese don't appreciate being told that they have a responsibility to run their exchange rate policy for the benefit of American workers who would rather not face low-wage competition, and I don't blame them.  But I don't think you can say that Americans have a special responsibility to manage their monetary affairs for the benefit of other nations, while China doesn't; after us, China's actions have by far the most influence on the rest of the world.

Report: China's banks stop real estate loans (AP) -- China's major banks have stopped lending to real estate developers as the government tries to cool an investment boom and surging home prices, a state newspaper said Monday. The top four state-owned lenders suspended credit to developers at the end of October after exhausting the industry's annual loan quota, China Real Estate Business said, citing unnamed bank employees. It said the government limit for total real estate lending next year might be reduced by up to 20 percent.Chinese regulators are trying to cool surging credit, worried that runaway lending might be fueling a dangerous boom and bust in real estate

First, Let’s Lower the Bar - By John Mauldin - China’s currency is rising ever so slowly against the dollar. But is that hurting China? We will look at a very interesting chart and some research. And then we’ll gain some more insight into why the employment numbers seemed to surprise. I guess if you lower the bar, it’s easier to jump over. I also deal with the pushback from last week’s Outside the Box! And Ireland is on my radar. There is a lot to cover, so let’s jump in.

Obama Sharpens Yuan Criticism After G-20 Nations Let China Off the Hook – President Barack Obama attacked China’s policy of undervaluing its currency minutes after he and other Group of 20 leaders ended a summit that failed to agree on a remedy for trade and investment distortions.  “It is undervalued,” Obama said of the yuan, speaking to reporters in Seoul after the meeting concluded. “And China spends enormous amounts of money intervening in the market to keep it undervalued.”  The G-20 leaders agreed to develop early warning indicators to head off economic turmoil as emergency talks on Ireland’s debt reminded them the recovery from the global financial crisis remains fragile. Obama and his South Korean counterpart, Lee Myung Bak, failed to complete a free-trade agreement.

Auerback: G20 Post-mortem – “Chimerica” has been a Chimera - I have already argued that QE2 has minimal impact on the amount of new net dollars in existence. But the viscerally hostile Chinese response to the Fed’s policy suggests that they see in it echoes of their own policy of the early 1990s (in spite of the fact that the US has a freely floating exchange rate, not a currency peg). Most defenders of Beijing justify the pegged rate regime on the grounds that it has helped to move the country up the technological curve and thereby enhance living standards. Perhaps, but India has done it without adopting a similarly mercantilist policy. In any event, the improvements of living standards facilitated by rapid export growth and income gains in China are still heavily skewed toward the exterior regions, rather than the interior of the country. There could have been better ways for China to improve the living standards of its people. It is perfectly understandable why Beijing adopted the Asian mercantilist model, as it worked so well for the nations of Northeast and Southeast Asia. But it makes no sense for a country of 1.5 billion people with a huge domestic market that its manufacturers could potentially supply for decades. India also seems to have improved the living standards of its people, but it has adopted a much more balanced economic model (and correspondingly less trade friction with the US and EU).

The G-20: This Time, It's Different - Last week's G-20 economic summit in South Korea was widely depicted as a failure for the Obama administration and a rebuff for the United States. In many respects, it was. Obama remarked that if the U.S. hadn't tried to set the agenda, it would have had an easier time. “Part of the reason that sometimes it seems that the United States is attracting some dissent is because we're initiating ideas,” he said. “We're putting them forward. The easiest thing for us to do would be to take a passive role and let things just drift which wouldn't cause any conflict.”  It's a fair comment but also an exercise in gilding the proverbial lily. The fact remains that the United States entered the summit hoping for joint agreement on addressing global surpluses and deficits and on currency valuations. The key players here, of course, are China and America, but China was not alone in rejecting American formulas for global economic stability. Germany and Great Britain were equally dismissive of American financial policy, and especially excoriating of the Federal Reserve and Ben Bernanke for recent measures to inject $600 billion of liquidity to spark what has so far been an anemic recovery in the United States.As a result of the Fed's moves, the Chinese were able to turn the charge of “currency manipulation” right back at America, and all but accused the U.S. of blatant hypocrisy. The British prime minister, meanwhile, scoffed at the inability of Americans to bring spending under control.

When the G20 stopped feeling like the G8-plus - Western officials should have realised this Summit would be different when they arrived in Seoul to find their phones and blackberrys didn't work. The problem was that Korea's nationwide 4G network was too advanced. On early negotiating missions, key UK officials found themselves communicating with London via gmail, on rented phones.  That was never a problem in Pittsburgh, or Toronto. But as George Osborne liked to point out, this was the first G20 Summit not hosted by a G8 country - and, he might have added, the first where G8 countries didn't call the tune.  As we know, there was vanishingly little progress on the debate of the hour - the question of global imbalances. China is going to open its economy and take on more of the burden for sustaining the world economy. But it's going to do it in its own time, in its own way. And that includes raising the international value of its exchange rate.

Losing the Battle, Winning the War? - Or, the Economic Implications of the G-20 Meeting's Aftermath.

The narrative emerging in the wake of the G-20 meetings is that, not only is the rest of the world angry at us over quantitative easing, but we also achieved none of our diplomatic objectives regarding rebalancing (the coverage seemed particularly negative on CNBC). [1] [2] [3] In addition, the outcome has been taken as a harbinger of the end of US dominance over economic policymaking, to the extent the US no longer has the intellectual high ground (given the failure to regulate the financial system in a sensible way) and the relative decline in economic weight. I think one important point is to realize that achieving economic goals and diplomatic successes are not always the same.

Is The U.S. The Largest Systemic Threat To Global Stability?…At question time Maughan rose from his chair, and clearly irritated by the anti-China sentiment prevalent in the conference room,  rattled off a series of barbed comments  about the U.S. economic statistics;“The U.S. has had only 1 year of a current account surplus in the last many decades” he said first. Followed by “The other central banks  own 1/2 the federal debt on which they are experiencing substantial losses” And the conclusion; “Isn’t the U.S. the largest systemic threat to the world economy?” The CFR panel looked a bit nonplussed. They preferred to muse about the need f or China to amass $3 trillion in reserves as  a  “self-insurance  policy” against volatility and another possible meltdown. Rather than tackle the accusations directly, the conversation switched over to the safer circumspection about the efficacy of quantitative easing, QE2

Throwing Free Trade Overboard - DESPITE his failure to conclude a trade deal with South Korea this week, President Obama has put free trade at the top of his agenda. That’s in part because the White House and the newly empowered Republican leadership see it as one of the few places where they can work together.  But those expectations could be upset by an unexpected force: the Tea Party. Strangely, for a movement named after an 18th-century protest against import levies, Tea Partyers are largely skeptical about free trade’s benefits — according to a recent poll by NBC and The Wall Street Journal, 61 percent of Tea Party sympathizers believe it has hurt the United States.  The movement has already forced the Republicans to alter their agenda in several policy areas. Should the same thing happen with free trade, America’s stance toward open markets and globalization could shift drastically.

America Undone - Eliot Spitzer - The president of the United States went as a supplicant to Asia, and he returned spurned and lonely. President Obama's trip to Asia may turn out to have been a more important event than the midterm elections, for it was in Asia that the new world order—and America's diminished place in it—became apparent.  The United States was scorned and repudiated in three sequential episodes: First, South Korea essentially rejected a reasonably standard and straightforward trade pact—a deal that everybody assumed was done ahead of time and was to be announced as Exhibit A in the president's "Job Creation Trip." Second, nearly every important economic power in the world criticized the Fed's effort to inject money into the U.S. economy via quantitative easing. Third, the president failed to get the G20 powers to agree to anything more than vapid words about trade. The final communiqué reads like a parody of diplomatic jargon determined to mean nothing at all.  In the choice between China and the United States that was being made by many nations, even some of our most stalwart allies, such as Germany, were more than willing to rush into the arms of an ascendant China and align themselves against our declining power. On issues of trade and currency, which is where the battles of today are waged, nations were choosing the future, not the past.

Industrialization and Its Discontents - When the United States talks about China, you hear a lot of complaints about how we're losing our "good jobs"--our manufacturing base--to countries abroad.  A lot of the people I've spoken with here so far have pointed out that this is silly--that comparative advantage is real, and that shipping lower-skilled jobs over here results in mutually beneficial gains from trade.  All true.  And yet what you also hear quite a bit now is the same sort of anxiety about China losing its jobs.  One person told us a story about the Chinese premier talking to Obama.  "Mr President," he said, "you say that the economy needs to create 8 million jobs in order to bring America back to prosperity.  I need to create 24 million jobs every year just to absorb the college graduates and the rural migration." I have no idea if the story is true, but the point is certainly sound:  China has an enormous population that needs to be absorbed into the labor market each year.  So perhaps its natural that you're starting to hear exactly the same trade worries that Americans voice:  textile jobs going to Bangladesh, assembly work heading across the border to Vietnam.  Hell, in Vietnam, they spend a surprising amount of time worrying about the Cambodians taking their low-end manufacturing jobs.

Pollster: Ban Words ‘Free Trade’ From Polite Society - Election polling this year documented widespread rejection of free-trade deals by the public, pollster Bill McInturff told corporate chief executives Tuesday, an ominous development for President Barack Obama’s vow to double U.S. exports by 2015. (Read full coverage of the CEO council) Last week the U.S. and South Korea failed to resolve lingering disputes over U.S. auto and beef exports in talks during the G-20 meeting in Seoul, failing to reach a deal on a Korea free trade agreement that has been a stated presidential priority. Recent polling showed that Americans say free trade deals “hurt the economy” by a margin of two to one, Mr. McInturff said. The words “free trade” should be banned from public discourse if trade advocates hope to build support, he said. “You have to talk about an export economy… new jobs,” he said. While CEOs know well the benefits of free trade on U.S. job growth, “if you look at your employees, that’s not what they’re telling people,” Mr. McInturff said.

G20: Seoul searching on trade and currency - It would be great if the leaders of the G20 countries knew a little economics. It might make their meetings more productive and less confrontational. The central area of dispute at the recently concluded meeting was the decision by the Federal Reserve Board to engage in another round of quantitative easing (QE2). This is intended to boost growth by pushing down long-term interest rates.  Lower interest rates will boost consumption by allowing people to refinance their mortgage and will also induce additional investment. QE2 will also likely have the effect of lowering the value of the dollar, as investors sell dollars in search of higher returns in euros, yuan and other currencies. This fact seemed to unite the rest of the G20 in their anger at the United States. There were numerous lectures coming from various countries that the United States was taking the easy way out. The argument ran that the United States should be correcting its overspending by reducing its budget deficit. The G19 argued that this was better than the US trying to increase growth by using a lower-valued currency to reduce its trade deficit.

Economics for the People - Is economic growth a means, or an end? That is one important question that surfaces again and again in the United Nations Development Project’s latest Human Development Report. The report tries to measure the development of countries, not only by wealth but also by investments in their greatest resource: their populations. As we’ve discussed before, three variables go into compiling this “human development index” — per-capita income, life expectancy and literacy rates. This index is then used to rank countries by how “developed” they are. Among the 169 countries ranked in 2010, Norway was rated the most highly developed country, and Zimbabwe the lowest. This year’s report also looked at which countries have shown the greatest growth in the human development index. And perhaps counterintuitively, the report found a very weak relationship between economic growth and improvements in health and education over the years, especially in less developed countries. In other words, in many places fast economic growth is not being realized by the citizens of that country.

Private sector must become agent of inclusive growth in the post-crisis world - The global financial crisis accelerated a shift of power from the West back to the East and, in the resulting landscape, companies will need to forge new business models that generate not only profit, but also more inclusive economic growth, panellists said in the opening today of the World Economic Forum’s India Economic Summit.  “The private sector needs to understand that they are now expected by society to play a role that goes beyond the role for which their business was created,” said Ajit Gulbabchand, Chairman and Managing Director of the Hindustan Construction Company and a co-chair of the Summit. “They have a transformational role to play.”

How to prevent a fiscal crisis: Vote-share bonds - How can excessive public debt be avoided? This column proposes a novel solution: “vote-share bonds”. These government bonds are tied to the share of the vote that the adoption of the underlying deficit has received in parliament. A bond with a higher vote-share is considered senior. Vote-share bonds inspire fiscal responsibility, while retaining the flexibility to stabilise negative macroeconomic shocks.

Under-development in Africa -How much influence did colonisation have on Africa’s development? This column examines data from before colonisation up to the modern day and argues that differences in colonial institutions do not explain differences in regional economic performance. Instead, it finds that pre-colonial political centralisation and ethnic class stratification have a significantly positive impact on local development.

China, Brazil Top U.S. as Best Places for Investors, Poll Shows - Investors say they are seeing opportunity and taking on greater risk, looking more to emerging markets such as China, Brazil and India than developed countries, a Bloomberg survey shows. The U.S. was in fourth place behind those economies in offering the most opportunity, in the latest quarterly Bloomberg Global Poll of 1,030 investors, analysts and traders who are Bloomberg subscribers. The world’s largest economy was also named the third-worst place to invest behind the European Union and Japan. Some respondents cited the Federal Reserve move to buy $600 billion of Treasuries as cause for concern. Some poll respondents said the move -- known as quantitative easing because it seeks to loosen monetary policy by buying quantities of bonds rather than lowering short-term interest rates -- was giving a potentially dangerous jolt to the markets.

Explained: Currency wars - MIT News - This month’s G-20 meeting of industrialized countries was rife with talk of potential “currency wars,” in which states try to devalue their currencies to help their economies. While a central tension is the United States’ unhappiness with China’s undervalued yuan, the issue is really hydra-headed: One country’s actions can create many reactions globally.  Currency policies are a particularly hot topic because the United States can no longer try two traditional remedies for a sluggish economy: government spending, because the political tide has turned against it, and lower short-term interest rates, because they’re already effectively at zero.  As a result, this month the Federal Reserve announced a new round of quantitative easing, in which the government puts cash into circulation by buying back its own bonds. Intended to encourage business activity, the move could also drive down the dollar. But that should actually boost the U.S. economy: a weaker dollar would make U.S. products more affordable globally, increasing U.S. exports, income and employment. Meanwhile, a potentially weaker dollar affects the United States’ interactions with many other countries.

Taiwan’s Blunt FX Interventions - Of all the roles central banks are asked to perform, keeping a lid on currency appreciation by directly intervening in foreign exchange market is perhaps one of the trickiest. And it’s certainly not made any easier when politicians weigh in with their two cents on how it should be done. In Taiwan’s case, however, the Central Bank of the Republic of China may do well to listen to the pols. In a rare display of government criticism, Taiwanese vice premier Sean Chen delivered a broadside against the CBC in the Legislature on Wednesday, demanding the bank radically change the way it manipulates the New Taiwan Dollar.  The issue isn’t over whether the huge intervention that’s been underway in recent months to curb the NTD’s unstoppable gains is in fact money well spent. Rather, it’s a question of whether they can get more bang from their buck. The way the central bank intervenes is quite unique. It buys dollars in massive quantities from state-owned banks during the last 15 minutes of the onshore five-hour trading session. It typically makes only one or two trades, but their size is large enough to bring the value of the NTD against the U.S. dollar back down to a level somewhere very near to the previous day’s close.

Robert Samuelson's Confusion on Real Interest Rates - Robert Samuelson is beating up on Japan in his column today. While its economy has certainly had troubles in the last two decades, the picture is not quite as bleak as he seems to believe. Its rate of productivity growth (the most important measure of economic dynamism) since 1995 has been almost identical to the average for the OECD and within 0.2 percentage points of the rate in the United States. Furthermore, since depreciation is a large and growing share of U.S. output (primarily because computers become obsolete quickly) it is likely that a net measure of output would show Japan and the United States having virtually the same productivity growth over this period. Net productivity is the measure that is relevant for living standards, since you can't eat depreciation. It is also worth noting that Japan's unemployment rate is just 5.0 percent. It never rose above 6.0 percent over the last two decades. However Samuelson's biggest error is that he fails to understand the problem that deflation, or more correctly low inflation, poses for Japan's economy. While he rightly ridicules the idea that consumers would delay purchases to buy items of like cars to buy them at a price that is 0.5 percent lower the following year, this is not the main way that low inflation harms the economy.

Stimulus Helps Lift Japanese Economy - The Japanese economy gained momentum in the third quarter, growing at an annualized pace of 3.9 percent, data released Monday showed, as the end of a government stimulus plan gave private consumption a last-minute lift.  Still, economists warned of an imminent slowdown as a strong yen, faltering exports and the end of generous government incentives for fuel-efficient cars pinched company earnings.  Deflation, or a decline in prices, has also weighed on the Japanese recovery as it has tried to pull out of its worst recession since World War II.

Japanese Q3 2010 GDP growth hit it out of the ballpark but set to fall flat next quarter - Rebecca Wilder - The Japanese economy grew 3.9% at a seasonally-adjusted annualized rate in Q3 2010 and over 2X the pace in Q2 2010 (data here). According to Bloomberg, the headwinds to Q4 growth are household consumption and the yen: Consumption, accounting for about 60 percent of GDP, led the gain as households stepped up purchases of fuel-efficient cars ahead of the expiration of a subsidy program and as smokers stocked up before an Oct. 1 tobacco-tax rise. The yen’s climb to a 15-year high will probably damp growth this quarter as companies from Sharp Corp. to Nikon Corp. cut profit forecasts. To be sure, the surge in real GDP growth is unlikely sustainable; but it's not because of the yen's strength, per se. True, consumption growth is more likely to print on the lefthand, rather than the righthand, side of the 0-Axis. However, the yen on a trade-weighted basis and in real terms hovers at its historical average; hence, the currency poses less of a risk to growth.

The Global Unemployment Crisis: Costs, Causes, Cures - The misery index — the sum of the inflation and unemployment rates — gained popularity as an indicator of tough times during the U.S. presidential election of 1980. Double-digit inflation in the United States and around the globe was the big problem then.  Today, the misery index is nearly back to the level it was in the 1980s. However, the source of the misery is now not inflation — but the near double-digit rates of unemployment.  Across the globe, an estimated 210 million people are unemployed, an increase of over 30 million since the start of the Great Recession of 2007. Three-fourths of this increase occurred in the advanced economies.  The problem is particularly severe in the United States — the epicenter of the Great Recession — and the country with the highest increase in the number of unemployed: an increase of 7.5 million unemployed people since 2007.

Germany's recession, and America's - A NEW piece of analysis from JPMorgan comparing the recession performance of Germany and America includes some really interesting charts. At the right, we see, the path of GDP and the unemployment rate. The GDP chart is interesting, as you normally see this comparison made with a later date as the baseline year. Germany had a much stronger 2006 than America did, and so including that extra year shows that over the second half of the decade Germany's economy outperformed America's. Both have yet to regain their previous output peaks, however. The chart below that compares the path of the unemployment rate. Germany spent much of the past decade making major structural reforms to its labour markets, a policy shift that meant German joblessness was falling heading into the recession. What's interesting is that having accomplished this change, Germany proceeded to protect its labour market from major disruption by the great recession, through the use of its "short work" labour sharing programme. Firms were encouraged to cut hours rather than jobs, and workers facing reduced work hours were provided an income subsidy. The result? Germany's huge output fall produced only a labour market wiggle.

Stranger and stranger grows the EU’s bailout fund - Anyone wanting to know just how daft and self defeating the EU’s latest utterences on the Permanent Crisis Resolution Mechanism (the structure through which sovereign bailouts would be conducted) really are, should take a look at the note just published by Marco Annunziata, chief economist at UniCredit Group. I’ve got no link for this, so I’ll quote his digest in full: The Eurozone’s credibility deficit is getting larger by the day. The most recent antics on the Sovereign Debt Restructuring Mechanism are a breath-taking mixture of suicidal irresponsibility and farcical incoherence, and risk inflicting lasting damage to the recovery prospects of the most troubled peripheral countries and to the credibility of the eurozone’s economic governance framework. Germany had seemed determined to have agreement on a SDRM. But now from Soul, EU finance ministers tell us that that any SDRM would only apply to new debt issued after the mechanism has been approved and put in place, that is 2013 at the earliest. Debt currently outstanding, and any debt issued over at least the next two years, would therefore be safe. But this commitment is time-inconsistent, and therefore not fully credible. If by 2013 countries like Greece, Ireland and Portugal are still in a shaky position, with weak fiscal accounts and weak growth, any new debt issued with SDRM clauses will carry exorbitant yields, inconsistent with debt sustainability....

Europe’s Monetary Cordon Sanitaire - – German Finance Minister Wolfgang Schäuble likes to criticize other governments, including that of the United States, for their “irresponsible” policies. Ironically, it is the German government’s loose talk that has brought Europe to the brink of another debt crisis.The Germans, responding to the understandable public backlash against taxpayer-financed bailouts for banks and indebted countries, are sensibly calling for mechanisms to permit “wider burden sharing” – meaning losses for creditors. Yet their new proposals, which bizarrely imply that defaults can happen only after mid-2013, defy the basic economics of debt defaults.The Germans should recall the last episode of widespread sovereign default – Latin America in the 1970’s. That experience showed that countries default when the costs are lower than the benefits. Recent German statements have pushed key European countries decisively closer to that point. The costs of default depend on how messy things become when payments stop. What are the legal difficulties? How long does default last before the country can reach an agreement with its creditors? How much more must it pay for access to debt markets later?

Merkel Defends Tough Stance on Euro Bailouts - Der Spiegel - German Chancellor Angela Merkel defended her tough stance on reforming EU budget rules on Monday as criticism of her policy mounted in Europe. "Everything is at stake -- if the euro fails, then Europe will fail," Merkel told delegates at the party congress of her conservative Christian Democratic Union (CDU) in Karlsruhe, southwestern Germany. Market "excesses" caused the crisis and "markets have to bear the consequences of their actions," she said. "It's up to us. It's our task to create a new anchor for a culture of stability in Europe." But other EU leaders are warning that her plan is scaring investors and could reignite the euro crisis.

German stance may push nations toward bankruptcy-Greek PM (Reuters) - Germany's tough stance on banks and bond markets sharing the pain of any euro zone sovereign debt default could force some economies toward bankruptcy, Greek Prime Minister George Papandreou said on Monday. "It created a spiral of higher interest rates for countries that seemed to be in a difficult position, such as Ireland or Portugal," Papandreou said during a visit to Paris.  "This could create a self-fulfilling prophecy ... This could break backs. This could force economies towards bankruptcy."

It’s Not About Ireland Anymore by Simon Johnson - On the Project Syndicate website, Peter Boone and I argue, with regard to the European situation in this coming week: The Germans, responding to the understandable public backlash against taxpayer-financed bailouts for banks and indebted countries, are sensibly calling for mechanisms to permit “wider burden sharing” – meaning losses for creditors. Yet their new proposals, which bizarrely imply that defaults can happen only after mid-2013, defy the basic economics of debt defaults. Given the vulnerability of so many eurozone countries, it appears that Merkel does not understand the immediate implications of her plan. Like it or not, it’s time for the Europeans to decide: Who gets unlimited liquidity support because they are essentially solvent, and who has to restructure their debt – with bridge financing and help from the outside?This will be painful and intense.  The case for debt restructuring in Ireland and Greece is clear.  What about Portugal and, even more controversial, Spain – and other eurozone sovereign borrowers?

Irish banks’ ECB borrowings rise to €130bn - Irish-based lenders’ borrowings from the European Central Bank rose 7.3pc last month as the yield investors demanded to hold the state’s debt surged on concerns about its budget deficit and mounting bank losses. ECB funds used by lenders including international and domestic companies climbed to €130bn as of October 29, from €121.1bn at the end of September, according to statistics published on the central bank’s website today.  Ireland's banks are becoming more dependent on the ECB after the central bank said in September a bailout of lenders may cost as much as €50bn as the state sinks more funds into nationalised Anglo Irish Bank and other lenders.

Bailing Out Ireland, Bailing Out Banks - Here’s one Irish-bailout-in-the-works story you absolutely should be reading, courtesy of the Irish Independent: European officials reportedly want the Government to avail of emergency loans of €60bn to €80bn to ease the pressure on the euro area. But under the Government’s alternative plan, emergency funds would be funnelled into Irish banks — and not state coffers — allowing the Government to save face while maintaining control of the economy. No doubt Irish ministers will deny this along with all the other whispers of bailout talks. Nevertheless, a bank-centric bailout would be quite an irony. Frankly it’s a fiction of accounting whether the Irish banking sector or the Irish sovereign actually gets the bailout. Firstly given the nexus of funding guarantees that have bound the two together since the crisis, and which remain open to possible burden-sharing by bank bondholders.

A collateral conundrum for Irish banks - Some more on the funding plights of Irish banks, which’ve hoved into view over those bailout non-talks between Ireland and Europe. We know that Irish banks increasingly need central bank liquidity in order to survive being shut out of funding markets, and we know (from its recent trading statement) that even Bank of Ireland is facing trouble here. And Bank of Ireland ain’t no Anglo Irish. The question, of course, is how much longer even the better banks can keep tapping these lifelines. For example, here are Deutsche Bank analysts Jason Napier, David Lock and Mark Wall on what’s troubling Bank of Ireland: BKIR’s loan deposit ratio rose from 145% to 160% in 3Q10, implying a loss of E10bn or 11% of deposits in three months. Funds were primarily lost in ratings-sensitive Capital Markets product, with retail deposits firm. This leaves c.E17bn of Capital Markets deposits – if these were withdrawn, the group LDR would rise to over 200%…

The Irish Economy » A Bailout Worth Considering - Even though it’s hard to separate fact from fiction in the fast-moving bailout story, reports that the Commission and ECB are pushing for Ireland to avail of the EFSF for broader European stability reasons could change the calculation in an important way. I still believe that Ireland’s best bet is to regain creditworthiness through a demonstration of political capacity with the budget and the four-year plan. The alternative of being forced to seek a bailout would involve at least as much austerity as our own adjustment and would do long-term reputational damage. But acceding to a request to avail of the facility is potentially a different proposition. I don’t think our European partners could simply expect us to pursue a less nationally advantageous path in the interest of broader euro zone stability. The terms would have to be mutually advantageous relative to the next best options for both sides. One reasonable agreement that could meet this requirement is for our European partners to support our four-year plan with a credit line from the EFSF at a reasonable rate of interest (say the 5 percent rate provided to Greece). Access to the funds would be conditional on meeting the targets under the plan, which after all is being developed with input from the Commission and the ECB.

The distorted European bailout - Some weird goings-on in the Irish yield curve. (Nicked from Frankfurter Allgemeine — the Ireland curve is the brown-ish one) Last week a jump in Irish two-year bond yields turned the whole thing rather hump-shaped. The curve had already been steepening at the long end as investors fled the 10-year, but between Monday and Friday they left the short-end too. It’s rather strange behaviour, given that tapping the European Financial Stability Facility (EFSF) would effectively protect bonds maturing until 2013. Talk of haircuts between now and then probably helped hump the curve — and would have been one of the reasons European leaders moved to issue that Friday joint statement.

Europe stumbles blindly towards its 1931 moment – Unless the ECB takes fast and dramatic action, it risks destroying the currency it is paid to manage, and allowing a political catastrophe to unfold in Europe.  If mishandled, Ireland could all too easily become a sovereign version of Credit Anstalt - the Austrian bank that brought down the central European financial system in 1931, sent tremors through London and New York, and set off the second deeper phase of the Great Depression, the phase when politics turned ugly.  “Does the ECB understand the concept of contagion?” asked Jacques Cailloux, chief Europe economist at RBS. Three EMU countries have already been shut out of the capital markets, and footloose foreign creditors hold €2 trillion of debt securities issued by Spain, Portugal, Ireland and Greece.

Ireland debt crisis: European banks’ exposure – Investors have piled pressure on Ireland amid growing concern over the potential cost to bondholders of any sovereign debt default. A number of European banks are exposed to Irish sovereign debt. Here is a table.

BBC News – Ireland ‘in preliminary talks with EU on bailout’ - The Republic of Ireland is in preliminary talks with EU officials for financial support, the BBC has learned. It is now no longer a matter of whether but when the Irish government formally approaches the European Financial Stability Fund (EFSF) for a bail-out, correspondents say. The provisional estimate for EFSF loans is believed to lie between 60bn and 80bn euros ($82-110bn; £51-68bn). Dublin says there are no talks on an application for emergency EU funding.

Time to reclaim the land that is rightfully ours - Last Thursday, a group of ten leading economists wrote to the Irish Times, arguing that some form of mortgage debt forgiveness was not only essential for our society, but also for the economy. The group argued that, were mortgage debt forgiveness not introduced - and radical reform not introduced to our debt and bankruptcy laws - then our financial crisis would only deepen. At the core of their argument was the following assertion: ‘‘As there are three parties to the problem - the banks, the regulator (ie the state) and the individual - these three must also be part of the solution." With the government having insisted on a year’s grace for home repossessions by the banks, we are currently in some sort of unreal financial hiatus. It means that the full dimensions of the crisis to come are still hidden. But late next year, when property and water taxes have been introduced - and when interest rates begin to rise, as they surely must - then the personal debt crisis has the potential to become the most serious crisis in the history of the state.

Ireland resists humiliating bail-out as UK pledges £7bn - Brian Cowen, the Prime Minister, dismissing the term 'bailout' as pejorative, said: "There has been no question of the government ... [being] in a negotiation for a bail-out." Instead Ireland committed itself to working with a European Union-IMF mission on urgent steps to help its stricken banking sector. Financial markets appeared unimpressed by Dublin's decision to reject assistance, with the premium investors charge for holding Irish 10-year bonds rather than German Bunds rising to a near-record 595 basis points. The cost of insuring against default by Ireland jumped, with five-year credit default swaps widening by 25 basis points on the day to 545 bps, while those for Spain and Portugal also rose - a sign of the contagion that EU policymakers fear most. George Osborne, the British Chancellor, has pledged British support of up to £7bn for an EU bail-out of Ireland and its banking sector. The Chancellor arrived in Brussels for a meeting of EU finance ministers aware that exposure of British financial institutions to Irish banks is £140bn.

Ireland plays hard to get - The Irish government refuses to apply for emergency aid, as puts EU puts pressure on Dublin to make an application; informal talks went on all the way through the weekend but the Irish government decided to walk away from a bailout; ECB is also believed to favour an EFSF/IMF programme to bring relief to its own bond buying programme; Irish government says it is funded until the middle of 2011; FT Deutschland says in an editorial that we are seeing the limits of what austerity can do; John McHale argues that an EFSF package would involve as much austerity as a domestic package, but would involve reputational damage; Simon Johnson and Peter Boone argue that Merkel’s crisis resolution regime was an open invitation to speculators; Wolfgang Munchau says the crisis resolution regime will either lead to a fiscal union, or a break-up; Nicolas Sarkozy reappoints Fillon as PM; in Greece, meanwhile, Papandreou talks about a rescheduling of the EU/IMF loan. [more]

Ireland Urged to Take Aid by Officials Amid Debt Crisis - Irish Prime Minister Brian Cowen said he is working with fellow European leaders as his nation’s sovereign debt crisis threatens the stability of European markets.  While reiterating that his debt-strapped country has not sought to tap an EU rescue fund, Cowen told reporters today that “there are issues affecting the wider euro area of which we are a member” and that he and his counterparts were working to “ensure that the bond markets respond positively to the euro.”  Irish bonds rose from a record low today, gaining for the first time in 14 days as traders bet a bailout was near. European governments sought to calm investor concerns, saying they won’t be forced to share the cost of a rescue. Irish Finance Minister Brian Lenihan nevertheless said in an interview with RTE Radio it “makes no sense” to request help as the government is fully funded to mid-2011.

Should Ireland Accept a Bailout? - NYTimes Room for Debate - Prime Minister Brian Cowen of Ireland was still insisting on Wednesday that the country did not need a financial bailout. But a team from the European Union and the International Monetary Fund was preparing to meet with Irish leaders in Dublin on Thursday to discuss the banking crisis there.  The E.U. is concerned about Ireland's long-term finances, and is hoping to stop the contagion of a debt crisis from spreading to Spain and Portugal. Meanwhile, the British government has said it could offer direct financial assistance to Ireland, even though Britain is outside the euro zone.  What choices would Ireland have if it doesn't agree to a bailout? Is there a case to be made that the country should resist a bailout?

BBC - Fear and the euro - Panic is not the right word, but fear lingers in Brussels's corridors and in some capitals.  The fear is that the crisis in the eurozone - far from ebbing as many times predicted - remains acute. You can sense the alarm today's comments by European Council President Herman Van Rompuy. He called it a "survival crisis". He urged: "We must all work together in order to survive with the eurozone, because if we do not survive with the eurozone, we will not survive with the EU." It is, of course, a debatable point. The EU survived before the advent of the single currency.  But this was a threat: that the Irish debt crisis could bring down the whole EU. This stark message was intended to scare states and leaders into coming up with answers.

Supply Side Rabbits - Krugman - Kevin O’Rourke is confused. He points out that optimists about Ireland’s outlook assert two things: 1. Ireland can grow out of its debt by instituting pro-market reforms.2. Ireland is in fundamentally good shape because it has such a flexible, liberalized economy. But if (2) is right, he points out, how much room can there be for (1)? The reason for my confusion is that if we are indeed fully deregulated and fully liberalised, it is hard to see where the Irish supply side rabbits are going to come from. So: are you optimistic because Ireland is a lean green market machine, which will adjust flexibly and push our (practically vertical) aggregate supply curve out to the right at a rate of knots? Or, on the contrary, are you optimistic because we are a eurosclerotic mess, whose rigidities imply a fruitful pro-growth structural reform agenda? Silly Kevin. What makes him think logic has anything to do with it?

Ireland leaves door open to bail-out - Ireland's justice minister has refused to rule out the possibility of an EU bail-out for the beleaguered economy as Brussels considers the possibility of a £77 billion rescue package.  EU sources confirmed yesterday that talks between the two sides about a rescue package had continued through the weekend. However Mr Ahern denied the existence of any discussions.  "There are no negotiations going on. If there were, the government would be aware of it, and we are not aware of it," he said. adding that he had spoken to Prime Minister Brian Cowen on Sunday and to Finance Minister Brian Lenihan.

Ministers claim fiscal plan and budget negate need for bailout - GOVERNMENT MINISTERS remain adamant that the four-year fiscal plan and the budget on December 7th will avert the prospect of Ireland having to avail of any EU/International Monetary Fund bailout. They have dismissed speculation in the international media about an imminent EU bailout, with one Minister describing the reports as “fiction”. The reaction of bond markets today will be crucial to the Irish position in advance of the meeting of euro zone finance ministers in Brussels tomorrow and Wednesday. Minister for Justice Dermot Ahern also said there was no foundation to media reports that the country is close to availing of the bailout. “It is fiction ..." "We have not applied. There are no negotiations going on. If there were, Government would be aware of it, and we are not aware of it,” said Mr Ahern

Ireland’s Resistance to EU Bailout May Rest on Crumbling Banks – Ireland’s sovereignty depends on the nation’s biggest banks as the European Union presses the government to accept a bailout.  While the government says it won’t need to raise money in the bond market until the middle of 2011, Irish lenders are depleting the collateral they need to get the emergency funding from the European Central Bank on which they depend. Corporate clients have pulled deposits from lenders including the country’s biggest, Bank of Ireland Plc.  With its lenders frozen out of Europe’s money markets and with their deposits shrinking, the Irish government may be forced to seek the bailout ministers have so far resisted. European Central Bank Vice President Vitor Constancio said today Ireland could use the European Financial Stability Facility to help prop up its banking system to restore investor confidence.

Ireland rides to defence of low tax regime - Ireland last night insisted it would resist any pressure to ditch its ultra-low corporate tax rate – which has persuaded major companies such as media group WWP to move their headquarters to Dublin – in return for an €80bn (£68bn) bailout by its European partners. In a speech in London, the Irish trade minister Batt O'Keeffe insisted a rise in the 12.5% corporation tax rate – the lowest of the major eurozone countries – was not on the agenda for the debt-laden country. While Ireland is fiercely fending off any rescue package, there is speculation that a rise in corporation tax could be demanded by countries such as Germany which fear they are losing business because of the country's low tax regime. Germany's equivalent rate is 29.41%, according to data compiled by KPMG. Elmar Brok, German Christian Democrat (CDU) member of the European parliament, told Reuters: "Ireland has two options to consolidate its budget – cut expenses even further or increase taxes like the corporate tax rate."

ECB Sees EU Aid for Irish Banks, Fueling Bailout Bets – Ireland could use European Union aid to bail out cash-strapped banks, the European Central Bank said, stepping up pressure on the Irish government to give up its resistance to a rescue package designed to prevent the debt crisis from engulfing the euro economy.  As Ireland insisted it doesn’t need handouts for its public budget, ECB Vice President Vitor Constancio said it would be able to use the emergency fund set up to support euro-area governments to recapitalize banks reeling from the bursting of the real-estate bubble.  “The problems of the Irish banking sector are not only problems of liquidity but also in some cases problems of capital,” Constancio said in Vienna today. While the EU rescue fund can’t lend directly to banks, the Irish government can “use the money for that purpose,” he said.

Ireland crisis could cause EU collapse, warns president - The president of the European Union has warned that the EU could collapse unless the debt crisis that is gripping the region is resolved. Herman Van Rompuy, president of the European Council, raised the stakes ahead of this evening's showdown talks between finance ministers in Brussels. With Ireland and Portugal both on the brink of seeking a bailout, Van Rompuy warned that there is a serious risk of contagion spreading across the continent. "We're in a survival crisis," Van Rompuy said in a speech in Brussels. "We all have to work together in order to survive with the eurozone, because if we don't survive with the eurozone we will not survive with the European Union." Van Rompuy's speech added to the pressure on the Irish government, which was continuing to resist international pressure to accept a bailout this morning.

ECB into the breach? - Various Eurosceptics are piping up this morning, and no wonder. Unfortunately some of the interesting stuff is behind the FT’s magnificently unstable subscription firewall, I might post again if the FT techies manage to tame it, but for the moment it is going to have to be a diet of Ambrose and Johnson&Boone, amplifying my post earlier today. The money quote from Johnson and Boone is this one, on the little problem with promising a bailout plan for 2013 when the bailout needs to happen in 2010: “Given the vulnerability of so many eurozone countries, it appears that Merkel does not understand the immediate implications of her plan. The Germans and other Europeans insist that they will provide new official financing to insolvent countries, thus keeping current bondholders whole, while simultaneously creating a new regime after 2013 under which all this debt could be easily restructured. But, as European Central Bank President Jean-Claude Trichet likes to point out, market participants are good at thinking backwards: if they can see where a Ponzi-type scheme ends, everything unravels.”

…or maybe the ECB isn’t the point at all  - Following up on my last, John Dizard takes a different line from Ambrose. What Dizard wants is a sovereign default system, and he wants it now, not in 2013. The starting point is last week’s Eurobungle: Last week’s crisis in “peripheral” euro area bond markets was the consequence of a series of own goals by the Brussels team. By attempting to postpone critical decisions on bank insolvency resolution, and on euro-area sovereign default procedures, the political leaders and their minions have brought one on. And Dizard thinks a fix is really urgent. So far, I cleave more to the rolling minicrisis view of European prospects, so I’d love to know more about the background to this forecast, implying a credit crunch that will take in more than Portugal: Within a month or so, the seize-up in the peripheral bond markets will lead to serious and immediate operating issues for the financial system. So the political leadership has no choice but to clarify how Europe will deal with sovereign default, and banking system insolvency.

Ireland bailout: UK taxpayers could face £7bn bill - Scale of eurozone crisis underlined as emergency bailout of Ireland appears increasingly likely and EU statistics body says Greek budget deficit was even larger than thought. An emergency bailout of Ireland, which is looking increasingly likely today, could cost Britain billions of pounds. Although Ireland continues to deny that it has asked for help, many analysts believe the country will have to tap a €60bn (£50bn) rescue fund set up by the European Union in May. Under the terms of a deal agreed by Alistair Darling, the UK is liable for 13.6% of this fund. This means taxpayers could contribute as much as €8bn, depending on how the rescue package was structured. The UK government declined to say how much an Irish rescue package could cost British taxpayers. "There has been no application [from the Irish government for emergency funding] and we won't speculate on it," said a spokesman for the Treasury this morning.

Euro Dominos Will Fall Until Currency Is Split - Who’s next? First Greece went bust. Now Ireland is on the brink of a bailout from the European Union and the International Monetary Fund.  When it happens, we’ll hear plenty of soothing words about how contagion has been stopped, the euro area has been put on a firmer footing, and the single currency saved. There will be a lot of grand rhetoric about the importance of the European project. Stern condemnations of the speculators will ring out across the continent.  Don’t listen to a word of it. The euro has turned into a bankruptcy machine. Once the markets have finished with Ireland, they will simply move on to Portugal and Spain, and after that to Italy and France.  There is a domino effect at work, and, with each rescue, the fault lines within the euro grow wider and wider. This process isn’t going to stop until the euro is taken apart.

The horrible truth starts to dawn on Europe’s leaders - The entire European Project is now at risk of disintegration, with strategic and economic consequences that are very hard to predict. In a speech this morning, EU President Herman Van Rompuy warned that if Europe’s leaders mishandle the current crisis and allow the eurozone to break up, they will destroy the European Union itself. “We’re in a survival crisis. We all have to work together in order to survive with the euro zone, because if we don’t survive with the euro zone we will not survive with the European Union,” he said. Well, well. This theme is all too familiar to readers of The Daily Telegraph, but it comes as something of a shock to hear such a confession after all these years from Europe’s president. He is admitting that the gamble of launching a premature and dysfunctional currency without a central treasury, or debt union, or economic government, to back it up – and before the economies, legal systems, wage bargaining practices, productivity growth, and interest rate sensitivity, of North and South Europe had come anywhere near sustainable convergence – may now backfire horribly.

Ireland: How much punishment for British and international banks? - Are haircuts in or out for Ireland? Will the putative experts at the IMF, European Commission and European Central Bank, who will spend the next few days examining Ireland’s intertwined banking and fiscal challenges, recommend that there should be losses imposed on the providers of tens of billions of euros of wholesale debt to banks. It’s extremely difficult to be sure - which is going to unsettle markets. This is what finance ministers from the eurozone said in a statement last night:“We welcome the measures taken to date by Ireland to deal with issues in its banking sector, via guarantees, recapitalisation and asset segregation. These measures have helped to support the Irish banking sector at a time of great dislocation. However, market conditions have not normalised and pressures remain, giving rise to concerns that further reforms and stabilisation measures may be appropriate.” Or to put it another way, the Irish strategy of using taxpayers money to strengthen the balance sheets of banks - by injecting new capital into them and dumping their worst loans into NAMA’s toxic bin - has only been partly successful. Other measures are needed.

That EFSF sense of urgency - Ireland may scream to the rafters that it’s funded until the second quarter of 2011 — but there’s a reason some eurozone leaders are pressing for it to tap Europe’s SPV. The European Financial Stability Facility, created in the spring to assuage contagion from the Greek crisis, is not prefunded. That is, the money isn’t sitting in a pool somewhere, just waiting to be used. It needs to be raised — and as we’ve mentioned before — raising it in the midst of an EMU crisis could be trickier than many expect.

The implausible in pursuit of the indefensible - When Ireland explicitly guaranteed all the liabilities of the Irish banking system just over two years ago, the finance minister, Brian Lenihan, said it was "the cheapest bank bailout in the world."  It is turning out to be very expensive, not just for Ireland but for the whole of the eurozone. The European ministers meeting in Brussels today know that they have also made promises to the markets that they will find hard to keep. Let me explain. Ever since this crisis began, the response by European policy makers has been centred around a promise that bondholders would be compensated in full for their investments - and a hope that this proposition would never seriously be tested.  Now that promise is being tested, in Ireland, which probably has the greatest mountain of problematic bank debt, relative to its economy, of any eurozone economy.

The Irish mess (VII), and a spot of Portugal - As far too diffidently implied in this post on Friday, looking out for an Irish bailout over the weekend turned out to be a mug’s game. There was a splendid swirl of authoritative reports about bailout talks and rebuttals by various Irish spokesmen, sampled here. But here we are: no bailout, with the Irish government still staggering gamely on with its tiny majority, planning to present its latest slash ‘n burn budget for a vote, most likely on 7th December. Apocalypse postponed for just a little longer. The market, the blogosphere, Twitter denizens & journalists all seemed to be working with a rerun of the Greek timeline in mind. But the Irish situation isn’t quite the same. What few noticed, amid the changing picture on Friday, is that the Seoul volte-face clarification on bond haircuts actually gave Ireland some (possibly transient) extra negotiating leverage. The Seoul statements fends off a bank run, but puts EU politicians, particularly Angela Merkel, on the hook. But the list of impalees gets longer. The EU is keen for Ireland to take a deal, (or is it the Germans who are keen?), the IMF is saying it’s standing by, though it believes Ireland doesn’t need a bailout just yet, and we are reminded that the ECB is funding Irish banks to the tune of EUR130Bn already.

Forex @ DailyFX - Euro Under Pressure as Ireland Bides Time, Contagion Threatens Rest of Eurozone - A closely-watched meeting of euro-area finance ministers failed to resolve the debt crisis that is sweeping over Ireland. No bailout was announced, not even a clue of what lies ahead. Instead, markets are left to speculate about the future course of events, with potential contagion impacting Portugal and Spain the next big concern. Ahead of the eurogroup meeting, Irish Finance Minister Brian Lenihan remarked that “market developments have not been good to Ireland,” but echoing what Prime Minister Brian Cowen said earlier, he continued, “Ireland is fully funded until the middle of next year.”

Europe Fears That Debt Crisis Is Ready to Spread - European officials, increasingly concerned that the Continent’s debt crisis will spread, are warning that any new rescue plans may need to cover Portugal as well as Ireland to contain the problem they tried to resolve six months ago.  Any such plan would have to be preceded by a formal request for assistance from each country before it would be put in place. And for months now, Ireland has insisted that it has enough funds to keep it going until spring. Portugal says it, too, needs no help and emphasizes that it is in a stronger position than Ireland. Of paramount concern to policy makers in Europe is Spain, which is struggling to close its own deficit of 9 percent of G.D.P. at a time when unemployment is more than 20 percent and the economy is failing to grow.

What a mess: Eurozone split on Ireland - Finland accuses EU of an abuse of the EFSF, saying it can only be triggered by government in funding difficulties (i.e. not by Ireland right now); behind the scenes talks on an Irish aid package continue; Ecofin to press Ireland and Portugal to detail their anti-crisis policies; ECB bond purchases went up to over €1bn last week; Portugal warns of a contagious spread of the crisis; the FT argues in an editorial that the underlying problem in Ireland is the commitment to bondholders; Nouriel Roubini proposes an immediate debt restructuring for Greece and Ireland; FT Alphaville notes that the Irish yield curve is strangely shaped; Papandreou criticises Germany’s crisis resolution plan as the source of the current problems; Greece revises its 2010 projected deficit from 7.8% to 9.4%; France’s debt costs more to insure against default than in Chile and Malaysia; Axel Weber, meanwhile, politely asks the Landesbanken to accept government capital before the expiry of the deadline by the end of the year. [more]

Bailout trio due in Dublin to assess banks - IRELAND moved closer to accepting an EU-IMF bail out last night as a team from the IMF, the ECB and the European Commission arrives in Dublin later this week to assess the condition of the Irish banks.Finance Minister Brian Lenihan said this will be the start of talks with the troika and the Irish Government on the issue. He ruled out that any bailout would mean changing our corporation tax rate and said Irish sovereignty was not an issue. Economics commissioner Olli Rehn said the mission to Dublin will focus on restructuring of the banking sector and so prepare for funding from the EU-IMF if it is deemed necessary.

Banks accused of deceiving Nama - Irish Times - THE BANKS may have tried to cheat the exchequer out of billions of euro in their dealings last year with the National Asset Management Agency (Nama), it was suggested yesterday. Fianna Fáil TD Michael McGrath said there was a need to investigate the fact that “false, misleading information” was provided to the agency in a systematic way. This could have led to a “huge overpayment by the taxpayer” to the banks. He knew this was a serious charge, but “the evidence is overwhelming”. Mr McGrath made his comments during a hearing of the Dáil Public Accounts Committee, which was hearing evidence from senior figures from the agency. Nama chief executive Brendan McDonagh said he did not disagree with the points being made by Mr McGrath.

Ireland debt crisis: experts to be parachuted in to finalise bailout - Financial hit squads from the International Monetary Fund, the European Central Bank and the EU are to be parachuted into Dublin within days to finalise details of a multibillion-euro bailout for the stricken Irish economy. Prospects for an emergency package of help – part bankrolled by Britain – moved a step closer after a day of tense negotiations between finance ministers from the 16-nation eurozone. With Ireland still holding out against a bailout for now, the experts will be sent in a fresh attempt to calm markets after yesterday's volatile trading ahead of the Brussels meeting. George Osborne was travelling to Brussels for a meeting of the wider EU group today amid mounting speculation that the UK would be expected to contribute at least £7bn to any Irish bailout. There were also suggestions that Britain would extend bilateral loans to stabilise Ireland's banking system.

Portugal and Spain urge Ireland to accept EU bailout to avoid contagion - An increasingly isolated Irish government was coming under mounting pressure tonight to seek an EU or International Monetary Fund bailout within 24 hours amid fears that contagion from its crippled banking sector might spread through the weaker eurozone countries. Portugal, Spain, the European central bank and opposition parties urged Brian Cowen's coalition government to remove the threat of a second crisis in six months by putting a firewall between Ireland and its 15 partners in the single currency. With finance ministers from the eurozone due to hold emergency talks tomorrow night, financial markets were expecting Dublin to finalise negotiations with the EU over the terms of a deal to allow Ireland to rescue banks laid low by the collapse of the country's construction boom.

Contagion hits Portugal as Ireland dithers on Rescue - The EU authorities have begun to vent their fury against Ireland over its refusal to accept a financial rescue, fearing that the crisis will engulf Portugal and Spain unless confidence is restored immediately to eurozone bond markets.  Spain's central bank governor, Miguel Angel Ordonez, lashed out at Dublin on Monday, calling on the Irish government to halt the panic and take the "proper decision" of activating the EU-IMF bail-out mechanism.  "The situation in the markets has been very negative due to the lack of a final decision by Ireland. It is up to Ireland to take that decision, and I hope it does," he said.  The outburst reflected suspicion at the European Central Bank that Dublin is holding the eurozone to ransom, allowing the crisis to fester until it extracts a pledge from EU officials that it will not suffer a loss of economic sovereignty or be forced to give up its 12.5pc corporate tax rate under any deal.

Portugal Foreign Minister Warns of Euro Exit - A Portuguese government minister openly speculated over the weekend that his country's economic frailties could lead to its expulsion from the euro zone, underscoring the growing fear in Europe that the continent's debt woes may force leaders to restructure the currency bloc. In an interview with the Portuguese weekly Expresso published Saturday, Foreign Affairs Minister Luis Amado said Portugal faces "a scenario of exit from the euro zone" if it fails to tackle its economic challenges. "There has to be an effort by all political groups, by the institutions, to understand the gravity of the situation we're facing," he said. Portugal is now the front line of the sovereign-debt crisis that already has claimed Greece and threatens Ireland, economists say. If economic weakness is sufficient to push an otherwise crisis-free country to the brink of default and rescue, then larger countries, such as Spain and Italy, could be threatened, analysts say.

Portuguese hint at euro exit as cost of debt soars -  Portugal's foreign minister has warned that the country may be forced to exit the euro currency if its government's austerity measures are not passed by parliament. Luis Amado called for a wide political coalition to confront current economic challenges. "We need to have an agreement to regain the conditions of stability to win the confidence of markets. There has to be an effort by all political groups and by the institutions to understand the gravity of the situation we're facing," he said. Portugal may confront "a scenario of exit from the euro-zone" if it fails to tackle its economic challenges, he said.  Portugal saw a sharp loss of investor confidence in the past few weeks as concerns over fellow eurozone weakling Ireland intensified over the Budget, pushing Portugal's risk premiums to their highest levels since it adopted the euro.

Unemployment hits record high - Portugal’s unemployment rate reached 10.9% in the third quarter of the year, and over 600,000 Portuguese are now unemployed, a record high, according to data released on Wednesday by the National Statistics Agency (INE). The unemployment rate, as measured by INE, grew by 0.3 percentage points over the second quarter of 2010. In the third quarter of 2009, the rate was 9.8%.  Also according to the data, the total number of unemployed in the third quarter of 2010 was 609,400, the highest figure ever registered by INE.

Portugal at risk of needing bailout: finance minister - Portugal is at a high risk of needing a bailout due to the danger of contagion from other debt-hit euro nations, the country's finance minister said in comments carried by the Financial Times Monday. "The risk is high because we are not facing only a national or country problem," the FT website quoted Fernando Teixeira dos Santos as saying in reference to the possibility Lisbon will need international financial aid. "It is the problems of Greece, Portugal and Ireland. This is not a problem of only this country," he added. His comments came after Ireland said it was in talks with "international colleagues" on its budget woes but denied reports that it was seeking EU assistance similar to that received by Greece earlier this year

Negotiations continue - REPORTING from Europe, Charlemagne catches us up on the state of talks with Ireland: The outline of a rescue package for Ireland is emerging from the vortex of the latest euro-zone crisis. As finance ministers of the euro zone prepare to meet in Brussels tonight, the Irish government is starting to make a fine distinction between what needs and does not need to be salvaged: the state of Ireland does not need a bail-out, it says, but the banking sector needs help for restructuring. The European Central Bank, which has been helping to buy up Irish bonds to try to prop up the country’s finances, wants Ireland to tap into tens of billions worth of European funds to stabilise its banking sector and avoid the risk of contagion to other weak euro-zone countries. Portugal is wobbling and Greece is expressing exasperation with Germany. Like many, the Greek prime minister, George Papandreou, blamed Germany for setting off the latest round of panic in the markets by pressing the EU to seek a system of restructuring the debts of countries that struggle to pay them. "This could force economies towards bankruptcy," complained Mr Papandreou.

Ireland Leads Jump in Sovereign Debt Risk, Default Swaps Show (Bloomberg) -- Ireland led an increase in the cost of insuring European government debt as finance ministers stopped short of an immediate bailout package and LCH Clearnet Ltd. raised the margin requirement for Irish bond trading. Credit-default swaps on Ireland jumped 35 basis points to 554.5, according to data provider CMA. Contracts on Greece increased 22 basis points to 950, Portugal rose 7 to 429, Italy was 6 higher at 192 and Spain was up 9.5 at 266. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments increased 2 basis points to 170. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

Ireland to work with EU/IMF mission on crisis steps (Reuters) - Ireland agreed on Wednesday to work with a European Union-IMF mission on urgent steps to shore up its shattered banking sector, a process that could lead to a bailout despite Dublin's deep reluctance. A team from the European Commission, the International Monetary Fund and European Central Bank will travel to Ireland on Thursday to examine what measures may be needed if Dublin decides to seek aid, euro zone finance ministers said. Irish Prime Minister Brian Cowen emphasized that the mission would look at what assistance Ireland might require, again rejecting suggestions his government was discussing a bailout. "What we want to concentrate on now is in a focused way, over coming days, to sit down and see in what way can assistance be provided to ensure that these issues can be dealt with properly and appropriately," he told parliament.

Update on Ireland Bailout Talks - The Guardian is providing updates: Ireland's debt crisis - live coverage From the Financial Times: Dublin in talks to resolve crisis “We are discussing with both the ECB and the IMF and of course the Irish,” Mr [Rehn, the EU’s economic and monetary affairs commissioner] told reporters in Brussels on Tuesday. “The real problems are in the banking sector,” not with the government, “but these are connected”. The WSJ has details of the proposed bailout: U.K. Support Sought for Ireland Bailout A package of aid for Irish banks could be worth €45 billion to €50 billion, while a broader package designed to restore confidence in Ireland's public finances as well could range from €80 billion to €100 billion ... In any deal, the IMF would likely contribute half as much aid as the EU and U.K. combined. And Irish leaders are still saying they have not asked for help, but they are now acknowledging the talks:  “Given the current market conditions, there have been on-going contacts at official level with our international partners,” [Taoiseach Brian Cowen] said. Some reports suggest a tentative deal could be reached very soon (perhaps as early as tomorrow).

You Can Pry our 12.5% Rate from our Cold, Dead Fingers - Irish Economy - Once again, the Government has gone on record that it will not be increasing the corporate tax rate. This firm stance is based on the idea that without our attractive tax rate, foreign firms will flee for other locations, increasing the speed of our downward spiral. Nevertheless, there has been little attempt to provide any suggestion as to how much such a move would hurt tax revenues or employment, or even whether it is a foregone conclusion that a tax increase would lower FDI at all. The first thing required to address the issue is to estimate how much FDI will respond to a corporate tax rate increase. As with everything else in economics, the answer is it depends (although one can reasonably rule out an increase). As summarized by a 2008 OECD report, on average, studies find that a 1 percentage point increase in the effective corporate tax rate leads to a 3.7% decline in FDI.

Ireland’s Cowen: No application for aid - Addressing parliament in Dublin, Brian Cowen said rising borrowing costs were a “concern,” but noted that Ireland is projected to have enough cash on hand to meet its funding needs through the middle of next year. It’s appropriate for Finance Minister Brian Lenihan to discuss initiatives to address high borrowing costs in the euro zone with fellow European finance ministers, Cowen said. The Wall Street Journal reported that European officials were working on an aid package that could include 80 billion to 100 billion euros ($108 billion to $136 billion) in credit to shore up confidence in the nation’s public finances, as well as a package of aid for Irish banks worth €45 billion to €50 billion. A meeting of euro-zone finance ministers was under way in Brussels. Finance ministers from all 27 European Union nations are set to meet Wednesday.

Report: European Crisis team heads to Ireland - The Financial Times is reporting that a Debt crisis team heads for Dublin. This team includes IMF, European Central Bank, and European Commission officials - personnel from the same agencies who visited Greece right before that bailout. Although this is just a "discussion", the Financial Times suggests this is sign "a bailout for the country’s ailing banks is imminent". And from the WSJ: Banks' Exposure Stirs EU Contagion Worries  All told, European banks were sitting on more than $650 billion of exposure to Ireland as of March 31, according to the Bank for International Settlements. A bailout of the Irish banks is a bailout of European banks (especially UK and German banks).

Ireland: Debt Crisis team arrives Thursday - A few details from the Financial Times: Dublin feels pressure on rescue package

  • Irish bank customers have withdrawn an estimated 11% of deposits over just a few weeks.

  • The Irish banks are now relying heavily on the ECB for liquidity.

  • The "rescue team" (IMF, European Central Bank, and European Commission officials) arrive on Thursday.

  • LCH.Clearnet (large clearing house) today doubled the margin requirements for Irish sovereign debt.
    Also from the WSJ: Ireland Braces for Bank Exam

Irish Eyes - The latest on Ireland: Senior European officials laid the groundwork for a bailout of Ireland that could reach €100 billion ($136 billion), saying experts would travel this week to Dublin to examine the country's finances amid alarm about the dire straits of the Irish banking system. I suppose this statistic is going to be splashed everywhere before long, but this is roughly 60% of Ireland's GDP. It would be about equivalent to the United States getting a bailout of $9 trillion. Just so you know.

Ireland Crisis Could Cause EU Collapse, Warns President - The president of the European Union has warned that the EU could collapse unless the debt crisis that is gripping the region is resolved. Herman Van Rompuy, president of the European Council, raised the stakes ahead of this evening's showdown talks between finance ministers in Brussels. With Ireland and Portugal both on the brink of seeking a bailout, Van Rompuy warned that there is a serious risk of contagion spreading across the continent. "We're in a survival crisis," Van Rompuy said in a speech in Brussels. "We all have to work together in order to survive with the eurozone, because if we don't survive with the eurozone we will not survive with the European Union."

Economic crash to drive 100,000 out of Ireland - With the unemployment rate still above 13 per cent and remaining high, many with a bankable trade are now considering taking the drastic option of leaving Ireland in search of work.  The government expects as many as 100,000 people to leave over the next four years. In most cases, it is a decision taken with the utmost reluctance. Mr Lynch said he would be leaving his wife and six-month-old son behind initially while he secured a job. A new wave of emigration would be one of the most painful symptoms of Ireland's financial crisis, which continued to be the subject of a fraught political stand-off yesterday. Brian Cowen, the under-siege Irish Prime Minister, again emphasised his government was not in need of a European bailout. However, finance minister, Brian Lenihan, conceded the country's banks needed help. A mission of EU and International Monetary Fund officials will visit Ireland today, in the latest attempt to resolve a debt crisis which some fear is putting the nation's European partners at risk.

A bank run in Ireland - We are on the brink again; the Irish banking sector is on the verge of total collapse, unless it can secure new funding, as customers are pulling out; an Irish bank default would almost certainly trigger a contagious banking crisis across Europe; the Irish central bank has provided extra funding, outside the ECB’s operations, to keep the system afloat; Lenihan says no funding crisis, Cowen still plays hard to get; there are signs that the crisis is already spilling over to Portugal, which is experience acute funding difficulties in the debt markets; the FT says in a trenchant editorial that the EU has mismanaged this crisis, and there was no little hope that contagion could be contained; Reuters Breakingviews has calculated that Irish banks need about €100bn in funding, about half of Ireland’s GDP; Kevin O’Rourke finds that the Irish growth forecasts are based on a contradictory premise – that a structurally reformed country could benefit from structural reforms; Sarkozy scraps wealth tax; Dominique Srauuss-Kahn says Germany’s economic miracle likely to peter out very soon; the German Bundestag, meanwhile, cancelled Germany’s funding of Bruegel, the European think tank. [more]

Ireland Brinksmanship with the EU: Slow Motion Bank Run May Be Giving Government Leverage - Yves Smith - In negotiations, understanding where you have leverage relative to your counterpart is key. Ireland appears to be engaged in a quiet staredown with the EU, evidently with the objective of securing a rescue of its banks rather than its government.  In case you managed to miss it, Ireland is in the midst of a long running budgetary crisis that has reached an acute phase. The implosion of a real estate bubble has left the country with banks up to the gills in bad loans. The government set up a “bad bank” entity, and the commitments per taxpayer, which were over 25,000 euros per taxpayer as of July, just keep rising. Deep budget cuts to meet eurozone fiscal deficit targets have put the economy in freefall, with nominal GDP falling nearly 20% and unemployment at 13%.  The immediate trigger for panic over Ireland was Merkel’s announcement that bondholders would have to take their lumps in any Eurobailouts. That immediately put Irish and other periphery country bonds under pressure. And although Merkel was beaten a bit back into line (all bondholders will supposedly be protected through 2013), the damage was done.

This Is The Way The Euro Ends - Krugman - Not with a whimper but with a bank run. OK, I’m overstating the case — we’re some ways from a euro exit for Greece, let alone Ireland. But we are drifting closer to the kind of scenario I wrote about back in April. I used to be a full believer in the Eichengreen theory of euro irreversibility, which said that no nation could even discuss leaving the euro, because it would lead to the mother of all bank runs. But as I wrote in April, I’m reconsidering, for a simple reason: the Eichengreen argument is a reason not to plan on leaving the euro — but what if the bank runs and financial crisis happen anyway? In that case the marginal cost of leaving falls dramatically, and in fact the decision may effectively be taken out of policymakers’ hands.  So what the FT is reporting is that there’s a sort of slow-motion run on Irish banks in progress, with corporate depositors gradually reducing their accounts. Not crisis-level yet. But the ghost of a possible ejection from the euro is starting to become visible.

Geithner says Confident Euro can Survive — US Treasury Secretary Timothy Geithner on Tuesday said he is confident Europe has the tools to tackle a deepening crisis that has called into question the future of the euro. "I think it is completely within Europe's choice to manage (the crisis)" Geithner said at a forum in Washington.  "Europe did put in place in the summer -- it took a while to do it, but they did put in place in the summer -- a very strong set of financial instruments to help those countries manage through the very difficult challenges they have," he said.Eurozone governments are staging crunch talks on a debt crisis threatening their future cohesion, with the markets having already pounced on Greece, Ireland and Portugal. The three countries are only the weakest links in a chain of debt throughout the 16 nations that share the euro currency, with almost every European Union member nation bursting at its fiscal seams.

Irish Crisis, Contagion Fears Loom over EU Meeting - Europe's debt crisis hit a critical juncture Tuesday, as finance ministers tried to keep Ireland's market turmoil from triggering a domino effect that could topple other vulnerable nations like Portugal and rock the region's currency union and shaky economic recovery. Only months after saving Greece from bankruptcy in May, the 16-country eurozone has been shaken anew by concerns that Ireland will be unable to pay the cost of rescuing its banks, suggesting only another bailout can now soothe investors' panicky nerves. The European Union's top monetary official, Olli Rehn, said the focus was on the banks as the EU works with the European Central Bank, the International Monetary Fund and national governments at a crisis meeting in Brussels. "The (European) Commission, together with the ECB, IMF, and the Irish authorities are working in order to resolve serious problems of the Irish banking sector and I expect that the eurogroup will support this objective,"

The stages of Ireland's grief - They say governments in financial crises go through a process much like the stages of grief. This week Ireland's ministers have been going through them at record speed. On Tuesday morning on the Today programme, the European Affairs minister was still denying that the country had a problem. Then came anger. Now, we have widespread acceptance that a deal will have to be struck. There are some question marks over the timing of a programme for Ireland's banks - and many more about the details. But the fact that there will be one is no longer in doubt. For what it's worth, I'd expect us to have the broad outlines by Monday morning - if not before. (Talking to anyone in Dublin, they tell you these things "always happen on Sundays".)

Noose Closing on Ireland - Yves Smith - We indicated yesterday that the Irish government had been in the process of trying to steer an inevitable rescue operation towards salvaging its bloated, cancerous banking system rather than a government bailout, which would not only further reduce national sovereignty but also saddle Erin with debt that could not be restructured. Stratfor describes how the Irish crisis is indeed a banking crisis: The Irish banking system is in extreme distress with the Irish government fearing that it may need to inject another 20 billion euros ($27 billion) on top of the 60 billion euros it has already used to recapitalize the sector. But unlike the debt situation in Southern Europe — and especially Greece — Ireland’s worst abuses are private in banking, not public in state spending. This is not the (Greek) story of a state that lived on loans to maintain a standard of living it could not afford. Instead, this is the story of an overall well-managed system whose banks are guilty of overexuberance. So where the Greeks begged for a bailout earlier this year and then railed against the budget cuts they are being forced to abide by to maintain the intravenous drip of euros, the Irish are already nearly two years into a self-imposed austerity, all without any serious protests or strikes.. And while odds favor that outcome, there are still some serious points of friction.

BBC News - Irish Republic to get bail-out loan, says central bank - Irish Central Bank governor Patrick Honohan has said he expects the Irish Republic to accept a "very substantial loan" as part of an EU-backed bail-out. Mr Honohan told RTE radio he expected the loan to amount to "tens of billions" of euros.  The final decision will be up to the Irish government, which has yet to comment.  Mr Honohan's comments come as a team of international officials meet in Dublin for further talks on the debt crisis. Representatives from the International Monetary Fund, the European Central Bank and the EU will meet the Irish government, which has denied that it has asked for aid.

Hooray,ECB Saves Eurozone 2nd Time;Allied Irish Bonds Bid at 45% of Face Value, Anglo Irish SubDebt has 99.99% Default Odds;Irish Citizens "Namatized" - Market participants are giddy today on the great news that Ireland will go deeper in debt in a foolish attempt to bail out the German and UK bondholders who were in turn foolish enough to lend ridiculous amounts of money to Irish banks in various real estate schemes. The Irish government was of course foolish enough to guarantee all of this foolishness which means that Irish citizens many of whom were sucked into buying property at foolish prices are now on the hook to bail out the bondholders, rubbing salt into the wounds of Irish taxpayers, not all of whom were foolish enough to freely participate in the general foolishness. Got that? Here is a short video from the Wall Street Journal that explains why the bailout will not work.

The end is near - THE news on the renewed flare-up of the European debt crisis seems to have gotten worse today, but markets are actually playing it cool, as they did on Friday. Greek bond yields are up a bit today on reporting that deficit figures are worse than initially estimated, but the rise is relatively small; markets had a good idea that this was coming. Portuguese leaders are sounding ominous notes: Feeding concerns about the euro, Portugal's foreign minister openly speculated over the weekend that his own country's debt troubles may ultimately trigger its expulsion from the euro zone. Portugal faces "a scenario of exit from the euro-zone" if it fails to tackle its economic challenges, Foreign Affairs Minister Luis Amado told a Portuguese weekly. But yields on Portugal's debts are down today. And the big story on Ireland is the country's refusal to accept European assistance, but Irish bond yields are off sharply today. What's going on? Remember, after all, that this is what the worst case scenario looks like

Transcript: Ireland’s central bank governor confirms IMF loan on its way - The governor of Ireland's central bank Patrick Honohan today confirmed that an International Monetary Fund loan worth "tens of billions" was on its way.  His eight minute interview on RTE's Morning Ireland was the first substantive discussion of how this loan would work and we have the transcript below. As the Irish government continues to deny, Canute-like, that it is getting a bail out from the IMF, Honohan told Rachel English the loan would be big enough to demonstrate Ireland had "sufficient fire power to deal with the concerns of the market". He said it would act as a "buffer" and would be made available to calm the international markets. He was also asked what the interest rate of the loan would be and to respond to a report in today's Financial Times about alleged concern of a deposit levels dwindling in three key Irish banks. Here is a transcript of the interview:

Ireland Seems Nearer $136 Bil Rescue Pact - Signs pointing to a rescue package for Ireland eased, at least for now, the sense of panic in Europe.  Relief from fears of another EU crisis helped send U.S. stocks surging and bonds, a popular safe haven, tumbling. Dublin will soon receive "tens of billions of euros," as part of a loan deal with the European Union and the International Monetary Fund, said Ireland Central Bank Governor Patrick Honohan.

Irish Talks on Aid Plan Intensify as Banks Lose Deposits, Cowen Campaigns-  Irish officials and experts from the European Union and International Monetary Fund are working through the weekend in Dublin, racing to finish an aid agreement amid pressure to act before markets tumble.  Allied Irish Banks Plc, Ireland’s second-biggest bank, emphasized the fragility of the financial system yesterday, reporting a 17 percent decline in deposits this year. IMF Managing Director Dominique Strauss-Kahn said Europe is moving “too slowly” to resolve the sovereign debt crisis that began in Greece.  The deposit outflow at Allied Irish “looks grim,” “It underscores the urgency in the situation and need to reach a resolution. A big package is needed to reassure the markets.”  The aid talks began two days ago after a meeting of EU finance ministers urged Ireland to agree to a package within days. The plan, which will focus on a banking sector reeling from the 2008 property crash, may total as much as 100 billion euros ($136 billion), according to Barclays Capital.

To rebuild an Irish banking system, part two  - We’ve now well and truly progressed to the question not of when but of how much in bailout loans is needed for Ireland, so…From a note on Friday, we’d point out the estimate of Barclays Capital’s Antonio Garcia Pascual and Pietro Ghezzi (emphasis ours):[A] bank restructuring and recapitalization fund of about EUR22-37bn… funds to cover the 2011-13 gross funding needs of the Irish treasury including redemptions, budget deficits, and promissory notes, which amount to EUR63bn (EUR23.5bn in 2011, EUR20.7bn in 2012 and EUR18.9bn in 2013).(As an aside — one point to note about these two analysts’ forecasting abilities, by the way? They saw EU-IMF Irish aid coming way back in September.)The problem with the first figure in particular, though, is that the Irish bailout is now more or less hostage to whatever future losses by banks remain out there.

Poland, Slovakia Need Deficit Reduction Similar to Ireland’s, OECD Says – Poland and Slovakia need to cut their budget deficits by as much as Ireland, which may seek an international bailout, to ensure sustainable debt levels, the Organization for Economic Cooperation and Development said. The OECD put the two eastern European Union members in a group of countries with the second-highest fiscal consolidation needs among its 33 members in a report released today. The report compared so-called underlying primary balance, which exclude debt payments and strip out the effects of recession and one-time items, as a percentage of gross domestic product. “Merely stabilizing debt-to-GDP ratios by 2025 from current positions may require strengthening the underlying primary balance by more than 8 percent of GDP in the United States and Japan, and by 5-6 percentage points in the United Kingdom, Portugal, the Slovak Republic, Poland and Ireland,” the Paris-based OECD said in its semi-annual economic outlook.

Irish Bailout May Unleash Vigilantes on Portugal (Bloomberg) -- A resolution of the Irish debt crisis may shift the burden of speculation to Portugal. While officials such as European Central Bank Vice President Vitor Constancio predict a bailout of Ireland will reduce financial pressures in the euro region, analysts from Citigroup Inc. and Nomura International Plc say any relief would be short-lived as investors turn their focus to the next-weakest peripheral nation. The markets indicate that country is Portugal with 10-year bond yields of 6.88 percent, compared with 8.26 percent in Ireland and 11.62 percent in Greece, which received rescue funds in May from the European Union and International Monetary Fund. Portuguese Finance Minister Fernando Teixeira dos Santos said Nov. 15 that while “there is a risk of contagion,” that doesn’t mean the country will seek financial aid

Portugal braces for 'biggest strike ever' - The industrial action planned for next Wednesday (24 November) is forecast in many quarters to result in the biggest strike by workers Portugal has witnessed and cost millions in lost revenue. As hundreds of thousands lay down their tools, disruption, especially for commuters, is expected to be extensive, while the state is already predicting the strike will cost the taxpayer tens of millions euros resulting from the loss in productivity. But the leader of the UGT trade union is convinced next week’s action is for the greater good. Expressing the conviction that the 24 November strike will be the “biggest ever”, João Proença also said it was “fair and fundamental in changing government policy”. “Government policies will have a negative impact on employment. We need policies that give preference to increasing employment”,

Who Is Next In The Eurozone? The Eurozone seems to be the place where the party never ends these days, as one skeleton after the other comes rattling out of the closet. Indeed, one has the impression that history is in the making right now; and the only thing we can hope is that it will be for the better. In truth however, I felt a good measure of sympathy for Ireland today as I read the Bloomberg report about how the country is now essentially on its way to accepting a deal that will have aid delivered from the EU, the IMF and, most painfully, from Britain. However, Ireland largely made the mistakes itself  – of which the biggest no doubt was to guarantee its banking system and essentially gamble that a) the economy could swallow the liabilities of its broken banks (which with a deficit of 32% of GDP in 2010 it obviously can’t) and b) that help could be found elsewhere.Iza’s report yesterday over at FT Alphaville about just how much European governments have promised during the past 2 years makes an extraordinarily important point and it is well worth reading in its entirety;

Spain to Pay More for Bonds Amid Irish Contagion - Spain’s borrowing costs may rise at tomorrow’s auction of as much as 4 billion euros ($5.4 billion) of bonds as the European Union’s squabbling with Ireland over emergency aid threatened to infect neighboring countries.  The extra yield investors demand to hold Spanish 10-year bonds over German bunds of similar maturity rose 3 basis points to 201.4, up 29 basis points from Sept. 16 when Spain last sold debt maturing in 2010 and 2041. Spain priced 3.7 billion euros of 12-month bills yesterday to yield 2.363 percent, compared with 1.842 percent a month earlier.  European Finance Ministers met in Brussels yesterday to begin work on a financial package for Ireland’s debt-laden banks that the government has been reluctant to accept. Yield premiums in Ireland and Portugal rose to euro-era records last week as Germany pressured Irish Prime Minister Brian Cowen to accept funds in a bid to calm markets as the EU prepares to turn the 750 billion euro-financial lifeline enacted after Greece’s near default in May into a permanent bailout mechanism.

Spain's Too Big to Fail, But is It Too Big to Bail? - Here's something to tide you over while we wait for the details of the impending EU-IMF bailout of Ireland. Dear readers, I point you in the direction of a series of videos the WSJ's Andy Jordan filmed on site in each of the embattled PIIGS countries--Portugal, Ireland, Italy, and Spain. (To rub it in perhaps, he even made a segment on the German paymasters.) Though Italy is thankfully a longer shot at the moment for feeding at the trough, prospects for Spain are troubling indeed. With unemployment hovering at the 20% mark due to a system that handicaps younger workers' ability to find employment (ditto for many other European countries), things aren't looking up on that front. If rethinking the employment and public benefits structure are crucial to Europe's fate going forward, then Spain is certainly in the frontline.

FT Alphaville » Thou shalt not bluff - As all eyes focus on what should be done about the Irish banking crisis, perhaps it’s time for the European Union, IMF and other related parties to take a closer look at some of the factors that may have exacerbated the problem. After all, it’s now becoming abundantly clear that the dishing out of an elaborate 100 per cent deposit guarantee back in September 2008 was largely nothing more than a massive bluff designed to steal attract deposit flows from neighbouring states to for the purpose of propping up Irish banks.Furthermore, as we’ve mentioned already, the EFSF is already turning out to resemble something like Paulson’s bazooka in its own right too. Which means  — with everything becoming a high-stakes game of ‘Call my bluff‘ — it could be time to restrict the ability of sovereigns  generally to randomly guarantee things they clearly can’t afford to guarantee in the first place.

EU Could Swap Sovereign Debts, Ireland Needs Restructuring, Roubini Writes - The European Union should study the examples of countries including Pakistan, Ukraine and Uruguay that exchanged sovereign debt for other assets as the EU faces the danger that putting private bank losses on to public balance sheets could leave its governments insolvent, Nouriel Roubini writes in the Financial Times.  “There will soon need to be a public debt restructuring” in Ireland, and the key question for EU policymakers is how the restructuring should be conducted. A similar debate occurred in 2001 and 2002 when the International Monetary Fund proposed a sovereign debt restructuring mechanism in insolvent emerging markets to determine which debt holders would be repaid and how much, Roubini writes.

Sarkozy Under Pressure as France Feels Irish Heat - French President Nicolas Sarkozy, fresh from skirmishes over plans to raise the retirement age, is now under pressure to reduce the government deficit as investors punish nations such as Ireland for having too much debt.  The extra yield investors demand to hold 10-year French government bonds instead of German securities of similar maturity reached 50 basis points last week, the most since June. France’s debt costs more to insure against default than in Chile and Malaysia, both of which have lower credit ratings. Its debt will equal about 84 percent of gross domestic product by the end of the year, more than the Netherlands and Germany, according to estimates from the European Commission.

PIGging Out in Portugal, Ireland, and Greece - Let's just say this ain't hog heaven. The Eurozone is again in one of its now-habitual periods of convulsion when peripheral member states display revulsion towards each other and the markets, too. The latest fashion is to blame common EU membership for contagion-like effects evident in the market for these countries' sovereign debt issues. Let's catalogue this tale of ill-advised and very public PIGging out in the appropriate acronymological order. (Merriam & Webster, I just devised the term "acronymological" by the way.) First, Portugal claims it does not have to return to the capital markets in the immediate future to fund its budget deficit. However, there are noises emanating from it and the others that indicate discontent over Germany showing who's boss around the EU (as if we didn't know already). Portugal's beef [pork?] with Germany revolves around the revocation of the European Financial and Stability Fund's (EFSF) guarantees against giving private creditors a haircut or loss on face value by 2013.

Euroconfusion - Most of the discussion I’ve seen of the financial crisis as it affects the eurozone seems to me both confused and confusing. A country outside the eurozone and without the “exorbitant privilege” of being able to sell lots of debt denominated in home currency has three options when it runs into debt trouble: default, depreciation and dependency. Default is the straightforward solution, but it involves a big loss of face, and unpredictable long-term costs. Depreciation doesn’t directly improve the debt position, since debts are in foreign currency, but by making exports cheaper and imports dearer it helps a country to trade its way out of difficulty, without the need for a reduction in domestic prices and wages. Finally, there’s the option of dependency on an outside rescuer, normally the IMF. A eurozone country doesn’t have the option of depreciation. In return, however, it has two dependency options, calling on either the IMF, or the European Financial Stability Fund. Since the EU would like to keep the IMF out, a distressed debtor can expect slightly better terms from the EFSF.

European anger finds a new target - LEADERS around Europe have had enough of the reckless and irresponsible behaviour of one of its member states, which has once again led the euro zone to the brink of crisis. Europeans are increasingly giving voice to anger at...Germany: [A]s bond markets have reacted and plummeted in the weeks since...resentment has begun to boil over, with increasing accusations that Ms Merkel has put many of her fellow eurozone leaders in untenable positions in order to reinforce her own standing with German taxpayers. “They’re unprintable at times,” said Daniel Gros, director of the Brussels-based Centre for European Policy Studies, of the angry remarks he has heard aimed towards Berlin...There are a lot of things going on here, not least that the German desire to impose German thrift and hard money on the rest of Europe has made for a more painful recession across much of Europe than needed to be the case. But the frustration with Germany's specific approach to the debt crisis is very understandable.

Eurozone returns to the edge of the cliff, as Merkel comes under attack - Ireland continues to refuse to take money, as Ecofin decided to send in a delegation of the ECB/IMF/Commission for further talks; there is a huge backlash at Merkel, whose handling of the bail-in mechanism is now widely consider the trigger for this latest crisis; stock markets and euro plunge, as investors are becoming convinced that the eurozone is not getting on top of this crisis; Herman van Rompuy says the survival of the eurozone and the EU are now at stake; Austria blocks Greek aid on the grounds that the Greek deficit is higher than envisaged; Olli Rehn criticises the critics, saying there is too much alarmism about the eurozone; Merkel says the real problem is the lack of competitiveness of several eurozone countries; Wolfgang Munchau says the sheer degree of incompetence at the top level of the German government is breathtaking; Charles Grant predicts that Germany will get its way, but not entirely; the new proposed rules, meanwhile, would create a two tier European bond market, and lead to a drastic increase in interest rates. [more]

Bifurcation - The euro has been dogged by logical inconsistencies since it began. The best known is the combination of “no bail-out, no exit and no default”. This particular inconsistency is now in the process of being resolved – through a permanent crisis resolution mechanism that will allow default. But the attempt to resolve one inconsistency has given rise to another: the possibility of default, persistent imbalances and lack of a fiscal union.  The German anti-crisis proposal is all about default, and has large support. Angela Merkel, the German chancellor, says the taxpayer cannot shoulder cross-border transfers to pay for a sovereign default. That is undoubtedly true in a monetary union with the present political and legal set-up. Imagine a situation in which the Bundestag is asked to sanction a multibillion transfer to Ireland or Greece, when Germany is cutting welfare payments to its own citizens. The “no bail-out” clause that underpins the monetary union is more than a legal constraint. In a decentralised monetary union, a system of cross-border transfers is politically out of the question. I would expect that to be true even if it were in Germany’s ultimate interest to make such transfers – for example, to maintain an undervalued real exchange rate to boost exports.

Germany heading back towards record imbalances - This is the most important eurozone news today, much more important, and alarming, than anything that happens in Ireland. The OECD forecasts that Germany’s current account surplus will rise back to 7% of GDP by 2012, close to the 7.6% record in 2007. OECD says return of global imbalances make a stable recovery unlikely; meanwhile in Ireland, the EU/ECB/IMF negotiators arrived and picked a row of the corporate tax rate: Germany and France insist on an increase, Ireland rejects; Honohan says Ireland will take the money in the end, but suggests that it may not be a straight loan, but a contingent facility; developments have calmed the markets a little, as the euro reversed some of the recent losses against the dollar; Samuel Brittan helpfully suggests that Ireland should form a currency union with the UK; after Ireland said it is no Greece, and Portugal said it is no Ireland, the Spanish finance minister said Spain was no Portugal; Fitch puts Irish sovereign bonds on a watch, expressing concern about the post-crisis growth and debt dynamics in the country; Greece implements another austerity budget to cope with the austerity effects of the last budget; Jean Marc Vittori says Europe is losing strength and political resolve with each crisis; Eric Le Boucher, meanwhile, says the lack of a political union is the eurozone’s ultimate weakness, but responsible politics can compensate. [more]

The Debt Problems of the European Periphery - Last week’s renewed anxiety over bond market collapse in Europe’s periphery should come as no surprise.  Greece’s EU/IMF program heaps more public debt onto a nation that is already insolvent, and Ireland is now on the same track. Despite massive fiscal cuts and several years of deep recession Greece and Ireland will accumulate 150% of GNP in debt by 2014.   A new road is necessary: The burden of financial failure should be shared with the culprits and not only born by the victims.  The fundamental flaw in these programs is the morally dubious decision to bail out the bank creditors while foisting the burden of adjustment on taxpayers.  Especially the Irish government has, for no good reason, nationalized the debts of its failing private banks, passing on the burden to its increasingly poor citizens.  On the donor side, German and French taxpayers are angry at the thought of having to pay for the bonanza of Irish banks and their irresponsible creditors. Such lopsided burden-sharing is rightly angering both donors and recipients. 

Greek rescue frays as Irish crisis drags on - The eurozone bail-out for Greece has begun to unravel after Austria suspended aid contributions over failure to comply with the rescue terms, and Germany warned Athens that its patience was running out.  The clash caught markets off-guard and heightened fears that Europe's debt crisis may be escalating, with deep confusion over the Irish crisis as Dublin continues to resist EU pressure to request its own rescue.  Olli Rehn, the EU economics commissioner, said escalating rhetoric in Europe was turning dangerous. "I want to call on every responsible European to resist the centrifugal tendencies and existential alarmism."

Greek debt crisis ‘worse than ever’ – Debt-ridden Greece is even further in the red than most people thought, experts have warned. Its 2009 budget deficit and debt levels were much higher than previously estimated, the European Union statistics agency said, making it unlikely the country will reach targets set out in its bailout agreement.  Greece's 2009 budget deficit reached 15.4pc of gross domestic product, significantly above its previous estimate of 13.6pc, Eurostat said.  Public debt stood at 126.8pc of GDP at the end of last year, higher than that of any other EU state. In April, Eurostat had estimated the figure at 115.1pc of GDP.  The revisions are likely to mean Greece will not achieve its initial target of lowering the deficit to 8.1pc of GDP by the end of this year.

Greek deficit much bigger than estimate - Greece's goal of reducing its gargantuan debt received a fresh blow today when the EU statistics agency announced that the country's 2009 budget deficit was much worse than first thought. Six months after Athens received €110bn (£93bn) in emergency loans from EU nations and the International Monetary Fund to prop up its near-bankrupt economy, Eurostat revealed that Greece's budget deficit reached 15.4% of GDP last year, substantially higher than its previous estimate of 13.6%. In April, Eurostat had estimated the debt-to-GDP ratio would reach 115.1%. The revised data meant that Greece's debt ratio has eclipsed those of every other EU state, officials said. By the end of 2009, its debt is projected to account for 126.8% of GDP. Greece's poor bookkeeping was blamed for the budget black holes

Greece 2009 deficit revised up to 15.4% of GDP-- The European Union statistics agency Eurostat on Monday revised Greece's 2009 fiscal deficit to 15.4% of gross domestic product, up from a previous estimate of 13.6%, and said it was lifting its reservation on Greece's budget data. The agency said Greece's national statistical agency addressed all of the issues flagged by Eurostat over the reliability of its data. Total public debt was estimated at 126.8% of GDP. The Greek finance ministry said it estimates its 2010 deficit at 9.4% of GDP, while the debt level is seen at 144% of GDP. The government said its deficit reduction of six percentage points of GDP was larger than planned and that it will stick to its goal of cutting the deficit to 3% of GDP by 2014

Greek loan repayment extension on the table - Greece's prime minister said in an interview that the possibility of extending repayment of its EU/IMF loan was on the table, but an ECB policymaker said any talk of renegotiation could harm the country's credibility. Greece has cut public wages and pensions and raised taxes to help plug its budget shortfall as part of a 110 billion euro EU/IMF bailout that saved it from bankruptcy in May. But officials say it will miss this year's deficit target because of a revision of 2009 fiscal data and weak revenue growth, and the government has said it is ready to make extra spending cuts if necessary. "The issue of extending the repayment of the support mechanism loan has already been put on the table," Prime Minister George Papandreou said in an interview to be published by the Greek newspaper Proto Thema on Sunday. Analysts have said Greece is likely to need additional help eventually because of a jump in 2014/2015 gross borrowing needs when the 3-year bailout deal expires.

Greece Expects Budget Pressure from EU, IMF - Debt-ridden Greece expects "substantial pressure" from the European Union and the International Monetary Fund this week to adopt further austerity measures, a senior government official said Sunday, amid expectations that the country will miss its deficit targets.The budget gap for 2009 is now expected at about 15.4% to 15.5% of gross domestic product, the official said, while the current year's deficit is expected to be 9.3% to 9.5% of GDP. The 2009 figure is expected to be announced this week. Since May, when Greece narrowly avoided default with the help of a €110 billion (about $151 billion at current rates) bailout backed by the IMF and the EU, the country's Socialist government has implemented a multiyear austerity program of spending cuts and higher taxes. Under the terms of the loan, Greece must cut its budget deficit to 8.1% of gross domestic product this year, from an estimated 13.8% gap in 2009, and to 7.6% of GDP in 2011. However, lagging tax revenue to date has already signaled that Greece would miss this year's deficit target by about €2 billion.

Ifo head says Greece should restructure its debt: paper --Greece should restructure its debt because its interest burden is unsustainable in the long term, the president of Germany's Ifo economic research institute said in a Portuguese newspaper interview on Monday. “Actually I think that a debt restructuring in Greece will be necessary soon,” Ifo President Hans-Werner Sinn told the Portuguese business daily Jornal de Negocios.  Sinn said, however, that Ireland and Portugal were unlikely to need to restructure their debts during the crisis currently hitting the peripheral eurozone countries. “I believe that Portugal and Ireland are in much better shape than Greece,” he said in the interview which was given to Reuters ahead of publication. “They belong in a different category” and are capable of repaying their debts, he said.

Greece's PM says debt restructuring would be 'catastrophe' for Greece, Europe - Greek Prime Minister George Papandreou insists his country won't default on its euro298 billion (US$406 billion) in debt because doing so would be a "catastrophe" for Greece, Europe and the euro.Papandreou said in an interview published Tuesday that a debt restructuring was "out of the question." The Greek leader, in Paris for a meeting of the Socialist International, was quoted in French daily Le Figaro saying that his people have made "sacrifices" to get Greece's national finances in order. On Monday, Greece said this year's deficit was now estimated at 9.4 percent, well above the 8.1 percent level it forecast earlier this year when it received a euro110 billion bailout from European partners and the International Monetary Fund.

All for one, one for all - PETER BOOCKVAR writes: Greek 5 yr CDS is blowing out by about 100 bps to 950-990 bps after Austria threatened to withhold its portion of the Greek bailout funds because they don’t believe Greece has met the conditions for the next round of money. “We are getting indications that the Greeks can’t stick to their plan in a sufficient manner, in particular on the revenue side” said the Austrian finance minister. On the news, yields on 10-year Greek government bonds rose sharply, closing up 1.3%. And yields on 10-year Austrian government debt? They were up 2.1%. Barry Eichengreen seems to have had it right in saying that the decision to join the euro zone was effectively irreversible. The more national governments act like it wasn't, the closer they all get to real trouble.

Austria tells Greece to get stuffed - Europe’s hastily assembled bailout fund already seems to be coming apart at the seams, and that’s before Ireland has even tapped into it. Austria is refusing to contribute to the next tranche of bailout money for Greece, citing the country’s failure to meet conditions. Yesterday it emerged there is serious slippage in Greece’s deficit reduction programme. The way things are going, the facility will fail even before its wider fault lines have been fully exposed. Europe is making things up as it goes along, and a pretty desperate job it is making of it too. The extraordinary thing to outsiders trying to analyse these events is just how poorly prepared Europe was to cope with sovereign debt crises within its midst. Indeed the no bailout clause contained in the Maastricht Treaty seemed to deny the possibility of there ever being one.

European Banks have $650 billion Exposure to Ireland; Germany’s Economy Minister says "EU Cannot Throw Money from Helicopters" - In case you were wondering about why there is intense pressure on Ireland to accept a bailout from the EU and the IMF, look no further than the fact that European banks have $650 billion Exposure to Ireland. Nonetheless, in a clear backhand slap in the face to Ben Bernanke, Germany’s Economy Minister says "the European Union cannot throw money from Helicopters". Let's explore this messy situation with a peek at a couple of articles. The New York Times reports New Push for Ireland to Consent to a Bailout As Ireland tried to fend off pressure to accept a bailout on Tuesday and other European nations raised objections to participating in a rescue plan, Europe again found itself confronting a crisis of confidence in the euro and, ultimately, in its ability to manage its economic problems. Banks' Exposure Stirs EU Contagion Worries All told, European banks were sitting on more than $650 billion of exposure to Ireland as of March 31, according to the Bank for International Settlements.

Ring a Ring o’ Roses - Some geographical and economic clarifications from politicians, officials and commentators:

Who Gains From The Eurozone Fiasco? China - Simon Johnson - Ireland will get a package of support from the EU and the IMF.  Will the money and the accompanying policy changes be enough to stabilize the situation in Ireland or more broadly around Europe?  Does it prevent Ireland from restructuring its debt – or move the Irish (and other parts of the European periphery) further in that direction? This is complicated economic chess within Ireland, across Europe, and at the international level.  In my Bloomberg column this morning, I suggest we look several moves ahead, recognizing the underlying political dynamic: Here is the present problem: It’s not just the Irish elite that is under pressure and struggling to sort out who should be saved. It’s also the European bankers who funded them. Who has the ready money available to recapitalize the International Monetary Fund, if needed?  And it will be needed if Spain comes under serious pressure. Who understands the strategic concept that piles of “reserve currency” can give you great political leverage?  And who is already playing international economic chess at the highest level? China.

Simon Johnson analyzes the Dublin gambit - There is little doubt that Ireland, as a one-off situation, is handled easily, albeit at greater expense than anyone would like.  But how does the game tree run?...the Irish leadership has every incentive to delay until other countries can be dragged into turmoil. The crisis will become euro-zone wide, at which point all eyes will turn to some combination of the European Central Bank, the German taxpayer, and the IMF. But the ECB can’t pay and the German taxpayer won’t pay. Does the IMF have the resources to tackle Spain, let alone a bigger country like, say Italy or even France? The U.S. could add sufficient funding to the mix -- this is what it means to be a reserve currency -- but the mood in Washington has shifted against bailouts. As an alternative, Europe could place a call to Beijing to find out if China would like to commit some of its $2.6 trillion in reserves to keep European creditors whole. This would be an enormous opportunity for China to vault to a leading global role. Perhaps it was a good idea to place Min Zhu, a top Bank of China official, in a senior position at the IMF.

Roubini Maps Out Nightmare Scenario of Domino Debt Collapse in Europe -  Roubini believes that further attempts at intervention have only increased the magnitude of the problems with sovereign debt. He says, "Now you have a bunch of super sovereigns— the IMF, the EU, the eurozone—bailing out these sovereigns."  Essentially, the super-sovereigns underwrite sovereign debt—increasing the scale and concentrating the problems.  Roubini characterizes super-sovereign intervention as merely kicking the can down the road.  He says wryly: "There's not going to be anyone coming from Mars or the moon to bail out the IMF or the Eurozone."  Looking beyond France to the future trajectory of the crisis, Roubini says, "The next one in line is going to be Portugal. "Due to the severity of Portuguese debt problems, Portugal is going to lose market access—and that means they are going to require IMF support as well. But the real nightmare domino is Spain. Roubini refers to the Spanish debt problems as "the elephant in the room".  "You can try to ring fence Spain. And you can essentially try to provide financing officially to Ireland, Portugal, and Greece for three years. Leave them out of the market. Maybe restructure their debt down the line."  "But if Spain falls off the cliff, there is not enough official money in this envelope of European resources to bail out Spain. Spain is too big to fail on one side—and also too big to be bailed out."

The IMF Could Not See the Housing Bubble That Wrecked the Economy, Wants Countries to Reduce their Deficits More Quickly -The Washington Post thought it was important to tell readers that the IMF thought that deficit reduction plans in many countries are inadequate because these countries were overly optimistic in their growth projections: "in its recent review, the IMF warned that governments were relying on optimistic assumptions about economic growth and had not yet specified adequate cuts in spending to control their finances." It would have been worth reminding readers that the IMF managed to overlook the housing bubbles in the United States, Spain, Ireland and other countries that led to the current economic crisis. In fact, if IMF economists were held to the same standard of accountability as ordinary workers, the vast majority of them would be among the 15 million unemployed. If readers were aware of the quality of the economic work produced by the IMF they would probably not give its concerns much credence.

VAT increase to wipe £5billion off UK economy - Nearly £5 billion will be wiped off Britain's economic output by the rise in VAT to 20 per cent in January, spending watchdogs forecast today. The increase from 17.5 per cent will reduce gross domestic product by 0.3 per cent, or £4.6 billion, in 2011/12, according to the independent Office for Budget Responsibility. Shops could shed jobs as consumers buy fewer goods and inflation could rise. Labour branded the rise a tax on jobs and some economic experts urged George Osborne to do a U-turn. But the Chancellor is relying on it to raise £13billion a year to tackle the £155 billion budget deficit. The Treasury stressed the impact of the VAT change had been taken into account in the office's June Budget forecasts for economic growth of 2.3 per cent next year.

BOE’s Posen: More QE Would Be Good for U.K. Economy - Adam Posen, a committee member at the Bank of England, Thursday said he still believes a weak U.K. economy would benefit from additional bond purchases, also known as quantitative easing, or QE. Though not his central scenario, Posen said “there’s a risk” of deflation as the U.K. budget cuts start to hit an already soft economy. Posen said his growth and inflation forecasts are “meaningfully below” those of his colleagues at the Bank of England. Minutes of the Bank of England’s latest meeting, which took place earlier this month, Wednesday showed that Posen continued to vote for a 50-billion-pound extension of the BOE’s 200-billion-pound program. But the committee is split, with member Andrew Sentance once again calling for tighter policy by raising the key interest rate a quarter-point to 0.75%. In the U.K., the Bank of England suspended its bond-buying in February, but left the door open to fresh asset purchases if conditions worsen.

Companies Safer Than Sovereigns as Old Order Ends (Bloomberg) -- Europe’s sovereign debt crisis has turned the region’s credit markets upside down, with companies now the safest ever relative to governments. “In the old order, sovereigns were tighter than corporates,” said Greg Venizelos, a credit strategist in London at BNP Paribas SA, the world’s largest bank by assets. “There’s been a repricing and corporates are now better credit quality than sovereigns in the periphery.” Thirty-three companies in an index of credit-default swap prices are less risky than governments, including six each in Spain and Italy. The index of 125 European companies dropped last week to a record 76 basis points lower than an index of sovereigns from Greece to Germany.

World debt comparison: The global debt clock - Our interactive overview of government debt across the planet. The clock is ticking. Every second, it seems, someone in the world takes on more debt. The idea of a debt clock for an individual nation is familiar to anyone who has been to Times Square in New York, where the American public shortfall is revealed. Our clock shows the global figure for all (or almost all) government debts in dollar terms.

JOURNAL: Dmitry Orlov on Collapse -Had the opportunity to attend a presentation by Dmitry Orlov (author of the excellent book Reinventing Collapse) last night, with my friend Steve Wardell.  Dmitry makes a compelling case that the US empire will suffer the same fate as its most hated rival, the Soviet empire, for many of the same reasons.  While Dmitry's top level analysis is great, it's the details (from his experience with how people dealt with the economic/political/social collapse of the Soviet Union) on how Americans will cope with daily life after a collapse, that are the most entertaining/sobering.  In a nutshell, life in a US Banana Republic means:  we're going to grow lots of our own food, make our own energy, and buy most our products at flea markets.Here's his presentation:  The Five Stages of Collapse. Here's a quick summary:

  • Financial Collapse. Already in motion.
  • Commercial Collapse. Just started.
  • Political Collapse (a loss of faith in the political process). First part is over (the recent election in the US). Second part is going to be nasty.
  • Social Collapse. Potentially the end state or stable equilibrium point for most of the world. Everyone against everyone with points awarded by the global marketplace.
  • Cultural Collapse. Full meltdown. Global market breaks.

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