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

Saturday, December 11, 2010

week ending Dec 11

Fed Assets Reach Record $2.39 Trillion on Purchases of Bonds - The Federal Reserve’s balance sheet reached a record $2.39 trillion as the central bank increased its holdings of Treasury securities as part of a bid to boost economic growth.  Treasuries held by the Fed increased by $32.2 billion to $949.6 billion as of Dec. 8, according to a weekly release by the central bank today, while the Fed’s holdings of mortgage- backed securities and federal agency debt securities were unchanged.  The Fed has bought $106.3 billion in Treasuries on its way to purchasing $600 billion of government debt through June 2011. Separately, it has purchased $75.8 billion of Treasuries as part of its plan, announced in August, to reinvest maturing mortgage holdings. The second round of unconventional monetary easing is aimed at spurring economic growth and preventing inflation from falling too low.

US Fed's balance sheet grows to record size - The U.S. Federal Reserve's balance sheet expanded for a sixth straight week, bolstered to a record by purchases of Treasuries, Fed data released on Thursday showed. The balance sheet rose to $2.364 trillion in the week ended Dec. 8 from $2.329 trillion the previous week. The balance sheet exceeded the previous record of $2.333 trillion set in May as the Fed was about to end its initial round of bond purchases that involved $300 billion of Treasuries and $1.425 billion in mortgage-related securities. The Fed's QE2 follows its use of proceeds from maturing mortgage securities in its portfolio to buy Treasuries -- a move that started in August. Since that time, it has purchased about a combined $175 billion in Treasuries. For details see [ID:nN20EDTABL]. The central bank's holdings of U.S. government securities totaled $949.61 billion on Wednesday, up from $917.45 billion last week.  For balance sheet graphic: The Fed's ownership of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and the Government National Mortgage Association (Ginnie Mae) was unchanged from a week ago at $1.023 trillion. The Fed's holdings of debt issued by Fannie, Freddie and the Federal Home Loan Bank system totaled $148.18 billion, unchanged from the prior week.

US Fed Total Discount Window Borrowings Wed $45.94 Billion - The U.S. Federal Reserve's balance sheet continued to grow in the latest week as the central bank kept buying up government bonds in an effort to stimulate economic growth. The Fed's asset holdings in the week ended Dec. 8 rose to $2.385 trillion, from $2.350 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities rose to $949.61 billion on Wednesday from $917.45 billion a week earlier. Thursday's report showed total borrowing from the Fed's discount lending window dipped to $45.94 billion Wednesday from $46.85 billion a week earlier. Borrowing by commercial banks slid to $25 million Wednesday from $40 million a week earlier. Thursday's report also showed U.S. government securities held in custody on behalf of foreign official accounts fell to $3.339 trillion, from $3.345 trillion in the previous week.

FRB: H.3 Release--Aggregate Reserves of Depository Institutions and the Monetary Base...December 9, 2010

US Third-Quarter Federal Reserve Flow of Funds (Text) - Following is the text from the Federal Reserve’s flow of funds report. Flow of Funds Summary Statistics Third Quarter 2010 - Debt of the domestic nonfinancial sectors is estimated to have expanded at a seasonally adjusted annual rate of 4¼ percent in the third quarter of 2010, ½ percentage point less than in the previous quarter. Private debt changed little in the third quarter, while federal government debt continued to grow rapidly.  ... At the end of the third quarter of 2010, the level of domestic nonfinancial debt outstanding was $35.9 trillion; household debt was $13.4 trillion, nonfinancial business debt was $11.0 trillion, and total government debt was $11.5 trillion.

NY Fed to Buy $105 Billion in Treasurys Over Next Month - The Federal Reserve Bank of New York said Friday it will buy $105 billion in Treasury debt over the coming month.The bank said in a press release the purchases will include $75 billion done under the new program to buy $600 billion in longer term government bonds by the middle of next year. The remaining $30 billion will be purchases related to reinvestment of the proceeds of the Fed’s mortgage holdings. The Fed operations will comprise 18 auctions occuring between Dec. 13 and Jan. 11, and will target a range of conventional and inflation indexed government bonds. The next auction schedule is expected to be made public on Jan. 12, 2011.

Treasury Fall Poses Long-Term Dilemma for Fed Balance Sheet - This week’s jump in Treasury yields hints at a day in the distant future when the Federal Reserve could confront real difficulties managing an enlarged balance sheet. At issue is the eventual cost of the Fed’s vast holdings of Treasury securities, which are growing rapidly as it carries out a “quantitative easing” program to add $600 billion in Treasurys to its books and reinvest up to $300 billion of maturing mortgages. While the institution faces no near-term threats to its healthy profitability, if it grows its portfolio while yields on Treasurys keep marching higher — and, by extension, when their prices are going lower — its profits won’t be as juicy.Sorting out what’s driving yields higher isn’t straightforward.  The Fed, whose principal concern right now is the risk of deflation and the weak state of the U.S. jobs market, would likely welcome both of those developments. Nonetheless, there are risks associated with yields rising so early in a quantitative-easing process that has many months to go. A fast market shift could quickly test the tools the Fed has put in place to control the inflation potential of a balance sheet that could reach $3 trillion.

Fed Unlikely to Alter Monetary Policy - The Federal Reserve is likely to leave monetary policy unchanged next week at its final meeting this year as it assesses the impact of its bond-buying program and the unfolding tax debate in Washington. The central bank has been buffeted by criticism of its plan to buy $600 billion of Treasury bonds since unveiling it in early November. Internal and external critics say the program, aimed at keeping long-term interest rates low, could spur inflation or another asset bubble, stirring doubts about the Fed's commitment to the program and likely muting its impact.But top Fed officials haven't expressed any inclination to veer from their course or to alter significantly their message to the public about the plan. Though the prospects of business and worker tax cuts and slightly stronger economic growth might reduce the Fed's incentive to add to the program later, persistently high unemployment and low inflation give the central bank little incentive to pull back now.

Sense and nonsense in the quantitative easing debate - In November, the Fed started its new “quantitative easing programme”. The Fed will buy up to $600 billion in long-term government bonds, putting $600 billion of extra money in the economy. Defenders think this is the key to reducing unemployment and breaking the economy out of its doldrums. Though the Fed's motives were initially unclear, Chairman Ben Bernanke's 5 December interview on CBS 60 minutes made it clear that fighting unemployment is a crucial motivation. Critics think this is the first step to out-of-control inflation, dollar devaluation, and a trade war. This column argues that now is not the time to be buying back long-term debt. Given exceptionally low long-term rates, the US government should be issuing it instead.

Bernanke on CBS’s '60 Minutes' (video) [Excerpts from the interview, Transcript and unaired excerpts.]

Why We Need an Explicit Nominal Target for Monetary Policy - So we learn from the 60 minutes interview with Ben Bernanke that if necessary there will be a QE3: Scott Pelley: Do you anticipate a scenario in which you would commit to more than 600 billion? Ben Bernanke: Oh, it’s certainly possible. And again, it depends on the efficacy of the program. It depends, on inflation. And finally it depends on how the economy looks.This ad-hoc approach is exactly why we need a rules-based approach to QE.  If the Fed had adopted an explicit nominal target--preferably a nominal GDP level target--and forcefully committed to maintain it no matter the cost, it is unlikely the Fed would need to keep announcing new rounds of QE. All the market would need to know is that the Fed is serious about hitting its nominal target.  The rest would take of itself.  The market would do the heavy lifting by automatically increasing nominal expectations to a level consistent with the target. 

Bernanke: Without Fed's actions, unemployment rate might have hit 25% - From the CBS 60 Minutes interview: Fed Chairman Bernanke On The Economy CBS: In the panic of 2008, the Fed put up $3.3 trillion. And just this past week, the Fed revealed who got emergency help. ... it was a historic transfusion of cash in a global system that was bleeding to death. We asked Bernanke what would have happened if the Fed hadn't acted.  Fed Chairman Bernanke: Unemployment would be much, much higher. It might be something like it was in the Depression. Twenty-five percent. We saw what happened when one or two large financial firms came close to failure or to failure. Imagine if ten or 12 or 15 firms had failed, which is where we almost were in the fall of 2008. It would have brought down the entire global financial system and it would have had enormous implications, very long-lasting implications for the global economy, not just the U.S. economy.

Bernanke Says More Fed Easing Possible With Jobless Rate Set to Stay High - Federal Reserve Chairman Ben S. Bernanke said the economy is barely expanding at a sustainable pace and that it’s possible the Fed may expand bond purchases beyond the $600 billion announced last month to spur growth.  “We’re not very far from the level where the economy is not self-sustaining,” Bernanke said in an interview broadcast yesterday by CBS Corp.’s “60 Minutes” program. “It’s very close to the border. It takes about 2.5 percent growth just to keep unemployment stable and that’s about what we’re getting.”  Bernanke, in a rare appearance on a nationally broadcast news program, defended the Fed’s efforts to prop up a recovery so weak that only 39,000 jobs were created in November. The unemployment rate last month rose to 9.8 percent, the highest level since April, the Labor Department said on Dec. 3, three days after the Bernanke interview was taped. Republican lawmakers have said the Fed’s policy of “quantitative easing” may do little to help unemployment and may fuel inflation.

Bernanke: China “Risking Inflation” With Currency Policy - Federal Reserve Chairman Ben Bernanke said China is “risking inflation” in its own economy, while threatening other nations, by not allowing its currency to appreciate. In an interview with CBS’s “60 Minutes” posted on the program’s Web site, Mr. Bernanke said China’s policy was “not even in their own interest” in addition to hurting others. “Keeping the Chinese currency too low is bad for the American economy, because it hurts our trade,” he said. “It’s bad for other emerging market economies. It’s bad for China. Because among other things, it means that China can’t have its own independent monetary policy.” “If they fix their currency to the dollar, then they have to have the same monetary policy, essentially, that the United States has,” Mr. Bernanke said. “Now, the United States needs and has a relatively supportive monetary policy. China is growing very quickly. They’re risking inflation by importing U.S. monetary policy. And that that’s a problem for them.”

Bernanke turns obfuscatory - When Ben Bernanke appeared on “60 Minutes” in March 2009, he was immediately embraced by middle America and overnight became considered the foremost explainer of economic concepts to the nation. This time around, Bernanke’s much more embattled. And his answers are much less clear, much more political, and much more contentious. This is not how impartial technocrats should speak: One myth that’s out there is that what we’re doing is printing money. We’re not printing money. The amount of currency in circulation is not changing. The money supply is not changing in any significant way. Yes, Ben, you are printing money. It’s how you pay for those Treasury bonds you’re buying. Greg Ip says so, and so does Scott Grannis, who helpfully provides this chart from the first round of QE:  Look at the y-axis, and you’ll see that $600 billion is a lot of money, even if it’s less than we saw in QE1. Clearly the monetary base is changing in a significant way.

Caught in a Massive Lie: Daily Show Comments on Bernanke's Lies Regarding "Printing Money" - Lawrence Summers

, chairman of the White House National Economic Council, predicted an increased risk of a “double dip” recession if Congress fails to pass the tax compromise brokered by President Barack Obama and congressional Republicans. The comments from at a briefing for reporters came as the White House spent a third consecutive day defending the deal. Mr. Summers said major economic firms have upgraded their forecasts for the economic outlook because of the agreement’s provisions, notably a temporary reduction in payroll taxes, extended unemployment insurance benefits and a provision that lets businesses take bigger upfront tax breaks on investments. Democrats insisted on all three of these provisions, along with others, in exchange for extending tax cuts for wealthy Americans and exempting many rich families from the estate tax. Mr. Summers warned that failure to pass the package “would materially increase the risk that the economy would stall out, and we would have a double-dip” recession.

What Does “Printing Money” Mean? -When I heard Ben Bernanke on 60 Minutes Sunday, I was initially taken aback when he said that QE2 did not constitute “printing money.” Obviously it’s not physically printing money, but nobody ever uses that phrase literally. If creating bank reserves is not “printing money,” then what is? My first thought, maybe he means that the increase in base money is not expected to lead to an increase in bank deposits. But if that’s the case, why would they be doing it? It’s hard to imagine QE2 being effective without causing bank deposits to increase. Apparently it gets worse. I had forgotten what Bernanke said on his earlier 60 Minutes appearance, but Jon Stewart has a clip where, in reference to QE1, Bernanke essentially acknowledges that the Fed is printing money. Naturally, Jon Stewart was amused by this seeming inconsistency, as was I. But I’ve been thinking about this a bit more, and I no longer think Bernanke’s statements are inconsistent. The problem is that the definition of the word “money” is not as clear cut as it seems. Indeed, one might argue that the whole concept of “money” is no longer useful (at least to economists) in a world where bank reserves pay interest and people pay bills with credit cards and with checks drawn on bond mutual funds.

Asking the Wrong Question - Randall W. Forsyth dreams he is doing the 60 Minutes interview with Ben Bernanke and comes up with this exchange: Bernanke: "What we're doing is lowering interest rates by buying Treasury securities. And by lowering interest rates, we hope to stimulate the economy to grow faster," Forsyth: "So, why are interest rates higher now after QE2? The key 10-year Treasury note yield is up to nearly 3% from 2.50% just after the Federal Open Market Committee announced the policy change in early November. Mortgage interest rates have climbed to three-month highs and applications fell the most this year in the latest week. So, what's the problem? Part of the problem is Bernanke and the Fed itself. They should not be creating the perception that a successful QE2 is one that will keep long-term interest low for a sustained period.  As I have noted several times now, this is terribly wrong.  If QE2 is successful, then we would expect treasury yields to rise!  A successful QE will first raise inflation expectations.  This alone will put upward pressure on nominal yields.   What he should be asking is why inflation expectations have not gone up anymore.  If anything, QE2 is much ado about nothing.  

The government has a printing press to produce U.S. dollars at essentially no cost - What was Bernanke saying here during this now famous speech? First of all, I reckon Bernanke wishes he had never delivered this speech because of how explicit it is about injecting money and depreciating the value of the dollar – and the degree to which today’s monetary policy can be gauged by this speech. This is what is being dubbed "the helicopter speech." This is the one speech Bernanke has given which makes inflation hawks fear quantitative easing. As to the content of the 2002 speech, it is clear that Bernanke was saying that quantitative easing is essentially money printing – i.e. the Fed can "produce as many U.S. dollars as it wishes at essentially no cost". So let’s get that out of the way first, shall we.  You have the Pragmatic Capitalist pointing to Bernanke’s performance last night on 60 Minutes as some sort of proof that QE is not money printing (see here). Yet this is in direct contradiction to Bernanke’s remarks from 2002. What gives? Well, let’s break down the 2002 speech.

Debunking Bernanke’s Myth - Bernanke argues his policies do not amount to printing money, as neither currency in circulation, nor money supply has increased. This analogy is a bit like giving a loaded gun to a kid, then telling your friends that it’s not a deadly weapon because the shots that have been fired haven’t killed anyone. Granted, we are exaggerating here because, after all, it’s only money we are talking about. Yet, printing money may destroy one’s purchasing power and thus one’s life’s savings.  Indeed, the Fed doesn’t only print money, but prints “super money”. The money the Fed prints is more powerful than currency in circulation. It’s money made available to the banking system. When the Fed buys government bonds, or any other security, from a bank, the Fed credit’s the bank’s account at the Federal Reserve, with the amount due. That “money”, however, is merely an entry on the computer system at the Fed – it’s literally created out of thin air. It’s not physically, but electronically printed. A bank with cash in its hands can create new loans; those loans may be deposited elsewhere by the person taking the loan; money created by the Fed out of thin air can have a multiplier effect of 1:100 by the time it makes its way through the economy. The loaded guns handed to the kids are not a water pistols, but automatic weapons.

Does Bernanke Look Like a Man Who is Confident About the State of the Economy and the Prospects for Recovery?- There is a lot to say about Bernanke’s comments on 60 Minutes today. Bernanke’s statement that unemployment is the biggest impediment to economic recovery is ironic, given that Bernanke’s policies have increased unemployment. See this and this. Harry Blodget notes that Bernanke implied that inequality is destroying America. Tyler Durden hones in on Bernanke’s statements that the economic recovery may not be self-sustaining, and that the Fed may buy even more bonds. Daily Bail picks on Bernanke’s claim that the Fed is not printing money. There are certainly a lot of interesting things to say about Bernanke’s words. But I think the real story is how nervous Bernanke appears.Listen to his voice, and watch his lips quaver. Ignore his words … does this look like a man who is confident about the state of the economy and the prospects for recovery? Does this sound like a man who is sure that history will judge his actions kindly?

Money Printing - From november 10th to december 9th, the Fed purchased about $90 bln worth of US Treasuries.

  • Total banks deposits before QE2 = $7.897 bln
  • Total banks deposits after one month of QE2 = $7.896.5 bln

Source: H.4.1 and H.8

There Is No Such Things As Monetary Policy - In my last post, I argued that bank reserves, if they pay interest, are essentially a form of government debt. They’re issued by a different institution and have a different maturity than most government debt, but in their essential nature, they’re just a special case of government debt. I was agnostic about whether bank reserves should be considered “money.” If bank reserves are government debt, then, to be consistent, we should either consider all government debt to be money or consider bank reserves to be something other than money. In particular, Ben Bernanke’s use of the phrase “printing money” is consistent if you consider all government debt to be money, in which case QE2 only exchanges zero-maturity money for high-maturity money whereas QE1 exchanges money for private sector assets. If you take the second option, however, then neither QE1 nor QE2 was “printing money.” I want to explore that second option, which seems pretty reasonable in terms of the way I learned liquidity preference theory in school. In the simplest version of liquidity preference theory, money (1) pays no interest and (2) is controlled by policymakers. Obviously bank reserves no longer meet the first criterion, and bank deposits do not meet the second criterion. I’m increasingly coming to believe that the most reasonable definition of “money” is simply “cash” (negotiable central bank notes plus coins). But the Fed does not attempt to control the supply of cash.

Fed’s Lacker Warns QE2 Carries Risks - The Federal Reserve’s efforts to expand its balance sheet by up to $600 billion in the coming months aren’t without risk, Richmond Federal Reserve President Jeffrey Lacker said Monday. “Further balance-sheet expansion now could require more rapid balance-sheet reduction later on,” “Central banks should be careful not to steer monetary policy off course by targeting the unemployment rate,” he said. Lacker’s warning came a day after Federal Reserve Chairman Ben Bernanke made a rare appearance on CBS’s “60 Minutes” to defend the Fed’s controversial plan to buy additional U.S. government debt.

Fed Won’t Raise for Years Amid Slow Payrolls Growth, Gross Says - Bill Gross, manager of the world’s largest bond fund at Pacific Investment Management Co., said the Federal Reserve is unlikely to raise interest rates for several years with employment growing less than forecast.  “The front part of the curve is the safe part of the curve” with policy makers forced to keep their target rate near zero to sustain growth, Gross, said today in a radio interview on “Bloomberg Surveillance” with Tom Keene. The difference between 2- and 10-year notes is known as the yield curve.  Employers added fewer jobs than forecast in November and the unemployment rate unexpectedly climbed. Payrolls increased 39,000, less than the most pessimistic projection of economists surveyed by Bloomberg News, after a revised 172,000 increase the prior month, Labor Department figures showed today in Washington. The jobless rate rose to 9.8 percent, the highest since April, while hours worked and earnings stagnated.

The Zero Lower Bound Does Not Bind - There are two respects in which standard theory tells us the zero lower bound on nominal interest rates matters. First, when short-term nominal interest rates are zero, conventional open market operations do not matter - there is a liquidity trap. If the central bank swaps zero-interest-rate reserves for zero-interest-rate Treasury bills, this should be irrelevant, in that no prices or quantities change. Further, a liquidity trap is also a feature of regimes like the one we currently have in the United States. When there is positive supply of excess reserves in the financial system, and reserves bear interest, then the interest rate on reserves (IROR) is determining all short-term interest rates. If the central bank swaps reserves for Treasury bills, that will also be irrelevant under current circumstances. Of course (again, under current circumstances), if the central bank lowers the IROR, this will not be irrelevant. The problem for the Fed is that, with the IROR at 0.25%, there is little room to move. As Ben Bernanke stated in his Jackson Hole speech, a decrease of the IROR to zero would have little effect and "could disrupt some key financial markets and institutions." It certainly seems correct to say that lowering the IROR to zero would have little effect, but arguing that this would be disruptive seems wrong.

Why The Low Interest Rates Mattered: Part II - This is the second of two posts detailing why the Fed's low interest rate policies in the early-to-mid 2000s was one of the more important contributors to the credit and housing boom.  In the first post I discussed how the low federal funds rate acted as a catalyst in bringing together the other contributors--financial innovation, weak governance, misaligned incentives, and globalization--to create the perfect economic storm.  Here I want to (1) flesh out why the low federal funds rate mattered from a neutral interest rate perspective and (2) discuss how the Fed's low interest rate policy created a global liquidity glut. (The material in this post is mostly excerpted from a previous one of mine.)

Are central banks up to the stability task? -In response to the financial crisis, the most immediate fundamental reform adopted by several developed countries is to have a “systemic regulator” overseeing the stability of the financial system as a whole. Through data gathering, analysis and ultimately regulation, the systemic regulator is expected is expected to mitigate the risks associated with highly inter-dependent relationships between financial institutions. Many central banks are receiving significant new responsibilities for macroprudential supervision. Changes to the UK regulatory framework in 2010 gave the Bank of England responsibility for microprudential and macroprudential regulation. In the US, the Dodd-Frank Act established the Financial Stability Oversight Council, to be led by Treasury Secretary including the heads of the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency. Several arguments have been put forward for justifying why central banks are receiving a prominent role in macroprudential supervision: financial supervision offer insights into the condition of financial institutions that is essential in the conduct of monetary policy; and central banks are inextricably involved in the financial stability function through their lender-of-last-resort function.

George Selgin on Replacing the Fed - In reply to one of my recent posts defending the Fed's actions over the course of the recent financial crisis, a reader asked me to consider George Selgin's recent talk, A Century of Failure: Why it's Time to Consider Replacing the Fed. I'm a big fan of Selgin's work and this is definitely a video worth watching. The main purpose of this lecture is to encourage people to be less complacent in their views of the modern day institution of central banking. I have some sympathy for many of the points made by Selgin in his lecture. But as it's no fun agreeing with people, I want to offer some criticism.  I am trying to imagine myself as a layperson attending this lecture. What impression would I be left with? The main impression would be that the Fed has failed miserably in its "promise" to maintain full employment, maintain price stability, to stabilize the business cycle, and to prevent banking panics. Comparing pre and post Fed data shows this. The Fed is like the Wizard of Oz. It's time to replace the Fed (he does not have time to say with what).

Sunlight shows cracks in crisis rescue story  - It took two years, a hard-fought lawsuit, and an act of Congress, but finally on Wednesday, the Federal Reserve disclosed the details of its financial crisis lending programmes. The initial reactions were shock at the breadth of lending, particularly to foreign firms. But the details paint a bleaker, earlier, and even more disturbing picture. They also highlight new tensions over high-tech transparency, echoing the controversy of the WikiLeaks cables, unveiled just days earlier. The Fed uploaded to its website several giant spreadsheets giving details on about 21,000 of its recent transactions. This data dump wasn’t willing: it was a response to litigation by Bloomberg, and a provision in the Dodd-Frank financial reform law requiring disclosure. Almost immediately analysts and bloggers sifting through the data honed in on Fed lending to non-US banks, particularly multibillion-dollar loans in October 2008 to Barclays of the UK, UBS of Switzerland, Dexia of Belgium, and several German banks. It didn’t take long to spot the $11.5bn loan to Royal Bank of Scotland, on October 9, 2008. It was the largest to date. Then the loans got even bigger.However, a close examination of the data shows that foreign lending actually began well before the bankruptcy of Lehman Brothers triggered the 2008 crisis. Indeed, as some have argued – and these data confirm – the crisis began a year earlier, when supposedly safe structured investment vehicles began to collapse during 2007.

The con of the century – Federal Reserve made $9 trillion in short-term loans to only 18 financial institutions. Since 2000 the US dollar has fallen by 33 percent. The hidden cost of the bailouts. - The Federal Reserve released a stunning report showing the details of bailouts that occurred during the peak of the credit crisis.  They won’t call it “bailouts” but giving money when others won’t is exactly that.  What the report shows is that the Fed operated as a global pawnshop taking in practically anything the banks had for collateral.  What is even more disturbing is that the Federal Reserve did not enact any punitive charges to these borrowers so you had banks like Goldman Sachs utilizing the crisis to siphon off cheap collateral.  The Fed is quick to point out that “taxpayers were fully protected” but mention little of the destruction they have caused to the US dollar.  This is a hidden cost to Americans and it also didn’t help that they were the fuel that set off the biggest global housing bubble ever witnessed by humanity.  A total of $9 trillion in short-term loans were made to 18 financial institutions.  Still think the banking bailout didn’t happen or cost us nothing?  Let us first look at the explosion of assets on the Fed balance sheet.

Bailout List: Banks, Car Companies, and More - We're tracking where taxpayer money has gone in the ongoing bailout of the financial system. Our database accounts for both the broader $700 billion bill and the separate bailout of Fannie Mae and Freddie Mac. Below is the list of companies to which Treasury has committed money. "Revenue to Government" shows the amount that has been paid to the Treasury Department through interest, dividends, fees or the repurchase of stock warrants. Click on each recipient for more detail on the transactions.

So That’s Where the Money Went - HOW the truth shines through when you shed a little light on a subject.  Such is the message from the massive document drop the Federal Reserve made last week. The Dodd-Frank law forced the Fed to disclose the recipients of $3.3 trillion from emergency lending programs put in place during the crisis days of 2008, so the taxpayers who paid for those rescue efforts now know whom they were helping.  Not that we should expect to receive any thank-you notes from these institutions for rescuing them from themselves.  Still, it’s good to know who got what at the bailout banquet. This helps us understand how expensive it is to live in a nation where big, politically interconnected financial institutions are not allowed to fail — even after they mess up in the most catastrophic of ways.

Barney Frank and the Fed Bailout Fallacy - Mike Stark has posted a provocative on-the-street interview with Barney Frank about the recently released Fed data. Frank offers what is now a standard defense of the Fed's bailout operations: Without them, the economy would have collapsed, so critics should just quit whining. But Frank takes this line a step further, accusing liberal Fed critics of playing into the hands of right-wingers who don't want to extend any economic relief to anybody for anything, ever. It's all hooey. First, the "disappointed" critics line massages away the fact that the Fed failed to disclose an enormous amount of information. We still don't know the credit ratings of collateral accepted at some facilities, and we don't know the trading prices of securities they accepted as collateral at any of the facilities. Without that information, we can't determine whether many of these actions were scandalous. Second, yes-- without major government intervention, the economy would indeed have collapsed.  But just because the Fed had to do something doesn't mean it had to do exactly what it did.

Sanders Has Questions for Bernanke on Emergency Lending - U.S. Sen. Bernie Sanders (I., Vt.) has a slew of new questions for Federal Reserve Chairman Ben Bernanke in the wake of new emergency lending data the central bank released last week. In a letter Monday to Bernanke ( Read the full text of the letter), Sanders is asking about potential conflicts of interest between bank executives and Fed officials, and he wants to know exactly how much money the Fed lent to millionaires and billionaires during the financial crisis. “The emergency response appears to any objective observer to have been a clear case of socialism for the rich, and rugged free market capitalism for everyone else,” Sanders, a Vermont Independent, wrote. “Much of the information that you have provided on your web site raises bigger questions than it answers, and some of the information mandated by the law appears to be missing.” Sanders also wants to know how much money the Fed lent to investment funds located in tax-haven areas such as the Cayman Islands.

Ron Paul Claims Chairmanship of Monetary Policy Subcommittee, Prepared to Subpoena Fed - Proving that on occasion the little guy can indeed win, Ron Paul announced to tonight that he will be named Chairman of the Monetary Policy Subcommittee.  When asked if he would take over chairmanship of the subcommittee, Paul replied "The chairman of the financial services subcommittee, Spencer Bachus, has told me today verbally that I will be the chairman of that subcommittee. He was the one who appointed me as the ranking member and he is sticking to his guns and that I will have responsibility of that committee." When asked about subpoenas and "audit the Fed", Paul went on to say that he can issue subpoenas but would need agreement from the chairman as well as speaker. It's a good clip, also containing a discussion of proposed legislation to redefine the word "journalist" and redefine the word "publisher", both scary thoughts.

More Than Half of Americans Want Fed Reined In or Abolished - The Bloomberg National Poll underlines the extent to which the central bank’s standing has suffered as it has come under fire in Congress, first from Democrats for regulatory lapses before the financial crisis and then from Republicans for failing to revive an economy in which the jobless rate hovers near 10 percent.   Americans across the political spectrum say the Fed shouldn’t retain its current structure of independence. Asked if the central bank should be more accountable to Congress, left independent or abolished entirely, 39 percent said it should be held more accountable and 16 percent that it should be abolished. Only 37 percent favor the status quo. In a previous poll, conducted Oct. 7-10, 35 percent of Americans said the Fed should be radically overhauled, while 8 percent said it should be abolished. Republicans and independents are more likely to support ending the Fed, with 19 percent of independents, 16 percent of Republicans, and 12 percent of Democrats wanting to do away with the central bank. Among those who identify themselves as supporters of the Tea Party movement, which wants to rein in government, 21 percent want to abolish the Fed.

House Republicans Continue Drumbeat Against Fed - Top members of the incoming Republican majority in the U.S. House of Representatives continued to level broadsides against the Federal Reserve Tuesday, questioning its proper role in shaping U.S. economic policy. Reps. Paul Ryan of Wisconsin and Indiana’s Mike Pence both repeated calls for an end to the central bank’s dual mandate to promote both jobs and maintain price stability. Members of Congress aren’t trying to encroach on the Fed’s independence, Pence said, but may have to take legislative action to change the Fed’s responsibilities. “It’s time that the Fed focus solely on price stability and the dollar,” Pence said. He said the Fed’s plan to buy $600 billion in Treasury securities to goose the economy — generally known as “QE2″ — is an example of the central bank overstepping its bounds. “QE2 is an example of what happens when the Fed involves itself too much in macroeconomic meddling,”

Fireworks? Ron Paul Gets Gavel for Fed Panel - Rep. Ron Paul, the Texas Republican who has passionately called for dismantling the Federal Reserve, will be running the panel that oversees the central bank when Republicans take the House majority next year. Mr. Paul has introduced legislation to abolish the Fed, wrote the book, “End the Fed,” and rallied support for eliminating it. Rep. Spencer Bachus (R., Ala.), who will take over the House Financial Services Committee from Rep. Barney Frank (D., Mass.), announced today that Mr. Paul, a libertarian who won a fervent following when he ran for president in 2008, will head the Domestic Monetary Policy Subcommittee.

The Hard (Money) Men - Krugman - There’s a widespread impression that Keynesian fiscal policy has failed. I would argue that this impression is wrong — that the truth is that it was never tried. But surely one clear lesson of recent events is the macroeconomic value of currency flexibility: Poland, Iceland, Sweden have all benefited from currency depreciation during the worst times.  But Republicans want the Fed both to abandon concerns about employment and to focus on keeping the dollar strong: Reps. Paul Ryan of Wisconsin and Indiana’s Mike Pence both repeated calls for an end to the central bank’s dual mandate to promote both jobs and maintain price stability. “It’s time that the Fed focus solely on price stability and the dollar,” Pence said. He said the Fed’s plan to buy $600 billion in Treasury securities to goose the economy — generally known as “QE2″ — is an example of the central bank overstepping its bounds. Oh, and this: “The time has come to have a debate on the role of gold,” Pence said. In other news, Republicans have demanded that doctors consider reintroducing the practice of treating illness by bleeding their patients.

Monetary and fiscal policy, working together -BUTTONWOOD continues to be sceptical of the Fed's new security purchases. And, you won't be surprised to hear, I continue to think his fears are somewhat misplaced. Reduced bond yields are not the Fed's goal. The Fed's goal is to facilitate recovery, so as to move inflation and unemployment closer to the central bank's target levels. Beginning in late August, the Fed signalled its intent to do more to achieve its goal through additional purchases of Treasury securities. And indeed, the Fed's messaging was successful; Treasury yields were lower in early October than they were in late August. But lower yields were the means, not the end. The promise of more Fed action boosted markets and expectations, and before long actual economic data was following suit. But of course, we'd expect an improving outlook for the American economy to lift American government bond yields. Yields were low, aside from Fed activity, because investors were uninterested in putting their money in private projects. That's no longer the case; with rising growth expectations comes rising interest in private investment, which makes for falling bond prices and rising yields. Yields are rising because QE2 has been successful.

Why we have to live with low interest rates - The Bank of England’s monetary policy committee confirmed its 0.5 per cent base rate of interest on Thursday. Thus the UK remains, with the Federal Reserve of the US, the Bank of Japan and even the European Central Bank in the very low interest rate club. Critics argue that this policy – even more than quantitative easing, in which the Federal Reserve is now engaged and the Bank of England may engage again – is unfair and inefficient. Are they right? “Yes and no” is the answer. These are bad policies. But alternatives are worse.  Ros Altmann, a well-known British expert on pensions, has sounded the charge in the UK. She has argued that the policy amounts to an unfair tax on savers in general, and the old in particular, undermines pension plans and distorts the market for long-term government bonds. To this, Andrew Smithers of London-based Smithers & Co adds, in a critique of quantitative easing published in October, that the policy can work only by creating new and perhaps even more damaging asset bubbles in future.  Consider these points, in turn.Yes, lower interest rates transfer incomes from lenders to borrowers: a 1 per cent fall in interest rates shifts close to 1 per cent of GDP from lenders to borrowers.  Is this “unfair”? It is not evident why. In general, lenders would be older, as Ms Altmann notes, and borrowers younger. As Charlie Bean, deputy governor of the Bank of England, has controversially noted, older savers have benefited from huge capital gains on their houses. Indeed, the credit expansion that has left many younger house buyers so heavily indebted fuelled those gains. Nor are savers the only losers in this recession.

QE2 and Rising Yields - More folks are now considering the possibility that the rise in long-term interest rates may be a sign of economic recovery.  For example, see Ryan Avent, Paul Krugman, Cardiff Garcia, and David Andolfotto.  This is a welcome reprieve from the those observers who point to the rising yields as a sign that QE2 is failing.  Recall that the recovery view begins with notion that a successful QE2 will first raise inflation expectations.    The increase in  inflation expectations, however, also implies higher expected nominal spending (i.e. higher future nominal spending means higher future inflation).  Higher expected nominal spending in an economy with sticky prices and excess capacity should in turn lead to increases in expected real economic growth.  Finally, this higher expected real economic growth should increase current real long-term yields.  Though it too soon to know for sure,  the data seem to support the recovery interpretation of the rising nominal yields.  Below is a figure showing the 10-year expected inflation rate and the 10-year real interest rate from the TIPs market.  This figure shows that inflation expectations pick up first and eventually the real interest rate does too: (Click on figure to enlarge.)

The Correlation between Money Base Growth and Inflation - I've been reading through undergraduate textbooks, trying to figure out where the idea that money base expansion must necessarily manifest itself in higher inflation. In Stephen Williamson's macro textbook, he argues that fears of inflation are motivated by the view that eventually, money base expansion will feed into money expansion (box on pp. 432), despite the fact that there is no obvious contemporaneous correlation between the two variables. I would've agreed with that assertion in a world where no interest was paid on reserves (see here for a primer). However, even the M2 to inflation link is less than entirely convincing of a money-inflation link at the short horizon. [1] In any case, here are some scatterplots. First, 3 month changes (in log terms):These are overlapping observations. The observations in the lower left hand side quadrant pertain to period of quantitative easing. The next two graphs eliminate overlapping changes, and then the post-Lehman observations.

Research Highlights Slowest Price Increases Since 1981 - Price increases are decelerating at the greatest pace in nearly 30 years, a paper from the Federal Reserve Bank of San Francisco said. The research, published Monday, offers additional evidence that ebbing levels of already-low inflation are moving ever closer to outright deflation. Last month, the Fed restarted a massive asset-buying program largely because officials feared tepid growth levels wouldn’t bring down high levels of unemployment and push inflation back up toward levels policy makers considered acceptable. The San Francisco Fed paper divided up the economy by sector to reach its conclusion. “Both deflationary and disinflationary pressures are relatively large by historical standards,”“The relatively high level of disinflationary pressure is concentrated in the goods and services that make up core inflation,” the economists wrote. “Over a sixth of consumer spending is on goods and services for which prices are declining, while three-fourths is on goods and services for which inflation has slowed,”

The Breadth of Disinflation - FRBSF Economic Letter - In recent months, inflation as measured by the personal consumption expenditures price index has been trending lower. This slowdown, known as disinflation, has raised concerns that inflation might actually drop below zero and enter a period of deflation. An examination of the distribution of inflation rates across the range of goods and services that compose the index suggests that downward pressures on inflation are relatively high by historical standards.

Bernanke is 100% Sure - I don’t know about you, but I’m not 100% sure about anything. The older I get, the less sure I am about everything. I question things that I was sure were true when I was 25 years old. I’m not sure I’ll wake up in the morning. I’m not sure I’ll survive my commute to work. That is why I was flabbergasted last night as I watched Scott Pelley interview Ben Bernanke on 60 Minutes. As a side note, boy this show has gone downhill. In the old days of real journalism, Mike Wallace would have scorched Ben Bernanke, pointing out his phenomenal ability to be wrong or clueless on every financial issue the country has faced in the last 10 years. Today, Pelley underhands softball questions to Bernanke and never challenges him. It was a pathetic display of journalism. Below is the dialogue that made me almost fall off my chair:

  • Pelley: Can you act quickly enough to prevent inflation from getting out of control?
  • Bernanke: We could raise interest rates in 15 minutes if we have to. So, there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation, at the appropriate time. Now, that time is not now.
  • Pelley: You have what degree of confidence in your ability to control this?
  • Bernanke: One hundred percent.

Fact, Fiction And Finally The Fix - Fiction: In this 60 Minutes clip Bernanke tells Scott Pelley, “The other concern I should mention is that inflation is very, very low…” Fact: There is massive inflation!Hearing The Bernanke fiction that he is 100 percent certain he can stop hyperinflation was as reassuring as hearing his continued commitment to continue Quantitative Easing. I know hyperinflation is ugly. I know stopping this train wreck years ago would have been the correct thing to do. The fact is – we are beyond any fix. Things like cutting government spending will only increase unemployment. We are bankrupt when: What we take in with taxes doesn’t pay the bills. When we borrow and that and the taxes still don’t pay the bills. Now we counterfeit so we don’t default. Game over!

Simple Ways to Forecast Inflation: What Works Best? - There are many ways to forecast the future rate of inflation, ranging from sophisticated statistical models involving hundreds of variables to hunches based on past experience. We generate a number of forecasts using a simple statistical model and an even simpler estimating rule, adding in various measures thought to be helpful in predicting the course of inflation. Then we compare their forecast accuracy. We find that no single specification outperforms all others over all time periods. For example, the median and 16 percent trimmed-mean measures outperform all other specifications during the 1990s, and survey-based inflation expectations seem to do better during volatile periods.

Don't Be Fooled: Inflation Has The Upper Hand - Technically, inflation and deflation are terms that indicate a particular combination of money surplus or deficit (respectively), demand for money (of which velocity is but one measure), and demand for various goods and services (which themselves may be in abundance or short supply). The reason that the inflation vs. deflation debate has been so noisy, yet simultaneously so murky, is that all of these intersecting variables impact the final equation.  It is like the difference between trying to balance a single broomstick on your outstretched hand vs. trying to balance a broomstick with three well-greased hinges at points along its length.  The former is tricky enough to balance; the latter would be impossible for nearly everyone. Some try to reduce the inflation/deflation debate to a single broomstick (“…all we need to do is look at declining credit and see that we are in deflation!”), but in my opinion, that is far too simplistic a view.  We still need to consider base money creation, velocity, and the relative level of faith in current and future monetary policy among the majority of market participants.

Nominal Interest Rates and Inflation Expectations -The first chart plots nominal yields on U.S. Treasuries since September 1 to the present. Seems like there has been a significant increase in nominal yields since QE2 was announced at the November 2-3 FOMC meeting. 5-year notes are up 63bp and 30-year notes are up 30bp.  Now, I know what some of you might be thinking. First, you might be thinking how it is possible that these yields are rising when QE2 was expressly designed to bring these rates down. Well, as Minneapolis Fed president Narayana Kocherlakota explains here, the idea was to lower the long-run real interest rate; i.e., the nominal interest rate net of expected inflation. For this to be true, the nominal rate increases above should be consistent with declines in the real interest rate; and to ascertain this, we need a measure of inflation expectations. The following chart plots a market-based measure of inflation expectations (the so-called, TIPS spreads--cheesy tutorial available here).

Still no strength in this rebound - The new news looks to me like the same old news. The brightest economic indicators continue to come from surveys of managers. The ISM manufacturing PMI held up at 56.6 for November. Any reading above 50 signifies that more responders reported improving conditions than reported deterioration, and a reading this high suggests manufacturing continues to do quite well. ISM nonmanufacturing PMI was also at a very healthy 55. U.S. auto sales for November were up 16.8% from a year ago, sustaining the kinds of year-over-year gains that we saw over the previous two months, but still stuck at a level far below what we used to think of as normal. A more troubling important economic summary is the Chicago Fed National Activity Index. Its 3-month average continued its recent slide, falling to -0.46 for October.

Trade will lift Q4 GDP est, import prices up again - The 1st UoM confidence reading of the month was 74.2, 1.7 pts above expectations, up from 71.6 in Nov and is the best since June when it was at 76. Both Current Conditions and the Economic Outlook moved higher and the Current component in particular rose to the best since Jan ’08. Because the state of the labor market is such a large component of one’s consumer confidence, maybe the jobs picture, while not great, is not as soft as Friday’s Nov figure implied. One year inflation expectations ticked down .1% to 2.9% from last month’s highest # since May. With the average gallon of gasoline less than .03 from $3.00 according to AAA last night, we’ll see how much longer inflation expectations remain tame.The Oct Trade Deficit was $38.7b, well below expectations of $43.8b and the lowest since Jan. Positively, exports led the way as they rose 3.2% while imports fell .5%. A sharp drop in the imports of crude kept a lid on the import component. A 4.2% rise in the export of goods led the rise in the export component while services rose .9%. The much lower than expected trade figure may raise Q4 GDP estimates by .4-.5% of a pt

Greenlight’s Einhorn Says Global Sovereign Debt Crisis Looms - David Einhorn, president of hedge- fund operator Greenlight Capital Inc., said the global economy will face a sovereign debt crisis after governments around the world increased spending to deal with the fallout from the financial crisis.  “We managed to transfer a lot of the problems from the private sector to the public sector,” Einhorn said in an interview with the Charlie Rose television show. “It’s created a very, very large budget deficit. And it’s created a monetary policy that’s extremely easy. It is eventually going to come to a tough spot.”  The Federal Reserve’s decision to buy an additional $600 billion in Treasuries to lower borrowing costs and stimulate the economy will probably result in rising prices of basic goods for consumers and businesses, curtailing economic growth, according to Einhorn.  “It’ll be counterproductive,” Einhorn said. “The goal of quantitative easing right now is to raise the inflation rate. If you do raise the price of clothing, it effectively lowers everybody’s standard of living and gives them less money to buy other things.”

US fiscal health worse than Europe: China cbank adviser - The U.S. dollar will be a safe investment for the next six to 12 months because global markets are focused on the euro zone's troubles but the U.S.'s fiscal health is worse than Europe's, an adviser to the Chinese central bank said on Wednesday.  Li Daokui, an academic member of the central bank's monetary policy committee, said that U.S. bond prices and the dollar would fall when the European economic situation stabilised. "For now, market attention is still on Europe and for the coming 6-12 months, it will not shift to the United States," Li said, when asked about U.S. President Barack Obama's plan to extend tax cuts for all Americans.

Two Flawed Currencies - Despite America's economic problems, the US dollar has maintained its respected status the world over - and has even managed to maintain value in comparison to other currencies. It appears that the dollar will likely finish 2010 at the same levels that it started. Even today's announcement of more tax cuts and stimulus, which will guarantee widening federal deficits for years to come, could not put a dent in the dollar. The dollar's charmed life stands in strong contrast to the euro, which is currently suffering from its internal flaws and the Europeans' unfortunate recognition of reality. Given Washington's monetary irresponsibility over the past decade and a half, many market observers have wondered if the euro could one day become the world's top currency. In the early to mid-2000s, when the euro surged more than 60% against the dollar, this was in fact a popular view. But unlike all other currencies on the planet, the euro is not a sovereign currency managed by a single country. It is dependent on the collective political will of the leaders of the European Union (EU).

Multi-polar era requires global reserve currency - In the context of the global economy emerging multi-polar in nature and the financial system becoming increasingly decentralised, the world needs a stable reserve currency that is independent of the fiscal weaknesses of individual nations, said Nasser Saidi, chief economist of the Dubai International Financial Centre. Presenting a paper, The Role of Gold in the New Financial Architecture by Saidi and Fabio Scacciavillani, Director of Macroeconomics and Statistics at the DIFC, Saidi said under the new economic realities faced by the world, a single reserve currency issued by a country whose relative economic share is dwindling, exposes the world economy to severe instability and becomes a source of global systemic risk."

US Treasuries hit by biggest sell-off since Lehman - US Treasuries suffered their biggest two-day sell-off since the collapse of Lehman Brothers, following a torrid month that has seen borrowing costs for western governments soar. Germany, Japan and the US have all seen their benchmark market interest rates rise by more than a quarter in the past month while the UK’s has risen by nearly a fifth. You could argue that we are at a new stage where the global cost of capital goes higher and higher,” said Steven Major, global head of fixed income research at HSBC. The yield on 10-year US Treasuries hit a six-month high of 3.33 per cent on Wednesday, up 0.39 percentage points from Monday and 1 percentage point higher than its October low. Japanese five-year yields also rose the most in two years, while Germany’s benchmark borrowing costs hit 3 per cent. “People are getting out of the market and moving to the sidelines, feeling shellshocked at the speed of the rise in yields,” said David Ader, strategist at CRT Capital. US 10-year yields have risen by about 0.76 percentage points since November 8, those of Germany by 0.62 percentage points, the UK by 0.53 percentage points and Japan by 0.29 percentage points as the prices of the bonds has fallen.

Treasury yields too low: TCW (Reuters) - The Treasury market has been distorted by the Federal Reserve's policies, causing yields to be "too low for too long," and the market faces volatility next year, a top fixed-income strategist with TCW said on Wednesday. The Treasury market sold off viciously over the last two days as traders began to unwind earlier bets on the Fed's second round of quantitative easing, Tad Rivelle, chief investment officer of U.S. fixed income at TCW, told the Reuters 2011 Investment Outlook Summit. He called the trend "a return to bond vigilantism," invoking a term coined by economist Ed Yardeni in 1984 to describe why major investors were demanding higher yields to compensate for perceived risks of rising inflation as a result of large deficits. "The deeply distorted Treasury market is not an unintended but a very direct consequence of what the Federal Reserve as well as other policy actors have been attempting to foster and bring about,"

Global Bond Rout Deepens On Us Fiscal Worries - Agreement in Washington on a fresh fiscal package has set off dramatic rise in yields of US Treasuries and bonds across the world, threatening to short-circuit any benefits of stimulus. The bond rout raises concerns that the US authorities may be losing control over events.  The yield on 10-year Treasuries – the benchmark price of money worldwide and the key driver of US mortgages rates – has rocketed to 3.3pc, up 35 basis points since President Barack Obama agreed on Monday to compromise with Senate Republicans on tax cuts. The Treasury sell-off has ricocheted through the global system, triggering bond sell-offs in Asia, Europe and Latin America. Japan's finance ministry braced as borrowing costs on seven-year debt jumped by a sixth in one trading session, while German Bunds punched through 3pc.

US Debt Hogs Risk Backlash, Volcker Begat Bailouts, Says Ex-Bear Banker - For decades, Americans have gotten away with gorging on debt and inflation because the dollar is the world’s reserve currency, says bank-rating specialist Christopher Whalen.  Now the day of reckoning may finally be at hand.  If the Federal Reserve keeps printing money and spreading inflation around the globe, creditors will turn against the U.S., writes Whalen in his new book, “Inflated: How Money and Debt Built the American Dream.”  Whalen, 51, is the co-founder of Institutional Risk Analytics and a former Bear Stearns Cos. banker. In “Inflated,” he digs deep into history to explain why Americans feel entitled to live beyond their means. In a phone interview, we discussed the past and the future of the financial system, from the days of Thomas Paine to the age of securitization and Paul Volcker’s support for bank bailouts.

US tax changes could mark start of bond bear market, warns economist - Investors have become nervous about the long-term outlook for the US economy after politicians struck a deal this week which extends tax cuts across the economy in exchange for extensions to payments to the unemployed. Tim Drayson, economist at Legal & General Investment Management, said that the new rules - which are being introduced despite existing worries about the high levels of US government debt - mean we may already be witnessing the start of a bear market in treasuries. On Tuesday, US Treasuries suffered their biggest sell-off in two years and the selling continued on Wednesday, pushing yields on US ten year borrowing to 3.28%, up from 2.93% on Monday morning.

Tax Cuts Could Hurt Moody's U.S. Rating: Report -- U.S. sovereign debt ratings from Moody's Investor Service could be hurt by extended tax cuts in the long term, Reuters reported Tuesday. Moody's lead analyst for U.S. sovereign debt, Steven Hess, told Reuters he is not concerned by an extension of the Bush tax cuts on the U.S.'s AAA rating over the next 18 months to two years, but he is worried about what happens after two years when the extensions are set to expire again. "We have long term concerns about the (U.S. credit) outlook and they are not yet being addressed. We're waiting to see if they're going to be addressed in the next couple of years," Hess told Reuters in an interview.

Bond Vigilantes, Still Invisible – Krugman - US long-term interest rates have risen somewhat in the wake of the debt deal — and sure enough, we’re hearing warnings about “bond vigilantes” again. OK, guys, first of all: interest rates have soared back to their levels of …. June.  Beyond that, it has been very clear, if you watch the ups and downs of long-term rates, that they reflect just one thing: perceived prospects for recovery, and hence when you might expect the Fed to move off the zero-rate policy. Rates began rising a few weeks ago as data began to suggest a somewhat stronger recovery than previously anticipated (stronger, not strong — we’re still looking at years of very high unemployment). They rose again in the past couple of days on the belief that the stimulus part of the tax deal would actually lift the economy to some extent.

US Treasury Sets Record for Debt Sales at $2.116 Trillion - The U.S. Treasury set a record for borrowing in a calendar year after selling $32 billion of three- year securities to push its total note and bond sales to $2.116 trillion amid all-time high demand for the debt. Bond dealers and investors have bid $6.33 trillion at the auctions this year, or a record $2.99 for every dollar of debt sold. Treasuries tumbled today, pushing the 10-year note yield up the most since September 2008, after President Barack Obama agreed to extend tax cuts for two years and the three-year note sale drew the lowest demand since February. The fact that Treasury is able to issue all this paper and get it financed speaks to the fact that deleveraging in the private sector has been on-going and significant,”

Tax Bill to add $857 Billion to Debt - From Bloomberg: Senate Tax-Cut Extension Plan Would Add $857 Billion to Debt The congressional Joint Committee on Taxation, which estimates the revenue effects of tax legislation, said the provisions would cost the government $801.3 billion in forgone revenue over 10 years. Extending unemployment benefits for 13 months, another feature of the package, would cost $56 billion, the Obama administration has said. It is important to remember the Joint Committee on Taxation assumed all the provisions will end as scheduled; the payroll tax cut after one year, and the other tax cuts after two years. That seems very unlikely, so the actual cost will be much much higher. As an example, if the tax cut for high income earners stays in place for the next decade that will add $700 billion alone to the debt! Also, the vast majority of the impact is from extending the Bush tax cuts.

The Number: $858 Billion - The Obama-McConnell tax compromise will cost $858 billion over the next 10 years, according to estimates from the Congressional Budget Office. In other words, the Republican-backed tax plan will cost more than the stimulus bill, which priced out at $787 billion. For starters, extending all of the Bush tax cuts for two years will cost a total $675.2 billion over 10 years, according to a Dec. 3 Congressional Research Service study. Setting the estate tax at 35%, adding an exemption for estates under $5 million, knocking 2 percentage points off employees’ portion of the Social Security payroll tax, and the cost quickly goes up. So, how does the U.S. pay the bill? Republicans, some Democrats and numerous economists argue the tax breaks will help quicken an economic recovery and eventually boost federal revenues.

The GOP’s next hostage: The full faith and credit of the U.S. government - The worst answer of President Obama's news conference yesterday had nothing to do with the left. It had to do with the debt ceiling. The National Journal's Marc Ambinder stood and asked the president whether there was "any attempt by the White House to include raising the debt limit as a part of this package," as if the debt limit doesn't get raised, the GOP has a "significant amount of leverage over the White House." Obama, who had gotten a bit prickly by this point in the Q&A, responded by questioning Marc's premise. "When you say it would seem they’ll have a significant amount of leverage over the White House," he asked, "what do you mean?"  Sigh. Here's what Marc means: In February, the Treasury Department will have borrowed as much money as the Congress has allowed them to borrow. If it is to keep meeting the government's obligations, Congress will have to raise the debt limit, which it does every few years. If it doesn't, the U.S. government can't fulfill its obligations to its creditors, and we fall into a fiscal crisis the likes of which are very hard to imagine, as it won't just be about immediate borrowing, but also the market's sudden realization that the political system might not be able to meet future obligations, either.

Debt Panel Chairmen Press Obama, Congress to Act Before Debt-Ceiling Vote - The co-chairmen of the White House’s debt-reduction panel, Democrat Erskine Bowles and Republican Alan Simpson, said the White House and congressional leaders should try to broker a bipartisan agreement to shrink the federal debt before Congress confronts a vote on raising the debt ceiling next year. Lawmakers and the White House are bracing for a collision next year over the debt ceiling issue. Administration officials have said Congress must raise the borrowing cap so the government doesn’t default on its debts. But some congressional Republicans say they won’t vote to raise the debt ceiling above the current $14.3 trillion level because it would encourage more government spending. Reaching an accord on deficit reduction could prove difficult before a vote on the debt limit expected sometime this spring. Members of both parties remain at odds over how to cut spending.

Why Democrats don't want to tie the debt ceiling to the tax cuts - What's important to understand about the debt-ceiling vote -- where Democrats and Republicans will either strike a deal to increase the Treasury's borrowing cap or the country will collapse into default -- is that it's not like Democrats have simply forgotten about it. It's not that they haven't realized that they could tie it to the tax cuts, which Republicans want and which will add $900 billion to the debt. It's that they simply don't want to. “Let the Republicans have some buy-in on the debt. They’re going to have a majority in the House,” said Harry Reid. “I don’t think it should be when we have a heavily Democratic Senate, heavily Democratic House and a Democratic president.” But this is a dangerous game of chicken that Democrats are playing, and not one they've shown much stomach for thus far. President Obama struck a deal on the tax cuts because he was terrified, in a weak economy, of letting taxes rise slightly. Are we really supposed to believe that Obama and the Democrats will be less terrified of letting the United States default on its debt, with all the attendant consequences to the economy?

FT Alphaville » Bonds: Bubble, bubble, toil and trouble - After this week’s mass sell-off in Treasuries, debate is still raging about whether this is a bursting bond bubble — and whether we should all be stampeding into equities and out of commodities (or even, back into commodities). Many believe, as MeanStreet’s Evan Newmark declared, that “America’s great bond bubble is over”. The problem, as he sums it up, was simply “too much money chasing too little yield”. As Mizuho International’s Jonathan Allum remarks in a more restrained fashion in his latest newsletter, for the world’s major government bond markets, in particular, “this has been the worst of times… ” Over the last month, he notes, 10-year bond yields have risen 28 per cent in the US, 29 per cent in Japan, 27 per cent in Germany and 18 per cent in the UK. As for what it all means Allum notes: The bearish view is that the developed bond markets are finally, albeit in a modest way, going the way of Greece, Ireland etc as investors finally start to worry about the fiscal position of the UK, US etc. The bullish view is that they reflect higher growth, and thus inflation expectations. Note, BOTH explanations are bad for the bond markets themselves.

Economic Impacts of Waiting to Resolve the Long-Term Budget Imbalance - CBO Director's Blog - Under current policies, the aging of the U.S. population and increases in health care costs will almost certainly push up federal spending significantly in coming decades relative to the size of the economy. Without changes in policy, spending on the government’s major mandatory health care programs as well as on Social Security will increase from the present level of roughly 10 percent of the nation’s output, or gross domestic product (GDP), to about 16 percent over the next 25 years. If revenues remain at their past levels relative to GDP, that rise in spending will lead to rapidly growing budget deficits and mounting federal debt, which would have significant negative economic consequences. Addressing the long-term budget imbalance would, at a minimum, require stabilizing the ratio of debt to output. In deciding when and how to do that, an important consideration is: What are the costs of waiting to address the budget imbalance? A CBO issue brief released today addresses that question.

A Gentle Nudge About the Deficit - With the recent deal to extend the Bush tax cuts, cut payroll taxes and extend unemployment benefits, it may seem like Washington does not care quite as much about the deficit as some politicians have let on. And given that the policies needed to get long-term fiscal problems under control (higher taxes, fewer government services) are unpopular in the short-term time-frame under which politicians face re-election, it seems unlikely that we should expect much movement on these issues in the near future.The Congressional Budget Office, whose mission is to keep tabs on the long-term fiscal picture, sent out a gentle nudge today though. An excerpt from a report titled “Economic Impacts of Waiting to Resolve the Long-Term Budget Imbalance“:

The Federal Deficit So Far This Year—$283 Billion Director's Blog - The federal budget deficit was $283 billion for the first two months of fiscal year 2011, CBO estimates in its latest Monthly Budget Review, $14 billion less than the shortfall recorded through November of last year. Outlays and revenues alike are higher than they were last year at this time, by about 2 percent and 9 percent, respectively. Revenues through November totaled about $269 billion, $25 billion more than in the same period last year. Because few payments of corporate or individual estimated income taxes are made in the first two months of the year, receipts in those months are typically dominated by withheld income and social insurance (payroll) taxes. Individual income and payroll taxes combined rose by $25 billion (or 10 percent). Withheld income and payroll taxes were about $17 billion (or 7 percent) higher, reflecting strengthening economic conditions. Individual tax refunds were down by about $7 billion (or 23 percent) from abnormally high amounts during October and November 2009. Receipts from corporate income taxes, net of refunds, were negative—by the same amount—for the first two months of this year and last

The Zero Deficit Line - Earlier this year, we posted a chart that illustrated the biggest single political issue of 2010, which revealed the near-complete disconnect that has developed since 2007 between the federal government's spending and the median income of American households. Today, we're going to take you deeper into that issue because rectifying that unsustainable situation will affect the lives of every single American.  We'll begin by revisiting a very slightly modified version of our "biggest issue" chart to give you a better idea of why we designed it to look the way it does.  As you can see, we've shown how the U.S. federal government's total spending has changed with respect to the level of the median U.S. household's income in every year from 1967 through 2009.  While the United States' historic federal expenditure data goes back to the nation's founding, the median household income data only goes back to 1967, which limited our ability to show the relationship between the two before that time. And then, the only reason we didn't go past 2009 is because the Census won't report the median household income for 2010 until October 2011! Not that we didn't take a stab at projecting what median household income will turn out to have been for 2010....

End of an Era? - Call me credulous, but after a week of listening intently to the talk from Washington, I am prepared to believe the US has indeed reached the end of an era. That long strange journey began in the mid-1960s, with a binge of Keynesian guns-and-butter spending unaccompanied by tax increases. It took a new twist in the mid-1970s, when a handful of policy entrepreneurs began to argue that large deficits were a reasonable strategy for governing the country.  And now, nearly fifty years after it began, the era has finally ended. The original policy of cavalier deficit spending evolved two versions in the last thirty years, depending on the context:  the “Two Santa” theory and “Starve the Beast.” As the late Jude Wanniski explained it in a memo in 1999:  I began arguing the “Two Santa Claus Theory.” If the Democrats are going to play Santa Claus by promoting more spending, the Republicans can never beat them by promoting less spending.  They have to promise tax cuts in order to grow the economy — not “starve the government of revenue,” which is Milton Friedman’s rationale. (Columnist Bruce Bartlett reproduced the entire essay here.)

Americans in Poll Say Cut Deficit With Entitlements Secured as Rich Pay Up - Americans want Congress to bring down a federal budget deficit that many believe is “dangerously out of control,” only under two conditions: minimize the pain and make the rich pay.  The public wants Congress to keep its hands off entitlements such as Medicare, Medicaid and Social Security, a Bloomberg National Poll shows. They oppose cuts in most other major domestic programs and defense. They want to maintain subsidies for farmers and tax breaks like the mortgage-interest deduction. And they’re against an increase in the gasoline tax.   “The idea that we can solve our structural-deficit problems merely by asking more of the well-off is totally unrealistic,” said David Walker, who was U.S. comptroller general from 1998 to 2008 and now leads a group advocating against deficits. “The math simply doesn’t work.”

The Rough Common Ground - I’ve seen two sets of policy proposals coming from the liberal-leaning/progressive groups as alternative visions of how the deficit can be reduced–one by the Institute for America’s Future’s “Citizens’ Commission” (whose members include Dean Baker, Robert Borosage, Robert Kuttner, and Robert Reich) and another by the “Our Fiscal Security” project, a partnership of Demos, the Economic Policy Institute, and the Century Foundation.  I actually like a lot of the policy substance in these more liberal-leaning packages when I muster up my “loving kindness”/yogi heart and am able to see past the deficit-hawk hatred and character assassination. Meanwhile, there have been plenty of critics from the opposite, conservative-leaning side who have been arguing that the bipartisan plans raise taxes too much; just see this critique from the Heritage Foundation or anything that Grover Norquist (or his organization, Americans for Tax Reform) has said.  Of course, Congressman Paul Ryan, the incoming House Budget Committee chairman, has had (well before these commissions’ proposals) his own fiscal sustainability plan that keeps taxes as a share of the economy low enough–below 19 percent–to please these conservative groups and his party’s caucus.

Alan Simpson Doesn't Know What His Grandchildren Are Talking About  - As President Obama's Fiscal Responsibility Commission releases its recommendations, we'll continue to hear how the plan stands up for young people -- people like Alan Simpson's grandchildren: "Erskine and I are in this one for our grandchildren," said Simpson. I'm 26. Like my fellow Millennials, I could be Alan Simpson's grandkid. And from that perspective, our national debt is not the greatest threat to my future, the future of my generation, or of the country more generally. For the last 9 months, the Roosevelt Campus Network has been holding forums asking Millennials what they want the world to look like in thirty years -- when our generation is in its prime. The first results of this "Think 2040" initiative, were released on December 1st, in the Blueprint for the Millennial America. According to the Millennial Generation's standpoint, as represented in the Blueprint for the Millennial America, the Bowles-Simpson report looks terribly out of touch. Yes, Millennials want to get our federal debt under control. But they also believe that we have to fix the economy comes first. In fact, they know without a growing economy, our federal deficit will grow dramatically larger.

9.8%: The Number That The Deficit Commission Left Out - 9.8%! It’s still all about jobs. It's still an emergency. And the DC elite still don’t get it -- or don't care. They give us a "deficit commission" not a jobs commission. They've got it nice while the rest of us have it not-so-nice. Maybe we should move the Congress out of DC so they can see for themselves what is happening to America. If you visit DC (and don’t go to the “wrong” areas) you see nice buildings, nice stores, nice houses, nice hotels, nice trains, nice cars and lots and lots of nice and very expensive restaurants. You see lots of nice nicely-dressed people walking in a hurry to their nice jobs. Lots of nice jobs. Nice, very expensive houses. Nice cars. Nice life. Nice fantasy.But if you leave DC you see something very, very different. Congress clearly doesn't see what the rest of us see. If they did, how could they possibly do the things they are doing? There is an absolute emergency going on in the country and Congress refuses to even see it. With 9.8% of us jobless -- that is the official rate, not counting the people who have given up or are "under"employed or took pay cuts or whatever -- Congress is debating tax cuts for the rich and cutting back on programs for the rest of us. Congress actually did act on jobs last week: with unemployment near 10% they killed unemployment benefits for people out of work more than 26 weeks!

Alternatives to Austerity, by Joseph E. Stiglitz - Technically, reducing a deficit is a straightforward matter: one must either cut expenditures or raise taxes. It is already clear, however, that the deficit-reduction agenda, at least in the US, goes further: it is an attempt to weaken social protections, reduce the progressivity of the tax system, and shrink the role and size of government – all while leaving established interests, like the military-industrial complex, as little affected as possible. In the US..., any deficit-reduction agenda has to be set in the context of what happened over the last decade: a massive increase in defense expenditures...; growth in inequality...; underinvestment in the public sector, including in infrastructure; and growth in corporate welfare, from bank bailouts to ethanol subsidies to a continuation of agricultural subsidies... As a result, it is relatively easy to formulate a deficit-reduction package that boosts efficiency, bolsters growth, and reduces inequality.

More Evidence That the Deficit Hysteria is Misguided and Destructive - Yves Smith - The drumbeat of press in favor of visibly failed austerity programs is simply astonishing. We have compelling evidence that they backfire in countries with heavy debt load, with Ireland and Latvia the poster children. By contrast, Iceland, with the mind-numbing debt to GDP ratio of 900% (some have put it at even higher levels at its peak), stiffed many of its foreign creditors (who should have taken notice that things were a wee bit out of balance, although glowing reports from the likes of Fredrick Mishkin may have blinded them to that fact). It also depreciated its currency and its voters turned down an IMF rescue which would have required Iceland to repay the foreign creditors of bust Icelandic private banks, to the tune of €12,000 per citizen. As John Mauldin points out, forcing creditors to take their lumps is the right course of action. Iceland is already showing GDP growth, while Ireland, which is following the austerity playbook to perfection, is imploding.  But as Joseph Stlglitz points out, the advocates of austerity have a lot in common with medieval bloodletters. When it’s pointed out that their programs made matters worse, their response is that they simply weren’t implemented aggressively enough. To illustrate how badly discourse has been commandeered by misguided moralizing, consider the piece by Matt Bai in today’s New York Times.

Sensible Deficit and Debt Reduction - Maxine Udall - A government can stimulate aggregate demand by accelerating investments in infrastructure, research, and defense. By borrowing at record low rates, it can bring those necessary investments that it would have made in the future forward to the present, thereby maintaining and also creating jobs that otherwise would be lost because of the current downturn. Such investment has the effect of stimulating demand now and keeps the economy from sinking deeper into recession or depression. It has the added advantage, if done wisely, of creating better health, education, and economic infrastructure that benefits our grandchildren and their grandchildren. The historically low cost of borrowing means that the cost to our grandchildren of repaying the loans for these investments are likely to be lower than the benefits they will realize from the investments, if they are made wisely. It took us at least 30 years to dig the hole we're in. Pretending that we can fill it up in two years or ten is not only silly, it's dangerous. We need a long-term perspective that combines strategic deficit reduction and strategic policies aimed at output growth and expenditure reductions that over the long-run reduce the debt. A willingness to incur new debt that contributes to future output growth and efficiency by increasing human and health capital, infrastructure, and energy efficiency, must be part of any such plan.

The deficit hawks' scare stories - Hollywood used to be the place where creative people went to cook up outlandish horror plots. Now, people go to Washington to spin their wild tales of looming disaster. The national agenda has been dominated by such tales over the last two years. Most recently, we have had the story of the bond market vigilantes doing to the United States what they have already done to Greece, Ireland and Portugal. This story requires suspending disbelief, but people who report on economic and political issues for major news outlets are good at ignoring reality. The plot is that, at some date in the not-distant future, if we don't mend our free-spending ways, no one will buy US government bonds. The United States will be forced to stand before the international community as a helpless beggar and agree to whatever humiliating terms bad guys from China to Saudi Arabia, and even France, choose to impose.

The Trouble With Fiscal Stimulus - There’s been a fair amount of blogospheric bemoaning of the failure of policymakers to adequately embrace the idea of fiscal stimulus as a macroeconomic stabilization policy. And as readers know, I’m very sympathetic to that point of view. But at some point when your side of the argument fails to carry the day, you do need to start thinking about why you’re not persuading people.  And in this case, I think the problem is pretty clear: In the absence of broad political consensus about the appropriate size and scope of the public sector, efforts at fiscal expansion will necessarily get bound up with these debates. Or at the state and local level, anyone who’s thinking seriously about the issue ought to see that the middle of a recession is a terrible time to implement major cutbacks in public spending. But at the same time, people who believe in good faith that state and local spending is above the optimal level will understandably agree with Rahm Emannuel that you don’t want to let a good crisis go to waste. After all, were center-left Keynesian economics bloggers issuing table-thumping condemnations of state and local spending increases in 2004-2007?

Off Message Watch: "I Don't Know That for Sure" - The administration just cannot admit that it made a mistake in proposing a stimulus package that was too small. This is from a Q&A with Austan Goolsbee:: Q. Would our economy be in better shape right now if the initial stimulus when the administration took office had been bigger? A. I don’t know the answer to that for sure. There’s a bit of a crystal ball in that. It obviously depends on what the things were. The right answer here is "of course if would have been better," and to then talk about how Republicans blocked any hope of additional stimulus once it was clear the economy was doing much worse than anticipated. But because the administration refuses to admit its mistake and concede that the stimulus was too small, it cannot bring itself to argue that the economy needs more help from fiscal authorities. There were nods in this direction now and again, but the administration never really tried to make this argument, a strong push for a job creation program for example, and it has thus given up the chance to make clear which party is standing in the way of providing more help for distressed households.

A Plea to Howard Gleckman: Please Don't Give More Free Gasoline to the Budget Arsonists! -- Howard Gleckman is perplexed. He says that he does not know which budget baseline to use. Is it best to use the "current law" baseline--what would happen if congress went home right now, or at least stuck to PAYGO by not passing things that increase the deficit--in evaluating the budget impact of laws and policies? Or is it best to use the current "policy baseline," according to which congress passes laws to keep tax rates what they are and spending programs on their current growth trajectories? Should extending the Bush tax cuts be thought of as something that increases the deficit because it changes current law in a way that makes the deficit bigger? Or should extending the Bush tax cuts be thought of as a nothingburger for the deficit because it would, after all, only continue current policy? Here is what I believe is the best way to think about it:

The Lame-Duck Congress: So Many Tax Issues, So Little Time - Everyone knows about the expiring Bush-era tax cuts—how taxes will jump for every taxpayer if the cuts sunset as mandated in the 2001 law. But that’s only the tip of the tax iceberg. Other issues, in no particular order here, also demand attention:  1. Patching the alternative minimum tax (AMT): Absent Congressional action, more than 28 million taxpayers will pay an average of more than $3,700 additional tax on their 2010 returns because of the AMT. Congress has repeatedly “patched” the AMT to protect those households but hasn’t done anything yet for 2010. 2. Estate taxes: People dying in 2010 will pay no estate tax, no matter how large their estates. Already five billionaires have taken advantage of that tax hiatus and—who knows?—others may have plans to join them this month. But miss the December window and everything changes—estates worth more than $1 million will face tax rates as high as 55 percent. 3. Stimulus Tax Provisions: Tax provisions in the 2009 stimulus act, most notably the Making Work Pay credit, also expire at year’s end. Expiration of MWP alone will cut workers’ after-tax income by an aggregate $60 billion next year. Other provisions that make the child credit more refundable, expand EITC for larger families, help pay for college, and exempt $2,400 of unemployment compensation from income tax will also disappear, pulling nearly $20 billion more out of taxpayers’ pockets. 4. Tax Extenders: Congress has yet to address the annual list of expiring tax provisions, all of which get extended every year. All this is a lot to deal with in the next ten days.

There Are No Deficit Hawks In Congress -Krugman - It’s a point barely worth making, but the tax cut deal demonstrates, for the umpteenth time, that self-proclaimed deficit hawks are frauds. We can’t afford unemployment benefits or public investment, the fake hawks say — but when it come to cutting taxes on the rich, money is literally no object.  It’s just possible, as Atrios says, that some journalists don’t understand this; if you do up-close-and-personal reporting, judging politicians by what they say and how they come across rather than by the content of their proposals, you might actually be snookered. But again: none of the people who claim about the deficit actually view it as anything more than a stick with which to beat down progressive ideas.

Friday Animations--Bush Tax Cuts - It might be worth reminding everbody about now that the Bush tax cuts were a poor idea even when they were first proposed. Like so much else done by the Bush administration (and pushed by the right generally), they amounted to yet another means of redistributing from the have-less to the have-mores that Bush called his base. The following is a good animation depicting the interrelationship of distributional issues and the tax cuts, showing visually how the riches from the last few decades went to the wealthy and then the tax cuts added to the problem by favoring them over ordinary folk. One can only wish that those GOP voters in the Senate and House this week had gone back to reiew these points and then listen to their own guru, John McCain, who thought that the projected 2003 deficit of 246 billion (without tax cuts and war costs) was scandalously high. He called "alarming" the 10-year deficit prediction for the cost of the Bush tax cuts of $1.8 trillion, especially when it didn't even include the war costs, and that such a deficit could "lower the standard of income" for generations of Americans.

Uncertainty Over Bush Tax Cuts is Not Hindering Economy - UNCERTAINTY is frequently blamed for the sorry state of the economy — for why businesses are not investing strongly in new equipment or hiring more workers, and for why consumers are not spending freely. On Wall Street, it’s even said that government meddling is the main culprit and that political gridlock is the cure.  This is a serious misreading of the situation. Despite all of the hand-wringing over the future of the Bush tax cuts, it is just not plausible that they are a major source of uncertainty. At a meeting on Tuesday with Congressional leaders, President Obama indicated, as he had done frequently before, that he was eager to reach a compromise.  Both political parties have clearly stated their intention to extend the tax cuts on incomes less than $250,000. The biggest question is whether the top tax rate will be 35 or 39.6 percent. That is not the degree or kind of uncertainty that is likely to cause businesses and consumers to put hiring and spending decisions on hold.

Bush Tax Cut Extension Compromise? - Now that Senate Democrats fell 7  votes short  of 60 yesterday on extending the Bush tax cuts only for those with incomes under $250,000 ($200,000 for singles) or under $1 million, the conventional wisdom says they will accept a two-year extension of the Bush tax cuts for everyone if unemployment benefits are extended too.  That's supposedly what has tentatively been agreed upon in the bipartisan talks with the White House.  I believe such a deal will be announced soon, but I remain skeptical about it chances for passing the Senate and the House.   What's to stop a filibuster by Senator Bernie Sanders (ID-VT) or other liberal Democrats?  Is there 60 votes for anything?  Until next January, it will take 18 Democrats to vote with all 42 Republicans to reach 60.  That's a lot of Democrats, many of whom are very much on the record as opposing an extension for those over $250,000.  And what about the House, where Democrats have a 255D-178R majority?  Are 39 House Democrats going to vote with all 178 Republicans? 

A deal on the horizon? - RECENT economic data out of America has been pretty decent (with the continuing exception of that from labour markets), but recovery still looks frail.  And while the president's deficit commission has generated a lot of headlines, the bigger short-term economic threat continues to be the looming end of a number of stimulative programmes. One has already begun to phase out; as of November 30, the federal emergency unemployment benefits programme has expired, which means that a steady stream of jobless workers are now cycling off benefits. Some 2m may stop receiving cheques by the end of the year. Another blow sits just on the horizon. All of the Bush tax cuts will expire at year's end absent action from Congress. In the short term, this would mean a fiscal adjustment of around 2% of GDP—a sizable impact on an economy as weak as America's. But it seems a deal may be near on both the tax cuts and unemployment insurance. At the moment, it looks like a compromise deal could be hashed out in which all tax cuts (and not just those for households earning less than $250,000) will be temporarily extended, as will emergency unemployment benefits.

Obama Signals Openness to a Tax-Cut Deal -The U.S. Senate on Saturday defeated two attempts by Democrats to extend the Bush-era tax cuts for the middle class permanently. After the Senate votes, President Barack Obama told Democratic congressional leaders he would be open to a temporary extension of the Bush-era tax cuts for the affluent, but he would demand concessions from the GOP. In rare weekend votes that likely had little effect on wider negotiations to reach a compromise about extending the tax cuts, the Senate voted 53-36 to reject an attempt to initiate debate in the chamber on a measure that would have extended lower tax rates for individuals who earn less than $200,000 and couples earning less than $250,000.  The measure would have also renewed the estate tax from 2011 at the same level it was set at in 2009 before it expired at the end of that year. It would levy a 45% tax on estates valued at than $3.5 million. Without congressional action, the estate tax will be reinstated in 2011 at a 55% level on estates in excess of $1 million.

GOP, Dems nearing deal on taxes, jobless benefits -- An outline of a bipartisan economic package is emerging that would temporarily extend the Bush-era tax rates for all taxpayers, while extending jobless benefits for millions of Americans.Differences remained over details, including White House demands for middle- and low-income tax credits. But the White House expressed optimism Monday, raising the possibility of a deal in Congress by the end of the week. "They are making progress," said White House spokesman Bill Burton. "The president is confident that within the next couple of days or so we'll find a way to extend tax cuts to middle class families and do some other things that the president thinks are important, helping to grow the economy and create jobs." Questions remained about how many concessions Obama could extract from Republicans in exchange for extending current tax rates for high earners, a proposal he opposed.

Let’s Not Make a Deal. by Paul Krugman - Back in 2001, former President George W. Bush pulled a fast one. He wanted to enact an irresponsible tax cut, largely for the benefit of the wealthiest Americans. But there were Senate rules in place designed to prevent that kind of irresponsibility. So Mr. Bush evaded the rules by making the tax cut temporary, with the whole thing scheduled to expire on the last day of 2010. The plan, of course, was to come back later and make the thing permanent, Democrats have tried to push a compromise: let tax cuts for the wealthy expire, but extend tax cuts for the middle class. Republicans, however, are having none of it. ... It’s all or nothing, they say: all the Bush tax cuts must be extended. What should Democrats do? The answer is that they should just say no..., saying no, and letting the Bush tax cuts expire on schedule, is the lesser of two evils.

Obama's Tax-Cut Retreat, Through Two Lenses  - Letting all of the tax cuts expire surely would have an economic effect, and not a positive one. At a time when the economy is weak, when job growth has proven disappointing yet again and when Europe is again struggling with debt crises, the national discussion would be dominated by an across-the-board tax increase. Households would have less money, and everyone would be talking about how households had less money. That situation seems very likely to push back the date when real improvement would begin and push back the date — still a long way off — when the economy would feel healthy again. One politician, above all, would be hurt by those events: the president.

Obama and G.O.P. in Deal on Tax Cuts - President Obama announced a tentative deal with Congressional Republicans on Monday to extend the Bush-era tax cuts at all income levels for two years as part of a package that would also keep benefits flowing to the long-term unemployed, cut payroll taxes for all workers for a year and take other steps to bolster the economy. The package would cost about $900 billion over the next two years, to be financed entirely by adding to the national debt, at a time when both parties are professing a desire to begin addressing long-term fiscal imbalances. It would reduce the 6.2 percent Social Security payroll tax on all wage earners by two percentage points for one year, putting more money in the paychecks of workers. For a family earning $50,000 a year, it would amount to a savings of $1,000.

Obama Agrees to Two-Year Tax Cut Extension, Lower Payroll Taxes – Bloomberg - President Barack Obama said he would agree to sustain Bush-era tax cuts for high-income taxpayers in exchange for extending federal unemployment insurance and cutting the payroll tax by $120 billion for one year.  Obama said he would accept lower rates on high earners’ income, dividends, capital gains and multi million-dollar estates for the next two years to break a stalemate over extending the Bush administration’s tax cuts for middle-class taxpayers before Congress adjourns. The current tax rates, enacted in 2001 and 2003, are set to increase Dec. 31.  Without the compromise, middle-income families would become “collateral damage for political warfare here in Washington,” Obama said in televised remarks yesterday. He said he still believes that the nation can’t afford to permanently extend the reduced top tax rates.

Report: General Agreement on Taxes for next two years - The NY Times has the details: Pact on Bush Tax Cuts Trims Payroll Levy A few points: Extend Bush income tax cuts for two years, including for high income earners.  13-month extension of jobless aid for the long-term unemployed.   Reducing the Social Security payroll tax by two percentage points for a year:  For a family earning $50,000, the two percentage point cut would mean a savings of $1,000.  For workers paying the maximum, the two percentage point cut would mean a savings of $2,136.  Estate tax exemption of $5 million per person and a maximum rate of 35 percent. This is expected to increase the budget deficit by $900 billion over two years.

Obama and the Republicans Reach an Odious Tax Deal - The tax deal reached by President Obama and congressional Republicans (but not Hill Democrats) includes a bit of good, some bad, and some really ugly.  To summarize, this package would make nearly the entire individual revenue code permanently temporary, which is horrible tax policy. It gives the lie to the pious talk about deficit reduction we’ve heard recently. And much of it will do nothing to stimulate the economy, fervent claims by supporters to the contrary. As George W. Bush might have said, “heckuva job, guys.”  Let’s start with the allegedly temporary aspect of a plan to continue the 2001 and 2003 tax cuts for two more years. Like the dozens of special interest tax breaks that get extended a year or two at a time, we now seem on the way to doing the same for the basic structure of the income tax. It is the worst of all worlds, combining the uncertainty of temporary tax law with the massive (but hidden) cost of never-ending tax breaks.  No-one can seriously think Congress will let any of these tax cuts expire on the cusp of the 2012 election, as they are scheduled to do under this deal.

Whose Side is the White House On? - I want to raise a hard question — a question on which Americans are divided. It seems to me, though, we will get nowhere unless we realize where we are, what has actually happened, and what the future most likely holds. Recovery begins with realism and there is nothing to be gained by kidding ourselves. On the topics that I know most about, the administration is beyond being a disappointment. It’s beyond inept, unprepared, weak, and ineffective. Four and again two years ago, the people demanded change. As a candidate, the President promised change. In foreign policy and the core economic policies, he delivered continuity instead. That was true on Afghanistan and it was and is true in economic policy, especially in respect to the banks. What we got was George W. Bush’s policies without Bush’s toughness, without his in-your-face refusal to compromise prematurely. Without what he himself calls his understanding that you do not negotiate with yourself. It’s a measure of where we are, I think, that at a meeting of Americans for Democratic Action, you find me comparing President Obama unfavorably to President George W. Bush.

Deal Reached to Extend All the Bush Tax Cuts - Here are the details of the agreement on the Bush tax cuts:

    • 1) The Bush tax cuts get extended for two years -- with one ugly surprise: For the next two years, estates up to $5,000,000 will be protected from the estate tax, and the tax rate for the few estates that are taxed will be 35 percent..
    • 2) The refundable tax credits are extended: The Earned Income Tax Credit, the Child Tax Credit and the American Opportunity Tax Credit were all pumped up in the stimulus, but set to expire this year. All of them will be extended. Price tag? $40 billion or so.
    • 3) Unemployment insurance gets extended for 13 months: ... In perhaps the most important part of the deal, there's going to be a 13-month extension at a cost of $56 billion.
    • 4) A 2 percent cut in the payroll taxes paid by employees: This is perhaps the most unexpected part of the compromise. Rather than extending the administration's Making Work Pay tax credit for two years, which would've been worth about $60 billion a year, they've agreed to a one-year cut in the payroll taxes paid by employees, which'll raise $120 billion in 2011. ...
    • 5) Business expensing: Remember back in September, when the White House announced a proposal to give businesses two years in which they could deduct 100 percent of the cost of new investments? That's in the deal, too. The cost of this is a bit complicated -- it's $30 billion over 10 years, but it works by offering huge tax cuts in the next two years and then paying that back over the next eight. ...

A few thoughts on the tax cut compromise - The tax cut deal is in. I would agree with Felix Salmon’s take, that "this is tax cutting, Oprah-style: you get a tax cut! And you get a tax cut! And you! And you! You all get a tax cut!" Since Democrats and Republicans were never going to agree on which tax cuts were a priority the compromise was to make all of them a priority. This is certainly what I expected as far as the Bush tax cuts go.  The Administration has now moved into re-election mode. Uppermost in their mind is the need to demonstrate that they have taken the right policy steps on the economy all along. And this means making the recovery stick… Therefore, he will want to demonstrate his ‘for-the-people’ bona fides by making the technical recovery stick in a way that benefits most voters.  Income tax cuts are the easiest way to do this given the way that the economic gains of GDP growth have been going disproportionately to upper-income households. What is important here from the President’s perspective is the part in the last paragraph about how he must "demonstrate his ‘for-the-people’ bona fides". That’s what is going to win him elections. And the President is a politician, so these are the things he is thinking about. Swampland reaches a similar conclusion:

Unemployment benefits extended in tax-cut deal - Brushing past opposition in his own party, President Barack Obama announced agreement with Republicans Monday night on a plan to extend expiring income tax cuts for all Americans, renew jobless benefits for the long-term unemployed and grant a one-year reduction in payroll taxes. The emerging agreement also includes tax breaks for businesses that the president said would contribute to the economy's recovery from the worst recession in eight decades. Obama's announcement marked a dramatic reversal of his long-held insistence, originally laid out in his 2008 campaign, that tax cuts should only be extended at incomes up to $200,000 for individuals and $250,000 for couples. He explained his about-face by saying that he still opposed the move and noted the agreement called for a temporary, two-year extension of cuts at all income levels, not the permanent renewal that Republicans have long sought.

A good deal (under the circumstances) NO REASONABLE person interested in improving the American economy and insuring against debt troubles would draw up the policy compromise that seems to have been reached in Washington this week. But no reasonable person starting from scratch would design America's sclerotic political institutions, in which a single Senator can derail the plans of the majority party and a determined minority can bring the business of governance to a standstill. In this imperfect political world, the agreement to temporarily extend all of the Bush tax cuts, extend unemployment insurance, and temporarily reduce payroll tax rates and allow enhanced business expensing looks like a pretty good outcome for the American economy. The sharp criticisms levied at it by both the Democratic base and the country's real deficit hawks are overstated.

Austerity delayed - FOR a brief interlude after the mid-terms Americans seemed seduced by the siren song of Germanic austerity. Feeble economy or no, the talk was all of rising taxes, pay freezes and spending cuts. Austerity will have to wait for its turn in the limelight. On Monday Barack Obama and Republican and Democratic leaders in Congress struck a deal on a massive new package of stimulus and tax cut extensions, worth some $800 billion  (around 5% of GDP). Though it must still pass the parties’ respective caucuses, this is good news for the economy: the prospect of inadvertent fiscal tightening was the biggest cloud hanging over the 2011 outlook. The package comes in two parts. The first is an extension of all of George Bush’s tax cuts for the next two years. Mr Obama acquiesced to an extension for the upper 2%, bowing to the reality that he did not have 60 votes in the Senate to extend only the cuts for the lower 98%. Tax credits for child care, education and for low-income wage earners are also extended.

A Few Reactions to the Tax Cut Agreement - Brad DeLong: Most of this round of stimulus does look to be relatively low bang-for-buck, and it is not paid for over ten years, but it does look to me as though it is better than a poke in the eye with a sharp stick. Dean Baker: It is important to realize that most of the money in this package is maintaining tax cuts in place that were scheduled to expire. This will prevent tax increases from having a contractionary impact on the economy, however there is very little, if any, net stimulus in this package compared with current levels of taxation and spending. Larry Mishel of the EPI: Who got what out of the deal is clear. The Republicans got tax cuts for the best-off two percent and lower estate taxes for the very wealthiest families, neither of which will do much if anything to create jobs. President Obama won policies that will put or keep money in the pockets of the families of the unemployed and middle and low-income families, which will increase spending and create jobs.

Tax cuts, Oprah-style - The outlines of the tax-cut negotiations have finally come into focus: basically, it’s a kitchen-sink approach where Republicans and Democrats all get the tax cuts they want. The Bush tax cuts get extended for people earning more than $250,000 a year — and unemployment insurance gets extended, along with various tax credits. On top of that, there’s a 2% cut in payroll taxes, and the reintroduction of the estate tax at the Republicans’ preferred level: 35% of estates over $5 million. There’s even a nice new tax deduction for businesses making new investments. This is tax cutting, Oprah-style: you get a tax cut! And you get a tax cut! And you! And you! You all get a tax cut! This is clearly a win for the Republicans, who get everything they want for the rich. The tax cuts on incomes over $250,000 a year will last for two years, versus just 13 months for the extension of federal unemployment benefits, and just one year of lower payroll taxes. Meanwhile, all the Congressional opposition to this deal is going to come from Democrats, who are basically being asked to sign off on exactly the same bill that George W Bush would have asked for, with a spoonful of unemployment-benefit sugar to help the medicine go down. A lot of them will be wistfully eyeing David Leonhardt’s list of what could be achieved with the $60 billion going on those tax cuts for the rich, and wondering how a Democratic president could find himself doing this.

“Bipartisan Compromise” As Usual - Here’s the breaking news on the “compromise” on the Bush tax cuts: (CNN) — President Barack Obama on Monday announced a deal with Republican leaders that would extend Bush-era tax cuts for two years and unemployment benefits for 13 months while also lowering the payroll tax by two percentage points for a year. It’s what I expected, because it’s the typical pattern we’ve seen for the past several years.  “Bipartisan compromise” means both sides get what they want, because deficit financing of these policies seems like the painless way to get out of gridlock. Rather than mutual sacrifice, it is mutual grabbing.  We can never manage to “trade off”–we only “pile on.”

How Effective Would a Payroll Tax Holiday Be In Spurring Employment and Stimulating the Economy? - Obama’s tax deal with Republicans extends the Bush tax cuts for the wealthy for another 2 years.As Bloomberg notes, Obama said that “he still believes the nation can’t afford to permanently extend the top tax rates”. But as Mish points out: Of course the last extension was “temporary” and the next extension will be “temporary” as well. Obama’s plan would also extend aid for the long-term unemployed for another 13 months. And the payroll tax (which funds Social Security and Medicare) would be cut by 2 percentage points during 2011 in an effort to help spur hiring. Will cutting the payroll tax really help to spur hiring?The Center on Budget and Policy Priorities argued in January 2009 that it wouldn’t.

If This Is Working Together, I'll Take Gridlock - A weak economy is not an excuse to spend money we don't have on things we don't need.  I am with Stan on this tax cut deal.  And Paul Krugman, for that matter.  I repeat my view that the Bush era tax cuts should expire on schedule.  The New York Times reports the two-year cost of this tax cut package at $900 billion. What is amazing is how little we have learned in three years.  Quoting from an op-ed I wrote in February 2008, almost nothing has changed (other than the magnitudes, which have all gotten worse): The agreement reached by the House and White House in January addressed two problems that the United States does not have. First, the nation does not have an underconsumption problem. The personal saving rate hovers around zero. The government’s budget has been in surplus in only four of the last 35 years. The nation has run current account deficits with the rest of the world for the last 15 years. If we are looking for additional economic activity, consumption is a poor choice.

Is The Tax Deal The Ultimate Irony Or Hypocrisy?: After making the budget deficit not just a campaign issue but the campaign issue of 2010, one of the very first legislative things the Republicans in Congress will do after the election is agree to a tax cut and extension of unemployment benefits (and god knows what else) that will...wait for it...increase the deficit.  The two-year increase in the deficit because of the deal will be greater than the stimulus bill the GOP railed against during the election. This is either one of the most exquisite ironies or extraordinary hypocrisies in the history of American politics.  It ranks right up there with Lyndon Johnson campaigning against Barry Goldwater in 1964 by criticizing his plan to increase military activities in Vietnam and then, after the election, having the Pentagon do many of the things he had criticized Goldwater for suggesting.

Tax Deal Suggests New Path for Obama - President Obama announced a tentative deal with Congressional Republicans on Monday to extend the Bush-era tax cuts at all income levels for two years as part of a package that would also keep benefits flowing to the long-term unemployed, cut payroll taxes for all workers for a year and take other steps to bolster the economy.  The deal appeared to resolve the first major standoff since the midterm elections between the White House and newly empowered Republicans on Capitol Hill. But it also highlighted the strains Mr. Obama faces in his own party as he navigates between a desire to get things done and a retreat from his own positions and the principles of many liberals.  Congressional Democrats pointedly noted that they had yet to agree to any deal, even as many Republicans signaled that they would go along.

Tax Extension Deal A Promising Sign for Future Reform - Last night, the President outlined a bipartisan compromise that has been reached with Congressional Republicans. While the plan may still undergo changes (particularly in response to some Congressional Democrat’s disapproval), the plan the President outlined contains some promising items including: a 2 year extension of all of the 2001 and 2003 tax rates (including for high income earners and an AMT patch); a 2 year extension of the tax provisions included in the ARRA; a 13 month extension of unemployment benefits; a 1 year reduction of the payroll tax by 2%; and a 2 year change to the expiring estate tax rates which would exempt the first $5 million of an estate and implement a 35% tax rate thereafter. According to one source, this compromise package would cost about $900 billion over the next two years, though firmer estimates will be released in the coming days. As we have discussed here before, addressing the uncertainty surrounding the looming tax increase is of the utmost importance and we applaud a 2 year extension of all the rates in order to restore some of that certainty.

Cost of the Tax Cut Deal: $900 Billion - It’s worth pointing out, as Andrew Samwick does, that the deal reached between Obama and the GOP is enormously expensive. As the New York Times puts it simply: The package would cost about $900 billion over the next two years, to be financed entirely by adding to the national debt, at a time when both parties are professing a desire to begin addressing the nation’s long-term fiscal imbalances. This is just mindbogglingly irresponsible.

Tax Cut Deal and Surprise Stimulus - The Cost -- The compromise on the Bush tax cuts announced Monday night between President Obama and Republicans could cost between $700 billion and $800 billion if ultimately signed into law as is -- no sure thing given opposition from many Democrats. About half of the measures in the announced package might be considered new short-term stimulus, meaning they may add to the deficits for two more years, but could help maintain the economic recovery and help spur economic activity and job creation. Many economists don't consider an extension of the Bush tax cuts stimulus, because it merely keeps current rates in place. But letting taxes go higher, they say, could impede growth. Several other measures announced Monday do count as stimulus, including a break on how much is deducted from workers' paychecks for Social Security and tax incentives that could encourage businesses to step up their investment.

A Good Deal for Democrats on Tax Cuts - With the wailing and gnashing of teeth from many progressives, you would think that Obama had cut a tax deal to eliminate tax breaks on the wealthy in exchange for freeze-drying Guatamalan orphans in order to use them as decorations on the Family Research Council's Christmas Tree.  Meanwhile, the conservatives I've seen are as proud of this deal as if they'd baked it from scratch.  I'm puzzled on both counts.  Let me get the personal stuff out of the way: I think this is a terrible deal.  I was rooting for gridlock to cause the tax cuts to expire entirely, which would probably have a moderately negative impact on the economy, but would at least somewhat forestall a devastating fiscal crisis down the road.  If it was politically necessary to do tax cuts, I wanted them to be as small as possible, not $900 billion over two years.

Initial Observations on Pending Tax Cut Deal - The plan extends current tax law for all individual taxpayers including: the lowest rate of 10 percent and the highest rate of 35 percent; marriage penalty relief; the $1,000 child credit; and the 15 percent tax rate for capital gains and dividends. Plus: Taxpayers now have some certainty about their taxes beyond December 31, 2010. Minus: Taxpayers now know that their taxes will once again become a political football in 2012. Stability is one of the guiding principles of sound tax policy, but lawmakers have traded some near-term certainty for further long-term unpredictability. Taxpayers will not know how to plan their affairs beyond 2012. Bottom line: Lawmakers have known since 2003 that they had to address the expiration of the Bush-era tax cuts and should never have allowed the situation to get to this point. While extending these tax laws for another two years will reduce some of the uncertainty that has stifled the economy, lawmakers have not made the tax code any less complicated nor any more conducive to long-term economic growth.

Who Benefits Most in Tax Deal? - There is something in the tax deal for everyone from the rich to the middle-class to the working poor to the unemployed to the retired. So who stands to benefit the most from the deal in 2011? It's not the middle class. The problem is some of the benefits aimed at the middle class will put money in the wallets of the rich as well. Add that to the extension of the Bush tax cuts, and the rich are clearly the winners here. But it's not by nearly as much as you might think. Who gets the biggest shaft in the deal? The retired.

The Tax Deal - It’s quite a turn of events. The Democratic party has more or less defined itself over the last decade by opposing the supposed irresponsibility of the Bush-era income-tax rates. Now, President Obama has turned his back on the liberal wing of his party and endorsed those very same rates for the duration of his current term in office. And not only that, he has endorsed a liberalization of the estate tax compared with the levels that were in effect during the Bush years, and agreed to abandon the signature tax break from the stimulus law in favor of a more sensible payroll-tax holiday. This latter change has the potential to become a very favorable development, as the payroll tax directly hinders job creation and Democrats have recently been more concerned with pushing those rates higher to sustain the expansive welfare state they have created.

Bang per (Borrowed) Stimulus Buck - Maxine Udall - From James Galbraith, writing in Mother Jones in 2008, we have this chart from Mark Zandi, chief economist for Moody’s...Where is infrastructure and human capital investment in the current bargain struck between President Obama and Congressional Republicans and why are tax cuts that are net negative the centerpiece of the Republicans' demands?..the rich are calling the shots. No surprise there.  So here's the question my mundane, raised-in-Appalachia, offspring-of-simple-business-men-and-women, forget-the-PhD-in-economics brain keeps asking: What does the financial sector produce, besides economic chaos? Where's the benefit for most of us or for most of the US? And if the financial sector isn't going to provide the service of deploying capital to support investments that benefit the rest of us, who will?  Instead, our tax dollars have been deployed to no-pain, no-downside bailouts of guys who turned around and awarded themselves bonuses for running us into the ditch. Now, finance and US politics seem committed to sustaining and feeding a casino and fostering an increasingly unstable and unfair plutonomy, instead of rebuilding a nation dominated by a productive, hard-working, ambitious middle class.

A Second Stimulus - The apparent deal over the Bush tax cuts highlights why the Democrats probably had to accept the extension of all the Bush tax cuts. No politician is likely to use this word — at least no Democratic politician — but the deal amounts to a second stimulus bill.  Democrats and Republicans agree to extend all the tax cuts and also agree to an extension of unemployment benefits, a cut in the payroll tax and, according to my colleagues, “continuation of a college-tuition tax credit for some families, an expansion of the earned income tax credit and a provision to allow businesses to write off the cost of certain equipment purchases.” The amount of money pumped into the ailing economy: about $900 billion over years. Subtract the $400 billion cost of the Bush tax cuts. Subtract another $140 billion or so, which is the cost of extending the Alternative Minimum Tax patch (and almost certainly would have happened regardless). You’re then left with more than $300 billion in net stimulus over two years. And while that sum will not be enough to fix the economy all by itself, it is serious money.

A December to Remember Compromise Boosts  Growth Prospects for 2011 - In our just published economic forecast we had already assumed many of the elements of this compromise would be enacted. However, there are three major components that we had not assumed, and that would, in fact, together significantly impact the economic outlook over the next few years. First is the extension of emergency unemployment compensation through December 2011. In total this would add roughly $56 billion to personal disposable income through early 2012. Second is the one-year, two-percentage-point payroll tax reduction for employees that would add approximately $120 billion to disposable income in 2011. It should be noted, however, that the administration dropped its proposal that the Making Work Pay refundable tax credit be extended permanently, something we had also assumed in our forecast. Therefore, the net effect on disposable income in 2011 is only roughly $60 billion, relative to our forecast. Third is the new expensing and bonus depreciation through 2012 that would reduce corporate taxes by roughly $170 billion through 2012, with roughly $140 billion of that subsequently recaptured by the federal government because of smaller depreciation deductions in later years.

Economists React: Pros and Cons of Tax Deal -Economists and others weigh in on the agreement between the White House and congressional Republicans on a broad tax package.–The proposed temporary tax cuts and spending increases will provide a substantial boost to growth in 2011. Instead of another year expanding at no more than the U.S. economy’s potential growth rate — with job gains of 1.2 million and unemployment hovering near 10% — real GDP growth will accelerate to 4%, job gains will pick up to 2.8 million, and the unemployment rate will decline to around 8.5% by year’s end. In all likelihood, the recovery would have made it through next year without backtracking into recession, but this deal improves those odds significantly. It also reduces the pressure on the Federal Reserve to engage in more aggressive monetary easing, a possibility even the central bank’s most ardent supporters aren’t happy about. –Mark Zandi, Moody’s Analytics (6 others)

Just How Stimulating Is the New Tax Cut-Jobless Benefit Deal? - As David Leonhardt blogged on Monday, the tentative deal extending both the Bush tax cuts and jobless benefits can be considered another round of fiscal stimulus. Just how stimulating will this new legislation be? The Center for American Progress, a liberal research organization, has crunched a back-of-the-envelope estimate. Its numbers, shown below, are based on the models used by the Congressional Budget Office and the economist Mark Zandi to project the bang-for-the-buck of various kinds of stimulus. Assuming this calculation is roughly on track, 3.1 million jobs is nothing to sneeze at. But if stimulus is what Washington truly wants politicians would most likely get a bigger bang for the buck with a different mix of programs. According to a recent Congressional Budget Office report on the impact of the Recovery Act, tax cuts had among the smallest ripple effects of all the act’s major stimulus components. Purchases of goods and services by the federal government and transfer payments to state and local governments for infrastructure projects, on the other hand, appeared to produce a bigger bang for the buck.

Economists Say Tax Cut Deal Won’t Stimulate the Economy Much - Obama got Republicans to agree to a year-long extension of unemployment benefits, and a year-long, two percentage point reduction in the payroll tax, meant to mimic a temporary extension of the tax breaks that were in the stimulus bill. Each of these concessions will inject much-needed demand into the economy. Could this silver lining be bright enough to make the extension of all the cuts worth it? According to progressive economists, it will help, but won't make a huge dent.  For starters, extending the Bush tax rates don't provide any additional stimulus -- you'd have to lower the rates from their current, Bush-era baseline to generate more stimulus. Letting them expire might have a contractionary impact, but keeping them in place won't create more stimulus.  Based on his back-of-the-envelope math, Dean Baker of the Center for Economic Policy Research told TPM that a year-long extension of the stimulus tax cuts "should lower the unemployment rate three to four tenths of a percentage point."In November, the Economic Policy Institute calculated that the a year-long extension of unemployment benefits would generate 700,000 jobs.

Tax Cut Ironies - From The New York Times: “Congressional Republicans in recent days have blocked efforts by Democrats to extend the jobless aid, saying they would insist on offsetting the $56 billion cost with spending cuts elsewhere.” Instead, as it turns out, they agreed to offset the cost with tax cuts elsewhere. Still, though, I place the blame for this one squarely on the White House. The Republicans are just doing what Republicans do: arguing for lower government spending and lower taxes. The fact that they justify the former by saying it will cut the deficit and the latter by saying it will stimulate the economy (when you could just as easily switch the arguments and make them point the other way) is just a detail. As I’ve said before, the Bush tax cuts were always bad policy.* After the last election, President Obama will be able to accomplish precious little. But he could easily have killed the Bush tax cuts and thereby done more good for our nation’s fiscal situation than anyone will be in a position to do for many years to come. Killing the tax cuts would alone reduce the national debt by roughly as much as the deficit commission’s entire proposal.

Tax Cut Deal Shows No One Really Cares About Deficits - President Obama and congressional Republicans struck a deal Monday night to fully extend the Bush tax cuts for two years, as well as extending unemployment insurance and stimulus tax cuts. They will also reduce the estate tax and temporarily cut payroll taxes. There are plenty of good things that can be said about the deal: it will help stimulate the economy and reduce unemployment, it allows (theoretically) for the tax cuts to expire or be renegotiated in two years, and it will break the legislative logjam. But you cannot say that it will reduce the deficit. The deal is just a microcosm of the bargain Republicans and Democrats have been making for decades: Republicans want low tax rates for rich people, Democrats want to help the needy, and you cannot do both without running a deficit. Something has to give, so it is the deficit.

Some Public Workers to Lose a Tax Benefit in Deal -More bad news for government workers.  At a time when state and local governments across the country are imposing furloughs and layoffs, and President Obama has frozen pay for federal employees, it turns out that one of the few groups to face higher federal taxes next year may be public sector employees.  The proposal to extend the Bush-era tax breaks unveiled by Mr. Obama this week would offer a tax cut for most Americans. The deal would end the Making Work Pay credit, which gave a tax reduction of up to $400 to workers with low and middle incomes. That credit will be replaced by a 2 percent decrease in the payroll tax for Social Security for people of all incomes.  But more than six million federal, state and local government employees do not pay into Social Security at all. Instead, they pay into public pension systems. So if the agreed proposal becomes law, such employees will lose the $400 credit and would not reap any benefit from the payroll tax cut.

Tax-Cut Deal Alone Won't Add Enough Jobs: Commentary by Mohamed El-Erian – Bloomberg - President Barack Obama made a very important policy announcement Monday while also noting that it was “not perfect.” If approved by Congress, which is likely, its impact will be felt both inside and outside the U.S. Still, the key objective -- to generate durable jobs -- will be possible only if this is part of a broader policy push.  After protracted negotiations that crossed party lines, Obama explained his willingness to maintain for two years the Bush tax cuts for all income brackets, extend federal unemployment insurance, cut payroll taxes by 2 percentage points for one year and reduce other taxes. The accord is important in three ways. First, it shows that America’s unemployment problem is finally at the top of Washington’s legislative agenda. Second, the measures take some pressure off the Federal Reserve, which has been pushed into unusual activism and policy experimentation to combat unemployment that remains stuck at almost 10 percent. Third, it signals that political compromises are possible in a city that has been characterized by massive polarization and fragmentation.

Additional Thoughts On The Tax Cut Deal As Stimulus - The economic blogosphere seems to be centering around a read of the second stimulus package –  the series of tax cuts, tax credits and unemployment insurance extensions bundled with the high-end tax cuts for households making more than $250,000 – as being a good deal for the economy. The distributional parts of the total compromise are a form of social robbery: “at least a quarter of the tax savings will go to the wealthiest 1 percent of the population.” But for this post I want to talk about that second stimulus bundled in with the bribe to the top 1%, as I think there are some real problems that need to be addressed in the discussion before this gets oversold. We are not creating new stimulus with much of these extensions to tax and unemployment benefits as much as we are merely keeping the old stimulus in place.  As such, job creation from the new tax extensions will function more like saving jobs and maintaining the old employment level rather than creating new jobs. A simple graph will explain. 

In tax deal, the rich get richer - The framework announced Monday evening by the White House would extend the Bush tax cuts for two years, preserving lower rates for those in the highest tax brackets. It's no surprise that the Obama administration had to back off its desire to raise taxes for those reporting the highest incomes, given the need to bring congressional Republicans on board. But the extension of the Bush tax cuts isn't the only sop to the high-income class. The framework announced Monday also:

  • Leaves in place the 15% capital gains rate on investment income. Obama had wanted to let that rate rise to 20% for those making more than $250,000 a year.
  • Puts the estate tax at 35%, its lowest rate since 1931 (not counting this year, when it was repealed). The top estate tax rate earlier in this decade ranged between 45% and 55%. The deal also exempts the first $5 million of assets from taxation -- much more than before.
  • Gives high earners big breaks on the payroll tax.
  • Allows the private equity type to carry on with their lucrative carried interest loophole.

All these cuts add up, needless to say, for a federal budget already straining to the tune of trillion-dollar-plus annual deficits. Policy analysts at MF Global put the cost of the tax package at around $1 trillion.

The Deal - Krugman - Well, for starters we have the two-year extension of the Bush tax cuts. As I pointed out yesterday, the CBO estimated that such an extension would reduce unemployment relative to what it would have been otherwise by 0.1 to 0.3 percentage points in 2011, twice that in 2012. To this, the deal added $120 billion in a payroll tax cut; $56 billion in extended unemployment benefits; about $40 billion in extension of other tax credit. Also, expensing of business investment. I’d discount the last item: we’re awash in excess capacity, and likely to stay that way for years. The rest is about $220 billion, or about 0.75 percent of GDP over the two-year period. What’s the multiplier on that? Pretty high on UI, which will get spent; less on the rest. Overall, probably less than 1. So let’s say that this raises GDP by 0.7 percent relative to otherwise; rule of thumb is that one point on GDP is half a point on unemployment, so add 0.35 points to the CBO numbers. That’s a two-year average; what about timing? Both the payroll tax break and the unemployment extension are for the first year only. So, a bigger boost next year, fading out in 2012. .

The economics of tax-cut fear-mongering - Despite a full-court press from the White House warning that the U.S. might slip into a "double-dip" recession if congressional Democrats reject Obama's tax-cut deal, the House Democratic caucus voted against bringing the package up for a vote on Thursday morning. Judging the significance of the vote is tricky. According to ABC's Rick Klein, the mastermind of the maneuver, Rep. Peter DeFazio, D.-Ore., the vote rejecting the deal "was nearly unanimous." Speaker of the House Nancy Pelosi declared in a tweet that "we will work to improve [the tax cut deal] before having a floor vote."However, the vote was non-binding, and if House Republicans fall into line, as expected, Obama doesn't need anything close to a majority of Democrats to pass the bill.  Senate Majority Leader Harry Reid announced that the Senate would vote on a version of the tax cut deal -- presumably loaded up with additional tax cut goodies to sway wavering Senators -- on Thursday night. So as we await the outcome of feverish horse-trading, it's worth taking a closer look at the White House's prime argument for passing the deal, and passing it now -- that fear of a double-dip recession.

Biden: Here's the Deal’ - A day after walking House Democrats through the tax deal President Barack Obama cut with congressional Republicans, Vice President Joe Biden breaks it down for the rest of us. The highlights: – No tax increase for middle-class families, saving the typical household $3,000 – The 2% cut in Social Security taxes will gives workers additional spending money every pay period – An extension of jobless benefits for the long-term unemployed means “good news for local economies because unemployment insurance dollars are among the most likely to be spent quickly.” His email directs readers to another White House White Board video from Austan Goolsbee, one of the president’s chief economic advisers.

Obama-GOP Tax Deal: Winners and Losers - On the defensive for cutting a $700 billion tax deal with Republicans, President Obama argued that the agreement is important because it would benefit middle-class Americans. The Tax Policy Center’s preliminary analysis of the plan finds that he’s right—though the proposal would help just about everyone else as well, including the nation’s highest-earners.  How much depends, as always, on what you measure the plan against. If you assume the Bush-era tax cuts were going to be extended anyway (what wonks like to call the current policy baseline), this deal is a sweet tax cut across the board. But if you compare it to the tax law at the end of the Clinton Administration—that is, if you assume the Bush-era revenue law expires in three weeks (the current law baseline)—this proposal is a big tax cut indeed and one that benefits very high earners much more than others.

Working Poor Will Pay More After Obama's GOP Tax Compromise - When President Obama defended his tax cut compromise with the Republican Party, he insisted that he was helping working people avoid taking a pay cut. "I'm focused on making sure that tens of millions of hardworking Americans are not seeing their paychecks shrink on Jan. 1, just because the folks here in Washington are busy trying to score political points," Obama said. But as tax experts look at the proposal more closely, it has become clear that the working poor will actually end up losing money under the new arrangement. "Single working people with earnings below $20,000 and married couples with earnings below $40,000 are worse off under the payroll tax cut proposals in the compromise between the president and the Republicans," Here's why: The Obama proposal substitutes a Social Security payroll tax cut for the Making Work Pay credit, which was targeted to do the most good for low-income families. Under current rules, the working poor receive $400 when they earn at least $6,452 a year through the Making Work Pay credit. Married couples with earnings above $12,900 get $800 under the program.

What the tax extension means for me - interactive graphic - President Obama campaigned on a promise to repeal the George W. Bush-era tax cuts that benefit the wealthiest 2 percent of U.S. households. But with Republicans insistent on preserving all of the cuts, the president decided that abandoning that position was the price of preventing a political stalemate that would have caused taxes to rise for all Americans. If Congress approves the compromise deal Obama reached with GOP leaders, most Americans will pay lower taxes next year than they would have if all Bush tax cuts were extended.

Is the Tax Deal Targeted, Timely, and Temporary? - Is this the best deal we could get in terms of its economic impact? Not by a long shot. Stimulus packages are supposed to be targeted, timely, and temporary, and this bill fails on all three fronts. It certainly could have been targeted better. Take the payroll tax cut. It will apply equally at all income levels and thus, in absolute terms, the highest income taxpayers will receive the highest benefit. Tilting the benefits toward those who are more likely to spend the tax cut rather than save it would enhance its impact. The same is true with items like tax cuts for the wealthy and the estate tax. Is it timely? No, it’s much later than would be optimal. There are lags between the time a bill passes — which this one has yet to do — and the time it actually hits the economy. We don’t need a stimulus several months from now, we needed it months and months ago. Will it be temporary? It’s supposed to be, at least according to what the bill says, but that’s not the intent of the GOP regarding their favorite tax cuts. And as I noted here, it will be hard to raise the payroll tax a year from now if the economy is still lagging, as it’s likely to be, and that sets it up to be extended permanently.

More on the Tax Deal - I got some valid criticisms for my last post on the tax cut deal. In particular, that post may make it seem as if my criticism of President Obama has to do with his negotiating ability. But if Obama really wanted the outcome he ended up with, then he is a master negotiator; where I really differ from him, then, would be in what policy should be.  I want to repeal all the Bush tax cuts, and eliminate the mortgage interest deduction, and eliminate the income cap on payroll taxes, and eliminate preferential rates for dividends and capital gains, and tax carbon emissions, and cut the defense budget (and secure lasting peace in the Middle East). I want to use some of those increased revenues to reduce the long-term deficit, some to provide block aid to state and local governments, some to extend unemployment benefits permanently, and the rest to fund a refundable tax credit for poor people that will basically ensure a minimum standard of living for everyone. But that’s not going to happen. You have to choose among the options you have.

In Obama Tax Plan, Boost for Job Creation - A year ago, President Obama and the Democrats made the mistake of assuming that an economic recovery was under way. This week’s deal to extend the Bush tax cuts shows that the White House’s top priority is avoiding the same mistake again — even if it has to upset many fellow Democrats in the process.  Mr. Obama effectively traded tax cuts for the affluent, which Republicans were demanding, for a second stimulus bill that seemed improbable a few weeks ago. Mr. Obama yielded to Republicans on extending the high-end Bush tax cuts and on cutting the estate tax below its scheduled level. In exchange, Republicans agreed to extend unemployment benefits, cut payroll taxes and business taxes, and extend a grab bag of tax credits for college tuition and other items.  Congressional Democrats have reacted with a mix of wariness and anger, and some said Mr. Obama should have put up a fight on the high-end tax cuts. Yet once the Democrats bungled this issue — failing to deal with it before the midterm elections — their choices were extremely limited. If they stood firm on the high-end tax cuts and Republicans stood firm as well, all of the Bush tax cuts, not just those on income above $250,000, would have expired Dec. 31.

What's Wrong With Cutting Taxes? - Simon Johnson - President Obama and Congressional Republicans have reached a deal that would cut taxes “for all Americans.” Their argument is that this package will stimulate the economy, create jobs and help lead to economic recovery and sustained growth. This proposal, which seems likely to pass Congress, is not a good idea. Why? (To see me explain these points in a five-minute video, click here.) Vice President Dick Cheney said, loud and clear, in 2002: “Reagan proved deficits don’t matter.” He was right that Ronald Reagan showed the Republican Party that you can get away with running significant deficits as a result of tax cuts – exactly the strategy of President George W. Bush. But Mr. Cheney was completely wrong with regard to the implication that there are no economic consequences of sustained fiscal deficits. If the I.M.F. could speak truth to authority in the United States, it would say this most forcefully.

Let the tax cuts go and you actually stick it to the top for real. - I made my position on of Obama clear after the 60 Minutes interview. Mr. Buffenbarger's comments only reinforces my position as to understanding President Obama as does Obama's latest “negotiation”. Surprisingly, only 4 comments were made. Too bad, the nation would have been more prepared for this latest act in "Obama the Negotiator. Not!" But, that is not what got me regarding Mr. Buffenbarger's interview. No. It was that he confirmed something I have been thinking since Obama stated his compromise policy after this current midterm elections.  ...when Bush put the tax cut's in place, very few of the members I'm privileged to represent noticed any difference in their pay check. And so, if the tax cuts were to go away, and we go back to the tax rates of then, our members would see very little change in their tax rates again. Exactly. Has not the argument been that the cuts did little for the middle class? Then what is the problem with letting them go? I know for me it meant very little difference. Though, I realize having “meaning” is different for all so, here is a very nice chart I saved from 2005 looking at the tax cuts and what they meant for the various income groups.

U.S. tax deal squeezes potential home buyers - Yields in the U.S. Treasury bond market spiked on Wednesday as investors worried the deal would inflate further the ballooning U.S. deficit, pushing mortgage rates upward just as the U.S. housing market was showing some signs of recovery. The average 30-year fixed mortgage rate has climbed nearly a half-percentage point since early October to 4.66 percent last week, the Mortgage Bankers Association said on Wednesday. Excluding points, or upfront fees paid by the borrower to the lender for a lower rate, the effective rate for a 30-year fixed-rate mortgage was 4.85 percent last week, the MBA said. The MBA said its refinancing index last week plunged to its lowest level since June 4, and the impact doesn't include the bond market's rout that has sent the influential 10-year U.S. Treasury note's yield soaring by a quarter percentage point since Friday, December 3.

"The Tax Cut Backstory" - Noam Scheiber has some of the backstory on the internal divisions over the Bush tax cut: ... Within the administration, the split over whether to mount a tax-cut offensive broke down largely along wonk-operative lines. The wonks spent the last year mystified that the White House was ducking the fight when the substantive merits were so one-sided. The operatives brooded that the politics could abruptly turn against them, despite polling showing little public appetite for the upper-income cuts. "They view it through the class warfare stuff-Kerry in 2004, Gore in 2000," says one administration official. "They worry that they'll get painted as lefties, tax-raisers." At key moments, including one internal discussion this spring, the political team declined to make a concerted push before Election Day. "The political people were like, 'It's a mess, let's not deal with it now,' " says another official involved. ... Such was the frustration among the wonks that, when asked to explain their tax-cut strategy, they'd morbidly joke that there was no strategy, just an "approach." ...

More on the White House "deal" on tax cuts - Dan Shaviro, a colleague at NYU, ends up being hopeful about the Obama-GOP deal. See "The deal on extending the tax cuts", Start Making Sense, Dec. 6, 2010 and "The tax cut deal: too soon to tell who really won?", Dec. 7, 2010. I think that is because Dan tends to credit Economics 101 with considerably more wisdom than I do (and place "efficiency", as defined by the free marketers, higher on the wish list for tax policy than I), so he thinks Social Security isn't on a sound footing and that benefits will need to be cut; thinks expensing for corporations is a reasonable way to spur growth; thinks there is some possibility that the 2012 replay of "Bush tax cuts, take 2" might play out in favor of Obama if he is "very clear that he planned to veto any extensions and let all the tax cuts expire UNLESS the Republicans made the deal he requires". I'll intersperse my comments with Dan's below.

Barack Obama's Time Consistency Problem? - The reason why governments always say they will not negotiate with hostage takers is that, if they won't negotiate, there is no incentive to take them in the first place.  But, once hostages have been taken, the government has a strong incentive to negotiate because they don't want to be responsible for the hostages getting killed.  And the problem is that the would-be hostage takers understand this, and therefore do not believe the government will follow its announced policy of not negotiating. That example may not work next semester, if my future students saw President Obama's press conference: I’ve said before that I felt that the middle-class tax cuts were being held hostage to the high-end tax cuts.  I think it’s tempting not to negotiate with hostage-takers, unless the hostage gets harmed.  Then people will question the wisdom of that strategy.  In this case, the hostage was the American people and I was not willing to see them get harmed.  

The Sorrow And The Self-Pity - Krugman - There is a case for the tax cut deal, as the best of a very bad situation. But Obama did not help that case yesterday by lashing out at “purists”. Leave aside the merits for a moment: what possible purpose does this kind of lashing out serve? Will activists be shamed into recovering their previous enthusiasm? Will Republicans stop their vicious attacks because Obama is lashing out to his left? It was pure self-indulgence; even if he feels aggrieved, he has to judge his words by their usefulness, not by his desire to vent. This isn’t about him. On taxes, the administration really didn’t push Congress to take up the issue... Let me add that Obama has never, as far as I can recall, pointed out that these horrible tax increases on the rich the GOP warns about would bring rates back to what they were under Bill Clinton — a time of enormous prosperity. But then, Obama has always had a weirdly hard time making the case that the Clinton economy refuted Reaganism.

Block That Metaphor - Krugman - Mark Zandi of Moody’s has released his estimate of the effect of the tax-cut deal; it shows a fairly big boost to growth in 2011, with most of that boost given back in 2012. My guess is that the actual numbers will be smaller: I suspect that Zandi’s multipliers assume that more of the payroll tax cut would be spent than is likely to be the case, and I have severe doubts about whether the business tax cut would do anything noticeable. More about the implications of these estimates in my next post. First, though, I want to point to something about the way Zandi discusses the outlook. While the numbers say that you get a temporary boost, Zandi says something quite different: The stimulus was never intended to power economic growth over the long term; rather, it was designed to jump-start the recovery, and did so. The intent of additional stimulus in 2011 would be to ensure the recovery evolves into a self-sustaining expansion, Uh-oh — it’s the jump-start metaphor (which used to be the pump-priming metaphor, back when Americans still knew what that meant.) It’s a bad metaphor, I’d argue — because it leads people to downplay the problems that arise when temporary stimulus fades away.

December 2011 - Krugman - On the straight economics, the tax deal is worth doing. But the history of the past two years drives home, if anyone doubted it, that economic policy must be considered from a political economy point of view; that you have to think ahead to how current policies affect the environment in which future policies will be decided. And the more I work on this, the more concerned I’m becoming. We already knew that extending the Bush tax cuts makes it more likely that they’ll be made permanent — which increases the costs of doing a deal beyond the direct budget impact. That is, we knew that any deal extending those tax cuts for two years means that we can expect a replay of December 2010 in December 2012, with a high chance of a bad result. But the new deal creates another hostage situation — this time for December 2011, when the good stuff in the deal is scheduled to run out. Look at the Zandi estimates: they show a boost to the economy in 2011, which is then given back in 2012. So growth is actually slower in 2012 than it would be without the deal.

Landrieu: It’s the ‘Obama-McConnell Plan’- Add the phrase “Obama-McConnell Plan” to words most Democrats don’t want to hear. “We’re going to borrow $46 billion, according to the Obama-McConnell plan — and that’s what I’m calling it, the Obama-McConnell plan,” Louisiana Sen. Mary Landrieu told reporters Tuesday afternoon as she sharply criticized extending tax cuts for upper-income Americans. “We’re going to borrow $46 billion from the poor, from the middle-class, from businesses of all sizes basically, to give a tax cut to families in America today that, despite the recession, are making over $1 million,” she said. “This is unprecedented.” Congressional Democrats will be loath to utter that phrase much over the next two years because it seems to signal President Barack Obama has adjusted to life without them after Republican election victories in November.

Trojan Horse in Tax Compromise: GOP Plan to Bankrupt States, Break Unions (Updated) -This alert came via James Pethokoukis of Reuters:  Congressional Republicans appear to be quietly but methodically executing a plan that would a) avoid a federal bailout of spendthrift states and b) cripple public employee unions by pushing cash-strapped states such as California and Illinois to declare bankruptcy. This may be the biggest political battle in Washington, my Capitol Hill sources tell me, of 2011. That’s why the most intriguing aspect of President Barack Obama’s tax deal with Republicans is what the compromise fails to include — a provision to continue the Build America Bonds program. BABs now account for more than 20 percent of new debt sold by states and local governments thanks to a federal rebate equal to 35 percent of interest costs on the bonds. The subsidy program ends on Dec. 31. And my Reuters colleagues report that a GOP congressional aide said Republicans “have a very firm line on BABS — we are not going to allow them to be included.” In short, the lack of a BAB program would make it harder for states to borrow to cover a $140 billion budgetary shortfall next year, as estimated by the Center for Budget and Policy Priorities. The long-term numbers are even scarier. Estimates of states’ unfunded liabilities to pay for retiree benefits range from $750 billion to more than $3 trillion.

Does the Tax Compromise Raise Taxes on Low-Income Earners? - The compromise plan agreed to between President Obama and Senate Republicans extends all of the Bush tax cuts, and most of the cuts in the 2009 stimulus bill.  Additionally, it includes a cut in the employee portion of the Social Security payroll tax from 6.2% to 4.2% of wages. David Kocieniewski of the New York Times (subscribe) wrote a story a few days ago that looked at how this compromise tax plan would affect a variety of taxpayers.   He claimed that, under the compromise, “the only groups likely to face a tax increase are those near the bottom of the income scale — individuals who make less than $20,000 and families with earnings below $40,000.”  The reason this claim is technically true is because, as explained in the article, the payroll tax cut is less generous to these groups than the Making Work Pay income tax credit that it replaces.  Making Work Pay was a refundable tax credit worth up to $400 ($800 for married filers) enacted in 2009 as part of the stimulus bill, and it is set to expire automatically at the end of 2010 along with all of the Bush tax cuts and the rest of the stimulus tax-cutting measures.  However, it’s silly to use the credit as a baseline for comparison, since nobody, Democrats or Republicans, wants to extend it.

Why the Tax Deal Confirms the Republican Worldview - Robert Reich - At least Republicans have a story – the same one they’ve been flogging for thirty years. The bad economy is big government’s fault and the solution is to shrink government.Here’s the real story. For three decades, an increasing share of the benefits of economic growth have gone to the top 1 percent. Thirty years ago, the top got 9 percent of total income. Not they take in almost a quarter. Meanwhile, the earnings of the typical worker have barely budged. The vast middle class no longer has the purchasing power to keep the economy going.  The crisis was averted before now only because middle-class families found ways to keep spending more than they took in – by women going into paid work, by working longer hours, and finally by using their homes as collateral to borrow. But when the housing bubble burst, the game was up.The solution is to reorganize the economy so the benefits of growth are more widely shared. Exempt the first $20,000 of income from payroll taxes, and apply payroll taxes to incomes over $250,000. Extend Medicare to all. Extend the Earned Income Tax Credit all the way up through families earning $50,000. Make higher education free to families that now can’t afford it. Rehire teachers. Repair and rebuild our infrastructure. Create a new WPA to put the unemployed back to work.

Obama’s Hostage Deal - Krugman - I’ve spent the past couple of days trying to make my peace with the Obama-McConnell tax-cut deal. President Obama did, after all, extract more concessions than most of us expected.  Yet I remain deeply uneasy — not because I’m one of those “purists” Mr. Obama denounced on Tuesday but because this isn’t the end of the story. Specifically: Mr. Obama has bought the release of some hostages only by providing the G.O.P. with new hostages.  About the deal: Republicans got what they wanted — an extension of all the Bush tax cuts, including those for the wealthy. This part of the deal was bad all around. Yes, some of those tax cuts would be spent, boosting the economy to some extent. But a large part of the tax cuts, especially those for the wealthy, would not be spent, so the tax-cut extension increases the budget deficit a lot while doing little to reduce unemployment.  And by stringing things along, the extension increases the chances that the Bush tax cuts will be made permanent, with devastating effects on the budget and the long-term prospects for Social Security and Medicare.

Bill Black: No, Mr. President, you did not negotiate a winning tax deal - This the third column in a series about President Obama’s decision to agree to support the extension of Bush’s tax cuts for the wealthiest Americans. The first column explained why the President folded on a winning hand on taxes. The second column showed that four of the five economists the administration was citing as supporting its plan were virulent opponents who were delighted that the President was capitulating to the Republicans and making them and their wealthy clients far richer. This column analyses Obama’s claim that he got the better of the Republicans in the negotiations.  . Austan Goolsbee’s (Chairman of Obama’s Council of Economic Advisors) white board presentation claims that the administration received concessions by the Republicans that are over twice as large as the concessions that the administration made on reducing taxes for the wealthiest two percent of Americans ($238 v. $114 billion in 2011).The first problem with Obama’s claimed tax miracle is that if you accept Goolsbee’s claims, then it takes a political miracle in America for a political party, pledged to ending the tax cuts for the wealthy, controlling the Presidency and with strong majorities in both Houses to get 98% of the citizens 67% of the benefits while giving the wealthiest two percent of the citizens 33% of the benefits.

Zandi on the 2012 Problem - I asked Mark Zandi of Moody’s Analytics about the 2012 problem — the fact that the tax-cut deal between President Obama and Congressional Republicans would likely reduce economic growth in 2012, as Paul Krugman and others have pointed out. Mr. Zandi agreed. “In my previous baseline I expected real G.D.P. growth of 2.8 percent in 2011 and 4.2 percent in 2012,” he wrote in an e-mail. “I’m now expecting real G.D.P. growth of 3.9 percent in 2011 and 3.4 percent in 2012.” Yet Mr. Zandi still favors the package. He explained: There are four key reasons why slower 2012 growth with the package should not forestall its passage. First, stronger growth in 2011 (particularly in the first half of 2011) will ensure that the recovery achieves escape velocity. That is, enough G.D.P. growth to generate enough job growth to bring down unemployment and propel the recovery into a self-sustaining expansion. This is a necessary condition for addressing our long-term fiscal problems. Without this additional boost, unemployment would continue to hover near 10 percent throughout 2011 and the recovery would remain very vulnerable to anything that might go wrong.

Why The Tax Cut Deal Isn’t Cutting It. - According to Ezra Klein, the White House is circulating this diagram around the Hill.  James Kwak dissects this chart and the narrative that “Obama won” on this deal; I’ll do the same.  Let’s take the “What We Got” apart.

  • Child Tax Credit" The GOP take pride in creating and fighting for the continuation of this Child Tax Credit in their Pledge To America. It’s likely this could have been “got” without this deal.
  • Equipment Expensing This is unlikely to be stimulative, as per earlier research on this field. Really it just puts tax credits that are always extended informally into law. It saves lobbyists some time, but there is little reason to believe this will be very effective with demand so slack.   Would the GOP really block this?
  • Unemployment Insurance Huge fan.  Love to get into long discussions about the merits. This is a win. While we are at it, I also like the EITC. UI extensions are doing the major work in the estimates of GDP and employment growth in the estimates; that it is shut off after only a 13 month extension (and not extended beyond 99 weeks) puts another hostage into the ideological field of fire.
  • Payroll Tax Holiday I don’t see this as a huge stimulus and the more I investigate the less I’m impressed with it.

Who Wanted What? - I’m familiar with the argument for the tax cut deal. It’s not a terrible argument. In simple form, it goes, the top priorities are to stimulate the economy and to cushion the impact of unemployment, and a two-year tax cut extension was worth it to get that, especially since we can kill the Bush tax cuts in 2012. Now, no one who wasn’t born yesterday buys that bit about killing the Bush tax cuts in 2012, but you could still make the argument that two years of stimulus is worth making the tax cuts effectively permanent. (I don’t agree, but it’s not a crazy argument.) But that’s not Austan Goolsbee’s argument on YouTube. Here’s his slide: Basically he’s trying to convince you that Obama won: Republicans wanted the top-end tax cuts and Obama wanted the “middle-class” tax cuts, and Obama conceded the top-end tax cuts, but in exchange he won lots of other great things: unemployment insurance extension, some sweeteners to the earned income tax credit, American Opportunity tax credit (for college), some sweeteners to the child tax credit, lower payroll tax, and an extension of some business investment credits. Notice which column he put them in.

Death Tax Compromise Protects Thousands of Estates from the Tax - One of the most debated provisions in the current tax deal between President Obama and the Republicans is over the reinstatement of the estate tax, which was allowed to expire for all of 2010. On January 1st, the estate tax rate is scheduled to rise from the current rate of zero to 55 percent on estates worth more than $1 million. Under the Obama/Republican agreement, the estate tax rate will instead rise to 35 percent on estates larger than $5 million ($10 million per couple). While the difference between $1 million and $5 million may not seem large to some people, it is remarkable how many estates will be protected from the tax by the higher exemption level. According to an estimate by Congress' Joint Committee on Taxation,  there would be ten times as many taxable estates between $1 million and $5 million under current law (with the top rate of 55 percent)  compared to the number facing higher taxes under the compromise deal (with the top rate of 35 percent). The table below also indicates the number of farm and small business estates protected from the estate tax because of the compromise deal.

Obama-Republican Deal Could Mean Tax Hike For One In Three Workers - The tax deal reached between President Obama and congressional Republicans could mean a higher tax bill for roughly one in three workers as a result of the Social Security tax cut Republicans pushed as a replacement for the current Making Work Pay tax credit. The Making Work Pay credit gives workers up to $400, paid out at 8 percent of income, meaning that anybody making at least $5,000 gets the full amount -- and gets as much as anybody else. Its replacement knocks two percentage points off the payroll tax cut, meaning a worker would need to make $20,000 to get a $400 break. Of the nation's roughly 150 million workers, around 50 million make less than $20,000 and will see at least some increase as a result.  Additionally, roughly a quarter of 20 million state and local workers pay no payroll tax, because they have a separate pension system. Some of those workers with children will benefit from the extension of other tax credits, but overall will have less money in their pocket. House liberals were opposed to the payroll tax cut because of its effect on the poorest workers. Progressives are also concerned that the tax cut will become permanent and undermine Social Security's funding stream and political support over time.

Tax-Cut Woulda, Coulda, Shoulda - Keith Hennessey, a former economic adviser to President George W. Bush, lays out how he thinks the Democrats could — and should — have dealt with the Bush tax cuts: In early 2010, pass a budget resolution conference report that creates a reconciliation bill for the President’s preferred tax policy.… This is the partisan path that would have eliminated Republicans’ ability to block the Democrats’ preferred policy. With a simple majority of the House and Senate, Democrats could have had a complete policy win. The budget resolution is a concurrent resolution that is not signed by the President. The failure to pass a budget resolution and create a reconciliation bill is entirely a failure of the Legislative Branch. Even better for the Left, the budget resolution (had there been one) could have provided protected reconciliation status only for tax changes of a certain deficit size. Congressional Democratic Leaders could have precluded the additional $700 B deficit effect of the Republicans’ preferred alternative. Thus the Democratic-preferred alternative would have needed only 51 votes in the Senate, while the Republican-preferred policy would have needed 60. That’s the margin of victory.

What's the Point of a Veto? - Over at the Huffington Post, Sam Stein regards me as skittish about the recent tax deal.  I haven't been skittish about the Bush era tax cuts -- I have been quite clear about wanting them to expire. I haven't been skittish about the payroll tax holiday -- I have suggested it as part of a green tax swap, offset by other revenues and not as a short-term stimulus measure. I haven't been skittish about what is conspicuously absent from this deal -- a means of paying for it over the long term and productive investments in public infrastructure that should form the backbone of it.  The person who has been skittish, sad to say, is President Obama.  Consider a counterfactual -- imagine that the President had no veto power and was required by the Constitution to sign all pieces of legislation that passed both Houses.  How would this tax deal have been any different?  How much less could the Democrats have gotten out of it?

Text and Revenue Estimate of Tax Cut Bill - Here's the text of the tax/unemployment insurance compromise bill being debated in Congress this week, and here's the revenue impact estimates from the Joint Committee on Taxation.

New Cost Figures for Tax Cut-Unemployment Insurance Deal -Last night, the Senate released legislative language for the tax cut-unemployment insurance compromise negotiated between President Obama and Congressional Republicans. The Joint Committee on Taxation (JCT) released an official cost estimate for the revenue portions of the bill shortly thereafter. These graphs illustrate the various components of the legislation and their costs; click here for details.

The White House White Board on the Tax Deal - Here is Austan Goolsbee explaining the President's rationale for the tax cut deal.� More detail can be found here.  He makes his case pretty well, subject to two assumptions.  First, he assumes that the listener doesn't have higher expectations of what concessions the President could have extracted from the Republicans in exchange for his veto threat.  My criticism in the last post was that he basically gave it away.  I don't think the Administration helps itself by using "hostage" language -- no one wants to hear the White House describing itself as helpless. Second, he assumes that the listener is incapable of properly assigning blame to the Republicans for taxes on incomes under $250,000 (or $1,000,000) going up in the counterfactual in which he doesn't cut this deal.  He might have mentioned, for example, that Senate Republicans have already blocked these two sensible alternatives. 

Why the Obama tax deal with Republicans is insane - The central premise of U.S. economic policy since the election of Ronald Reagan in 1980 has been that the people in the private sector who know how to invest – the rich – do a much better job allocating society’s financial resources than the federal government. In fact, Reagan told us in his first inaugural address, “government is the problem. In order to get as much of society’s financial resources into the hands of the rich - the people in the private sector who supposedly would do a better job investing it - Reagan, the Republican Party, and American conservatives in general developed a simple-minded faith in tax cuts, especially in reducing taxes on the highest incomes. What are the results of this thirty year experiment low taxes? The Reagan / Republican / conservative theory DOES NOT WORK. For the first time in American history, we now have a generation that has less education and worse economic prospects than their parents did thirty years ago. In all the hub-bub and brou-hah-hah of the tax debate the past few days, weeks, and months, hardly anyone has put forward the clear and unambiguous information that TAX CUTS DO NOT WORK.

Harry Reid Will Try To Add Online Poker Payback To Tax-Cut Bill - Last week, we brought you word that during this limited lame-duck session of Congress, Senate Majority Leader Harry Reid decided to put his staff to work drafting legislation that would legalize online poker. So long as only "existing casinos, horse tracks and slot-machine makers" operated the poker websites, that is! And only as long at oversight over the websites was put into the hands of state regulators. You know, because the Nevada gaming industry gave Harry Reid all kinds of money, so he could defeat Sharron Angle. Well, here's some more great news from Ken Vogel and Manu Raju, at Politico: Senate Majority Leader Harry Reid is trying to use the tax cut package President Barack Obama brokered with Republicans to legalize online poker, POLITICO has learned -- a move that could further complicate the deal Obama announced Monday.

Dem's “Tax CutBill Includes Gifts to Rum Producers and Hollywood - The sweeping tax cut bill introduced Thursday night by Senate Majority Leader Harry Reid is chock-full of sweeteners which could serve as a legislative pacifier for Democrats outraged over the concessions President Obama has handed to Republicans.  The stimulus-sized package includes about $55 billion worth of short-term tax extensions for businesses and individuals. They cover a host of alternative energy credits, a potential salve for environmentally conscious lawmakers, as well as targeted benefits for everything from the film and television industry to mining companies to rum producers.  Reid has set up a test vote on the package for Monday, which could clear the way for a final vote as early as Wednesday. The bill stands a good chance of passage in the Senate, but the House is less predictable as rebellious Democrats accuse the president of caving and clamor for changes.

Add-ons turn tax cut bill into 'Christmas tree' -  In the spirit of the holiday season, President Barack Obama’s tax-cut deal with Republicans is becoming a Christmas tree tinseled with gifts for lobbyists and lawmakers. But that hardly stopped the squabbling on Friday, with Bill Clinton even back at the White House pleading the president’s case.   The tax deal, reached behind the scenes and still informal, now includes ethanol subsidies for rural folks, commuter tax breaks for their cousins in the cities and suburbs and wind and solar grants for the environmentalists — all aimed at winning votes, particularly from reluctant Democrats.  The holiday additions are being hung on the big bill that was Congress’ main reason for spending December in Washington, long after the elections that will give Republicans new power in January. The measure will extend Bush-era tax cuts, averting big tax increases for nearly all Americans, and keep jobless benefits flowing.

Sanders, DeMint pledge to filibuster Obama-GOP tax cut deal - The US Senate's most liberal and most conservative member have both come out strongly against the bipartisan compromise on tax cuts between President Barack Obama and Republicans. Self-avowed democratic socialist Sen. Bernie Sanders (I-VT) on Tuesday evening promised he will "do whatever it takes" to prevent passage of the measure, objecting to its temporary two-year extension of tax cuts for the highest income earners, a centerpiece of the Republican agenda. Also on Tuesday, after Obama's prime time pitch depicting the bill as a necessary compromise to move forward, arch-conservative Sen. Jim DeMint (R-SC) said he'll also filibuster to the bill, but for different reasons than Sanders. DeMint told conservative radio host Hugh Hewitt the deal is inadequate because it doesn't permanently extend the high-end tax cuts, it alters the estate tax for estates valued at over $5 million, and doesn't offset unemployment insurance.

House Democrats defy Obama on tax cut bill - Defying President Obama, House Democrats voted Thursday not to bring up the tax package that he negotiated with Republicans in its current form. "This message today is very simple: That in the form that it was negotiated, it is not acceptable to the House Democratic caucus. It's as simple as that," said Democratic Congressman Chris Van Hollen. "We will continue to try and work with the White House and our Republican colleagues to try and make sure we do something right for the economy and right for jobs, and a balanced package as we go forward," he said. The vote comes a day after Vice President Biden made clear to House Democrats behind closed doors that the deal would unravel if any changes were made. "Wow did the [White House] mishandle this," a senior House Democratic Source told CNN. "Breathtaking. Rep. Peter DeFazio of Oregon said: "They said take it or leave it. We left it."

House Democrats vow to block tax measure - The Senate opened debate late Thursday on a reworked tax package that would add incentives for renewable energy, which many Democrats have demanded, but leave intact the core elements of a deal negotiated by the White House and Republicans, including a revived inheritance tax that has outraged liberal lawmakers.  As the Senate steamed toward a Monday afternoon vote on the far-reaching package, House Democrats were in open revolt. Amid chants of "Just say no," they agreed overwhelmingly during a private meeting Thursday to block the measure from going to the House floor, a symbolic move that underscored the depth of their anger.  Later, House Democratic sources said several options were under discussion, including an amendment to strengthen the inheritance tax provisions. By changing the underlying terms of the deal, however, such an effort could imperil the bill in the Senate, raising the risk that lawmakers could leave town without extending a host of tax provisions that are set to expire on New Year's Eve - hitting virtually every U.S. family with an immediate tax increase.

Congressional Black Caucus Says Obama’s Tax Plan Compromise is Harmful to African Americans - At a Friday press conference on Capitol Hill, Rep. Barbara Lee (D-California), who chairs the Congressional Black Caucus, said that an “overwhelming majority” of the group opposes the tax plan brokered by President Obama and Senate Republicans. “We’re extremely concerned that the cuts that could be made should this package pass would disproportionately hurt the poor and low-income communities and further erode the safety net,” Lee said. “We don’t want to create a situation here that will exacerbate the conditions for Americans who are already hurting. That would be unfair and would be unwise.”The caucus endorses three components of the plan: a 13-month extension of emergency unemployment insurance benefits; a payroll tax holiday or an equivalent, such as a tax rebate check that will not deprive the Social Security fund of revenue; and a two-year extension of the Bush-era tax cuts for middle and low income families. Rep. Bobby Scott (D-Virginia), a member of the House Budget Committee, said that Congress should allow all of the tax cuts to expire to prevent Congress from having to make “draconian spending cuts to vital programs” in next year.

Senate to Consider Tax-Cut Bill That Would Add $857 Billion to U.S. Debt - Senate leaders released an agreement crafted by the White House and Republicans to sustain Bush-era tax rates through 2012, set the estate tax at the lowest rate in 80 years, extend jobless aid and cut payroll taxes by 2 percentage points.  The legislation would add $857 billion to the federal debt over 10 years, government analysts said.  President Barack Obama, in an interview with NPR News broadcast today, said he’s “confident” the tax deal will pass largely intact to keep the tax cuts from expiring at the end of the year. “Nobody -- Democrat or Republican -- wants to see people’s paychecks smaller on Jan. 1 because Congress didn’t act,” he said.  Senate Majority Leader Harry Reid introduced the legislation late yesterday after three days of lobbying by Democrats to include measures excluded from the framework announced Dec. 6 by Obama. The measure includes some provisions favored by Democrats such as renewed ethanol and commuter subsidies. Others, such as an extension of the Build America Bonds program, didn’t make the cut.

Tea Partiers gripe at the tax cut deal -While Democrats argue about whether Obama's tax cut deal is better than could be expected, given the circumstances, or less painful "than a poke in the eye with a sharp stick," or the first step in the road to gutting Social Security or one of the most "extraordinary hypocrisies in the history of American politics" since Lyndon Johnson escalated the war in Vietnam, some Republicans are also letting loose with their own murmurs of discontent. The Hill quotes House Tea Party Caucus chairwoman Michele Bachmann (R-Minn.):  "I don't know that Republicans would necessarily go along with that vote. That would be a very hard vote to take," Bachmann said on conservative commentator Sean Hannity's radio show. In Michele Bachmann's world, a tax cut "compromise" means only going so far as to keep all the Bush tax cuts temporary, instead of making them permanent.

Support the Tax Deal - Given a Democratic President, this is the best possible deal that could be reasonably expected. For the next two years, through the remainder of President Obama’s first/only term, tax rates won’t go up on anyone except dead people. (OK, actually their heirs.) That is a total and complete policy win. With almost no political effort and very little public discussion, capital tax rates aren’t going up. I had expected Congressional Republicans to get two years on all the individual rates but was nervous about the capital tax rates. That is a slightly surprising and complete policy win. The estate & gift tax deal ends up at the Kyl/Lincoln compromise levels, as most anyone could have guessed for a while. While this isn’t a complete victory, it’s darn good. The stupid Making Work Pay credit, which the President mislabeled as a tax cut, is now a true payroll tax cut. That’s a marginal improvement.

Ezra Klein - How the White House cut its deal and lost its base - If you look at the numbers alone, the tax cut deal looks to have robbed Republicans blind. The GOP got around $95 billion in tax cuts for wealthy Americans and $30 billion in estate tax cuts. Democrats got $120 billion in payroll-tax cuts, $40 billion in refundable tax credits (Earned Income Tax Credit, Child Tax Credit and education tax credits), $56 billion in unemployment insurance, and, depending on how you count it, about $180 billion (two-year cost) or $30 billion (10-year cost) in new tax incentives for businesses to invest. But that's not how it's being understood. Republicans are treating it as a victory, and liberals as a defeat. Which raises two separate questions: Why did Republicans give Obama so much? And why aren't Democrats happier about it?

Did Barack Obama lose a political battle but win a war - The number crunchers have had their first stab at Monday’s tax deal and the economic impact is impressive. Goldman Sachs now thinks the economy will grow 0.5 to 1 percentage points faster next year than its current forecast of 2.7%, which was bumped up from 2% only a week ago. JPMorgan has raised its 2011 forecast (fourth quarter compared to a year earlier) to 3.5% from 3%. Moody’s sees growth next year at 4%. All of these forecasts imply some decline in the unemployment rate. ... The initial reaction, in particular among liberal commentators, was that this was a political loss for Barack Obama, since he gave up more than the Republicans. I initially shared that view, but a colleague notes that this constitutes a loss only by narrow Beltway-based accounting. What will ultimately matter in 2012 is how the economy performs, not whose policies are responsible for that performance. If the economy is booming a year from now, Mr Obama may be seen to have lost the battle but won the war. ...

A What-If on the Bush Tax Cuts - In retrospect, an extension of the high-end Bush tax cuts seems to have become inevitable shortly after Labor Day. When Congress returned from its August recess, some Democrats and White House officials were pushing for a vote on the tax cuts. But other Democrats didn’t like the idea. They thought a vote in the heat of the midterm campaign would hurt Democrats running in tough races. So Obama administration officials and Congressional leaders delayed the issue until after the election. The Republicans then won the election, and Democrats were left with a choice between all the tax cuts or none of the tax cuts. Republicans, who did not hold the White House, could more credibly threaten to let all the tax cuts expire, even if a weak economy became weaker. What could the Democrats have done differently?

Why employees got the payroll tax cut - Greg Mankiw discusses the economics of the payroll tax cut, and raises the question of whether it might have been better used to cut employers’ share of payroll taxes, rather than employees’ share: An alternative would have been to reduce the employer’s share of the payroll tax, at least to some degree. Given a sticky wage, this policy would have reduced the cost of hiring and, to the extent labor demand curves slope downward, increased employment. It would also have increased business cash-flow and, to the extent that firms are cash-constrained, increased business investment. After raising the question, Mankiw stops short of answering it, leaving the possibility open that maybe Congress and the White House came to the wrong decision for political reasons. But of course they didn’t: this is a no-brainer. Michael Cooper had a great article in the NYT in October about the last payroll tax cut, a/k/a “the Tax Cut Nobody Heard Of.” The idea is that the less noticeable a tax cut is, the more effective it is: Faced with evidence that people were more likely to save than spend the tax rebate checks they received during the Bush administration, the Obama administration decided to take a different tack: it arranged for less tax money to be withheld from people’s paychecks.

What Does $60 Billion Buy? - In today’s Week in Review section, I look at how else Congress could spend $60 billion a year — the annual cost of extending the Bush tax cuts on income above $250,000 a year. This post provides details on the calculations. First, a few specifics about the tax cut itself: Less than 2 percent of households will be affected by this extension, according to the Tax Policy Center, a Washington research group. The great majority of these households will be earning $300,000 or more (because of exemptions that reduce taxable income below $250,000). On average, each household in this group will save more than $25,000 a year because of the extension of the high-end cuts. And they will save even more than that from the extension of the Bush tax cuts, because they will also benefit from the extension of the tax cuts that apply to their first $250,000 of taxable income.

What Else Would $60 Billion Buy? -- $60 Billion: The approximate amount that extending the Bush tax cuts on income above $250,000 a year — which Congress seems on the verge of doing — will cost a year, in inflation-adjusted terms. On average, the affluent households that benefit from these cuts will save $25,000 annually. What else might that $60 billion a year buy?

  • •As much deficit reduction as the elimination of earmarks, President Obama’s proposed federal pay freeze, a 10 percent cut in the federal work force and a 50 percent cut in foreign aid — combined.
  • •A tripling of federal funding for medical research.
  • Universal preschool for 3- and 4-year-olds, with relatively small class sizes.
  • •A much larger troop surge in Afghanistan, raising spending by 60 percent from current levels.
  • •A national infrastructure program to repair and upgrade roads, bridges, mass transit, water systems and levees.
  • •A 15 percent cut in corporate taxes.
  • •Twice as much money for clean-energy research as suggested by a recent bipartisan plan.
  • Free college, including room and board, for about half of all full-time students, at both four- and two-year colleges.
  • •A $500 tax cut for all households.

The mortgage interest deduction: winners and losers -  The debate on tax reform is starting to heat up with various proposals being debated, and many policies are being considered for the chopping block. One of them is the mortgage interest deduction (MID). I’ve covered the previous research before, which shows the deduction doesn’t increase homeownership, and now a new paper sheds further light on the losers and winners from this subsidy. Using national data from 1984 to 2007 they found that the MID did not increase overall homeownership. In areas with light land use regulation they found that homeownership among higher income families was increased, and in tightly regulated housing markets homeownership was decreased for all income groups except the lowest. The effects, both positive and negative, generally range from 3% to 5%. Regardless of the regulatory environment, homeownership among the lowest income group was not affected at all by the MID. The authors estimate that it each additional homeowner created by the mortgage interest deduction costs the government $53,590, a number they rightly call “staggering”.

Chart of the day: U.S. taxes - Stephen Culp has another striking chart today. If you were structuring a tax code from scratch, it would look nothing like this. But the problem is that tax hikes seem to be politically impossible no matter which party is in power. And since any revamp of the tax code would involve tax hikes somewhere, I fear we’re fiscally doomed. This chart should be ingrained in the mind of anybody who cares about fiscal policy. The main things to note:

  • Federal taxes are the lowest in 60 years, which gives you a pretty good idea of why America’s long-term debt ratios are a big problem. If the taxes reverted to somewhere near their historical mean, the problem would be solved at a stroke.
  • Income taxes, in particular, both personal and corporate, are low and falling. That trend is not sustainable.
  • Employment taxes, by contrast—the regressive bit of the fiscal structure—are bearing a large and increasing share of the brunt. Any time that somebody starts complaining about how the poor don’t pay income tax, point them to this chart. Income taxes are just one part of the pie, and everybody with a job pays employment taxes.
  • There aren’t any wealth taxes, but the closest thing we’ve got—estate and gift taxes—have shrunk to zero, after contributing a non-negligible amount to the public fisc in earlier decades.

Federal Tax Receipts By Source (Percent Of Total)

Tax Code Should Be Simplified, Obama Aides Say - President Obama is considering whether to push early next year for an overhaul of the income tax code to lower rates and raise revenues in what would be his first major effort to begin addressing the long-term growth of the national debt. While administration officials cautioned on Thursday that no decisions have been made and that any debate in Congress could take years, Mr. Obama has directed his economic team and Treasury Department analysts to review options for closing loopholes and simplifying income taxes for corporations and individuals, though the study of the corporate tax system is farther along, officials said. The objective is to rid the code of its complex buildup of deductions, credits and exemptions, thereby broadening the base of taxes collected and allowing for lower rates — much like a bipartisan majority on Mr. Obama’s debt-reduction commission recommended last week in its final blueprint for reducing the debt through 2020.

Pay Freeze Could Cripple Dodd-Frank - Here’s just a quick example for why a pay freeze for public workers is about the stupidest policy you could put together right now. If you’re Barack Obama, you believe have engineered two signature victories through the Congress. You have a health care bill where the regulation that is key to the bill has been outsourced to state insurance regulatory shops (which is a problem), meaning that the relative effectiveness of the regulations are contingent on states allocating resources to those departments. In this time of budget cuts at the state level, that’s shaky. Then you have a financial regulatory reform bill which is incredibly dependent on effective regulation at the federal level. There’s even a new agency, housed inside the Federal Reserve, charged with consumer financial protection. In order to stay a step ahead of the bankers and to comply with the law, this agency and the others overseeing the financial sector must hire more people (the SEC wants to hire 800 more employees to meet the requirements of Dodd-Frank), and be populated with the brightest and most incorruptible minds we can find, who know the tricks and traps that the bank lobbyists will seek as cover from the law. One of the problems we had in the past was that the regulators who weren’t captured by the finance lobby actually didn’t have the smarts to keep up with them as they ran their Wall Street casino.

Mirabile Dictu: The Treasury Flexes Some Muscle on the Volcker Rule? -  Yves Smith - As readers know, this blog has LOOONG been a critic of the Treasury Department’s stance towards big dealer banks, both in the Paulson era and from the very get-go of Geithner’s tenure. So on those all-too-rare occasions when Treasury seems willing to meddle in a real way with the “heads we win, tails you lose” arrangement the financial services industry has managed to devise with broader society, it’s important to applaud those efforts. Admittedly, it is premature to declare victory, but the fact that Treasury is even taking a serious stance on the so-called Volcker rule is a surprise. Conventional wisdom on financial reform, and it is being borne out in the backroom wheeling and dealing on derivatives regulation, is that despite the length of the Dodd-Frank bill, numerous key details remained to be worked out in detailed provisions which were to be negotiated with industry incumbents. That looked to be a way to retrade the deal, since the legislation could be interpreted as narrowly as possible, with the end result that the industry incumbents would be merely inconvenienced, as opposed to required to do business in fundamentally different ways.

Futures Trading Panel Weighing Swap Exemptions - The Commodity Futures Trading Commission proposed a plan on Thursday to excuse wide swaths of non-financial companies from new rules governing the $600 trillion over-the-counter derivatives market.  As part of the proposal, the trading commission is also considering whether to exempt thousands of small financial institutions such as community banks, thrifts and credit unions.  Thursday’s vote means only that the plan is up for public comment. The C.F.T.C. will finalize the rules before July 2011. Under the Dodd-Frank financial overhaul law, the C.F.T.C. and the Securities and Exchange Commission, for the first time, have broad authority to regulate swaps, crucial financial instruments used in the shadowy derivatives world. The law requires big banks and other financial institutions to submit swaps to regulated clearinghouses, which serve as a backstop in case one party defaults.

Global Derivatives Trading Estimated by TABB at $700 Trillion (Bloomberg) -- Global derivatives trading in over- the-counter and exchange-traded futures and options will represent a $700 trillion market with $3.7 quadrillion in annual turnover by the end of this year, research company TABB Group said. Rules to have central clearing for over-the-counter trading would require additional collateral of as much as $2.2 trillion, Westborough, Massachusetts-based TABB said in a statement on its website, citing a report it completed at the request of the World Federation of Exchanges.

Sorkin: Pulling Back the Curtain on Fraud Inquiries -On Monday in Washington, Mr. Holder, the United States attorney general, announced with much fanfare the results of a new enforcement program: Operation Broken Trust. “With this operation, the Financial Fraud Enforcement Task Force is sending a strong message,” Mr. Holder declared, highlighting the Ponzi schemes, affinity frauds and investment scams his department had prosecuted. In all, Mr. Holder said his new task force had brought cases against 343 criminal defendants and 189 civil defendants for fraud schemes that harmed more than 120,000 victims throughout the country, involving more than $8 billion in estimated losses. Wall Street’s biggest firms or corporate America’s biggest companies paying any attention to Mr. Holder’s “strong message”? Of course not. (I actually called some chief executives after Mr. Holder’s news conference, and not one had heard of Operation Broken Trust.) That’s because in the two years since the peak of the financial crisis, the government has not brought one criminal case against a big-time corporate official of any sort. Instead, inexplicably, prosecutors are busy chasing small-timers: penny-stock frauds, a husband-and-wife team charged in an insider trading case and mini-Ponzi schemes.

Department of Justice “Crackdown” On Wall Street Is Just a P.R. Stunt Targeting Small-Time Crooks - Alan Greenspan, William Black, James Galbraith, Joseph Stiglitz, George Akerlof, Chris Whalen and many other economists and financial experts all say that the economy cannot truly recover unless those who committed fraud are prosecuted. So we should be ecstatic that the Justice system is finally prosecuting fraud, right? As the Washington Post notes: At a news conference headlined by Attorney General Eric H. Holder, authorities unveiled “Operation Broken Trust,” a collection of unrelated criminal and civil cases involving Ponzi schemes, foreign currency frauds, investment scams and other market cons. Authorities said the operation involved 343 defendants facing criminal charges and 189 facing civil charges, though some will be counted in both categories. The cases represent more than $8.3 billion in investor losses and 120,000 victims. That may sound impressive at first. But $8 billion divided by 343 (the number of criminal prosecutions) only averages around $24 million per prosecution, which is small potatoes given that financial fraud by the big banks has cost the country trillions.

Jamie Dimon Profile Misses The Point: Trusting Bankers Is Too Stupid To Try Again - Poor, sad Jamie Dimon, the frustrated and--by his account--tragically misunderstood chief of megabank J.P. Morgan Chase. It's not enough that he gets to keep the tens of millions of dollars he netted turning an already enormous institution into a sprawling empire of finance that now controls $2 trillion in assets, even as it has tangled ordinary people in the red tape of the foreclosure mess and seized hundreds of thousands of homes. He wants us to like him, too, and give him props for magnanimously saving the world. The government has been unfairly putting the blame for the financial crisis on Wall Street bankers, he complains to Roger Lowenstein in a profile gracing the cover of Sunday's New York Times Magazine. "It's harmful, it's unfair, and it leads to bad policy," Dimon is quoted as saying, leaving you free to imagine the sad strains of the string quartet playing for him as he nurses a brandy at one or another of his residences. .

What Jamie Dimon Won’t Tell You: His Big Bank Would Be Dangerously Leveraged - The debate is raging about banks and their size, financial regulation, and the international capital standards known as “Basel”.  Jamie Dimon of JP Morgan Chase, in his New York Times magazine profile, expresses admiration for the Basel committee and says, “… they are asking the questions that, in theory, bankers ask of themselves: how much capital do banks need to withstand the inevitable downturn, and what is an acceptable level of risk?” There is one problem, however. Basel may have asked the right question, but it did not come up with the right answers, mainly because it allows banks to remain dangerously leveraged, setting equity requirements way too low. This fact is not understood because the debate on capital regulation has been mired with a cloud of confusion, and filled with un-substantiated assertions by bankers and others. As a result, the issues appear much more mysterious and complicated than they actually are.

Gasparino: Bank Of America Is Worried Next WikiLeaks Dump Will Contain Evidence Of Fraudulent Countrywide Loans - Fox Business Network's Charlie Gasparino told Shep Smith today that Bank of America has set up a "legal swat team" in case the next big WikiLeak is directed at them.   The official line thus far is that they've had "no indication" they're being targeted, however Gasparino says he's spoken to a person who claims to have seen some of the bank-related documents and says that while they couldn't make out how damaging the documents were they "clearly pointed to Bank of America."  The big fear inside Bank of America, says Gasparino, is that the documents will lead back to (BofA-owned) Countrywide Financial, and show that the subprime loans that Countrywide gave out to high-risk applicants were fraudulent. "And if these gigabits of memos show that those were fraudulent loans that were given, especially during a housing bubble, Bank of America could be on the hook for billions of dollars.  And that's what the big fear is in Bank of America."

The Era of Mega Banks - The growth of the too big to fail bank is something that is modern to this era.  In the 1990s there were fewer than 40 institutions that had total assets above $20 billion.  In the late part of the 1980s and 1990s this number was below 20.  The peak was reached in 2005 with 55 institutions having more than $20 billion in total assets.  That number has fallen in recent years because of the crisis yet we have a handful of banks that control most of the nation’s banking assets.  The total U.S. banking system as of today supports over $13 trillion in total assets.  The FDIC insures these deposits with a deposit fund that is negative so it might as well be supported by pure faith.  What makes up most of these assets are residential and commercial real estate loans.  As we have discussed banks have yet to come to terms with the reality that many of these loans are not worth what they claim they are.  First, let us look at the growth of too big to fail.

Should Megabanks Be Broken Apart? - By Simon Johnson.  This material was prepared as part of the New York Times’ Room for Debate on “Should Mega-Banks Be Broken Apart“?  I strongly recommend the post by Anat Admati. Writing in the Washington Post, in November 2009, Jamie Dimon, chief executive of JP Morgan Chase, argued: “Creating the structures to allow for the orderly failure of a large financial institution starts with giving regulators the authority to facilitate failures when they occur. Under such a system, a failed bank’s shareholders should lose their value; unsecured creditors should be at risk and, if necessary, wiped out. A regulator should be able to terminate management and boards and liquidate assets."But the Dodd-Frank financial reform legislation does not create a “resolution mechanism” that can deal with cross-border megabanks; this point is admitted by all involved. And there is nothing in the G20 process or underway with any other international forum that would make a difference in this regard. So when very big banks are on the brink of failure, the Obama administration and Congress will have to face this choice: either let this big bank go through bankruptcy, like Lehman Brothers, or provide it with a bailout — meaning complete protection for all creditors (but hope you can at least remove some management this time around).

Warren Says Wall Street Bonuses Show ‘We Still Have a Problem’ - Wall Street banks reaping profits and paying bonuses while the rest of the country struggles shows “we still have a problem” with economic disparity, said Elizabeth Warren, the Obama administration adviser responsible for setting up the Consumer Financial Protection Bureau.  “This just staggers me; I mean, I just don’t have words to describe what this means,” she said in an interview for Bloomberg Television’s “Conversations With Judy Woodruff” that will be broadcast this weekend. “For me, what an economic recovery is about is about what happens to American families. It’s what happens in the real economy. It’s whether or not families are building up wealth in their homes or whether or not their homes are dragging them over an economic cliff.”  “It isn’t meaningful to talk about profits and a growing economy until American families are stabilized,” she said.

Bank complaints soar even after law changes-- Complaints against banks are soaring, suggesting that new laws and regulations put in place since the financial crisis two years ago aren't dampening Americans' anger over overdraft fees and foreclosure practices they view as unfair. If the trend continues, experts say, it will set banks on a collision course with their customers and lead to tougher rules that will hurt their earnings. The Office of the Comptroller of the Currency estimates that complaints from customers of the 1,500 banks it regulates will hit 80,000 this year. That would be the highest level in the 15 years it has recorded them and more than double the 2008 total. The Better Business Bureau and state attorneys general also report big increases.  Regulators say the surge has put them on high alert. The Fed sought to head off one area of large complaints in November 2009 by prohibiting banks from charging overdraft fees on ATM withdrawals without customers' consent. Elizabeth Warren, the Harvard professor chosen by President Barack Obama to set up the new Consumer Financial Protection Bureau, said she is frustrated with how banks find ways to skirt new laws that ban certain practices.

The Impact of Public Guarantees on Bank Risk Taking: Evidence from a Natural Experiment - In 2001, government guarantees for savings banks in Germany were removed following a law suit. We use this natural experiment to examine the effect of government guarantees on bank risk taking, using a large data set of matched bank/borrower information. The results suggest that banks whose government guarantee was removed reduced credit risk by cutting off the riskiest borrowers from credit. At the same time, the banks also increased interest rates on their remaining borrowers. The effects are economically large: the Z-Score of average borrowers increased by 7.5% and the average loan size declined by 17.2%. Remaining borrowers paid 46 basis points higher interest rates, despite their higher quality. Using a difference-in-differences approach we show that the effect is larger for banks that ex ante benefited more from the guarantee and that none of these effects are present in a control group of German banks to whom the guarantee was not applicable. Furthermore, savings banks adjusted their liabilities away from risk-sensitive debt instruments after the removal of the guarantee, while we do not observe this for the control group

Too Big to Regulate: Systemically Dangerous Institutions – the U.S., Iceland, and Ireland This column was prompted by Thomas Hoenig's December 1, 2010 op ed in the New York Times (“Too Big to Succeed”) warning that we must end banks that are “too big to fail.” I will focus on the profound, negative consequences that the “systemically dangerous institutions” (SDIs) pose for effective financial regulation using the examples of the U.S., Ireland, and Iceland  I call these banks SDIs because “systemically important” is a dishonest euphemism. The administration claims that the failure of any U.S. SDI is likely to cause a systemic, global financial crisis. That means that they are dangerous. The SDIs led the charge against effective financial regulation and supervision. They produced the repeal of the Glass-Steagall Act and the passage of the Commodities Modernization Act of 2000 (which placed credit default swaps into a regulatory black hole). At the international level, the SDI led the travesty that was Basel II. The anti-regulators that administered the Basel II process decided to invite the SDIs into the standard-setting process – with predictable results. At the same time that the SDIs were massively increasing their risks, the Basel II standards substantially reduced their capital requirements, placed increased reliance on credit rating agencies, and encouraged banks to create models to value their own assets. The result was an enormous growth of SDI leverage, grotesquely inflated credit ratings for financial derivatives created and sold by the SDIs that were backed by pools of “liar's” loans (toxic waste became “AAA”), and ludicrously inflated asset values at the SDIs. Bank leverage was even more extreme in Europe than in the U.S.

No, The Big Banks Have Not "Paid Back" Government Bailouts and Subsidies - The big banks claim that they have paid back all of the bailout money they received, and that the taxpayers have actually made money on the bailouts. However, as Barry Ritholtz notes: Pro Publica has been maintaining a list of bailout recipients, updating the amount lent versus what was repaid. So far, 938 Recipients have had $607,822,512,238 dollars committed to them, with $553,918,968,267 disbursed. Of that $554b disbursed, less than half — $220,782,546,084 — has been returned. Whenever you hear pronunciations of how much money the TARP is making, check back and look at this list. It shows the TARP is deeply underwater. Moreover, as I pointed out in May, the big banks have received enormous windfall profits from guaranteed spreads on interest rates:

FDIC Launches Investigation of Officials of Failed Banks - In a move reminiscent of the last time the United States was in such dire financial straits, the FDIC announced recently that it has begun an investigation of executives and other employees of failed banks. In the 1980s and 1990s, the savings and loan (S&L) crisis prompted the government to investigate and prosecute hundreds of bank insiders, sending more than 1,000 to prison, and collecting $4.5 billion.  This time around, the FDIC has opened more than 200 civil cases, including more than 50 against top officials of failed banks, seeking to recover around $2 billion in money it spent taking over the failed institutions.  The cases aim to prosecute banking employees who may have helped exacerbate the financial collapse by fraud, dangerous lending, and other criminal behavior. So far this year 149 banks have failed. This increase is not as sizable as the predicted increase from 2009, when there were 140 bank failures, but does show how dramatically the market has changed in recent years. In 2008 there were 25 bank failures, and in 2007 there were only three.

Orszag named vice chairman of global banking (Reuters) - Citigroup Inc named U.S. President Barack Obama's former budget director as a senior global banking adviser on Thursday, strengthening its ties to high-profile former officials the same week the bailed-out bank finished shrugging off U.S. government ownership. Peter Orszag, currently a senior fellow at the Council on Foreign Relations, is Citigroup's second hire of a former senior government official this month. Last week the bank hired Carlos Gutierrez, former Commerce Secretary under President George W. Bush, as a vice chairman for its institutional clients group.Orszag, who had worked as director of the Office of Management and Budget under President Obama, left the White House in July. He was one of the president's most prominent advisers and remains well-connected in U.S. political circles.He follows in the footsteps of another prominent Democratic government official -- former Treasury secretary Robert Rubin, who became a senior counselor to Citigroup and helped shape the bank's strategy during the years leading up to the financial crisis.

Firms, Funds Feel Squeeze of Low Rates - Historically low interest rates are starting to take a toll throughout the financial industry, presenting a potential downside to the Federal Reserve's aggressive efforts to reignite growth in the sluggish economy. Rock-bottom rates are squeezing profit margins at banks that rely on the gap between what they charge borrowers and pay depositors. They also are hurting returns at pension funds already under mounting pressure to meet obligations to retirees, while making certain kinds of insurance more expensive as firms try to recoup earnings that are likely to shrink if the ultralow rates linger. Two years of generally falling interest rates, along with the Fed's plan to buy as much as $900 billion of U.S. Treasurys through mid-2011 to keep bond rates low, have delivered a much-needed lift to borrowers such as companies, consumers, cities and states. Still, "it is clear that there are costs," . "The question is whether the good done by low interest rates is enough to justify forcing people and institutions to incur these costs."

Companies Cling to Cash - Corporate America's cash pile has hit its highest level in half a century. Rather than pouring their money into building plants or hiring workers, nonfinancial companies in the U.S. were sitting on $1.93 trillion in cash and other liquid assets at the end of September, up from $1.8 trillion at the end of June, the Federal Reserve said Thursday. Cash accounted for 7.4% of the companies' total assets—the largest share since 1959. The cash buildup shows the deep caution many companies feel about investing in expansion while the economic recovery remains painfully slow and high unemployment and battered household finances continue to limit consumers' ability to spend. The buildup has a big downside for companies, which get little return on their money because interest rates are low, but it reflects the relatively few opportunities they see to deploy their cash more creatively.

Flying With Faulty Indicators -Rising equity prices haven’t inspired corporate investment because companies don’t believe what the market signals. ...what if consumption doesn’t match up to what asset prices are telling firms? The risk is that additional investment could create overcapacity. Reluctant to invest their capital, they’re sitting on an ever bigger pile of cash. Everyone knows the Federal Reserve has inflated asset prices. Because that’s what the Fed explicitly set out to do. At some point, the Fed won’ be able to prop up this Potemkin edifice of ebullient asset prices set in front of a heavily overleveraged and deeply distorted economy. The Fed’s key measure for how the economy is performing is unemployment. At near 10% it is too high and isn’t expected to revert to a normal range of between 5% and 6% for years, according to Fed chairman Ben Bernanke. The implication is rates will stay at near zero until the jobless rate reaches those levels. President Obama’s tax compromise qualifies as another major fiscal stimulus–threatens to become the sort of debt monetization that destroys currencies. So investors chase assets and seek protection, not knowing if they’re facing stall speed or the point at which the financial structure starts to break apart.

Hive-minds and Kleptocrats - Krugman - There was a time, back when John Kenneth Galbraith was writing The New Industrial State and all that, when the notion of the soulless corporation transcending individual will was big stuff. But much of what JKG wrote then if anything evokes nostalgia now. These days, we’re living in the world of the imperial, very self-interested individual; the man in the gray flannel suit has been replaced by the man in the very expensive Armani suit. Look at the protagonists in the global financial meltdown, and you won’t see faceless corporations subverting individual will; you’ll see avaricious individuals exploiting corporate forms to enrich themselves, often bringing the corporations down in the process. Lehman, AIG, Anglo-Irish, etc. were not cases of immortal hive-minds at work; they were cases of kleptocrats run wild. And when it comes to the subversion of the political process — yes, there are faceless corporations in the mix, but the really dastardly players have names and large individual fortunes; Koch brothers, anyone? So never mind the hive-minds; good old greed still rules.

Did Goldman and Other Dealers Squeeze Mortgage CDS Shorts So They Could Sell Toxic CDOs? -As reported in the Financial Times, Senator Carl Levin of the Senate permanent investigations released damaging e-mails in which Goldman traders discuss “killing” some mortgage-related CDS shorts in May 2007. Levin understood the implications, that damaging the shorts would allow Goldman to buy CDS even more cheaply, but did not tease out the logical conclusion. This move was a likely a major step that allowed Goldman (and fellow dealers not under investigation who likely pursued parallel strategies) to package its remaining mortgage dreck into CDOs, which were launched as the reported squeeze evidently took place, and unload as much toxic inventory as possible before the wheels came hopelessly off the subprime bandwagon.  Goldman gives the usual pious denials, arguing that the market tanked, but the market action in later March to June 2007 belies their claims. And Levin may have unwittingly given Goldman an out by pegging the time of the short squeeze a bit late. It’s a bit hard to see on the scale of this chart, but CDS spreads on subordinated bonds widened markedly in February and continued into March of 2007. And even though that move looks tame compared to what later came to pass, it was enough to create havoc in the subprime market.

Annals of CDS manipulation, Goldman Sachs edition - A politician whipping up a storm over artificial manipulation of the CDS market? So far so boring. But this time it’s different: the politician in question is Senator Carl Levin, and he has explicit emails from Goldman Sachs (oh yes) which show bond trader Michael Swenson trying to engineer a short squeeze in CDS: Goldman Sachs’ trading activities in the credit insurance market in 2007 have come under attack from a US senator after e-mails revealed a senior trader urged colleagues to “kill” some investors’ positions. Carl Levin, chairman of the Senate permanent subcommittee on investigations, told a hearing on Wednesday that the alleged activity “looks like a trading abuse to me”, If you look a bit closer into this story, it turns out to be doubly ironic. For one thing, the squeeze was meant to drive down the price of credit protection. The WSJ misses this, saying that Goldman “wasn’t the only player in subprime mortgages to bet that the market would suffer”; in fact, the scheme was designed to bolster the market and make it look artificially healthy. If it had worked, Goldman would have made money on bond values going up. Which raises the second irony: the strategy didn’t work. Which allows the bank to wheel out the rare Goldman Sachs Incompetence Defense:

Unofficial Problem Bank list at 919 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Dec 10, 2010. Changes and comments from surferdude808:  The Unofficial Problem Bank List declined by one to 919 this week after three additions and four removals. However, total assets increased by $1.1 billion to $411.4 billion.

Trepp Reports a Jump in CMBS Delinquencies as Rate Nears 9% Again - The recent optimism surrounding delinquencies on commercial real estate loans bundled into investment bonds has been hit with a blast of cold water. The rate of past due loans suddenly jumped in November after seeing a big decline the month before. According to data from the New York-based research and analytics firm Trepp LLC, the percentage of loans held in U.S. commercial mortgage-backed securities (CMBS) that were 30 or more days delinquent, in foreclosure, or REO rose 35 basis points in November to 8.93 percent, putting the value of delinquent loans at $60.3 billion. Trepp says November’s climb is the largest monthly increase since May 2010. The overall rate is the second highest reading ever recorded by the company, second only to this September’s measurement of 9.05 percent. The steep upsurge follows a 47 basis point decline in the rate of CMBS loans 30-plus-days delinquent, in foreclosure, or REO reported by Trepp for the month of October, when the company put the CMBS delinquency rate at 8.58 percent with a value of $58.3 billion.

Treasury Bars Use of TARP Funds to Help Borrowers Facing Foreclosure - If you had any doubts about whose side the Administration is on, this story should settle all doubts. From the Nation: Consider this: the recent Fed audit revealed over $3.3 trillion in emergency assistance to the banks and other corporate behemoths during the financial crisis–no strings attached…. Then consider the 19 states which are recipients of the Hardest Hit Fund (HHF)–a portion of TARP money set aside to help homeowners in states struggling with the highest unemployment rates and steepest declines in the housing market.  Some of those states, including Ohio, let Treasury Secretary Tim Geithner know as far back as this past spring that they wanted to use some of those funds to assist legal aid groups that help individual homeowners…. Treasury solicited the opinion of an outside law firm, Squire, Sanders & Dempsey. Never mind that the firm’s clients include BB&T Corporation and payday lender CNG Financial Corp. The firm said, in essence–sorry, no can do on the legal aid. Not permitted under the TARP.  Huh? Hold on a sec–is this the same TARP that granted the Treasury Secretary all those “extraordinary powers” to protect people’s home values, preserve home ownership, promote economic growth, etc.?

Wells Fargo to submit affidavits: Reviewing 55,000 pending foreclosures seems to be taking longer than planned - Wells Fargo & Co. has nearly completed its preparation of new affidavits in 55,000 pending foreclosure cases in 23 states, according to sources familiar with the situation. The effort appears to be taking longer than originally expected. In October, the San Francisco bank said its goal was to complete the process by mid-November, subject to state and local requirements. Wells is among a number of lenders that have been revamping foreclosure procedures amid allegations that they employed so-called "robo-signers" who rapidly signed off on documents without properly reviewing their contents. The accusations have spurred investigations by Congress and attorneys general in 50 states.

    Fisking the American Securitization Forum's Congressional Testimony - Tom Deutsch, the Executive Director of the American Securitization Forum (ASF) testified before the Senate Banking Committee this past week about chain of title problems in securitization.  I was fascinated to see how much attention the ASF spent in attempting to rebut my testimony from a pair of previous hearings (here and, in a more polished form, here). My first thought was "gosh, ASF's awfully defensive. They sure seem spooked." And on looking at the details of the ASF's rebuttal, my sense is they're on very shaky ground if these are the best arguments they have.   Below I review some of the ASF's arguments and show why they're just wrong. In particular, note the PSA language that I quote that demolishes the ASF's claim that PSAs do not require an endorsement from every party in the securitization chain: "the original Mortgage Note bearing all intervening endorsements showing a complete chain of endorsement from the originator to the last endorsee" If there's any doubt about what that language means (more discussion below), I'd love to hear it in the comments.  There's a very specific method of transfer required in securitization by PSAs and if it wasn't followed, then under New York law, the transfers are void.  And it is sure looking like many deals didn't comply with the PSA terms.

    MBA Releases Letter to FHA Criticizing Indemnification Proposal - The Washington, D.C.-based Mortgage Bankers Association (MBA) sent a letter to the Federal Housing Administration (FHA) on Tuesday, expressing criticism of a proposal that would increase indemnification requirements on lender-issued loans. The proposed regulation would allow FHA to require lenders to compensate the agency for losses incurred on certain loans. Traditionally the FHA can only request such recompense. MBA feels the FHA would use the policy to find “small, inconsequential reasons” to require indemnification. Additionally the suggested rules will allow FHA to “continually” review lender performances, which MBA protests is vague.  “This proposed rule … penalizes responsible lenders by requiring them to indemnify FHA for loans regardless of cause or materiality, and without a well-defined, clear and transparent appeals process,” MBA said.

    Rep. Bachus Criticizes Handling of Fannie, Freddie - The chairman-elect of the House Financial Services Committee isn’t happy with the Obama administration’s pressure on government-controlled Fannie Mae and Freddie Mac to reduce balances on mortgages that total more than the homes are worth, and he plans to pursue the matter early next year. The Wall Street Journal reported Wednesday that the Obama administration is leaning on the mortgage finance giants through their primary regulator, the Federal Housing Finance Agency, to join government programs aimed at writing down such underwater loans. Rep. Spencer Bachus (R., Ala.), in an interview with Washington Wire, criticized the cost to taxpayers for such write-downs, especially since propping up the two mortgage companies already has cost taxpayers about $134 billion. Mr. Bachus was chosen Tuesday to be chairman of the Financial Services Committee, which has jurisdiction over Fannie and Freddie.

    Pressure Mounts for Fannie and Freddie to Write Down Mortgages - With property values still tumbling, it comes as no surprise that nearly a quarter of the nation’s mortgage borrowers owe more on their loan than the home is worth. Industry studies support the consensus that the farther a borrower sinks into negative equity, the more likely they are to throw in the towel.  The severity of this catch-22 is now top-of-mind for government officials. The administration is reportedly pressuring Fannie Mae and Freddie Mac – who together own or guarantee half of the nation’s home mortgages – to make principal write-downs a key component of their foreclosure prevention efforts.  The two GSEs are currently in talks with the White House and federal housing officials who are advocating for Fannie and Freddie’s participation in the government’s newest initiatives to reduce loan balances for borrowers who are underwater, the Wall Street Journal reported Wednesday, citing “people familiar with the situation.” A second initiative that the GSEs have yet to sign on to is the Federal Housing Administration’s (FHA) refinance program for underwater borrowers, which was rolled out in early August. Under the program, which is also voluntary, the federal agency will offer new FHA-insured mortgages to borrowers whose lenders agree to write off at least 10 percent of the unpaid principal balance.

    Housing agencies clash over mortgage-relief program - The top federal agencies responsible for setting housing policy are clashing over a new program designed to help borrowers whose homes are worth less than they owe on their mortgages, according to industry and government sources.  The Federal Housing Administration says the program could avert foreclosures, but the Federal Housing Finance Agency has concerns that the program, if expanded to include the government-controlled mortgage giants Fannie Mae and Freddie Mac, could be a logistical nightmare that would cost taxpayers too much, the sources said.  At issue is an FHA program launched in September that would allow some underwater borrowers who are current on their mortgages to refinance into more-affordable loans with a smaller loan balance and lower interest rate.  But without the participation of Fannie Mae and Freddie Mac, which control more than half of the mortgage market, analysts say the FHA's program is likely to have little impact on the depressed housing market.

    Collateral damage – more than Paul Jackson’s reputation at risk - Events during this financial crisis have repeatedly displayed a degree of disrespect for various pundits’ authority; every so often another pulpit is toppled. So spare a thought for the pundits, the most unmourned of crisis casualties.  Why do they set themselves up for a fall like that, I wonder? Volunteering to be part of the collateral damage seems to be compulsive. The latest to stick his neck out is the respected Housing Wire commentator, Paul Jackson. Hang it, don’t spare a thought for him at all. He should know better than to combine a shoddy defense of document forgers with a drive by shooting of servicer critics. The starting point of the piece is the celebrated DocX document fabrication price sheet, which, having debuted in the blogosphere in early October, made it onto TV the week before last, brandished in the mitt of Rep. Maxine Walters. This is why it matters (from the class action against LPS):

    Lender Processing Services Produced More Bogus Foreclosure Documents Than It ‘Fessed To - Yves Smith - Readers may recall that this site broke the story of litigation against Lender Processing Services, the biggest player in foreclosure management on behalf of mortgage servicers. These cases, launched earlier in the fall, accused the company of taking impermissible legal fees. These class action lawsuits were joined by the US bankruptcy trustee for the Northern District of Mississippi, both for herself and on behalf of all US bankruptcy fees, which meant she felt the issues set forth in the case had merit and were serious. In November, an additional class action case was filed against LPS, this time securities litigation, charging the company with making false and misleading statements to investors, including “deceptive and improper document execution and preparation related to foreclosure proceedings.” Subsequently, as our Richard Smith detailed earlier today, Housing Wire’s Paul Jackson attacked critics of LPS, including this blogger, of going off half baked in accusing the company of engaging in document fabrication. A Reuters investigation published today supports the critics’s case, revealing that document creation was far more extensive that the company has suggested.

    Another Erroneous Securitization-Industry-Defending Post by Paul Jackson - Yves Smith - It’s worrying to see Paul Jackson, the creator of the generally-respected Housing Wire, damage his brand by continuing to provide misleading and erroneous commentary in an area of keen interest to his readers, the foreclosure crisis. One could have hoped that Jackson would have learned to question his sources after unwisely sticking his neck out for them in a his article “A Crime of Omission” in which he sided with forgers against the critic of servicers. A takedown of his post by our Richard Smith was validated less than seven hours later by an extensive, exclusive Reuters article that not only validated Richard’s post, but all of our previous reporting on the company at issue, Lender Processing Services. But Jackson has offered another erroneous defense of securitization industry bad practices in the form of “BofA, the MBS unwind, and the other side of the coin.” This post narrowly is a discussion of a recently widely discussed case, Kemp v. Countrywide, and more broadly, an effort to again discredit critics of the securitization industry. (In a tweet the next day, Jackson does appear to recognize that the post may have problems but this falls short of acknowledging the full scope of the problems with his post). If you didn’t know better, Jackson’s post would sound reasonable, even persuasive, because it hews to the form of a fair treatment

    Anatomy of Mortgage Fraud: MERS's Smoking Gun, Part I - In two recent pieces I harped on the problems at MERS, the Mortgage Electronic Registration System. ("Support Representative Kaptur's Bill: Time To Shut Down Mers And To Restore The Rule Of Law" and "Shut Down MERS"). Briefly, MERS purportedly offers an alternative to paperwork, maintaining an electronic record of mortgages that are usually packaged into mortgage backed securities (MBSs). When mortgages go delinquent, MERS helps mortgage servicers foreclose on homes. I argued that MERS was created to run multiple frauds, a topic I will discuss in more detail in part two of this series. However, one of the big puzzles of the ongoing foreclosure crisis concerns the whereabouts of the "wet ink notes" -- the IOUs signed by borrowers. In foreclosure cases across the nation, the banks have been filing "lost note affidavits", certifying that they cannot find the notes that are required to prove that they have the right to take away someone's home. In some cases, the notes miraculously appear, seemingly out of nowhere, and in others "Burger King kids" have been manufacturing them for robo-signers. By law, the notes are supposed to be at REMIC trustees, held against the MBSs sold on to investors -- and must be presented to foreclose.

    Marci Kaptur’s Anti-MERS Bill Target of Misleading PR by Title Insurance Industry - Yves Smith - Rep. Marci Kaptur of Ohio has introduced a short bill, H.R. 6460, which would seriously restrict the operations of MERS by effectively removing Freddie, Fannie and Ginnie as users. The bill would bar the GSEs from guaranteeing or owning any mortgage that is either assigned to MERS or lists MERS as the mortgage of record. Note that those are the two roles typically set forth in the registrations at local courthouses which register mortgage in the name of MERS. H.R. 6460 Bill Text Not surprisingly, the pushback started quickly. The Kaptur bill requires that HUD, in conjunction with the Office of the Comptroller of the Currency, undertake a study of land recordation in the US, including the impact of the lack of electronic records, the current state of play in the use of electronic records at the local level, and whether a Federal system could be created that would not interfere with the local recordation system or state laws.

    Bank of America Thaws Foreclosure Freeze - If you're an under-the-gun homeowner with a Bank of America mortgage and you've been keeping your fingers crossed that the bank's temporary suspension of foreclosures would continue indefinitely, you can uncross them. The bank announced today that it would resume foreclosures this month.  CNN reports that Bank of America has examined its processes, and is ready to get back into the foreclosure business. Bank of America expects to foreclose on 16,000 homes this month. But BofA will observe a "holiday suspension" between December 20th and January 2nd, so if you're not kicked out by then, you'll get a few extra days before you have to pack up and go.

    The New Robosigning - First there was robosigning.  Now there's illegal practice of law.  It seems that one of the major Pennsylvania foreclosure mills, Goldbeck, McCafferty & McKeever, was routinely using non-lawyers to do all the paperwork in foreclosure cases without any review by attorneys.  (See here for Yves Smith's take.)   That works in most small claims courts, but raises real problems in a foreclosure context.  Perhaps related to the apparent lack of attorney oversight, every Pennsylvania foreclosure filing that I've looked at by Goldbeck, McCafferty, & McKeever appears to be facially defective because of a failure to include the note with the complaint.  Pennsylvania law requires that an action based on a writing include a copy of the writing.  A foreclosure action is necessarily based on two writings--a note and a security instrument.  This means that a well-pleaded foreclosure case in Pennsylvania should include the note, the mortgage, and any assignments thereof as part of the complaint.  (There's even case law on this, not just statute.)  Many Pennsylvania foreclosure filings properly include all of the required writings, but I have never seen any notes included in Goldbeck, McCafferty & McKeever foreclosure filings. 

    Some Lenders Sell Foreclosed Homes Without Obtaining Title - Yves Smith - When you thought you’d seen every possible stuff-up in mortgage land, a new one comes to light.  When the housing market correction started, most savvy observers pointed out that prices needed to revert to long-term relationships with rentals and income levels. The powers that be have been trying to forestall the inevitable that by using super low interest rates and purchases of mortgage backed securities to keep mortgage borrowing rates low, making housing more affordable. But with these ongoing large-scale subsidies, and the almost certain prospect of banks pressing for continuing favored treatment (recall, for instance, the “securitization market is TBTF” argument by American Securitization Forum president Tom Deutsch), it’s disturbing to see members of the financial services industry continue, through incompetence and an undue focus on cost containment, take actions that are detrimental to the housing market.  Evidence of the latest self-inflicted wound comes via e-mail from Lisa Epstein of, namely that some lenders, such as Fannie Mae, had not obtained title to foreclosed properties before selling them out of foreclosures.

    Special report: Legal woes mount for a foreclosure kingpin - But a Reuters investigation shows that LPS's legal woes are more serious than he let on. Public records reveal that the company's LPS Default Solutions unit produced documents of dubious authenticity in far larger quantities than it has disclosed, and over a much longer timespan. Questionable signing and notarization practices weren't limited to its subsidiary, called DocX, but occurred in at least one of LPS's own offices, mortgage assignments filed in county recorders' offices show. And rather than halt such practices after the federal investigation got underway, the company shifted the signing to firms with which it has close business ties. LPS provided personnel to work in the new signing operations, according to information from an LPS spokeswoman and court records including an October 21 ruling by a judge in Brooklyn, New York. Records in county recorders' offices, and in the judge's opinion, show that "robosigning" and preparation of apparently false documents went on at these sites on a large scale.

    WOW – Is Lee County Foreclosure Court Above the Law? This is outrageous! Now a Judge is flat out saying that the Florida Rules of Civil Procedure do not apply! Florida Rules of Civil Procedure 1.510 Summary Judgment e) Form of Affidavits; Further Testimony. Supporting and opposing affidavits shall be made on personal knowledge, shall set forth such facts as would be admissible in evidence, and shall show affirmatively that the affiant is competent to testify to the matters stated therein. Sworn or certified copies of all papers or parts thereof referred to in an affidavit shall be attached thereto or served therewith. Not only does it appear that the judge “withdrew” the defendants motion to dismiss, he flat out tells him the Fla.R.Civ.Pro do not apply in his court… Now check out the order below!

    Foreclosure is not an Option- Given the grim news in lending and home financing in recent months, it would appear that little can be done to stem the tide of foreclosures sweeping the nation.That’s why I’m focusing today on ESOP, an organization headquartered in downtown Cleveland that has been unusually successful in helping struggling Ohioans to hold onto their homes. Last year, ESOP, reported that about 70 percent of those who completed its process received loan modifications that allowed them to avert foreclosure. The organization, which honed its strategy fighting predatory lending in the inner city, has now become an important destination for suburban homeowners desperate for help.Bank officials say that they try to avoid foreclosures, but the recent “robo-signing” scandal indicates that many have sought to repossess homes as cheaply as possible, even if it has sometimes meant sidestepping the law. (Last month, 50 attorneys general launched a joint inquiry to examine charges that banks used deceptive practices to accelerate foreclosures.) So how has ESOP, a not-for-profit organization with about 50 employees and 10 offices across Ohio, been beating the odds?

    Trapped in foreclosure maze, homeowners say banks went after the wrong people - The banks say they are reviewing their mortgage and foreclosure procedures and most of the people involved in foreclosure deals were behind on their payments. As for people wrongly caught in the foreclosure net, they say they are reviewing those cases, too. But what emerges from court filings, depositions, and interviews is that once the bank places you on its foreclosure assembly line, it becomes nearly impossible to get off. The minute Marconi ripped the foreclosure notice from the door of his house in Garrison, N.Y., on Oct. 20, he saw he was named as a defendant along with a woman who had run a red light and smashed into Marconi's car four years earlier. Marconi had received a payment from her insurance company. It was her house, in Rye, N.Y., that Wells Fargo was foreclosing on.Marconi explained the bizarre mix-up to Wells Fargo's customer service department, its ethics complaint department, its law firm and the office of the chief executive officer, John Stumpf. Marconi says they all told him that they could not help him and that he needed to get a lawyer."Now I have to pay a $3,500 retainer for a lawyer to get my name pulled off some lawsuit by Wells Fargo,"

    New Tactic to Silence Foreclosure Abuse Critics: Sue Them - Yves Smith - I suppose the latest efforts taken by the members of the foreclosure industry to silence and neuter critics represent a perverse form of progress. If you go by the Ghandi timeline, “First they ignore you, then they ridicule you, then they fight you, then you win,” opponents of bad foreclosure practices seem to have done enough damage as to now be worth fighting. But what is telling are the desperate-looking but nevertheless potentially effective measures being deployed to hamstring the opposition. The vanguard of this effort are foreclosure defense attorneys, many of whom are solo or small firm operators, with not hugely lucrative practices or doing pro bono work (you don’t make a lot of money defending people who have no money). Suing someone like that, even with a suit that seems spurious, throws a wrench in their operation. It takes time to deal with litigation, and often money, plus the stress is also a considerable distraction. And of course, the hope is no doubt that this sort of risk will also deter other lawyers and critics. The first example is a lawsuit filed by National Title against Matthew Weidner, a Florida attorney who blogs about foreclosure fraud. The suit charges him with slander and libel.

    Robo-Signing Scandal Dampens Housing Recovery Hopes - Recent bank scandals involving robo-signing foreclosure documents and improprieties in the lending process have weakened consumer confidence about housing market recovery prospects. More than half of adults report that robo-signing disclosures account for less faith in mortgage lenders, banks, and government, according to a recent study by Trulia and RealtyTrac. Thirty-five percent believe the robo-signing issue will delay housing market recovery, and only six percent think the robo-signing issue will have no impact on recovery. RealtyTrac and Trulia conduct a semi-annual survey about foreclosures and consumer sentiments attached to the housing market. “More and more, American homeowners, -sellers and -buyers are tamping down their expectations for a swift recovery in the housing market and bracing themselves for a long, slow climb back to a healthy real estate market.  Fifty-eight percent believe recovery will happen after 2012 and more than one in five U.S. adults believe recovery won’t happen until 2015 or later,”

    Distressed Homes in U.S. Sell at Biggest Discount in Five Years… U.S. homes in the foreclosure process sold for about 32 percent less than non-distressed properties in the third quarter, the biggest discount in five years, as buyer demand slumped, according to RealtyTrac Inc.  The average discount for bank-owned real estate, residences in default or those scheduled for auction rose from 29 percent a year earlier, RealtyTrac said in a report today. A quarter of all U.S. transactions involved those types of homes, according to the Irvine, California-based data seller.  Sales of foreclosure properties plunged 31 percent as the end of a buyer tax credit reduced purchases overall, RealtyTrac said. The decline came before loan servicers including Bank of America Corp. and JPMorgan Chase & Co. halted some home seizures amid claims that employees processed thousands of documents without verifying them, a practice known as robo-signing.  “The foreclosure-processing controversy, which was brought to light at the very end of the third quarter, could chill demand even further,”

    Using Google Maps to Find Foreclosures - You can add foreclosures to the list of searches that Google excels at executing. Barry Ritholtz of The Big Picture blog explores the amazing functionality provided through Google Maps, which he says has been around for a while but has improved recently. It's both incredible and awful to see just how foreclosure continues to plague the U.S. Here's how it works, from Chart Porn, via Ritholtz:

    Google Maps Foreclosure Listings
    1. Punch in any US address into Google Maps.
    2. Your options are Earth, Satellite, Map, Traffic and . . . More. (Select "More")
    3. The drop down menu gives you a check box option for "Real Estate."
    4. The left column will give you several options (You may have to select "Show Options")
    5. Check the box marked "Foreclosure."

    Servicer Distrust as an Obstacle to Mortgage Mods -- Yves Smith - Before we get the usual objections to mortgage modifications, I need to remind readers that in the old fashioned days of banking, when bank kept the loans they made, it would be unthinkable NOT to modify a mortgage or any other loan when a borrower got in trouble, assuming the borrower was viable. “Viable” means that the borrower still has enough income to pay enough that the bank still comes out ahead by modifying the loan rather than other recovery strategies, which for a mortgage loan means foreclosure. This isn’t charity, it’s good business sense.  Many commentators have pointed out that mortgage servicers are the big reason mods aren’t happening. Most mortgages in recent years were securitized, and the servicers are not the investors. With loss severities at 70% and higher on a foreclosure, a principal mod in the 30% to 50% range is a clear win-win.  But servicers have lots of reasons not to go there. First, they get lots of fees upon foreclosure and have organized streamlined processes to make it a profitable activity for them. Second, they are obligated to keep advancing principal and interest when borrowers default.. So they also are driven to foreclose to recover P&I advances. Third, they are just not set up to do mods. Not only do their contracts not allow for them to collect fees to do mods, but for a mod to have any hopes of success, you need to do some borrower assessment. Servicers are factories, highly routinized, so doing anything on a one-to-one basis is difficult given their operating parameters.

    Wall Street Sees New Profits In Homeowner Distress - Barely more than a year after a taxpayer bailout of major financial institutions, Bank of America and the hedge fund, Fortress Investment Group, spotted a fresh money-making opportunity - collecting the tax debts of tens of thousands of people like Walker. The bank and hedge fund can add interest charges and fees, and they bundled the debts as securities for investors. In late May and early June, proxies for the two institutions quietly bought hundreds of millions of dollars in homeowners' property tax debts in Florida by bidding at a series of online auctions held by county tax collectors. They didn't use their names but donned multiple other identities, dominating the auctions and repeatedly bidding on the same parcels - in the case of Walker's small home, more than 8,000 times. Then, in September, Bank of America's securities division packaged $301 million worth of the tax liens it and Fortress had acquired into bonds pitched privately to major investors. The anticipated return - estimated at between 7 to 10 percent - is possible because buyers of tax debts can assess a panoply of interest charges and other fees. When the debt goes unpaid long enough, the liens buyer can seize properties through foreclosure.

    Housing Crash Continues - It's A Terrible Time To Buy An Expensive House. Why? Because house prices will keep falling in the areas where prices are still dangerously high compared to incomes and rents. Banks say a safe mortgage is a maximum of 3 times the buyer's annual income with 20% downpayment. Landlords say a safe price is a maximum of 15 times the house's annual rent. Yet in affluent areas on the coasts, both those safety rules are still being violated. Buyers are still borrowing 6 times their income and putting only 3% down, and sellers are still asking 30 times annual rent, even after recent price declines. Renting is a cash business that proves what people can really pay based on their salary, not how much they can borrow. Salaries and rents prove that those high prices will keep falling for a long time. Anyone who bought a "bargain" in those areas last year is already sitting on a very painful loss.

    At least 3 more years of housing troubles seen (Reuters) - The housing market will remain depressed, with record high foreclosure levels, rising mortgage rates and a glut of distressed properties dampening the market for years to come, industry experts predicted on Tuesday. "We don't see a full market recovery until 2014," said Rick Sharga of RealtyTrac, a foreclosure marketplace and tracking service. He said that he expected more than 3 million homeowners to receive foreclosure notices in 2010, with more than 1 million homes being seized by banks before the end of the year. Both of those numbers are records and expected to go even higher, as $300 billion in adjustable rate loans reset and foreclosures that had been held up by the robo-signing scandal work through the process. That should make the first quarter of 2011 even uglier than the fourth quarter of 2010, he said. Mortgage rates will start to rise in 2011, further dampening demand and limiting affordability, said Pete Flint, chief executive of, a real estate search and research website. "Nationally, prices will decline between 5 percent and 7 percent, with most of the decline occurring in the first half of next year," he said

    Q3 Flow of Funds: Household Real Estate assets declined $650 Billion in Q3 2010 - The Federal Reserve released the Q3 2010 Flow of Funds report this morning: Flow of Funds. According to the Fed, household net worth is now off $11 Trillion from the peak in 2007, but up $5.8 trillion from the trough in Q1 2009.  The Fed estimated that the value of household real estate fell $684 billion to $16.55 trillion in Q3 2010, from $17.2 trillion in Q2 2010.This is the Households and Nonprofit net worth as a percent of GDP. This includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc) net of liabilities (mostly mortgages). Note that this does NOT include public debt obligations. Note that this ratio was relatively stable for almost 50 years, and then we saw the stock market and housing bubbles. This graph shows homeowner percent equity since 1952.  Household percent equity (as measured by the Fed) collapsed when house prices collapsed in 2007 and 2008.  In Q3 2010, household percent equity (of household real estate) declined to 38.8% as the value of real estate assets fell by almost $650 billion. The third graph shows household real estate assets and mortgage debt as a percent of GDP.

    Home values tumble $1.7 trillion in 2010  -- Can't sell your home for a decent price? You're not alone. American homes are expected to be worth $1.7 trillion less in 2010 than they were worth last year, according to a report released Thursday by real estate website Zillow.  This year's drop in home values is 63% bigger than the $1 trillion dip in 2009, and brings the total value lost since the housing market's peak in 2006 to a whopping $9 trillion. While the homebuyer tax credit helped prop up the housing market in the second half of 2009 and the first half of 2010, home values continued their slide in the second half of the year. Almost $700 billion in value was lost in the first half of the year, compared to Zillow's estimates of $1 trillion in the second half of 2010.

    Dr. Doom Predicts Another $1 Trillion in Housing Losses - As Nouriel Roubini heads to Athens to meet with investors and policymakers potentially about the debt crisis in Europe, the economist says he’s increasingly worried about a problem closer to home: America’s real estate mess. The country’s real estate problems are “underappreciated,” and banks could face another $1 trillion in housing-related losses, Mr. Roubini said in a phone interview with DealBook on Monday. At the same time, he played down the issues in Ireland, Greece, Portugal and Spain, calling the matter “contained” for now.

    The inefficiency of refinancing - This paper explores the practice of mortgage refinancing in a dynamic competitive lending model with risky borrowers and costly default. We show that prepayment penalties improve welfare by ensuring longer-term lending contracts, which prevents the mortgage pools from becoming disproportionately composed of the riskiest borrowers over time. Mortgages with prepayment penalties allow lenders to lower mortgage rates and extend credit to the least creditworthy, with the largest benefits going to the riskiest borrowers, who have the most incentive to refinance in response to positive credit shocks. Empirical evidence from more than 21,000 non-agency securitized fixed rate mortgages is consistent with the key predictions of our model. Our results suggest that regulations banning refinancing penalties might have the unintended consequence of restricting access to credit and raising rates for the least creditworthy borrowers.

    Refinance Activity and Mortgage Rates - Earlier the MBA reported on the decrease in refinance activity: The Refinance Index decreased 1.4 percent from the previous week. This is the fourth weekly decrease for the Refinance Index which reached its lowest level since June 2010. This graph shows the MBA's refinance index (monthly average) and the the 30 year fixed rate mortgage interest rate from the Freddie Mac Primary Mortgage Market Survey®.  December mortgage rates are estimated at 4.75% (the rates quoted by several sources yesterday). Although mortgage rates haven't risen very far - and are still below 5% - it takes lower and lower rates to get people to refi (at least lower than recent purchase rates).

    Mortgage Rates rise sharply [I]t's been a complete bloodbath in the market for us. ... Three rate sheets for the worse, an average 4.75% 1.0 point loan today, well up from the October lows of 3.750%. Crushing to say the least. From economist Tom Lawler:  Benchmark US interest rates are up sharply today in at times frantic trading in response to the tax package “deal” reached between the administration and Congressional Republican leaders. (While yesterday’s silly “60 Minutes” bond market rally lasted longer than an hour, it wasn’t by much!!!) The MBS market also got crushed today, and indicative 30-year conventional conforming fixed-rate quotes, which had moved lower following Friday’s employment report, jumped up sharply today, with most lenders showing something in the range of 4 ¾% and 1 point (for a 60-day lock). This will impact refinance activity immediately, but might accelerate some purchase activity because of a fear of further rate hikes.

    Mortgage Rates for U.S. Loans Jump to Five-Month High - U.S. mortgage rates surged to a five- month high, tracking a jump in bond yields after President Barack Obama agreed to extend tax cuts for two years.  The average rate for a 30-year fixed loan increased to 4.61 percent in the week ended today from 4.46 percent, the fourth week of gains, Freddie Mac said in a statement. The average 15- year rate climbed to 3.96 percent from 3.81 percent, The agreement to extend tax cuts sent yields on mortgage- bond securities to six-month highs yesterday on speculation that the budget deficit may widen and inflation will accelerate. Rising borrowing costs from record-low levels may spur some prospective homebuyers to make purchases to lock in low rates,

    Mortgage Rates, at Six-Month High, Threaten Refis and Fed - Rising government borrowing costs have driven mortgage rates to their highest level in six months, challenging the still-shaky housing market and the Federal Reserve's efforts to boost the U.S. economy. The rate for a 30-year, fixed-rate mortgage averaged 4.61% this week, according to the weekly survey from government-backed mortgage firm Freddie Mac, up from 4.46% a week ago and the highest level since June 24.   Thirty-year mortgage rates have bounced rapidly from a record-low 4.17% less than a month ago. These rates closely track moves in the yield on the 10-year Treasury note, given that most mortgages are paid off due to sale, refinancing or default in 10 years or less. The 10-year note yield has surged to 3.23% on Thursday from a low of 2.38% in early October.  The surge in Treasury yields and mortgage rates has come despite the Federal Reserve's efforts to boost the economy by buying up to an estimated $900 billion in Treasury bonds through next June to help ease financial conditions in the economy.

    Builders benefit from cost savings - Times have been tough for homebuilders these days. Sales have fallen to their lowest level in decades. And the buzz of saws and staccato beat of hammers are sounds seldom heard as production rates drop to lows not seen since World War II. But developers are benefitting from a little reported side-effect to the housing slump: It's cheaper now to build a home. Builders say construction costs are down 15 to 25 percent. That translates into an average cost of $100,000 to $140,000 for just the "sticks and bricks" (without land) for a modest, 2,000-square-foot house. That same house cost $140,000 to $190,000 to build during the peak of the housing boom just four years ago.

    Residential Investment and Unemployment -  One of the key reasons for the sluggish recovery has been the ongoing problems in housing. Usually residential investment (RI) is a major contributor to GDP growth in the early stages of a recovery, but not this time because of the huge overhang of existing vacant homes. This graph shows RI and investment in single family structures as a percent of GDP. Usually RI rebounds strongly at the beginning of a recovery, but this time RI has continued to decline. RI as a percent of GDP is at a post WWII low of 2.22%, and investment in single family structures is near the all time low.  This graph shows single family housing starts (through October) and the unemployment rate (inverted) through November. Note: Of course there are many other factors too, but housing is a key sector. You can see both the correlation and the lag. The lag is usually about 12 to 18 months, with peak correlation at a lag of 16 months for single unit starts. The 2001 recession was a business investment led recession, and the pattern didn't hold.

    Are underwater homeowners breaking the Beveridge Curve? - There are two important questions in the economy today that may be related: 1) is negative equity causing a decrease in geographic mobility? and 2) why is the Beveridge Curve breaking down? Wait! Don’t stop reading yet, I can explain it in non-econo-jargon, I promise. House prices have obviously fallen a lot since the peak of the bubble, and this has left many homeowners “underwater”, so to speak, meaning they owe more on their mortgages than their house is worth. This is potentially causing a big decrease in people’s willingness to move, which includes moving for a job. This, in turn, is potentially causing higher unemployment by preventing people from moving.  The question is, how big of a deal is this? The second question relates to the Beveridge Curve, which shows the relationship between the unemployment rate and the number of job vacancies. The idea is that when unemployment is high, job vacancies should be low, and vice versa. If people are having a hard time finding work, then employers shouldn’t be having a hard time finding workers, since there are plenty of unemployed people looking for work. However, as the graph below shows this relationship has broken down somewhat over the recent recession.

    Several Stories: Apartment vacancy rates falling - The trend of falling vacancy rates continues ... From the North County Times: Rental vacancy rates fall as people lose homes Vacancy rates for North San Diego County apartments fell 1.2 percentage points to 4.3 percent in the fall, the fourth straight drop... and landlords took the opportunity to raise rents 0.8 percent ...From the Virginian-Pilot: Rents rise, vacancies drop for apartments in Hampton Roads ... In the past year, the number of renters in the region has climbed by nearly 2,000, the largest uptick since 2005. From the Aurora Sentinel: Denver metro vacancies for homes, condos to rent at lowest since 2001 Vacancies in for-rent condos, single-family homes and other small properties across metro Denver fell to 2.9 percent during third quarter of this year - the lowest third-quarter rate since 2001. This fits with the Reis vacancy survey (showing apartment vacancy rates fell in Q3 to 7.2% from 7.8% in Q2), the NMHC apartment survey, and the Census Bureau's quarterly rental vacancy rate.

    Under 35: Living with Parents vs. Homeownership rate - This interesting graph is from economist Tom Lawler comparing the percent of 24-34 year olds living at home vs. the under 35 year old homeownership rate ... There is a clear inverse relationship, and this suggests some pent up demand for housing units when the employment picture improves (although the demand could be for rental units).

    Number Of Adult Americans Living With Their Parents Has Exploded (Chart) Empty nest parents, be warned: the number of adults aged 25 to 34 who are living with their parents has exploded, according to this rather shocking chart put together by economist Tom Lawler and posted on Calculated Risk. Earlier this year, a study published in the journal Transitions to Adulthood titled "What's Going on with Young People Today? The Long and Twisting Path to Adulthood" concluded that the economic downturn has caused an entire generation to delay adulthood.As ScienceDaily summarized the study: "In 1969, only about 10 percent of men in their early thirties had wages that were below poverty level. By 2004, the share had more than doubled. Overall, the share of young adults in 2005 living in poverty was higher than the national average."

    On Christmas Shopping Lists, No Credit Slips - The lowest percentage of shoppers in the 27-year-history of a national survey said they used credit cards over the Thanksgiving weekend, while the use of general credit cards like Visa and MasterCard fell 11 percent in the third quarter from a year earlier, according to the credit bureau TransUnion. Britt Beemer, chief executive of America’s Research Group, a survey firm, said “The consumer really feels a lot of pressure from previous debts, and they just aren’t going to dig themselves into that kind of hole,” he said. After the Thanksgiving shopping weekend, the group found that just about 17 percent were paying with credit — just over half of last year’s level and the lowest rate in the 27 years it has conducted a survey. Some people are shunning credit cards for budgeting reasons, while others do not have a choice. More than 15 million Americans lost their cards because of strict credit-card regulations that were passed last year, or when issuers cut back on credit during the recession, said David Robertson, publisher of The Nilson Report, a credit card industry newsletter.

    AAR Reports November 2010 Rail Traffic Continues Mixed Progress The Association of American Railroads (AAR) today reported that monthly rail carloads for November 2010 were up 4.5 percent compared with the same period last year, while intermodal traffic was up 11.3 percent compared with November of 2009. Seasonally adjusted AAR data for November showed a month-to-month dip in carloads, down 1.1 percent from October 2010, as well as in intermodal traffic, down 0.4 percent from the month before.  "Even though U.S. rail volumes were down in November from October levels — due largely to Thanksgiving — November marks the 11th straight month in which rail volumes were higher than year-earlier levels. That hasn’t happened since January 2006," said

    Don’t Look Now, But Rail Activity Has Fallen For Three Of The Past Four Months - From the latest AAR Rail-Time Indicators report, seasonally adjusted rail carloads across all commodities have seen a sequential volume decline in three of the past four months.

    The Jobs Picture - The clarion cries of "recovery" cut painfully through the crisp pre-Christmas air while the now-perpetually unemployed huddle in their tents around the Sacramento delta, and the state AGs slug it out with the foreclosure goons, and not a few mortgage payment drop-outs enjoy luxury living in McMansions with no monthly carrying costs, and the minions of Goldman Sachs (with fellow squids) groom their beaks waiting for the massive chum slick of bonus checks to be dropped by helicopters in this the third holiday season since Wall Street committed suicide by an overdose of Ponzi.    It's pathetic to hear the wan cry of "recovery" issued by the high priests and tribunes of this land. Do the president and his train of wizards really suppose that all the necessary pieces are in place to re-start the economic dynamics of, say, 2003? A million busboys and lawn service lackeys lining up for half-million dollar liar loans at the Countrywide office? BCA, Citi, and all the other big banks pawning off bundles upon bundles of these worthless obligations to insurance companies, pension funds, foolish endowment fund managers and any other reckless entity desperate for yield? A hyperbolic consumer economy pyramid resting on a base of empty promises to repay?  Sorry. There's no way the USA can ever "recover" to that lush breeding ground of swindling, fraud, and childish irresponsibility.

    Laboring Over Labor Data - The Bureau of Labor Statistics (BLS)  November 2010 employment report was a downside surprise to many who anticipate some ratio to the ADP jobs report. . For months, the BLS has been estimating more jobs then were estimated by payroll service agency ADP.  This month BLS reversed positions with ADP estimating non-farm private payroll growth at 93,000 (analysis here) – while the BLS estimate of non-farm private payroll was 50,000. (Note: the 39,000 headline number includes both private and public sector – the public sector non-farm employment declined 11,000.)For a year, BLS has consistently estimated higher jobs growth until now.  Those who read my work know I am not a fan of BLS methodology.  This month, the BLS has provided a better seasonally adjusted answer to jobs growth.  ADP’s seasonal adjustment factors for November are wrong.  In the ADP analysis, it was found that the seasonally adjusted ADP data historically spiked in November, then corrected in December.  It was warned that the ADP increase in November was small in comparison to the  historical spike.

    Trend of Unemployment Claims as % of Continuing Unemployment; US Population vs. Employment, vs. Labor Force, vs. Continued Unemployed - Inquiring minds might be interested in a pair of charts courtesy of reader Tim Wallace. Click on either chart to see a sharper image.Note the trendline of new unemployment claims as a percentage of continuing unemployment. Over time, the chart suggests it takes longer and longer to find a job. There was a brief respite in the Clinton years, no doubt because of the internet boom, not because Clinton did anything particularly special. The trend is unbroken all the way back to 1967. It just was not noticeable before because overall unemployment was lower. The recent spike in continued unemployed is especially aggravating given the flat growth in employment.

    Self-Employment Falls, Labor Department Stats Show - The share of Americans working for themselves has fallen since the recovery began, according to the Labor Department. The following chart, from Steven F. Hipple, an economist at the Bureau of Labor Statistics, shows the quarterly rates of self-employment over the last decade. The figure for the last quarter of 2010 is estimated from rates recorded in October and November. Since the recession ended, the proportion of self-employed nonagricultural workers peaked at 10.6 percent in the last quarter of 2009. It has edged steadily downward since then, sitting at 10 percent in recent months. It’s not clear why this might be the case. To summarize what we’ve written before about this subject, two competing forces affect self-employment and entrepreneurship rates. One is opportunity: how much demand there is for the good or service your new company would offer. The other is opportunity cost: what you’d be giving up by starting a business.

    Employment Report Emphasizes Need for Government to Get Out of the Way - The lack of employment growth is startling given corporate profits growth. Year-over-year, the net income of companies in the S&P 500 grew by 23.8%, excluding financials. Rather than putting this money to work in the form of employment growth or investment spending, companies have instead build up massive cash reserves. Moody’s estimates large corporations have $1 trillion of excess cash on balance sheet. Data from the Fed show that U.S. nonfinancial businesses hold over $2.4 trillion in cash in aggregate. This sort of cash hoarding is unprecedented, especially considering that nonfinancial businesses do not need the cash to reduce debt levels. The argument that corporations won’t hire or invest due to a lack of household demand is specious. Causality seems to run in the opposite direction. Household spending has held up remarkably well given the employment situation. Prior to the employment report, confidence of a turnaround was high due to the 6% rise in retail sales – the fastest growth since the business cycle peak in 2007. If the problem is not inadequate household spending or a reduction in liquidity facilities, why are businesses holding cash instead of hiring or making new investments? The best explanation is that the uncertainty created by current fiscal and regulatory policies has sapped business confidence.

    Participation Rate of 25 to 54 Age Men at Record Low - The collapse in the labor force participation rate has been one of the key stories of the great recession. The participation rate is the percentage of the working age population in the labor force.  The labor force participation rate has fallen from 66.2% in May 2008 to just 64.5% in November 2010. A few weeks ago I looked at Labor Force Participation Rate: What will happen?. I looked at the aging of the population and concluded that the participation rate will probably increase to around 66% over the next 5 years before declining again - and that will keep upward pressure on the unemployment rate. However one of the key trends has been the decline in the participation rate of men - and that is continuing. This graph shows the changes in the participation rates for men and women since 1960 (in the 25 to 54 age group - the prime working years). The participation rate for men in this key demographic fell to a record low 88.8% in November.

    Jobless Recovery?: 25 Unemployment Statistics That Are Almost Too Depressing To Read - Guess what?  Unemployment is up again!  That's right - even though Wall Street is swimming in cash and the Obama administration is declaring that "the recession is over", the U.S. unemployment rate has gone even higher.  So are you enjoying the jobless recovery?  The truth is that there should not be any talk of a "recovery" as long as the "official" unemployment rate remains at around 10 percent and the "real" unemployment continues to hover around 17 percent.  There are millions and millions of American families that are living every day in deep pain because of the lack of jobs.  Meanwhile, there are all of these economic pundits that are declaring that we are just going to have to realize that chronic unemployment is the "new normal" and that if other nations can handle high rates of unemployment then so can we.  ...If you have never been unemployed, it can be hard to describe how soul-crushing it can be.  As the bills pile up and the financial obligations mount, the pressure can be debilitating.  Being unemployed for an extended period of time can easily plunge you into depression and grind your self-worth away to almost nothing.  After getting rejected dozens of times (or even hundreds of times), many Americans simply give up.  There are countless marriages and countless families that are being ripped to shreds by financial pressure even as you read this.  When the money is gone and there is no job in sight it can be a really, really empty feeling.

    Today’s Jobs Numbers: Proof Against Structural Unemployment - In 2009, there was a meme about how the recession was really a “mancession” because male-dominated fields like construction and finance took a larger hit and unemployment was going to hurt men much more than women. This story had a lot of legs then, when unemployment rose much more rapidly among men than women. I argued at the time that this was a false dichotomy, and that the evolving nature of families securing homes and benefits leads to “two-income traps” where either parent in a family being unemployed put the family at risk. The idea that men are more vulnerable than women ignores how vulnerable households themselves have become. But this story does have a bit of a “structural unemployment” part to it, because it assumes men are going to be harder to employ in the post-recovery period.

    BLS: Job Openings increase sharply in October, Labor Turnover still Low - From the BLS: Job Openings and Labor Turnover Summary The number of job openings in October was 3.4 million, which was up from 3.0 million in September. Since the most recent series trough in July 2009, the number of job openings has risen by 1.0 million or 44 percent. The following graph shows job openings (yellow line), hires (purple), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS. Note: The difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. This report is for October, the most recent employment report was for November.Notice that hires (purple) and total separations (red and blue columns stacked) are pretty close each month. When the purple line is above the two stacked columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs.

    The Job Openings Paradox - Actual new hires and employment growth have only edged up mildly. In other words, good labor demand has not translated into actual hires… What is going on here? There are three possibilities: Mismatch, offshoring, and lags. Mismatch says that companies would like to hire, but can’t find the right people. Offshoring says that companies have openings, but they are filling them overseas. Lag would say that companies have openings, but it’s taking them time to pull the trigger, given the overall uncertainty. I’m going to vote for a combination of offshoring and lag. I’m sure that some job openings are going overseas. But the statistics also suggest that hiring pressure is building up in some sectors of the economy. If that’s so, 2011 may be a better year for the labor market than people expect.

    What does the “Take this Job and Shove-It Indicator” say about the Economy? - With a salute to Johnny Paycheck, inquiring minds are investigating the CNBC claim ‘Shove It’ Indicator Turns Positive: More People Quitting Call it the “Take This Job and Shove It” indicator. The latest report from the Bureau of Labor Statistics shows that an increasing number of people are quitting their jobs, a sign of an upturn in consumer confidence and the economy, according to one economist.With that lead-in let's turn our focus on the BLS Job Openings and Labor Turnover Survey for October on any chart in this post for a sharper image While admitting the trend looks very favorable, please note the ratio was 2.0 at the end of the 2001 recession. It is roughly 4.5 now. Furthermore, at the end of the last recession, the indicator rose for another 2 years. Here is the alleged Take This Job and Shove It” indicator.While this indicator did indeed turn up (making a higher low in December 2009), the indicator has done little but flatline since April 2010, a full 6 months. Maybe it continues and maybe it doesn't. Moreover, it has to rise by another 5,000 just to get to the August 2003 low.

    What is the real problem for most of us? -  We have an economy scarred by mass unemployment, falling wages, and growing insecurity. In the downturn, a staggering 40 percent of American households have been afflicted by unemployment, negative home equity, mortgage payment arrears, or foreclosure. In November 2008, one quarter of Americans aged 50-59 reported that they'd lost more than 35 percent of their retirement savings. But this devastation caused by the collapse of the financial bubble and resulting recession is but the foul expression of an economy that has suffered long-term decline. We were hemorrhaging manufacturing jobs when the economy was growing before the bubble burst. Wages fell for most Americans over the course of the last decade, which suffered the worst job creation of any period since the end of World War II. The imbalances were obscene before the recession, with finance capturing 40 percent of corporate profits, the wealthiest 1 percent capturing half of the benefits of economic growth, the US running soaring trade deficits, even in high technology products, with China and the world. Our decaying infrastructure, broken health care system, declining educational performance in relation to the industrial world all preceded the fall.

    Does the U.S. need factories to be an economic power? - I recently had a fascinating conversation with Hartmut Jenner, CEO of a German firm named Kärcher, which produces very high-quality cleaning equipment. Kärcher is a prime example of those mid-sized, extremely competitive manufacturers that are the backbone of Germany's export sector, the part of the economy that drives the nation's growth.  Jenner has some strong feelings about the U.S. economy. Companies in America, he believes, have moved so much production offshore to China and other low-cost countries that the U.S. is losing its ability to manufacture. Here's what he told me: I have some fear that (Americans) are losing their capability for mechanical manufacturing. I'm very scared. The physical skills are missing to manufacture. This is not a joke. That's not good for a country. The U.S. needs a mechanical base again. Passionate stuff. His thoughts echo those of many in the U.S. who worry about the potential damage done to America's future by the loss of factories to a rising Asia.  I'm going to offer up a counterpoint: A nation today doesn't need to have its own factories to be an economic power, even a manufacturing power.

    After stimulus, construction projects drying up - The end of the stimulus - the $787 billion that Washington approved last year in an effort to forestall another Great Depression - is more than a year away. But for Carter and thousands of other workers in the road construction industry, it has already arrived.  Road construction workers were among the first to benefit from the 2009 American Reinvestment and Recovery Act, which pumped hundreds of millions of dollars into "shovel-ready" road resurfacing projects in order to save or create millions of jobs.  The bulk of highway-related work will be done within a year and more than half of the funds for it have been paid out, said Ken Simonson, chief economist for the Associated General Contractors of America, an Arlington County-based trade group.  But with the economy continuing to lag, private-sector work has all but disappeared, and many states have cut back on road work in an effort to plug gaping deficits.

    Immigration and remittances - Atlanta Fed's macroblog - Immigration is a topic that raises many questions from both policymakers and the public, and researchers work to offer perspective. Some questions currently being posed are

    • Does immigration into the United States have a positive impact on native-born employment opportunities?
    • If remittance fees (that is, fees immigrants pay to send money home) are reduced, how much more money do migrants send home?
    • How does sponsorship of family members' immigration into the United States change immigration patterns?

    Researchers discussed these questions and more at the Federal Reserve Bank of Atlanta's Americas Center research conference on Remittances and Immigration, Some highlights from the research presented at the conference include a paper by University of California, Davis professor Giovanni Peri that was recently profiled in the New York Times. Peri argues that unskilled immigrant labor helps prevent U.S. firms from relocating offshore.

    What Costs $919 Billion But Isn't Likely to Create Many Jobs? - Could the answer to this question be the just announced tax deal and the so-called "doc fix"?  Here are the arguments that might be made for why these two separate actions by the lame duck 111th U.S. Congress might have succeeded in spiking the job market in 2011.  First, we'll consider the tax bill compromise between the Obama administration and the Republican minority in the U.S. Congress. The bill, at first glance, would appear to contain a number of provisions that would tend to promote job creation, but not as much as you might think on first glance, such as:

    Analysis: GOP Senators Represent More Than Four Times As Many Unemployed People As Wealthy Households - Last week, Sen. Lamar Alexander (R-TN) admitted on the Senate floor that a proposal to extend tax cuts for families with incomes below $1 million would entail a tax increase for “just a small number of people, most of whom live on Wall Street and in New York.” This bout of honesty made it painstakingly clear that President Obama was correct yesterday when he called tax cuts for the wealthy the “holy grail” of conservative economic theory.  In striking a tax deal with Obama, Republicans insisted that the price of extending middle-class tax cuts and unemployment benefits for middle-class families (along other initiatives to boost the economy) would be extending the Bush tax cuts for the rich and slashing the estate tax. As Pat Garofalo and Michael Linden noted yesterday, the GOP’s priorities would cost $133 billion to benefit fewer than 5 million people, whereas the Democratic priorities cost $214 billion, but would help 156 million people.

    Employment-Population Ratio: A Potential Lost Generation -Ed Burmila walks through the horror of trend stories about happy, young, unpaid interns on-the-go in Interns Built the Pyramids. Anyone who works with young people is aware of the lack of jobs and opportunities, from the most disadvantaged through those who leave college with fresh skills.  The lucky end up in non-paying internships, a nice little inequality generating machine for the 21st century.If you wonder why people are so worried about the current unemployment crisis, look at these two statistics of the employment-population ratio rate of young people in the United States: A 10% drop in the amount of young people working as a result of this recession. That’s 10% more people detached from the labor market and with decades of lost wages. That’s 10% more people with fewer opportunities to develop their capabilities and build the American economy over the 21st century. And that is a generational crisis unless we get a serious attempt to fix this economy and put people to work.

    Is the Deficient Demand Hypothesis Consistent with the Facts? -What's holding back the U.S. labor market? Why does employment growth remain slow? Why does the unemployment rate remain so persistently high? Is a prolonged jobless recovery possible? These questions are naturally at the forefront of current policy debates. Some economists believe--were trained to believe, I would say--that the lacklustre performance of the labor market is easy to explain: there is a lack of demand. Just ask firms why they're not hiring: a lack of product demand frequently tops the list reasons provided.  I'm not sure that economists can rely on answers like this to identify the type of aggregate shock that is afflicting the economy. A negative productivity shock to one sector in their model economy could lead to a decline in the production and employment in many sectors of the economy. This is because firm level production functions use the intermediate goods of many sectors as inputs into their own production processes. To an individual producer, it would appear as the demand for his product is declining. In any case, let us take this deficient demand hypothesis seriously for the moment. Then I want to ask how this hypothesis might be reconciled with the labor market data I present below.

    Department of "Huh?!" (Unemployment Insurance Edition) » Greg Mankiw writes: I should note, by the way, that economists who strongly favor the extension of UI benefits, such as those who signed this letter, also tend to favor more income redistribution in general.  I suspect, therefore, that the foundation of their support comes not from having weighed the specific pros and cons of UI per se, but rather from a more general desire to "spread the wealth around."  That issue is, as I tell my students, more a matter of political philosophy than it is of economics. This does surprise me. I would have thought he would have said that continuing our current extension of unemployment insurance benefits to 99 weeks is a good idea: Continuing the current extension is an expansionary short-run fiscal policy, the economy badly needs more expansionary short-run fiscal policy, and it is one of the few expansionary short-run fiscal policies that might get enacted in the current political climate.Down the hall at Harvard he has Raj Chetty, who has thought as carefully as anybody about the pros and cons of unemployment benefits and about the optimal structure unemployment insurance. Cf. Chetty (2004), "Optimal Unemployment Insurance When Income Effects are Large" http pdf.

    The effect of unemployment insurance on unemployment - Last week, when I wrote my post on how to boost employment, the list started off unambiguously: The first—and this can’t be stressed enough—is simply extending the federal unemployment extensions. As Menzie Chinn notes, the CEA has scored this, and the numbers are enormous: already, the program has increased the level of employment by 793,000 jobs. If the extensions are kept dead, there will be 593,000 fewer jobs in a year’s time than there would be if they were resuscitated, including more than 46,000 jobs in Florida and more than 26,000 jobs in Michigan. There is of course some effect by which paying people to stay unemployed will increase their chances of doing so. Rob Valletta and Katherine Kuang, of the San Francisco Fed, did the math back in April, concluding that the effect is “relatively modest”: The question arises whether this extended availability of UI benefits has contributed to a lengthening of unemployment spells because jobless workers are staying in the labor force longer in order to continue collecting benefits. Such a dynamic could raise the unemployment rate. However, analysis of data on unemployed individuals decomposed by their reason for unemployment, which affects their eligibility for UI, suggests that extended UI benefits have had a relatively modest effect. Peter Coy has taken a detailed look at the interplay between the two effects: Do the extra checks make unemployment higher than it would otherwise be by paying people to sit at home? Or do the checks sustain growth by supporting the spending power of households with out-of-work breadwinners?

    What Does 13 Months of Extended Unemployment Mean? (Not What You Think.) Each state has an unemployment insurance program that covers most employers. Generally these programs cover the first 26 weeks of unemployment insurance. (31 states have exhausted their reserves in paying for these programs and have been borrowing from the federal government, with interest, to be able to make payments.) After an individual has completed 26 weeks of state unemployment benefits, they may then begin receiving federal benefits as part of the Emergency Unemployment Compensation (EUC) program. EUC is divided into four tiers of varying length (and a total of 53 weeks), and as a person completes one tier they transition into the next one. After an individual has completed EUC, they may then begin receiving benefits as part of the federal Extended Benefits (EB) program. EB is divided into two tiers of a total of 20 weeks. (All tiers in EUC and EB may not exist for states under varying unemployment rate thresholds.) If an individual is in a particular tier when the EUC or EB programs end, they can (I think) complete that tier, but they cannot move into another tier. So, until the recent agreement, you had people in various tiers exhausting their benefits and unable to move to the next tier, even if they had received less than 99 weeks of payments (26+53+20).

    4 Million Americans Set To Lose Unemployment Benefits Even If Congress Passes Extension (CHART) - Even as Congress debates whether to extend emergency unemployment checks for more than six million Americans who are approaching the 99-week limit, some four million others are facing the certain end of their benefits over the next year, unless an entirely new program is crafted. This is the sobering conclusion of a report released by the President's Council of Economic Advisers on Thursday. The study forecast that the exhaustion of unemployment benefits for so many will curb spending power enough to significantly impede an already weak economic recovery. The typical household now receiving emergency unemployment benefits would see their income fall by a third should they lose their checks, according to the report. Among the roughly 40 percent of households in which the person receiving a check is the sole breadwinner, income would fall by 90 percent.

    Deal Doesn't Help Workers Who've Already Exhausted Jobless Benefits - The recent tax compromise between President Obama and the Republicans may be packed with treats for the upper middle class and the wealthy, but its benefits for the unemployed are perhaps not quite what they appear. The 13-month extension of unemployment benefits offers no additional help for the hundreds of thousands of Americans who have already reached, or are fast approaching, the 99-week limit on unemployment benefits. By contrast, my colleague David Kocieniewski noted in his article on Wednesday that a quarter of the savings from this compromise will go to the wealthiest 1 percent. “There is nothing for someone who is in that unfortunate position,” Chad Stone, chief economist at the Center on Budget and Policy Priorities, said of the so-called 99ers. Unemployment pay comes in four consecutive tiers, and each one offers a set number of additional weeks of benefits, depending on the unemployment situation in a given state. If Congress and the president had not agreed to extend qualifying dates, workers would not have been able to move to the next tier. Only workers in states with high enough unemployment rates can qualify for 99 weeks of benefits; currently, 25 states meet this threshold.

    Tax Negotiations: No help for 99ers - Just to be clear, the "extension of the unemployment benefits" is an extension of the qualifying dates for the various tiers of benefits, and not additional weeks of benefits. There is no additional help for the so-called "99ers".Emergency Unemployment Compensation (EUC) comes in four tiers:
    Tier I is for 20 additional weeks;
    Tier II is for up to 14 weeks;
    Tier III is for up to 13 weeks;
    Tier IV is for up to 6 weeks.
    As an example, if a worker was receiving Tier I benefits, they will be able to move to Tier II benefits with this proposed extension. Without the extension of the qualifying dates, workers would not be able to move to the next tier. These two tables are from the Center for Budget and Policy Priorities. The total number of weeks depends on the state unemployment rate.

    About 6 Million Didn’t Work at All Last Year - Nearly 6 million Americans looked for work but weren’t able to find employment at all last year, a new report shows. The Labor Department’s report on work experience in 2009, released today, highlights the long-term unemployment problem that’s likely to linger for years. Some 5.8 million job-seekers were without work for the entire year in 2009, an increase of 2.7 million from a year earlier. The majority of those unemployed for the entire year, nearly 57%, were men. Long-term unemployment, which describes people who have been out of work for 27 weeks or more, has been more pervasive in the latest downturn than any other period on record. Of all those unemployed, 41.9% had been out of work for more than six months as of November. Economists widely acknowledge the vexing nature of the problem. It has the potential to be long-lasting, it’s expensive and it’s not clear what policies would be most helpful in solving it.

    "Why work?" - Here's a claim, with concrete numbers, that: "a one-parent family of three making $14,500 a year (minimum wage) has more disposable income than a family making $60,000 a year." That's after various government benefits and taxes, but the calculation seems incorrect to me.  For instance, should the Medicaid and CHIP benefits of the poorer household actually be valued -- to the user -- at $16,500 a year?  (Is that number coming from some kind of cost basis?  If so, is it adjusted for the age of the Medicaid recipients to rule out nursing home expenditures?)  Is the $60,000 per year family receiving employer-supplied health insurance?  The assumption seems to be that they do not. Still, even if you make adjustments this is a scary comparison.

    Unemployment and Food Stamps - Two statistics from the Wall Street Journal. First, 6 million people were unable to find work last year. Nearly 6 million Americans looked for work but weren’t able to find employment at all last year,... an increase of 2.7 million from a year earlier. ... That makes it thard to swallow stories where the high unemployment rate is caused by an unwillingness to work due to government programs such as unemployment compensation. Second: More people tapped food stamps to pay for groceries in September as the recession and lackluster recovery have prompted more Americans to turn to government safety net programs to make ends meet. Some 42.9 million people collected food stamps last month, up 1.2% from the prior month and 16.2% higher than the same time a year ago... Nationwide 14% of the population relied on food stamps as of September... That means the presently about one out of every seven people relies on food stamps.

    Population Adjusted Food Stamps / U6 Unemployment

    Food Stamp Rolls Continue to Rise - More people tapped food stamps to pay for groceries in September as the recession and lackluster recovery have prompted more Americans to turn to government safety net programs to make ends meet. Some 42.9 million people collected food stamps last month, up 1.2% from the prior month and 16.2% higher than the same time a year ago, according to the U.S. Department of Agriculture. Nationwide 14% of the population relied on food stamps as of September but in some states the percentage was much higher. In Washington, D.C., Mississippi and Tennessee – the states with the largest share of citizens receiving benefits – more than a fifth of the population in each was collecting food stamps. Click on the top of any column to resort the chart.

    A Grim Record: One In Seven Americans Is On Food Stamps - The number of people on food stamps keeps hitting new all-time highs; as of September, nearly 43 million people were using the program, according to figures out this week. Of course, because of population growth, absolute numbers only tell part of the story. The best way to look at the numbers over a long period of time is as a percentage of the population. And when you do that, you see that we're also hitting new highs. The criteria for qualifying for food stamps haven't changed much over time, according to Jean Daniel, a spokeswoman for the government agency that oversees the food-stamp program

    How conservatives learned to love the federal food stamps program. - Of all the numbers quantifying this recession, few can match the grim precision of 42,911,042. That's the number of Americans, mostly children and the elderly, who used food stamps in September—521,428 more than in August, itself a record month, and 12 million more than in September 2008. In the past year, according to the Department of Agriculture, every state has seen its rolls swell—with increases ranging from 5.1 percent in West Virginia to 28.7 percent in Nevada. Then there is Idaho. Enrollment in the state's program soared nearly 40 percent year-on-year, 10 percentage points more than in any other state. What gives in potato country? In one sense, the jump is expected, given the economic fundamentals. Unemployment sits at 9.1 percent—lower than the national average, but eons away from the 2.7 percent rate the state saw just before the recession hit. Idaho has also suffered a catastrophic housing bust, causing billions of dollars of wealth to evaporate. But there's another reason for the soaring growth: Idaho has made it easier and quicker for residents to apply.

    Record levels of poverty among families with wages - A record number of children in the UK are living in poverty despite the fact that one or both of their parents work, according to a new report to be published tomorrow. The figure of 2.1 million is the highest on record – up 400,000 in the past five years, undermining the oft-repeated claim that people simply have to work their way out of poverty. The new figure accounts for more than half of the 3.7 million children living in poverty in Britain today, according to researchers from the New Policy Institute (NPI) who produced the report for the Joseph Rowntree Foundation (JRF). It is perhaps the most damning element of an analysis of the past decade, showing how initial progress in some areas has halted or been reversed.

    Give the Poor Money! - Matthew Yglesias posted a blog with a similar title, without the exclamation which I express for this idea. Here’s Matt: Alternatively, one under-discussed possibility is for a guy who has a lot of money and a desire to help poor people to just identify some poor people and give them some money. It sounds banal when you say it, but one of the main obstacles to people being less poor is that they don’t have enough money. If you give them money, they’ll have more of it. Will this be optimal in all cases? Of course not. But in the vast majority of cases, you’ll do some good. It’s tempting to believe that you’re on the [v]erge of some major conceptual breakthrough in the field of philanthropy. But give some consideration to the possibility that you’re not. Perhaps if you have a special talent for anything, it’s a talent for making money. It’s not very hard to identify some people who might need money more than you do. Maybe you should just give them some, and then go back to making money. Indeed, I think that Matt discounts the effectiveness of making simple transfers of cold hard cash (or digital numbers) from one section of society to another. Here’s me:

    Texas Borrows to Pay Unemployment Benefits as Spread Narrows - Texas, the second most-populous U.S. state, avoided paying higher interest rates on federal obligations with the sale of $854.7 million in debt to cover unemployment benefits.  The so-called spread on a similar borrowing Nov. 18 narrowed even as rates in the broader municipal market rose to their highest since Nov. 19 along with U.S. Treasury yields yesterday. President Barack Obama’s accord with Republican leaders to extend tax cuts led investors to dump bonds, said John Bonnell, who helps oversee $6.9 billion including munis at USAA Investment Management Co. in San Antonio.  Texas, which is borrowing through the Texas Public Finance Authority, didn’t expect the selloff in yesterday’s market to affect plans to offer no more than 3 percent, said Dwight Burns, the agency’s executive director.

    Unemployment Insurance Rate To Rise - Nevada businesses will pay $136 million more in taxes in 2011 to try to put some cash back into the state's Unemployment Insurance Trust Fund. That fund, which started this recession with a balance of more than $700 million, was depleted in October 2009 by benefit payments to record numbers of out-of-work Nevadans. Since then, Employment Security Division Administrator Cindy Jones said the state has had to borrow $579 million to cover checks for more than 100,000 on unemployment each week. Through the end of September this year, she said, the state collected $570 million from employers but paid out $1.8 billion. The situation forced the state Employment Security Council to recommend in October an increase in the average employer tax from 1.33 percent of wages to 2 percent. That recommendation was adopted Tuesday.

    Are Job Subsidies in Your State Working? - So you live in a state that provides companies with hundreds of millions of dollars in subsidies to create jobs. But do you sometimes wonder whether those companies have delivered all the jobs they promised? Indeed, do you worry that your state is wasting millions of dollars in economic subsidies each year? If you do, there’s a new report that will help provide you with some answers on whether your state is getting the best bang for the buck on jobs. Good Jobs First, a nonprofit group that seeks to shed light on how well or poorly economic subsidies work, has issued a report on Wednesday, “Show Us the Subsidies,” that rates all 50 states on how well they disclose information about the more than $10 billion dollars in economic subsidies that states sprinkle on companies nationwide each year. “A few states have created exemplary online disclosure systems,” the report says, “while many release recipient information only in obscure reports tucked away in remote corners of official Web sites.”

    Which States Manage Household Finances Best? - Now you can go to a new website, and see just how good or bad citizens in your state are at managing household finances. Here’s a small spoiler: if you aren’t a citizen of New York, New Jersey or New Hampshire, you are less likely to be among the most financially adept individuals. Those three states were among the top five in at least three of five measures of financial capability, according to a survey of more than 28,000 people. The interactive, clickable map of the U.S. is based on the State-by-State Financial Capability Survey released Wednesday that was developed in consultation with the Treasury Department and the President’s Advisory Council on Financial Literacy. Find the full data here.

    Mounting State Debts Stoke Fears of a Looming Crisis - The State of Illinois is still paying off billions in bills that it got from schools and social service providers last year. Arizona recently stopped paying for certain organ transplants for people in its Medicaid program. States are releasing prisoners early, more to cut expenses than to reward good behavior. And in Newark, the city laid off 13 percent of its police officers last week.  While next year could be even worse, there are bigger, longer-term risks, financial analysts say. Their fear is that even when the economy recovers, the shortfalls will not disappear, because many state and local governments have so much debt — several trillion dollars’ worth, with much of it off the books and largely hidden from view — that it could overwhelm them in the next few years.  “It seems to me that crying wolf is probably a good thing to do at this point,” Some of the same people who warned of the looming subprime crisis two years ago are ringing alarm bells again. Their message: Not just small towns or dying Rust Belt cities, but also large states like Illinois and California are increasingly at risk.

    Economy and Debt - US States Face More Financial Stress… Legislatures around the country may have to make more spending cuts over the next couple of years because of dwindling help from the federal government and a slow recovery in tax revenue, according to a new report. States will spend about $43 billion in economic stimulus funds during the current fiscal year, which ends June 30. After that, they'll probably have to get by with less federal funding. The report from the National Governors Association and the National Association of State Budget Officers warned of "extremely tight fiscal conditions for states" as federal support winds down. Critics of the economic stimulus legislation note that it failed to prevent a large jump in the unemployment rate. But the report credited the money with helping states avoid "draconian cuts" to Medicaid, education and other programs.

    States Face Budget Shortfalls of $26.7 Billion - States are reporting billions in midyear budget shortfalls, and the crunch is likely to continue for at least several more years, a new report says. Fifteen states are facing combined budget gaps midway through their 2011 fiscal year totaling $26.7 billion, according to a National Conference of State Legislatures report to be released Wednesday. The other 35 states say they are on target with their budgets. At this time last year, 36 states reported a combined $28.2 billion shortfall.State government spending has begun to rise after falling sharply during the recession, in part because tax revenues are slowly on the mend as the economy recovers. Even so, revenues remain far below pre-recession levels, and many states face pressure to cut programs and raise taxes to cover yawning gaps in their budgets

    US States Face `Cliff' as Federal Stimulus Ending Opens $38 Billion Hole - U.S. states are preparing for more budget cuts next year as tax revenue isn’t likely to rebound enough to replace almost $38 billion in aid that will be gone as federal economic stimulus ends, according to a report. At least 31 states and Puerto Rico are forecasting deficits of $82.1 billion in the next fiscal year even as tax receipts are picking up, the National Conference of State Legislatures said today. Under a temporary mandate since 2009, the U.S. has provided economic aid to states, helping to pay government workers and shoulder the cost of the Medicaid program to provide health care for the poor. That aid will be gone, the group said. “Although a recovering national economy is helping to stabilize state revenues in fiscal year 2011, serious budget challenges await state lawmakers in the new year,” the group said today in the report. “This largely stems from fewer federal stimulus funds available for next year’s budgets.”

    If Democrats are the big spenders, why do Republican states get the money? - Republicans have a near monopoly on complaints about government spending. Dozens of new Tea Party candidates were elected to Congress on a promise to clean house. But data going back two decades—to stick to Simpson's crude metaphor—show the milk is mostly coming from Democratic states, and the sucking is being done by Republican states.  The "red" states up in arms about government spending receive the largest share of it. This is not a new finding, but research by economist Gary Richardson at the University of California-Irvine backs it up. It isn't surprising that the more Republican a state leans, the more likely it is to be furious about government spending. But what is surprising is that states with the highest anti-spending sentiment appear to be the largest beneficiaries of government spending. Not only do red states swallow the lion's share of government spending, but Richardson found a linear relationship between the extent of GOP support in a state—and, by implication, the fervor of its anti-government sentiment—and the amount of federal largesse the state receives.

    Should states be able to go bankrupt? - Jimmy P has discovered a secret GOP plan to push states to declare bankruptcy in order to avoid bailing them out. Like most secret plans, it was splashed all over the Weekly Standard in a piece by David Skeel, and it does make a certain brutal sense: The effectiveness of state bankruptcy would depend a great deal on the state’s willingness to play hardball with its creditors. The principal candidates for restructuring in states like California or Illinois are the state’s bonds and its contracts with public employees. Ideally, bondholders would vote to approve a restructuring. But if they dug in their heels and resisted proposals to restructure their debt, a bankruptcy chapter for states should allow (as municipal bankruptcy already does) for a proposal to be “crammed down” over their objections under certain circumstances. Skeel doesn’t mention the single biggest problem with this idea. If it were implemented, or if it even looked like it might get implemented, prices of municipal bonds would plunge, and most states would find it pretty much impossible to borrow money.

    Opening Bankruptcy Court to the States - Imagine a time a year or two into the future. A large American state has reached the limit of its ability to raise taxes and cut spending. It then is unable to roll over its debt. It defaults. Imagine also that a hedge fund has bought a good deal of that debt in the distressed debt markets. It puts all that debt in a newly formed limited liability company, or L.L.C., and when the state in question defaults on the debt, the L.L.C. files a Chapter 11 petition. And then the debtor (the L.L.C.) seeks to enforce that debt, as it is the only asset in the debtor’s bankruptcy estate. “Impossible!” you say, since states enjoy sovereign immunity. Well, outside of bankruptcy they do. But in 2006, the Supreme Court held that the Bankruptcy Clause to the Constitution represents an exception to the normal rule of sovereign immunity. So maybe this little scheme might work, at least if the L.L.C. were given a few other assets to make the scheme a little less obvious. This possibility raises the question of whether we should amend the Federal Bankruptcy Code to allow states to file for relief under Chapter 9, like municipalities, counties and other subsidiary governmental entities can already do. Even if states never filed under Chapter 9, such an amendment might be a good idea for a few reasons.

    Plunging Home Prices Fuel Property Tax Appeals Swamping U.S. Cities, Towns - A fiscal flood that threatens to swamp local government budgets across the U.S. overflows from file cabinets in the office of Patty Halm, chair of the Michigan Tax Tribunal.  The backlog of cases from taxpayers seeking to lower property-tax bills of more than $100,000 shot up to 14,236 this year from an annual average of about 6,000 during the past decade. The backlog of smaller claims was at 28,558 at the end of September, eight times higher than a decade ago, according to records at the tribunal, a Lansing-based administrative court.  From Los Angeles to Atlantic City, the New Jersey gambling resort whose credit rating Moody’s Investors Service cut by three levels last month, property owners are demanding lower taxes after real-estate values plunged. The disputes over billions in dollars come as municipalities are already slashing services such as police and fire protection and may depress revenue further as communities try to recover from the longest recession since the 1930s. In Michigan, Governor-elect Rick Snyder has warned that hundreds of towns face financial crises

    Fiscal Stress Faced by Local Governments - CBO Director's Blog - In 2009, the expenditures of local governments—including counties, cities, towns, school districts, and special districts—equaled 8.7 percent of gross domestic product, and those governments employed just over 9 percent of the labor force. Those governments, which play a significant role in people’s lives and in the nation’s economy, have not been immune to the weak economic conditions of the past few years. Many are facing significant budgetary challenges (often termed “fiscal stress”) and have been compelled to constrain spending and services. Today, CBO published an issue brief entitled Fiscal Stress Faced by Local Governments, describing the economic conditions and budgeting practices that can lead to fiscal stress at the local level. The brief also reviews the options available to local governments, state governments, and the federal government for addressing such financial difficulty. Last, the brief examines two options that local governments very rarely use—defaulting on their debt or filing for bankruptcy.

    City Unemployment: Slow Progress - Unemployment rates are falling in about two-thirds of the country’s major metro areas from a year earlier, signaling continued slow progress in the labor market. The Labor Department’s report on metro area employment Wednesday showed jobless rates in October were lower in 235 of 372 metro areas surveyed, compared to a year ago. But the unemployment rate was up in 121 places and flat in 16. Overall, 224 areas recorded unemployment rates below the national U.S. figure, 138 areas reported rates above it, and 10 areas had rates equal to that of the nation. El Centro, Calif. and Yuma, Ariz., led the pack with the highest jobless rates at 29.3% and 26.7%, respectively. Among the 10 areas with jobless rates of at least 15%, eight were located in California, according to the Labor Department. Yuma recorded the largest over-the-year jump in its unemployment rate. On the opposite end of the spectrum, Elkhart-Goshen, Ind. and Hickory-Lenoir-Morganton, N.C. registered the largest year-over-year drop in their unemployment rates. The following chart tracks unemployment changes in the 49 most populous cities.

    Where the jobs are - THE Bureau of Labour Statistics released two interesting reports this morning that shed a little more light on the state of the American recovery. The first updated metropolitan-level employment data through October, providing a sense of exactly where things are improving, and where they aren't. As you can see from the chart above, unemployment rates are highest in the West and in Florida, as well as across the country's manufacturing belt. Things are better than average on the east coast, and from Texas north across the Plains. What's particularly interesting to watch is how recovery has proceeded in recent months. The biggest metropolitan employment gains over the past twelve months have accrued in a diverse array of places. In order, they are: Washington, DC (44,000 jobs), Boston (25,000), Dallas (25,000), Phoenix (24,000), Minneapolis (21,000), Austin (18,000), Baltimore (14,000), Orlando (10,000), Cleveland (10,000), and Seattle (9,000). There's no one explanation that accounts for these performances. Centres of government do well, as do hubs for medical and science research.

    New York City Budget Deficit Next Year May Widen by $2 Billion, Page Says - New York City’s projected budget deficit for fiscal 2012 may widen by $2 billion, to $4.5 billion, because cuts in state aid may be greater than forecast, Budget Director Mark Page said. Mayor Michael Bloomberg’s proposal last month to cut the city workforce by 10,000 as part of plan to save $1.6 billion during the next 18 months may not be enough to close the gap, Page told the City Council’s Finance Committee today. “The reality that we’re facing is that the future could be considerably worse,” Page told the council members. “This is something we are solemnly worried about.”

    Bank of America Deal in Muni Case May Be `Tip of the Iceberg' - Bank of America Corp.’s agreement to pay $137 million in restitution for taking part in a nationwide bid-rigging conspiracy for municipal-investment contracts may soon be followed by more settlements to repay the scheme’s victims, the Justice Department’s Antitrust Division head said.  “Stay tuned to this channel -- I think you will see a lot more activity in the coming weeks and months,” Christine Varney, the antitrust chief, told reporters yesterday. “We are committed to getting restitution, full restitution, to all the municipalities that were victims of this scheme.”  Bank of America, which has assisted the government probe of the $2.8 trillion municipal-bond market since at least 2007 in return for leniency, has provided documents, e-mails and recordings of phone calls, according to court records of civil suits. In September, Douglas Lee Campbell, formerly employed by the bank’s municipal derivatives group, pleaded guilty to taking part in a conspiracy to pay state and local governments below- market rates on investments purchased with bond proceeds.

    New Data Blur Foreign Holdings in Muni Bonds - Amid growing worries about state budget deficits and pension burdens, one bright spot in the municipal bond market has been data showing that foreign investment had climbed to record-setting levels.   The surge was widely credited to foreign interest in the taxable bonds that dozens of states have issued under the Build America Bond program. Enacted in early 2009, the program gives state and local issuers a federal subsidy that offsets the higher interest rates they would otherwise pay to issue taxable bonds. On Thursday, with Congress still debating whether to extend the Build America Bond subsidy beyond the end of the year, the Federal Reserve released data for the third quarter on foreign holdings of municipal securities — and revised all the quarterly numbers going back to mid-2009.  The result? The evidence of growing foreign interest vanished.

    Governor To Call Emergency Session – Governor Christine Gregoire says she will call state lawmakers into an emergency session later this month to deal with a billion-dollar hole in the state budget. Gregoire says she had not set a date but said it is likely it will get under way before Christmas. The governor made the announcement today after meeting for an hour with the Democratic and Republican leaders of the Legislature. She will meet with the leaders again Thursday then decide on a date for the start of the special session. Washington State is facing an estimated $1.1 billion deficit in its current budget and $5.7 billion in the 2011-13 biennium.

    Oregon Timber Counties Face Financial Collapse - The loss of federal timber payments is pushing some Oregon counties already suffering from the recession toward possible financial collapse. To make things worse, the Legislature is trying to pare down a projected $3.5 billion state budget deficit that likely will result in cuts to services that counties provide under shared funding or contracts with state and federal agencies. Federal timber payments are set to expire in 2012, carving big holes in the budgets of 18 Oregon counties, The Oregonian reported.

    Fiscal experts set NC budget gap at $3.7 billion - There's now a better estimate of how wide the gap between expected revenues and expenses could be in North Carolina state government in 2011. Fiscal experts at the Legislature announced this week the preliminary gap for the year starting July 1 is $3.7 billion. That's $500 million more than the minimum budget gap discussed after the current year's $19 billion budget was approved last summer. Most of the gap is caused by the loss of federal stimulus dollars and temporary taxes set to expire. The increase can be attributed to high-priority spending items the General Assembly usually agrees to such as increasing school enrollment, state pension funds and the employee health insurance plan

    Florida's 2011-12 Budget Outlook Getting Gloomier -A legislative economist told the Senate Budget Committee on Tuesday that she expects a predicted $2.5 billion budget gap to widen because the state's economic recovery has been slower than forecast. The panel's chairman, meanwhile, hinted that Gov.-elect Rick Scott's campaign promises for deep spending and tax cuts may run into trouble in the Legislature. State economists in September estimated the $2.5 billion difference between anticipated revenues and expenses ranging from high priority to critical for the 2011-12 budget year that begins July 1.  "It sounds like it's all bad, but the truth of the matter is we are starting to show improvement" in the economy,. "It's just not as strong as we'd hoped it would be at this point."

    Schwarzenegger Proposes $9.9B In Cuts — Gov. Arnold Schwarzenegger has declared a fiscal emergency and is asking lawmakers to meet in a special session to save the state $9.9 billion over the next two years. Schwarzenegger on Monday unveiled a plan that relies largely on cuts to health care and social services for the poor. About $7.4 billion of his proposal would come from cuts, include reducing cash assistance to needy families by 15.7 percent in April, then eliminating the entire welfare-to-work program in July. He is proposing to eliminate vision coverage and increasing monthly premiums for Healthy Families, a program that provides health coverage for children of low-income families. The governor also is asking the state to limit prescriptions and cap physician visits to 10 a year for Medi-Cal recipients.

    Chart of the day: California taxes - I pulled table D1 (Californian GDP) and table M13 (Californian state tax collection) from the California statistical abstract. That only gives data from 1967 to 2007, unfortunately, and the GDP series changes slightly in 1997. But in any case, here’s the result: It seems to me that tax revenues have been floating pretty steadily around roughly 5.5% of GDP since the mid-70s, with a brief blip up to a high of 6.8% during the dot-com bubble. I’m sure that the recession has brought the ratio down of late. But what I’m not seeing is any indication that the decline of federal tax revenues is made up for by a concomitant increase in state tax revenues.

    California Budget Gap May Reach $28.1 Billion Over 18 Months as IOUs Loom - California’s budget gap may widen to $28.1 billion over 18 months, according to Governor-elect Jerry Brown, who takes charge of the most-populous U.S. state next month. A cash shortage may force the use of IOUs by July, Controller John Chiang said.  The deficit estimate takes into account a $2.7 billion drop in projected estate-tax receipts, and compares with the most recent forecast of a $25 billion gap for the period, Brown said today at a public meeting of state officials. The cash accounts may be short by $2.3 billion within eight months, Chiang said at the meeting in Sacramento.  “I don’t want to say it, but this could mean IOUs and more tax-refund deferrals,” Chiang said.  Chiang, who contemplated the use of warrants this year amid a record 100-day budget impasse, issued $2.6 billion of the IOUs to vendors in July 2009 while waiting for lawmakers to pass a spending plan.

    California's Deficit Jumps To $28 Billion As Tax Deal Rips Away Vital Income - California's budget gap has been revised upward again to $28.1 billion over the next 18 months. Remember just days ago Schwarzenegger declared a fiscal emergency to deal with a $26 billion gap. Governor-elect Jerry Brown announced the new estimate last night. The reason for the jump is Obama's tax deal, specifically the establishment of a 35 percent estate tax -- the lowest since 1931 -- plus exemptions. California will lose $2.7 billion in this arrangement. And that's not even the biggest black eye in the tax deal. The failure to extend Build America Bonds will end what was effectively a stimulus for the Golden State and drive up the cost of issuing new debt. See 16 reasons why California is the next Greece>

    Death Penalty: Can Ending Capital Punishment Help States?… California has a $25 billion deficit and almost 700 inmates on death row. According to a 2008 report issued by the California Commission for the Fair Administration of Justice, maintaining the criminal justice system costs $137 million per year, but the cost would drop to $11.5 million if it weren't for the death penalty. A 2010 study from the Northern California chapter of the American Civil Liberties Union found that California would be forced to spend $1 billion on the death penalty in the next five years if the state does not replace capital punishment with permanent imprisonment.  California is not the only state where cost has become an argument for abolishing the death penalty.  Last week a commission report recommended to the New Hampshire legislature that the state not expand its death penalty, citing its higher costs as one of the reasons, and the same week a bill to abolish the death penalty in Illinois passed in the state's House Judiciary Committee.

    San Francisco Utility Delays Build Americas After Yields Leap - San Francisco’s Public Utilities Commission, which supplies water to 2.5 million people in the Bay Area, postponed $524 million in competitive offerings, including $350 million in Build America Bonds, as yields soared.  The average yield on taxable Build Americas climbed to 6.35 percent Dec. 7, the highest since Jan. 7, according to a Wells Fargo index. Signs that the global economic recovery is gathering pace also pushed up tax-exempt yields, which move inversely to prices, along with U.S. Treasuries and other fixed- income markets.  The future of the Build America program, which expires Dec. 31, remains unclear after President Barack Obama and congressional Republicans left the federally subsidized bonds out of a tax deal they reached this week.

    LA County libraries in a bind - Los Angeles County's library system — one of the largest public libraries in the nation — is in financial distress and cannot sustain its level of services over the next decade, according to county library officials. A proposed solution — increasing property taxes — seems to be getting a tough reception. The Library Commission's recommendation last week prompted no action by the Board of Supervisors. Library officials have declined to be specific about what will be eliminated if a new tax isn't passed. But the size of the deficit — about $22 million a year over the next decade — may mean even deeper cuts into hours of operation and services that include homework help, children's story time and gang prevention efforts. The current budget is $160 million.

    jobless rate by education level achieved

    OECD Education Rankings – 2010 - The countries which belong to the Organization for Economic Cooperation and Development (OECD) produce two-thirds of the world’s goods and services. The organization publishes annual reports about economic and social factors in the member states. School performance league tables are presented in the OECD report, Education at a Glance 2010. It includes comparison tables of educational performance, class sizes, teachers’ salaries, tertiary education and much more. The report can be downloaded as a PDF document. Chart A1·2 [ page 29] ranks countries, in descending order, according to the percentage of 25-34 year-olds who have completed an upper secondary education (the most recent data in the 2010 report is from 2008). The United States of America is the only OECD country where 25-34 year-olds are not better educated than 55-64 year-olds. Chart A1·2 is reproduced here in accordance with the terms specified at:

    Education Spending and Those International Test Scores -  As my colleague Sam Dillon reported on Tuesday, China gave the rest of the world a run for its money in the Program for International Student Assessment, a test administered to 15-year-olds around the world. But how might money actually have affected these test scores?  The Organization for Economic Cooperation and Development, which administers the test, has put together some handy graphs showing how well a country’s students scored on the reading portion of the test in comparison to other variables, like how rich or educated that country is. Below, for example, is a graph showing a country’s gross domestic product per person versus the country’s reading test scores. The relationship between the two is very weak.

    How Republicans Might Improve Education -I, too, worry about the future of a nation whose 15-year-olds scored in the bottom quarter of participating nations of the Organization for Economic Cooperation and Development in one major test of “mathematical literacy.” To recapture the presidency, the Republican leaders will have to convince voters that they, and they alone, can help create a visibly stronger America, and to do that they will do well to align their party as closely with education as it once was with military strength. National prosperity today rests on the bedrock of human capital. Across countries, an extra average year of schooling is associated with a greater than 30 percent increase in per-capita gross domestic product, my colleague Robert Barro and his co-author, Jong-Wha Lee, estimate.

    Obama: New Spending Needed for Education, Innovation –President Barack Obama said the U.S.’s ability to compete in the global economy depends on making new investments in education, innovation and infrastructure. As Democrats and Republicans talk more about the need to cut federal spending, Mr. Obama argued that spending on tuition assistance, research and development tax credits and other initiatives cannot be reduced. He did not specify where new money should be spent or lay out any new policies; aides said those ideas would be unveiled ahead of the State of the Union speech early next year. Rather, the president laid out his own set of priorities and made clear he would resist efforts to cut federal spending in those areas. “We’re going to have to be bold and courageous in eliminating spending programs that we don’t need and we can’t afford,”

    Tax cuts for the rich, or better teachers in schools? - It was depressing enough when the president caved on extending $120 billion in tax cuts for the highest-earning 2 percent of Americans at a time of war and surging debt. As proof of White House fear and timidity, and Republican greed and myopia, the news doesn't get much worse.  That's $120 billion over two years that won't go to boost job creation. Nor will it fund a portion of the $300 billion we'll spend on wars during same period - instead, we'll borrow that abroad and hand the bill to the kids. Worse, none of that cash will be available to lure America's top young talent to the classroom by finally making teaching a prestigious, well-paying career.  Oops - I forgot - no one in the tax and budget talks was talking about transforming the teaching profession as part of America's long-term economic recovery plan. After all, that would mean thinking beyond 2012. Yet the education world was rocked Tuesday when students in Shanghai, in that city's debut on a respected international test, outscored dozens of other countries in math, science and reading.  Shanghai was No. 1 in all three subjects; the United States was 17th, 23rd and 31st.

    Credit-Card Borrowing Dips, but Student Loans Jump - U.S. consumer borrowing unexpectedly climbed again in October as a jump in student loans offset the 26th consecutive decline in credit-card use. Consumer credit outstanding increased at a seasonally adjusted annual rate of 1.7%, up by $3.4 billion to $2.4 trillion, a Federal Reserve report said Tuesday. The gain was the second in as many months following 19 straight losses. Economists surveyed by Dow Jones Newswires had predicted a $2 billion decline in October consumer credit. The data Tuesday showed the October gain was driven by another big increase in student loans, a category that pushed up overall consumer credit in September by $1.2 billion. Originally the Fed reported a $2.1 billion increase in September borrowing.

    College Education at the Margin -- Richard Vedder writes, approximately 60 percent of the increase in the number of college graduates from 1992 to 2008 worked in jobs that the BLS considers relatively low skilled--occupations where many participants have only high school diplomas and often even less. This reinforces my suspicion that if one does the calculation at the relevant margin, adding to the pool of college graduates will not raise productivity or wages.  I hasten to add that this is a highly controversial issue. For some people, the best hope for reducing the dreaded Rising Inequality is more education. Of course, for some people (not necessarily the same people), the best hope for ____ is renewable energy, where the blank can be filled by fighting terrorism, saving the climate, or what have you.

    Crisis in the States - Nice little briefing from Douglas Elliot at Brookings on the scope of the state and local pension problem:  Unfortunately, pension deficits are closely correlated with the overall economy, principally because of the high level of investments in the stock market.  Thus, pension deficits turn out to be worst when the economy is in bad shape, such as today, making it particularly hard for taxpayers to absorb the cost of the required additional pension contributions. In this respect, risk-taking in pension funds is the opposite of hedging - it is more like gambling the grocery money. Winning would be nice, but losing would be very painful. And how likely is this gamble to pay off? Not very. Deficits at state and local pension funds constitute a serious problem, with economic values of these deficits aggregating to approximately $3 trillion or more than 2 years worth of tax revenue. This problem has been building for a long time.  That's the problem with retiree benefits--they can accumulate for quite a while before you notice that, oops, they're budget killers.  Unfortunately for us, as with Medicare and Social Security, now is when these problems have gotten too big to ignore.  We have a triple-whammy of rising health care costs, a demographic bulge, and the historical legacy of a major expansion of government.

    NYS Public Pension Costs Will Double In 5 Years: Report (Reuters) - New York State taxpayer-funded contributions to public pensions will "explode" in the next five years, forcing the state to divert resources from other services to meet the obligation, the Empire Center for New York State Policy said in a report on Tuesday. Taxpayer contributions to the New York State and Local Retirement Systems could double over the next five years, adding nearly $4 billion to annual taxpayer costs, according to the report by the nonpartisan think tank. Taxpayer contributions to the New York State Teachers' Retirement System, which totaled $900 million this year, could reach $4.5 billion by 2016, the report said. "The run-up in pension costs threatens to divert scarce resources from essential public services during a time of extreme fiscal and economic stress for every level of government," the report said. "This is not just a matter of financial necessity but of basic fairness to current and future taxpayers -- the vast majority of whom will never receive anything approaching the costly, guaranteed benefits available to public employees," it said.

    New York State Pension $71 Billion Underfunded, Empire Center Report Says - New York state’s $132.8 billion pension plan is underfunded by $71 billion and annual taxpayer payments to keep it sound may more than double to almost $4 billion during the next five years, a report says.  Increased payments are needed by the third-largest U.S. public pension to recover from a 26 percent decline in assets in the year ended March 31, 2009, and to cover benefits lawmakers increased over the past decade, the Empire Center for New York State Policy said.  “The traditional pension system exposes taxpayers to intolerable levels of financial risk and volatility,” said the Albany-based center, a project of the Manhattan Institute, which opposes taxes and promotes outsourcing to private companies and reduced spending. 

    Passing the Pension Time Bomb?  - Reuters reports, NYS public pension costs will double in 5 years: While I agree that using a discount rate based on rosy expected investment returns is a recipe for disaster, the report irked me when it went as far as recommending closing defined-benefit plans to new members: So let me get this right, it's fair to close defined-benefit plans to new teachers, police officers, firemen, and civil servants?!? Why not just use a proper discount rate, increase contributions and bolster the governance of these plans so that pension fund managers are properly compensated based on risk-adjusted returns over the long-term? In other words, don't condemn defined-benefit plans, but look into other structural weaknesses of the US pension model and try to incorporate Canadian-style pension governance. And if you think there aren't governance issues at New York's pension funds, just look at Attorney General (now governor) Cuomo's probe into misconduct and fraud at NY State's pension fund.

    Illinois's Pension Funding May Weaken Further Despite Bonds, Moody's Says - Illinois, which has the worst-funded pension system among U.S. states, may see it deteriorate more even if it sells bonds to close the gap, Moody’s Investors Service said. Moody’s issued its report today after the state last week sold $1.5 billion of bonds backed by payments it receives from a 1998 settlement with tobacco companies. The proceeds will go to pay $1.18 billion of bills for fiscal 2010, which ended June 30, Moody’s said.  Lawmakers recessed until January without approving Governor Pat Quinn’s plan to sell $3.7 billion of bonds to fund this year’s contribution to state pension plans. About $1.7 billion of a $5.3 billion backlog of bills for fiscal 2011 is owed to pensions, Moody’s said. Contributions are below the amount needed to cover unfunded liabilities, Moody’s said.

    California Pensions May Face $200B Hole - But the county may be facing more like $1 billion to $2 billion in unfunded pension obligations, according to Joe Nation, a professor of public policy at Stanford University and a former assemblyman who represented Marin. In a report last month for the Stanford Institute for Economic Policy Research, Nation said independent public employee pension systems in California may have unfunded actuarial accrued liabilities of roughly $200 billion. One of the key differences between Nation’s calculations and those of Marin officials and other municipalities across the state is that he uses a “risk-free” 4% discount rate. That rate is used to determine the anticipated rate of return on a pension fund’s assets and is used to calculate how much cities and counties must pay into funds. And that rate is lower than many funds use to estimate returns. If they used the lower rate they would have to make higher annual payments in order to meet their pension benefits.

    Video Reveals Gimmicks Used by CalPERS to Hide Its Decline in Assets - CalPERS financial sleight of hand is reminiscent of Bernie Madoff’s lying to his investors through phony statements designed to mask losses and outright fraud. Much has been written about The California Public Employees’ Retirement System (CalPERS) being underfunded by $500 billion due to massive investment losses over the last decade, but now we have video of a CalPERS Senior Pension Actuary, Kung-pei Hwang, describing how they intend to change basic assumptions in their financial model to (please allow me to mix my metaphors) Hide The Decline in their assets held for municipal, county, and state employee’s retirement. Through this statistical gimmickry, CalPERS can push the loss into later years and appear solvent today.  Of course, at some point in the future it will need to raise funds from state and local governments to compensate for these losses.  But for now, they seem content to hide the disastrous condition of their fund.

    Calpers Aristocracy (Video posted at CNBC)

    Middle class falls short on retirement funds - The average American has saved less than 7 percent of his desired retirement nest egg and will likely have to keep working in retirement to supplement his income. Middle-class Americans think they need $300,000 to fund their retirement, but on average have only saved $20,000, according to a survey released on Wednesday by Wells Fargo & Co."Middle class" is defined as those aged 30 to 69 with $40,000 to $100,000 in household income or $25,000 to $100,000 in investable assets "Too many Americans have their heads in the sand in the face of obvious savings deficits," said Laurie Nordquist, director of Wells Fargo Institutional Retirement Trust. "Barring a miracle, a winning lottery ticket or a big inheritance, they're going to be forced to dramatically cut back their lifestyles after retirement."

    Retirees: Get Ready to Live on $190 a Month - Are you prepared to live on $190 a month when you retire? For most Americans in their 50s, that’s all the personal savings they’ll have to look forward to during retirement, according to Wells Fargo’s annual retirement survey. The survey, which polled nearly 2,000 middle-class Americans ranging from 20 to 60 years old, found that Americans aren’t saving enough, they are underestimating the amount of money they will need in retirement, and they are more likely to end up working through retirement. While most Americans predict they will need a nest egg of $300,000 to live on for 19 years in retirement, the average savings of 50-somethings is only $29,000, which comes out to an income of $190 a month over 20 years assuming a 5% rate of return. "$190 a month is not going to cut it," said  "This reinforces the huge gap in terms of what people are going to need and what people have. They have a little time to add to that nest egg, but it's a huge shortfall to recover."

    Number of the Week: 1.6 Million Put Off Retirement - 1.6 million: The number of older Americans  in the labor force as a result of the financial crisis. In a new paper, two economists at the Chicago Fed estimate that the labor-participation rate among people 51 to 65 years old is 2.9% higher as a result of their financial losses alone. That’s about an added 1.6 million people staying in jobs or looking for work. The financial crisis has been hard on just about everyone. But for older folks, the pain is proving particularly deep and lasting — a problem that could put a drag on the economy for many years to come. People approaching retirement age are suffering on all fronts. Even with the Dow above 11,000, their stock holdings are worth less than they were back in 2006. Fixed-income investments hardly provide any income. Home prices remain depressed. As a result, more older people are trying to make up lost ground by staying at work longer or rejoining the labor force – precisely at a time when finding a job is exceedingly difficult.

    PBGC helped preserve pensions for 360000, as deficit widened in FY 2010 - In the past year, the Pension Benefit Guaranty Corporation (PBGC) took over failed pension plans covering nearly 109,000 workers and retirees, and helped prevent the termination of plans covering about 250,000 others, according to the Agency's fiscal year 2010 annual report. At the same time, the PBGC's deficit widened to $23 billion during the fiscal year, an increase from $22 billion in fiscal year 2009. The report also noted that in the 2010 fiscal year the PBGC paid $5.6 billion in benefits to 801,000 retirees whose plans had failed. Nearly 700,000 other participants in those plans will receive benefits when they reach retirement age. The PBGC annual report provides both performance and financial information for fiscal year 2010, which ended September 30, 2010.

    Not Crass, Class - Paul Krugman - Karl Smith sort of takes issue with my point about how Social Security is a favorite target of the Beltway crowd, because it’s not important to anyone they know. “I doubt anyone thinks about it in such crass terms,” he writes. Actually, there’s more crassness in this world than is dreamed of in most professors’ philosophy. But still, Smith is right that this is mostly not an explicitly cynical calculation, more a matter of tout le monde, as Tom Wolfe would say — meaning a narrow circle of People Like Us — doesn’t care about Social Security, so it’s hard to grasp how much it matters to others. Yglesias points us to a chart:Social Security is crucial to most Americans — but not at all to the elite.But Smith has another point: Social Security is easier to discuss than Medicare. True. The story about an aging population and how it burdens the system is easy to explain; explaining that this story is mostly wrong, that we already did the big adjustments for the baby boomers in the 1980s, is a lot harder. And the problem with health care costs is especially hard to explain.

    Social Security and the Very Serious People - Karl Smith ventures a guess about why elite pundits and analysts obsess so much over Social Security even though its solvency problem is fairly easy to solve. He thinks they obsess over it because its solvency problem is so easy to solve: I think Very Serious People concentrate on Social Security because they can understand it. The program is relatively simple and the math straightforward. The ultimate driver of most projections — that there will be more retirees than workers — makes sense. There might be something to this. As pushback, I'd note — and perhaps you've seen this in action yourself? — that opinion mongers don't generally have any problem pushing simplistic solutions to fantastically complex problems. So I'm not sure Social Security's relative simplicity really explains much. On the other hand, it's true that there's a class of problems that are not only hard, but also seem hard to ordinary people, and things like healthcare and globalization might fall into those categories. By contrast, there's a different class of problems that are hard, but seem pretty simple to lots of people.

    What IS the Social Security Crisis? - Well the answer is in the above figure, or actually answers because the post title actually hides multiple questions depending on your view of Social Security generally. There are actually three lines represented in the figure: scheduled benefits (top thin line), payable benefits (middle thick line), and income excluding interest (bottom thin line). A close examination shows that tax income exceeded scheduled benefits up until 2009, meaning Social Security was in surplus by anyone's definition, that tax income dipped below scheduled benefits this year, but are projected to rise again to meet the schedule in 2012 only to go permanently below the schedule in 2017. But the figure also shows that payable benefits continue to be paid until 2037, the difference representing the draw down of first interest on and ultimately principal from the current Trust Fund. Which is our first point of departure.

    On Social Security Payroll Tax Cut as a Hidden Threat to Social Security - If you haven’t seen it yet, please read The End of Social Security by Nancy Altman. A brief part: …Given that unwillingness to raise taxes by less than a nickel on every dollar earned over $1 million, I find it unfathomable that a more conservative Congress, in two years, in an election year, will increase the payroll tax by 2 percent on the very first dollar, and every other dollar up to the cap, earned by virtually every single worker in the country. Consequently, I think we have to assume that the payroll tax holiday will be extended beyond the two years the president is proposing and quite likely could become permanent. It’s clear that it would be an ugly battle to raise this payroll tax in 2012 when unemployment will likely be 8%+. If we took $120bn out of the general fund and put it in the “Making Work Pay Awesomer To The Extreme” fund that mailed out checks it could be set up to have similar effects without setting up a mistaken understanding that Social Security was being raided to pay for a stimulus program. I wasn’t sure how worried to be about this until I saw Ryan Grim’s Tax Cut Deal A Hidden Threat To Social Security article, where he finds Republicans more than happy to frankly explain how this will become permanent, and how it’ll be used to jump start a conversation about Social Security reductions:

    Social Security Fund Can Weather Tax Break - A plan that is projected to take $120 billion out of the Social Security trust fund would seemingly be one to draw the ire of deficit hawks.. President Barack Obama and congressional Republicans have agreed to temporarily reduce the payroll taxes that fund Social Security by two percentage points, to 4.2% from 6.2%, on the employee side.  Other proposals would go even further. Two bipartisan plans to cut the deficit, the president’s National Commission on Fiscal Responsibility and Reform and the Bipartisan Policy Center’s Debt Reduction Task Force, advocated a one-year suspension of payroll taxes paid by both employers and employees, or 12.4% of covered wages.  Social Security trustees had projected a deficit for 2011 even before the proposal to cut the payroll tax, though they had anticipated a surplus between 2012 and 2014.  At the end of 2009, the Social Security trust fund had $2.34 trillion in assets, so the loss of $120 billion won’t immediately put the program in any kind of jeopardy.

    Governor says Arizona wants Medicaid waver - PHOENIX - Arizona Gov. Jan Brewer said Thursday she'll ask for a waiver under the federal health care overhaul so Arizona can reduce its Medicaid rolls to lower costs that Brewer and fellow Republicans say the cash-short state can't afford. If approved, the change could mean the loss of government-funded health care for hundreds of thousands of people.  Brewer's administration previously said it might request a waiver, but the governor on Thursday said "yes we are" when asked directly whether she would.  "We need flexibility from the federal government in order to get our state budget in line," she said.  Brewer spokesman Paul Senseman later said details of the waiver request are still being decided, including how many people could lose coverage.

    Nevada Medicaid Program Continues To Grow, Adding To State Budget Challenges– Despite the need for drastic spending reductions to balance Nevada’s budget, the government program that provides health care to the poor continues to expand, consuming a growing share of the state’s scarce state revenues. Medicaid, the cost of which is shared by both the federal government and the state, could require about $1.25 billion in state general fund support in the upcoming two-year budget. That’s a spike up from the $835 million approved by the 2009 Legislature for the current spending plan. The increase is due both to an ever rising caseload and the loss of federal stimulus funds that paid for a greater share of the Medicaid budget in the current biennium. Unlike many other state-funded programs, the state must provide Medicaid coverage to those who qualify. Higher education funding can be cut and prison populations can be managed with early parole or alternative sentencing.

    Feds Slated to Reduce Texas Medicaid Match - "The biggest culprit in Texas’ growing debate over escalating Medicaid costs? A mathematical formula that calculates how much the federal government pays and what’s left over for the state. Already facing a record budget shortfall, Texas’ Federal Medical Assistance Percentage (FMAP) will drop more than 2 percentage points in late 2011, equivalent to a $1.2 billion hit. Only two states — Louisiana and North Dakota — will face a bigger percentage drop. And that’s after federal stimulus funds that have been artificially enhancing this match dry up in the spring, another blow to cash-strapped state Medicaid programs in Texas and across the nation. The problems with the Medicaid matching formula “have been talked about for the last 15 years,” says Tom Suehs, the state’s Health and Human Services Commissioner. “But the magnitude of the problem and the growth rate of health care spending in general is going to make this a front-line issue.”

    Texas Considers Dropping Medicaid as States Face Budget Crisis - For 45 years, the states and federal government's Medicaid program has provided health care to low income children, pregnant women, seniors and disabled adults. Today, Medicaid covers about 50 million Americans. But the traditional health care safety net for some of America's most fragile citizens is in trouble like never before. The Kaiser Family Foundation reports that in fiscal 2010 "states were still in the midst of the worst economic downtown since the Great Depression with high unemployment, severely depressed revenues and increased demand for services." That's why last year almost every state cut spending on Medicaid to help close budget shortfalls. The 2009 federal stimulus program infused about $87 billion into state coffers to help stabilize Medicaid programs. But that money will dry up next June with no promising prospect for more.

    Deal reached to avoid cut in doctors' Medicare pay  — When Democrats passed President Barack Obama's health care overhaul, they used Medicare cuts to pay much of the cost of providing insurance to millions of uninsured. Now, lawmakers scrambling to stave off a scheduled 25 percent cut in doctors' Medicare pay on Jan. 1 plan to reverse the flow. They're tapping financing for the health care overhaul to keep Medicare from breaking down. The $19 billion will help pay doctors at current rates for another year. It will come mostly from tightening the rules on tax credits in the health care law that make premiums more affordable, according to an agreement reached Tuesday by Senate leaders of both parties.

    Obama’s quiet $49 billion gift to America’s Health Insurance Plans - America’s Health Insurance Plans (AHIP) is a trade association representing private health insurance companies including those that operate most Medicare Advantage plans.  AHIP opposed the Affordable Care Act (ACA), spending heavily on ads that criticized the President and Democrats for supporting cuts in Medicare Advantage payments.  These cuts, which Austin and I have shown would fall mostly on plans, not on beneficiaries, were scored by the CBO as worth $136 Billion over 10 years.  They are the backbone of the financing for expanding coverage to the uninsured and one of the few real cost control measures in the law.  On Veterans’ Day, just 8 days after the election, the Obama Administration quietly released a new regulation expanding quality bonuses to Medicare Advantage plans that receive only average quality ratings.  Julie Appleby of Kaiser Health News reported a few days later that some analysts interpreted this as a gift to the plans worth about $1.3 billion over 3 years ($5.3 billion over 10 years).  Austin and Brad Delong both expressed concern that this could be the beginning of the political unraveling of one of the few cost controls in the ACA.

    The Courts Divided: How Health Care Lawsuits Have Exposed A Partisan Judiciary When the health care law passed earlier this year, Democrats and Republicans had already been bickering for months over one of the central provisions of the legislation: the individual mandate. Can Congress, under the Constitution's commerce clause, compel people to purchase health insurance? Normally, a lawsuit challenging the scope of Congress' power under the commerce clause would be open and shut -- it's been a perennial loser for plaintiffs going back decades. But in that time, the court has moved to the right, and become more partisan. And the early rulings in these health care lawsuits indicate what Republicans knew all too well -- that Republican-appointed judges will be as sympathetic to their arguments as Democrat-appointed judges will be opposed. And that could presage several major victories for conservative foes of the health care law as their challenges make their way toward the Republican-leaning Supreme Court.  "It's hard to avoid the conclusion that the courts are breaking down along partisan lines,"

    U.S. food in pictures

    Obsidian Wings: you don't miss the water 'til the well runs dry - While the Republicans celebrate their historical victories, the Democrats lick their wounds, the bankers count their bonus money, and the rest of us try to hold on to our jobs, homes, and retirement savings, some large US cities are facing a real challenge: They're running out of water. We're talking big cites: LA, Houston, Phoenix.  Some are places, like Las Vegas or Tuscon, that you might expect to have water issues.  Others are kind of surprising: Orlando, frex, and Atlanta. Some -- Orlando, Tuscon, San Antonio -- are having issues because they've simply outgrown the regional groundwater supply.  Others -- Atlanta, LA, Phoenix -- compete with other states and cities for limited shared resources.  LA, Phoenix, and Las Vegas get much of their water from the Colorado River system, which is basically tapped out.  For much of the year, the Colorado doesn't even reach the ocean anymore, the river is completely consumed over the course of its run. And it's not just the supply of water to the end user.  Lake Mead is so low that the Hoover dam could stop producing electricity by 2013.  And in the Colorado system in particular, it's not just a decline in water flow; a lot of reservoirs are filling with silt, reducing their utility for water storage and power generation.

    Feeding A Larger Population On A Warmer Planet - At a recent event hosted by the International Food Policy Research Institute (IFPRI) in Washington D.C., Mark Rosegrant, Director of the Environment and Production Technology Division, said, “Income and population growth drive food prices higher, putting pressure on our food system.” And climate change adds more pressure to these already big challenges. “We can expect to see more extreme events – more floods, more droughts, more shocks to agriculture,” noted Sherman Robinson from the United Kingdom’s Foresight Programme on Global Food and Farming Futures Project. There is, therefore, an urgent need to manage these challenges in a more sustainable way.The event marked the launch of a new IFPRI report titled “Food Security, Farming, and Climate Change to 2050,” co-authored by Rosegrant and a team of 12 other researchers. By focusing on the period between 2010 and 2050, the report details the impact of climate change on food security, highlighting how policymakers can effectively facilitate adaptation and mitigation.

    Ted Turner urges global one-child policy to save planet - The compromise tax bill will extend the ethanol subsidy for one year at 45 cents per gallon while also retaining the 54-cent tariff on imports of the biofuel. The legislation also will revive the $1-a-gallon subsidy for biodiesel that expired at the end of 2009 retroactively back to January 1. Climate change and population control can make for a politically explosive mix, as media mogul Ted Turner demonstrated Sunday when he urged world leaders to institute a global one-child policy to save the Earth’s environment. Mr. Turner spoke at a luncheon where economist Brian O’Neill from the U.S.’s National Center for Atmospheric Research unveiled his study on the impact of demographic trends on future greenhouse gas emission, a little-discussed subject given its political sensitivity.

    Market Power: "Ethanol on the Run" -  It's nice to see Congress finally coming around to something so many of us have known for years:  subsidies to ethanol were a waste of money.  I particularly liked this part. The ethanol industry is responding by predicting disaster if it loses its taxpayer feeding tubes, with the Renewable Fuels Association evoking massive job losses and another Dust Bowl. But what kind of business can't survive without subsidies when government also mandates that consumers buy its products? As the Senators dryly noted, "Historically our government has helped a product compete in one of three ways: subsidize it, protect it from competition, or require its use. We understand that ethanol may be the only product receiving all three forms of support from the U.S. government at this time." And it still can't get off the ground.  If an infant industry cannot convince private investors to lend it money so it can get off the ground, it's probably not that hot.  If people must also be forced to use it, then it's probably pretty cold.  If it also must be protected from foreign competition, that's absolute zero, baby.

    Grassley says tax bill will extend ethanol subsidy - The tax legislation that congressional Republicans and the White House have agreed to will include extensions of the biodiesel and ethanol subsidies through 2011, says Iowa's Chuck Grassley, the ranking Republican on the Senate Finance Committee. The $1-a-gallon biodiesel subsidy, which lapsed at the end of 2009, would be retroactive to this year, he said. Some leading Senate Democrats, including the chairman of the Senate Finance Committee, Max Baucus of Montana, indicated that the energy tax provisions were still to be worked out. Grassley wasn't sure if the tax agreement would extend the ethanol tax credit at its current level - 45 cents per gallon - or reduce it. Grassley said the subsidy should stay at 45 cents, but there have been proposals in the House and Senate this year to reduce it to 36 cents.

    Clean Energy Sector Scrambles to Save Incentives - Representatives of the renewable energy industries are scrambling to salvage what they say is a crucial federal incentive that has helped keep them afloat during the worst of the recession. In a release circulated Tuesday afternoon, the American Wind Energy Association, a trade group, said that “tens of thousands of Americans could lose their jobs or not get called back from layoffs” if the incentive program is not extended. The program, part of last year’s federal economic stimulus package, allows qualified renewable energy projects to access a cash grant — 30 percent of the project’s cost — in lieu of traditional tax credits. The measure, industry representatives have said, proved vital in helping developers to secure financing amid the downturn. The incentive will expire in a little over three weeks unless Congress extends it. “We have people being laid off right now, and we expect to see more without fast action on the tax extenders now being negotiated,”

    Wind, solar backers take their case to Congress - Supporters of wind and solar energy urged Congress on Wednesday to renew a federal grant program credited with jump-starting renewable power projects nationwide. The incentive program is set to expire at month’s end unless Congress acts – but the odds of that happening narrowed when the initiative was left out of a tax cut package developed by the Obama administration and congressional Republicans. Under the grant program, companies can nab direct cash payments from the Treasury Department that cover up to 30 percent of the cost of building qualified renewable projects. The initiative was created as part of last year’s stimulus package in response to concerns that the economic downturn had caused traditional renewable energy financing tied to investment and production tax credits to dry up. Because that tax credit financing market hasn’t rebounded, the incentive program is “the most important policy for continued growth of the renewable energy industry in the United States,” .

    Tax Package Changes – Renewable Energy Programs are Back in Business - Clean and renewable energy provisions that were set to expire have been added into the tax package. This is good news for progressives and friends of clean energy, depending on how you look at it – we get a pittance out of the near-trillion dollar deal, but if the monster was going to go through anyway, this way at least we get a few crumbs to move renewable energy forward. Led by California’s Senator Dianne Feinstein, 17 Democratic Senators had been pushing to get these items added in. It’s still unclear just what is going into the package, set to be voted on Monday – nobody has seen an actual text of the bill yet. “I believe they are [in],” Feinstein  told reporters in the Capitol. ” ‘Believe’ is the operative word because I haven’t seen it.” One big item: the Treasury Grant Program. With the economy in the doldrums, financing for big-bucks wind and solar projects had tanked. This program provided direct grants to jump-start projects ($2 billion in government seed money brought in another $9 billion in private funding); looks like it’s back for at least one more year at the behest of Sens. Feinstein, Maria Cantwell (D-Wash.) and the other 15.

    States Want Their Cap-and-Trade Plans Added to U.S. EPA's Carbon Limits - U.S. states with cap-and-trade laws want the Obama administration to add their carbon markets into new federal greenhouse-gas regulations, a California environmental official said.  State-run carbon-trading programs should be “treated as equivalents or substitutes” for Environmental Protection Agency regulations for emissions tied to global warming from power plants, oil refineries and factories, Mary Nichols, chairman of the California Air Resources Board, said yesterday in a telephone interview.  “It would be a way to make sure that industries in our state are not being penalized by being regulated by EPA on top of what the state is doing,”

    EPA delays tougher rules on emissions -The Obama administration is retreating on long-delayed environmental regulations — new rules governing smog and toxic emissions from industrial boilers — as it adjusts to a changed political dynamic in Washington with a more muscular Republican opposition. The move to delay the rules, announced this week by the Environmental Protection Agency, will leave in place policies set by President George W. Bush. President Obama ran for office promising tougher standards, and the new rules were set to take effect over the next several weeks.  The delayed smog rule would lower the allowable concentration of airborne ozone to 60 to 70 parts per billion from the current level of 75 parts per billion, putting several hundred cities in violation of air pollution standards. The agency says that the new rule would save thousands of lives per year but cost businesses and municipalities as much as $90 billion annually.

    Brad Johnson: Is The CBO Trying To Kill Humanity? - Yesterday, Doug Elmendorf, the director of the Congressional Budget Office, testified before the Senate energy committee about the “comparatively modest” cost of a cap-and-trade system to limit carbon pollution. The Washington Post and Wall Street Journal blared “Congressional Budget Chief Says Climate Bill Would Cost Jobs” and “Cap-and-Trade Would Slow Economy, CBO Chief Says.” Conservatives leapt on the reports to cheer the “end” of “cap-and-tax. Of course, Elmendorf’s testimony is nothing new. Elmendorf warned that jobs in the fossil fuel industry would be lost, and that overall GDP growth would be slowed by less than 1% by 2020. No one is arguing that there won’t be a shift from pollution-based industries to clean-energy industries. But doing so will create millions more jobs than are lost, as energy companies invest in American workers instead of foreign oil and mountaintop removal. The effect on GDP is within the margin of error of future estimates of growth. Even pessimistic studies by the National Association of Manufacturers find that U.S. GDP will increase by $9 trillion with limits on carbon pollution.

    Ministers arrive in Cancun touting optimistic outlook - Ministers from around the world will begin to gather in Cancun today for the UN’s crucial climate change summit with opinion largely divided on the extent to which the negotiations progressed last week. Observers said progress had been made on a number of issues, including proposals for improved forestry protection, the formation of a global green fund, and the independent verification of countries’ emission pledges. However, experts also warned the talks remained on a knife edge over the future of the Kyoto Protocol following Japan’s surprise declaration that it will not support any extension of the controversial treaty. There had been reports over the weekend that a number of developing countries led by Bolivia and Venezuela could abandon the talks if the latest version of the official negotiating text dropped proposals to extend the Kyoto Protocol when it expires in 2012.

    Leaked documents show alternative deal in Cancun negotiations - Europe and a group of small island Pacific states have jointly proposed a new international treaty at the UN climate talks in Cancún, Mexico, to commit developing and developed countries to reducing their climate emissions, according to leaked documents seen by the Guardian and the Times of India. The move has outraged many developing countries, including China, Brazil and India, who fear that rich countries will use the proposal to lay the foundations to ditch the Kyoto protocol and replace it with a much weaker alternative. The new negotiating text could provoke the most serious rift yet in the already troubled climate talks because the Kyoto protocol is the only commitment that rich countries will cut their emissions. The treaty, adopted in 1997 and due for renewal in 2012, has been the subject of fierce arguments in Cancún, with Japan flatly refusing to sign up to a second round of pledges. Some Latin American countries have declared that they will not sign up to any deal if Japan carries out its threat.

    Brazil best, Canada worst in climate index - Canada, the United States and China rank near the bottom of a global climate change performance index released this week by Germanwatch and Climate Action Network Europe. The world’s two biggest greenhouse gas emitters dropped a few ranks compared to last year, with China now ranked 56th and the United States 54th out of 57 countries surveyed. Canada ranked last in the index, compiled with the help of more than 190 experts who analyzed national policies in the countries. Poland was placed at No. 55. Australia, Kazakhstan and Saudi Arabia came in after Canada. This year’s index identifies Brazil as the top climate protection performer for its successful efforts to reduce emissions and contain deforestation. Brazil ranks fourth, with the first three spots again left vacant as no countries did enough to earn the honor, the groups behind the index said. Sweden, Norway and Germany came after Brazil on the list.

    Blackened Pork: Liquid Coal Subsidies Sneak into Senate Tax Bill - Is regular coal not dirty enough for you? Meet liquid coal fuel! Destructive to mine, water-intensive to manufacture, devastating to our climate at every step of the way – liquid coal is one of the world’s dirtiest fuels. Liquid coal production emits twice as much global warming pollution as gasoline & requires at least four gallons of water per gallon of fuel produced. Today the National Wildlife Federation has learned the Senate version of tax legislation includes subsidies for liquid coal fuels. Section 704 of the Senate tax bill as written right now would extend the Alternative Fuel Tax Credit to liquid coal, giving a 50-cent tax credit for each gallon of liquid coal sold or used in a fuel mixture. While many senators have fought to include important clean energy provisions in the the tax package, the National Wildlife Federation strongly opposes expanding alternative fuel tax credits to cover dirty liquid coal. Why? For starters, the provision could cost taxpayers $400 million per plant, every year. That’s on top of the subsidy coal already receives by not having to pay for its pollution – today in America, polluters can dump as much carbon pollution as they want into our atmosphere free of charge.

    World Bank will help finance carbon markets - As the United Nations climate change talks in Cancún lurch slowly toward an uncertain conclusion, the World Bank is stepping in to help developing countries set up pollution credit markets to help pay for clean development programs. Robert B. Zoellick, the World Bank president, will appear before delegates here on Wednesday to announce the creation of a multimillion-dollar program to create trading mechanisms to stimulate clean energy projects and to slow the destruction of tropical forests, one of the primary sources of global warming emissions. He will also be announcing new World Bank programs to help island nations that are acutely vulnerable to rising seas and other climate-related threats to increase their access to renewable energy sources.

    World Bank to lead global carbon market charge - The World Bank will today formally launch a new multimillion-dollar fund designed to help developing countries deploy carbon market mechanisms to put a price on greenhouse gas emissions. Trailing the announcement, which will be made later today on the sidelines of the UN’s climate change summit in Cancun, World Bank President Robert Zoellick released a statement yesterday confirming the bank would unveil a host of new measures designed to help those countries most vulnerable to climate change invest in adaptation and mitigation measures. “We know that the poorest countries will suffer the earliest and the most from climate change,” he said. “We also know that, while these countries would like to see a comprehensive global accord on climate change, they are not waiting for one. They are acting now and acting differently to shift from being climate vulnerable to being climate smart. We are fully engaged and have been ramping up our efforts with countries as they put in place practical, effective solutions leading to low-carbon growth and inclusive efforts to overcome poverty.”

    NASA: Hottest November on record, 2010 likely hottest year on record globally — despite deepest solar minimum in a century. In U.S., heat records far exceed cold for 10th consecutive month - NASA released its monthly global temperature data, revealing November was easily the hottest in the temperature record.  The “meteorological year” — December to November — was also the hottest on record.  Calendar year 2010 appears poised to be the hottest on record. These records are especially impressive because we’re in the middle of a strong La Niña, which would normally cool off temperatures for a few months (relatively speaking), and we’ve been in “the deepest solar minimum in nearly a century.”  It’s just hard to stop the march of manmade global warming, other than by sharply reducing greenhouse gas emissions, that is.As for the U.S., Steve Scolnik at Capital Climate analyzed the data from NOAA’s National Climatic Data Center (NCDC) for his post, “November Temperature Extremes: Heat Records Far Exceed Cold For 10th Consecutive Month,” which notes: As they have for every month in 2010 except January and February, U.S. daily maximum temperature records far exceeded minimum records in November.

    China Can Slow Global Warming If The US Won’t - Below are charts for current emissions and cumulative emissions. The United States bears 27% responsibility for cumulative emissions. China is second at 9.5%. On a per capita basis, the United States is more responsible than China by about a factor of ten. Nevertheless, China's annual emissions have rocketed past those of the United States and other developed countries, and, if they continue on their current growth path, China will become the principal cause of climate change within the next few decades. Also, as shown in the graphs below, the task of getting global CO2 emissions to stabilize can be accomplished only if the rapidly growing emissions of all developing countries can be stabilized and begin to decline over the next few decades. How can I possibly be optimistic about that? I must start with a fundamental law: as long as fossil fuels are the cheapest energy, they will continue to be burned. This law is as certain as the law of gravity. No "caps," "goals" for future emissions, or other self-deceptions can alter this fact. Caps only alter who burns the fuel and the pace of burning – they will not leave fossil fuels in the ground, as science demands. Caps are also inherently disingenuous – a pretense that the price of fossil fuel energy does not need to steadily rise, an attempt to circumvent the "law of gravity" 2.

    Nature: Pacific island nations champion tuna ban - A bold move by eight Pacific island nations to preserve the world's last large stocks of tuna is expected to face strong resistance this week at a meeting of the Western and Central Pacific Fisheries Commission (WCPFC) near Honolulu, Hawaii. By leveraging agreements with foreign fishermen in their own territorial waters, the islands have banned fleets that fish with purse-seine nets — mechanized nets that can capture entire schools of tuna in a single haul — from operating in a region of international waters roughly the size of India. The area, known as the Eastern High Seas (see map), will still be fished by hook-and-line, which is considered biologically more sustainable. The islands will also cut the time that purse-seiners can spend fishing in their territorial waters by nearly a third. The restrictions, agreed to by the eight nations in April, are scheduled to take effect on 1 January 2011.

    An Alert on Ocean Acidity - Carbon dioxide emissions from man-made sources are causing the acidity level of the world’s oceans to rise at what is probably the fastest rate in 65 million years, threatening global fisheries that serve as an essential food source for billions of people, according to a new United Nations report. Roughly 25 percent of the carbon dioxide generated by the combustion of fossil fuels enters the oceans, and as the gas dissolves in seawater, it changes into carbonic acid. One result has been a rapid alteration in ocean chemistry that is already affecting marine organisms. The acidity of the oceans has grown by 30 percent since the beginning of the Industrial Revolution. At current emission rates, ocean acidity could be 150 percent higher by the end of the century, the report states. Marine life and coral reefs have already shown vulnerability to rising levels of acidity, and the changes expected in coming decades are severe enough that they could have a serious impact on the ability of people around the world to harvest needed protein from the seas, according to Carol Turley, senior scientist at Britain’s National Oceanography Center and the lead author of the report. “We need to start thinking about the risk to food security,”

    Sahara Desert Solar Project (Not DESERTEC) to Power Half the World by 2050? - If you haven’t heard about this project yet, it is a HUGE, renewable energy project with a ton of cool features. The Sahara Solar Breeder Project is its name, though it has also been referred to as the Super Apollo Project by the project leader. To start with, it will build a silicon manufacturing plant in the desert, a good location for such a plant. Using that silicon locally (rather than just shipping it around the world), solar power plants will be constructed nearby as well. Then, some of the electricity generated from those will be used to construct more silicon manufacturing plants. Sounds like a solar energy empire in the making. You are probably wondering at this point which country the people doing all this are coming from. It is a joint project between universities in Algeria and Japan, and Hideomi Koinuma of the University of Tokyo is leading the project. “The energy generated by the solar power plants will be distributed as direct current via high-temperature superconductors, a process that Koinuma said will be more efficient than using alternating current,” Lin Edwards of PhysOrg writes. “He envisages a large network of supercooled high-voltage direct current grids capable of transporting the expected 100 GW of electricity at least 500 kilometers.”

    U.S. energy chief says improved car batteries 5 years off (Reuters) - Cars that run on batteries will begin to be competitive with ones that burn petroleum fuels in about five years, the U.S. energy secretary said at the annual U.N. climate talks. "It's not like it's 10 years off," Chu said at a press conference on U.S. clean energy efforts on the sidelines of the climate talks. "It's about five years and it could be sooner. Meanwhile the batteries we do have today are soon going to get better by a factor of two." Chu is one of three Obama administration officials that will briefly visit the talks among 190 countries being held at a Mexican beach resort through December 10. Agriculture Secretary Tom Vilsack and Nancy Sutley, the head of the White House's Council on Environmental Quality, are the other two. Chu's Department of Energy, or DOE, is supporting several approaches seeking to improve car batteries. A battery race has developed between U.S. companies like Massachusetts-based A123 and ones in Asia, like China's BYD, which Warren Buffett's Berkshire Hathaway owns 10 percent of.

    The Smart Grid: A Primer - The electricity grid is made up of four main components: generation, transmission, distribution, and customers. Generation refers to the production of electricity from sources of energy, such as coal and natural gas. The transmission system carries the electric power from the generators over long distances to a distribution system, which brings the power to the customers. Distribution systems can include power stations of their own. Developing countries often have antiquated systems. But even more modern systems, which in a developed country such as the United States can be 50 years old or more, are typically inefficient, unreliable, polluting, incompatible with renewable energy sources, and vulnerable to cyberattack. In other words, problems with electric grids abound. A smart grid would help make everything better, thus improving reliability, security, and efficiency, which are of critical importance given that electric power consumption worldwide is expected to triple by 2050.

    Australia Floods Damage Crops, Disrupt Coal Output - Flooding and heavy rainfall in Australia damaged wheat crops, disrupted coal production and caused communities to be evacuated as eastern states prepared for further wet weather this week.  The rain may cut the quality of more than 40 percent of the country’s wheat crop, according to estimates by National Australia Bank Ltd. Rio Tinto Group, the world’s third-largest mining company, said today coal mines in central Queensland state had partially resumed operation after rains.  Wheat futures in Chicago rallied to the highest level in four months on concern that the weather in Australia, the fourth-largest shipper, may reduce global supply of high-quality milling grain. The rain had wiped as much as A$500 million ($496 million) off the expected A$3.2 billion value of New South Wales winter crops, state Premier Kristina Keneally said today.

    Coal, Climate And Confusion - Two related events occurred recently which affect the world of energy and climate science. A group of British climate researchers met in Oxford to discuss 4 Degrees And BeyondDespite 17 years of negotiations since the 1992 Rio Earth Summit, global greenhouse gas emissions have continued to rise. Since 2000 the rates of annual emissions growth have increased at rates at the upper end of the IPCC scenarios, presenting the global community with a stark challenge: either instigate an immediate and radical reversal in existing emission trends or accept global temperature rises well beyond 4°... The second event was the publication of a comment in the science journal Nature called The End Of Cheap Coal. The authors Richard Heinberg and David Fridley give their rationale for sounding a warning— World energy policy is gripped by a fallacy — the idea that coal is destined to stay cheap for decades to come. This assumption supports investment in ‘clean-coal’ technology and trumps serious efforts to increase energy conservation and develop alternative energy sources. It is an important enough assumption about our energy future that it demands closer examination.

    Exclusive: Submarine Dive Finds Oil, Dead Sea Life at Bottom of Gulf of Mexico Near BP Spill Site - A mile below the surface in the Gulf of Mexico, there is little sign of life.  "It looks like everything's dead," University of Georgia professor Samantha Joye said.  In an exclusive trip aboard the U.S. Navy's deep-ocean research submersible Alvin, ABC News was given the chance to observe the impact of this summer's massive oil spill that most will never see.  The ocean floor appears to be littered with twigs, but Joye points out that they are actually dead worms and that Alvin is sitting on top of what is considered an 80-square mile kill zone.  Having taken nearly two dozen dives in the Gulf inside the tiny sub that helped discover the Titanic, Joye is leading a team of scientists who are investigating how much oily material is left on the sea floor.  Aboard the Alvin Thursday, Joye said she saw "about three to four inches of material."  The devastation, she said, could last "years or decades."  "It's still there and it's going to degrade very slowly," she said.

    Strong Evidence Emerges of BP Oil on Seafloor - A university scientist and the federal government say they have found persuasive evidence that oil from the massive Gulf of Mexico spill is settling on the ocean floor. New research shows that environmental damage from the BP oil spill in the Gulf of Mexico could be significant where it’s hardest to find: deep under the Gulf’s surface. The new findings, from scientists at the University of South Florida and from a broad government effort, mark the latest indication that environmental damage from the blowout of a BP PLC well could be significant where it’s hardest to find: deep under the Gulf’s surface. The amount of oil that has settled in the sediment—and the extent of damage it has caused—remains unclear. But scientists who have been on research cruises in the Gulf in recent days report finding layers of residue up to several centimeters thick from what they suspect is BP oil.

    Guest Post: Secretary of the Navy Hatches Brilliant Plan to Sell More Gulf Seafood and Transport Oil to the War Zone - An unknown quantity of Gulf seafood is tainted with oil and/or dispersant. See this, this, this, this, this, this, this, this, this, this, this, this, this, this and this. Some have speculated that Gulf seafood would be quietly sold to makers of cat and dog food, to avoid public scrutiny. But the Secretary of Navy has a different idea – force the good men and women in our armed services to eat it. As the Times Picayune reported yesterday: Navy Secretary Ray Mabus, who doubles as President Barack Obama’s point man on Gulf Coast oil spill recovery, is pressing America’s armed services to consume as much Gulf seafood as possible, and his staff has talked to the Defense Commissary Agency, which operates a worldwide chain of stores for military personnel, making the point “that we should be buying Gulf Coast seafood.” I have friends who served in Iraq and Afghanistan, and the thought of folks in our armed services being fed Gulf seafood angers me.

    Shell Nigeria Plays Dirty With Government - Shell

    Nigeria isn’t just participating in the usual bribes, according to one Wikileaks document. Instead, Shell is playing CIA, inserting employees into every recess of Nigeria’s corrupt government. From the UK Guardian: The oil giant Shell claimed it had inserted staff into all the main ministries of the Nigerian government, giving it access to politicians’ every move in the oil-rich Niger Delta, according to a leaked US diplomatic cable. The company’s top executive in Nigeria told US diplomats that Shell had seconded employees to every relevant department and so knew “everything that was being done in those ministries”. She boasted that the Nigerian government had “forgotten” about the extent of Shell’s infiltration and was unaware of how much the company knew about its deliberations. The cache of secret dispatches from Washington’s embassies in Africa also revealed that the Anglo-Dutch oil firm swapped intelligence with the US, in one case providing US diplomats with the names of Nigerian politicians it suspected of supporting militant activity, and requesting information from the US on whether the militants had acquired anti-aircraft missiles.

    World Faces Oil Supply Crisis - Iran Opec Chief (Reuters) - Iran's OPEC governor believes the world faces great uncertainties in security of energy supply and that the price of crude is still undervalued and set to hit $100 in the short term. In an interview with semi-official Iranian news agency Mehr published on Tuesday, Mohammad Ali Khatibi said: "The global markets are close to a crisis of uncertain oil supply." "The world is concerned about the security of energy supply due to the anticipation of a drop in global oil production and a drop in the supply from non-OPEC countries." When asked how he saw the oil price moving in 2011, he replied: "The supply of oil with at a price of $100 price is quite normal in short term."

    Worrying about oil prices - The price of oil moved above $90 a barrel yesterday. Is it time to become concerned about the possible macroeconomic effects? In the early part of this decade, consumers seemed to be largely ignoring oil prices, in part because energy expenditures had become a smaller part of their budget than they had been in the late 1970s. But as the price of oil rose over the decade, energy expenditures returned to a position of importance in consumer budgets. I'm persuaded that the oil price shock of 2007-2008 made a measurable contribution to the initial downturn of the Great Recession. Based on the BEA breakdown of consumer expenditures, as of October consumer spending on energy goods and services constituted 5.5% of total spending, a bit below the 6% levels at which we saw significant consumer responses two years ago.

    Beware $90 oil - With high unemployment, weak consumer spending and falling home prices, what else could possibly slow America's economic recovery? Oil prices. Though prices have retreated a bit since, crude oil climbed above $90 a barrel on Tuesday – its highest level in two years. Futures rose by 1.5% to trade as high as $90.76 in New York, according to Bloomberg. Why should we care? The development alone certainly won't pull the economy back into a recession, but it's an indicator to start watching closely, says James Hamilton, economist with the University of California in San Diego. Hamilton, who has done extensive research on oil shocks and business cycles, says the rise could put another damper on consumer spending and add to factors slowing the economic recovery. He believes that the surge in oil prices, which surpassed $140 a barrel in the summer of 2008, helped send the economy into the Great Recession that started December 2007 and ended in June 2009. It's true that the housing and banking crisis played a major role, but so did oil shocks. The spike in prices hurt consumer spending, and especially the U.S. auto industry.

    With oil prices around $90, recovery is over a barrel - The "recovery" gained another enemy this week when the price of oil hit $90 a barrel on Tuesday (it was trading around $88 this morning). Higher oil prices translate into bigger costs for American households and the many petroleum-based products they use. This benchmark has long been seen by many economists as a point when oil prices start to harm the U.S. economy. They also are one of the biggest wild cards in the Federal Reserve's bet that deflation -- or at least disinflation -- are the big dangers, rather than inflation. You can always find a school of thought that oil prices are a creature of speculation. But the price rise has also been driven by higher demand in an Asia and parts of Latin America that are recovering while America and Europe lag. Oil & Gas Journal reports that third-quarter demand hit an all-time high. It's also important to recall the new International Energy Agency report that concludes world conventional production peaked in 2006. That means higher prices ahead. Oilman T. Boone Pickens Jr., who correctly foresaw the $80 ceiling being shattered this year, predicts $100 a barrel oil in 2011.

    OPEC Production Capacity to Dip Next Year Before Rising After, IEA Says - Bloomberg - OPEC’s crude oil production capacity will dip next year then rise steadily through 2012 to 2015, according to a monthly report from the International Energy Agency. The daily production capacity for all 12 members of the Organization of Petroleum Exporting Countries is forecast at 35.50 million barrels for this year, 35.22 million barrels for 2011 and 36.94 million barrels for 2015, it said.  Capacity declines in 2011 are forecast in Algeria, Angola, Iran, Kuwait, Saudi Arabia and Venezuela, according to the report from the Paris-based agency. Not all of the capacity is currently used after the group reduced output last year.

    IEA Raises 2011 Global Oil Demand Forecast for a Third Month, Citing China - Bloomberg - The International Energy Agency raised its 2011 global crude oil demand forecast for a third month on consumption gains in North America and China. Crude use worldwide will average 88.8 million barrels a day next year, about 260,000 barrels more than its previous forecast, the Paris-based adviser said today in its monthly Oil Market Report. Increasing demand could put pressure on OPEC to boost supply early next year, the IEA said.  Oil traded at the highest level in more than two years this week amid evidence of global economic recovery. U.S. jobless claims fell a more-than-forecast 17,000 to 421,000 last week, the Labor Department said yesterday. China’s manufacturing grew at a faster pace for a fourth straight month in November. The Purchasing Managers’ Index rose to 55.2 from 54.7 in October, China’s logistics federation said on its website on Dec. 1.

    IEA and OPEC differ on need for more oil supply -  (Reuters) - Two of the world's most influential oil forecasters gave sharply different outlooks for 2011 on Friday, as the consumer's watchdog anticipated robust demand and producer group OPEC said supply was plentiful. The Organisation of the Petroleum Exporting Countries' relatively bearish outlook makes the case for no change in OPEC supply policy when the group meets on Saturday in Quito. OPEC forecast 2011 global oil demand growth would increase to 1.18 million barrels per day, only 10,000 bpd more than predicted in last month's report. Daily demand will average 87.11 million bpd next year. In its monthly update, the International Energy Agency lifted its 2011 oil demand growth forecast by 130,000 bpd to 1.32 million bpd. That marks a slowdown from the surge of 2.47 million bpd expected this year, from a low base. Oil prices this week hit $90 a barrel for the first time in more than two years driven, the IEA said, by rising demand. In its view, sustained prices at current levels pose a risk to economic growth.

    Branson Says Crude Oil Prices Might Hit $200 a Barrel Without New Policies - “It’s certainly conceivable unless we can start to conserve energy quickly and come up with alternative fuels,” Branson said yesterday in Cancun, Mexico, where countries are meeting to negotiate a new accord to combat climate change. Branson predicts an “unbelievably painful” economic slump if governments don’t do more to encourage renewable energy as an alternative to fossil fuels such as oil. In the U.S., where efforts to cap carbon-dioxide emissions failed in the Senate earlier this year, unemployment could reach record highs, the British billionaire said. “We are going to have the mother of all recessions if we don’t sort out our energy policy fast,” Branson said earlier yesterday at the World Climate Summit in Cancun. “We think we’ve got it bad today. In five years time unemployment could go to 15 percent without any difficulty at all in America.”

    Age of Cheap Oil Is Over: IEA's Chief Economist (Video) - The age of cheap oil is over, International Energy Agency Chief Economist Fatih Birol tells MarketWatch's Steve Goldstein as he also discusses the extended U.S. deepwater drilling ban, the possible direction of oil prices and climate change reduction efforts.

    The Bridge - The Western elites used the industrial revolution and the fossil fuel heritage to organize the amassment of a vast wealth and power surplus. Their goal was always to steal as much of this surplus as they could, using the wealth and power they amassed to organize themselves to use Peak Oil itself as the ultimate opportunity to steal the rest.  First they used the power to force the Global South to pay the costs of the West’s post-war affluence. Cheap oil and the fact that non-Westerners were providing most of the resources, doing most of the work, and bearing most of the costs, enabled the West to temporarily distribute the fruits of this crime fairly widely among the populace. Out of that we saw the temporary rise of the mass middle class. As the oil crunch began in the 1970s, this middle class was carried further by the exponential debt system. Now that cheap oil and exponential debt are over, the elites intend to clutch at 100% of the deteriorating wealth and power, forcing all the austerity of the end of cheap oil onto the Western peoples, just as they stole all the surplus in the first place. Permanent mass unemployment in itself is an intentional policy goal. It’s part of the winding down of the “growth” economy which will no longer be able to grow, post-Peak Oil.

    Growth can't continue forever in finite world - How dependent are we? The bioenergetics are not good. In nature, if an animal expends more energy to capture food than the food contains, starvation is the eventual outcome. Our contrived food chain uses 10 calories of fossil energy to put one calorie of food on the table. When energy production declines, we can expect food production to decline also. Here is a recent headline from the British newspaper The Guardian: "US military warns oil output may dip causing massive shortages by 2015." See, you don't need to worry until at least 2015! Economists talk only of growth when what we need is stability and a reversal of growth on an overpopulated, finite planet. Perhaps economist Ken Boulding said it best: "Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist." Economics is a subset of ecology and nature, not the other way around. It is a biological and geological world, and we need to come to terms with its finiteness no matter how self-congratulatory we are at globalization and at being clever.

    Straight Talk with Charles Hugh Smith: Why The Status Quo Is Unsustainable - Clearly, demographics and Peak Oil are forces which cannot be massaged away by policy tweaks or financial engineering. I think the exhaustion of Global Neoliberal Capitalism and State Capitalism is apparent, as is the bankruptcy of the two ideologies that more or less define our politics. The reliance on expansion of credit and State power is a dynamic with only unhappy endings. There are also structural end-games such as Baumol's Disease at work: the inefficient sectors of the economy end up dominating the national income. Services such as healthcare, education and the Armed Forces become more productive at much slower rates than the overall economy. Looking ahead, the Empire (the hundreds of overseas military installations, the diplomatic and financial reach into every nook and cranny of the planet, etc.), healthcare and other entitlements will require most of the national income. That is an unsustainable trajectory, especially as Peak Oil/peak everything kicks in.

    RIGZONE - CNPC, Sinopec, Cnooc Sign Venezuela O&G Deals - China's three main state-owned oil companies have strengthened their ties to Venezuela's energy sector, signing six agreements and increasing their investments to a planned $40 billion dollars. The deals are the latest of a string of multi-billion dollar South American ventures signed by Chinese companies in recent months, aimed at acquiring major chunks of the continent's rich resources and at helping fuel China's economic boom. Among the agreements signed was one by China National Petroleum Corp., President Jiang Jiemin and Venezuela Oil Minister Rafael Ramirez, for the joint development of the Orinoco basin Junin 4 oil block, the Chinese company said Friday in its in-house newspaper. It said the agreement had been signed Wednesday. The cost of developing Junin 4, capable of producing 400,000 barrels of crude daily, could be as much as $16 billion, with the block developed as a 60:40 joint venture by state-owned Petroleos de Venezuela SA and CNPC, the two companies said in April when they agreed to a preliminary pact

    Chinese renewable energy firms encouraged to invest in U.S. market (Xinhua) -- A senior official of China's National Energy Administration (NEA) encouraged Chinese firms to invest in the renewable energy market of the United States to boost their competitiveness in the international market. The statement was made by Wang Jun, head of the department of new energy and renewable energy at the NEA, during the wind power section at the China-US Renewable Energy Investment Forum, also attended by officials from the U.S. Department of Energy and the Department of Commerce. He noted that the U.S. wind power market has great potential but is short of funding in the wake of the international financial crisis. However, there remains opportunities for many Chinese wind power enterprises with strong expertise and funding.

    China to hit 500 Gigawatts of Renewable Power by 2020! - China has just published an astoundingly ambitious and exciting renewable energy plan for the next ten years. China’s plan is to get a total of 500 Gigawatts of renewable energy on the grid by 2020. It explodes wind power from a mere 25 GW on the grid now, to a staggering 150 GW, a six-fold increase on the previous already ambitious plan. Electric power would come from adding 100 GW to make 300 GW of hydro power, adding 125 GW to have 150 GW of wind power, adding 28 GW to have 30 GW of biopower, and going from a half Gigawatt to 20 GW of solar. Giant steps. To put that in perspective: the US will have added 16 GW of all renewable energy combined once the Obama administration Recovery Act funds are allocated – which, while a fabulous change for us, because it doubles the entire last thirty years of renewables on the grid – pales by comparison with 500 GW.

    China takes a short-cut to power - To travel on one of China’s high-speed trains as I did recently, is to experience China’s rapid industrial advance. We cruised from Nanjing to Shanghai at speeds of which Amtrak’s service from New York to Washington can only dream. If CSR Corporation, the Chinese company that built the train, has its way, the US will get a taste of the technology in the next decade. This week, CSR struck an agreement with General Electric to bid jointly against Siemens and Alstom for the high-speed rail services intended for Florida and California. On the face of it, the high-speed train is a shining symbol of China’s intended shift from being the world’s manufacturing plant to being a high-skilled, innovative economy. It is tooling up in other ways – it emerged this week that 15-year-olds in Shanghai outperform their counterparts in 65 countries in reading, science and maths. But the train is as much a symbol of something else – China’s determination to gain technological ascendancy by any means possible, including taking western technology and reworking it just enough to claim it as its own. CSR’s use of the strategy has left its former partner Kawasaki Heavy Industries, maker of Japan’s bullet train, smarting. Western companies have had to disclose details of their technology in order to gain contracts and later had to compete against Chinese state-owned enterprises selling near-identical products. Westinghouse Electric, a US nuclear group, has just handed over 75,000 documents as part of a deal to build four advanced nuclear reactors in China.

    Why are Chinese schoolkids so good? - There are two stereotypes about schooling in east Asia: the students work extremely hard, and the learning is by rote. In fact, things are more complicated, as the OECD’s latest global schools survey has shown. Shanghai came top in the Pisa survey, with three other east Asian territories in the first five. But not all east Asian countries did well, says the OECD’s Andreas Schleicher, adding that it’s innovative thought that is assessed. Shanghai schools aren’t turning children into walking textbooks: they are channelling their ability and enthusaism into exceptional results. How? Undertaken every three years, the Pisa survey tests 15-year olds, with a rotating focus on maths, reading and science. The emphasis is on broad learning: literacy tests involve reasoning, for example. In the three previous editions - 2000, 2003 and 2006 - Finland came top. But this year, with the focus on reading, Finland was displaced by Shanghai, with South Korea second, Hong Kong fourth and Singapore fifth. So why did Shanghai do so well? The OECD points to Chinese school reforms: it was impressed by the initiative shown by teachers, who are now better paid, better trained and keen to mould their own curricula. Poor teachers are speedily replaced. China has also expanded school access, and moved away from learning by rote.

    Day Trading in China a Growing Business - Before the opening bell sounded on the New York Stock Exchange on a recent Tuesday, a group of fresh college graduates clocked in at a small trading firm on the outskirts of this capital city.  They were hired to engage in rapid-fire stock trading with some of the world’s most powerful investment houses in New York, London and Tokyo, and they were instructed to be alert.  “The market could be volatile today,” King Chan, the general manager at the firm, Lazer Trade, shouted to the group during a pep talk. “Be careful at the open. And don’t take dumb risks!”  Mr. Chan’s day trading shop is one of many that have sprung up in and around China’s major cities in recent years. Trading firms based in the United States and Canada are recruiting inexpensive workers in China and teaching them to engage in speculative trading — which means repeatedly buying and selling shares listed on the New York Stock Exchange and Nasdaq, hoping for quick profits.  By some industry estimates, as many as 10,000 people in China are doing speculative day trading of American stocks — mostly aggressive young men working the wee hours here, from 9:30 p.m. to 4 a.m., often trading tens of thousands of shares a day.

    America’s Message To The Rest Of The World: You Send Us Oil And Cheap Plastic Gadgets And We’ll Send You Our Wealth And Prosperity - In order to maintain our standard of living, the U.S. government has been going to the countries we have been sending our wealth to and has been begging them to loan us massive amounts of their dollars.  At this point the U.S. government literally owes trillions of dollars to the rest of the world. Scoffers say that it is just a bunch of "paper money" that we are sending them, but the truth is that it is hundreds of billions of dollars of "paper money" that is not in the hands of average Americans.  We have sent massive amounts of our wealth and prosperity overseas and it isn't coming back unless we borrow it. Today there are dozens and dozens of U.S. cities such as Detroit, Michigan and Camden, New Jersey that are turning into post-industrial hellholes while thousands of gleaming new modern factories are going up all over China.  42.9 million Americans are now on food stamps (a 16 percent increase in just one year) while the oil sheiks of the Middle East build opulent palaces that are extravagant beyond belief. Most Americans do not realize how serious the U.S. addiction to foreign oil really is.  We are constantly being drained of our wealth by the oil powers of the Middle East.

    Trade policies, stimulus, and tax cuts - Both parties promise 'economic growth' in this debate as the way out of our troubles for unemployment and federal deficits. Left out of the discussion currently is the way to actually accomplish this growth in a way that delivers more specifically to voters other than some vague notion of trickle down from a 'global free market'.  Andrea Hayley writes: Chinese State-Controlled Market Policies Increasingly Unfavorable to the U.S. in The Epoch Times Deeply concerned about an unsustainable trade deficit with China, the chair and commissioner of the U.S.-China Economic and Security Review Commission (USCC) say that in order to compete with China’s state-controlled economic policies, the U.S. government needs to significantly shift its current market-based approach. “A lot of our major competitors have game plans. The United States doesn’t have a game plan, and our people are suffering,” said Patrick A. Mulloy last Friday at the Center for National Policy.

    U.S. Trade Gap Drops as Exports Rise to Two-Year High - The trade deficit in the U.S. shrank more than forecast in October as a weaker dollar and growing economies overseas propelled exports to a two-year high.  The gap narrowed 13 percent to $38.7 billion, less than the lowest estimate of 78 economists surveyed by Bloomberg News and the smallest since January, Commerce Department figures showed today in Washington. Exports were the strongest since August 2008 as Mexico and China bought record amounts of U.S. products. 3M Co. and General Dynamics Corp. are among companies that will probably benefit from growing demand in markets like China, Brazil and South Korea, which this year are among the top-10 buyers of American-made goods. Imports stagnated in October as U.S. demand for crude oil plunged, an outcome that may prove to be temporary as the world’s largest economy picks up

    Trade Does Not Equal Jobs - Krugman - One thing I’m hearing, now that all hope of useful fiscal policy is gone, is the idea that trade can be a driver of recovery — that stuff like the South Korea trade agreement can serve as a form of macro policy. Um, no. Our macro problem is insufficient spending on U.S.-produced goods and services; this spending is defined by  Y = C + I + G + X – M  where C is consumer spending, I investment spending, G government purchases of goods and services, X is exports, and M is imports. Trade agreements raise X — but they also lead to higher M. On average, they’re a wash. This, by the way, is why claims that the Smoot-Hawley tariff caused the Great Depression are nonsense. Yes, protectionism reduced world exports; it also reduced world imports, by the same amount. There is a case for freer trade — it may make the world economy more efficient. But it does nothing to increase demand.

    Global Imbalances and the War of Attrition - Back in 2005, Ben Bernanke, then (“just”) Governor at the Federal Reserve Board, coined the term “global savings glut” to describe the “significant increase in the global supply of saving” that, as he argued, helped explain the increase in the US current account deficit and the low level of global real interest rates. In short, a deliberate rise in emerging market (EM) savings from c. 2000 onward flooded the world with cheap money, helping finance an ever-widening US trade deficit and contributing to the perverse lending incentives that eventually led to the 2008 financial collapse. Five years later, Ben has a chance to restore the global savings-investment landscape; i.e. help force a “correction”, in the form of an exchange rate adjustment and/or a decline in EM net savings. The key here is to recognize that a repeat of the EM savings glut story is less feasible because of important differences between then and now. And the Fed has the capacity to make it, if not impossible, at least extremely costly.

    China's Services Industry Grows at Slower Pace as Inflation Erodes - China’s non-manufacturing purchasing managers’ index fell to a nine-month low in November as accelerating inflation eroded service companies’ margins.  The index dropped to 53.2 from 60.5 in October, according to a statement today by the Beijing-based National Bureau of Statistics and the Federation of Logistics and Purchasing. A reading above 50 indicates an expansion. A separate service PMI released by HSBC Holdings Plc fell to 53.1, a near two-year low. Policy makers have raised benchmark interest rates and banks’ reserve ratios, and threatened to impose price controls, in a drive to rein in inflation that reached a two-year high in October. Higher prices may challenge the government’s plan to boost consumption, with a consumer confidence index last month showing the first drop in six quarters because of rising costs.

    China's credit bubble on borrowed time as inflation bites - The Royal Bank of Scotland has advised clients to take out protection against the risk of a sovereign default by China as one of its top trade trades for 2011. This is a new twist.  It warns that the Communist Party will have to puncture the credit bubble before inflation reaches levels that threaten social stability. This in turn may open a can of worms.  "Many see China’s monetary tightening as a pre-emptive tap on the brakes, a warning shot across the proverbial economic bows. We see it as a potentially more malevolent reactive day of reckoning," said Tim Ash, the bank’s emerging markets chief. Officially, inflation was 4.4pc in October, and may reach 5pc in November, but it is to hard find anybody in China who believes it is that low. Vegetables have risen 20pc in a month.

    China declares shift to "prudent" monetary policy (Reuters) - China will switch to a prudent monetary policy from a moderately loose stance, the Communist Party's top leaders decided on Friday, a change that could pave the way for more interest rate increases and lending controls. At the same time, the Politburo elected to maintain China's proactive fiscal policy, an indication that the government wants to continue to ramp up investment spending even while taking tightening steps to control inflation. That was underscored on Thursday when sources told Reuters that China is considering investments of up to $1.5 trillion over five years to promote the production of high-value technologies.

    Multiple Simultaneous Games of "Chicken"; China Declares Shift to "Prudent" Monetary Policy - China's is overheating. Consumer prices in aggregate rose at an annual rate of 4.4% as of October. Food prices are up 10.1 percent according to China Financial Daily. Moreover, accelerating inflation is hurting profit margins in China's service sector. China's non-manufacturing PMI fell to a nine-month low in November, with new orders in consumer service industries showing outright contraction. In response to these inflationary price pressures, China declared a shift to a "prudent monetary policy", including price controls at Walmart. This begs the question: Since when do price controls constitute "prudent policy"? Price controls have never worked in history and this time will be no different. This is a pretty long post, but please stay tuned until the end for an analysis of Multiple Simultaneous Games of "Chicken".

    Who gains from a revaluation of China’s currency? - A gradual renminbi revaluation will help China and a few other countries that compete with China. It will also make China’s growth more balanced and resilient, which is in the general interest. However, unless China’s revaluation is accompanied by an acceleration in its domestic demand, most countries will see little benefit and some countries will lose as their import prices rise and their current-account deficits with China widen, at least over the next year or two1. Ironically, the US, which has been leading the charge on renminbi appreciation, would likely be among the losers. Certainly, a very large one-off revaluation that disrupts China’s growth hurts everyone.

    China to Pay Rubles for Timber and Seafood - China wants to pay in rubles for Russian timber, coking coal and seafood, as the two countries seek to boost bilateral trade in national currencies, Russian Central Bank official Viktor Melnikov said Monday.  MICEX will start trading in yuan-ruble on Dec. 15 to support bilateral trade ties, Igor Marich, a vice president of the bourse, told a conference. This move follows the launch of the forex pair in China on Nov. 22.  Russia is trying to raise the profile of the ruble and has called for a reduction in reliance on the U.S. dollar as a global reserve currency. China, Moscow's second-largest trading partner after the European Union, is interested in establishing long-term supplies of oil and gas from Russia.

    Russians to gain US uranium foothold - A Russian state-owned company is set to control up to half of US uranium output by the middle of the decade, after American authorities gave the go-ahead to the partial takeover of Uranium One of Canada by ARMZ. The deal is the latest sign of how, after a three-decade hiatus in new reactor projects, the US has lost control of key parts of the nuclear supply chain. It also comes amid a sharp rise in the price of uranium on hopes that reactor construction will accelerate, led by China and other emerging economies. ARMZ, the uranium mining division of Russia’s state-owned Rosatom nuclear power group, has taken a 51 per cent stake in Toronto-listed Uranium One which owns mines in Wyoming.

    India, the IMF's Poster Child for Capital Flows - It's always one step forward, two steps back with the IMF moving into a post-Washington Consensus age, it seems. We've talked about it becoming kinder and gentler with regard to conditionalities--or maybe not. Today, let's revisit the tolerance of states implementing capital controls in contravention of the Washington Consensus--or maybe not. IMF Managing Director Dominique Strauss-Kahn seemed to raise more questions than answers in his recent speech in Delhi lauding India's approach to the subject matter. Unlike a certain even more populous neighbour, India does not actively clamp down on capital inflows (or at least so far). Unlike a certain nominally socialist regime, nor does it try to manage the level of its currency. So, for what it's worth, this latest iteration of DSK is broadly in the Washington Consensus mould. (Hear that, China?)

    India’s battle against hunger beset by problems of delivery and corruption - Malnutrition in India is on the rise, despite nutrition rehabilitation centres and ration shops. "Indicators of urban food insecurity ... reveal an alarming picture," says the Report on the State of Food Insecurity in Urban India, published by the MS Swaminathan Research Foundation and the World Food Programme. The Congress party, which promised to lift the country out of poverty when it returned to power in 2009, is drafting a revolutionary Right to Food bill. To achieve this goal, organisations will have to be reformed – starting with the ration shops, which are supposed to distribute rice, sugar, wheat and even kerosene at subsidised prices to anyone in need. But none of the inhabitants of Gautam Nagar are entitled to this bounty. More than 60 families live in cramped quarters on wasteland that has a filthy stench, with only plastic sheets to protect them from the elements. Children with swollen bellies wander along the road, begging from passersby...

    Americans appalled at how much we spend on aid, want to spend 10 times more - This chart is courtesy of Ezra Klein (h/t @viewfromthecave and @laurenist), who summarizes the results from a new World Opinion Poll. The 848 Americans polled guessed, on average, that the US spends 25 percent of the budget on foreign aid, but opined that the figure should be about 10 percent. The actual number, as you Aid Watch readers probably know, is less than 1 percent. The chart will also be interpreted by many as showing that the US should spend more, since many citizens – who have just demonstrated they have no clue what we are currently doing – theoretically have a tolerance for more spending.

    African poverty: Falling faster than you think - The picture of Africa as a place of collapse, hunger, disease and death is slowly fading. Both official statistics and the popular press acknowledge a nascent “African Renaissance”, as the continent is enjoying its longest and strongest growth spurt since independence. Sub-Saharan Africa has made little progress in reducing extreme poverty, according to the latest Millennium Development Report. This column presents evidence from 1970 to 2006 to the contrary.

    In Search of Equilibrium - The best idea of 2010 came from the Himalayan mountain kingdom of Bhutan. Standing before world leaders in the United Nations General Assembly in September, Prime Minister Jigmi Thinley asked the decisive economic question of our time: “As all our people rise above the threats of basic survival, what will our collective endeavor be as a progressive society?”  He proposed an answer. Let us, he said, make “the conscious pursuit of happiness” a new pillar of global cooperation, the “ninth Millennium Development Goal.”   The world, indeed, is long on worries and short on happiness. The problem, as Prime Minister Thinley incisively explained, is not really a shortage of material goods, even in a year of economic recession. The world is richer than ever before in history; that is certainly the case in the richest countries, even those in a cyclical downturn. Happiness, according to Bhutan’s great tradition of Himalayan Buddhism, comes not from the raw pursuit of income but, in Thinley’s words, from a “a judicious equilibrium between gains in material comfort and growth of the mind and spirit in a just and sustainable environment.”

    SWFs set their sights on Brazil - Like everyone else, sovereign wealth funds are turning their eyes - and their considerable capital - to emerging markets. Today brought news that a consortium of funds is investing $1.8bn in fresh capital into BTG Pactual, the independent Brazilian investment bank. The deal is “a sign of a new financial order”, according to Pactual chief Andre Esteves, and is the funds’ first big move into Brazil in particular and Latin America in general. The FT’s Patrick Jenkins and Jonathan Wheatley report: The investment – by nine funds, including Singapore’s GIC, China’s CIC and the Abu Dhabi Investment Council – marks the biggest ever sovereign wealth fund commitment in Brazil and underlines the shift in the funds’ focus away from western economies and towards emerging markets.

    Collect(ion) Call - The Land of the Rising Sun has the dubious distinction of sporting the highest debt-to-GDP ratio of any industrialized nation in the world. Now greater than 200%, Japan’s relative debt load is bigger than that of Greece, Spain, Portugal or the US. Japan needs to borrow over 50% of GDP this year just to stay afloat, according to the International Monetary Fund (IMF), and its financing needs are expected to reach almost 60% of GDP next year. (See graph below.) Its strength has been somewhat befuddling, especially considering this growing burden of debt. Japan’s extreme borrowing needs over the next couple of years are, at this point, locked in – which almost certainly means that Japanese interest rates will rise – potentially by a lot – relative to the near zero yields now on offer. Yet it should be obvious from the IMF data that Japan simply can’t afford to have the cost of servicing its massive debt rise even a little, let alone a lot. Which is another way of saying that something has to break, and soon.

    The mercantilist road to recovery - LEADERS from South Korea and America seem to have reached an agreement on a new trade liberalisation deal that looked doomed just a few weeks ago (thanks Kim Jong-Il!). The deal would slowly reduce barriers on a range of goods, from agricultural products to automobiles, and it could give momentum to ongoing trade talks between America and other trading partners. What does economist Paul Krugman think of the deal? If you want a trade policy that helps employment, it has to be a policy that induces other countries to run bigger deficits or smaller surpluses. A countervailing duty on Chinese exports would be job-creating; a deal with South Korea, not. If you want the Korea deal, fine; but don’t claim virtues for it that it doesn’t possess. Got it? If you want to create jobs, go as mercantilist as possible. Maximise your exports; minimise your imports. Just how does Mr Krugman arrive at this 19th century policy prescription? He starts here: Our macro problem is insufficient spending on U.S.-produced goods and services

    Hiring Plans Pick Up Across Globe - Employers in countries such as India and China expect more robust hiring heading into 2011, while U.S. hiring plans, though improved, are more modest, a new survey finds. Employers in 15 of 36 countries predicted their pace of hiring would improve in the beginning of 2011, compared with the end of 2010, according to a survey by staffing company Manpower Inc. The largest gains were expected in Italy, Germany, Hong Kong, Singapore and the U.S. Meanwhile, employers in Switzerland, Austria and Colombia projected weaker hiring in the beginning of next year, compared with the prior quarter. Even more employers expected gains, compared with the same time a year ago. Employers in 28 of 35 countries expected stronger hiring in the first quarter of next year, compared with the first quarter of 2010. The biggest gains in expected hiring from the previous year were reported in China, Italy, Mexico and Taiwan, according to the survey. The slowest pace of hiring was expected in Greece, followed by South Africa and Austria.

    Globalisation’s impact on inflation in the European Union - Over the past two decades, Western European trade has become increasingly integrated with emerging economies. This column uses a novel empirical technique to show that import competition from East Asian low-wage countries – in particular China – has dampened inflation in five Western European nations. Increased integration with Turkey and Central and Eastern Europe, meanwhile, has had little effect on inflation.

    Bank assets as a percentage of gdp - Via Megan McArdle (from a good post on why it's hard to leave the euro), we are offered this list: Bank assets as a percentage of GDP (For comparison, total banking assets in the U.S. are equal to approximately 82 percent of GDP.):

    Luxembourg 2,461
    Ireland 872
    Switzerland 723
    Denmark 477
    Iceland 458
    Netherlands 432
    United Kingdom 389
    Belgium 380
    Sweden 340
    France 338
    Austria 299
    Spain 251
    Germany 246
    Finland 205
    Australia 205
    Portugal 188
    Canada 157
    Italy 151
    Greece 141

    The crisis in the euro area: No easy exit | The Economist - ONCE again a late Sunday night in Brussels ended with a bail-out for a stricken economy and a set of improvisations to stem the euro zone’s debt crisis. Ireland’s rescue had a similar script to Greece’s, but with a very different outcome. In May European policymakers trumpeted a €110 billion ($146 billion) bail-out for Greece and the promise of €750 billion in rescue funds for the whole zone. They succeeded, temporarily: yields on Greek government bonds plunged and Europe’s sovereign-debt markets calmed down for several months. On November 28th they tried to repeat the trick, announcing an €85 billion package for Ireland and the outline of the European Stability Mechanism (ESM), a permanent system to deal with debt crises, to come into effect after 2013. This time markets were not reassured. Irish bond yields fell for a few hours, but were setting new records by the end of November 29th. Contagion intensified: yields on Portuguese, Spanish, Italian and even Belgian bonds jumped (see chart). The gap between these countries’ borrowing costs and Germany’s became wider than at any time since the birth of the single currency. European stockmarkets fell. The euro hit a ten-week low against the dollar.

    Euro Trouble - Another sign the euro is in trouble: this week's Economist has an article on how a member country might leave the currency union.  It concludes: The cost of breaking up the single currency would be enormous. In the ensuing chaos and recrimination, the survival of the EU and its single market would be in jeopardy. But by believing that a break-up cannot happen, the euro zone’s authorities will always tend to stop short of the radical measures needed to hold the project together. Germany may be the country that walks - the Guardian reports: At the Brussels dinner on 28 October, witnesses said Papandreou accused Merkel of tabling proposals that were "undemocratic". "If this is the sort of club the euro is becoming, perhaps Germany should leave," Merkel replied, according to non-German government figures at the dinner. Much of the difficulty in Europe stems from German attitudes on monetary policy (though their deeply ingrained aversion to inflation is understandable) and their influence on the ECB.  Ryan Avent put it well last week:A demonstration of commitment to Europe requires a little bit from everyone, and what it requires from the ECB is that it act like the European Central Bank, rather than just a Bundesbank that gets to impose unreasonably hard money on everyone in the single currency.

    Germany denies Merkel threatened to leave euro (Reuters) - Germany on Saturday categorically denied a British newspaper report that Chancellor Angela Merkel warned Berlin might leave the euro during a heated exchange at a summit of European Union leaders at the end of October. Citing non-German government figures at the Brussels meeting, daily The Guardian said Merkel made the comments following a dispute with Greek Prime Minister George Papandreou, who it said had accused her of making "undemocratic" proposals. "If this is the sort of club the euro is becoming, perhaps Germany should leave," it quoted Merkel as saying. Merkel's spokesman Steffen Seibert said the report was untrue and that the chancellor had not made the remarks.

    Marshall Auerback: What Happens if Germany Exits the Euro? - As far as European Monetary Union goes, the prevailing thought has been that one of the weak periphery countries would be the first to call it a day (in Ireland’s situation, one could make a good case for it on the grounds of persistent spousal abuse). It may not, however, work out that way: All of a sudden, the biggest euro-skeptics in Europe are not the perfidious English, but the Germans themselves. Take a look at these headlines Germany and the euro: We don’t want no transfer union | The Economist -- Jenkins: Where Are the Business Europhiles Now? – And even a book by Hans-Olaf Henkel, formerly of IBM (Germany), and hitherto one of Germany’s great euro-enthusiasts: English translation: “Return our Money”So let’s consider what happens if Germany decides to follow Herr Henkel’s advice. On the plus side, given Germany’s historic reputation for sound finances, the country will likely emerge with a strong Deutschmark, a global safe haven

    Germany and the euro: We don’t want no transfer union - “WHEREVER there’s a fire in the euro zone, the financial firefighters rush to the scene. That’s us,” jokes Oliver Welke, Germany’s version of Jon Stewart, an American comedian. Although the IMF and European Union are acting as co-rescuers of Ireland and Greece, Germans see themselves as rescuers-in-chief—and they resent it. “Will we finally have to pay for all of Europe?” asked Bild, a tabloid.  Other Europeans see Germany as an arsonist. Angela Merkel, the chancellor, has twice dithered, arguing about conditions for a rescue even as the flames took hold. Her demand that creditors must share in the losses triggered what is now being called the “Merkel crash”, which threatens to engulf not just Ireland but Portugal, Spain and even Italy. Luxembourg’s Jean-Claude Juncker, leader of the euro group of finance ministers, frets that the Germans “are losing sight of the European common good”. Spain’s problems start in Germany, wrote a Spanish analyst in the Financial Times. There is more than a grain of truth in this. Germans were loth to give up the D-mark in 1999 and have never warmed to the euro.

    The future of the euro: Don’t do it - The Economist - BOND markets have scorned the €85 billion ($113 billion) bail-out offered to Ireland on November 28th. Yields have risen not just for Ireland but for Portugal, Spain, Italy and even Belgium. The euro has fallen—again. As one botched rescue follows another, solemn vows from European Union leaders that a break-up of the single currency is unthinkable and impossible have lost their power to convince. And that is leading many to question whether the euro can survive. The case against it is that European citizens can no longer live under its yoke. In Europe’s periphery some are yearning to be spared the years of grinding austerity that may be needed for wages and prices to become competitive. In the German-dominated core they are fed up with paying for other countries’ fecklessness and they fear that, as creditors, they will suffer if the European Central Bank (ECB) inflates away the laggards’ debts. Deep down lurks the sullen suspicion that this is a drama that the euro zone may be condemned to relive time and again. So why not get out now?

    What Does it Look Like to Leave the Euro? - The Economist has an excellent piece this week outlining just how difficult it would be to leave the euro.  Bank runs, capital controls, angry voters, and where, exactly do you get currency for people to use?  How could this be done? Introducing a new currency would be difficult but not impossible. A government could simply pass a law saying that the wages of public workers, welfare cheques and government debts would henceforth be paid in a new currency, converted at an official fixed rate. Such legislation would also require all other financial dealings--private-sector pay, mortgages, stock prices, bank loans and so on--to be switched to the new currency.  The changeover would have to be swift and complete to limit financial chaos. Bank deposits would have to be converted at the same time, and the same rate, as overdrafts and mortgages to keep the value of banks' debts in line with their assets.

    Chart of the Day: Net Payers and Receivers of EU Money - This chart is in German, but most of the terms should be clear. The top half of the chart are the net payers of existing fiscal transfers within the EU, Germany being the largest, followed by Italy, France, and the Netherlands. The biggest net beneficiaries are on the bottom half, with Greece in first place, followed by Poland, and Spain. Note that these sums from 2008 are in total euros and not on a per capita basis within the EU and not the euro zone.

    Row Over ECB Handling of Euro Crisis : The Lonely Fight of Monetary Dogmatist Axel Weber - SPIEGEL - The head of the German central bank, Axel Weber, is openly critical of the way the European Central Bank has handled the euro's debt woes. He is fighting to uphold purist monetary principles that are untenable in the current crisis. His chances of succeeding Jean-Claude Trichet as ECB chief are waning as a result.

    Is Germany to blame for the euro crisis? - The financial turmoil in the Eurozone is fostering another potentially scary problem that could hamper the resolution of Europe's debt crisis – smoldering anger towards Germany, the dominant member of the monetary union. Take a look at the venom spewed at Germany by José-Ignacio Torreblanca, head of the Madrid office of the European Council of Foreign Relations, the other day in The Financial Times: Seeing how the story unfolded in Greece and Ireland and watching the crisis heading for Portugal, it is no wonder that the dominant sentiment in Spain is concern. But more than that, the prevailing feeling is one of frustration with Germany…Spain's current problems start not at home but rather abroad – in Germany, to be precise…Seen from Spain, it is as if Germany had decided southern Europe was a burden that prevents it from going global and needs to be dumped. Pretty strong stuff. But it is fair? The fact is that Germany, as the leading economic and political force in the Eurozone, does have to take its share of the blame for the severity of Europe's debt crisis. Here's why:

    EU in context - Ten years ago the PIIGS and others were desperate to get into the EU and use the Euro because they had depreciated the hell out of their currencies for decades and were unable to borrow money at reasonable rates anymore, if at all.  The EU architects weren't as stupid as our brilliant economists make them out to be. They imposed limits on fiscal and trade deficits on EU members. It is a well known fact that a stable currency is good for business, and the idea was to create a larger regional market with a single currency and more common regulations and import duties between members.  Where the problem came in is fiscal and trade deficits rules either weren't enforced, or like Greece, some countries cooked the books and hid the problem. So the only good thing about having their own currency is the PIIGS would have gone bankrupt 10 years ago, and maybe would have partially recovered by now. But only maybe.

      EU's Bailout Fund May Be Increased, Reynders Says in a Break With Merkel - Belgian Finance Minister Didier Reynders said the euro region could increase the size of its 750 billion-euro ($1 trillion) bailout fund, breaking ranks with German Chancellor Angela Merkel and France’s Nicolas Sarkozy. Reynders told reporters in Brussels that the current cash pool could be increased if governments decide to create a larger fund as part of a permanent crisis mechanism in 2013. “If we decide this in the next weeks or months, why not apply it immediately to the current facility?” While Sarkozy and Merkel rejected expanding the fund on Nov. 25, European Central Bank President Jean-Claude Trichet yesterday indicated governments should consider just such a move.

      The Bond Vigilantes Have Moved to Dublin - DURING the Reagan administration’s experiment with supply-side economics, the United States budget deficit swelled and bond buyers were appalled. They punished the government by pushing down the price of Treasuries.  Ed Yardeni, then an economist with Prudential-Bache Securities, dubbed the informal posse of outraged investors “the bond vigilantes,” writing in 1983: “If the fiscal and monetary authorities won’t regulate the economy, the bond investor will.”  Now an independent economist and market strategist, Mr. Yardeni says that over the last few years, the American vigilantes have been asleep at the switch — lulled by the Federal Reserve’s seductive monetary policies. While the budget deficit has mushroomed to previously unimaginable, $1 trillion-plus dimensions, bond traders have been buying Treasuries with gusto, keeping prices rich and yields extremely low.  But in Europe, where a series of credit crises have sent the euro plummeting, the situation is quite different. There, he says, “the bond vigilantes are very, very active.”

      Texas, Ireland and Ten Little Indians - There is the childhood story and song about the ten little Indians. And of course the Agatha Christie tale of the same name, with 10 people invited to an isolated place, only to find that an unseen person is killing them one by one. And that seems to be what the markets want to do with European sovereign debt. First it was Greece, then it was Ireland. Very soon it will be Portugal, then Spain, and even Italy? Belgium perhaps? How many more Indians till it hits the core of Europe? My friend Dennis Gartman wrote a very humorous note yesterday about the following conversation between two Irishmen, Liam and Paddy, sitting in their local pub. The current Irish government has agreed to borrow something like $88 billion euros to shore up their banking crisis. That is about $27,000 for every man, woman, and baby in Ireland, a rather small country with a little over 4 million people. “Aye, Paddy, now that it’s all done, lad, we Irishmen owe the IMF; we owe the countries of the European Union; we owe those damned Englishmen; we owe the Danes; we owe the Swedes for God’s sake! Oh, and we owe the banks, and we owe ourselves. Aye, lad; we owe the whole bloody world it seems.” That they do. And a lot of that Irish debt is owed to German, French, and UK banks.

      Rescue-package debt seniority and the vicious cycle of rescues and emergencies - Despite its large size relative to the small Irish economy, last weekend’s bailout is not working. Risk premiums continue to rise. This column argues that part of the problem lies in a seemingly innocuous provision in the rescue facility that is to replace the current European Financial Stability Facility in 2013. The argument is tricky, but the heart of the problem is the insistence that rescue financing be senior to private debt while simultaneously ruling out rescheduling of short-term debt.

      Debt-hit Ireland faces toughest budget in history - Debt-struck Ireland braced for the painful details Tuesday of the toughest budget in its history, a condition for receiving a massive international bailout. Finance Minister Brian Lenihan's 2011 budget is being unveiled and voted on Tuesday night in parliament as protesters gather in exceptional snow and ice outside. Lenihan says the plan — the fourth emergency budget for Ireland since 2008 — will cut spending by euro4.5 billion ($6 billion) and raise taxes by euro 1.5 billion.

      Irish lawmakers offer initial OK for brutal budget --- Lawmakers narrowly approved tax hikes as part of Ireland's most brutal budget in history, a euro6 billion ($8 billion) slash-and-tax plan imposed as a key condition of the nation's international bailout. Rejection following Tuesday's publication of the long-awaited 2011 budget would have forced Prime Minister Brian Cowen's resignation and snap elections -- and raised doubts about whether Ireland could tap euro67.5 billion ($90 billion) from the European Union and the International Monetary Fund. But Cowen survived thanks to an 82-77 vote in favor of midnight hikes in taxes on vehicle fuel. The complex budget faces several more parliamentary tests between now and February, with at least three separate votes for major bills on welfare cuts, sweeping expansion of the income-tax net and other measures. Unveiling the budget, Finance Minister Brian Lenihan said every household in this country of 4.5 million must take hits on their net incomes to close Ireland's staggering deficit.

      Ireland - The Questions Nobody Seems to be Asking - Talk about deja vu all over again. Here's Tyler Cowen talking about the Ireland bailout, and linking to Megan McArdle discussing the same. Its deja vu, for me, because it seems just about everyone commenting on the issue is ignoring what should be an obvious point, namely that a bail-out is at best a possible solution to the wrong problem. Interestingly enough, this wrong problem has been around for a very long time, and the same cast of characters have been busily ignoring it (or even praising it) for a very long time.  I said this is deja vu all over again for me, because the last time I gave much thought to the issue (back in 2006), I wrote a post that linked to both Tyler Cowen and Megan McArdle. I'd like to quote myself extensively if I may: There seems to be some discussion about why Ireland is growing as quickly as it is. I am completely ignorant about this, and haven’t even been to Ireland. But I do have a question… Is it possible that part, even a large part, of the Irish boom, is fictional?

      Ireland About to Give Another Sop to the Banks, a Bad Assets Fire Sale? - Yves Smith - Reader Swedish Lex, who was involved in the famed and generally well regarded Swedish banking industry cleanup of the early 1990s, read an innocuous-sounding Financial Times story the same way I did. Not only are the banks who lent recklessly to Ireland’s overheated property sector being shielded from most of the consequences of their stupidity and greed, but other financiers are likely to make out like bandits on what looks certain to be an unduly rapid sale of bad bank assets. For readers new to how banks get euthanized, an approach generally regarded as sound when dealing with banks that are seriously insolvent (as in their assets are worth less than their debts) is the “good bank-bad bank” approach. The bank is taken over, the board and senior management is fired. The good parts of the bank are usually spun back out as quickly as possible with new management in place. The bad parts, typically the bad loans, are put in a separate entity and disposed of.  Now there are a lot of variants on that theme...

      €6bn cut and run - FAMILIES are reeling from a savage Budget that will take €3,000 from the average household. Income tax rises, cuts to child benefit, higher petrol prices and a string of other charges will leave low and middle-income families much worse off. However, Finance Minister Brian Lenihan's €6bn Budget -- Fianna Fail's last for some time with a general election rout likely -- did not contain any root-and-branch economic reforms.  Rather than going for more wide-ranging public sector reform, the Government stuck to the Croke Park deal and failed to announce any dramatic new job initiatives.  The passage of early Budget votes also failed to bolster embattled Taoiseach Brian Cowen's position, with widespread speculation circulating about his leadership.

      Shane Ross: Bankers who peddled the poison - WILL our European masters or the IMF czars ever inflict the same penury on Spain as they did on Ireland? Or will they ever put Italy on the same rack?  What do you think?  Europe has ganged up with the IMF to squeeze Ireland and protect its own bankers. First, our external saviours force-fed Ireland with a juicy loan. Then, they squeezed us dry.  Europe was hell-bent on lending us the money, even keener than we were on borrowing it. They desperately desired a deal. Europe's big players feared the consequences of an Irish default. The default disease could spread from the island on to the mainland. Unchecked , it could travel not just to Portugal and Spain, but even as far as the mighty Italy. Hence the force-feeding.  Ireland was a pushover. The Irish negotiating team was stuffed with conventional apparatchiks deeply deferential to the European ethos. The nuts and bolts of the deal were agreed by lesser civil servants, intent on staying on the right side of the big nations.  Ireland was humbled for its pains. The mandarins allowed little Ireland to act as a firewall to defend big Portugal, bigger Spain and even bigger Italy.  Would the IMF and European leaders have treated Spanish prime minister Zapatero or even Europe's most unlovable lover, Italian premier Silvio Berlusconi, with the same disdain as they dished out to Ireland?

      Sovereign insolvency and illiquidity - If a country has a debt/GDP ratio of 100%, and is paying 9% interest, and nominal GDP is not rising, then it's got a solvency problem. It needs to run a budget surplus of 9% of GDP just to stop the debt/GDP ratio rising further. But why would a country ever be paying 9% interest and have 0% nominal GDP growth? By David Beckworth's simple, crude, but nevertheless useful measure of the tightness of monetary policy -- the gap between nominal interest rates and expected nominal GDP growth rate -- a gap of 9 percentage points is very tight monetary policy. No country that had control over its own monetary policy would set monetary policy that tight. Ireland has a solvency crisis, but only because it has a liquidity crisis. Ireland does not control its own monetary policy. Money is the most liquid of all assets. If monetary policy were less tight, so the gap between nominal interest rates and nominal GDP growth were 1%, a country with a 100% debt/GDP ratio would only need a budget surplus of 1% of GDP to prevent the debt/GDP ratio from rising. That's doable. That country is solvent.

      Iceland rises again as Ireland sinks - Iceland's central bank today cut its headline interest rate, giving a signal that the island's bankrupted economy was edging back towards health. The country's base rate fell one percentage point to 4.5%, after figures showed the economy growing at a faster pace than expected after seven successive quarters of contraction. But while a resurgent Icelandic economy means rising income levels for the country's 320,000 inhabitants, it causes problems for Irish politicians. Far from the worst being over for Ireland, as its politicians and bankers have claimed over the last year, the situation is getting worse. The huge bailout brokered by the EU and the IMF last week and agreed by the Dáil yesterday is seen by many analysts as perpetuating Ireland's recession for many years to come. Unions and opposition MPs are already preparing for a further round of protests to defeat the ruling Fianna Fáil coalition government in a desperate attempt to rewrite the rules of the deal that ties Dublin to repay almost all its debts over what could be a generation.

      Moody's Cuts Hungary Close to Junk, Warns of Risks (Reuters) - Credit rating agency Moody's cut Hungary's sovereign rating by two notches, to just above "junk" grade, on Monday and said it may cut further if the government fails to put public finances on a sustainable footing. Hungary's government has rejected austerity and aims to close its budget deficit with hefty new taxes on banks and other businesses as well as a diversion of private pension savings into state coffers."The negative outlook reflects the uncertainties regarding the government's financial strength, as the country's structural budget deficit is set to increase and external vulnerabilities make the country susceptible to event risk."

      Spain on the Verge of a Nervous Breakdown - Europe's debt crisis continues to spread. And as the crisis develops, far from sending a much-needed signal of confidence and self-assurance, the rhetorical register we're seeing from Europe's leaders is becoming increasingly nerve-racked and even at times apocalyptic. In a typically troubling example, European Council President Herman Van Rompuy warned recently that the eurozone, and even the European Union itself, were in the process of fighting for their lives, telling the astonished audience at a Brussels think-tank conference, "We're in a survival crisis."  Only a few days later, another top EU official, European Competition Commissioner Joaquín Almunia, stunned market observers with a statement that was widely interpreted as suggesting there might be something behind the rumors that Spain's banking and government debt statistics were not as reliable as they should be. "There are no doubts that there is doubt [about Spain]," he said in an interview with a Spanish radio station, doubts that are connected with the possibility that Spain could "have something more than what it has already put on the table."

      Zapatero Warns Spain Strikers After State of Emergency Declared -  Spanish Prime Minister Jose Luis Rodriguez Zapatero said he’ll use all tools at his disposal to fight future strikes after declaring a state of emergency to break a walkout by air-traffic controllers. The government “won’t hesitate” to use “all the instruments of the rule of law to avoid or put an end to situations like those we saw last weekend,” he told parliament in Madrid today in a session to explain the steps taken by the government to break the wildcat strike. The government “intends to maintain or if necessary seek an extension of the state of emergency,” depending on the situation, he said. The Socialist premier, facing his lowest poll ratings since coming to power in 2004, declared a state of emergency on Dec. 4 and put air traffic under military control to end the walkout during a holiday weekend. The strike followed government plans to partly privatize the airport operator as part of budget- cutting measures aimed at stemming the sovereign-debt crisis.

      France could be next to fall after Spain, Portugal - France will be the next country to come under attack from government bond investors after Portugal and Spain, according to the head of the London Stock Exchange (LSE). Xavier Rolet warned the UK’s Independent on Sunday: “France’s deficit is much, much higher than anyone realises. My view is that markets are not prepared to finance it unless there is serious structural reform.” “It won’t be long before bond investors turn to France after they have finished with Portugal and Spain,” added Rolet, who is a French citizen. “No one, not even France, can hide anymore."

      A big-bang solution to Eurozone problems -Muddling through isn’t working. This column argues that troubled Eurozone nations should simultaneously open restructuring talks while continuing to service their debts normally. Germany, France, and other core Eurozone nations would have to stand ready to recapitalise the banks most exposed to the restructured debt. The ECB would then stabilise the banking system and the EFSF would stabilise sovereign debt. This big bang could be prepared in a weekend; the market already seems to be pricing it in.

      Europe Update: The launch of "E-Bonds"? - The European finance ministers meet this week in Brussels. Some ministers are pushing to increase the bailout fund and others are arguing for "E-bonds" - joint European government bonds. Although the key 10-year bond yields fell sharply last week (Ireland, Portugal, Spain), the crisis is far from over. A couple of articles: From the NY Times: Pressure Rises to Bolster European Bailout Fund European finance ministers are under mounting pressure to significantly increase the €750 billion rescue fund for the currency union when they meet Monday. ... Didier Reynders, the Belgian finance minister, suggested over the weekend that the fund ... will have to be increased when it is made permanent after 2013, From the Financial Times: Europe’s leaders at odds over bond plan Jean-Claude Juncker, Luxembourg’s prime minister who also chairs meetings of eurozone finance ministers, and Giulio Tremonti, Italy’s finance minister, argue in Monday’s Financial Times that the launch of “E-bonds” would send a clear message to financial markets and European citizens about the “the irreversibility of the euro”.

      Juncker and Tremonti: “E-bonds would end the crisis” - Eurogroup leader and Italian finance minister present a fully worked-out plan for a single bond; say that this would end the crisis; bond would be subject to a ceiling of 40% of GDP, and a European Debt Agency would offer exchanges of national bonds at a discount; Schauble opposes the move, says it would require significant changes to the European Treaties; Didier Reynders was among a number of officials of over the weekend called for an increase in the size of the EFSF; Wolfgang Munchau says the eurozone is totally “überfordert” with this crisis; Frankfurter Allgemeine says the story that Germany is the main beneficiary of the euro, sounds increasingly hollow; details of the Irish agreement, meanwhile, have emerged, according to which Irish banks will have to sell a large portion of their loan books.[more]

      Germany rejects calls for larger rescue fund and "E-Bonds" - The European finance ministers are meeting today in Brussels. As we discussed over the weekend, some ministers are pushing to increase the bailout fund and others are arguing for "E-bonds" - joint European government bonds. As expected, Germany reject both suggestions ... From the Irish Times: Germany rejects calls over debt fund German Chancellor Angela Merkel said she saw no need to increase the size of the bailout mechanism. Mrs Merkel also said the European Union treaty did not allow for issuing common bonds, which would anyway reduce the element of competition and the interest rate incentive for fiscal good behaviour. The German view is the higher spreads are the penalty for bad behaviour.

      European Officials Split Over Fund Increase, New Eurobond - European officials voiced divisions over the steps needed to stop the sovereign debt crisis as Germany opposes increasing the 750 billion-euro ($1 trillion) bailout fund and the introduction of joint European bonds.  Belgian Finance Minister Didier Reynders told reporters on Dec. 4 that the fund might be expanded if ministers decide to introduce a larger permanent facility when the current temporary one expires. Luxembourg and Italy today called for the creation of joint European bonds. Both proposals were today rejected by German Chancellor Angela Merkel.  European policy makers head to Brussels today for a regular meeting on concern their rescue fund may not be large enough to stop contagion spreading from Greece and Ireland to Spain. While Sarkozy and Merkel last month rejected expanding the fund, European Central Bank President Jean-Claude Trichet on Dec. 3 indicated governments should consider such a move

      European bonds: For and against - The chairman of the Euro group, Jean-Claude Juncker and the Italian finance minister, Giulio Tremonti, talk up the merits of common European sovereign bonds - or E-bonds - in today's FT. There are some positives, which were widely discussed when the rules for the euro were being drawn up. One is to provide deeper markets for European sovereign bonds. Another is to express the irreversibility of the euro and the strength of the countries' common commitment to make the single currency work. Another advantage - not discussed at that time but sorely missed by the ECB - would be to give the central bank a way to ease monetary policy by buying bonds, without appearing to prop up individual governments or underwrite their borrowing. This gets us to the big unanswered questions in the article, which explain why Germany remains opposed to the idea (it was German opposition that skuppered E-bonds at the start of the euro.)

      Eurozone under pressure to aid euro with more cash — European officials wrestled over whether to commit more money to help stabilize the euro as the European Central Bank revealed it has stepped up purchases of government bonds in an attempt to restore confidence in the EU's single currency bloc. Finance ministers gathered Monday in Brussels to find ways to fight the debt crisis that has rocked the currency bloc, while the European Central Bank said it splashed out euro1.965 billion ($2.57 billion) buying government bonds in the week leading up to Tuesday. That was up from euro1.345 billion the week before and the highest weekly amount in months. Next week's figures will be key as they will contain purchases by the bank last Friday, Dec. 2, when it held its monthly policy meeting. Market participants suspect the stabilization in European bond markets since the meeting has been largely due to even more purchases by the central bank, under pressure from policymakers to do more to prevent Europe's debt crisis from spreading to Portugal, and more dangerously to much larger Spain, following earlier bailouts of Greece and Ireland.

      Merkel says No and No, but Schauble is more circumspect - Merkel rejects both an increase in the seize of the EFSF and a European bond; says the bond would require changes to the European treaties; Juncker said the eurogroup has no new proposals, but he reaffirmed his E-bond proposal; IMF urges an increase in the EFSF ceiling; so does Lorenzo Bini Smaghi of the ECB; there was a top level crisis meeting yesterday, involving Barroso, van Rompuy, Rehn, Trichet, Juncker and Reynders; Merkel and Sarkozy will realign position by end of week; Schauble sticks to the official sceptical German line, but says fiscal union is a possibility; Jurgen Stark came out against an E-bond; Austria chancellor Werner Faymann says Spain will have to come under the EFSF – Spain denies; Lucas Zeise says debt restructuring is inevitable; an FT editorial welcomes the Juncker and Tremonti proposal, but says it implicitly acknowledges the need for debt restructuring; the ECB has upped its bond purchases last week; European bond spreads a rising again; In Taiwan, meanwhile, they are poking fun at us Europeans. [more]

      France Joins Germany to Nix Junker's Junk Bond Proposal to Save the Euro - Jean-Claude Juncker, President of the Euro Group and Prime Minister of Luxembourg (not to be confused with Jean-Claude Trichet, President of the ECB) hatched a plan to combine the bonds of all the Eurozone countries into one entity, saying E-bonds would end the crisis Europe must formulate a strong and systemic response to the crisis, to send a clear message to global markets and European citizens of our political commitment to economic and monetary union, and the irreversibility of the euro. This can be achieved by launching E-bonds, or European sovereign bonds, issued by a European Debt Agency (EDA) as successor to the current European Financial Stability Facility. Junker's plan is much like the idea of taking subprime loans bundling them together with AA and A loans, putting the mess into one package and stamping the whole thing AAA on the misguided notion (lie) that bundling would make everything safe.

      France and Germany agree: No to E-bonds - Sarkozy follows Merkel in her rejection of European bonds; Mario Draghi says e-bond are not the answer, but also plays down impact and scope of bond purchases; Wolfgang Munchau says e-bond is a necessary and sufficient step in crisis resolution; Germany and France are also pushing to stitch up the top ECB jobs, according to a news report; the ECB warns that banks are over-reliant on ECB funds, and pressure on funding is growing as banks are competing with sovereigns for limited finance; Barry Eichengreen says the periphery’s internal devaluation strategy requires debt restructuring; funding pressure will increase dramatically in January; bond spreads, meanwhile, are edging up again.  [more]

      Euro's Worst to Come as Trichet Fails to Calm Crisis, Top Forecasters Say - The most accurate foreign-exchange strategists say the euro’s worst annual performance since 2005 will extend into next year as the region’s sovereign-debt crisis saps economic growth.  Standard Chartered Plc, the top overall forecaster in the six quarters ended Sept. 30 based on data compiled by Bloomberg, predicted the euro may weaken to less than $1.20 by mid-2011 from about $1.33 today. Westpac Banking Corp., the second most accurate, is “bearish in the short term,” and No. 3 Wells Fargo & Co. cut its outlook at the end of last week.  The 16-nation currency’s first weekly gain against the dollar since Nov. 5 may prove short-lived amid mounting concern that more nations will need rescues. European Central Bank President Jean-Claude Trichet delayed the end of emergency stimulus measures last week and stepped up government-debt purchases as “acute” market tensions drove yields on Spanish and Italian bonds to the highest levels relative to German bunds since the euro started in 1999.

      Europe Update: More Stress Tests, Iceland out of recession - From the Financial Times: EU banks face new stress-tests A new round of co-ordinated stress-tests on European banks would begin in February ... The “scope and methodology” of the new round of tests was still under discussion, [Olli Rehn, EU commissioner for economic and monetary affairs ]said, but should be disclosed fairly shortly. The last round of stress tests were heavily criticized - and all of the Irish banks passed the tests only to fail a few months later. And from the NY Times: Iceland Breaks Out of Recession Iceland broke out of recession in the third quarter of this year, official data showed Tuesday ... Unlike Ireland and Greece ... Iceland allowed private banks to fail, and its currency, the krona, has declined by about 46 percent against the dollar since the start of 2008.

      Keep calm and muddle on - It was a technical meeting, they said - not a time for big new ideas. And that was probably just as well - because right now there do not appear to be any big new ideas which all of Europe's finance ministers can support. Even before the meeting began, Germany had shot down the idea of a common European bond, which might make it easier for weak economies to borrow, and make European bond markets more liquid, among other things, but could also lock Germany into guaranteeing other countries' debts (see yesterday's post European bonds: For and against).  At a press conference last night, after the dinner of euro group ministers, Jean-Claude Juncker stuck to his view that the E-bond idea was "intellectually attractive". But he also accepted that it's time had not yet come. If ministers rejected a diluted version of the common bond proposal, when the markets had a gun to their heads in early May, it's hard to see why they would accept the full-strength version now.

      Banks in Europe Fail Market Tests for Stress With No Authority-- In the five months after the U.S. published results of its 2009 bank stress tests, the Standard & Poor's 500 Financials Index rose 25 percent. Five months after the European Union released its version, the Bloomberg Europe Banks and Financial Services Index is down 4 percent.The failure of the EU tests to restore confidence in the region's banks was underscored last month when Ireland directed its two biggest lenders, both of which passed the exams, to raise additional capital. Since July 23, when the results were disclosed, the average cost of insuring the senior debt of 110 European banks against default has surged 114 basis points, or 1.14 percentage points, more than 30 times as much as for the 34 largest U.S. banks whose credit-default swaps are tracked, according to data compiled by Bloomberg. Now, amid a widening European debt crisis, regulators from 27 nations are searching for ways to improve the tests, which will be repeated next year. That won't be easy as long as national leaders and central banks remain unwilling to cede bank oversight to a central authority

      The ECB's bad poker - THE New York Times has a piece today tracking the latest dynamic in European bond markets, in which the European Central Bank buys the debt of troubled countries in an effort to convince traders there's no money to be made betting against those countries. And yet the traders keep on betting against those countries! But the amount of intervention so far is far smaller than many investors and economists think is necessary to calm markets. And the markets continue to probe that discomfort. Pimco, for example, sold the vast majority of its holdings of Greek, Irish, Portuguese and Spanish government bonds late last year and early this year, When markets attack a currency peg, as they did Britain's in 1992, there is a real question as to whether the country has the resources to defend its peg. When the Treasury ran out of reserves to buy the sterling George Soros was furiously selling, the jig was up. But the ECB can't run out of money. All it has to do to convince markets that they shouldn't bet against Portuguese debt is...convince markets that they shouldn't bet against Portuguese debt.

      European Central Bank Plays Cat and Mouse Over the Euro - It is the battle that could well determine the fate of the euro.  On one side is the European Central Bank, which is spending billions to prop up Europe’s weak-kneed bond markets and safeguard the common currency.  On the other side are hedge funds and big financial institutions that are betting against those same bonds and, by extension, against the central bank, that mighty symbol of Europe’s monetary union.  The war keeps escalating as traders position themselves for what some believe is inevitable: a default by Greece, Ireland or perhaps even Portugal.  The strains grew Tuesday, when European finance ministers made no pledge to increase the emergency fund that the European Union has put in place to help protect the euro. The head of the International Monetary Fund, meantime, urged Europe to take broader action to fend off speculators.

      Euro Area in 'Final Countdown' to Debt Restructuring, M&G Says - The euro area is in a “final countdown” before lenders and some nations need to revise terms of outstanding debt, M&G Investments said. “I can’t see any solution other than debt restructuring for banks and very likely a number of sovereigns in the long term, and that’s not going to be pain-free to put it mildly,” money manager Michael Riddell said yesterday in his blog on the company’s website. M&G had more than 190 billion pounds ($298 billion) under management as of Sept. 30, the company said on its website. The prospects for creating a fiscal union and a single European debt agency are “exceptionally unlikely,” he wrote. “Similarly, increasing the size of the stability fund is unlikely to prove popular with core countries.”

      The European Council is once again at each other’s throat - Juncker calls Merkel simplistic and un-European, and accuses her of not even studying his proposal before rejecting it; Merkel says Eurobond was bad on economic and legal grounds, and says her quiet response is intended to bring calm into the debate; German coalition sources accuse Juncker of making a proposal which would have zero costs for Luxembourg; Germany’s five-year auction flop – the third auction flop in a row – as 10 year yields rise above 3%; Brian Lenihan says bondholder default is not an option for Ireland, unless it was supported by the EU; Strauss Kahn warns the EU crisis response was insufficient, and that the crisis would continue; Andrew Duff says a fiscal union is not only desirable, but it is the only way for the EU to survive the crisis; Peter Ehrlich comments on the conspiracy theory that German newspapers want to bring down the eurozone; Gordon Brown, meanwhile, predicts a huge crisis in the eurozone next year, that requires a high noon EU summit to resolve.  [more]

      German 10 year yields surpass 3% - Germany’s hear-no-evil, see-no-evil policy stance is now starting to backfire on its own bond market, as investors are uncertain about the scale of fiscal transfers; bond spreads are getting narrower as a result of higher German interest rates; Ireland passes the first round of the budget vote – average middle-income earner to be 3% worse off; Italy adopts 2011 budget; Straus-Kahn, and a string of other politicians and central bankers, criticise the EU’s piecemeal approach to crisis resolution; Olli Rehn says the EU “even more rigorous” stress tests’; Helmut Schmidt says Merkel and Schauble have no clue about international capital markets; Ken Rogoff says he expects restructuring; Wolfgang Munchau would welcome the emergency of anti-euro party in Germany, as this would clear the air; Martin Wolf, meanwhile, argues that the eurozone will very soon face its moment of truth.  [more]

      German 2 Year Auction Fails By 20% Of Notional As Rush From Government Paper Intensifies - There is only so long that the Bundesbank can keep ignoring the fact that it has recently started piling on failed auction after failed auction. Today, Germany tried to sell €5 billion in 2 Year 1% Schatz notes. And while the official tally on the auction was a 1.1 Bid To Cover at a 0.92% average yield, just above our own 3 Year auction yesterday, (and a drop from the 1.4 previously) this was yet another failed auction, as the bank managed to get only €4.33 billion in competitive and non-competitive bids. The kicker: the Bundesbank retained €995 million of the issue, a whopping 20% of the proposed issue size - this is the amount it could not find any buyers for, and the deficit to what have been a non-failed auction. In other words, after the entire world was rushing to buy German paper, suddenly there is nobody willing to get in.

      Europe’s Inevitable Haircut - What once could be dismissed as simply a Greek crisis, or simply a Greek and Irish crisis, is now clearly a eurozone crisis. Resolving that crisis is both easier and more difficult than is commonly supposed. The economics is really quite simple. Greece has a budget problem. Ireland has a banking problem. Portugal has a private-debt problem. Spain has a combination of all three. But, while the specifics differ, the implications are the same: all must now endure excruciatingly painful spending cuts. The standard way to buffer the effects of austerity is to marry domestic cuts to devaluation of the currency. Devaluation renders exports more competitive, thus substituting external demand for the domestic demand that is being compressed. But, since none of these countries has a national currency to devalue, they must substitute internal devaluation for external devaluation. They have to cut wages, pensions, and other costs in order to achieve the same gain in competitiveness needed to substitute external demand for internal demand.But one economic variable has not adjusted with the others: public and private debt. The value of inherited government debts remains intact, and, aside from a handful of obligations to so-called junior creditors, bank debts also remain untouched.

      Is it time to call it quits on the Euro? - It pained me to write this as I have never been a Euroskeptic, but I fear the answer for Greece, Ireland, Spain, and Portugal may well be yes.  These countries need both debt restructuring and a boost in competitiveness, and it is very difficult to see how they will get those while remaining in the Eurozone.  The most likely alternative is economic decline and political turmoil. Through long and painful experience, Europe’s leaders first learned that financial integration requires eliminating volatility among national currencies.  Next they learned that eradicating currency risk requires doing away with national currencies altogether.  Now they are learning – but resisting – the lesson that you cannot achieve monetary union, among democracies, without political union. In other words, Europe is learning that political trilemma of the world economy applies there too.  It is a very sad story for one of this century’s boldest economic experiments. 

      Fitch Says More ECB Buying, EU Aid Needed to Stem Contagion – Bloomberg - Fitch Ratings said the European Central Bank’s bond purchases may need to be increased and Europe’s rescue fund expanded to stem contagion from the sovereign-debt crisis.  The region’s debt crisis has “escalated beyond the point that it can be contained” by individual bailouts, the company said in a report today in London. Additional steps that may be needed include “a substantial increase in the volume of ECB purchases of government debt under its Securities Market Program, an increase in the financial support potentially available and further fiscal- and structural-reform measures.”  The European Union and the International Monetary Fund approved an 85 billion-euro ($113 billion) rescue for Ireland on Nov. 28, seven months after a 110 billion-euro bailout for Greece, sparking a surge in the extra yield on Spanish and Portuguese debt. Spreads also widened on concern about finance chiefs’ decision to open the door to restructurings of government debt after 2013 as part of a permanent crisis mechanism to replace the temporary fund created in May.  Fitch said the details of the new European Stability Mechanism aren’t yet concrete enough for the company to judge how it will affect sovereign ratings.

      Thinking the Unthinkable in Europe - When Greece was bailed out by a joint eurozone-IMF rescue package back in May, it was clear that the deal had bought only a temporary respite. Now the other shoe has dropped. With Ireland’s troubles threatening to spill over to Portugal, Spain, and even Italy, it is time to rethink the viability of Europe’s currency union.These words do not come easily, as I am no Euroskeptic. Unlike others, I believed that monetary union made perfect sense in the context of a broader European project that emphasized – as it still does – political institution-building alongside economic integration.Europe’s bad luck was to be hit with the worst financial crisis since the 1930’s while still only halfway through its integration process. The eurozone was too integrated for cross-border spillovers not to cause mayhem in national economies, but not integrated enough to have the institutional capacity needed to manage the crisis.

      A hopeless Europe, unable to cope - Usually I stay clear of connotation-rich German words that have no real equivalent in other languages. Their purpose is to obfuscate. But there is one that describes the eurozone’s crisis management rather well. It is überfordert. The nearest English translation is “overwhelmed”, or “not on top of something”, but those are not quite the same. You can be overwhelmed one day, and on top the next. Überfordert is as hopeless as Dante’s hell. It has an intellectual and an emotional component. If you are it today, you are it tomorrow. I am not saying that every policymaker in the eurozone is hopeless. There are a few exceptions. My point is that the system is überfordert, unable to cope. This inability has several dimensions. I have identified six. The first, and most important, is a tendency to repeat the same mistakes. The biggest of these is the repeated attempt to address solvency problems through liquidity policies. It happened in October 2008 with bank guarantees. The European Central Bank’s never-ending liquidity support is another example. So is the Greek bail-out. And so is the European Financial Stability Facility, the €440bn ($588bn) bail-out fund. Set up in May as a mechanism to resolve financial crises, it became a cause of the Irish crisis in November. What triggered last week’s panic was the sudden realisation by investors that, with an interest rate of 6 per cent and an ongoing no-default guarantee to bank bondholders, Ireland is insolvent.

      Overmatched – Krugman - Wolfgang Munchau suggests that we need a German word — ueberfordert — to describe the condition of Europe right now. I think he’s wrong about the lack of an English equivalent; “overmatched” seems fairly close. European leaders, and the European system, just seem not up to dealing with the crisis. But then, who in the West is? It has been 22 months since I gave vent to a growing sense of despair about the US response; events have not, I’m sorry to say, proved me wrong. One thing that is peculiarly distressing to people like me, by the way, is the determination of key players to rewrite history. Wolfgang Schaeuble tells us that “deficits were one of the main reasons for the crisis”; in what universe? Ireland and Spain were running surpluses on the eve of the crisis; the US crisis was clearly driven by private-sector, not public-sector debt; unless you define the crisis entirely in terms of Greece, this makes no sense at all. So we’re ueberfordert, both in terms of will and in terms of intellectual clarity.

      If you think the EU is Left-wing now, just imagine what it could be like after 2014 - If you thought Brussels couldn’t get any worse, just remember that José Manuel Barroso, the European Commission president, is – at least nominally – on the centre Right. He’ll be replaced in 2014, but instead of the normal horse-trading between European governments, it’s expected that the European Parliament will be able to exert genuine influence over who gets the job. Europe’s socialist parties know this, and they are determined to use their new powers in the European Parliament to ensure that Barroso’s replacement is a Left-winger. Last week, they held a conference in which they formulated their plan to take control of the parliament and the presidency. At the next European elections, the candidates of Europe’s socialist parties – including Britain’s Labour Party – will act “as a coherent political family, with both a programme and a personality to lead Europe”.

      Euro could fail says UK fiscal watchdog official - A dissolution of the euro is highly unlikely but is not in the realms of impossibility, a top official at Britain's fiscal watchdog said on Monday. Former Bank of England Monetary Policy Committee member Stephen Nickell said the Office for Budget Responsibility, an independent body that produces economic forecasts for UK fiscal policy, may have to take into account "very low" growth in the eurozone in its next forecasts before the March 23 budget. Some commentators have raised the possibility that the euro and the euro zone may not be able to survive a sovereign debt crisis which has forced bailouts for two EU governments Ireland and Greece this year. "Of course, there's a possibility that it (the euro) will collapse but, at the moment, it's not something to which I'd assign a very high probability," Nickell told parliament's Treasury Committee.

      Leading in underdevelopment - Every year since 1990, the United Nations has published its Human Development Report,  a comparative survey of the world’s nations and peoples measured not just by income, but  also by education, health, life expectancy, literacy and so on. The report’s narrative focuses primarily on the Developing World; but the statistical underpinning embraces all countries and is presented in the form of a table -  the Human Development Index (HDI)  -  in which each country appears in rank order of developmental success. The different components of the HDI  - income, education, health etc. - are also presented in rank order so that readers can identify how well or poorly countries have performed in these sub-categories. UK readers, however,  regardless of political stripe, may find some of the fare unpalatable. Here’s why.  In the first year of the Report - 1990 - the UK placed tenth overall in human development, behind Japan, Sweden and Canada - amongst others, but ahead of West Germany, Italy, Spain and the USA. Twenty years later, in 2010, we have fallen to 26th position, behind not only these four countries (including a united Germany) but also Israel, Korea, Hong Kong and Greece. Moreover, unlike most of our European neighbours, our relative trajectory has been firmly downward.

      Fury over bid to cut pension payments by 25pc - Pension changes that could lead to millions of private sector workers losing up to a quarter of their retirement income have been strongly criticised.  Ministers have been studying plans to allow funds to water down their own rules promising members minimum annual increases in pension payments.  About six in 10 private-sector pension schemes have clear rules dictating that members' pension payments should increase every year in line with the retail prices index (RPI) measure of inflation.  Steve Webb, the pensions minister, will publish today a consultation on changes that could allow schemes to override their rules and increase payments according to the consumer price index (CPI) instead, which is generally significantly lower.

      No comments: