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

Saturday, December 18, 2010

week ending Dec 18

Fed Assets Increase to Record $2.39 Trillion on Bond Purchases - The Federal Reserve’s balance sheet grew $3.5 billion to $2.39 trillion as the central bank increased its holdings of Treasury securities faster than its holdings of housing debt declined.  Treasuries held by the Fed increased by $17.9 billion to $967.6 billion as of Dec. 15, according to a weekly release by the central bank today. The Fed’s holdings of mortgage-backed securities fell by $13.8 billion to $1.01 trillion and federal agency debt securities fell by $294 million to $147.9 billion.  The Fed has bought $127.7 billion in Treasuries on its way to purchasing $600 billion of government debt through June 2011. The Fed is also reinvesting the proceeds of its maturing mortgage holdings. M2 money supply rose by $1 billion in the week ended Dec. 6, the Fed said. That left M2 growing at an annual rate of 3.1 percent for the past 52 weeks, below the target of 5 percent the Fed once set for maximum growth. The Fed no longer has a formal target.

A Look Inside the Fed’s Balance Sheet - Assets on the Fed’s balance sheet expanded to around $2.367 trillion in the latest week. But all the additions came from new Treasury purchases — some $18 billion just in the week ended Dec. 15. All other holdings were flat to lower. Since the QE announcement, the Fed has purchased nearly $130 billion in Treasurys, while its MBS portfolio has declined by $42 trillion. Though the overall size of the balance sheet is set to jump, the makeup is moving back toward the long-term trend. The MBS and agency debt holdings have steadily declined as loans are paid off or mature. The Fed still holds more assets in MBS — over $1 trillion — than any other portfolio, including Treasurys. Though at around $970 billion, Treasurys are catching up. Meanwhile, other assets were also declining. The Term Asset-Backed Securities Loan Facility, or TALF, ended in March, and is falling as the last loans made through the program mature. Liquidity swaps with foreign central banks have fallen back to the millions of dollars after jumping in the spring in response to European sovereign debt concerns. Direct-bank lending was essentially flat, remaining at precrisis levels. In an effort to track the Fed’s actions, Real Time Economics has created an interactive graphic that will mark the expansion of the central bank’s balance sheet. The chart will be updated as often as possible with the latest data released by the Fed.  See a full-size version. Click on chart in large version to sort by asset class.

US Fed Total Discount Window Borrowings Wed $45.75 Billion - The U.S. Federal Reserve's balance sheet kept growing in the latest week as the central bank continued with a controversial plan to buy billions of dollars worth of government debt. The Fed's asset holdings in the week ended Dec. 15 climbed to $2.389 trillion, from $2.385 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities rose to $967.55 billion on Wednesday from $949.61 billion a week earlier. Much of the increase stems from purchases of securities set to mature in five to 10 years. Meanwhile, Thursday's report showed total borrowing from the Fed's discount lending window slipped to $45.75 billion Wednesday from $45.94 billion a week earlier. Borrowing by commercial banks dipped to $21 million Wednesday from $25 million a week earlier. Thursday's report showed U.S. government securities held in custody on behalf of foreign official accounts rose to $3.340 trillion, from $3.339 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts grew to $2.612 trillion from $2.608 trillion in the previous week.

Fed Statement Following December Meeting - The following is the full Fed statement following the December meeting:

Redacted Version of the December 2010 FOMC Statement

Parsing the Fed: How the Statement Changed = The Fed’s statement following the December meeting was little changed from the previous month when the central bank announced a new round of bond buying. (Read the full December statement.)

FOMC Statement: No Change - From the Federal Reserve...

• The target range for the federal funds rate remains at 0 to 1/4 percent
• The policy of reinvestment of principal payments remains
• no change to the plan to purchase an additional $600 billion of longer-term Treasury securities by the end of June 2011.
• the key sentence "likely to warrant exceptionally low levels for the federal funds rate for an extended period" remains

The Fed Leaves the Target Rate and QEII Unchanged - The committee in charge of monetary policy, the FOMC, met today and decided to leave the target interest rate unchanged. The committee also decided to continue with its plans to implement QEII, a plan that attempts to stimulate the economy through the purchase of $75 billion in Treasury securities per month until a target level of $600 billion is attained. The continuation of present policy is not a surprise at all, committee members have been signaling in recent speeches that nothing would change, so the real question is when the Fed is likely to alter course. As the Fed notes, presently the recovery is too weak to bring down unemployment, long-term inflation expectations are stable, and actual inflation is trending downward (it’s presently below the Fed’s target). So long as those conditions persist — high unemployment, stable inflation expectations, and actual inflation below target — the Fed will not change its policy. How long will the conditions persist? Nothing will change until the Fed sees a couple of quarters of solid data showing that unemployment is falling and inflation is becoming a problem, so the policy is likely to stay in place for at least the next two Fed meetings.

The Fed’s Contrarian, With a Wary Eye on the Past - All year, Thomas M. Hoenig has been saying no.  As the lone dissenter on the Federal Reserve committee that sets interest rates, Mr. Hoenig, the president of the Federal Reserve Bank of Kansas City, has been a persistent skeptic of just about everything the Fed’s chairman, Ben S. Bernanke, has done to try to stimulate the flagging recovery.  Mr. Hoenig’s latest, loudest objections, aimed at the Fed’s risky $600 billion infusion into the markets to reinvigorate the economy, have made him a champion of the Fed’s critics in Congress, on Wall Street and among business leaders, who, like Mr. Hoenig, fear that the central bank is risking runaway inflation, asset bubbles and a weakened dollar.  At 64, Mr. Hoenig has witnessed jolts in the nation’s economic history that make him deeply skeptical of short-term fixes. He says he believes the Fed’s tools for fixing the economy in the short run are limited and the potential for things to go disastrously wrong is very high.

FOMC Statement, December 14, and the Recent Increases in Bond Yields - Since "proponents" argue that QE2 will work through reductions in long bond yields, clearly they would like to see those reductions in the data. But, as is evident to everyone, including the NYT, bond yields have gone up, not down. The top line in the chart (sorry for the crappy chart, by the way) is the nominal yield on 10-year Treasuries. Encouragingly for the Fed, this rate fell in the period when it was becoming clear that the Fed would embark on some kind of quantitative easing program, leading up to the November 3 QE2 announcement. Better still, the 10-year TIPS yield, the bottom line in the figure, fell during this period, and by more than the nominal yield. We can take the 10-year TIPS yield as a measure of the real rate of interest over a 10-year period, which is what the FOMC proponents of QE2 would think of as the real rate of interest relevant for influencing economic activity. Note as well that the break-even inflation rate (the inflation rate required to equate realized rates of return on nominal bonds and TIPS - the difference beween the nominal bond yield and the TIPS yield) rose over the period leading up to November 3. This is even better for the Fed, as it reflects an increase in inflationary expectations.

When Will The Fed Tighten? - Krugman - According to the Federal Reserve Bank of Atlanta (pdf), investors now expect the Fed to start raising rates next summer. But why? Yes, the latest news suggests improving growth prospects. But we are very deep in the hole, and it would take a lot of growth to get us to anything like full employment. Put it this way: suppose that you assume that the slump has raised the NAIRU to something like 6 percent (which I don’t believe); even so, it would take about five years of growth at 4 percent to get us down to that level. And if you apply any kind of simple Taylor rule to even the optimistic forecasts I’m seeing, it implies zero rates through to the end of 2012 and beyond.

More QE2 Details - The New York Fed released its plan for the second month of QE2 purchases, and this is available here. Essentially, this is identical to the first month, with a $75 billion net addition to the Fed's Treasury security holdings over the next month being the target, and an allowance of $30 billion in gross purchases for agency securities and mortgage-backed securities that are predicted to run off within the month. You can see some of the effect on the Fed balance sheet of QE2 operations up until now, in the first chart. In the reported numbers, there was an increase of about $54 billion in securities held outright (blue) by the Fed from the week of November 17 to the week of December 8, a $67 billion increase in reserves (red), and a $3 billion increase in currency in circulation (green). It will be useful to track some monetary quantities as QE2 progresses. With that in mind, the second chart shows the percentage change, year-over-year, in the currency component of M1 and in total M1 (at a weekly frequency). Note that currency is currently about 6% higher than a year ago, and M1 is about 9% higher. Percentage growth rates in both quantities have been increasing since late spring of 2010.

Evaluating QE2 - On November 3, the Federal Reserve announced some new monetary policy measures that have been popularly (if perhaps inaccurately) referred to as a second round of quantitative easing, or QE2. What effects, if any, does QE2 seem to have had so far? Measures like those announced by the Fed have the potential to lower long-term interest rates. What we've observed since the Fed's announcement has instead been an increase in the 10-year yield of about 60 basis points. In my view, the mechanism by which QE2 could potentially have an effect on interest rates is by changing the maturity composition of the outstanding supplies of Treasury securities held by the public. In my research we found evidence that changes in the maturity composition have historically been associated with changes in the slope of the yield curve, and that policies like QE2 had the potential to lower long-term rates even when the overnight rate was stuck near zero. QE2 as it's actually being implemented by the Fed turns out to be something a little different. The Fed is buying very little in the way of bonds of 10 years or longer maturity, and is concentrating its purchases instead on securities between 2-1/2 and 10 years

The Fed's Policy Is Working - The recent surge in long-term Treasury yields has led many to say that the Fed's second round of quantitative easing is a failure. The critics predict that QE2 may end up hurting rather than helping the economic recovery, as higher rates nip in the bud any rebound in the housing market and dampen capital spending. But the rise in long-term Treasury rates does not signal that the Fed's policy has backfired. It is a sign that the Fed's policy is succeeding.  Long-term Treasury rates are influenced positively by economic growth—which encourages consumers to borrow in anticipation of higher incomes and causes firms to seek funds to expand capacity—and by inflationary expectations. Long-term Treasury rates are affected negatively by risk aversion: Seeking a safe haven, investors pile into Treasury bonds, running up their prices and lowering their yields.  The Fed's QE2 program has raised expectations of growth and inflation, sending long-term Treasury rates up. It has also lowered risk aversion, which implies rising long-term rates.

The Dangers of Quantitative Easing - The Fed has described this new round of quantitative easing, this huge creation of new money, as QE2. Someone suggested it’d be better named the Titanic. I hope that quip does not turn out to be prophetic. But it is $600 billion in the creation of new money that they will use to buy Treasuries. It’s going to expand the monetary base dramatically. It will explicitly monetize something like three-quarters of all the new debt created by next year’s government deficit. And this is all in addition to something like $2 trillion of monetary easing that was done a couple of years ago. Now, let me state very clearly, I believe Chairman Bernanke is a very smart guy. But I think he feels compelled to do something that he shouldn’t feel compelled to do, and I want to discuss that in a moment. But first, let me run through a couple of the arguments that we sometimes hear in favor of this massive quantitative easing and tell you why I’m skeptical about these arguments.

Sense and nonsense in the quantitative easing debate - All that quantitative easing (QE) does is to restructure the maturity of US government debt in private hands. Now, of all the stories you’ve heard why unemployment is stubbornly high, how plausible is this: "The main problem is the maturity structure of debt. If only Treasury had issued $600 billion more bills and not all these 5 year notes, unemployment wouldn’t be so high. It’s a good thing the Fed can undo this mistake."  Of course that's preposterous. The banking system is awash in liquidity. Banks used to hold about $2 billion dollars of excess reserves. Now, they have about a trillion. If they didn’t lend out this first trillion of extra cash, why would they lend the next $600 billion?

 Andy Harless on monetary policy - I’ve been asked to comment on a recent Andy Harless post that denied the existence of monetary policy: So there you have it: there is no such thing as monetary policy. There is “central bank directed stabilization policy,” and, for convenience, you can refer to that as monetary policy if you want. If so, recognize that you are using the term loosely, and let’s not get into arguments about whether some particular Fed action is “really” monetary policy. None of it is really monetary policy. I agree that when one takes a close look at monetary policy, things are never quite what they seem.  And that it’s hard to draw a bright line that separates monetary policy from other policies.  But I still think one can identify two basic types of monetary policy:

  • 1.  Policies that affect the supply (or quantity) of the medium of account. 
  • 2.  Policies that affect the demand for the medium of account.

Tax Deal Could Be Fed’s Savior - It’s looking increasingly likely a new round of government stimulus spending will determine the future of the Federal Reserve’s controversial Treasury bond buying program. On Tuesday, the Fed left in place its agenda of 0% interest rates and again committed itself to buying $600 billion in longer-dated Treasurys as it tries to engineer a better level of growth that will bring inflation up and away from its current flirtation with deflation, while at the same time lowering the unemployment rate. Thus far, it is hard to say what effect the bond buying effort has had. While bond yields fell as the Fed moved toward announcing the program’s launch, they have risen since the early November Federal Open Market Committee meeting launching the effort. While it’s possible to have a positive read on that development, interpreting higher yields as a vote in favor of rising price pressures and better growth, it could also signal the Fed has chosen an ineffective path to providing fresh stimulus.

9 TRILLION Dollars Missing from Federal Reserve, Fed Inspector General Can't Explain – CSPAN - Rep. Alan Grayson asks the Federal Reserve Inspector General about the trillions of dollars lent or spent by the Federal Reserve and where it went, and the trillions of off balance sheet obligations. Inspector General Elizabeth Coleman responds that the IG does not know and is not tracking where this money is.

The Fed: Time For Transparency and Accountability - When the global financial crisis began in 2007, the Fed reacted by providing liquidity through its discount window and open market operations, later supplemented by a number of extraordinary facilities created to provide reserves as well as guarantees. Some estimates place the total amount of government loans, purchases, spending, and guarantees provided during the crisis at more than $20 trillion—much greater than the value of the total annual production of the nation. Only a very small portion of this was explicitly approved by Congress, and much of the detail surrounding commitments made—especially those made by the Fed—was clouded in secrecy. A few days ago the Fed finally released on its website some data on its behind-closed-doors deal-making. In coming weeks I will provide more comments on what has been revealed. In this column I will only raise questions concerning the appropriateness of secret bail-outs that were provided to financial institutions, nonfinancial firms, and even individuals. Fed critics from both the right and the left have been arguing it is time to reign-in the Fed and it is certain that the next Congress will return to this issue.

Q&A: Ron Paul on His New Perch to Fight the Fed - Next month, Rep. Ron Paul (R., Tex.) will strengthen his place as a thorn in the side of the Federal Reserve when he becomes chairman of a House subcommittee that oversees U.S. monetary policy. That will give the longtime critic of the central bank an opportunity to question the Fed more aggressively about its role in the U.S. and the global economy. In an interview, Paul said he plans to use the position to gain more support for his movement to audit the Fed’s monetary-policy operations. A version of his measure made it into the financial overhaul-legislation last year, leading to recent details about the Fed’s emergency lending programs (with more to come down the road about who borrows from the Fed). But Paul calls the audit provision and the Fed’s releases “incomplete.” We talked with the author of “End the Fed” about his new role. (Read a previous Q&A on Mr. Paul’s views) Here are excerpts:

Ron Paul Appears Poised to Irk the Fed Chief - A congressman from Texas, long a dissident critic of the Federal Reserve, is scheduled to become the chairman of a House panel with jurisdiction over the central bank. It promises to be a miserable time for the Fed chairman as he is peppered with hostile questions at oversight hearings and with legislation to force complete audits of Fed operations.  So it is now, with Representative Ron Paul about to take over as chairman of the Domestic Monetary Policy Subcommittee of the House Financial Services Committee. Mr. Paul campaigned against big banks, arguing that concentrated financial power goes hand in hand with concentrated political power.  If the Fed were abolished, he wrote last year, “the national wealth would no longer be hostage to the whims of a handful of appointed bureaucrats whose interests are equally divided between serving the banking cartel and serving the most powerful politicians in Washington.”

The GOP's anti-employment Fed agenda - Once upon a time, liberals savaged Federal Reserve Chairman Ben Bernanke for not doing enough to combat unemployment. The Fed operates under a "dual mandate" to seek maximum employment and price stability (i.e., low inflation). But progressives have generally been suspicious of Bernanke's commitment to spur job creation. How ancient those concerns seem now! Today, the primary assault aimed at the Fed is coming from Republicans, who believe that Bernanke is doing too much to combat unemployment. Some would like to simplify the Fed's responsibilities by putting an end to the dual mandate. Bloomberg: Republican lawmakers have proposed stripping the Fed of its mandate to achieve maximum employment, so it would focus only on inflation ... [Ron] Paul expressed concern last week that the central bank won't be able to avert an acceleration of inflation. He also said he plans to "push for debating" whether the Fed should focus solely on policies that promote price stability.

Fed independence is the worst solution except for all the others - THERE’S cause to question the Fed's policies lately. The so-called “Greenspan put” and loose monetary policy may have fueled the financial crisis. More recently, the second round of quantitative easing has divided economists. Some say it’s the only way to prevent harmful deflation. On the other hand, it may spark asset bubbles abroad and rampant inflation in America. It’s not surprising that the Fed's independence has become so unpopular. We may hear more Fed scepticism now that Ron Paul, not a Fed fan, is chairman of the subcommittee that oversees it. He favours more congressional oversight.  But subjecting monetary policy to the political process would be a mistake. An independent monetary authority makes fiscal policy possible because it gives the Treasury the ability to issue cheap debt.  It is too easy for politicians to use monetary policy to inflate away debt. Independent monetary policy provides credibility to the bond market that this will not happen, keeping rates low.

Money rules - To control inflation, the Fed should target nominal income. Monetary policy has always been the Achilles’ heel of conservative economics. We’ve repeatedly seen conservative policymakers work hard to create a successful free-market economy, only to have their efforts undone by a devastating period of deflation. In the 1920s, the U.S. economy did well with all levels of government spending only about 10 percent of GDP. All those efficiencies were lost in the subsequent decade. Nominal GDP fell by half between 1929 and 1933, opening the door to big-government statism. Similarly, the neoliberal reforms in Argentina during the 1990s were discredited by the deflation of 1999–2001. In each case, markets got blamed for what was actually the fault of a dysfunctional monetary regime. Unfortunately, many conservative economists are too dismissive of the costs of deflation. They claim that wages and prices can adjust to any increase in the value of money. But if this were so, there is no reason to believe that wages couldn’t adjust to any decrease as well — and high inflation would also be of no concern. In fact, deflation tends to be far more costly than the sorts of mild inflation that we tend to see in the U.S.

Scott Sumner plumps for Nominal GDP targeting - It is a very interesting article. The first half of it is the best conservative argument for nominal GDP targeting that I have ever seen. Then the going gets somewhat weird, for it is a somewhat strange form of nominal GDP targeting he ultimately calls for...The start of his essay: Money Rules: Once the devastating costs of deflation are acknowledged, one can no longer imagine an earlier age when the dollar was “as good as gold.” A gold standard stabilizes the price of one good, gold itself, at the cost of allowing instability in the overall price level.... Then, however, things in the essay do get somewhat weird, for it is a somewhat strange form of nominal GDP targeting he ultimately calls for.  It is not that the Federal Reserve buys and sells bonds (government and perhaps private) for cash in order to try to get the money stock and other variables to levels that lead its forecasters to predict that nominal GDP will grow at, say, 5% per year.  Instead, Scott writes that: [t]he Fed would simply define the dollar as a given fraction of 12- or 24-month forward nominal GDP, and make dollars convertible into futures contracts at the target price.... The public, not policymakers in Washington, would determine the level of the money supply and interest rates most consistent with a stable economy...

What Does Cutting-Edge Macroeconomics Tell Us About Economic Policy for the Recovery? -  You see, Say(1803) (lovely way to express this, by the way) was very nearly right. Suppose we start in equilibrium, then there's a sudden desire to stop buying newly-produced goods and buy land instead. Either the price of land rises to equilibrium or it doesn't. If the price of land rises to equilibrium, then people stop wanting to buy land and return to buying newly-produced goods. If the price of land stays fixed (it's sticky, or whatever) people cannot buy land because nobody is willing to sell. So they have to buy something else with their income instead, or else hoard money. Ultimately there are only two things an individual can do with his income, if everybody else is trying to do the same thing: buy newly-produced goods, where there are plenty of willing sellers in a general glut; or hoard money, by not buying things, which nobody else can stop you doing.

A Rant Against Monetarism - Think about the problem of the "double coincidence of wants." If the baker wants meat and the butcher wants bread, they can trade. But what if the baker wants candlesticks, the butcher wants bread, and the candlestick-maker wants meat? Only if they contrive a medium of exchange can they trade. Today, you have a former construction worker and a new college graduate who are both unemployed. In some sense, there are goods and services that they could be producing and trading, but in the context of a huge, complicated economy, they cannot figure out what to produce and trade. If you took money out of the picture, the construction worker and the college student would still be unable to solve their problem. When it comes to the failure of wants to coincide, the existence of money is part of the solution, not part of the problem.Which is not to say that printing more money is what solves the problem. What solves the problem is a series of entrepreneurial experiments, many of which fail, that ultimately create a roundabout pattern of production that enables the construction worker to produce something that is indirectly of value for the college grad, and vice-versa.

Money, Barter, and Recalculation. A response to Arnold Kling. - Nick Rowe - Arnold Kling has a good "rant against monetarism", triggered by my saying "My position is that a general glut can *only* be caused by an excess demand for the medium of exchange." Arnold's response: "Most economists believe this, or something like it. I used to believe it, or something like it. I think that it is a horrible, horrible, confusion." (I only wish he were right about the first bit, because I can find very few economists who believe it, and I've been trying hard to get them to believe it.) Let's start with where I agree with Arnold. "If you took money out of the picture, the construction worker and the college student would still be unable to solve their problem. When it comes to the failure of wants to coincide, the existence of money is part of the solution, not part of the problem." Bingo! Yes, absolutely.

If cows were money (a response to Brad DeLong) If cows were money, an increased demand for milk would cause a recession. People would stop spending their cows to buy goods and services, because if you spend your cows you don't have as much milk. Was the recession caused by an excess demand for milk, or an excess demand for money? If gold bars were money, an increased demand for bling would cause a recession. People would stop spending their gold bars to buy goods and services, because if you spend your gold bars you don't have as much bling. Was the recession caused by an excess demand for bling, or an excess demand for money? If dollars were money, an increased demand for savings would cause a recession. People would stop spending their dollars to buy goods and services, because if you spend your dollars you don't have as much savings. Was the recession caused by an excess demand for savings, or an excess demand for money?

What Is Money? -Krugman - There’s a lot to be said about the right-wing attack on the Fed, none of it good. But I’d like to highlight one aspect of this discussion that has been striking me: the conservative focus on the evils of increasing the money supply. You hear it all the time: the Fed is printing money! Danger, Will Robinson! In some comments on this blog I see assertions that the true measure of inflation isn’t prices, it’s what happens to the quantity of money. But here’s an even more basic question: what is money, anyway? It’s not a new question, but I think it has become even more pressing in recent years.  The truth is that these days — with credit cards, electronic money, repo, and more all serving the purpose of medium of exchange — it’s not clear that any single number deserves to be called “the” money supply. Intellectually, this isn’t a problem; nor is there necessarily a problem maintaining monetary policy even if there isn’t any single thing you’re willing to call money. Mike Woodford has been writing about this stuff for years.

Fed - Inflation, Inflation, Inflation - In August, Federal Reserve (Fed) Chairman Bernanke stated inflation was too low; in October, the Fed's Minutes lamented that the market appeared not to take Bernanke's August statements seriously enough. In our assessment, today's Fed statement of the Fed's Open Market Committee (FOMC), with an almost verbatim repetition of the previous FOMC statement, screams: "markets: trust us, we mean what we say." When former Fed Chairman Volcker raised rates in the 80's to root out inflation, initially, the markets didn't take him seriously. But persistence eventually made the market price in lower inflation expectations. Similarly, as the markets appear slow to embrace the Fed's at higher inflation target. We have little doubt, however, that the Fed will succeed in raising inflation expectations. The risk, in our view is, that the Fed will get more than it is bargaining for. Having said that, it's a problem for tomorrow and the Fed has rarely been accused of being too far-sighted.Consumer Price Index increased 0.1 percent in November - The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1 percent in November on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.1 percent before seasonal adjustment. The index for all items less food and energy rose 0.1 percent in November [Core CPI], its first increase since July. The index for shelter rose 0.1 percent in November, the same increase as the previous month. The rent index rose 0.2 percent, its largest increase since March

Inflation: Core CPI, Median CPI, 16% trimmed-mean CPI remain below 1% YoY - In addition to the CPI release this morning from the BLS, the Cleveland Fed released the median CPI and the trimmed-mean CPI:  According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.1% (1.0% annualized rate) in November. The 16% trimmed-mean Consumer Price Index increased 0.1% (1.1% annualized rate) during the month. ... Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers rose 0.1% (1.5% annualized rate) in November. The CPI less food and energy increased 0.1% (1.2% annualized rate) on a seasonally adjusted basis. Over the last 12 months, the median CPI rose 0.5%, the trimmed-mean CPI rose 0.8%, the CPI rose 1.1%, and the CPI less food and energy rose 0.8% So these three measures: core CPI, median CPI and trimmed-mean CPI, all increased less than 1% over the last 12 months. This graph shows these three measure of inflation on a year-over-year basis. They all show that inflation has been falling, and that measured inflation is up less than 1% year-over-year.

(Lack of) inflation watch - The latest estimte of the CPI was released today. Via the Atlanta Fed's Inflation Project: Though most CPI indexes rose slightly in November, core measure remains near historical low, Atlanta Fed: The Bureau of Labor Statistics reported that the all-items consumer price index (CPI) rose an annualized 1.5 percent in November. The indexes for energy, food, and core prices all increased slightly. The core CPI edged up 0.1 percent in November after no change in the past several months. In fact, the core CPI is up only 0.7 percent from a year earlier, nearly its slowest year-to-year advance in more than 50 years. And, from the Cleveland Fed: Cleveland Fed Estimates of Inflation Expectations: The Federal Reserve Bank of Cleveland reports that its latest estimate of 10-year expected inflation is 1.64 percent. In other words, the public currently expects the inflation rate to be less than 2 percent on average over the next decade. ... Estimates are updated once a month, on the release date of the CPI.

Williams Calls for "Great Hyperinflationary Great Depression"; A Very Easy Rebuttal - As inflation and its costs could become more important to us soon, I thought it would be useful to consolidate some key ideas. As well, this is much more interesting to me than whether people in Congress want to, or do not want to, tax rich people. Since the Volcker disinflation, inflation in the United States has been low-profile in the minds of most people, outside of policymakers in the the Federal Reserve System and some groups of monetary economists. However, given our recent central banking experiments, which have greatly expanded the Fed's balance sheet, and increased the probability of higher inflation, everyone should have inflation on their minds.

Economists Disagree on Future Path of Inflation - Some economists see in the November consumer price data the makings of higher underlying inflation, while others expect a disinflationary trend to continue. On Wednesday, the government reported that as part of its consumer price index for last month, core prices, which are stripped of food and energy factors, rose by 0.1%, matching the gain seen in the overall index. Central bankers watch core price measures most closely because they believe they mirror true inflation patterns best. The core CPI increase was the first in three months. For some economists, the change in the direction might be the start of something. If they’re right, the Fed may be able to breathe easier, as much of its current, controversial policy of bond buying is aimed at preventing very low inflation levels from tipping over into outright deflation.

The Risk Tsunami - It is time for the G-20 to take seriously its mandate to agree on steps to stabilize the global economy and launch it on a more sustainable pattern of growth. Instead, the G-20 is behaving like a debating society, Meanwhile, capital is flooding into the higher-interest-rate emerging markets, causing inflationary pressures, driving up asset prices, and subjecting currencies to competitiveness-threatening appreciation – in short, distortions and policy headaches that require unconventional, defensive responses.Worryingly, QE2 appears to be viewed in the US as a growth strategy, which it isn’t, unless one believes that low interest rates will reverse the private-sector deleveraging process, raise consumption, and lower savings – neither a likely nor a desirable scenario. It also assumes that addressing structural constraints on competitiveness can be deferred – perhaps permanently. The view from outside the US is that QE2 is either a mistake with negative external effects, or a policy with the clear but unannounced intention of devaluing the dollar – a move whose main negative competitive and growth effects would most likely be felt in Europe, not in China, India, and Brazil. Unilateral action in this and other dimensions has undercut the G-20’s mission of identifying and implementing mutually beneficial policies in a coordinated way.

The Climax is Coming - So if everything goes as Bernanke expects (or hopes), inflation, i.e. the general price level, will rise a bit, to around two percent. The banks will remain solvent in spite of the fact that they are still carrying billions of bad loans and that real estate will continue to fall in value. Freddie and Fannie will survive. The unemployed will begin to find jobs. U.S. Bonds will continue to sell at low interest rates and the Treasury will be able to finance the biggest budget in history. The U.S. dollar will retain its reserve status because the Chinese and other U.S. financiers will continue to play the game, in spite of the fact that the dollar will continue to lose purchasing power relative to other store-of-value items (e.g., gold and perhaps other currencies). . On the other hand, if things don't go as he expects, commodities will blow off the charts. Retailers will find themselves forced to pass along costs, and general prices will start to rise even though real estate will continue to tank. U.S. bonds will take a big hit and reveal themselves to have been in bubble territory up until two months ago. Banks will find themselves in the interest-rate squeeze. Foreign trading partners will continue the currency race to the bottom and impose more restrictions. The American workforce will profit from the additional year of benefits the government might hand out, and the unemployment figures will not budge or may get worse. General unrest will rise in parts of the world that depend upon commodity prices remaining stable.

"Before You Uncork The Champagne": David Rosenberg's 10 Themes For 2011### - David Rosenberg has some bearish words in his latest investment letter. "Before you uncork the champagne," he writes, take a look at how few holiday shoppers are spending with credit cards. And before you get excited about consumer confidence, note that we're down several points from June and still miles away from the 90's era consumer confidence. His outlook for 2011 has big reservations too. Click here to see Rosenberg's 10 themes >

What Lies Ahead in 2011?, by Joseph E. Stiglitz - Given the high levels of excess capacity and unemployment in Europe and America, quantitative easing is unlikely to trigger a bout of inflation. It could, however, increase anxieties about future inflation, leading to higher long-term interest rates – precisely the opposite of the Fed’s goal. The gravest threat comes from the wave of austerity sweeping the world, as governments, particularly in Europe, confront the large deficits brought on by the Great Recession, and as anxieties about some countries’ ability to meet their debt payments contributes to financial-market instability. The outcome of premature fiscal consolidation is all but foretold: growth will slow, tax revenues will diminish, and the reduction in deficits will be disappointing. And, in our globally integrated world, the slowdown in Europe will exacerbate the slowdown in the US, and vice versa. With the US able to borrow at record-low interest rates, and with the promise of high returns on public investments after a decade of neglect, it is clear what it should do. A large-scale public-investment program would stimulate employment in the short term, and growth in the long term, leading in the end to a lower national debt. But financial markets demonstrated their shortsightedness in the years preceding the crisis, and are doing so once again, by applying pressure for spending cuts, even if that implies reducing badly needed public investments.

Three Good Economic Reports - Americans were greeted today by three good economic reports:

  • Retail sales rose for the fifth consecutive month in November, and the October and September figures were revised up sharply.
  • The National Federal of Independent Business’s small business optimism index also rose for the fourth consecutive month, giving hope that the nation’s small companies may start hiring again.
  • The producer price index also increased more than expected, dampening concerns about deflation.

Another report, on business inventories, came in somewhat below expectations but is unlikely to have much effect on overall gross domestic product. In fact, in light of recent upward revisions to inventories and retail spending, the output outlook is looking somewhat better:

    Upbeat data, downbeat Fed - THEY say a central banker is someone who lies awake worrying that someone, somewhere, might be happy. That seems to be what the Federal Reserve is trying to prove by raining on a parade of upbeat economic and market developments with a morose economic assessment. “The economic recovery is continuing”, it allowed, a mite more upbeat than last month’s description of the recovery as “slow”. That’s it for the good news. The rest of the statement repeats last month’s litany of negatives: household spending is constrained by powerful headwinds, employers are reluctant to hire, and expected inflation is edging lower. The statement seems a little out of place amidst the accumulation of upbeat economic news, and the tax deal announced last week which eliminates the single greatest risk to the outlook, namely, an inadvertent tightening of fiscal policy. Just today a report of strong retail sales led to a round of forecast upgrades. Morgan Stanley sees consumption rising 3.5% annualised in the current quarter, and overall GDP up 4.4%. JPMorgan raised its fourth quarter number to 3.5% from 2.5%, and Macroeconomic Advisers, with one of the lowest estimates on the street, raised its projection to 3.1% from 2.7%. Even before the additional stimulus in the tax deal is felt, this tells us that the economy had more underlying momentum than we realised. This has the bond market running scared: the 10-year yield is up 11 basis points today to 3.38%.

    Fed Watch: Turning Tide - For the past three years, it has paid to bet on the pessimistic side of the outlook. For the past few months, I have privately fretted that this bet would soon wear thin. And it sure looks like it has. The flow of data in recent weeks has been, on net, very positive, offering a vision of a sustainable recovery. The Fed, however, has not yet gotten that memo. From today's FOMC statement: Information received since the Federal Open Market Committee met in November confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment. Household spending is increasing at a moderate pace, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. The housing sector continues to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have continued to trend downward.The Fed remains locked into a forecast that anticipates output growth hovering near potential. Contrast this with rising expectations for, at a minimum, solid near term growth:

    Finally, everything is good again - THE news out of the American economy keeps getting better and better. The country's trade deficit has fallen thanks to improved exports. Retail sales are beating expectations. Industrial production has been growing steadily, and service sector activity is growing at an increasing rate. Consumer confidence is up. And the Dow Jones Industrial Index has finally regained all the ground lost after August of 2008. The deal on extension of the Bush tax cuts led some major macroeconomic forecasters to revise 2011 growth expectations up to around 4%. The retail sales surprise this week led to similar upward revisions for fourth quarter output. It seems, at last, that good times are here again. Except. Unemployment is at 9.8%. Over 6m Americans have been out of work for more than 6 months. Some 2m jobless workers will exhaust unemployment benefits by the end of 2010. Housing prices, nationally, are falling once again. Nearly 11m households have mortgages larger than the value of their homes. Consumers are still heavily indebted, which will constrain further growth in spending. So, should we be optimistic about the American economy or pessimistic?

    Keeping the Good News in Perspective - The most recent batch of economic data has been quite positive. On Thursday alone, three different reports showed that initial jobless claims had fallen, housing starts and the issuance of building permits had both risen and a Federal Reserve index of manufacturing activity rose too. But before getting too excited about these trends, let’s think back to the early part of this year. Back then, initial jobless claims were falling. Housing starts and the issuance of building permits were rising. A Federal Reserve index of manufacturing activity was rising too. And then what happened? The recovery stopped. Some people blame the debt crisis in Europe (which, of course, has not ended). Others think we’ll never know exactly what stopped the recovery, because the aftermath of a financial crisis tends to be difficult. That last point is important. The notion that a couple of weeks of decent news should cause the Fed to proclaim victory and halt its campaign to lift growth — a notion you’re starting to hear — seems misplaced.

    Economy Still Fragile, Dallas Fed, National Economic Update: Economic indicators released early in November suggested that the U.S. economic outlook was brightening. Since then, releases have been mixed. Real activity appears to be gaining momentum, yet not rapidly enough to provide consistently strong job gains. Growth of real gross domestic product (GDP) was revised up to 2.5 from 2.0 percent annualized in third quarter 2010. Contributions from consumption, net exports and government were larger than initially reported, while inventory investment was revised downward, increasing final demand growth to 1.2 percent annualized from the original 0.6. This is encouraging because the possibility of slow growth after the temporary impetus from the inventory cycle fades remains a predominant concern for the recovery.

    Waltzing towards the next, inevitable implosion - Much head scratching in the latest note from Albert Edwards. The SocGen perma bear says he hasn’t got a clue what is going in financial markets at the moment or why investors believe the economic recovery is sustainable. I’ve been doing this job long enough to recognise when the markets are entering a new phase of madness that leaves me scratching my head with bemusement. The notion that we are in a sustainable economic recovery is as ludicrous as it was in 2005-2007. But investors are back on the dance floor, waltzing their way towards the next, inevitable implosion – yet another they will no doubt claim in retrospect was totally unpredictable! Unlike Ben Bernake, I like to retain some sense of humility. And it’s at times like these that I really start to think I haven;t got a clue what is going on anymore. It really is a mad, mad, mad world. However, Edwards clear on one thing – the bull market in bonds is not over – it’s just pausing for breath.

    Canadian Central Banker Warns of ‘Death Grip’ on U.S. Dollar - Canada’s central bank governor, Mark Carney, warned that the “death grip” on the U.S. dollar is “reducing the prospects for rebalancing global demand.”In the text of a speech Monday to the Economic Club of Canada in Toronto, Carney said the international monetary system is “sliding towards a massive dollar block.” He noted that over a dozen countries are accumulating reserves at double-digit annual rates, and countries representing more than 40% of the U.S. dollar trade weight are now managing their currencies. But, he said, excessive reserve accumulation will prove futile. He said structural changes in the global economy will “yield important adjustments in real exchange rates.” Carney said many emerging economies are approaching limits to non-inflationary growth and the challenges of shadowing U.S. policy are increasing. Without changes in nominal exchange rates, he said the adjustment will come through inflation in emerging economies and disinflation in major economies.

    France to revise current global monetary system - While serving as the chairman country of the G20, France wants to revise the current global monetary system and encourage countries to diversify the portfolio of reserve currencies, said Christine Lagarde, Minister of Economic Affairs, Finances and Industry of France. The control over financial flows in the process of diversification should be granted to the International Monetary Fund. According to Reuters, Lagarde believes that the world powers should abandon the outdated ideas of forty years ago and stop treating the dollar as the major reserve currency. A balanced portfolio of reserve currencies, by contrast, would reduce the imbalance and help restore the countries' economy, said Lagarde. According to Lagarde the IMF should control financial flows because, in her words, unilateral actions are fraught with risks. However, so far countries are doing it on their own. In particular, the Ukrainian government has recently announced its intention to expand the country's foreign exchange reserves adding the Russian ruble. The Russian ruble is a part of the currency reserves of Belarus which is Russia's active trade partner. At the same time, Russia's currency basket consists only of the euro and the dollar.

    France's Sarkozy says time to consider SDR role - (Reuters) - French President Nicolas Sarkozy said on Monday that his G20 agenda to reform the international monetary system would look at widening the role of the IMF's Special Drawing Rights and tackling international capital flows. France, which took over the presidency of the G20 group of industrial and developing nations last month, is sounding out governments on ways to reform a monetary system dominated for decades by the U.S. dollar with the aim of creating greater global stability. "We need to start thinking about the relevance of a system based on accumulation of dollar reserves," Sarkozy said, adding that France would float proposals during the next year. "Does not this system make part of the world dependent on American monetary policy? Should we not reflect on the role of the SDR (Special Drawing Rights) and on the internationalisation of other currencies?" asked Sarkozy, in a speech to mark the 50th anniversary of the Organisation for Economic Co-operation and Development (OECD). French officials have said they hope to encourage greater use of the Chinese yuan as a reserve currency during their G20 presidency, including talks on a possible timetable for its inclusion in the basket of currencies which underpin the International Monetary Fund's Special Drawing Rights.

    Straight Talk with Tyler Durden: The U.S. Is Free-Falling Into Bankruptcy - This week's Straight Talk contributor is Tyler Durden, founder and chief demagogue of the popular econoblog Zero Hedge. Zero Hedge's mission is to bring back a more critical, rigorous, and informed style of commentary and synthesis for the professional investing public. The blog has experienced explosive growth in it's two-year existence, due in part to its prolific coverage of financial events as well as its unapologetic (some say controversial) editorial approach, which is often highly critical of today's economic and political leaders.

    John Williams Discusses The Reasons For The Upcoming Dollar Dump - Lately, anywhere we look, there seems to be a pattern emerging: those economic thinkers who actually construct and run their own macro models (not the glorified powerpoint presenter variety) and actually do independent analysis and tracing of the money flow, instead of relying on Wall Street forecasts that have as much credibility as a Moody's home price hockey stick from 2006, almost inevitably end up having a very dire outlook on the economy. One such person is and has pretty much always been Shadowstats' John Williams, whose "shadow" economic recreation puts the BLS data fudging dilettantes to shame. That said any reader of Zero Hedge who has been with us for more than a few weeks, knows all too well our eagerness to ridicule the increasingly more incoherent lies coming out of the US department of truth, so no surprise there. Yet another aspect over which there is much agreement is that no matter how one slices the data, the outcome for the US currency is a very grim one.

    Dollar: National Currency With State Implications - The Obama administration hopes to double exports within five years, and a weaker U.S. dollar would help lift foreign demand. But the dollar’s impact will not be equal on each state or region. That’s because, for instance, Texas ships more exports to Mexico while New York sends more exports to Canada. Understandably, then, the health of Texan exporters depends more on changes in the dollar-peso rate while New York exporters care more about the U.S.-Canadian exchange. To gauge the regional impact of exchange rates, the Federal Reserve Bank of Dallas has developed a real trade-weighted value of the dollar index for each state. Foreign-exchange markets tend to focus on the dollar’s value versus the euro or yen. But for state exporters, the exchange rates in emerging nations and our NAFTA partners Canada and Mexico are probably more important.

    Visualizing the U.S. National Debt: 1791-2010 - It's time to update our U.S. national debt history visualization project, bringing it fully up to date through Fiscal Year 2010. First up, the exponential view of both annual GDP and the national debt:  And now, the same data, but shown on a log-lin chart:  Here is another log-lin chart, but this time, showing GDP and the national debt per capita:   Finally, let's conclude with the U.S. national debt burden, or rather, the debt-to-income ratio for the nation

    Federal Debt and Interest Costs - CBO Director's Blog - Recently, the federal government has been recording the largest budget deficits, as a share of gross domestic product (GDP), since the end of World War II. As a result of those deficits, the amount of federal debt held by the public has soared—surpassing $9.0 trillion at the end of fiscal year 2010 and equal to 62 percent of GDP. The interest the government pays on that debt is currently low by historical standards as a percentage of GDP but is expected to grow rapidly over the next several years as interest rates rise. In response to a request from the Senate Budget Committee, CBO prepared a study providing background material on federal debt and interest costs.

    QE2 Pushing Interest Rates Up and Not Down - US mortgage rates have risen by 0.85 per cent since the Federal Reserve first signaled its intension to go for a second round of quantitative easing three months ago. And this week the yield on 10-year US treasuries is up 0.35 per cent to 3.3 per cent in a widespread global sell-off of T-bonds.This is not supposed to be how QE2 works. The whole point of this $600 billion exercise is to squeeze interest rates down, and keep them down to give the US economy breathing space to recover. The tax deal this week added $1 trillion of stimulus over two years, reckon BNP Paribas.  Analysts said America’s budget deficit will now stay around 10 per cent for the next two years. Public debt of 110 per cent is close to debt spiral levels – when a country’s debt starts to expand because the interest is not being fully paid.  The US can only hope to get away with this because the dollar is the reserve currency of the world. But the Fed now has to raise around $100 billion in treasury bond sales a month to keep this show on the road.

    Unintended Consequences - Correct me if I'm wrong, but I seem to remember that one of the reasons for QE2 was to lower rates on the longer end of the US yield curve. Clearly, that has not happened? Today we look at come of the unintended consequences of monetary policy, turn our eyes briefly to consumer debt, and wonder about deflating incomes.Look at the chart below. The yield on ten-year US bonds has been rising since the beginning of QE2. But it is not just US bonds; European and UK bonds are moving up as well. This has also meant that mortgage rates in the US are up almost a half percent in the last few months. That certainly has not helped housing prices or sales, as it makes housing less affordable. But it is not just the US and UK. Look at what is happening to German bonds, supposedly the safest in Europe. They are up about as much as their counterparts. And then we look at Japan and we see the same phenomenon. Japanese real rates going up? Really? What is up with that?

    ‘Avalanche’ of Sales Drives Rates to 16-Month High - Yields on top-rated tax-exempt securities due in 30 years climbed twice as fast as those on U.S. Treasuries, reaching the highest level in almost 16 months. The prospect that tax-free municipal issuance will surge if the Build America Bonds program isn’t renewed after Dec. 31 drove 30-year tax-exempt rates up 20 basis points, or 0.2 percentage point, to 4.84 percent, the highest since Aug. 17, 2009, according to a Bloomberg Valuation index. Bondholders sought buyers for $1.4 billion in debt yesterday, the most since June 15, 2006, according to a Bloomberg bids-wanted index. “Nobody’s bidding,” There’s “an avalanche of bid-wanteds, and there is just not enough liquidity to accommodate this much sell-side pressure.” Amid the rising yields, New York City cut today’s tax- exempt offering by two-thirds to $100 million citing “volatile market conditions,” the Office of Management and Budget said in a press release yesterday.

    Economics by Invitation: Why are government bond yields rising? - The Economist - This week, government bond yields have risen around the world, on the debt of troubled European countries but also for relative safe havens like Germany and the US. Why have yields risen? Are different factors at work in different countries? Will there be additional sovereign debt crises in 2011? And will an American crisis be among them?  Guest contributions: 5

    Junk Spreads Tumble to Lowest Since '07 as Fed Prints Cash - Relative yields on junk bonds narrowed to a three-year low as investors gained confidence in Federal Reserve Chairman Ben S. Bernanke’s efforts to stimulate the economy.  The extra yield investors demand to own high-risk debt rather than government bonds has dropped 82 basis points this month to 540 basis points, or 5.4 percentage points, the lowest since Nov. 16, 2007, according to Bank of America Merrill Lynch’s U.S. High-Yield Master II index.  Goldman Sachs Group Inc. and JPMorgan Chase & Co. are advising clients to buy speculative-grade debt in 2011, even after gains of 14 percent this year and a record 57.5 percent in 2009. Economists are boosting growth forecasts after President Barack Obama agreed to extend tax cuts enacted by his predecessor and as Bernanke seeks to reduce unemployment and avert deflation by buying Treasuries.

    Global Demand for U.S. Financial Assets Slowed in October, Treasury Says - Global demand for U.S. stocks, bonds and other financial assets slowed in October from a month earlier, the Treasury Department reported, as the pace of economic recovery weighed on demand.  Net buying of long-term equities, notes and bonds totaled $27.6 billion during the month compared with net buying of $77.2 billion in September, according to statistics issued today in Washington. Including short-term securities such as stock swaps, foreigners purchased a net $7.5 billion compared with net buying of $80.1 billion the previous month.  The U.S. economic recovery from the deepest recession since the 1930s has lagged behind growth in emerging markets, weighed down by an unemployment rate close to 10 percent and record home foreclosures.

    Net foreign buys of U.S. assets $27.6 bln in Oct. -- Foreign investors bought a net $27.6 billion of long-term U.S. assets in October down from $77.2 billion in September, the Treasury Department said Wednesday. International demand for Treasurys decelerated to an increase of $23.5 billion in October from a gain of $78.9 billion in September. Official purchases from foreign central banks declined $1 billion in October after a $39.5 billion gain in the previous month. Including short-term securities and bank lending data, foreigners purchased a net $7.5 billion of U.S. assets compared with net purchases of $80.1 billion a month earlier.

    Alarm over rise in US bond yields - The UK’s largest investment manager has warned of a potentially “catastrophic” rise in US Treasury yields in the wake of the “extremely irresponsible” fiscal policy being adopted by Washington.  Barack Obama and congressional Republicans last week agreed a fresh economic stimulus package, involving the extension of Bush-era tax cuts and unemployment benefits, a payroll tax holiday and tax breaks for investment that, if passed, are forecast to maintain the bloated federal deficit at 9-10 per cent of gross domestic product. The package, significantly larger than expected, fuelled a surge in 10-year Treasury yields to 3.28 per cent on Friday, from 2.51 per cent at the start of week, with most commentators attributing the jump to expectations of faster economic growth in the US in 2011 thanks to the stimulus. However, Legal & General Investment Management, which manages £342bn ($541bn) of assets, warned the jump in bond yields could be the start of a bear market in US debt. “They are running an extremely irresponsible fiscal policy, completely abusing their reserve currency status. No other country would be able to run such a deficit without a long-term plan to bring it under control,” “There seems to be absolutely no political will, judging by the events of the past few days, to tackle this deficit. At some point the US bond market is going to wake up and realise that US fiscal policy is on completely the wrong path. Even if US growth is strong, it still leaves them with a horrendous long-term fiscal outlook.”

    Pimco Total Return Among Biggest Losers as Bond Rally Fizzles - Bill Gross’s Pimco Total Return Fund, the world’s largest mutual fund, was the second-biggest decliner among the largest U.S. bond managers in the past month as clients pulled money for the first time in two years amid a selloff in Treasuries.  The $250 billion Pimco Total Return fell 3 percent in the 30 days through Dec. 8, trailing all but one of the 10 largest bond mutual funds, which lost an average of 2 percent, according to data compiled by Bloomberg. Only the $33 billion Vanguard Inflation-Protected Securities Fund declined more, falling 3.9 percent in the period. Benchmark 10-year Treasuries had their biggest two-day slump since September 2008 this week after tax cuts, signs of an economic recovery and asset purchases by the Federal Reserve fueled expectations inflation will accelerate. The losses may surprise investors who poured $267 billion into fixed income funds this year through October, ignoring warnings by Gross that the 30-year bond rally may have run its course.

    What's behind the recent rise in Treasury yields? -  Atlanta Fed's macroblog - David Beckworth, who blogs at Macro and Other Market Musings, posted a comment regarding macroblog's post "What might monetary policy success look like?" from December 2. Beckworth's comment specifically mentioned this chart…(enlarge) … as part of this question: "How did you create the latter figure [shown above]? Using the Fed's own constant maturities series (for both the nominal and real yield), the figure I come up with is less impressive. It shows a turnaround in inflation expectations about the time QE2 is promoted by Fed officials, but then inflation expectations stall and remain far from the 'mandate-consistent inflation rate.' "Here is a post where I placed one such graph." And here's the graph of expected inflation from Beckworth's post:(enlarge) The chart Beckworth shows in his referenced blog post is the five-year Treasury Inflation-Protected Securities (TIPS) spread (the difference in nominal and real Treasury yields at five-year maturities). And so when he states, "This figure shows average annual expected inflation over the next five years has been flatlining around 1.55% over most of November" it means just that: it's examining the next five-year period (2010–15). I've reposted below an updated version of this chart, along with the 10-year TIPS spread.

    Rising Interest Rates Really a Bullish Sign of Recovery - There has been much hand-wringing in the business press lately about the recent rise in interest rates. The fear is often expressed that this will choke off the economic recovery and decimate further the still-weak housing industry. But in fact, rising interest rates are an extremely bullish sign; tangible evidence that the economy may have finally turned the corner and is poised for a sharp rise in growth. The rise in rates has been greatest in the middle of the maturity schedule. Over the last month, for example, the yield on the Treasury’s five-year note has doubled from 1.04 percent to 2.08 percent. A month ago one could get a 30-year fixed rate mortgage at a rate of 4.17 percent; now it’s up to 4.83 percent. Short rates, however remain flat; the 3-month Treasury bill rate has been stuck at about 15 basis points (0.15 percent) since earlier this year. To understand why this is good news, one needs to know something about the fundamental nature of interest rates. The most important thing is that economists talk primarily about the “real” interest rate.

    Moody's may shift U.S. rating outlook on tax package -  (Reuters) - Moody's warned on Monday that it could move a step closer to cutting the U.S. Aaa rating if President Barack Obama's tax and unemployment benefit package becomes law.The plan agreed to by President Barack Obama and Republican leaders last week could push up debt levels, increasing the likelihood of a negative outlook on the United States rating in the coming two years, the ratings agency said. A negative outlook, if adopted, would make a rating cut more likely over the following 12-to-18 months. For the United States, a loss of the top Aaa rating, reduce the appeal of U.S. Treasuries, which currently rank as among the world's safest investments. "From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth," Moody's analyst Steven Hess said in a report sent late on Sunday. After Obama announced his plan, Treasury prices fell sharply in volatile trade last week and yields have hit a six-month high, in part due to concerns over the effect the package will have on government debt levels.

    Moody's Warns Tax Deal Could Harm U.S's Triple-A Rating - Is the U.S. about to get a case of the Moody’s Blues? Reuters reported today that the credit rating agency is unsettled by the deficit-increasing tax deal struck by President Obama and Congressional Republicans. Should the deal pass, it will "adversely affect the federal government budget deficit and debt level," Moody's said. That means it might be more likely to downgrade Uncle Sam’s credit rating in the future. What gives? After all, in the past years, as the Federal Reserve more than doubled its balance sheet, and as the government reported consecutive trillion-dollar-plus deficits, the ratings agencies and bond vigilantes saw, heard, and spoke no evil.  It’s possible that the bond market vigilantes and Moody’s are more troubled by a failure to tax than a failure to cut spending. But it’s also quite possible that analysts and investors have lost faith in the ability of our political system, as currently constructed, to deal with the mismatch between the amount of government we want and the amount of money we’re willing to pay for it.

    With Friends Like Moody’s… - Good to see Moody’s rebuilding its franchise. Their aura of mystery is still reassuringly intact, two years after the subprime CDO ratings fiasco, as a bemused Firedoglake notes, in connection with two diametrically opposed, and politically charged, opinions about the tax cuts and their projected effect on the US credit rating: Can someone tell me why the same guy, at the same ratings agency, does a 180 in less than one week, when the deal hasn’t changed an iota? A cynic might think that the Dec 7th report was Moody’s putting all its credibility behind the deal to extend the tax cuts, while the Dec 12th report was Moody’s putting all its credibility behind a move to ensure Obama got no political credit for it, once the deal, that they had implicitly supported a week earlier, was looking much more certain. That type of maneuver will have a familiar feel to the bedraggled Obama, one suspects. Anyhow, if you are shocked, shocked at the idea of credit rating agencies working a political angle, you can comfort yourself with the thought that no stratagem underpinned by all Moody’s credibility is going to be very threatening.

    Must Watch: Stockman Explains To Ratigan How In Thirty Years America Spent Enough Debt To LBO Itself, And Ended Up Bankrupt - After recently debunking the economic "recovery's" flagrantly misrepresented employment data, the OMB's David Stockman makes a third appearance in as many months (previously here and here), this time on Dylan Ratigan. And as always, it is a must see: key soundbite: "We have had a Fed engineered serial bubble, that has created the appearance of wealth, that has caused people to consume beyond their means through borrowing, and that has flushed the income and wealth of our society up to the top, as a result of the Fed turning the financial markets into a casino. These are pure casinos, they are not capital markets, they are not adding to the productive capacity of our economy, they simply are a bunch of robots trading with each other by the millisecond as a result of the Fed giving them zero cost overnight money, and giving them all kinds of hand signals on what to front-run." It is almost as if Stockman reads Zero Hedge... And he continues: "The Fed is destroying prosperity by funding demand that we can't support with earnings and productions, causing massive current accounts deficits and the flow of funds overseas and the build up in China, OPEC and Korea of massive dollar reserves which is a totally unsustainable, unsupportable system, and we are coming near the edge of where that can continue to remain stable." Ironically, Stockman is spot one when he notes that America incurred enough debt to have effectively LBOed itself. The net result, as every PE principal knows all too well, is a husk of an entity, whose most valuable assets have been bled dry. At this point, the last straw for America will be the inevitable rise in interest rates (at some point over the next five years, the Fed and Treasury will have to sell a combined $5 trillion in debt - that alone will destroy the supply/demand equilibrium and send rates surging) which will result in either debt repudiation or outright bankruptcy. The only good outcome is that the great experiment of LBOing America by the kleptocratic elite is coming to its sad conclusion.

    U.S. Posts $150.4 Billion November Budget Deficit - —The U.S. government ran its 26th straight monthly budget deficit in November amid wrangling over a package that would extend big tax cuts to Americans trying to recover from recession.  The Treasury Department, in its regular budget monthly statement, said the government spent $150.4 billion than it collected in the second month of fiscal 2011.  Economists surveyed by Dow Jones Newswires had expected a shortfall of $126.5 billion. November is traditionally a month for deficits.  The Treasury report, detailing the government's spending programs, prompted an economic research firm, Macroeconomic Advisers, to lift its forecast for economic growth from October through December by four-tenths of a percentage point, to 2.7%.

    Analysis pegs US debt service at $800B by 2020 - Interest payments on the U.S. debt could balloon to $800 billion a year, or 3.4 percent of the economy, by 2020 under current spending and tax laws, a congressional budget analysis released Tuesday said. The report by the non-partisan Congressional Budget Office said that U.S. debt held by investors, which stands at $9.3 trillion, will exceed $16 trillion by the end of the decade under current law. Rising interest rates means federal spending to service the debt will increase to at least $800 billion by the end of the decade from $197 billion, about 1.4 percent of gross domestic product, in 2010. Debt and interest costs will rise even higher if Bush-era tax cuts and current levels of spending continue unchallenged, the CBO warned. “If, for example, the tax reductions enacted earlier in the decade were continued, the alternative minimum tax was indexed for inflation and future annual appropriations remained the same share of GDP that they were in 2010, debt held by the public would total nearly 100 percent of GDP by 2020,” the CBO said. “Interest costs would be correspondingly higher.”

    The Federal Budget Deficit and the Looming Crisis - cmartenson - The US federal government is barreling towards a certain fiscal train wreck. While there is much being gleefully reported about the return of the shoppers - er consumers - uh patriotic citizens - spending more than they have, there is almost no hope of growth returning fast enough to offset the amount of budgetary deterioration that now seems to be baked into the cake. As always, one component of the problem is that the US political leadership has absolutely zero experience with even controlling spending let alone cutting spending. Where austerity is being attempted in Europe (at great pain too...if you have not seen this video of the recent Greek riots it is both remarkable and disturbing) the current civil unrest shows that citizens don't necessarily dutifully accept their politicians' belt-tightening policies. The plan, such as it is, for the US fiscal and monetary authorities seems to be to keep up the government spending (including the Fed's QE efforts) for as long as necessary until self-sustaining growth returns.


    U.S. Yield Curve Steepest Since February on Tax-Cut Extension - The extra yield Treasury investors demand to hold 10-year notes over 2-year securities touched the widest since February on speculation an extension of tax cuts will spur growth and increase deficits. The benchmark 10-year yield rose this week to the highest level in seven months as retail sales advanced in November more than economists forecast and the Federal Reserve said the recovery is continuing. The U.S. economy grew at a faster pace in the third quarter, a report is forecast to show next week. “The market will be subject to selling,” said Brian Edmonds, head of interest rates in New York at Cantor Fitzgerald LP, one of the 18 primary dealers that trade directly with the Fed. “It’s hard to think of anything good for bonds coming out of the tax-cut extension. Something has got to give.” The difference in yield between 10- and 2-year notes increased for a third week, rising to 272 basis points yesterday, or 2.72 percentage points, from 268 basis points on Dec. 10, according to Bloomberg data. The spread touched 289 basis points on Dec. 15, the widest since Feb. 23.

    The Federal Budget's Future In 2011 Looks Grim - My last Roll Call column for this year predicts what's ahead for the federal budget in 2011.  The full column is below, but the short answer is...nothing good, especially if your expectations were raised in recent weeks by commission reports, election results, and promises to do better. My seven main predictions are:

    1. Gridlock supreme all year long on anything having to do with spending, revenues, deficit, and debt
    2. No legislated reductions in the deficit
    3. Bowles-Simpson quickly fades into oblivion
    4. No fiscal 2012 budget resolution
    5. Earmarks will thrive
    6. Government contractors will have far more influence than anyone has ever imagined
    7. Wall Street is going to be surprised by #s 1-6

    Charting The US Fiscal Catastrophe - With little fanfare, the November budget deficit of $150.4 billion was reported, which happened to be the worst fiscal November in the history of the US, and just out of the top 10 of worst deficit months ever, including the traditionally weak seasonal months of December, April and September (indicatively, the worst deficit month was the February 2010 $221 billion). The deficit was a major surprise to all those who had expected a pick up in income tax revenues. And as the charts below demonstrate, while there was indeed a modest pick up in tax collections, it was nowhere near enough to offset the surge in government outlays (even with interest payments still at near record low levels). What was also not broadly appreciated is that the cumulative debt issuance over deficit funding has hit a new all time high of $1,735 billion since our October 2006 starting point (4 fiscal years ago). And what is a bigger concern, is that the debt issuance continues to remain at almost exactly 50% over the deficit.

    You are going to LOVE these Numbers…The Collapse of the USSA…PWA - Incoming Speaker of the House, John Boehner, fresh off of ridding Congress of those out-of-control, tax and spend Democrats announced his first big plan to cut the budget today and he started close to home – in his and other congressman and senator budgets. He stated:“I’m gonna cut my budget — my leadership budget — 5 percent,” he said, in video released by CBS. ”I’m gonna cut all the leadership budgets by 5 percent. I’m going to cut every committee’s budget by 5 percent. And every member is going to see a 5 percent reduction in their allowance. All together. that’s 25, 30 million dollars that likely would be one of the first votes we cast. We can start with ourselves.”Wow!  $30 million out of a $3.9 trillion budget.  That’s 0.000007%! Just out of curiosity, I went to the US Debt Clock website and timed how long it took for the US national debt to increase by $30 million.  The amount of time?  13 minutes. Therefore, if the amount of time spent enacting this budget cut takes up more than 13 minutes it will, literally, be a waste of time.

    The Pitfalls of Economic Nostalgia - The United States faces economic problems as daunting as any seen since the 1930s. GDP growth and job creation remain slow in the early stages of the current recovery, when both should be strong.  Moreover, the pressures of globalization, along with technological advances, have reduced the capacity of American businesses to create new jobs even when demand is strong.  These changes have boosted productivity, but most people’s wages and incomes remain stalled.  And in the most dynamic sectors of our economy, those technological advances increasingly demand skills beyond those of most working Americans.   Yet, Washington continues to respond to these challenges through an economics of nostalgia.  The economic agenda of most conservatives today consists mainly of tax cuts for those at the top who earn, save and invest the most, resting on an unflagging faith that markets are self-correcting and invariably produce the best possible outcome.   After all, this approach seemed to work in the 1980s -- even if its reprise under George W. Bush led to nearly a decade of historically anemic job creation and stagnating incomes, and culminated in a disastrous financial meltdown and long deep recession of 2007-2009.   The progressive response amounts mainly to a series of stimulative spending and tax measures bolstered by virtually unlimited and free loans for large financial institutions to stimulate their own lending.   And while similar approaches worked in the 1960s and 1990s, the current iteration has produced the weakest recovery in decades.

    GOP gets queasy over earmark ban - After agreeing to kill earmarks, some of the most conservative GOP lawmakers are already starting to ask themselves: What have we done?  Indeed, many Republicans are now worried that the bridges in their districts won’t be fixed, the tariff relief to the local chemical company isn’t coming and the water systems might not be built without a little direction from Congress.  So some Republicans are discussing exemptions to the earmark ban, allowing transportation, U.S. Army Corps of Engineers and water projects. While transportation earmarks are probably the most notorious — think “Bridge to Nowhere” — there is talk about tweaking the very definition of “earmark.”

    Defense is On the Table - Some people, like Ezra Klein, think the taxes/unemployment agreement pending before the Congress this week amply demonstrates that "no one [including the Congress] really cares about the deficit," since the package will add roughly $900 billion to the deficit over the next couple of years. Maybe some people are right. Members of Congress have rarely been reluctant to push a pet spending rock when the opportunity presented itself and this agreement is expensive.  But when the posturing stops this week and the last Congress slinks out of town, the last month will have been memorable for the way it changed the atmosphere around deficits, particularly with respect to defense.  The Simpson-Bowles deficit reduction proposal may have failed to get the requisite 18 votes to force it on the Congress, but it changed the debate about our spending. And the earlier Rivlin-Domenici panel matched that effort and raised it, putting an even wider array of options on the table, including the idea of a payroll tax holiday next year to provide short-term stimulus.

    Defense Budget in Doubt - The tipping point on defense budgets is upon us.  The Inouye Omnibus appropriations bill in the Senate would provide funding for the base defense budget that is $10.5 below the administration's request.  The House year-long CR would go deeper - $19 billion below the request.  Secretary Gates has made his preference clear.  But even the FY 2012 budget request is likely to come in well below the Department's preferences.  National security will survive, but everything is on the table now.  For my views on this, see the blog I did today for The Will and the Wallet.

    Democrats concede budget fight to Republicans - Senate Democrats abruptly abandoned an omnibus budget bill for the coming year, pushing major spending decisions into the next Congress and giving Republicans immense new leverage to confront President Barack Obama priorities.  The decision Thursday night sweeps away months of bipartisan work by the Senate Appropriations Committee which had crafted the $1.1 trillion bill to meet spending targets embraced by Minority Leader Mitch McConnell (R-Ky.) himself prior to the elections.  Sen. Robert Bennett (R-Utah), an old McConnell friend, worked actively to round up as many as nine potential Republican votes for the compromise, but these numbers rapidly evaporated amid personal attacks and the uproar this week over spending earmarks in the package.  McConnell, embarrassed by reports on his own earmarks in the omnibus, went to the Senate floor Thursday to propose a one page, “clean” two month extension of the current stop gap funding resolution that has kept the government funded since Oct. 1.

    Republican Opposition Kills $1.2 Trillion `Omnibus' US Spending Measure - A $1.2 trillion “omnibus” spending bill loaded with thousands of lawmakers’ pet projects known as earmarks is dead in the U.S. Senate after the chamber’s top Democrat conceded that he didn’t have the votes to overcome Republican opposition.  Senate Majority Leader Harry Reid of Nevada said yesterday that he was abandoning the measure after several Republicans he had been counting on withdrew their support of the plan to fund the government through Sept. 30, 2011. He said he would work with Republicans to write a shorter-term funding bill, known as a continuing resolution, in its place.

    Washington Has Your Checkbook – And They Won’t Stop Spending Your Money - Republicans have a chance to make billions, maybe trillions, of dollars for the country this weekend. With rare backbone, they should actually cut federal spending. If they did, it would utterly shock financial markets and global investors, causing the dollar to surge and the U.S. stock and bond markets to levitate. That adds to pension funds, lowers the cost of capital and would instantly be the biggest jobs program of the outgoing Congress. To date, the motto of the 2009-2010 Congress has been to “leave no spending undone.” The latest attack on fiscal sanity is the continuing resolution making its way through Congress this weekend. It spends more than last year and extends for nine long deficit-riddled months into 2011. The proposed bill defies the election results, costing as much as $1.2 trillion. It’s past time for an upheaval in Washington’s tax-and-spend culture. We can’t afford it even another week. Any final 2010 ‘continuing resolution’ should spend less than last year, not more.

    GOP Gets Chance to Cut Spending in February After Omnibus Collapses - This was the trade made in the Senate last night; the Dems will get legislative repeal of Don’t Ask Don’t Tell, a couple judges, and probably the new START Treaty, and the Republicans will get the chance to massively cut spending early in the 112th Congress. If I’m a Republican, I take that trade. This all came about last night, when several Senate Republicans on the Appropriations Committee picked up the football, and informed Harry Reid that they would renege on their support of the $1.1 trillion dollar omnibus spending bill which they had worked on for close to a year. Because Republicans signaled a willingness to filibuster the omnibus, even if the government shut down as a result, Reid suddenly didn’t have the votes for anything but a short-term continuing resolution, probably for two months until February 18. The angry exchanges from Democrats were obvious on the floor last night, but in the end, the Republicans got a big win.

    QCut - As some of you may have heard, the incoming Republican majority in Congress has a new initiative called YouCut, which lets ordinary Americans like me propose government programs for termination.  So imagine how excited I was to learn that YouCut’s first target—yes, its first target—was that notoriously bloated white elephant, the National Science Foundation.  Admittedly, I’ve already tried to save NSF from some wasteful expenditures, in my occasional role as an NSF panel member.  But this is my first chance to join in as a plain US citizen. In a video explaining the new initiative, Congressman Adrian Smith concedes that the NSF supports “worthy research in the hard sciences,” but then gives two examples of NSF grants that strike him as wasteful: one involving collaboration among soccer players, the other involving modeling the sound of breaking objects.  This article gives some more detail about the projects in question.

    MoveOn Calls for Phone-In Filibuster - Liberal organizers want to flood the Senate phone lines today in the run-up to a test vote this afternoon clearing the way for President Barack Obama’s tax deal with Republicans. MoveOn alerted its members in an email on Monday asking them to call their senators and urge them not to vote for the measure, which would extend tax cuts for two years for every income bracket and reinstate the inheritance tax at 35% for estates larger than $5 million. “As President Obama said, the middle class is being held hostage by the Republicans, and for ransom they’re demanding a massive tax break for the rich,” the email reads. “But President Obama has agreed to pay that ransom by extending the Bush tax breaks for the top 2% of earners, lowering the estate tax, and cutting the payroll tax for one year, which would undermine the key source of revenue for Social Security.”

    Will Obama’s latest $990 billion stimulus package work? - The graphic below shows a breakdown of where the tax cuts are going in the latest deal the President and the Republicans in Congress have hammered out. The expected impact is that unemployment will finally start to fall from its current high of 9.6% to 5.7% by 2015 and that as economic growth picks up, the budget deficit will fall back to more manageable levels (see article).  How successful this expansionary fiscal policy will be depends on how much of these cuts will actually be spent and saved. The graphic shows that $280 billion of tax cuts will go to middle income households who are more likely to spend any additional income they receive (higher marginal propensity to consume) than higher income earners and therefore have a greater impact on overall GDP. A while ago I blogged about the importance of the multiplier for policymakers when deciding which of their policy options will have the most desired impact (More bang for your buck) and the evidence suggested that government spending rather than tax cuts, would have a larger impact on total demand. With US unemployment still high and this plan worrying some commentators, Obama and co will hope they get some value for almost a trillion dollars spent! 

    Pew Poll Finds Broad Support for Tax Deal - The latest poll by the nonpartisan Pew Research Center for the People and the Press found broad and consistent bipartisan support for the tax deal struck by President Barack Obama and congressional Republicans, pointing to a disconnect between activists on both sides of the political spectrum and broader public opinion. The Pew poll, conducted Dec. 9-12 among 1,011 adults, found that 60% of the public supports the deal, and 22% oppose it. But that support is remarkably consistent across the spectrum. Among those polled, 62% of Republicans, 64% of conservatives, 63% of Democrats, 65% of liberals and 60% of political independents said they support the deal, which extends all the Bush-era incomes taxes for two years, cuts payroll taxes next year, extends unemployment benefits for a year and keeps in place a variety of tax breaks for middle-class and working class people passed in last year’s stimulus law. About half of Republicans, Democrats and independents said they thought the plan would help the economy, compared with about 29% who said it would hurt.

    Ezra Klein - Column: Six lessons from the tax deal - In Washington, the temperature dipped into the 20s this week, which is evidently the point when hell freezes over: President Obama reached an agreement on the Bush tax cuts with the Republican Senate leader who said "the single most important thing we want to achieve is for President Obama to be a one-term president." Sen. Bernie Sanders, a socialist from Vermont, and Sen. Jim DeMint, an arch-conservative from South Carolina, threatened to filibuster the agreement. Liberal Democrats said they'd prefer a permanent extension of most of the tax cuts, and the architect of those cuts said the country couldn't afford anything more than a temporary extension. It's been a little confusing. But it's also been clarifying. The tax-cut deal, in which the Republicans will give the White House about $300 billion in stimulus in return for the White House giving Republicans about $130 billion in tax cuts for the wealthiest Americans, laid bare some old and new realities of how Washington works - and doesn't work - right now. It's worth going through them one by one.

    Why the tax “compromise” is a very dumb idea - Let me start with a simple statistic:  Since this past September, real personal consumption has exceeded the pre-crisis peak it reached in December 2007. In other words, Americans on aggregate are buying as much stuff (in volume terms) as before the official onset of the recession. Now, this is not necessarily something to celebrate: On an annualized basis, real personal consumption has only grown 0.1% since December 2007, compared to the 3.5% during the decade leading up to the crisis. But there is still something impressive going on: Real consumption is back to its 2007 levels despite the fact that the number of people employed (in non-agricultural sectors) is some seven million less than it was back in end-2007. What’s my point here? That the problem with the economy is not that (employed) Americans don’t consume enough; it is that we have too many unemployed people who can’t consume, not even the basics. And this is my first reason why giving a tax gift to employed Americans is a completely dumb policy: Not only is it unfair to the unemployed; it is questionable whether those Americans with jobs and with comfortable cash positions are going to spend this tax gift, if they are already close to reaching their long-term consumption growth. So much for a “targeted”, “efficient” fiscal “stimulus”.

    In Tax Deal with GOP, Obama Didn’t Win as Many Concessions as Advertised - President Obama seems remarkably proud of himself for the many “concessions” he won from Sen. Mitch McConnell (R-KY) as part of their deal to extend all the Bush tax cuts for two years. The administration has really tried to spin the “success” of this deal by claiming Obama got $238 billion in spending while the Republicans got only $114 billion of spending on what they want. Yet, it seems almost all of the “concessions” Obama claims to have won were ideas actually promoted by Republicans. The amount of money allocated for things Obama wanted that didn’t have bipartisan support is much smaller. Looking at the entire package, it is a very pro-Republican proposal. Many of the items in the package that Obama and other Democrats have bragged about winning already had Republican support or were originally Republican ideas. Republicans have long pushed for a payroll tax cut, expanding the child tax credit, and special tax treatment for business investment. Congress probably could have passed all of these even without Obama giving in on the estate tax, so you can’t really count them as real concessions. Even the extension of unemployment benefits, which is a win for Obama, is only a partial cocession, given that the White House would have been able to get a shorter extension, separate from this deal.

    The Poor Get Screwed by the Obama-McConnell Plan - Guess who would see their taxes increase as a result of the Obama-McConnell plan? Well: The wealthiest Americans will also reap tax savings from the proposal's plan to keep the cap on dividend and capital gains taxes at 15 percent, well below the highest rates on ordinary income.....In fact, 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.  Contrast this with who gets new tax cuts--this is not keeping the Bush cuts, but adding a whole new set of cuts: An individual who earns $10,000 a year would lose half of the $400 he or she received in 2010 under Making Work Pay. Every family earning less than $20,000 a year would end up losing money under the proposal, according to Williams. On the other hand, taxes will drop dramatically for those earning $95,000 a year or more, who made too much to qualify for the Making Work Pay credit, said Williams. The $400 credit under Making Work Pay starts phasing out for individuals more than $75,000 a year and disappears above $95,000; but under the proposed payroll tax cut, all earners get a 2 percent tax cut, no matter what their total income, up to a maximum per-family credit of $4,362.

    The Effort to Claim That Economists Support Obama's Capitulation on Tax Cuts for the Wealthy - You know the administration is desperate when it creates a web page citing economists who support its capitulation on taxes. The web page cites the support of five economists. Peter Cardillo, the Bank of America, Greg Mankiw, and Wells Fargo (are the second through fifth economists on Obama's list). Who are these supporters and why is the administration proud of their support? Cardillo is an economist for an investment firm, Avalon Partners. Avalon's web site states that it specializes in "wealth management" for "affluent meet the unique needs of high net worth individuals...." Yes, the wealthiest one-hundredth of one percent of Americans -- the truly, uniquely needy.  The administration's web site gives pride of placement to Avalon Partners' support of Obama's decision to support the extension of Bush's dramatic reduction in the taxes its ultra-wealthy clients will pay. Obama's capitulation on tax breaks for the richest one percent of Americans is worth tens of thousands of dollars personally to Cardillo and hundreds of millions of dollars to Avalon's clients. Mr. Cardillo does not support Obama's capitulation -- he rejoices in it.

    The Moderate Republican Stimulus - Last week I said that Obama’s position on the tax cuts was a “moderate-Republican line in the sand” and that the tax deal was closer to the Republicans’ ideal outcome than the Democrats’, but the latter argument was based on some guesses about Republican preferences. Now Mike Konczal has done some of the harder argument, uncovering hard evidence that the Republicans would have agreed to the extended child tax credit sweetener anyway and presenting five points for the argument that the Republicans wanted payroll tax cuts – in particular, they wanted them more than Making Work Pay tax credit that they replaced. Here’s Mike’s version of the administration’s chart: He calls it the “Moderate Republican Stimulus Package 2.0.”

    A Fiscal Non-Event, and a Stimulus Non-Event, Too - The discussion surrounding the tax bill — especially its contribution to deficits and debt and its “stimulus” effects — is hopelessly muddled. By and large, the bill is a continuation of current policy, which is to run massive deficits. And doing more of the same is not stimulus.The confusion stems, in large part, from misleading and slanted congressional budget practices. In the real world, continuing current policy would be just that — continuing. It would not add to or subtract from the deficit or debt. So, extending the current tax rates, extending the current Alternative Minimum Tax (AMT) patch, extending the business tax “extenders,” or extending the current Unemployment Insurance (UI) provisions would have a net deficit impact of exactly zero. On the other hand, a new policy of reduced payroll-tax rates for one year or a new policy on investment expensing (one year at 100 percent and one year at 50 percent) would add to the deficit and future debt. And raising the estate tax from zero to 35 percent would lower the deficit.

    President Obama Gets Leading Proponent of Social Security Privatization and Bubble Economy to Tout Budget Deal - Dean Baker - That could have been the lead of a front page Washington Post news story reporting on a press conference in which former President Bill Clinton touted the budget deal that President Obama negotiated with the Republicans. Remarkably, President Clinton's record on these issues was never mentioned in the article. As many former aides have acknowledged, President Clinton had been considering a variety of options for partially privatizing Social Security in the beginning of 1998 when the Lewinsky scandal exploded. With his presidency in jeopardy, Clinton had to rely on his core constituencies -- labor, the African American community, women's organizations -- all groups that would have been infuriated by an effort to privatize Social Security. As a result, Clinton was forced to abandon this effort. President Clinton also set the economy on a path of bubble led growth, touting the stock market bubble that drove growth in the late 90s. He also pushed for the financial de-regulation that helped clear the way for the abuses of the housing bubble era. In addition, he also actively promoted the high dollar policy that led to the enormous trade deficit, which was another major imbalance distorting the economy's growth path.

    Disregard Bill Clinton's Favorable View of Obama's Tax Deal - Robert Reich - Bill Clinton seems the perfect validator for Barack Obama — which is why the President is utilizing the former president for selling his tax deal. After all, the economy boomed when Clinton was president and 22 million net new jobs were created. What’s more, Bill Clinton was reelected — even though he lost both houses of Congress in the 1994 midterms. Bill Clinton presided over an economic boom engineered by Fed chair Alan Greenspan, who felt confident he could drop interest rates far lower than anyone expected without risking inflation. The result was 4 percent unemployment in many parts of America, as well as the best jobs recovery in history. But the economy’s underlying structure remained as it had been before, including stagnant wages for most Americans. Within a few years the middle and working class was treating their homes as ATMs, borrowing trillions of dollars in order to maintain their standard of living, and at the same time demand enough goods and services to keep almost everyone in jobs. Those days are over. The Democratic Party can no longer ignore critical investments in the productivity of average workers. Nor can it ignore the increasing concentration of income and wealth at the very top, and the inability of America’s middle and working class to get the economy moving again.

    Auerback/Wray: Liberals need not fear Obama’s tax deal: Why a payroll tax holiday actually helps support tomorrow’s retirees - Yves Smith - Yves here. As much as Auerback’s and Wray’s argument does describe the reality of government fiscal operations accurately, I see their political reading as wildly optimistic. Given that disproven ideas like “trickle down economics” still hold considerable sway, I think the concerns about how a payroll tax holiday will serve as a wedge to cut Social Security benefit are valid.  Auerback/Wray: The commentary in the aftermath of President Obama’s announced tax deal with the GOP has been both predictable and, for the most part, misconceived. Leaving aside the issues of income inequality (which we discussed in a previous post), the more predominant critique (especially from the “deficit dove Left”) focuses on the proposed temporary payroll tax cut and the adverse implications that such a cut implies for budget deficits and for Social Security’s longer term “solvency”. Payroll tax cuts are seen by many as part of a bigger plot by Republicans to destroy Social Security’s finances or permanently fund it with general revenues rather than allowing the payroll tax to be re-imposed at the end of the tax “holiday”.

    The New Era of Cooperation Between the White House and Big Business - Robert Reich - Jamie Dimon, chairman and CEO of JPMorgan Chase & Co., praises the President’s agreement with Republicans to extend the Bush tax cuts.“If we’re going to strengthen our economy and grow jobs, this type of outreach — and cooperation between the administration, Congress, and the private sector — are critical,” says Dimon. Dimon met last week with the President. Thirty other CEOs are meeting with him today. Dimon’s compensation over the last three years has averaged $21,991,394 a year. The tax deal agreed to between President Obama and the Republicans will give Dimon and extra $1,179,000 next year, according to an analysis by Citizens for Tax Justice.

    Extending Tax Cuts Does Little For Middle Class And Does Nothing To Promote Economic Growth - Events of the last few days show the US is on an accelerating descent into banana republic finance. First, the siren song that the cure for debt is more debt was given another stanza by the nation’s chief money printer on 60 Minutes Sunday night. Then, on Monday evening, the nation’s capitulator-in-chief made a deal with Congressional Republicans to light up a trillion dollar budgetary Christmas tree. Moreover, in throwing the deficit financing spigot wide open on the back of Ben Bernanke’s promise to continue monetizing all the new debt Washington might create, the tax plan negotiators booby-trapped the nation’s budget with the expiration of several hundred billion of tax-cut goodies on election eve in 2012. So after the next predictable exercise in rinse and repeat, the true cost of Monday night’s plan will be in the multi-trillions. In this context, it's useful to recall the classic traits of banana republic finance. These include massive and chronic government debt issuance; reckless monetary expansion to absorb it; and pervasive economic distortions that cause an uphill flow of income and wealth to the top of the economic ladder. The Obama White House’s latest act of fiscal desperation accomplishes all three

    Obama haters praise his tax policies because they believe those policies will make him fail - Like the Sirens reputed to lure sailors onto rocks, a series of columnists who want President Obama to fail are praising Obama’s capitulation on extending the Bush tax cuts for the wealthy. The motif of these comments has three common characteristics – all designed to destroy the Obama presidency. First, and the chutzpah of this aspect is wondrous, those that hate Obama’s policies are telling Obama he is demonstrating his strength by surrendering on the Bush tax cuts to the wealthy. Second, they claim that Obama “moved to the center” by agreeing to support tax cuts for the wealthy. Third, they claim that Obama’s attacks on his strongest supporters are brilliant politics essential to saving his Presidency. Dana Milbank’s recent column is one example of the three-part motif. The title of the column captures the first aspect: “Obama finally stands his ground." What he means of course is that Obama failed to stand his ground, repudiating his promises to end the Bush tax cuts for the wealthy.

    Untellable truths - The differences between Democratic progressives and the president over the tax deal the president has made with Republicans is being argued from a materialist perspective. That perspective is real. It matters who gets how much money and how our money is spent. But what is being ignored is that the answer to material policy questions depends on how Americans understand the issues, that is, on how the issues are realized in the brains of our citizens. Such understanding is what determines political support or lack of it in all its forms, from voting to donations to political pressure to what is said in the media. What policies are proposed and adopted depend on how Americans understand policy and politics. That understanding depends on communication. And it is in that the Democrats — both the president and his progressive critics — have surrendered. The Democrats have left effective communication to the conservatives, who have taken advantage of their superior communications all too well.

    The Payroll Tax Cut Versus Making Work Pay, in One Chart - Nancy Altman of Social Security Works has created a chart that shows just how imbalanced this tax cut deal is because of the use of the payroll tax cut. What I didn’t remember, until I saw this chart from Nancy Altman, is that the Making Work Pay Tax cuts phase out at high income levels. It starts phasing out at income of $75,000 or more, and phases out completely at $95,000 or more. So those tax cuts were really concentrated on lower levels of income. Almost the opposite is true with the payroll tax cut. While it does phase out above $106,800, it increases as a percentage of income all the way up to that. So while everyone gets the same percentage-of-income benefit on the first $106,800, as a real dollar amount it’s much higher for those at high incomes. And at low incomes, it doesn’t benefit the worker at the same rate as making work pay.

    The Payroll Tax: Just Another Tax? - What does it mean that the U.S. no longer has a permanent tax code? That every major tax Americans pay, including income tax and the payroll tax covering Social Security, is now a temporary measure subject to — effectively — mandatory revision by Congress in the next one to two years? With passage of the Obama-McConnell “stimulus” package, American government is entering a fun-house period like no other in its history. The tax cut/stimulus bill passed, of course. Indeed, the skids were really greased on this baby (to use then-Treasury Department official Bob Rubin’s choice phrase) like nothing since the 1983 Amendments to the Social Security Act. Here’s how the Wall Street Journal describes the situation we’re about to be living under: Welcome to the world of the temporary tax code.

    Will the Tax Deal Hurt Housing? - Some are worried that the tax deal and other recent efforts to boost the economy will have an unintended and potential troublesome casualty: The Housing Market.  Rates on the 10-year Treasury bond have spiked in the past week since news that a tax deal, which would keep the US income tax rate at Bush-era levels and temporarily lower others, between the White House and Republicans was in the works. Some Democrats are wary about giving into the extension of lower rates for the rich, but Time's Alex Altman reports today that the deal is likely to pass. That should be good news. Some studies say the deal, by lowering taxes and stimulating the economy, could add as many as 2.2 million jobs during the next two years. It also will add nearly $900 billion to the deficit and is already increasing fears that the government will not be able to pay off its debt. In the past week, the rate on the 10-year Treasury bond has jumped to a recent 3.3%, from 2.9%. The jump, which caps a nearly 1% run up in 10-year yield since early October, in turn is making some nervous about the housing market. But those fears may be misplaced. Here's why: When it comes to the housing market, the 10-year rate is the one to watch. That's because most banks tend to base their mortgage loans on the 10-year Treasury. If the 10-year goes up, so, too, do home loan rates, and vice versa. And when mortgage rates go up, buying a house becomes more expensive for most people.

    Video: Stockman Says Tax-Cut Deal Is Bad Policy - WSJ - Former Reagan White House budget director David Stockman says the tax deal emerging in Washington is “Keynesian flimflam” that won’t help stimulate the economy. In an interview with Simon Constable, he rails against the current system of deficit financing and warns the U.S. faces a crisis of indebtedness in the long run.

    RealClearPolitics - Video - Sen. Sanders To Rich "Crybabies": "When Is Enough, Enough?" - Sen. Bernie Sanders (I-Vermont), a socialist, said "greed is like an addiction" and compares it to heroin and nicotine. "This reckless uncontrollable greed is like a disease," Sanders said. Sanders asks how can anyone be proud to call themselves a "multimillionaire?"

    Bernie Sanders Puts Barack Obama to Shame - Matt Taibbi - I’m bringing this up now to put into context what Bernie did on the floor of the Senate last week, standing up for eight hours and 37 minutes to make a case that the hideous deal that Barack Obama cut with the Republicans to extend the Bush tax cuts was an outrage to the very qualities that matter most to this politician, common decency and common sense. While everyone else in Washington was debating the political efficacy of the deal – the Hill actually published a piece talking cheerfully about how CEOs found a “new friend” in Obama, while the New York Times shamelessly ran a front-page “analysis” talking up the deal’s supposed benefits to the middle class and the political benefits from same that Obama would enjoy – Sanders blew all of that off and just looked at the deal’s moral implications. Which are these: this tax deal, frankly and unequivocally, is the result of a relatively small group of already-filthy rich people successfully lobbying an even smaller group of morally spineless politicians to shift an ever-bigger share of society’s burdens to the lower and (what’s left of the) middle classes. This is people who already have lots of shit just demanding more shit, for the sheer rotten sake of it.

    Tax Cuts Are Theft - Conservatives like to say that taxes are theft. In fact it is tax cuts that are theft because they break a long-standing contract.  The American Social Contract: We, the People built our democracy and the empowerment and protections it bestows. We built the infrastructure, schools and all of the public structures, laws, courts, monetary system, etc. that enable enterprise to prosper. That prosperity is the bounty of our democracy and by contract it is supposed to be shared and reinvested. That is the contract. Our system enables some people to become wealthy but all of us are supposed to benefit from this system. Why else would We, the People have set up this system, if not for the benefit of We, the People? The American Social Contract is supposed to work like this diagram:

    Summers Warns Against Permanent Tax Cuts - Top Obama economic adviser Lawrence Summers praised the White House's tax-cut compromise with Republicans, but issued a defiant warning to Congress to not make some cuts permanent when major elements expire in two years. "Compromises that were necessary with a weak economy in 2010 should be inconceivable as recovery accelerates in 2012," Mr. Summers said in a speech at the Economic Policy Institute Monday.He also labeled "inconceivable" the idea that lawmakers would have a protracted fight over whether to raise the federal debt ceiling and potentially "allow any serious question to arise with respect to our debt."

    The Tax Deal and the Apocalypse - The proponents of the tax deal that President Obama and the Republicans negotiated last week have gotten out their TARP and Iraq War hysterics. All the important people are now telling us that if Congress doesn't approve the package, it will be the end of the world! To be an important person in Washington these days requires a solid record of failure. That is why we have 25 million people unemployed, underemployed or out of the labor force altogether. And those who got us into this disaster are still overwhelmingly the ones calling the shots. So, people who want a realistic assessment of what the defeat of this tax package means for the economy may not want to rely on the usual suspects. As I have noted before, the major risk of this deal is that it would undermine Social Security. The deal temporarily lowers the Social Security tax by 2 percentage points. In principle, the tax rate will go back to its current rate after the end of next year. However, several prominent Republicans have already made it clear that they will call the expiration of this tax cut a tax increase. And they will point out that it is an extremely regressive tax increase that disproportionately hits low- and moderate-income workers.

    Romney: Tax deal, bad deal - Death and taxes, it is said, are life's only two certainties. But in the wake of President Obama's tax compromise with congressional Republicans, only death retains the status of certainty: The future for taxes has been left up in the air. And uncertainty is not a friend of investment, growth and job creation. The deal has several key features. It reduces payroll taxes, extends unemployment benefits and keeps current tax rates intact. So far, so good. But intermixed with the benefits are considerable costs of consequence. Given the unambiguous message that the American people sent to Washington in November, it is difficult to understand how our political leaders could have reached such a disappointing agreement. The new, more conservative Congress should reach a better solution. The deal keeps current tax rates from rising to pre-Bush era levels for two years. But in 2013, unless Congress acts again, rates will increase dramatically.

    Darrell Issa uncomfortable with tax deal - Count a future GOP committee chair as one of those icy on President Barack Obama's tax compromise with Republicans. California Rep. Darrell Issa, the future chair of the House Oversight and Government Reform committee, said the tax bill that passed a key procedural hurdle Monday is "an incomplete effort that fails to create a permanent tax structure giving businesses the kind of long-term predictability needed to support investment, economic growth and job creation." Issa isn't yet saying he'll vote against it and even concedes that it avoids "massive and immediate tax increases that would harm our economy and kill more jobs."  "While my vote will ultimately depend on the final bill brought to the floor of the House, the flawed last minute consideration of this proposal underscores the need for Congress to act decisively in the new year to support job creation, curb government spending and enact permanent tax reform,"

    Voodoo Economics Revisited - Simon Johnson - Democratic and Republican leaders in Washington are suddenly falling over themselves to agree on the need for major tax cuts – affecting not just middle-class Americans, but also very rich people (both living and when they die). Does this sudden outbreak of the long-desired bipartisan consensus indicate that a new, stronger America is just around the corner? Unfortunately, the opposite is true. What we are seeing is agreement across the aisle on a very dangerous approach to public finance: a continuation and extension of what President George H.W. Bush memorably called “voodoo economics.” Its consequences are about to catch up with America, and the world. Bush was competing with Ronald Reagan for the Republican nomination in 1980. Reagan suggested that tax cuts would pay for themselves, i.e., actually raise revenue – a notion that became known as “supply side” economics. There’s nothing wrong with worrying about the disincentive effect of higher taxes, but the extreme version put forward by Reagan did not really apply to the United States. When you cut taxes, you get lower revenue, which means a bigger budget deficit

    'Temporary' Tax Code Puts U.S. in a Lasting Bind - Welcome to the world of the temporary tax code. The U.S. tax code is slowly being turned into a temporary patchwork of provisions that need to be addressed every year or two, depriving individuals and businesses of the predictability they need for long-range plans. John McKinnon discusses. Also, Brett Arends says not only are the Democrats politically bankrupt and the Republicans morally bankrupt, but that this tax deal will play a big role in America's undoing. In the late 1990s, there were typically fewer than a dozen tax provisions that had just a limited lease on life and needed to be renewed every year or so.  Today there are 141. Now Congress, taking up a deal worked out between the Obama administration and Republican leaders, is poised to turn the whole personal income-tax system into something of a temporary structure. The plan embraces a broad range of provisions—an extension of Bush-era rates, a new estate-tax formula—but for only two years. A payroll-tax cut in the bill is for a single year.

    Republican Splits, Fiscal Opportunity – Simon Johnson -An informative and potentially productive political debate has broken out over fiscal policy. But it is not between Democrats and Republicans — the leadership on both sides of the aisle is trying hard to agree that a moderate stimulus is worth the cost: increasing the national debt by nearly $900 billion. Rather, the intensifying and illuminating debate is within the Republican Party — particularly among people who are presumed to be interested in running for the presidency in 2012.  On one hand, there are those like Newt Gingrich and Mike Huckabee, who are in favor of the tax deal currently on the table. This seems to be where most of the Republican mainstream is. On the other hand, Sarah Palin and Mitt Romney have come out strongly against the proposal.On the merits of the economic argument — within the terms of reference laid down by Republicans themselves — Mr. Romney and Ms. Palin have the advantage. The House Republican Pledge to America, after all, said clearly and forcefully, “We will put government on a path to a balanced budget and pay down the debt.”

    When $250,000 Equals $315,000 -  There are two aspects of the high-end cuts that often get lost in the public discussion. The first is households with more than $250,000 a year in adjusted gross income would still get a tax cut — on their first $250,000 of such income. On average, this tax cut would equal about $6,500 a year, regardless of whether a household had $250,000 in adjusted gross income or $1 million (or much more) in adjusted gross income. If all the Bush tax cuts are extended, by contrast, households making at least $1 million a year would receive an average annual tax cut of $104,000. The second issue is that earning $250,000 in adjustable gross income is different from earning $250,000 in total income. High-income households tend to take a significant number of deductions. At our request, Roberton Williams at the Tax Policy Center analyzed the total income of households with $240,000 to $260,000 a year in taxable income. On average, they made $315,000 in adjusted gross income, including $32,000 in capital gains and dividends.

    Tax Cut Deal Wildly Popular - ABC News and the Washington Post have the first poll out about public reaction to the Obama tax cut deal. ABC created a colorful chart of the results, so I'll link to them: Support for the overall package was extremely high: 68% among Democrats and Independents and 75% among Republicans. But the breakdown in the chart above ought to give all of us lefties pause. It's great to see that extending unemployment benefits polled higher than any other element of the plan, but not so great that bonus tax cuts for the rich polled considerably higher than cutting payroll taxes. Obviously wording can be an issue in polls like this, and it's notable that the tax cut question didn't provide a choice of supporting only the broad cuts but not the additional cuts for the rich, and also notable that the estate tax question didn't mention that estates under $3.5 million would be tax free in any case. On the other hand, the tax cut question specifically called out "wealthy people" and the estate tax question specifically mentioned an exemption of $5 million. So it's not as if people didn't have some idea of just whose taxes were being cut here.

    After the tax deal vote, get ready for another fiscal apocalypse. -The current tax cut deal moves us closer to hitting the current debt ceiling of $14.2 trillion, which moves the analysts at Moody's closer to downgrading America's bond rating. This might seem like more of a reason to oppose the tax deal than a reason to force an apocalyptic debt ceiling vote. And some Democrats are using it as one. Sen. Mark Udall (D-Col.) asked if the Senate was suspended in a "parallel universe," since it had so quickly forgotten all the warnings about debt coming out of the Simpson-Bowles commission. "The president's fiscal commission called our national debt a 'cancer' that is threatening our country from within!" said Udall. It sure did. And so did Udall. Nobody in Washington gets anything done anymore without explaining how the failure to do it will cause an extinction-level event.

    Tax bill passes Senate test - A proposal to extend Bush-era income tax cuts set to expire at the end of the year easily cleared a critical Senate vote Monday, shifting the focus to skeptical House Democrats and setting up a showdown on the measure later this week. President Obama, acknowledging discontent within his party over the compromise he reached with Republicans this month, nevertheless pressed the House to act quickly. The White House has cast the measure as key to boosting the nation's economy. Top Democrats predicted the extensions will pass, but would not say in what form. House Majority Leader Steny Hoyer, D-Md., said he is hopeful the measure will move by the end of the week. "We're going to have a vote on the Senate bill, and with possible changes," he said. "The legislative process is a process of give-and-take."
    Democrats are particularly anxious about changes to the estate tax that would permit a couple to pass $10 million on to heirs tax-free and would tax inheritance beyond that amount at 35%. The provision, which Hoyer said "a number of us would like to change," would cost $68 billion over the next decade.

    As Senate Sets Up to Pass Tax Cut Bill, House Blows Hot Air - After an 83-15 vote on the motion to proceed in the Senate, final passage could apparently come as soon as today. Tom Coburn, who voted no, isn’t typically willing to cede all the post-cloture time to speed things along, and he could hold out until Friday if he so chose, but the indications are that he won’t. In case you were wondering how serious he was about stopping the bill. The real problem comes in the more partisan House, where Democrats are doing a lot of jawing about changing the bill. Mitch McConnell laid down a familiar marker by saying that the House can’t change one word of the bill or the deal’s off. This is what’s known as “bipartisan compromise.” If the House Democratic Leadership decides to make partisan changes, they will ensure that every American taxpayer will see a job-killing tax hike on January 1st,” McConnell said in the statement. McConnell may not have the support of his own party in the House. Republicans in the grassroots have become more strident against the bill in recent days, and noted weather vane Mitt Romney has an op-ed today where he slams the bill, mostly because it doesn’t make the Bush tax cuts permanent and because it adds to the deficit (yeah, I don’t get it either).

    Tax Deal--On the Senate Legislation - The Senate Democrats have developed substitute language to replace the House's language amending the Senate's language amending that earlier bill with the tax deal.  They've named it the "tax relief, unemployment insurance reauthorization and job creation act of 2010".  That job creation part is, I expect, mostly a wish and not a likely expectation.  Other than the few provisions that put money into the hands of those who really need it, the bill won't be very stimulative.  Those provisions are unemployment insurance extension and the payroll holiday (to the extent it goes to people making at or below the average income).  The rest is dross that goes primarily to companies and individuals who are getting along okay.  It seems foolish to think expensing, the research credit, the break to big banks from the active financing exception, extending the percentage depletion allowance or tax breaks for millionaires--from rate reductions to estate tax reductions to tax-free distributions from individual retirement accounts for charitable purposes and exclusion of all gain from certain small business stock-- will create jobs.

    Can Rush Limbaugh kill the tax cut deal? - The U.S. Senate, after shrugging off amendments proposed by Jim DeMint and Bernie Sanders, voted overwhelmingly to approve the tax cut deal early Wednesday afternoon, 81-19. Attention now turns to the House, where some are wondering if Tea Party angst and Rush Limbaugh's hectoring will sway enough Republicans to put passage of the deal in jeopardy. On Dec. 10, Limbaugh declared that "I now hope this tax deal fails. I say it directly and officially." Political scientist Jonathan Bernstein followed up by writing that he can't recall "a lot of examples of House Republicans defying Rush Limbaugh on a high-profile vote over the last twenty years." But the consensus expectation of political analysts still holds that the tax deal will pass, regardless of the grousing. Democratic opposition in the House appears to be withering on the vine, and only a handful of Republican members have come straight out and declared that they will not vote for the deal under any circumstances.That roster of holdouts includes the usual suspects, the hardest of the hardcore: Indiana's Mike Pence, Minnesota's Michele Bachmann, Arizona's Jeff Flake, Utah's Jason Chaffetz, California's John Campbell and New Jersey's Scott Garrett. Spence fired the most recent broadside against the agreement Tuesday night, in an interview with Fox's Sean Hannity.

    Just-Released IRS Data Show Effects of Our Radical New Greed-Is-Good Culture - As the House considers a bill to extend the Bush tax cuts for the top 2%, slash corporate taxes and potentially make the Estate Tax more generous to billionaires than ever before, it's instructive to put the move into a larger cultural/historical context. And thanks to newly released IRS documents, we can do just that.  As the Institute for Policy Studies reports, officials at the National Archives recently released a 67-year-old U.S. Treasury Department report detailing what the richest Americans once paid in taxes in the middle of the 20th century. IPS notes that "We have simply never had clearer evidence of just how much America used to expect out of individual wealthy Americans - and just how little, by comparison, we expect out of our wealthy today." Here are some of the details:

    House Dems Prepare To Fold On Obama Tax Cut Deal - House Democrats are coming to terms with the fact that a tax cut compromise filled with provisions they despise will pass and be signed into law. On Tuesday night they vented their frustrations to their harried leadership in a private caucus meeting, but emerged acknowledging that they've been boxed effectively in by the White House and GOP.  Tomorrow, after the Senate passes the plan President Obama negotiated with Congressional Republicans, Democratic leaders in the House will present their members with an end game. That endgame may involve passing the legislation word for word. Leaders may allow votes on amendments to the Senate-passed bill, and may even allow some minor tweaks to the package. But as far as dramatically tweaking its key provisions -- particularly the estate tax -- or otherwise endangering the deal, members predict leadership will allow those efforts to fail.

    3% of the Tax Cut Deal - The Senate is about to pass the full tax cut “compromise,” but House Democrats are trying to hold out for a more fiscally responsible option.  From the Washington Post:  After meeting for two hours with rank-and-file lawmakers late Tuesday, senior Democrats said the House is likely to stage votes to change the terms of a revived estate tax that many Democrats view as overly generous to the wealthy. Outraged by the agreement to exempt individual estates worth as much as $5 million from taxation, senior Democrats said they would press to lower the threshold to $3.5 million.  House Democrats said their alternative would hit only about 6,600 of the nation’s wealthiest households while raising an additional $26 billion over the next two years compared with the Obama-GOP compromise - money that could be used to reduce the soaring national debt.  I agree that we shouldn’t need to deficit spend that additional $26 billion, which would benefit such a tiny fraction of the richest Americans who don’t exactly need any help–to spend or to save or to do whatever.  But this is an even more perverse version of President Obama’s wish to “save” the $700 billion 10-year cost of extending the high-end Bush tax cuts while urging the deficit spending of the $2.2 trillion 10-year cost of extending all the rest of the Bush tax cuts.  Note that the $26 billion House Democrats wish to shave from the estate tax cut, for fiscal responsibility’s sake, is just 3 percent of the cost of the ($858 billion) tax cut deal. 

    It's a Great Time to Be Rich - A bonanza of new and extended tax benefits could make it as easy as ever for the rich to stay that way. Under legislation approved by the U.S. Senate on Wednesday, Dec. 15, and now moving on to the House, savvy wealthy Americans would be able to capitalize on an environment in which their tax rates on income and investments remain at historic lows. Also, new rules would make it possible to pass on fortunes to heirs with less fuss and lower taxes than all but a brief period of the past 80 years. It's a far cry from the 70 percent bite the federal government took out of the largest incomes and estates as recently as 1980. "The climate we'll have after this legislation is extremely favorable for wealthy families," The good news for the rich starts with income tax rates, which for top income groups would remain 35 percent , a rate enacted by former President George W. Bush in 2003. Except for a period from 1988 to 1992, the top tax rate has never been this low since 1931.

    Do Progressives Hate Rich People? - Roger Simon looks at the Congressional Democrats trying to block the Obama-McConnell tax-cut-extensions-for-everybody-whether-they-need-them-or-not bill, and draws the only possible conclusion: Democrats hate rich people, and want everyone else to hate them too.  Yes, of course, that must be it: All those self-hating rich Democrats in Congress just want to punish themselves to assuage their terrible rich-person guilt – who could possibly think otherwise? Simon is really employing two fallacies for the price of one.  The first is that the desire to return the well-to-do’s tax brackets to their Clinton-era levels is somehow the same as implacable hatred. The second fallacy is that we hate rich people simply for being rich, because we’re envious or communists or whatever. 

    Give Up on the Estate Tax - CONGRESSIONAL Democrats have voiced outrage at President Obama’s compromise proposal to lower the estate tax rate to 35 percent, from 55 percent, and raise the per person exemption to $5 million, from $1 million. They have called it a giveaway to the rich. A more reasonable compromise, they say, would have set the rate at 45 percent and the exemption at $3.5 million when the estate tax goes back into effect in January.  But instead of getting into any further arguments over rates and exemptions, Democrats would be better off conceding defeat. They should allow Republicans to get rid of the estate tax altogether — but at the same time arrange for inherited wealth to be subject to income tax.

    Congress Passes Tax Deal - Congress passed the most far-reaching tax bill in a decade late Thursday, averting across-the-board tax increases, enacting new breaks for individuals and businesses and laying a marker for how Washington might work in an era of divided government.The bill goes to the White House for President Barack Obama's signature after the House overcame persistent liberal opposition and passed it with an unexpectedly large bipartisan majority of 277-148. The measure passed the Senate earlier in the week also with an overwhelming majority. The bill reaches deeply into the life and economy of the U.S., more so than might have been expected when Congress first started tackling the matter. Wage-earners will get a new payroll tax break; wealthy heirs get a lower estate-tax rate; and businesses gain an unexpected plum—a big tax write-off for new equipment purchases.

    Congress Sends $801 Billion Tax Cut Bill to Obama - Congress at midnight Thursday approved an $801 billion package of tax cuts and $57 billion for extended unemployment insurance. The vote sealed the first major deal between President Obama and Congressional Republicans as Democrats put aside their objections and bowed to the realignment of power brought about by their crushing election losses.  The bipartisan support for the tax deal also underscored the urgency felt by the administration and by lawmakers in both parties to prop up the still-struggling economy and to prevent an across-the-board tax increase that was set to occur if the rates enacted under President George W. Bush had expired, as scheduled, at the end of the month. Administration officials said Mr. Obama would sign the package into law on Friday.

    President Obama signs sweeping tax-cut package into law - President Barack Obama signed into law a huge, holiday-season tax bill extending cuts for all Americans on Friday, saluting a new spirit of political compromise as Republicans applauded and liberals seethed. The benefits range from tax cuts for millionaires and the middle class to longer help for the jobless.The most significant tax legislation in nearly a decade will avert big increases that would have hit millions of people starting in two weeks on New Year's Day. Declared Obama: "We are here with some good news for the American people this holiday season.""This is progress and that's what they sent us here to achieve," The package retains Bush-era tax rates for all taxpayers, including the wealthiest Americans, a provision Obama and congressional liberals opposed. It also offers 13 months of extended benefits to the unemployed and attempts to stimulate the economy with a Social Security payroll tax cut for all workers.

    In Tax-Cut Capitulation, House Democrats Again Redefine Pathetic - The House Democratic caucus is truly pathetic. They are, in fact, so pathetic that I’ve been forced to use a thesaurus to find new ways of describing their pathetic behavior: weak, impotent, pitiful, feeble and toothless. Last night, they again folded completely and passed the Senate’s version of the Obama-McConnell tax deal–as is–even though only a week earlier the House Democratic caucus voted to reject the deal. This tax deal can be added to the list of legislation, including the stimulus package, financial reform, health care, and countless smaller bills, in which the House Democrats essentially just rubber-stamped whatever came from the Senate. Their feckless behavior has resulted in their influence being so minor that if we had disbanded the House of Representatives entirely at the beginning of Obama’s term, making the Senate an official unicameral legislature, I doubt the resulting legislation of the past two years would be much different.

    Tax Foundation Experts Comment on Passage of Obama Tax Package - Late last night the House of Representatives voted 277-148 to approve the compromise package of tax provisions which were passed by the Senate 81-19 earlier in the week. Tax Foundation President Scott A. Hodge, Tax Foundation Staff Economist Mark Robyn, and Tax Foundation Programmer/Analyst Nick Kasprak have issued a statement in response to the passage of these provisions. Hodge comments on the impact of passage on the future of tax policy, Robyn discusses the impact of the payroll tax cut on the economy, and Kasprak explains the impact of passage on low-income workers.

    The Obama-GOP Tax Deal May Be Bipartisan, But It Isn’t Stimulus and It Isn’t Smart - A modest thought experiment: Here is a check for $858 billion. Your job is to boost short-term economic growth. What would you do with the money?  President Obama and a huge bipartisan majority of the Senate have given us their answer (and the House is likely to add its support tonight or tomorrow): They’d extend the Bush-era tax cuts, restore the estate tax but at an historically low level, cut payroll taxes for all, protect the middle-class from the Alternative Minimum Tax for another year, and continue jobless benefits for the long-term unemployed.  But upon closer inspection, very little of this massive increase in the deficit over the next few years will actually boost growth. If you care about the bang for the buck—and given our long-term fiscal mess, you should—this new law is a colossal waste of money. In fact, you'd be hard pressed to use $850 billion in a way that's less effective than much of what’s in this package.

    Ezra Klein - Republicans are not fiscally responsible - In the Clinton era, and then again in the Obama era, congressional Democrats operated under "paygo" rules. Paygo meant, quite simply, that each dollar of spending or tax cuts had to be matched by a dollar of spending cuts or tax increases. They didn't always follow it -- emergency spending, like for the war or the stimulus, didn't fall under paygo, and nor did the extension of the Bush tax cuts -- but generally speaking, they did.  In the Bush years, Republicans didn't use paygo at all. That's why neither the tax cuts nor Medicare Part D even pretended to be paid for. But the Boehner Republicans just won an election by fretting over deficits. It would look sort of bad to repeal paygo on day one. So instead, they're neutering it. House Republicans are adding it with something called "cutgo." Under cutgo, tax cuts don't have to be paid for, and spending increases can't be offset by tax increases. The idea is that the only two things you can do are cut spending and cut taxes.

    The New Tax Deal: Reaganomics Redux - Robert Reich - More than thirty years ago, Ronald Reagan came to Washington intent on reducing taxes on the wealthy and shrinking every aspect of government except defense. The new tax deal embodies the essence of Reaganomics. It will not stimulate the economy. A disproportionate share of the $858 billion deal will go to people in the top 1 percent who spend only a fraction of what they earn and save the rest. Their savings are sent around the world to wherever they will earn the highest return.  The only practical effect of adding $858 billion to the deficit will be to put more pressure on Democrats to reduce non-defense spending of all sorts, including Social Security and Medicare, as well as education and infrastructure. It is nothing short of Ronald Reagan’s notorious “starve the beast” strategy. In 2012, an election year, when congressional Democrats have less power than they do now, the pressure to extend the Bush tax cuts further will be overwhelming

    Delusions Of Fiscal Grandeur - Simon Johnson - If you honestly believe that investors will happily buy up any amount of US government debt (at low interest rates) for the indefinite future, then relax.  The tax deal passed yesterday should make you happy. But if you fear that the US will soon be tested by financial markets – just as the eurozone is being tested today – then please read my column,”Voodoo Economics Revisited“, which is now on the Project Syndicate website.  There is a well-established tradition in the Republican Party of thinking that tax cuts cure all ills; many in the Democratic leadership have apparently now fallen into line.  We need to think hard about what our fiscal crisis will look like – and who will end up being hurt the most.

    Resurrecting the Estate Tax as a Shadow of Its Former Self - For nearly a year, we’ve had no federal estate tax. The estates those who died in 2010—including at least five billionaires—have passed to their heirs with nothing going to Uncle Sam. Compared to the estate tax in place in 2009, the tax hiatus cost the government an estimated $14 billion in desperately needed revenue.  The compromise tax bill worked out by President Obama and congressional Republicans would reinstate the tax for 2011 and 2012 with a $5 million exemption and a 35 percent tax rate. Though obviously a tax increase compared to what estates pay this year (i.e., nothing), that would be much less onerous for the wealthy than the $1 million exemption and 55 percent top tax rate that will take effect in January if Congress makes no changes. Absent congressional action, about 2 percent of estates would pay the estate tax (see red point on graph); under the compromise agreement, less than a tenth as many would owe anything (blue dot). That 0.2 percent would be the smallest percentage of estates owing tax since at least 1934 (other than 2010, when the one-year hiatus exempted every estate).

    Friday Animations--Estate Tax - Well, not exactly an animation, but Estate tax attorney Douglas A. Cook has a chart on the Federal Estate Tax 2001-2011 (linked from the Wills, Trusts & Estates Prof Blog) and also as an animation (see below). Certainly a picture worth a thousand words in terms of showing that ordinary Americans are essentially not taxable under any version of the estate tax. So what the Obama -GOP deal amounts to is a giveway to those few millionaires who had enough assets in the wrong category that they would actually have to pay some amount of tax--only about 5,500 estates under the 2009 version of the bill, about 145,000 in 2011 if the current laws (enacted under GW Bush) remain without any action by today's Congress to change them, but even fewer than 5500 under the Obama deal for a $5 million exemption and a mere 35% top rate

    Estate Tax Collections By State - A key component of the tax compromise bill being voted on today is the return of the estate tax. It’s a tax levied on the transfer of wealth from deceased persons to their heirs, and has a progressive structure: Most Americans are largely exempt because the tax only applies to wealth above a certain amount. This exemption has risen over time; during the most recent year in which the estate tax existed, 2009, it was $3.5 million, with a tax rate of 45% on wealth over the exemption. The compromise bill reduces the tax and raises the exemption considerably – 35% over an exemption of $5,000,000. This comparatively low tax (compared to the recent history of the estate tax) has become a sticking point with some more liberal House members and is something they may try to change before the final vote. So who pays the estate tax? What parts of the country are most affected by it? Here is a table that ranks the 50 states based on federal estate tax collections per capita for the year 2009:

    TFT to Billionaires: Pay Up -Even Pete Peterson, who funds The Fiscal Times, advocates raising taxes on the rich. Since the debate over the Bush tax cuts seemed to have some billionaires and millionaires begging to be taxed more, maybe it’s time for them to put their money where their mouths are.  So, for the fat cats who are quoted, and the millionaires and billionaires below who have signed pledges against extending the tax breaks for the wealthy through the organizations Wealth for the Common Good and Patriotic Millionaires for Fiscal Strength, The Fiscal Times has decided to put them to the test. We’re asking them to pay the amount they would have paid to Uncle Sam if the Bush tax cuts had expired. For Mr. Buffett, that’s $4.3 million more, based on his $46 million income from 2006. Not a small chunk of change to help bring down the growing deficit.

    • “People like myself should be paying a lot more taxes.” - Warren Buffett, chairman and CEO, Berkshire Hathaway
    • “Rich people aren’t paying enough.” - Bill Gates Sr., co-chair, Bill and Melinda Gates Foundation
    • “I’m rich; tax me more.” - Garrett Gruener, founder,
    • "I don't understand why my tax rate didn't go up.” - Alan C. “Ace” Greenberg, former chairman, Bear Stearns
    • “It’s so clear what’s needed. But because of the political debate, which the administration has lost, we are going to follow the wrong policy by extending the Bush tax cuts.” - George Soros, Soros Fund Management

    Senate Bill Extends IRA Donations, Other Provisions - Since the announcement of the deal by the White House and top Republicans to extend Bush-era tax cuts for two years and cut payroll taxes for one, taxpayers have been anxious to learn the fate of other tax breaks that have expired or are set to. Now there is news: The Senate bill released Thursday night reveals which "extenders," as they are known, would be renewed and for how long. The Senate plans a vote on Monday, but it's unclear when and what House members will do.  Several important individual extenders made the cut—and one didn't. The extended provisions would be continued for two years, retroactive to the beginning of 2010, so they would expire again in 2011.  Taxpayers could make tax-free distributions of up to $100,000 of IRA assets to charities per year. The bill allows donations made in January, 2011, to be treated as if made in 2010. The provision, which allows people to take the required minimum distribution while minimizing their tax bill, is a popular one, says Ms. Labant. By giving their IRA assets to charity, taxpayers don't have to claim the distributions as income, so they avoid being disqualified for other tax breaks and deductions.

    Republicans Block Effort To Repeal 1099 Tax Reporting Rules - After spending much of the past eight months or so criticizing the new 1099 reporting requirements contained in the Affordable Care Act, and even trying to repeal them back in July, Republicans are now blocking a Democratic effort to repeal the rules in the lame duck session: Another day, another failed attempt at 1099 repeal. Republicans rebuffed a Democratic effort to repeal health reform’s universally panned 1099 IRS reporting requirements as a piggyback in the tax cut deal, congressional aides on both sides of the aisle confirm to POLITICO. The move leaves 1099 rollback in play for the next Congress, giving Republicans an easy target in an otherwise challenged landscape for health reform repeal. Democratic aides allege Republicans are stalling on repealing the unpopular measure for political benefit. Health reform’s 1099 tax reporting provision requires businesses to file IRS paperwork on any vendor purchases over $600. Both parties have failed in multiple attempts to dial back the unpopular provision.

    Republicans Make Good On Threat To Force Lame Duck Spending Showdown - Before the midterms, conservative leaders were warning that they'd force a showdown over federal spending much earlier than expected: in the lame duck session, before the newly elected Republicans come to Washington. They weren't joking. Republican and Democratic leaders are now engaged in a brinksmanship that could result in a temporary shutdown of the federal government. After the election, Republicans voted among themselves to eschew all earmarks for two years, and now they have to make good on their pledge. Yesterday, Democrats' chief appropriator, Sen. Daniel Inouye (D-HI) unveiled what's known as an omnibus spending bill -- a bundled up package of appropriations legislation, earmarks, and other measures -- which would keep the government running for a year.  In response, most Republicans -- even those whose multimillion dollar earmark requests are included in the legislation -- are saying, "Hell no you can't!"  That puts them all in an awkward position. At a press conference this morning, Sens. John Cornyn (R-TX) and John Thune (R-SD) were at pains to explain away why they requested earmarks that appear in the bill they're now railing against. But it also sets the two parties up for a standoff -- and one side must blink by this weekend, or the lights will start going out in the federal government.

    The Tax Rate Fallacy - When anyone starts lecturing you that the US has the highest tax rate in the industrialized world, just turn around, walk away, and pretend you never heard of them. This person is either ignorant about this country’s taxation system, or is deliberately trying to deceive or mislead you. According to a report released by the Internal Revenue Service, America’s tax collection agency, the top 400 individual tax returns filed in 2009 reported an average gross income of $358 million each. The average amount of tax paid by these individuals came to under 17%, less than half the maximum Federal rate of 35%, which kicks in on annual income over $372,950 (click here for the 2009 tax tables at ). This explains why Warren Buffet pays a much lower tax rate than his secretary. It really is true that in America, only the poor people pay taxes. Look at any international comparison of taxes to GDP, and one can always find the United States at the bottom of the table. What the US has that other countries lack is the 100,000 pages of the Internal Revenue Code. It is a 97 year accumulation of deductions, accelerated depreciation rates, tax credits, and other tax breaks that are the end product of intensive lobbying efforts and bribes by special interest groups, corporations, unions, and even religious groups.  I have a very simple solution to the country’s budget deficit problem. Hit the reset button. Eliminate the Internal Revenue Code. Just set it on fire. Keep the existing progressive, hockey stick tax rates on income, but eliminate all deductions. And I mean everything; deductions for dependents, home mortgage interest, medical expenses, the works. There are no sacred cows. My revised Form 1040 would have only three lines on it:

    -Tax Rate
    -Tax Due

    Why the Economy Stubbornly Insists on Growing More Slowly When Taxes are Lower - I've been writing for years about the fact that a basic piece of economic theory does not apply to real world US data: unless one engages in the sort of assumptions that can justify eating ceramic plates as a cure for leprosy, there is simply no evidence that lower taxes lead to the good stuff we've been led to believe over non-cherry picked data sets. Recent examples include this look at the effect top federal marginal rates on various measures of growth, this look at the effect of top federal marginal rates on tax revenues, a different look at federal marginal rates and growth, and this look using state tax levels. I've also shown that effective tax rates also have fail to cooperate with theory when looking over the length of presidential administrations - examples include myriad posts and Presimetrics, the book I wrote with Michael Kanell.

    Bullet Proof Result Of Progressive Tax Tables? Better Economic Growth - From pessimetrics blog article entitled ‘The Effect of Changing Top Marginal Tax Rates’ written by Mike Kimel, an economics professor and co-author of the book ‘Pessimetrics:’ “The positive relationship between the top marginal tax rate and the growth in real GDP is very nearly bullet-proof. For instance, it extends all the way back to 1929, the first year for which the government computed GDP data. Additionally, higher marginal tax rates are not only correlated with faster increases in real GDP from one year to the next, but also with increases in real GDP over the subsequent two, three, or four years. This is as true going back to 1929 as it is for the period since Reagan became president. In fact, since the Reagan Revolution took hold, similar relationships have existed between the top marginal rate and several other important variables, like real median income, real private investment, consumer sentiment, the value of the dollar relative to other major currencies, and the S&P 500. Lower tax rates in any given year are associated with slower growth rates for each of these variables, whether those growth rates are measured over periods of one, two, three or four years.”

    Wall Street Journal Discusses Consequences of a  Temporary Tax Code - Today's Wall Street Journal (subscribe) has an in-depth article on the consequences of making so many tax provisions temporary. Here's an excerpt: In the late 1990s, there were typically fewer than a dozen tax provisions that had just a limited lease on life and needed to be renewed every year or so. Today there are 141. Now Congress, taking up a deal worked out between the Obama administration and Republican leaders, is poised to turn the whole personal income-tax system into something of a temporary structure. The plan embraces a broad range of provisions-an extension of Bush-era rates, a new estate-tax formula-but for only two years. A payroll-tax cut in the bill is for a single year. This means that if the compromise passes largely intact, the U.S. will have no permanent regime governing levies on salaries, capital gains and dividends, the Social Security tax, as well as a slew of targeted breaks for families, students and other groups. This on top of dozens of corporate-tax provisions that already were subject to annual renewal.The level of uncertainty, unusual for developed nations, complicates planning and discourages hiring and investment, many economists and corporate executives say.

    Law lab - The Boston Globe - If only there were a scientific way to determine the real impact of taxation on industriousness, labor supply, and innovation.According to some scholars, there is. Randomly assign a representative sample of the population — say, 10,000 taxpayers — a lower tax rate, and see what happens. Did these Americans, on average, behave any differently than their counterparts? Did they work longer hours or more jobs, start more businesses, hire more employees?In other words, test government policies using the same technique — randomized controlled trials — used to test new drugs. A growing chorus of legal scholars, economists, and political scientists believes that such trials should be conducted to evaluate a wide range of laws: gun control, safety and environmental regulations, election reforms, securities rules, and many others. And some believe that we are ethically obligated to do this, because laws affect our lives so pervasively. Understanding the true costs and benefits of legislation, they say, is essential to making good policy — and we may know much less about our own laws than we think.

    Tax reform and the revolving door - Last week, we learned that President Obama intends to push for comprehensive tax reform. We also learned that Peter Orszag, who until recently headed up the Office of Management and Budget (OMB), will be taking a top job at Citigroup. These two events may seem to have little in common, but unfortunately, they are intimately related.With comprehensive tax reform, as President Obama told us, everything is supposed to be on the table. That sounds great. As everyone knows, the tax code is a mess. It is full of items that may, at one time, have served a purpose, but now just hand money to powerful interest groups. Who could be opposed to cleaning up the muck?If the group of people designing a new tax code really had the public interest foremost in their thoughts, there is much good that could be done. The mortgage interest deduction in its current form is an utter absurdity. Most low- and middle-income people get little or nothing from this deduction. By contrast, millionaires often pocket tens of thousands a year in tax savings.

    13M get unexpected tax bill from Obama tax credit - About 13.4 million taxpayers may be getting unexpected tax bills because they were awarded too much money under President Barack Obama's Making Work Pay tax credit, a government audit said Thursday. The tax credit, which expires Jan. 1, was designed to increase take-home pay by about $8 a week through new tax withholding tables. The credit was capped at $400 for individuals and $800 for married couples filing jointly. However, the credit put millions of taxpayers at risk for not having enough taxes withheld from their paychecks, resulting in a tax bill when they file their returns, said the audit by J. Russell George, the Treasury inspector general for tax administration. Those at risk included people with multiple jobs, married couples who both work, Social Security recipients who also work, and young workers who are also claimed as dependents on their parents' tax returns.

    Financial arms race underway in Washington - When it comes to money in politics, the new normal is already on vivid display. It could be seen last week in posh restaurants and corporate townhouses on Capitol Hill, where politicians held fundraisers at a record pace. It was evident at Washington's blue-chip law firms, where campaign finance lawyers began work setting up new political committees to collect unlimited donations. It was apparent in the halls of Congress, where lawmakers swapped strategies about how to contend with muscular interest groups looking to take them out. The unusually intense December bustle is the product of this year's elections, where spending surged to $4 billion in sharp-edged campaigns across the country — a record for a midterm. Those who survived already are plotting how to deal with the attacks next time. There is no down time. Even the most entrenched incumbents — including many Republicans, who could face left-leaning independent attacks in 2012 — feel compelled to go into permanent campaign mode, further impinging on the already limited time lawmakers spend on policymaking and constituent service.

    The legacy of Larry Summers - FOR two years the Obama Administration’s economic policy has been caricatured from the right as an invasive expansion of government and from the left as a cowardly capitulation to Wall Street free market fundamentalism. How can it be both things at once? It helps to understand the philosophy of the man who most embodies that policy, Larry Summers, who today delivered perhaps his final public speech as Barack Obama’s National Economic Council director. The "Summers Doctrine" fuses microeconomic laissez faire with macroeconomic activism. Markets should allocate capital, labour and ideas without interference, but sometimes markets go haywire, and must be counteracted forcefully by government.

    I come to bury Larry Summers, not to praise him - To say certain people in the media weren’t sorry to see Big Larry go is understating matters. The Washington Post’s Dana Milbank described him as a man who “rose to national prominence because of his intellect but is now leaving government known more for his dyspepsia.” In Summers’s final public appearance in Washington, Reuters blogger Felix Salmon noted, he failed to thank President Obama for hiring him as head of the National Economic Council. Why would he do this? “I don’t think Summers thinks that way,” Salmon wrote. “In his mind, the thanks should all flow the other way.” At the National Interest, Jacob Heilbrunn dismissed Summers thus: “He exemplifies the Ivy League syndrome: He is a high-IQ moron.” Still, reporters need to get over it. After all, we aren’t the only folks Larry considers intellectually beneath him. Such a category would include most members of President Obama’s cabinet and their top policy advisers; many of his colleagues in the White House; virtually all foreign officials; ninety per cent of the Harvard faculty; and a similar proportion, or possibly higher, of his fellow academic economists.

    Incoming GOP Financial Services Chairman: Washington’s Role Is “To Serve The Banks” - During the financial reform debate, Rep. Spencer Bachus (R-AL) — who will become chairman of the House Financial Services Committee in the 112th Congress — continually criticized the reform effort. He falsely characterized the legislation that ultimately became the Dodd-Frank financial reform law as creating “permanent bailout authority,” and he staunchly opposed the creation of the new Consumer Financial Protection Bureau. Now that he’ll be taking the Financial Services committee gavel, Bachus has telegraphed his intention to weaken some of the bill’s most important sections, including derivatives reform and rules meant to prevent banks from making risky trades with federally insured dollars. In an interview with The Birmingham News, Bachus made it clear why he opposed stricter regulations for banks in the wake of a huge financial crisis largely caused by Wall Street excess and a lack of prudent regulation. In Bachus’ estimation, the government’s role is not to protect consumers and the wider economy through regulating financial activity, but to simply “serve the banks”:

    This is how the GOP Congress will regulate Wall Street? - Rarely do you see a politician quite this honest: Last Wednesday, just hours after securing the position of chairman of the House Financial Services Committee, Spencer Bachus, R-Ala., told the Birmingham News that "in Washington, the view is that the banks are to be regulated, and my view is that Washington and the regulators are there to serve the banks." In the very next paragraph, the newspaper reported that Bachus "later clarified his comment to say that regulators should set the parameters in which banks operate but not micromanage them."  The candor of Bachus' initial statement is eyebrow-raising, no doubt about it, but the fuss and bother over his revelation is a little bit disingenuous. We don't need to listen to the Alabama Republican's words to understand just which master he intends to serve -- all you need to do is watch his actions. Together with his fellow Alabaman Republican, Sen. Richard Shelby, the powerful ranking member of the Senate Banking Committee, he's part of a dynamic duo of market fundamentalist crusaders who will likely set the tone for how banking reform and regulatory oversight aimed at Wall Street are implemented for the next two years.

    “Washington and the Regulators Are There To Serve the Banks” - At the urging of the administration, Congress passed a financial reform bill this past summer that expanded the theoretical powers of regulators, but also gave those regulators the power to write the rules implementing the bill and then to enforce the rules. The bill’s sponsors fended off efforts to write specific constraints, whether size limits or leverage limits, into the statute. Yet the bill did nothing that I am aware of to ensure that regulators do a better job than they did last time around, unless you count the creation of a standalone consumer protection agency. (Yes, this is a hard problem with no easy solutions, but ignoring it doesn’t make it go away.) Now we will see the results. Via Mark Thoma, Andrew Leonard provides the money quote, from incoming House Financial Services Committee chair Spencer Bachus: “in Washington, the view is that the banks are to be regulated, and my view is that Washington and the regulators are there to serve the banks

    Ron Paul: ‘I Don’t Think We Need Regulators’ Rep. Ron Paul (R., Texas), who is taking over a key House panel with oversight over the Federal Reserve, criticizes regulators in a new interview. Appearing on C-SPAN’s Newsmakers (interviewed for a second time by the Journal’s Sudeep Reddy), Paul responded to recent comments by incoming House Financial Services Committee Chairman Spencer Bachus (R. Ala.,) on bank regulation. “I don’t think we need regulators. We need law and order. We need people to fulfill their contracts,” Paul said. The congressman said that the market should play the main role in regulation. “The market is a great regulator, and we’ve lost understanding and confidence that the market is probably a much stricter regulator,” he said. Separately, Paul, author of “End the Fed,” said of his new role overseeing the central bank: “I will continue to do exactly what I have been doing” but with a “better platform.”

    Regulator Is Slowed By Budget Impasse - The Securities and Exchange Commission is slowing the pace of some investigations and routine inspections as part of a belt-tightening caused by the budget impasse in Congress. Agency officials recently postponed gathering testimony from witnesses in a number of probes into potential wrongdoing, according to people familiar with the situation. And some previously scheduled audits of financial firms outside Washington have been put on hold because the SEC won't pay travel costs for investigators until an agreement is reached on the agency's funding for the current fiscal year. SEC Chairman Mary Schapiro says the agency needs 800 additional employees to shoulder its new workload.

    SEC Bracing To Lose Funds, Scaling Back Investigations - As lawmakers in Washington attempt to slash the budget, Wall Street regulation could be on the chopping block. The Securities and Exchange commission has already scaled back its investigations of potential wrongdoing, anticipating that it may lose a portion of its funding when Republicans take over the House of Representatives next year, the Wall Street Journal reports. During this critical time for the SEC, as it helps write the rules for a wave of new financial regulations, and as it tries to determine whether Wall Street firms committed wrongdoing of potentially epic proportions, the agency is paring down. To achieve its growing list of goals, the SEC had planned to increase its staff by 11 percent next year, counting on a budget increase of 12 percent, proposed by President Obama, the WSJ notes. It's unclear at this point whether that increase will be approved. The agency, worried that the newly Republican House will push for austerity, has already cut back.

    So what’s become of credit derivatives? - What happened to the credit derivatives market? You remember, the market that was supposed to threaten the whole world with annihilation, but was then heroically brought under control by courageous political leaders and central bankers? The one that was the target of “Wall Street Reform”?  Much, much less than you think.  It suits the large banks and the curiously well dressed politicians who oversee them to agree that the derivatives market people are groaning under the lash of regulation. In truth, credit derivatives professionals are still being very well paid, and their employers are still making outsized profits, albeit from somewhat different conceptual “products”. There is probably a fifth fewer people employed in the business than there were in the autumn of 2008, but that’s a much better survival rate than even the insiders expected.  In a way, the much-denounced excessive complexity, riskiness, and incomprehensibility of the credit derivatives market have saved it from populist retribution. The media, political class and general public were told that Wall Street and the City had created a pile of unstable explosive devices. They had to keep calm and let the experts disconnect the wires to keep everyone’s money from blowing up. The experts were the people who created the stuff or regulated it from the beginning.

    A Secretive Banking Elite Rules Trading in Derivatives - On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.  The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.  Drawn from giants like JPMorgan Chase, Goldman Sachs and Morgan Stanley, the bankers form a powerful committee that helps oversee trading in derivatives, instruments which, like insurance, are used to hedge risk.  In theory, this group exists to safeguard the integrity of the multitrillion-dollar market. In practice, it also defends the dominance of the big banks. The banks in this group, which is affiliated with a new derivatives clearinghouse, have fought to block other banks from entering the market, and they are also trying to thwart efforts to make full information on prices and fees freely available. 

    Bankers Secretly Meeting to Control the World?!? Yawn - If you want to know why the powers that be hate the New York Times – read this! "The Paper of Record," one of the few remaining news entities not controlled by Rupert Murdoch or some other Billionaire or major corporation, still has the guts to tell it like it is as they are actually pointing a finger right at the Gang of 12 (well 9 of them) and those not-so-secret meetings they have been having for years where they sit down and think of new and exciting ways to control the World. It takes a lot of guts to write an article like this, especially one which actually names ICE (I got my ass handed to me with legal BS when I dared mention them in conjunction with the word "manipulation." Fortunately they straightened me out and we now know that clearly there is no manipulation in the energy markets – can I have my Grandma back now?).   Anyway, those fools at the NY Times have thrown caution to the wind without naming specific names using the phrase "giants LIKE JPM, GS and MS" – something I have learned to do as well because, if you don’t – THEY WILL GET YOU! And what are they saying about our friendly Banksters?:

    Wall Street's cozy derivative club - When you make trading of financial instruments open and competitive, it becomes less profitable for dealers and banks. This happened in 1975 with stock broking and in 2002 with corporate bond trading, and in both cases broker-dealers lost billions of dollars as aggressive price cutters entered the market and commissions shrunk. It was good news for buyers and sellers, but bad news for banks. So what about derivatives trading, the biggest and most profitable market by far on Wall Street? You will be unsurprised to learn that big banks have never been keen on the prospect of putting derivatives trading into a clearinghouse and requiring that prices be made public. They much prefer the current system, in which a small number of banks control the entire market and neither buyers nor sellers have any idea exactly what commissions they're paying when they puchase derivative contracts. Sadly for the big banks, the Dodd-Frank bill mandates the end of this cozy relationship.

    Derivatives: greater transparency is needed - The big banks got into considerable trouble doing derivatives trades--especially the credit default swaps where AIG was the major counterparty and the taxpayers ended up bailing out the Big Banks like Goldman Sachs. So surely one of the results of "financial reform" in the wake of the casino banking financial crisis would be utter and complete transparency about derivatives, correct?  One would think so.  But it may not be so.For a detailed picture of the way the Big Banks have controlled derivatives trading in order to make it a lucrative noncompetitive market for them and a costly market for derivatives endusers, read the article in the Saturday New York times:  Louise Story, A Secretive Banking Elite Rules Trading in Derivatives, As Story notes, there is an exclusive group of bankers that has a great deal of say about derivatives trading.  The theoretical purpose is to "safeguard the integrity" of the derivatives market.  The real purposes is to "defend[] the dominance of the big banks" which the banksters do by thwarting efforts to create transparent markets where end users get real information on prices and fees and comparable trades.

    Bachus, Lucas Warn Regulators on Derivatives Rules - In a warning shot from Republicans over putting the new financial overhaul law into practice, Reps. Spencer Bachus of Alabama and Rep. Frank Lucas of Oklahoma said they don’t like how new derivatives rules are turning out. In a letter to Treasury Secretary Timothy Geithner, Commodity Futures Trading Commission Chairman Gary Gensler, Securities and Exchange Commission Chairman Mary Schapiro and Federal Reserve Chairman Ben Bernanke, the two lawmakers warned the regulators against forcing companies that use derivatives to hedge commercial risk to post margin -– money set aside to absorb some potential losses — saying a margin requirement would “move billion of dollars of capital onto the sidelines.”  Mr. Bachus has been under fire from Democrats this week for an interview with an Alabama newspaper, in which said, “In Washington, the view is that the banks are to be regulated, and my view is that Washington and the regulators are there to serve the banks.”

    Financial Crisis Panel In Turmoil As Republicans Defect; Plan To Blame Government For Crisis - The four Republicans appointed to the commission investigating the root causes of the financial crisis plan to bypass the bipartisan panel and release their own report Wednesday, according to people familiar with the commission's work.The Republicans, led by the commission's vice chairman, former congressman and chair of the House Ways and Means Committee Bill Thomas, will likely focus their report on the explosive growth of subprime mortgages and the heavy role played by the federal government in pushing mortgage giants Fannie Mae and Freddie Mac to purchase and insure them. They'll also likely focus on the Community Reinvestment Act, a 1977 law that encourages banks to lend to underserved communities, these people said. The Republicans' report is expected to conclude that government policy helped inflate the housing bubble and that prices weren't expected to crash because the government pushed homeownership so aggressively. They say that the report will note that once the bubble burst, a financial panic followed because firms weren't adequately prepared

    The FCIC falls apart - Shahien Nasiripour reports this morning that the Financial Crisis Inquiry Commission has, to all intents and purposes, fallen apart. The four Republicans seem set to issue their own minority report, sticking to discredited Republican talking points which blame the government and Frannie for the crisis, with especial focus on the long-standing and harmless Community Reinvestment Act. As a result, the official report will be received as some kind of equal-and-opposite Democrat view, rather than a definitive take along the lines of the 9/11 Commission report.  You really can’t make this stuff up: During a private commission meeting last week, all four Republicans voted in favor of banning the phrases “Wall Street” and “shadow banking” and the words “interconnection” and “deregulation” from the panel’s final report, according to a person familiar with the matter and confirmed by Brooksley E. Born, one of the six commissioners who voted against the proposal.

    Republican Panelists Dissent on Causes of Crisis -The Republican members of the commission appointed by Congress to investigate the causes of the financial crisis plan to release on Wednesday a document that assigns government housing policies substantial blame for the origins of the 2008 financial crisis.  The release of the 13-page document is an indication of a major partisan division within the 10-member Financial Crisis Inquiry Commission, which was required to deliver its report on Dec. 15 but has pushed that deadline back to January. Two people close to the work of the commission provided copies of the document to The New York Times on Tuesday.  The Republican members of the panel were angered last week when the commission voted 6 to 4, along partisan lines, to limit individual comments by the commissioners to 9 pages each in a 500-page report that the commission plans to publish next month with Public Affairs, an imprint of the Perseus Books Group, one Republican commissioner said.  The Government Printing Office will publish an official version of the report that will contain the full comments of each commissioner, but the commercially available version is the one likely to get the most visibility,

    Republican Members of FCIC to Promote Crisis Urban Legends, Shift Blame From Bank, by Yves Simth: Lordie, the Big Lie is with us in force. The New York Times reports that the Republican members of the Financial Crisis Inquiry Commission are going to pre-empt the report (due in mid-January) and issue their own 13 page screed later today focusing blame for the crisis on…Fannie and Freddie, and no doubt the CRA too. Let’s look at a few inconvenient facts. We had housing bubbles in the UK, Australia, Ireland, Spain, Iceland, Latvia, Canada, and a lot of Eastern Europe. Can we blame the CRA and Fannie and Freddie for that? How about the M&A boom, which resulted in a ton of leveraged loans being issued at super low spreads? If the Fed and other central banks had not driven rates to the floor, we’d see a good bit more distress and dislocation in this sector of the market. Oh, and how about the fact that banks in Continental Europe, which had no housing bubble in their home markets, and no evil Fannie or Freddie analogues, also nearly keeled over in the crisis? This whole line of thinking is garbage, the financial policy equivalent of arguing that the sun revolves around the earth. Yes, the US and other countries provide overly generous subsidies to housing, and curtailing them over time would not be a bad idea. But that’s been our policy for decades. Calling that a major, let alone primary, cause of the crisis, is simply a highly coded “blame the poor” strategy.

    Invincible Ignorance - Paul Krugman - So Republican members of the Financial Crisis Inquiry Commission are going to issue their own report, placing primary blame on the government — because it’s always the government’s fault. And according to reporting at the Huffington Postall four Republicans voted in favor of banning the phrases “Wall Street” and “shadow banking” and the words “interconnection” and “deregulation” from the panel’s final report, according to a person familiar with the matter and confirmed by Brooksley E. Born, one of the six commissioners who voted against the proposal.  Yep. It was all Fannie and Freddie, which somehow managed to cause housing bubbles in Ireland, Iceland, Latvia, and Spain as well as the United States; and the repo market had nothing to do with it. And bear in mind that this wasn’t one Republican; it was all of them.

    Crisis panel's GOP members blame U.S. housing policy for crisis… Republicans on a congressionally appointed panel studying the causes of the financial crisis largely blamed federal housing policy in a brief paper Wednesday that highlighted how differently the right and the left view the origins of the crisis. Splintering from their Democratic counterparts, the four GOP members of the Financial Crisis Inquiry Commission pointed the finger at politicians in Washington for promoting lax mortgage lending standards that allowed lower- and moderate-income people to buy homes beyond their means.  Specifically, they wrote, the Clinton and Bush administrations turned mortgage finance companies Fannie Mae and Freddie Mac, chartered by Congress to expand homeownership, into "two enormous monoline hedge funds" whose "only option available was to invest in mortgages of increasingly lower quality and higher risk to the taxpayer."

    Commentary: Subprime Thinking - When I started this blog in January 2005, one of my goals was to alert people to the housing bubble, and to discuss the possible consequences of the then approaching housing bust. Residential investment has historical been one of the best leading indicators for the economy, and I was deeply concerned a major housing bust - both in terms of activity and house prices - would take the economy into recession.When the Financial Crisis Inquiry Commission was announced, I was skeptical if they'd be willing to address the willful lack of regulatory supervision, and the role of Wall Street in the crisis. This morning, Shahien Nasiripour at the HuffPo wrote: Financial Crisis Panel In Turmoil As Republicans Defect; Plan To Blame Government For Crisis.  Republicans voted in favor of banning the phrases "Wall Street" and "shadow banking" and the words "interconnection" and "deregulation" from the panel's final report, How depressing.Lets name names: Bill Thomas, Peter Wallison, Keith Hennessey and Douglas Holtz-Eakin. These are all subprime thinkers.

    10 Questions for GOP Members of Financial Crisis Inquiry -  I never wanted to write Bailout Nation. I turned McGraw Hill down — repeatedly — but they cajoled and flattered and wheedled and promised, and eventually I relented.I approached the subject with a blank slate, pragmatically, with no agenda. It was a problem solving exercise, and I began by looking for and at the data that led me where ever it would. Following the money is always a good tactical approach for anyone researching these sorts of events. The data led me to numerous conclusions: I blamed Republicans, I blamed Democrats, I blamed the Federal Reserve, Congress, the ratings agencies, mortgage originators and lending banks, the biggest Wall Street firms, the SEC. I blamed US borrowers and home buyers, the RE agents, the mortgage brokers, and appraiser. I blamed the other end of the sausage factory, the collateralized debt obligation (CDO) underwriters, managers and the funds that bought them. I blamed Greenspan & Gramm, Bush & Clinton, Paulson & Bernanke & Rubin & Summers. Even mutual funds, compensation consultants and crony corporate board members come in for criticism. (This is only a partial list). Which leads to today’s exercise in willful ignorance.

    Orwell and the Financial Crisis - Krugman - Barry Ritholtz catches AEI purging mention of deregulation from Peter Wallison’s bio. Wallison is co-director of AEI’s financial deregulation project; but he’s also one of the Gang of Four demanding that the Financial Crisis Inquiry Commission not so much as mention deregulation in its report. So Wallison’s history as an advocate of the policy that shall not be named must be expunged, I guess. If this sounds familiar, it should. The same thing happened with Social Security privatization. There was a long effort by conservative groups to promote privatization, a term they themselves devised. Cato had a Project on Social Security Privatization. But then, when it turned out that the term polled badly, they began rewriting old records in an attempt to cover up the fact that they had ever talked about it.

    Decade of the Living Dead - Barry Ritholtz expresses amazement at the way the Fannie-Freddie-CRA lie — the claim that gubmint bureaucrats forced all those poor bankers into making bad loans — not only persists, but seems to be growing in influence. But this story is hardly unique. Ever since I began writing for the Times — and probably before, but I wasn’t paying so much attention then — I’ve been struck over and over again by the unkillability of zombie lies. I mean, supply-side economics should have been killed by the Clinton years: he raised taxes on the rich, everyone on the right predicted catastrophe, and what followed was 8 years of rapid growth and surging revenues, with the budget actually moving into surplus for the first time in three decades. But no: the right interpreted all the good stuff as a lagged effect of the 1981 tax cut.

    Fannie Freddie Forked Tongue - Krugman - As I pointed out in today’s column, Republicans on the Financial Crisis Inquiry Commission are pushing a false story — that Fannie and Freddie, by pushing loans to low-income buyers, created the housing bubble and hence the crisis. The right way to refute this story is to point to all the contrary evidence. But catching the commissioners in some rank hypocrisy can’t hurt. And sure enough, Richard Green points us to this 2006 article by Peter Wallison in which he attacks Fannie and Freddie for … not doing enough to promote borrowing by low-income home buyers: There are many lenders aggressively competing to make the higher-amount loans, and the GSEs are not doing the job they should for low-income homebuyers. Fannie and Freddie should do a much better job of providing affordable home financing to a neglected portion of the mortgage market.  Less than a year after that article was published, by the way, the subprime meltdown began.

    Wall Street Whitewash, by Paul Krugman - When the financial crisis struck, many people — myself included — considered it a teachable moment. Above all, we expected the crisis to remind everyone why banks need to be effectively regulated. How naïve we were. We should have realized that the modern Republican Party is utterly dedicated to the Reaganite slogan that government is always the problem, never the solution. And, therefore, we should have realized that party loyalists, confronted with facts that don’t fit the slogan, would adjust the facts. Which brings me to the case of the collapsing crisis commission. The bipartisan Financial Crisis Inquiry Commission has broken down along partisan lines, unable to agree on even the most basic points. It’s not as if the story of the crisis is particularly obscure. ... It’s a straightforward story, but a story that the Republican members of the commission don’t want told. Literally.

    Republican Financial Crisis Report Repeats Party Dogma - Is there such a word as “presponse?” Perhaps we should coin it to describe what took place this week at the F.C.I.C.  I’m talking about that odd 13-page “report” issued on Wednesday by the four Republican members of the Financial Crisis Inquiry Commission. The F.C.I.C., of course, is the 10-member, supposedly bipartisan panel that was created by Congress last year and charged with examining the root causes of the financial crisis.  After a year and a half of hearings, including questioning over 800 witnesses, reviewing millions of pages of documents, and spending some $6 million in taxpayers’ money, its final report is due to be delivered in a month. Except that in Washington these days, there is no such thing as bipartisan. On every major issue facing the country, Democrats and Republicans have competing narratives. Why should anyone expect anything different when it comes to the origins of the financial crisis?  The Republican minority, fearing their view would get short shrift, pre-emptively put forward a CliffsNotes version of their theory of the case. In other words, they responded to a report that hasn’t even yet been written, much less read and voted on by the members.

    Fannie Mae, Freddie Mac, the CRA, and the Financial Crisis - As should not surprise anyone, the financial crisis has created opportunities for virtually everyone to promote their own ideas, by blaming the people they don't like for causing the crisis or not seeing it coming. What did Fannie Mae (the Federal National Mortgage Association), Freddie Mac (the Federal Home Loan Mortage Corporation) and the CRA (the Community Reinvestment Act of 1977) have to do with the financial crisis, and why should we care? Some unhappy campers - the Republicans on the Financial Crisis Inquiry Commission (FCIC) - claim here that Fannie, Freddie, and the CRA had a lot to do with the financial crisis. This guy and Paul Krugman (here and here), among others, claim that the unhappy campers are liars, and that their ideas were debunked long ago. Obviously some people are not agreeing. Let's see if we can learn something here.

    Springtime for Hypocrites _ Krugman - It has been a great week on the hypocrisy front. A couple of high points: The hypocrisy of the apparatchiks: Joe Nocera amplifies some of the points I made in my column. The determination of the Republicans on the crisis commission to lay the blame on Fannie and Freddie flies right in the face of the evidence; and Nocera also adds some information on the curious switch of positions taking place. A few years ago the same people now attacking F&F for promoting loans to low-income borrowers were attacking F&F for … not promoting loans to low-income borrowers. Back then they castigated F&F by pointing to the fact that private lenders were making loans where the agencies refused to tread, now they say that it was F&F that lured the private sector into making those very same loans. The hypocrisy of the centrists: Just two weeks ago, the deficit was the great evil, and all the VSPs insisted that we needed fiscal austerity now now now. Then, magically, a big tax cut — increasing federal debt by more than the original Obama stimulus, and substantially raising the probability of making unaffordable tax cuts permanent — was the greatest thing since sliced bread. Why, it’s almost as if all the concern about the deficit was a front for opposing anything progressives might want, to be dropped as soon as debt was being run up on behalf of conservative goals. But that can’t be true, can it?

    Bethany McLean on the GOP "primer" - She writes: This narrative isn't completely wrong—but it is shockingly incomplete, which makes it, in the end, a ludicrous distortion of what happened. Three points.  First, I have never, ever, seen Peter Wallison suggest that banks are ever anything by morally upright and wise, despite lots of evidence to the contrary (I would welcome a correction on this point).   Second, to say that the Affordable Housing Goals were major contributors to the crisis is silly, because as people like Wallison liked to point out, the GSE's continually lagged the market when it came to advancing mortgages to low income borrowers and underserved areas.  Wallison specifically said in 2006 that GSEs were "not doing the job they should for low income borrowers.  Finally, the Community Reinvestment Act did not cover many of the financial institutions that originated the most toxic loans.

    Why won't the GOP's financial-crisis report follow the money? - Almost from day one, there have been rumors that the Financial Crisis Inquiry Commission, which the government established in the spring of 2009, was plagued by infighting between Democrats and Republicans. Lo and behold, on Dec. 15, defecting Republicans broke ranks and released what they describe as their "preliminary findings and conclusions." This "primer" (in a blog, Wallison denied that it was either a "report" or a "response") put blame just where many Republicans would like to see it: on the government's push for homeownership "There were three important ways that the government pushed investors toward investing in mortgage debt," the authors write. First, the regulatory capital requirements associated with mortgage debt were lower than for other investments. Second, the government encouraged the private market to extend credit to previously underserved borrowers through a combination of legislation, regulation and moral suasion. Third, and most important, during the bubble's expansion, the largest investors in the mortgage market … Fannie Mae and Freddie Mac, were instruments of U.S. government housing policy.

    Does Economic Inequality Cause Crises? - Did inequality cause the recent housing and financial crisis? For decades, a growing literature has tried to establish links between inequality and adverse outcomes, such as low economic growth, weak social cohesion and mortality and, most recently, financial crises. If true, these arguments would provide even more reasons to worry about our unequal income distribution. If false, we should still worry about income inequality, because in a just society everyone should have a decent standard of living and the opportunity to succeed.

    Extreme Inequality Helped Cause Both the Great Depression and the Current Economic Crisis - It is clear that when banks become too big, it harms the economy. Economist Steve Keen says that “a sustainable level of bank profits appears to be about 1% of GDP”, and higher bank profits lead to a Ponzi economy and a depression. But most mainstream economists dismiss the idea that wealth inequality among individuals causes economic crises. Of course, some ideologues will argue that even discussing inequality is waging class warfare, and smacks of an attack on capitalism. However, the father of modern economics – Adam Smith – disagreed. And as Warren Buffet, one of America’s most successful capitalists and defenders of capitalism, points out: There’s class warfare, all right, but it’s my class, the rich class, that’s making war …. And as I have previously noted, radical concentration of wealth actually destroys capitalism, turning it instead into socialism for the rich.

    The Inequality That Matters - Tyler Cowen -Does growing wealth and income inequality in the United States presage the downfall of the American republic? Will we evolve into a new Gilded Age plutocracy, irrevocably split between the competing interests of rich and poor? Or is growing inequality a mere bump in the road, a statistical blip along the path to greater wealth for virtually every American? Or is income inequality partially desirable, reflecting the greater productivity of society’s stars?  There is plenty of speculation on these possibilities, but a lot of it has been aimed at elevating one political agenda over another rather than elevating our understanding. As a result, there’s more confusion about this issue than just about any other in contemporary American political discourse. The reality is that most of the worries about income inequality are bogus, but some are probably better grounded and even more serious than even many of their heralds realize. If our economic churn is bound to throw off political sparks, whether alarums about plutocracy or something else, we owe it to ourselves to seek out an accurate picture of what is really going on. Let’s start with the subset of worries about inequality that are significantly overblown.

    The inequality that matters - Here is a new and longish piece by me, on the inequality debates, in The American Interest.  It's about which kinds of inequality matter and which do not.  Most of them do not: A neglected observation, too, is that envy is usually local. At least in the United States, most economic resentment is not directed toward billionaires or high-roller financiers—not even corrupt ones. It’s directed at the guy down the hall who got a bigger raise. It’s directed at the husband of your wife’s sister, because the brand of beer he stocks costs $3 a case more than yours, and so on. Furthermore there is a natural rising inequality in a world of strivers and slackers.  But some forms of inequality are more dramatic and are associated with unstable incentives: If we are looking for objectionable problems in the top 1 percent of income earners, much of it boils down to finance and activities related to financial markets...The first factor driving high returns is sometimes called by practitioners “going short on volatility.” Sometimes it is called “negative skewness.” In plain English, this means that some investors opt for a strategy of betting against big, unexpected moves in market prices.

    Inequality and crisis - "DOES economic inequality cause crises?" asks economist Ed Glaeser at the New York Times' Economix blog. Mr Glaeser surveys the literature as it relates to a handful of different inequality-crisis mechanisms and he concludes that inequality was likely "only a small part of the story", at least during the most recent crisis. But Mr Glaeser neglects one potential causational avenue in his analysis. Happily, that relationship is explored in a thoughtful piece in the American Interest magazine by economist Tyler Cowen. Mr Cowen begins his essay by describing the ways in which inequality is not a problematic feature of American society. Much of the recent rise in American inequality can be explained, he writes, by demographic shifts or education, as well as the changing return to high achievement thanks to improvements in communications technologies. But one aspect of rising inequality is more pernicious: If we are looking for objectionable problems in the top 1 percent of income earners, much of it boils down to finance and activities related to financial markets

    Why Are Bankers So Rich? - Tyler Cowen has a big piece about income inequality in The American Interest that's well worth reading. However, it's not really about the growth of inequality. It's about Wall Street. In particular, it's about this question: why do financial professionals make so damn much money? The answer, of course, is that they work in an industry that's become ungodly profitable. But how? Tyler attributes it to the practice of "going short on volatility." That is, modern finance professionals mostly gamble that what happened in the past will keep happening in the future, and disasters will never happen. In most years this makes them a lot of money (because, in fact, disasters rarely happen). But this is mysterious. After all, not everyone is going short on volatility. In fact, by definition, only half of the punters on Wall Street are doing it. The other half are taking the other side of the bet. So how can you make money doing this? Answer: find someone who doesn't know much

    Cowen’s Counsel of Despair - Tyler Cowen’s essay in the latest American Interest is nominally about income inequality, but really it’s about the pernicious role that big finance plays in modern political economy. Cowen isn’t worried about inequality per se, but he is worried about the forces that give rise to it, and specifically the boom-bust cycle of Wall Street investment — and more specifically still, the way the “bust” part of the cycle tends to make taxpayers suffer more than the Wall Street investors themselves, thus incentivizing further recklessness and still worse crack-ups down the road: If we are looking for objectionable problems in the top 1 percent of income earners, much of it boils down to finance and activities related to financial markets … The first factor driving high returns is sometimes called by practitioners “going short on volatility.” Sometimes it is called “negative skewness.” In plain English, this means that some investors opt for a strategy of betting against big, unexpected moves in market prices.The problem, he argues, is that it’s hard to see how anything can be done about this:There are more ways for banks to take risks than even knowledgeable regulators can possibly control; it just isn’t that easy to oversee a balance sheet with hundreds of billions of dollars on it, especially when short-term positions are wound down before quarterly inspections

    Doom and the Big Banks - Tyler Cowen has an interesting essay that’s ostensibly about income inequality but in practice presents a very gloomy portrait of modern finance as both utterly dysfunctional and also irredeemably so. Ross Douthat responds by invoking a conservative version of the “break up the big banks” agenda whereby bank smashing is paired with balancing the budget. I think this actually misses the full force of Cowen’s saga of doom, which doesn’t say that we won’t restrain the financial sector because it’s too politically powerful. It says we won’t restrain the financial sector because we actually can’t. For one starters, I think everyone should read Tim Fernholz on the myth of “too big to fail” where he persuasively argues that the basic logic of bailouts has very little to do with institution size. But I would also note that even though Cowen ends up dwelling on bailouts a bit in his piece, fundamentally the problem he highlights exists independently of bailout issues

    Tyler Cowen on Inequality and the Financial Sector.- Tyler Cowen has written an article for the American Interest titled The Inequality That Matters. It’s about inequality, the financial sector and the possibility of reform. I really enjoyed the essay and recommend you check it out; I’m going to write a few critical comments. 1. The essay doesn’t tackle what I think is, in one sense, the most important question – how much did a broken financial system inflate the housing bubble, especially in the United States?  It’s one thing if the financial sector drinks our milkshake a bit;  it’s another if they are creating bubbles to profit on the way up and on the way down, either by choice or by accident. 2. The essay talks about how the financial sector goes “short on volatility”, which is a bet that things won’t go crazy in the short term, or a bet that takes on tail risk.  As Kevin Drum mentions someone is on the other side of that bet.  And what do we call a product that pays out in times of high volatility, in times when an event out of the ordinary happens?  One thing to call it is “insurance.”

    The newest and best data on income inequality - Our findings suggest that the incomes of executives, managers, supervisors, and financial professionals can account for 60 percent of the increase in the share of national income going to the top percentile of the income distribution between 1979 and 2005. We also demonstrate significant heterogeneity in income growth across and within occupations among people in the top percentile of the income distribution, suggesting that factors that changed in the same way over time for all high income people are probably not the main cause of increasing inequality at the top. The incomes of executives, managers, financial professionals, and technology professionals who are in the top 0.1 percent of the income distribution are found to be very sensitive to stock market fluctuations. Most of our evidence suggests that financial market asset prices, corporate governance, entrepreneurship, and income shifting across corporate and personal tax bases may be especially important in explaining the dramatic rise in top income shares.

    Your Complete Guide To Who's Who In Wall Street's Spiraling Insider Trading Scandal#slideshow-start# -- The FBI's insider trading probe has gotten so huge and there are so many names and so many firms, that even we're beginning to lose track of who's been raided, subpoenaed, mentioned or arrested. So for our sanity, and yours, here's a simple reference resource that outlines every significant individual and company that's somehow linked to the investigation.  Our story occurs in the order we found out about each player's connection to the case.

    How Hedge Funds Create Criminals - Hedge funds are playing the role of Wall Street villain again. This time, the charge is rampant insider trading. First came the 2009 arrest of Raj Rajaratnam, founder of the Galleon Group. Then came the November 22, 2010 raids of three hedge fund headquarters by FBI agents who seized documents and confiscated BlackBerries. Now authorities are serving subpoenas on other, larger hedge and mutual funds. Attorney General Eric Holder has announced the government's widening investigation is "ongoing" and "very serious." (Recently, though, Jesse Eisenger in the New York Times called these investigations a "side show.") These events raise suspicion that many hedge fund traders may have succeeded at beating the market not through careful research and original analysis but by breaking the law. The question, then, is, Why does a large slice of the hedge fund industry seem to have succumbed to illegal behavior?

    Why Aren't More Bankers Going To Jail? - Jesse Eisenger and Andrew Ross Sorkin have both written about the surprising lack of convictions in the wake of the financial crisis.  Surely someone made public statements of confidence immediately before the bank collapsed? I'm as surprised as anyone, mostly on political economy grounds.  You've heard before on this blog some concern about the criminalization of corporate governance, and in my view, even the prosecutors of Enron could have done a better job explaining why the CEO and Chairman had to walk the plank, especially on honest services and obstruction of justice (the Supreme Court agreed on the former, too)).  But they did go to jail, so did S&L executives numbering in the four figures - and the S&L crisis is one that many people blame more on Paul Volcker than on thousands of surprising concurrent cases of fraud. But the SEC and DOJ don't always win these cases, as Peter Henning reports.  He thinks that these cases really are difficult to win

    The Difficulty of Proving Financial Crimes - Recent columns on DealBook by Andrew Ross Sorkin and Jesse Eisinger asked why federal prosecutors have not brought any significant cases against senior corporate executives related to the financial meltdown. A partial answer to the question can be found in a decision issued on Friday by the United States Court of Appeals for the Ninth Circuit that reversed the conviction of a financial executive accused of accounting fraud for lack of evidence of any intent to defraud or mislead.  It is easy to assert that there ought to be prosecutions of corporate chieftains — “show trials” like the Soviet Union used to stage — because of the enormous losses sustained from the meltdown. Actually proving criminal charges is much more difficult, however, if the government has only sketchy evidence of an executive’s involvement in questionable decisions and the applicable legal standards are vague, at best.

    Stocks Rally With Bernanke Bond Purchases as QE Buoys S&P 500 – Bloomberg - Most of the 47 percent stock rally during the past two years came on days when the Fed pumped money into markets through bond buying, according to data compiled by Bloomberg. Since the $1.7 trillion first round of quantitative easing began on Dec. 5, 2008, the Standard & Poor’s 500 Index of stocks has climbed a combined 267 points on the 212 days when the Fed was adding stimulus, compared with 128 points on the 297 days when it wasn’t. “We took action,” said Hembre, who helps manage more than $86 billion at the unit of U.S. Bancorp in Minneapolis. “The primary benefit of quantitative easing ends up supporting the price of riskier assets, not necessarily that of Treasuries.”

    Wall Street Set For Best Two Years Ever, Thanks To Bailout - Two agonizing years for the U.S. economy have been some of the best years on record for Wall Street. After first receiving billions in taxpayer aid, and now ultracheap funding from the Federal Reserve, Wall Street banks are on track to wrap up two of their best years ever. Even if the current quarter only matches the third in revenue, this year will be the second best ever for Wall Street, capping a two-year winning streak fueled by government dollars, Bloomberg reports. With more than $100 billion in their pockets from the Troubled Asset Relief Program, which offered them hundreds of billions more, the five biggest investment banks -- Goldman Sachs, JPMorgan, Bank of America, Citigroup and Morgan Stanley -- have seen their revenue this year climb to $93.7 billion. "This is a once-in-a-lifetime opportunity for most of these banks, and I think they've recognized it as that," finance professor Charles Geisst told Bloomberg.

    Wall Street Sees Record Revenue in '09-10 Recovery From Bailout – Bloomberg - Wall Street’s biggest banks, rebounding after a government bailout, are set to complete their best two years in investment banking and trading, buoyed by 2010 results likely to be the second-highest ever.  The five largest U.S. firms by investment-banking and trading revenue -- Goldman Sachs Group Inc., JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Morgan Stanley -- will likely have a better fourth quarter than the previous two periods, driven by equity underwriting and higher volume in stock and bond trading, according to data compiled by Bloomberg. Even if this quarter only matches the third, the banks’ revenue will top that of any year except 2009.  The surge has come after the five banks took a combined $135 billion from the Treasury Department’s Troubled Asset Relief Program and borrowed billions more from the Federal Reserve’s emergency-lending facilities in late 2008 and early 2009 following the collapse of Lehman Brothers Holdings Inc. Since then, the firms have benefited from low interest rates and the Fed’s purchases of fixed-income securities.

    Easter Egg Out Of The BIS: US Banks Are On The Hook To The PIIGS By Over $350 Billion - Last night, the BIS released its latest quarterly review, as always chock full of useful information. The one major item that caught our eye was the updated exposure toward the PIIGS countries by various foreign banks. And specifically the brand new category that had never been disclosed before by the BIS, namely the "other exposures" category, which per a rather closeted footnote is defined as: "other exposures consist of the positive market value of derivative contracts, guarantees extended and credit commitments." This is exposure that appears for the first time in an official BIS document. And it is sizable: while total foreign claims stood at $2,281 billion, the newly disclosed category accounts for a whopping two thirds of a trillion: $668 billion. How generous of the BIS to share this data which as recently as 2 years ago may have been considered as material, and these days is merely dismissed with a laugh. After all who cares unless the potential loss has at least 12 zeroes in it. Yet what is most significant for the US taxpayer, who is now dead set on proving that St Sebastian was an amateur when it comes to (in)voluntary martyrdom, is that US exposure to the P(I)IGS (Italy excluded, for the time being - give it a few months), has just tripled as a result of this revelation. While before it was "common knowledge" that US banks have nothing to lose should Europe go down the drain, it has now been revealed that US banks actually have $353 billion in exposure, of which $233 billion is of this newly revealed "other category."

    Moody's says 2011 double dip damages US banks (Reuters) - U.S. banks will be "significantly strained" by credit losses if the global economy slips back into a recession, Moody's Investor Service said on Thursday. The ratings agency, in its quarterly research note, said U.S. banks' loan losses have begun to improve as the global economy has healed since the 2008 financial crisis.But losses remain near historic highs and have not improved as quickly as they deteriorated in 2009. Additional losses would strain banks' credit ratings, absent moves to bolster capital, Moody's said.

    Goldman Officers to Reap $111 Million Payout From 2007, 2009 - Bloomberg -- Goldman Sachs Group Inc.’s top executives will get about $111.3 million in stock next month in a delayed payout from last year and their record-setting 2007 awards, even as Wall Street prepares for lower bonuses.  Chief Executive Officer Lloyd C. Blankfein, 56, is poised to receive about $24.3 million in January, based on the closing share price on Dec. 14, while President Gary D. Cohn, 50, will get about $24 million, company filings show. The payouts, just a portion of the $67.9 million bonus awarded to Blankfein for 2007 and the $66.9 million paid to Cohn, reflect a 24 percent decline in the stock’s value since it was granted at $218.86.  Within a year after the bonuses were approved, Goldman Sachs took $10 billion of U.S. bailout money..

    Big Banks Bonus Bonanza - Once again, Wall Street is on track to pay astronomical bonuses to its star traders, even as the rest of America is reeling from the devastation the banks have unleashed on the global economy. These billion-dollar bonuses come at our expense, have no rational justification, and only serve to destabilize the larger economy. It is time to rein in banker compensation to get the economy working for Main Street again and to prevent another global economic catastrophe in the near future.  Today SEIU has released a new report, Big Banks Bonus Bonanza.

    "Black Swan" author Nassim Taleb on the Debt Crisis, on Davos, on Regulation - Here is a video of "Black Swan" author Nassim Taleb on Bloomberg Television's "Surveillance Midday" with Tom Keene. Taleb said that he's worried about the crisis in the U.S. more than in Europe and that executive compensation on Wall Street is not fully addressed by regulators, causing a "moral hazard."

    Banning Big Wall Street Bonuses Favored by 70% of Americans - More than 70 percent of Americans say big bonuses should be banned this year at Wall Street firms that took taxpayer bailouts, a Bloomberg National Poll shows.  An additional one in six favors slapping a 50 percent tax on bonuses exceeding $400,000. Just 7 percent of U.S. adults say bonuses are an appropriate incentive reflecting Wall Street’s return to financial health.  A large majority also want to tax Wall Street profits to reduce the federal budget deficit. A levy on financial services firms is the top choice among more than a dozen deficit-cutting options presented to respondents.  With U.S. unemployment at 9.8 percent, resentment of bonuses and banking profits unites Americans across political, gender, age and income groups. Among Republicans, who generally are skeptical of business regulation, 76 percent support a government ban on big bonuses to bailout recipients, that’s higher than backing among Democrats or independents.

    Bloomberg Poll Finds That 88% Of Americans Say Bonuses At Banks Should Be Banned Or Taxed At 50% - According to the latest Bloomberg poll, a whopping 71% of respondents (many of whom are likely bankers) have said that bonuses at banks receiving bail out funds (that's all of them) should be banned this year, and another 17% believe that a 50% tax should be imposed on all bonuses exceeding $400,000 (which, in another record bonuses year, will likely be most of them). This goes back to our thesis presented over a year ago that since Wall Street is essentially a government utility, it should be treated as one, with set IRR targets and caps, and bonuses for bankers, whose every action results in a government bail out sooner or later, should be closely controlled and scrutinized in concordance with traditional utility metrics. Then again, in keeping with the spirit of the middle-class wealth transfer program so well presented by Ben Bernanke over the past 5 years, this proposal has about a snowball's chance in hell of passing.

    Geithner: Pay Incentives Need More Changes - Treasury Secretary Timothy Geithner told the Congressional Oversight Panel that there hasn’t been “enough change” in the way financial-sector employees are paid, particularly after widespread criticism following the financial crisis. Mr. Geithner said there had been some “shift” away from risky behavior, but that companies have more work to do.“I would not claim that we have seen enough change in the structure of compensation,” Mr. Geithner said. A major criticism during the financial crisis was that lenders and traders were given financial incentives to take big risks that led some companies to fail or necessitated government bailouts. Many financial companies have resisted government interference in their pay packages, but some have altered their plans in recent months.

    Wall Street bonus datapoint of the day - In a Bloomberg poll, 88% of respondents said that Wall Street bonuses should either be banned outright or taxed at 50%. Just 7% said they should remain an incentive: To put that 7% figure in perspective, 6% of Americans believe the moon landings were a hoax; 7% believe Elvis lives; 24% believe that Barack Obama is a secret Muslim; 41% believe in ESP; and 48% believe in creationism. Americans will believe anything, it seems—except the idea that incentivizing bankers at systemically-important institutions to take big risks makes any sense at all. Now all we need to do is find one or two people in the Obama administration who are aligned with the 88% rather than the 7%. I’m not holding my breath.

    The SPECTRE of Inequality - Krugman - I’m still a couch potato, box of tissues close at hand. So I’m watching stuff my Tivo thought I might want to see, which happened to include the old Bond film Thunderball. And I found myself thinking about inequality. You see, there’s a scene early in the movie when the minions of SPECTRE, the evil conspiracy, are shown reporting on their profits from dastardly activities. And the numbers are … ludicrously small. I know that’s a running gag in Austin Powers, But it’s true, it’s true!  Even the big one — demanding a ransom for two stolen nuclear warheads — is 100 million pounds, $280 million. Adjusted for inflation, that’s about $2 billion — or one-eighth of the Goldman Sachs bonus pool. It’s just an indicator of how huge top incomes have become that what were once viewed as impressive numbers, the kind of thing only arch-villains might demand, now look trivial. Or maybe the other way to look at it is that we have a lot more arch-villains around than we used to.

    Smugman - In light of Paul Krugman’s recent pro-corporate proclamation, where he sneers that we should just lie back and enjoy corporate tyranny, that to want to fight it is “so sixties” anyway, I thought I’d ask a few questions about him of those who still believe in him. The contention is that he’s a reformist, and even among those who reject reformism there’s a residual affection for him. Everything he says is, on its face, reformist at best. But as I’ve traced in many posts, I think he’s actually a pro-bank, pro-austerity manipulator who only poses as a citizen. Others think his pro-bank aspects are the pose. If he’s really a citizen advocate, that’s the secret. Others think they can detect this citizen advocacy in him, but it seems to me they can never adequately explain it. My explanation for what I think is a scam is that it’s precisely because Krugman has such (fraudulent) progressive credibility that he can astroturf better by posing as a real progressive, even though he’s not really that even in his pose. But here’s my questions (versions of this can apply to many others as well):

    Failed Us Bank Count In 2010 Nears 150-Mark - The number of American banks that went out of business in 2010 has surged to a whopping 149 entities so far this year.  The count of collapses, which has already surpassed last year's total of 140, is expected to rise till the US labour market situation stabilises. As per the latest official data, two banks were shut down on December 10, pushing this year's failures to 149.  In the last two months, 22 banks went belly-up. The maximum number of failures this year occurred in April, when 23 entities went out of business. Official estimates show that the number of problem banks -- those at risk of failing -- climbed to 860 in the three months ended September from 829 in the June quarter.

    Unofficial Problem Bank list increases to 920 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for Dec 17, 2010. Changes and comments from surferdude808: The Unofficial Problem Bank List finished the week at 920 institutions with assets of $411.4 billion, up from 919 institutions last week. Assets were essentially unchanged. This week there were six failures, but only four were on the list...

    Number of the Week: Using Cash Piles to Buy Shares - $92 billion: How much companies spent on their own shares in the third quarter of 2010. U.S. companies are finally finding a use for some of the nearly $2 trillion in cash sitting on their balance sheets. In the three months ended September, they spent a seasonally adjusted $92 billion on share buybacks, up 71% from the previous quarter and the highest level since the beginning of 2008, according to the Federal Reserve. Buybacks can be a good signal, suggesting that company executives believe their stock is worth more than what the market is offering. In this case, though, the buybacks more likely reflect companies’ solution to a dilemma: How to keep boosting earnings per share at a time when earnings aren’t likely to rise as fast as they have been.

    More on Ratings Agencies and Consultants – What a bunch of quants! - If the ratings agencies don’t state anything new but only officially "time stamp" what we know already on the risk curve, why do markets insist on step change moves in response to their announcements? Are there really investors so comatose that they don’t react until a ratings agency announcement tasers them out of their torpor? Yes, apparently there are and people even pay fees to these people to manage their money. How do they justify these fees? Well, dear investor, it's called Benchmarks and, to paraphrase the Sex Pistols (and to nick a chapter heading from from a friends book), "Never mind the benchmarks". Because benchmarks are indeed bollox. It's all part of the cycle of unintended consequences. The investor tries to protect himself from risk by insisting that his money only be put in "safe" investments, but who decides whether they are safe or not? Enter the ratings agencies who then carve up a normal curve of risk into thick histogram buckets with Hoover Dam-like edges. The difference in real risk between a top BBB+ rated bond and a single A- may be non-existent in reality. But to the benchmark-driven, ratings agency-dependent passive bond fund, investment dicta handed down from a board of fund trustees made up of laymen advised by "consultants", it can make a difference on the order of 1000bp of performance.

    Another Day, Another Rating Agency Fail, This Time S&P - Yves Smith - If you thought that the rating agencies had cleaned up their act in the wake of the crisis, think again. Our Richard Smith reported on a couple of black eyes by Moody’s, one a rather implausible 180 degree turn on its take on the US tax deal, the other a suspiciously flattering take on whether Countrywide had indeed transferred notes (retaining them, as an executive testified they did on a routine basis, would confirm our suspicions about widespread problems in the securitization industry. Now we have a big blooper by S&P, this one in the form of mass rerating, based on an admitted faulty analysis. That is code for “big error in the model that everyone missed.” The subject of this screwup is 129 so-called re-remics, consisting of about $85 billion of bonds which were devised by repackaging existing residential mortgage backed securities. Never heard of re-remics? There’s a good reason why. This market has been very active since early last year, but third party purchases were limited. Given the scarcity of third party buyers, which means the deals were largely retained by banks, one has to assume that the object of re-remics was to manipulate capital levels. Just like CDOs, which are now understood to have been over-rated, re-remics achieve the seemingly impossible task of increasing ratings of junky RMBS. From a ">Bloomberg report:

    Rating structured bonds is impossible - Re-remics are a regulatory arbitrage with negative economic value — you take a bunch of bonds , and then spend lots of money on bankers and lawyers and ratings agencies in order to transform them into other bonds. The financial-services industry gets lots of lovely fee income, which ultimately comes out of the pockets of the beneficial owners of those bonds. And no one makes out more handsomely than the ratings agencies, without whom none of this would be possible: it’s their precious triple-A ratings which make the arbitrage attractive in the first place.The problem is that the ratings agencies, as we saw in the crisis, have no idea how to rate structured debt. And they also have no idea how to learn their lesson: the first big re-remic downgrades happened almost immediately, and then they just kept on trickling out — there were 224 in September, and another 129 have just arrived. S&P is the big villain in this story, both rating and downgrading many more re-remics than anybody else. They emailed their press release to the FT, where Tracy Alloway reprints large chunks of it, but the only way you can find it is by paying $100 to Alacra. Just because you’re releasing something to the press doesn’t mean you want it to be public, I guess, and neither does it mean that you want to talk about it:

    Government guarantee expected for one-third of MBS in 2011 - Government-backed bond issuer Ginnie Mae's share of mortgage-backed securities issuance should reach 32% in 2011, continuing a steady growth seen after the financial crisis of 2008, Deutsche Bank analysts said. Ginnie Mae guarantees timely payment of principal and interest on federally insured loans to investors of MBS. While the issuance of these Ginnie-backed securities slipped 1.4% to $413 billion in the fiscal year of 2010, 30% of all MBS issued was backed by the agency. It's grown every year since 2007 when only 9% of MBS issued that year was backed by Ginnie Mae.

    The cost of bailing out Frannie - Let’s say I buy a $3,000 pair of handmade shoes but don’t have that kind of cash to hand, so I put them on my credit card. I then rack up another $2,000 in penalties and interest before I’ve paid them off. Then the total cost associated with my poor investment in footwear is $5,000. The credit card company bailed me out but charged through a lot of money for doing so, and the money is absolutely part of the total sum I end up paying for those shoes. Weirdly, Jeffrey Goldstein, the under secretary for domestic finance at Treasury, doesn’t seem to think that way. Fannie and Freddie have already borrowed $151 billion from Treasury, and they’re set to borrow another $90 billion by the end of 2013. That’s hardly chump change. Yet Goldstein says, with a straight face, that “the GSEs have already absorbed the vast majority of costs associated with the poor investments they made during the housing boom”.

    SEC Examining Role of Servicers, Whether Mortgages Transferred to Trusts -- Yves Smith - Hhhm, despite the breezy assurances of the American Securitization Forum that everything was handled properly when residential mortgage backed securitizations were created, the SEC does not seem completely convinced. Reuters reports it has expanded its ongoing probe into foreclosure practices: The Securities and Exchange Commission launched the new phase of its investigation by sending out a fresh round of subpoenas last week to big banks like Bank of America Corp, Citigroup Inc, JPMorgan Chase & Co, Goldman Sachs Group Inc and Wells Fargo & Co, the sources said. The SEC’s subpoenas focus on the earliest stage of the mortgage securitization process, said the sources, who requested anonymity because the probe is not public. The sources said the SEC is asking for information about the role of so-called “master servicers” — specialized firms that oversee the selection and maintenance of the large pool of home loans that go into every mortgage-backed bond. In many cases, Wall Street banks that underwrite mortgage-backed securities either own their own master servicing firms or are closely aligned with one.

    SEC Goes Deeper in Foreclosure Fraud Examination - The Securities and Exchange Commission has issued additional subpoenas for documents from the big banks in a growing probe over servicer behavior and foreclosure fraud. They seem particularly interested in securitization, and whether the assets, i.e. the mortgage and the note, were ever properly conveyed to the trusts. U.S. regulators have opened a new line of inquiry in their mortgage foreclosure probe and are asking big Wall Street banks about the beginning stages of mortgage securitization, two sources familiar with the probe said. The Securities and Exchange Commission launched the new phase of its investigation by sending out a fresh round of subpoenas last week to big banks like Bank of America Corp (BAC.N), Citigroup Inc (C.N), JPMorgan Chase & Co (JPM.N), Goldman Sachs Group Inc (GS.N) and Wells Fargo & Co (WFC.N), the sources said.

    BofA Scrambling To Dump $1 Billion In Mortgage Paper - A report by the Post today discloses that Bank of America, haunted by ongoing pressure in both the robosigning/fraudclosure scandals, and demands by the likes of Pimco and the New York Fed to putback billions of paper to the bank due to misrepresentations, is rapidly trying to dump $1 billion worth of toxic paper. One can only assume that this is merely another tactic by the bank to further confuse forensic tracking of who owns what in the multi-trillion whole loan/RMBS space, in which it has recently been discovered that few actually know and track who is the end owner (as opposed to servicer) of a large amount of mortgage paper. This follows comparable actions by Wells Fargo which recently announced it was spinning off its mortgage business as a separate division, as well as Goldman's announcement it was seeking to distance itself from its Litton Loan mortgage unit. It appears the Plan B in case a broad settlement with the Attorneys General is not reached is to simply offload as much responsibility to someone else before the hammer finally falls. Then again for BofA this may be far too little too late: "As of Sept. 30, BofA owned more than $12 trillion in mortgage-servicing rights, down from $19 trillion last year. The bank owns and services mortgage assets totaling $2.1 trillion."

    Bank of America Discussing Settlement of Pimco/Fed/Blackrock Letter (Updated: Less Here than Meets the WSJ’s Eye) - Yves Smith - The Wall Street Journal reports that Bank of America is in discussions with a group of investors headed by Pimco, Blackrock, and the New York Fed that sent a letter roughly 60 days ago that was setting the groundwork for possible litigation. The underlying issue is alleged breaches of representations and warranties in 115 Countrywide securitizations. Note that this development is not unexpected, although the timing is interesting. These cases nearly always wind up being settled; the cost of pursuing them very far is extremely costly to both sides. Note the problematic issue is not the breaches of the reps and warranties, which most commentators focus on; it’s that it takes a great deal of forensic work to prove those rep and warranty failures were really what caused a particular loan to go bad. As a result, these cases tend to be fought on a loan by loan basis; even a process that constructed adequate samples for each of 115 trusts would involve a whole passel of loans. The part that appears to be a climbdown is that Bank of America had previously issued a “we will fight them on the beaches, we will fight them in the trenches” sort of statement. So they seem to be entering into talks earlier than one might have expected.  Update: This “story” is a crock. I’m no fan of Bank of America in general and particular, but the parties pressing this litigation have managed to get the press to run what amount to their press releases.

    Mortgage-Backed Securities: Is “Skin in the Game” Important? - FRBSF - Financial reform legislation passed by Congress in 2010 requires mortgage originators to retain some loss exposure on the mortgages they securitize. Recent research compares the performance of mortgage-backed securities for different types of issues in which originators retain different degrees of loss exposure. The findings suggest that retention of even modest loss exposure by originators reduces moral hazard and is associated with significantly lower loss rates on these securities.

    Research: ‘Skin in the Game’ Is Good for Mortgage Market - Requiring mortgage providers to retain a stake in what they have lent reduced the chance a borrower will run into trouble, a new paper from the Federal Reserve Bank of San Francisco argues. The research, released Monday, was weighing the “skin in the game” idea, which holds that mortgage-lending quality is improved when those who offer the mortgage are prevented from unloading it completely onto other investors. “Retention of even modest loss exposure by originators reduces moral hazard and is associated with significantly lower loss rates on these securities” resulting from the mortgage process, wrote bank economist Christopher James, as part of the regional Fed’s regular Economic Letter series. The paper’s findings suggest that the recently passed financial-overhaul legislation will have a positive influence on the future of the housing market. Under the new law, those who securitize mortgages are required to hold a minimum of a 5% exposure to the credit risk. It is hoped the increased chance a loan originator will feel pain should the borrower run into trouble will make those lenders more careful when providing loans.

    Mortgage-Bond Slump No `Fun' for Housing as Rates Increase --A slump in government-backed mortgage bonds that’s sent yields to the highest level since May is threatening a recovery in the U.S. housing market, which had been bolstered by record-low borrowing costs. Yields on Fannie Mae-guaranteed securities that most affect loan rates jumped as high as 4.21 percent yesterday, an increase of 1 percentage point from an all-time low in October, according to data compiled by Bloomberg. They ended New York trading at 4.1 percent.  “If you were looking at buying a house a few weeks ago, the same house, to you, looks as much as 9 percent more expensive,” he said. Investors in agency mortgage securities have suffered during this month’s crash in bond prices amid speculation that President Barack Obama’s agreement to extend and expand tax cuts will bolster growth and inflation. While the drop hasn’t been as severe as for Treasuries, the effects of higher mortgage rates, along with climbing gasoline prices, will offset much of the tax package’s intended stimulative effects,.

    Is It Verboten to Talk About the Securitization Buyers’ Strike? - Yves Smith - There is a perfectly fine article up at the Wall Street Journal on the current, probably weakening, state of the housing market, save that it fails to discuss the elephant in the room, that of the continuing moribund conditions in the so-called private label securitization market.  The piece, “Housing Shaky as Lenders Tighten,” gives a straightforward recitation: housing sales have fallen markedly in the second half of 2010 as housing tax credits expired, even with record low interest rates. (And that tailwind may no longer be behind housing as mortgage rates moved up last week). The piece also gives macro implications: that housing has normally provided a significant boost in all past postwar expansions (yes, Virginia, this is not a normal “recovery”). And it does acknowledge the way that lending is now dominated by government entities, which are not being terribly generous with credit now. This picture is woefully incomplete. Before the crisis, Fannie and Freddie provided roughly 40% of residential lending. Their outsized role now is in large measure due to the collapse of the so-callled private label securitization market.

    Paul Jackson’s Largely Irrelevant Responses to Mortgage Securitization Critics’ Case - Yves Smith - When I worked for Goldman, and later McKinsey, professionals at each firm would joke about presentations that passed the weight test. That tag line referred to documents heavy enough to land on a client desk with an impressive “thunk” so as to seem intimidating even before opening them. The implication was that length could and did serve to finesse substance. Paul Jackson’s nearly 2600 word post endeavoring to address our previous critique of his analysis appears to be a similar weight test exercise. I do not mean to suggest that Jackson is seeking to deceive; rather, as I posited before, his main sources continue to be unnamed attorneys who are come from the securitization industry, given how closely his arguments hew to American Securitization Forum party line. A journalist is only as good as his sources, and it appears that Jackson has made at most only token efforts to reach out beyond his circle of usual suspects. While Jackson also claims to have invested “weeks” of research into this topic, this pales compared to the career-spanning efforts of legal authorities like New York trust law experts Professor Ira Bloom and Professor Adam Levitin, who are in complete opposition to the Jackson assertions (and remember that Jackson is not even an attorney).

    Lender Processing Services Makes False Statements About Pending Litigation in SEC Filing -  Yves Smith - Shortly after Lender Processing Services became the target of class action lawsuits for alleged illegal legal fee-splititing in early October, an investor commented that he had never seen a company do such a poor job of crisis management. LPS has become the object of more class action litigation in November, this time for alleged securities law claims, namely making false and misleading statements including “deceptive and improper document execution and preparation related to foreclosure proceedings.” The latest instance occurred on December 10. Readers may recall that Reuters published a major story on LPS on December 6, which confirmed many details about the inner workings of LPS’s processes for managing foreclosure mills that had been published on this blog a full two months earlier (LPS acts as an outsourced contractor to servicers). The Florida Times-Union ran a story based on the Reuters piece.  LPS claimed in a December 8 press release that the stories were inaccurate, but did not demand corrections, and Reuters said it stood by its account. On December 10, LPS wrote letters to the editor of Reuters and the Florida Times-Union and also filed them with the SEC as 8-K reports (click to enlarge): The letter to the Times-Union, which you can read on the LPS website, contains a patently untrue statement about its pending litigation:

    When Robosigners Attack! - Sometimes, the best defense is a good offense. That seems to be the approach that notorious robo-signing firm Nationwide Title Clearing has taken in responding to some of its critics. If you are unfamiliar with their name, you might recall earlier this Fall when depositions of several Nationwide robo-signers employees went viral on YouTube (We mentioned these here and here). This, amongst other perceived sleights has upset Nationwide Title, who has sued a St. Petersburg foreclosure defense lawyer, Matthew Weidner, for alleged libel and slander.  Given that Truth is a defense, the defendant will prevail if they can demonstrate Nationwide’s approach was robotic. Not literally machines doing the work, but any showing of assembly line manufacturing.  Here’s where things get very very interesting: In civil litigation, the discovery process provides lots of opportunities for a defendant to gather information related to the accusations to prove they are true. Why any private firm would subject themselves to this degree of scrutiny is quite baffling to me.And so the executives who run Nationwide just gave carte blanche to a very angry, well connected, deep-pocketed, web & media savvy attorney who wants their blood.

    Foreclosure Fraud – Simple BofA Refi Turns Into Foreclosure Nightmare - Homeowner says Bank of America refinanced her mortgage, then stopped taking her payments. Next, it threatened to seize her condo. Barely a week goes by without someone contacting me to say that a bank is trying to steal their home. Often, this “theft” is the result of unpaid mortgages that have resulted in foreclosure. But every so often, I hear from someone who seems to have become genuinely entangled in a banking system that is both rigid in its dealings with customers and deaf to legitimate pleas for help.That’s the case with Lana Ashford, who faces the loss of her Marina del Rey condo to Bank of America because of what turned into the refi from hell.

    Mortgage Servicing - This Article argues that a principal-agent problem plays a critical role in the current foreclosure crisis. A traditional mortgage lender decides whether to foreclose or restructure a defaulted loan based on its evaluation of the comparative net present value of those options. Most residential mortgage loans, however, are securitized. Securitized mortgage loans are managed by third-party mortgage servicers as agents for mortgage-backed securities ("MBS") investors. Servicers‘ compensation structures create a principal-agent conflict between them and MBS investors. Servicers have no stake in the performance of mortgage loans, so they do not share investors‘ interest in maximizing the net present value of the loan. Instead, servicers‘ decision of whether to foreclose or modify a loan is based on their own cost and income structure, which is skewed toward foreclosure. The costs of this principal-agent conflict are thus externalized directly on homeowners and indirectly on communities and the housing market as a whole. This Article reviews the economics and regulation of servicing and lays out the principal-agent problem. Correcting the principal-agent problem in mortgage servicing is critical for mitigating the negative social externalities from uneconomic foreclosures and ensuring greater protection for investors and homeowners.

    GMAC Can Sell Foreclosed Homes in Maine After Court Ruling - GMAC Mortgage, after defeating a bid by homeowners in Maine who sought a federal court order blocking sales and evictions, can sell foreclosed homes in the state.  The judge said his decision hinged on the power of federal courts to stop proceedings in state courts, where foreclosures take place. He said individual homeowners who face losing their homes in a foreclosure sale can go to state court to stop the sales, he said.  “This decision is based on the limited authority federal courts have,” Hornby said.  The Maine case, filed in state court in October and moved to federal court by GMAC in November, involves five homeowners who are suing GMAC, claiming the company relied on defective court documents in seizing homes. The plaintiffs are seeking to represent Maine homeowners who are facing foreclosure by GMAC or who lost their homes in a GMAC foreclosure during the past six years and whose case relied on false documents, according to court documents.  Maine Attorney General Janet Mills is considering joining the GMAC lawsuit, Assistant Attorney General Linda Conti said in an interview yesterday. The office is also considering filing its own lawsuit against GMAC, she said.

    Letters From Foreclosure Hell  - From 'Single Mom': "I lost everything, I am now losing the roof over our heads, my 30 year history of good credit, my self-respect. I cried at night, sobbed really, about how I had destroyed my life, how I can't look my son in the face now sometimes, for fear he will see how I let us down. "  I wish somebody in a position of power would read the emails I keep getting from foreclosed homeowners. They paint a very different picture of the world than the one we usually hear about in Washington. The Administration's doing too little, or the wrong things, at a time when their opponents are brazenly submissive to the banks. The public is frightened and angry, and nobody's listening. The headlines tell the story, too. In the last 24 hours we've learned that a large majority of Americans want to ban bonuses at any bank that received Federal help. We also learned that more than half of those polled are worried about making their housing payments, a number that's up sharply from 2008. And we've received more detail about the unethical and illegal behavior of big bank lawyers.

    “Crime Shouldn’t Pay”: Tell the State AGs You Want Mortgage Fraud Prosecuted -  Yves Smith: Tomorrow, a group of homeowners is meeting with Iowa’s attorney general Tom Miller, who is leading the 50-state effort which is investigating foreclosure and mortgage lending abuses.  This group is presenting a letter to Miller asking them to prosecute bank executives for mortgage fraud and wants to show broad-based support for this idea via having concerned citizens sign it.  I have signed this letter and strongly encourage you to do so. Please visit the site, to support this effort. Thanks!

    Iowa AG Miller Commits to Prosecution of Bank Execs, Seeking Principal Mods -- Yves Smith - We asked readers to sign a letter to Iowa attorney general Tom Miller, who is leading the 50 state probe into foreclosure and mortgage abuses. Here is the official report from National People’s Action, which was part of the group that met with Miller earlier today: Leader of 50 State Foreclosure Probe Tells Struggling Homeowners: “We Will Put People in Jail” Iowa’s Attorney General Miller also agreed that principal reductions, loan modifications, and compensation for defrauded homeowners are all on his agendaThe lead Attorney General in the 50-state foreclosure investigation, Iowa’s Tom Miller, told homeowners at risk of foreclosure today that he supports a settlement with the big banks that requires significant principal rate reductions, loan modifications, compensation for citizens defrauded of their homes, and criminal prosecutions against big bank executives who broke the law. “We will put people in jail,” Miller said, in response to questioning. “One of the main tools needs to be principal reductions, just like in the farm crisis in the 1980s…There should be some kind of compensation system for people who have been harmed…And the foreclosure process should stop while loan modifications begin. To have a race between foreclosures and modifications to see which happens first is insane.”

    Florida AG investigates two companies delivering foreclosure court papers - Two companies that deliver foreclosure notices to homeowners are under investigation over complaints including filing questionable statements with courts, back-dating documents and billing practices.. State regulators this month began examining Gissen & Zawyer Process Service, of Miami, because of ``numerous complaints.'' Among them: filing questionable statements with the court, back-dating documents and billing practices. The attorney general also has begun investigating ProVest of Tampa, one of the largest process servicing outfits in the nation, because of similar complaints.  Process servicers personally hand court summonses to defendants, notifying them that legal actions have been filed against them. In foreclosure cases, the paperwork tells the recipients they must respond in 20 days or the action will proceed.

    Some Foreclosure Mills Disregarding Post Robo-Signing Requirements -- Yves Smith - As much as a whole bunch of bank executives and securitization industry types have given Congressional testimony in which they maintained that they were duly concerned about “technical” errors like robo signing and would clean up their act, it appears that follow-through has been less than stellar. New York State responded relatively promptly and imposed new requirments. On October 20, it issued a new rule requiring attorneys in foreclosure actions to certify that they have taken reasonable steps to verify the accuracy of documents they submit to the court. Although that might sound a tad redundant (aren’t they supposed to be doing that now?), the preamble to the new requirement discussed some of the practices that were cause for concern: These insufficiencies include: failure of plaintiffs and their counsel to review documents and files to establish standing and other foreclosure requisites; filing of notarized affidavits which falsely attest to such review and to other critical facts in the foreclosure process; and “robosignature” of documents by parties and counsel. The wrongful filing and prosecution of foreclosure proceedings which are discovered to suffer from these defects may be cause for disciplinary and other sanctions upon participating counsel. Today, published that a single judge, Peter Cohalan, had denied 127 foreclosures under this new provision. Although the site did not offer any commentary, it appeared to regard this development as positive.  I see it as the reverse.

    Survey Finds Banks Still Foreclose on Homeowners Seeking Loan Mods -  In May, we first reported on how disorganization at banks caused homeowners to lose their homes while still in the loan modification process [1] -- something that's not supposed to happen under the rules of the government loan modification program. Treasury officials said they were working to fix the problem, but nine months later the practice is prevalent, according to a new report.  For the report, the National Consumer Law Center and the National Association of Consumer Advocates surveyed 96 attorneys, representing over 2,500 homeowners. Nearly every attorney [2] said that they had clients whose banks tried to foreclose while the homeowner was still negotiating a loan modification. Half of the attorneys said they had represented more than 20 homeowners in that situation. Typically, foreclosures and modifications are processed at the same time in different parts of banks that often don't talk to one another. This "dual track" became a hot topic [4] this fall as the "robo-signing" scandal [5] highlighted the degree to which banks automated the foreclosure process. In a congressional hearing [6] in November, Bank of America and Chase both admitted to using this system and said it was actually an industry-wide practice.  Diane Thompson, an attorney who works with the NCLC, told us a big hurdle to changing the system is the government-sponsored mortgage giant Fannie Mae, which owns or guarantees a third of all mortgages.

    Obama Foreclosure Relief: Even 'Success' Is Hellish - But one fact makes Town's case both unusual and especially troubling: She amounts to a success story. She is among those who have applied for help under the Obama plan and eventually come out with a so-called permanent loan modification--lowered payments for five years.  The Treasury Department counts more than 520,000 people who have secured permanent loan modifications under its Home Affordable Modification Program, or HAMP. Town is among those who have secured permanently lowered payments from Fannie Mae or Freddie Mac, the government-controlled mortgage companies. Since the fall of 2009, they have collectively delivered about 179,000 permanent loan modifications, according to the the Federal Housing Finance Agency. "If I'm a success," Town said, "I feel badly for the failures."

    Geithner on Foreclosure Fraud: What’s the Problem? - The Congressional Oversight Panel held a hearing today with Treasury Secretary Timothy Geithner. The issue areas were broad, but the COP’s two most recent reports have concerned the failure of HAMP and the significant systemic risk to the financial system from foreclosure fraud and investor put-backs. So obviously, this was a major subject in today’s hearing. Damon Silvers got at this dramatically, essentially slamming the cheerleaders trying to push the “TARP worked!” line...And the foreclosures that have resulted, often fraudulently, are off-loading that unhealthiness to millions of borrowers facing a life-changing tragedy. So what does Secretary Geithner think about these issues? Not much! He didn’t get around to the housing market in his opening statement until the very end, where he merely touted the failed HAMP program, and cited some additional steps and programs. When asked point-blank about the issues raised by the November COP report, namely about the risk to the banks from investor put-backs and foreclosure fraud, he shrugged it off. Asked whether the mortgage servicing problems could damage institutions and require a “TARP two”, Geithner replied simply: “No.”

    Geithner Blocking Legal Help For Foreclosure Victims - Treasury Secretary Timothy Geithner has authorized big payouts to banks in an effort to encourage mortgage modifications, but is preventing borrowers in danger of losing their homes from accessing legal assistance under the Obama administration's foreclosure relief plan -- even when banks are wrongfully or fraudulently attempting evictions. The 2008 bank bailout bill gave the Treasury secretary broad discretion to spend money to fend off foreclosures. As of August, the administration's foreclosure prevention program had paid out $231.5 million to banks and nothing in borrower's legal fees, despite the urging of congressional Democrats who say legal funding is critical to easing the crisis. Democrats from foreclosure-battered states are pushing new legislation that would overrule Geithner's edict, but the legislation is doomed this session with apathy from leadership in both parties and a packed lame duck calendar.

    Arizona, Nevada Sue Bank of America Over Mortgage Fraud While Treasury Sits on Its Hands - Yves Smith -Yesterday, we had the sorry spectacle of Treasury Secretary Timothy Geithner, under questioning by Congressional Oversight Panel commissioner Damon Silvers, maintain that the Treasury really had very little power to require banks to engage in certain types of behavior under the Treasury mortgage modification program, HAMP (see the testimony starting at 101). Silvers made it quite clear that he did not buy Geithner’s claim. If you think I am reading more into Geithner’s response than is warranted, he had a longer form discussion with a small group of bloggers last August and made a similar argument when asked why Treasury had done nothing when servicers were clearly gaming HAMP. I pointed out that there was a big difference between narrow authority and broad authority, and pointed out that Treasury had lots of leverage over banks, starting with REMIC violations. He pointedly ignored the REMIC issue. So we now have the spectacle of two state attorney generals who see mortgage modification abuses large and persistent enough to warrant filing lawsuits against Bank of America. And both their press releases and media reports on the lawsuits (sadly, the filings themselves do not yet appear to be online) make clear that some of the alleged violations took place in connection with HAMP. So why is Treasury playing what amounts to “see almost no evil, hear almost no evil, see almost no evil” as far as HAMP in particular and banks in general are concerned?

    Where’s the Note? Leads BAC to Ding Credit Score -  You have a Jumbo mortgage with Bank of America. You are a good customer, do your banking with BofA, and you have never missed a payment. In fact, you always send your mortgage in on time. But this fraudclosure mess has you curious. You wonder who actually holds your note, how many times its been sold, what MERS involvement is. With your curiosity piqued, you decide to ask Bank of America where your actual mortgage note is, and who is holding it. That is what long time BP reader SM did. He writes in to note what happened:“FYI Just to let you know I ended up doing Where’s the Note and it resulted in this for me, see the 2 reported disputes in the attached screenshots below for my Jumbo 1st mortgage. 40 point hit on my scores. I will be speaking with an attorney soon. We need to get a warning out (SEIU has not responded).”That is astonishing – SM included a snapshot of his Credit report (Nice payment history!):...Looks like a job for Elizabeth Warren . . .

    21% HAMP First Year Redefault Rate - The Congressional Oversight Panel has a new HAMP report out.  Like all COP reports, it's long and chock full o' analysis.  There's an executive summary up front, but some of the most important points are only in the report proper (especially pp. 100-111).  I think there are three big things to take away from the report: 

    • First, 21% of HAMP permanent modifications have redefaulted in their first year.  That's ghastly given that HAMP permanent modifications have an additional 3 months of trial seasoning and fairly serious payment reductions.  The fact that Treasury hasn't been reporting on this itself, much less analyzing the reasons for the redefaults is disgraceful. 
    • Second, if past trends continue, starting this month, there will be more HAMP redefaults each month than new permanent modifications.  That means that the total number of active permanent modifications will peak at around 500,000 and decline.
    • Third, it looks as if Treasury will only end up spending $4B for HAMP out of the $75B allocated for homeowner assistance.

    More on the HAMP Train Wreck in Latest Congressional Oversight Panel Report -- Yves Smith - The Congressional Oversight Panel has issued another typically detailed report, this one focusing on the Administration’s widely criticized mortgage mod program, HAMP. HAMP is so widely recognized as being a failed program that when a group of bloggers met with Treasury officials last August, even Timothy Geithner didn’t try to pretend the program worked very well.  Of course, that view conveniently omits the fact that servicers told borrowers that were current to quit paying so they could qualify for HAMP, plus the fact that the borrowers that did not get “permanent” mods also were assessed missed payments and late fees. But the focus on HAMP has been mostly about how badly the program worked operationally, and less on the crappy design of the misleadingly-labeled “permanent” mods. Only in the US could a kick the can down the road strategy be branded as “permanent”. The HAMP mods are five year payment reductions. They don’t reduce principal,  HAMP leaves 95% of borrower in a worse negative equity position than before.

    Are Mortgage Defaulters Getting a Pass? - It appears not paying your mortgage won't hurt your credit as much as you think.  The New York Times reports that banks, in an effort to boost their credit card business, are courting customers who decided to default on their home loans. So-called "strategic defaulters," who walk away from their mortgage loan because they owe more than their house is worth, are now apparently considered to be good potential customers. Voluntarily choosing foreclosures was once seen as financial suicide. It was assumed that banks would shun those that didn't end up paying back their home loans. But it turns out that was more of a threat by the banks. That's good news from the millions of Americans who are underwater on their homes. But if banks are truly giving strategic defaulters a pass that could lead to a new wave defaults, and more pain for their mortgage lending divisions and the housing market in general. This seems like another dumb move for the banks and for our economy. Here's why:

    Foreclosures Fall to Lowest Level Since 2008 on Robo-Signing Delays - New data from RealtyTrac shows that foreclosure activity last month fell to a level not seen since November 2008, after problems with paperwork prompted case reviews, foreclosure suspensions, and re-filings of affidavits by mortgage servicers.Foreclosure filings nationwide in November dropped 21 percent from the previous month and 14 percent from a year earlier. For the first time since February 2009, RealtyTrac says the total number of filings for the month dipped below the 300,000 mark. The company tracked foreclosure filings – including default notices, scheduled auctions, and bank repossessions – on 262,339 U.S. properties during November. That equates to one in every 492 U.S. homes hit with a foreclosure notice or taken back by the lender during the month, compared to one in every 389 homes during October.  James Saccacio, RealtyTrac’s CEO, said “While part of the decrease can be attributed to a seasonal drop of 7 to 10 percent that typically occurs in November, fallout from the foreclosure robo-signing controversy forced lenders and servicers to hit the pause button on many foreclosures while they scrambled to revamp their internal procedures and revise or resubmit questionable paperwork.” According to RealtyTrac’s report, a total of 78,955 properties received default notices in November, a 21 percent decrease from the previous month and a 31 per-cent decrease from November 2009. While the robo-signing scandal may have impacted the short-term numbers, this marked the 10th straight annual decline in default notices.

    CoreLogic: 10.8 Million U.S. Properties with Negative Equity in Q3 - First American CoreLogic released the Q3 2010 negative equity report today.  CoreLogic reports that 10.8 million, or 22.5 percent, of all residential properties with mortgages were in negative equity at the end of the third quarter of 2010, down from 11.0 million and 23 percent in the second quarter. This is due primarily to foreclosures of severely negative equity properties rather than an increase in home values. During this year the number of borrowers in negative equity has declined by over 500,000 borrowers. An additional 2.4 million borrowers had less than five percent equity in the third quarter. Together, negative equity and near-negative equity mortgages accounted for 27.5 percent of all residential properties with a mortgage nationwide. Here are a couple of graphs from the report: This graph shows the distribution of negative equity (and near negative equity). The more negative equity, the more at risk the homeowner is to losing their home.  The second graph shows the break down of equity by state.

    CoreLogic: House Prices declined 1.9% in October - From CoreLogic: Home Price Index Shows Decline for Third Straight Month, October Home Prices Declined 3.93 Percent Year Over Year CoreLogic ... today released today released its October Home Price Index (HPI) which shows that home prices in the U.S. declined for the third month in a row. According to the CoreLogic HPI, national home prices, including distressed sales, declined by 3.93 percent in October 2010 compared to October 2009 and declined by 2.43 percent* in September 2010 compared to September 2009. Excluding distressed sales, year-over-year prices declined by 1.5 percent in October 2010 compared to October 2009. ...This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100. The index is down 3.93% over the last year, and off 30.2% from the peak. The index is 2.2% above the low set in March 2009, and I expect to see a new post-bubble low for this index - possibly as early as next month or maybe in early 2011.

    MBA: Mortgage Applications decline, Mortgage rates rise sharply - The MBA reports: Mortgage Applications Decrease in Latest MBA Weekly Survey - The Refinance Index decreased 0.7 percent from the previous week. This is the fifth straight weekly decline for the Refinance Index. The seasonally adjusted Purchase Index decreased 5.0 percent from one week earlier. The average contract interest rate for 30-year fixed-rate mortgages increased to 4.84 percent from 4.66 percent, with points increasing to 1.34 from 0.94. This graph shows the MBA Purchase Index and four week moving average since 1990. The four-week moving average of the purchase index is at about the levels of 1997 - and about 17% below the levels of April this year - suggesting weak existing home sales through the end of the year and into January.

    Mortgage Rates pushing 5% - My favorite word of the day, remarked by another LO, is "gruesome". That's what's going on in the mortgage market.... A "true" -0- point, -0- lender fee refinance rate is in the mid 5's which is wholly unappealing to consumers. Benchmark FHA 30 fixed loans are in the 4.75% rate range, also for 1.0 point origination.From economist Tom Lawler: The US MBS market had a very bad day, and secondary market yields surged from early this morning. For example, Freddie Mac’s required net yield on a 60-day commitment to purchase conventional conforming 30-year fixed-rate mortgages went from 4.50% at 8:30 this morning to 4.64% at 3:00 PM. For Freddie “PMMS” mortgage rate followers, such a level would, if sustained, suggest that next week’s “Freddie 30-year primary mortgage market rate” would be somewhere in the neighborhood of 4 7/8% and 0.8 point. Usually I track Freddie Mac's Primary Mortgage Market Survey® (PMMS®) and it appears 30 year rates will be pushing 5% this week. "Gruesome" is the word for those in the mortgage industry, especially for refinance activity.

    30-year mortgage jumps to 7-month high — Mortgage rates jumped again this week, with rates on the 30-year fixed-rate mortgage reaching a seven-month high and the 15-year fixed-rate mortgage above 4% for the first time since the end of July, according to Freddie Mac’s weekly survey of conforming mortgage rates.  “Market concerns over stronger economic growth that, in the near term, could lead to an increase in inflation have sparked a rise in bond yields and mortgage rates have followed,” said Frank Nothaft, chief economist of Freddie Mac, in a news release.

    Misc: Mortgage Rate above 5%, House Vote on tax legislation likely later today - On mortgage rates from Tom Lawler:  This morning most major mortgage lenders were posting indicative quotes for a 60-day lock on a 30-year fixed-rate prime conventional conforming mortgage in the range of 5 1/8% and 1 point, reflecting the sharp runup in secondary mortgage market yields. And some resources for following the House vote:  U.S. House: Office of the Clerk. This is a running account of what is happening on the floor. Watch for H.RES.1766  Providing for consideration of the Senate amendment to the House amendment to the Senate amendment to the bill (H.R. 4853) to amend the Internal Revenue Code of 1986 ... And a live video feed from the House (currently in recess)While we wait for paint to dry ...

    Q3 2010: Mortgage Equity Withdrawal - The following data is calculated from the Fed's Flow of Funds data and the BEA supplement data on single family structure investment. This is an aggregate number, and is a combination of homeowners extracting equity (hence the name "MEW", but there is little MEW right now!), normal principal payments and debt cancellation. For Q3 2010, the Net Equity Extraction was minus $86 billion, or a negative 3.0% of Disposable Personal Income (DPI). This is not seasonally adjusted. This graph shows the net equity extraction, or mortgage equity withdrawal (MEW), results, using the Flow of Funds (and BEA data) compared to the Kennedy-Greenspan method.  The Fed's Flow of Funds report showed that the amount of mortgage debt outstanding declined sharply in Q3, and this was probably mostly because of debt cancellation per foreclosure and short sales, and some from modifications, as opposed to homeowners paying down their mortgages. .

    Housing Starts increase slightly in November - Total housing starts were at 555 thousand (SAAR) in November, up 3.9% from the revised October rate of 534 thousand, and up 16% from the all time record low in April 2009 of 477 thousand (the lowest level since the Census Bureau began tracking housing starts in 1959).  The increase this month was due to single-family starts, but the level is still very low. Single-family starts increased 6.9% to 465 thousand in November.  The second graph shows total and single unit starts since 1968. This shows the huge collapse following the housing bubble, and that housing starts have mostly been moving sideways for two years - with a slight up and down over the last six months due to the home buyer tax credit. Here is the Census Bureau report on housing Permits, Starts and Completions.

    Housing Starts and Vacant Units - Here is an update to a graph showing total housing starts and the percent vacant housing units (owner and rental) in the U.S. Over a year ago, I used this chart to argue that there would be no "V shaped" recovery, and that housing starts wouldn't rebound rapidly. See: Housing Starts and Vacant Units: No "V" Shaped Recovery. In that earlier post, I also argued that the unemployment rate would remain high throughout 2010. Hey, housing matters!The good news is the total vacancy rate has started to decline. We know that the homebuilders will complete a record low number of housing units in 2010, and the declining vacancy rate suggests more households are being formed than net housing units added to the housing stock, or in other words, the excess supply is being absorbed.  The bad news is there is a long ways to go. In some areas there will probably be a pickup in building next year, but the recovery in construction will remain sluggish until more of the excess supply is absorbed.

    More Immigration, Higher House Prices - I have an op-ed about how immigration could be used to increase house prices. I’ll put the whole thing below the fold, but it’s also worth noting another recent study that supports the results of the study I cite in my piece. Importantly, this study provides evidence that immigration raises house prices even in housing markets with low price inflation and rent control, and even when the immigration amounts are modest. The impact they find, which is for Switzerland, is that a 1% increase in immigration causes a 2.7% increases in home prices. To my knowledge it is still the case that every study on this issue, which is admittedly few, has found that immigration has a positive impact on house prices. Here is what I wrote, with more below the fold: Amid reports of continuing declines in home prices, it’s safe to say that government policies designed to prop up those prices have failed. More than 14 percent of home mortgages are delinquent or in foreclosure, and 23 percent of homeowners owe more on their homes than they’re worth. At this point, it may seem as if we have to let prices fall until they find a bottom. But we haven’t yet tried one of the easiest and least costly options for helping the housing market: more immigration.

    Unemployment and migration -  I see Austin Frakt has some interesting thoughts about how unemployment insurance may be decreasing migration: I wonder to what extent UI benefits discourage migration. North Dakota could use some workers. Nevada has too few jobs. Yet we’re paying people in Nevada whether they have a job or not. I doubt many would move to North Dakota anyway. Paying them not to makes it less likely. But how much less likely? This reminds me of something I proposed awhile ago, which is to let the unemployed front-load their unemployment insurance if they use it to move. Here is what I wrote:So what policies could we pass to make the unemployed better off and incentive them in a way that speeds up the structural unemployment adjustment process? One idea is relocation vouchers. If you offer relocation vouchers to unemployed workers who move a minimum distance from their current residence, then you could incentivize labor to move where it is needed away from where it is no longer needed. The demand for this type of voucher can be seen in the piece from Catherine Rampell on structural unemployemt that Avent was commenting on…

    Lenders Extend Credit to Risky Borrowers Again -Credit card offers are surging again after a three-year slowdown, as banks seek to revive a business that brought them huge profits before the financial crisis wrecked the credit scores of so many Americans. The rise is striking because it includes offers to riskier borrowers who were shunned as recently as six months ago. But this time, in contrast to the boom years, when banks “preapproved” seemingly everyone, lenders are choosing their prospects more carefully and setting stricter terms to guard against another wave of losses. For consumers, the resurgence of card offers, however cautious, provides an opportunity to repair damaged credit and regain the convenience of paying with plastic. But there is a catch: the new cards have higher interest rates and annual fees. In extending credit again to riskier borrowers, lenders are looking beyond standard credit scores, on the theory that some people who may seem to be equivalent credit risks on the surface may show differences in spending or other behavior — like registering on a job Web site — that suggest variations in their ability to keep up with payments.

    Banks Desperate for Profits Seek Out Risky Credit Card Customers - Yves Smith - Banks, having trashed their once-sound model for the credit card business, are back trolling to find credit junkies, albeit of a somewhat safer type than the ones that blew up on them in the credit crisis. So per an article in the New York Times, the banks are back trying to build up their credit card businesses, which had become a major source of bank profits. Unfortunately, have trained a whole generation of customers to expect no-fee cards, they’ve made it well nigh impossible for themselves to go back to a more prudent pricing model. But never fear. The card issuers claim to be wiser and thus better able to make more discerning choices among risky borrowers, such as “strategic defaulters” versus “first time defaulters” versus “sloppy payers”. But how reliable can these credit score and payment history analyses be? We’ve only had two years or so of the “new normal”. The subprime crisis illustrates the perils of extrapolating from unduly short time frames. Now admittedly, the banks are building in more protection for themselves in the form of annual fees and high interest rates. But the flip side is, independent of the terms the banks put in place is that uptake on its new card offers are very likely to be subject to adverse selection.

    Credit Card Companies Seeking to Expand Lending? - This weekend, I received a rather odd email from American Express, announcing that they were roughly doubling my credit limit.  This was odd, I say, because I hardly needed a higher credit limit; the card currently has a balance of $222 on it, from traveling to New York last week.  I certainly hadn't requested such a thing.  I'll keep the higher limit, since this modestly improves my credit score, but it gives me a sort of shifty feeling.  Why would they have increased my limit, unless they thought they might somehow induce me to go on a wild, credit-fuelled binge? Apparently, I'm not the only one getting unsolicited offers of more credit:  the New York Times has a piece on lenders once again plunging--or at least, dipping a few toes--into the bottom of the market: Lenders have taken $189 billion in credit card losses since 2007, according to Oliver Wyman Group, a financial consultancy. That was a significant part of the $2 trillion or so that banks are estimated to have lost since the crisis began, and a contributor to the government bailout of the banking system.

    Senators Express Concerns Over Debit-Card Fees - A bipartisan group of U.S. senators is urging the U.S. Federal Reserve to make sure that consumers aren’t hurt by new rules that would limit debit-card transaction fees. In a recent letter to Federal Reserve Chairman Ben Bernanke, the senators said they fear that new rules on debit card “interchange” fees could replace market-based pricing with a government-controlled system. They also expressed skepticism that interchange fee limits will benefit consumers. Price-fixing hurts consumers, they said. Congress earlier this year signed off on a sweeping package of financial regulations that requires the Federal Reserve Board to issue rules on “interchange fees,” which banks charge merchants each time a debit card is swiped. The Fed Board plans to hold a meeting on the issue later this week, on Dec. 16. In a first for the Fed, the critical meeting will be webcast.

    Fed Proposes Rules to Cut Debit Card Fees - The Federal Reserve, fulfilling a Congressional order to examine whether merchants were being charged excessive fees to process debit card transactions, proposed new rules on Thursday that analysts said could cut those fees as much as 90 percent.  The Fed’s report went much further than the 50 percent reduction that Wall Street analysts had expected. Shares of Visa and MasterCard, which could come under increasing pressure from banks seeking to make up billions of dollars in lost revenue if the Fed proposal was adopted, plunged more than 12 percent.  As part of the Dodd-Frank Act’s overhaul of the financial code, Congress directed the central bank, which oversees the regulation of electronic payments, to ensure that the swipe fees charged by the banks and payment card networks like Visa and MasterCard were “reasonable and proportional” to the cost of processing the transaction.

    The Fed’s bold move on debit interchange - The Fed’s swipe-fee proposals are out, and the market action in Visa and Mastercard — both of them are down more than 10 percent today — tells you everything you need to know. Basically, big card issuers won’t be able to charge more than 12 cents per transaction for debit-card purchases, and under one alternative their fees might be kept as low as 7 cents per transaction. That’s a massive reduction from the levels we’re seeing right now, which can range as high as 2 percent. This is a victory for Dodd-Frank, a victory for consumers, and above all a victory for merchants over the financial-services industry. Assuming, that is, that the banks don’t find some way of killing, avoiding, or repealing it. Well done, Fed.

    Debit Card Fee Cap Could Mean Higher Banking Costs - A proposed cap on the fees that banks charge for debit card transactions would substantially reduce the cost for businesses. But it's started a death watch for debit card rewards and renewed predictions that free checking is done for. At issue is who will ultimately benefit from the savings? The Federal Reserve's proposal to cap these fees, officially known as interchange fees, at 12 cents per transaction would enable retailers to pass on annual savings of $10 billion to $13 billion to consumers. But banks and card networks maintain that retailers will pocket the savings. This would leave consumers to bear the brunt of the new law through higher costs for banking and reduced rewards programs.

    Infographic: How Color Affects Our Purchasing Habits - There's a reason Tide is bright orange: the color is aggressive, it screams for a call to action, "buy me, buy me, buy me." Black means luxury. Banks love blue and green because they exude trust and relax you, plus money is green.  KISSmetrics has collected this handy infographic on how colors affect our buying decisions, including which colors attract impulse buyers or budget shoppers. All of this quantified data, however pretty, is just another window into the terrifyingly sophisticated psychology behind consumer marketing.

    U.S. Retail Sales Rise Above Forecast as Consumers Recover - Sales at U.S. retailers increased more than forecast in November and optimism among small businesses rose to a three-year high, signaling the economy was gaining momentum as the holiday season began.  The 0.8 percent gain in purchases followed a 1.7 percent jump in October that was larger than previously estimated, Commerce Department figures showed today in Washington. The National Federation of Independent Business’s sentiment gauge rose by 1.5 points to 93.2, the highest since December 2007, as more companies projected sales will grow.  Stocks rose and Treasuries fell as the figures confirmed a yearend-sales rebound at retailers like Target Corp. and Macy’s Inc. Even as the world’s largest economy strengthens heading into 2011, high unemployment and the risk of a prolonged drop in prices remain concerns for Federal Reserve policy makers meeting today.

    Retail Sales increase 0.8% in November - On a monthly basis, retail sales increased 0.8% from October to November(seasonally adjusted, after revisions), and sales were up 7.7% from November 2009.  This graph shows retail sales since 1992. This is monthly retail sales, seasonally adjusted (total and ex-gasoline). Retail sales are up 12.8% from the bottom, and only off 0.3% from the pre-recession peak.  The second graph shows the year-over-year change in retail sales (ex-gasoline) since 1993. Retail sales ex-gasoline increased by 6.9% on a YoY basis (7.7% for all retail sales). Here is the Census Bureau report:

    Canary In The Coal Mine  - Some people have contested my statement that there are thousands more retail stores in the US today than there were in 2007. Yes, many mom and pop stores have gone out of business, but the big boys continued to expand in the face of reality. The mall based mega-retailers dominate the retail landscape in this country. Here is a partial list of the biggest retailers in the US and their store counts. Just these nine well known retailers alone, have added 6,435 stores since 2007. Some of the stores were international, but the vast majority were opened in the U.S. This increase in store counts in the face of reality is the ultimate in CEO hubris. Inflation adjusted retail sales since 2007 in the U.S. are down 19%. This is a recipe for disaster. Americans must deleverage over the next decade. They have no choice. Their retirement savings levels are pitiful. They will be forced to stop buying crap. The boomers are leaving their high spending years and entering the forced saving phase of their lives, whether they like it or not. Every retail CEO in the country should recognize these facts. But still, they relentlessly expand. A fool and his company are soon parted.

    Is deleveraging just a delusion? - Well, that was quick. The new frugality lasted all of two years. Is that good or bad? One takeaway from the newly minted Federal Reserve quarterly flow of funds report is that America has stopped paying down debt. Not the most reassuring picture Private sector debt fell by $165 billion in the third quarter. That is just a quarter of the rate of decline a year ago, Capital Economics notes. But what's more, government debt issuance more than canceled out that drop, expanding by $380 billion during the period ended in September. That gap, if you can bear it, stands to get even bigger in coming quarters should Congress approve the deficit-expanding tax deal reached this month by the White House and congressional Republicans. That shift is not exactly reassuring the many fiscal hawks who warn that U.S. profligacy will not end well. They say the wider the budget gap, the bigger the mountain of debt sitting atop U.S. assets. Both of those trends, they claim, will push the dollar toward collapse in an inflationary crisis reminiscent of a banana republic.

    A Terrible Way To Fix The Economy: Households Deleveraging Through Defaulting on Debt - For those who aren’t familiar with the narrative on deleveraging – the process of households paying down debts – as being crucial to our weak economy and high unemployment, they should check out Paul Krugman’s column today. He points out: What we’ve been dealing with ever since is a painful process of “deleveraging”: highly indebted Americans not only can’t spend the way they used to, they’re having to pay down the debts they ran up in the bubble years. This would be fine if someone else were taking up the slack. But what’s actually happening is that some people are spending much less while nobody is spending more — and this translates into a depressed economy and high unemployment.  The Federal Reserve just released the latest quarterly Fed Flow of Funds last week, and consumers continue to delever: That our current situation is the exact opposite of this happening would be an understatement. The result is exactly what you’d expect: our consumer de-leveraging is mostly taking place through defaults on loans, the most painful, externality-prone, and drawn-out mechanism we have for resolving bad debts. 

    Any Talk of Recovery Is False - Have you noticed the latest sound bites coming from the punditry in the corporate mainstream media? Here's the latest wisdom flowing from Wall Street, Washington DC, and mega corporations: The economy is recovering and employment is growing. Consumers are deleveraging, saving, and using cash for purchases. Retailers are doing fantastic as consumers increase spending. How can consumers be deleveraging, saving, and increasing spending at the same time? Let's examine the facts. The fallacy that the economy is recovering and employment is growing can be put to rest by an examination of the Bureau of Labor Statistics data: The number of Americans employed over the last few years is as follows:  2007 -- 146.0 million -- 2008 -- 145.5 million -- 2009 -- 139.9 million -- 2010 -- 138.9 million
    It seems there are 7.1 million less employed people than there were three years ago. Contrary to the spin from the White House, there are 1 million less people employed today than during the horrific 2009 year. Luckily, another 6 million people left the work force, or we'd really have a problem. The truth is that if the government actually counted everyone in the country who wants a job, the unemployment rate isn't 9.8%, but 23% -- and it continues to rise

    Charting America's Transformation To A Part-Time Worker Society, Following 6 Straight Months Of Full Time Job Declines - It is surprising that over the past several years very little has been said in the popular media about the fact that America is slowly (but surely) transforming from a full-time to part-time employed society. And while much has been said about the temporary and now past impact of census hiring, and government jobs on the workforce, there are still few mentions in mainstream media that since the depression started in December 2007, America has lost 10.5 million full time jobs, offset by a 2.8 million increase in part time jobs. Two recent mentions of this extremely troubling phenomenon were those by David Stockman, who characterized the recent unjustified economic (and naturally market) euphoria in terms that could have come straight from David Rosenberg's mouth, and, more recently, Van Hoisington. And since the Teleprompter in Chief has now made it a monthly pilgirmage to extol the NFP number no matter how manipulated by Birth-Death and seasonal adjustments, perhaps next time someone can ask him why the US not only lost 478k seasonally adjusted full time workers in November but has lost full time jobs for 6 months in a row, for a total of 1.6 million job losses!

    Industrial Production, Capacity Utilization increase in November - From the Fed: Industrial production and Capacity Utilization  Industrial production increased 0.4 percent in November after a decline of 0.2 percent in October. The rate of change for industrial production was revised down in October but up in September; the net effect of the revisions from June to October left the level of industrial production in October about the same as was previously reported. ... At 93.9 percent of its 2007 average, total industrial production in November was 5.4 percent above its level a year earlier. The capacity utilization rate for total industry rose to 75.2 percent, a rate 5.4 percentage points below its average from 1972 to 2009.This graph shows Capacity Utilization. This series is up 10.3% from the record low set in June 2009 (the series starts in 1967). Capacity utilization at 75.2% is still far below normal - and well below the pre-recession levels of 81.2% in November 2007. The second graph shows industrial production since 1967. Industrial production increased in November, but production is still 6.8% below the pre-recession levels at the end of 2007.

    Capacity Utilization - One thing there is almost universal agreement on is that the US economy has very large excess capacity and that capacity constraints are unlikely to be a significant factor for the foreseeable future. But is it. In November capacity utilization in manufacturing rose to 75.2%. But this does not mean that the manufacturing sector has 25% of its capacity sitting idle waiting for demand to appear. If you look at the chart of capacity utilization it shows a downward trend of generally lower highs and lower lows across time. For example in the last cycle capacity utilization peaked at 81.7% in April, 2007 before plunging to a low of 68.2% in May, 2009. The average from the last peak to trough was 75.0% so with capacity utilization now at 75.2% the system is already over half way back to its previous peak.If you do a trend of the lower lows and lower highs the current trend is at 77.5%, so capacity utilization is only slightly below the long term trend at 97.0% of trend. This 97% figure is clearly a much more realistic measure of how much excess manufacturing capacity exist than the 75% observation being commonly cited.

    Can the Great Lakes Region Break Free of its Long-term Slide? - How can we best understand and adapt to the Region’s long term changes? There are three trends that are fundamental to assessing the Region’s economic behavior and prospects. One is the region’s sharp sensitivity to the national business cycle. The region continues to specialize in manufacturing, especially durable goods sectors such as automotive and machinery. For this reason, the region exhibits above-average swings in employment and business activity as the U.S. economy falls into a recession or recovers afterward. The second trend behavior concerns the Region’s long term re-structuring out of manufacturing. Here, it is not so much that the Region’s manufacturing specialization has abated. Rather, since manufacturing productivity gains give rise to fewer workers, and because consumer demand growth for manufactured goods does not compensate for rising labor-saving productivity, the region’s economic base does not keep pace with the nation. Finally, from decade to decade, the Great Lakes Region has experienced pronounced deviations from its overall growth trend.

    Reuter’s Bad Arguments on Structural Unemployment - A Reuter’s report by Nick Carey, Special Report: Is America the sick man of the globe?, is almost painful to read as it tries to extrapolate the problems of unemployment from the Detroit, Michigan area to the entire country. America now faces “structural” unemployment. Which means unless the world’s largest economy changes in a fundamental way, millions of unskilled workers will remain jobless and economic growth will be sluggish, at best “The financial sector and America’s wealthiest classes can help grow the economy, but not enough to bring down unemployment,” None of this means a death spiral is inevitable. A growing number of economists and investors like PIMCO’s Gross say a fix exists: a comprehensive overhaul of America’s education system and retraining programs for the unskilled.  Quick first: I’m less convinced by the arguments that “We decided as a nation to issue debt and focus on the financial sector to counter what was becoming a major structural issue in the 1980s” than I was at the beginning of the year.  We’ll talk about this paper next week, but recent research is leading me to believe that the supply curve on debt shifted out in the past 10 years, not the demand curve.

    Reuters Invents “Structural” Unemployment in the Absence of Any Evidence - Reuters decided to abandon evidence-based reporting in a news story that told readers that the United States is suffering from "structural" unemployment. The use of the term "structural" is important because it implies that the main reason that people are unemployed is that there is a mismatch between skills and the available jobs. The alternative explanation, is that we just need more demand in the economy to drastically increase employment levels.There are certain pieces of evidence that economists would look to as evidence of structural unemployment. For example, there should be high rates of job openings, which would suggest that there are sectors of the economy or regions of the country in which employers are having difficulty finding workers. In fact, data from the Bureau of Labor Statistics show the job opening rate at 2.5 percent. This is above the 1.9 percent low hit last year, but only slightly higher than the 2.3 percent low from the last recession. It is well below the 3.4 percent pre-recession rate. If the economy's main problem is structural unemployment then there also should be sectors where wages are rising rapidly as firms are forced to compete for an inadequate supply of skilled workers.

    Forgetting about Demand, Once Again -Professor Mulligan asserts that the payroll tax cut will have little effect on output, even in sticky price Keynesian, and New Keynesian, models. He writes: In summary, the proposed payroll tax cut does not increase national employment in the sticky-price Keynesian model, regardless of whether the cut is aimed at employers or employees. The sticky-wage Keynesian model says that, because the cut is aimed at employees, it will not increase hiring in those sectors where wages are sticky -- such as the market for low-skilled workers.  It is interesting that Professor Mulligan observes that sticky-price Keynesians believe in demand effects arising from payroll tax reductions, then quickly segues to Krugman's model, and finally completely fails to deal with the demand argument, and focuses on the supply side. In this sense, Professor Mulligan remains completely predictable and consistent (see here, here and here).

    Yet More Evidence of Hunkering Down Among Small Businesses - Several recent studies suggest that small business owners are hunkering down.  As sales have declined, these entrepreneurs have cut expenses and shed debt to survive the Great Recession and to hopefully be able to thrive when that increasingly elusive recovery actually begins. A new study release by Forbes Insights confirms the findings of previous reports. One of the cautions about some of the previous studies is that the samples used in the studies may not be fully representative of all small businesses.  Most of these are conducted among small business owners from membership or client lists. This study is based on a comprehensive survey of 1.777 small businesses conducted by Forbes Insights in October 2010.

    Motivating Miss Daisy -  The Obama Administration just successfully passed important small business legislation, for example, that has no value at all for tech startups. This probably shouldn’t surprise us: former President George W. Bush was clueless about this stuff, too. The good news is that none of this really matters a lot: tech startups will continue to happen in great numbers no matter what Congress and the White House do. The bad news is neither institution would know a tech startup if they saw it and there probably are ways that government could help but won’t. The new small business legislation intended to support startups is based entirely on debt — getting banks to lend money to small companies. But the only kind of debt that most tech startups know is credit card debt. Little tech companies grow by selling equity, not borrowing money. Short-term debt goes on plastic at 18 or 23 percent because no bank has — or will — lend to real tech startups in any significant amount.They’ll finance new Burger King franchises, but lend money for electric cars or new kinds of data storage or — shudder — software? Forget about it. Presidents Obama and Bush didn’t know this, Fed chairman Bernanke doesn’t know it, nor does Treasury secretary Geithner. None of these men have a minute’s experience with tech startups, yet our economy is almost entirely dependent on those startups for real recovery.

    Unemployed and Uncounted (RT Video)The 9.8% unemployment rate in the United States may be closer to 20%, or 30 million Americans without a job. Those measured are those who had a job before, are actively looking for work and are immediately available for work. Despite Washington DC having a somewhat healthy economy, so many residents here are left behind without a job, an income or any hope that things will get better.

    Obama to Discuss Jobs, Economy With CEOs - President Barack Obama plans to sit down with 20 corporate chief executives Wednesday morning to discuss jobs and the economy. Presidential adviser Valerie Jarrett said the meeting is part of a renewed effort to form “partnerships” with Corporate America on issues from education to trade. The meeting will be closed to the media, to encourage participants—who have been encouraged to bring substantive ideas–to be candid. In the past, some have complained that highly public gatherings discouraged frank talk.  The participants are all familiar faces at the White House; several already serve on presidential advisory councils. That disappoints some business observers who say a fresh approach calls for fresh faces.

    The jobs and economy roundtable - What will America’s economy look like in ten years? Will the jobs that we lost come back? And what policies must we put in place now and in the coming years to make sure America will be healthy and prosperous again by 2021?  “America 2021” is a series that we began in our Summer 2010 issue. The idea is to bring together some of our brightest progressive minds to discuss what our country might look like roughly a decade from now.  For this edition, we take a look at jobs and the economy. We brought together five distinguished experts–Robert Atkinson, Heather Boushey, Harry J. Holzer, Thea M. Lee, and Sherle R. Schwenninger–to debate the big picture. E.J. Dionne Jr., Democracy’s editorial chair, moderated the discussion. Editors Michael Tomasky and Elbert Ventura also participated. *This discussion was edited for publication. For a PDF of an expanded transcript, click here.

    Dylan Ratigan on Get America Working - Dylan Ratigan is leading town hall events in various cities to help spur the establishment of a job creation movement. The goal is to push for policies that foster higher employment than the ones we’ve seen over the last thirty years, which instead promoted financialization, the use of consumer debt to paper over lack of wage growth, asset inflation and speculation, and increasing income and wealth disparity.  Ratigan wants to create a dialogue among key political groups, including ordinary citizens, investors, small business operators, and corporate leaders. His sessions will focus on four issues, as he outlined in in the Huffington Post:

      • Promote “fair trade” not “free trade”
      • Require banks to focus on lending, rather than gambling or parking funds in Treasuries
      • Rein in health care and college tuition costs
      • Reform the tax code

    No, really — we can! - The diminished expectations aren’t merely evidence of a national funk; they also pose a real threat to our economy — not just by making businesses and consumers less willing to invest in the future, but also by letting elected officials off the hook. Bringing down unemployment means more stimulus programs, but the widespread idea that we are doomed to austerity gives policy makers an excuse not to tackle the problem.Americans are talking as though 2008’s direst economic predictions had come to pass. “Recovery means lower expectations,’’ MSNBC recently pronounced, reflecting the tone. Three out of every four millennial workers — those age 18 to 27 — report feeling threatened by the possibility of a layoff or job loss in the near future, and this is dimming their career hopes, according to a recent study by Lumin Collaborative. Older workers are delaying retirement because of falling assets and many are accepting jobs far beneath their experience and education.

    Extending unemployment benefits - Here I make two quick observations on the policies being discussed. The first point has been widely noted, but it bears repeating since I keep hearing comments from people who seem to be unaware of it. When you hear that current unemployment benefits can in some cases be collected for up to 99 weeks, and that Congress is discussing an extension of this program, it is perhaps natural to think this means that some people might be eligible for longer than 99 weeks. But this is not the case. Instead what is being discussed is whether the current limits will be kept in place for another two years or whether the limits will be decreased immediately.The second point to which I'd like to call attention has also been around awhile, but is appropriately still being discussed (e.g., Calculated Risk, Washington Post). The source appears to be observations made by Wal-Mart CEO Bill Simon in September. And if you really think about it, the only reason somebody gets out in the middle of the night and buys baby formula is that they need it, and they've been waiting for it. Otherwise, we are open 24 hours — come at 5 a.m., come at 7 a.m., come at 10 a.m. But if you are there at midnight, you are there for a reason.

    Are The Long-Term Unemployed Saved Or Screwed? - Advocates for the jobless are divided on whether a deal reauthorizing emergency benefits for a full year has saved or screwed the unemployed. Fans of the deal, including the White House, the AFL-CIO, and the National Employment Law Project, say legislation passed by Congress Thursday evening provides the longest-possible -- and nearly the longest-ever -- reauthorization of extended unemployment benefits, despite fierce Republican opposition to the extension.  Many Democrats in the House of Representatives remain unimpressed. "This legislation will push struggling American families off their last lifelines during the worst recession since the Great Depression just to give tax breaks to the super rich," said Rep. Jim McDermott (D-Wash.) in a statement Friday morning. McDermott's statement reflects many Democrats' concern that the fate of the jobless aid one year from now will be decided by a Republican-controlled Congress at a time when the employment situation isn't expected to be much better than it is now.

    When unemployment extensions end, a movement rises: the 99ers…Out of full-time work since 2006, LaDona King says she's nearly penniless, having used up her retirement savings, exhausted unemployment benefits, and tapped relatives for as much help as possible. Before long, she may have to move in with one of her two sisters. But Ms. King, of Escondido, Calif., is far from giving up. Even as she spends 40 to 55 hours a week looking for work, she's founded a swelling national grass-roots movement to aid people like her: the so-called 99ers. Named for the maximum number of weeks the jobless can now collect unemployment insurance (UI), these long-term jobless are clamoring for faster job creation and extended jobless benefits. In the short term, many activist 99ers are pushing for passage of the Americans Want to Work Act, a Senate bill that would provide 20 additional weeks – a so-called Tier V – of unemployment insurance. The 99ers, who often find each other through social media, also talk about organizing around other related issues. Although their ranks are growing, they face an uphill battle persuading Congress to act.

    Here come the '99ers - As I mentioned last week, the proposed tax legislation provides no additional help for the so-called "99ers". 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. The above quote is from an article  in the Oregonian: Oregon aid agencies brace for tens of thousands losing unemployment benefits Each week, about 600 Oregonians exhaust jobless benefits. In January, about 4,000 a week will lose coverage. And state officials expect those numbers to spike in April when more than 35,000 people will exhaust benefits in a single week.  The mass exhaustion of benefits, an echo effect of the great recession, is unprecedented ...This graph shows the change in payroll jobs each month. The peak job losses were in early 2009 - and 99 weeks is just under two years - so many of those people will be exhausting their benefits over the next few months. There is much more in Richard Read's article.

    The 99ers Are Coming - As Michael Powell wrote last week, President Obama’s compromise with Republicans may keep the existing 99-week structure of unemployment in place, but it does nothing to help those Americans who are, or will become, unemployed beyond 99 weeks. Ninety-nine weeks is just shy of two years. Given that the recession began exactly three years ago, and that some people live in states that don’t even qualify for all 99 weeks of unemployment, it should be no surprise that some Americans (like this television producer), have already exhausted their benefits. Many more are coming. As the Calculated Risk blog observes, the peak of job losses was in early 2009.Two years from early 2009 is early 2011. With job creation still sluggish and the long-term unemployed most likely becoming less attractive candidates to employers, perhaps we should start preparing for a flood of jobless workers newly without safety nets.

    The 99ers — Our National Shame - The historic tax cut compromise ensures that those forces tearing American society apart will become even more entrenched. Among these trends, one that doesn't get much attention is a key new industry here in the United States: we are "manufacturing" poor people like there's no tomorrow. And for these newly poor citizens, the so-called 99ers whose unemployment benefits have expired or will soon, there may not be a tomorrow. Obama's "compromise" does not extend "Tier 5" benefits, which means those who have exhausted their 99 weeks of unemployment insurance are screwed.. Calculated Risk recently posted a chart you should take a look at. He also quoted a 99er in Oregon who's about to lose his benefits. "This is just as scary as people lobbing mortars over your head at 2 o'clock in the morning."   —James Mitchell, a 64-year-old Vietnam veteran who lost his job in early 2009 and is about to exhaust his unemployment benefits.And like all poor people, the 99ers will soon be forgotten. But at least no one can claim that America doesn't "manufacture" things anymore. Poor people are our biggest product.

    Unemployment Extension Won’t Help 99ers - The extension for unemployment benefits that is part of the compromise tax deal is good news for many of the unemployed, but it won’t provide aid to anyone who’s been out of a job over 99 weeks. As we’ve explained previously, the extension worked out by President Barack Obama and congressional Republicans only lets unemployed workers continue to draw benefits for up to 99 weeks, it doesn’t extend the duration of the program beyond that point. Those who have exhausted all currently available benefits — so-called 99ers — won’t be granted an extension. That’s a concern because the number of 99ers may be increasing. The number of people who have received their final payments from extended-benefits programs this year through the end of October — the most recent month for which data are available — is over one million, and that number has been steadily increasing. Separately, the Labor Department reported that nearly 10% of the unemployed in the third quarter of 2010 — more than one million people — had been out of a job and looking for work for about two years or more. Meanwhile, initial claims for unemployment have been trending lower recently, but the biggest surge came in early 2009. The peak of 643,000 claims in a single week came in March of last year, 89 weeks ago. Anyone still unemployed since that peak is likely to run out of benefits soon, if they haven’t already.

    The Declining Demand for Men - The Great Recession has sometimes been dubbed the Mancession because it drove unemployment among men higher than unemployment among women. Because men tend to work in more cyclical industries than women, they have historically lost more jobs on the downturn and gained more on the upturn. The current upturn, however, is doing little to restore jobs, with November unemployment rates at 10.6 percent for men and 8.9 percent for women. A long-term trend also lurks behind the cyclical pattern — a decline in the demand for the kinds of jobs that men typically fill. For example, men constitute more than 71 percent of the work force in manufacturing but less than 25 percent of the workers in health and education services. As the chart above shows, these two employment categories were similar in size in 2000, but manufacturing employment has failed to rise, even in non-recession years. Employment in health and education, in contrast, has risen slowly, but steadily.

    Understanding Provisions Affecting Women, Mothers, and Working Families in the New Tax Agreement – As new tax legislation makes its way through Congress, the media storm surrounded it can be overwhelming. Here are some key issues to understand about how the proposed agreement will affect women, mothers, and working families.

    Production, Consumption, and Prosperity - David Boaz at the Cato Institute uncritically endorses an extremely foolish Steven Horwitz take on consumption versus production in recession-fighting: One of the most pernicious and widespread economic fallacies is the belief that consumption is the key to a healthy economy. We hear this idea all the time in the popular press and casual conversation, particularly during economic downturns. People say things like, “Well, if folks would just start buying things again, the economy would pick up” or “If we could only get more money in the hands of consumers, we’d get out of this recession.” This belief in the power of consumption is also what has guided much of economic policy in the last couple of years, with its endless stream of stimulus packages. I think people find this sort of logic compelling because it has the combination of sounding virtuous and tough-minded, but also aligns you politically with the interests of rich people and powerful business executives. It’s a hard to beat combination.  But ask yourself, why does the focus on consumption become prominent during economic downturns? Well it’s because in a modern economy downturns often occur absent any kind of negative shock to our productive capacity. 

    Working For the Weekend - There are so many things wrong with this Steve Horowitz post its hard to know where to begin. However, I must note that Matt Yglesias does an excellent job responding to the claim that we should focus on increasing production not consumption. People talk about demand during downturns because in a downturn you have an unusually large number of unemployed people. That’s people producing nothing who the year before were producing something. If there were more demand, they’d produce something. There is a certain “click” when a concept becomes more than a set of principles or equations but is imbedded into your fundamental understanding of reality. You can see that business cycle macro has “clicked” in what Yglesias writes.  I still want to address another claim that Horowitz makes The great irony is that leftists frequently argue that capitalism equals “consumerism.”  They think defenders of free markets believe that more consumption promotes economic growth; thus we are charged with providing the ideological cover that justifies the consumerism they see as deadening lives and wasting resources.

    Company Store Redux - Maxine Udall - Nick Krafft at Open Economics sends us to this IMF working paper by Michael Kumhof and Romain Ranciere, “Inequality, Leverage, and Crises.” In it, the authors develop a model in which income inequality gives rise to different preferences and behaviors within two income groups: workers and investors.  The impacts of the two groups' preferences and behaviors play out differently depending which group is favored in terms of bargaining power within an economy. In the United States, where rising income inequality has been accompanied by erosion of labor union membership and political power and a rise in the political influence of financial and commercial interests, it's no surprise that bargaining power has favored so-called "investors." Kumhof and Ranciere note that as income inequality has grown in the US, it has fueled a recirculating flow of borrowing by working and middle class families and lending by the "investor" class, borrowing that has been necessary to maintain working and middle class consumption as real working and middle class incomes have stagnated or fallen: Kumhof and Ranciere's paper is chock full of interesting and thought provoking insights into the dynamics of income inequality and the economic fragility it induces, but I want to highlight one particular aspect of it that really crystallized as I read their paper. Our current situation in which 5% of the population captures and owns a disproportionate share of national output, which it then lends to the teeming masses whose share of output has been stagnant or dwindling, is really just a new variant of the company store.

    US Wage Stagnation Leads to Rampant Inequality - Alan Blinder has a great story in the Wall Street Journal today about the US economy and how impossibly tilted it is toward the rich: Those of us who live near the top of the income pyramid are doing very nicely, thank you. Yet our government keeps showering us with Christmas presents. Meanwhile, economic life is pretty miserable for those near the bottom and is getting worse for those in the middle. Does this strike you as fair? When it comes to wages, the basic story of recent decades is redolent of Scrooge. Real average hourly earnings (excluding fringe benefits) now stand roughly at 1974 levels. Yes, that’s right, no real increase in over 35 years. That is an astounding, dismaying and profoundly ahistorical development. The American story for two centuries was one of real wages advancing more or less in line with productivity. But not lately. Since 1978, productivity in the nonfarm business sector is up 86%, but real compensation per hour (which includes fringe benefits) is up just 37%. Does that seem fair?

    Income Inequality vs. Lifestyle Inequality - Tyler Cowen‘s American Interest essay “The Inequality That Matters” has sparked some interesting commentary on the wealth of bankers.  But, while that is indeed the meat of the piece, the titular topic is actually more important to the 99 percent of us who aren’t hyper wealthy bankers, athletes, and entertainers. [T]he inequality of personal well-being is sharply down over the past hundred years and perhaps over the past twenty years as well. Bill Gates is much, much richer than I am, yet it is not obvious that he is much happier if, indeed, he is happier at all. I have access to penicillin, air travel, good cheap food, the Internet and virtually all of the technical innovations that Gates does.  Not only do lower middle class Americans live better by almost every measure than their wealthy counterparts of a century ago, there are many ways in which they’re better off than the rich of even fifteen or twenty years ago.  Technology, particularly in medicine, information, and entertainment, has moved at a lightning pace with fantastic changes having occurred right before my eyes.

    Has rising inequality been bad for the poor? - Income inequality has risen sharply in the United States and some other affluent countries since late 1970s, with much of the increase consisting of growing separation between the top 1% and the rest of the population. Has this been bad for the incomes of the poor?In a relative sense, the answer is yes, at least in the United States. According to the best available U.S. data, from the Congressional Budget Office, the share of income going to households at the bottom has decreased. What about in an absolute sense? Would the incomes of low-end households have grown more rapidly in the absence of the top-heavy rise in inequality? If we look across the rich nations, it turns out that there is no relationship between changes in income inequality and changes in the absolute incomes of low-end households. The reason is that income growth for poor households has come almost entirely via increases in net government transfers, and the degree to which governments have increased transfers seems to have been unaffected by changes in income inequality. (For more detail, see my piece in the November-December issue of Challenge.)

    Our Dickensian Economy - The main story line of the U.S. economy over the last third of a century evokes Charles Dickens's classic "A Christmas Carol." Starting in the late 1970s, the labor market turned ferociously against those with less education and in favor of those with more. This was not Ronald Reagan's fault, nor George Bush's (either one), nor Mitch McConnell's. It just happened. And except for a brief shining moment during the Clinton boom, the Great Disequalization has continued unabated to this day.  You might have thought that the government would push back against this trend, but you'd have been wrong. Instead, our government has opted for lavish tax cuts for the haves and crumbs (or worse) for the have nots. In consequence, America may now be the greatest place on earth to be rich but an awful place to be poor.

    Labor Market Stagnant in Most U.S. States = Unemployment rates were little changed in most states in November, as employment was stagnant in most of the U.S. The Labor Department reported that 21 states and Washington DC experienced jobless-rate increases in November from October, while the rate fell in 15 regions and was unchanged in 14. In all, 13 states had rates above or equal to the 9.8% national figure released earlier this month. Nevada remained the state with the highest unemployment rate in the nation — 14.3% — nearly two percentage points higher than the 12.4% recorded in Michigan and California, tied for second place. Michigan’s unemployment rate has declined by two percentage points since 2009, but the employment situation hasn’t improved significantly. The number of unemployed people in the state has declined, but so has the overall labor force. Meanwhile, the number of people employed has also declined. Michigan had already been struggling with high unemployment before the recession started hitting other states, indicating that some of the long-term unemployed are just dropping out of the labor force altogether.

    State Unemployment Rates in November: "Little changed" from October - From the BLS: Regional and State Employment and Unemployment Summary Regional and state unemployment rates were generally little changed in November. Twenty-one states and the District of Columbia recorded unemployment rate increases, 15 states registered rate decreases, and 14 states had no rate change, the U.S. Bureau of Labor Statistics reported today.  Nevada continued to register the highest unemployment rate among the states, 14.3 percent in November. The states with the next highest rates were California and Michigan, 12.4 percent each, and Florida, 12.0 percent. North Dakota reported the lowest jobless rate, 3.8 percent, followed by South Dakota and Nebraska, 4.5 and 4.6 percent, respectively. This graph shows the high and low unemployment rates for each state (and D.C.) since 1976. The red bar is the current unemployment rate (sorted by the current unemployment rate). Nine states now have double digit unemployment rates. A number of other states are close.

    Jobs threatened as end nears for stimulus — Texas' $16.4 billion share of federal stimulus money winds down next year, a fading boon that will affect Houston jobs and research from the M.D. Anderson Cancer Center to the Metropolitan Transit Authority. While Republicans have argued that the Obama administration's emergency spending plan cost too much to create too few jobs, it did result in hundreds of thousands of jobs across the nation that will need other money to continue or face extinction over the next six months. But the short-term difficulties of extending 2,184 federally subsidized jobs across Harris County pale against the wider challenges ahead as Texas' state and local governments brace for even deeper cutbacks and as the White House and Congress work to trim the deficit and national debt. And with politically conservative gains in the midterm elections, it's likely that the loss of government-funded jobs is just beginning, both nationally and in Texas.

    State Unemployment Insurance Tax To Go Up For Nearly All Businesses - The state’s 2011 unemployment insurance tax rates are out, and it’s going to be an expensive year for many Illinois companies. More than nine in 10 businesses will see their per-employee unemployment tax rates rise, according to Illinois Department of Employment Security spokesman Greg Rivara, with only 8.8 percent of employers seeing a decrease in their rate. Nearly one out of five — 17.9 percent — companies will have the maximum tax rate....Although the rates are going up this year, they’re not being raised nearly enough to deal with the $2.2 billion loan to the state unemployment fund from the federal government. Interest charges start accumulating on the loan next year

    Agency decides it can't afford to stay in S.F. - After almost 100 years, the State Compensation Insurance Fund is pulling 755 of its 830 jobs out of town, having determined that San Francisco is just too expensive - and its workforce too dumb - for the agency to continue doing most of its business here. "It's part of a whole geographic strategy to reduce our footprint in high-cost areas like San Francisco," said agency spokeswoman Jennifer Vargen. Vargen estimated that about half the workers now live either in the city, Daly City or the South Bay.  The fund, which handles workers' compensation, is a quasi-government agency - its workers are civil servants and it is overseen by a state-appointed board of directors. Its headquarters have been in San Francisco since 1913.  The move to cheaper climes is part of a statewide plan aimed at saving the fund $200 million over the next three years.

    More and More Senior Citizens Filing For Bankruptcy - Some people were feeling like the golden years were being tainted because many senior citizens were declaring bankruptcy in retirement.   Those, 65 and older, became the fastest-growing group facing severe debt problems.  69-year-old Suzanne Ballard, of La Quinta, said finding money to support herself in the economy is really tough.  "I see the end of the money coming.  It's just like you can't get ahead.  Your hole digs a little deeper all the time," Ballard said.   While Ballard did not resort to bankruptcy, some of her friends did. "It's destroyed them.  They lost everything they had.  They had no credit," Ballard said.   A University of Michigan Law School study found that those 65 and older were the fastest-growing group filing for bankruptcy

    Kids write Santa this year for basic needs instead of toys… Santa Claus and his elves are seeing more heartbreaking letters this year as children cite their parents' economic troubles in their wish lists. U.S. Postal Service workers who handle letters addressed to Santa at the North Pole say more letters ask for basics — coats, socks and shoes — rather than Barbie dolls, video games and computers. At New York City's main post office, Head Elf Pete Fontana and 22 staff elves will sort 2 million letters in Operation Santa, which connects needy children with "Secret Santas" who answer their wishes. Fontana, a customer relations coordinator for the Postal Service, has been head elf for 15 years. "The need is greater this year than I've ever seen it," he says. "One little girl didn't want anything for herself. She wanted a winter coat for her mother."

    Federal Welfare Reform Funding Declines Despite Rising Need - In recent weeks, the already weak safety net for some of our most vulnerable citizens became substantially weaker.  For the first time since 1996 when President Clinton and Congress created the Temporary Assistance for Needy Families (TANF) block grant as part of welfare reform, no additional TANF funds are available from the federal government to help states respond to the large increases in the number of impoverished families as a result of a recession.  We’ve just issued an analysis on the topic. The federal cut-off in recession-related help to states is due to two factors:

    • Congress recently enacted legislation that will essentially end funding for fiscal year 2011 for the TANF Contingency Fund, which was specifically created in welfare reform to help states respond to increased need during hard economic times.
    • Congress failed to extend the TANF Emergency Fund, which was created in the 2009 Recovery Act to create jobs and help families weather the current downturn, but which expired on September 30.

    Aggravating these problems, the 17 states that have received Supplemental Grants every year since TANF was created (most of them relatively poor states) will see those grants cut by 33 percent this year, unless Congress provides additional funding to restore them to their original level.

    Food Pantry Demand Skyrockets - Record-setting demand will result in nearly 1.3 million pounds of food being distributed this year through the Greater Dover-New Philadelphia Food Pantry. The pantry also is changing its distribution days to accommodate the Christmas and New Year’s holidays. Through Dec. 11, the pantry distributed a net total of 1,257,818 pounds of food, compared to 706,129 pounds during the same period in 2009.During the first week of November, 469 families were served. In the following weeks the totals rose to 487 and a record 559 families before dipping to 549. Finley said statistics show 3.2 people per family.

    Big Appliances Set Out as Trash Are Vanishing, Puzzling City - Over the last several months, 22,741 New Yorkers contacted the city’s Department of Sanitation and arranged for the pickup of refrigerators, air-conditioners and freezers. In more than 11,000 instances, the machines vanished before sanitation workers arrived in their white trucks to pick them up. The sheer magnitude of the thefts — 11,528 appliances, to be precise — over a relatively brief period suggests to some in city government and the recycling industry that a more organized enterprise may be at work as well.. Indeed, the big loser in what might be called New York’s Appliances Caper appears to be a multinational recycling conglomerate, a subsidiary of which has a large city contract to recycle the hundreds of thousands of tons of metal, glass and plastic generated each year by New Yorkers, including bulk metal, like appliances. In response, the officers have stepped up their enforcement, Inspector D’Angelo said, and while the theft of curbside recyclables warrants only a summons, the sanitation officers impound the vehicles and their cargo — frequently a jumbled load of refrigerators, air-conditioners, Venetian blinds, office partitions and stoves.

    Banana Republic Watch: New York City More Unequal Than Chile - Yves Smith - A newly released report, “Grow Together or Pull Further Apart? Income Concentration Trends in New York,” by the Fiscal Policy Institute gives a picture of how New York City is now at Latin American levels of income disparity. New York’s top one percent has an income share that one and a half times as high as the 23.5 percent historically-high national level….The city used to have a broad middle class, rooted in a vast manufacturing sector and mid-level positions in corporate headquarters as well as in education, government, construction and other good-paying blue-collar jobs... the city’s labor market has seen the disappearance of thousands of middle-paying jobs and the growth in their place of moderate- to low-paying jobs, mainly in services. Given its degree of inequality, if New York City were a nation, it would rank 15th worst among 134 countries with respect to income concentration, in between Chile and Honduras. Wall Street, with its stratospheric profits and bonuses, sits within 15 miles of the Bronx—the nation’s poorest county.And if you think that the rising tide of burgeoning financial services profits has improved the living standards of those at the bottom, think again: over the period from 1980 to 2007 in New York, when total inflation-adjusted income in the state grew an average of 2.1 percent a year after adjusting for population increase, incomes for those in the bottom half of the income spectrum generally declined while those in the middle income range rose but at only a fraction of the pace of total income growth.

    New York Study on Who May End Up Homeless Called Cruel … It has long been the standard practice in medical testing: Give drug treatment to one group while another, the control group, goes without.  Now, New York City is applying the same methodology to assess one of its programs to prevent homelessness. Half of the test subjects — people who are behind on rent and in danger of being evicted — are being denied assistance from the program for two years, with researchers tracking them to see if they end up homeless.  The city’s Department of Homeless Services said the study was necessary to determine whether the $23 million program, called Homebase, helped the people for whom it was intended. Homebase, begun in 2004, offers job training, counseling services and emergency money to help people stay in their homes. But some public officials and legal aid groups have denounced the study as unethical and cruel, and have called on the city to stop the study and to grant help to all the test subjects who had been denied assistance.

    New York City Budget Deficits May Be Larger Than Mayor Predicted, Liu Says - New York City Comptroller John Liu said looming budget deficits in the most populous U.S. city will be bigger than Mayor Michael Bloomberg anticipates.  Although the city experienced less economic turbulence than most of the U.S. during the recession that began in December 2007, it faces budget gaps of $3.6 billion, $6 billion and $6.6 billion in the next three fiscal years, a report by the comptroller’s office said today.  Bloomberg’s Nov. 4 financial plan anticipated deficits of $2.4 billion, $4.8 billion and $5.6 billion in 2012, 2013 and 2014. The city’s fiscal year starts July 1.

    Pay Freeze Recommended for Public Employees - Cities across New York are talking about a different kind of freeze - a temporary Pay freeze for public employees. The New York State Conference of Mayors and Municipal Officials is asking the state legislature to declare a fiscal emergency and freeze public sector pay for one year. NYCOM Executive Director Peter Baynes says this would give Albany lawmakers time to roll back unfunded state mandates that are crippling local governments, "So that there'd be a fiscal pause if you will or suspended animation where for one year local governments in the state can try to get their fiscal house stabalized while the other recommendations in our report are enacted, implemented and start to take effect."

    New York State May Face Deficit Topping $11 Billion as Bonuses Set to Fall - New York state’s deficit may be 22 percent wider than estimated by the Budget Division because tax revenue, including from Wall Street bonuses, may be less than expected. The division has forecast a 13 percent increase in taxable cash bonus payments to $39.7 billion, according to Erik Kriss, a spokesman. By contrast, Options Group, an industry consultant, estimates the annual payments will drop from a year earlier. Capital gains revenue also may fall short of estimates.“The next administration will have to contend with a snowballing budget deficit that’s growing fast and picking up speed,”

    New York State Faces $14 Billion Deficit, Lieutenant Governor Ravitch Says - New York state would face a $14 billion deficit for the year starting April 1 if it measured with a more accurate system, Lieutenant Governor Richard Ravitch said. The state’s use of cash accounting, in which spending and revenue are recorded only as they occur, is “misleading,” Ravitch, 77, said today in an interview on Bloomberg Television.  New York should use a version of generally accepted accounting principles, in which expenditures and receipts are recorded as they are incurred or earned even though they may not have actually happened, he said. He made a similar proposal in March.

    Less Than a Full-Service City - More than 20% of Detroit's 139 square miles could go without key municipal services under a new plan being developed for the city, with as few as seven neighborhoods seen as meriting the city's full resources. Those details, outlined by Detroit planning officials this week, offer the clearest picture yet of how Mayor Dave Bing intends to execute what has become his signature program: reconfiguring Detroit to reflect its declining population and fiscal health. Yet the blueprint still leaves large legal and financial questions unresolved. Mr. Bing's staff wants to concentrate Detroit's remaining population—expected to be less than 900,000 after this year's Census count—and limited local, state and federal dollars in the most viable swaths of the city, while other sectors could go without such services as garbage pickup, police patrols, road repair and street lights.

    Special Report: Is America the sick man of the globe? - This is the point of the story where many Americans typically glaze over because they see Michigan as a long-standing financial basket case of a state thanks to the shrinking U.S. auto industry. But the problem is that the broad decline of the manufacturing sector that has been underway in this country for decades now may threaten not just the long-term health of the economy but also the living standards of all but the wealthiest Americans. "The whole country is now seeing the story that Michigan has been living with for a long time," . "We have kicked the can so far down the road that now all we have is a cliff to fall off."

    Detroit Mayor Plans to Halt Garbage Pickup, Police Patrols in 20% of City; Expect Bankruptcy, Massive Municipal Bond Turmoil in 2011 - Detroit has been bankrupt for years. It simply refuses to admit it. Detroit's schools are bankrupt as well. A mere 25% of students graduate from high school. Yet, in spite of hints and threats from mayors and budget commissions, and in spite of common sense talk of bankruptcy, Detroit has not pulled the bankruptcy trigger. In a futile attempt to stave off the inevitable one last time, Mayor Bing's latest plan is to cutoff city services including road repairs, police patrols, street lights, and garbage collection in 20% of Detroit. City officials suggest this will not shrink the size of the city. Perhaps it won't shrink Detroit on Google Maps. However, Bing's plan would effectively surrender 20% of the city to gangs and the homeless. Would you want to live in one of the gang war-zones that his plan would create? Would you want to live in a bordering neighborhood or in a bordering city?  Bing's plan cannot and will not work and I believe Detroit will, sometime in 2011, file for bankruptcy. If so, expect massive turmoil in municipal bonds.

    24 Signs That All Of America Is Becoming Just Like Detroit – A Rotting, Post-Industrial, Post-Apocalyptic Wasteland - For years, people have been laughing at the horrific economic decline of Detroit.  Well, guess what?  The same thing that happened to Detroit is now happening to dozens of other communities across the United States.  From coast to coast there are formerly great manufacturing cities that have turned into rotting, post-industrial war zones.  In particular, in America's "rust belt" you can drive through town after town after town that resemble little more than post-apocalyptic wastelands.  In many U.S. cities, the "real" rate of unemployment is over 30 percent.  There are some communities that will start depressing you almost the moment you drive into them.  It is almost as if all of the hope has been sucked right out of those communities. Meanwhile, the economic downturn has been incredibly hard on the finances of state and local governments across the United States.  Unlike the federal government, state and local governments cannot use the Federal Reserve to play games with their exploding debt burdens.  Facing horrific budget deficits, many communities have begun adopting "austerity measures" in an attempt to slow the flow of red ink.  All over the nation, deep budget cuts are slashing police departments, fire departments and other basic social services, but it seems like no matter what many of these communities try the debt just keeps growing.

    Thoughts on Detroit - Detroit and the Detroit metro area are a pathetic, decaying mess. The reasons are many, ranging from the decline of the Big 3 auto companies to rampant corruption. For almost 40 years corruption has been well known and wide spread. In a city where infrastructure is literally collapsing in front of peoples' eyes the crooks were using city construction contracts to extort money to selected cronies who then funneled money to Kilpatrick. Kilpatrick is already in jail for perjury for a scandal involving wild sexual escapades, misuse of government funds, misuse of police security officers, and there is an on-going investigation of the murder of a stripper who may have been beaten by the Mayor's wife when she came home to one of Kwame's parties in the mayoral mansion (the investigation also focuses on possible official obstruction of the murder investigation).  Corruption is nothing new, but this corruption was on a scale that was astounding, just based on the convictions thus far.

    Opportunities in Detroit? - Detroit has lost about 60% of its population since the 1950s peak of about 2 million. About 50 square miles of Detroit is so thinly populated that the Mayor wants to pay for people to move to more densely populated neighborhoods so the area can be abandoned for municipal services. No trash pick up, no police patrols. The first and second ring of suburbs are facing much of the same plight, and some may be headed for bankruptcy.. One idea for reclamation is urban farming, but that assumes people will not move into Detroit any time soon. So does the 50 square miles provide us with an opportunity? New neighborhoods? New types of communities? A special immigration zone? Homesteading by young people? Entrepreneurial zones? If so, where do we get the money (Detroit and Michigan both being in various stages of broke)? Who leads the charge?

    Impact of the Great Recession on Metropolitan Immigration - Brookings - During 2009, the U.S. economy was in the throes of the Great Recession, and immigration had become a highly polarized topic of debate, reflected by a rise in anti-immigrant sentiment. Immigration was high prior to the Great Recession which offi cially commenced in December 2007. While immigration seemed to come to a standstill in 2008, an increase between 2008 and 2009 may be reflective of the first signs of the comeback of the national economy. At the very least, the demand for immigrant workers seems to have reappeared, though immigrant earnings are diminished in the post-recessionary period.Despite the national trend, metropolitan markets have experienced the recession in different ways, causing shifts in immigrant settlement patterns, at least for the time being.

    The Seven Myths of ‘Slums’ - For anyone who takes an interest in the problem of slums, a few basic facts will soon become clear. Firstly, the locus of global poverty is moving from rural areas to the cities, and more than half the world population now lives in urban areas for the first time in human history. Secondly, most of the world’s urban population, most of its largest cities and most of its urban poverty is now located in Africa, Asia and Latin America – the so-called developing world. Thirdly, the growth in slums since the 1980s is both formidable and unprecedented (even though urban slums have existed in Europe since the Industrial Revolution), and the number of slum-dwellers worldwide is expected to continually increase in the decades ahead.  Beyond these facts, there seems to be little awareness about the reality of slums in the popular imagination. Thanks to the tireless work of many activists and non-governmental organisations over many decades, the issue of global poverty is now high on the international policy radar – but the issue of slums, which forms a major component of poverty in urbanising cities, still fails to register in most people’s concerns

    Flint moving ahead with police layoffs, after city breaks murder rate record - Flint has set a new record for murders in the city in a single year.  This comes at a time when the city plans to lay off 20 police officers later this week.  Flint recorded its 62nd murder of the year on Monday. That broke Flint's previous record of 61 murders in a year set back in 1986, when the city of Flint was much larger. There are no suspects in Flint's 62nd homicide of the year.  And beginning Friday, there will be fewer police officers in Flint. The city has issued layoff notices to about a hundred employees, including 20 police officers. The layoffs are intended to help reduce the city's projected 5 million dollar budget deficit.

    Hamtramck's Budget Nightmare: Michigan Town Left With Nothing Else To Cut - Bill Cooper, the city manager of Hamtramck, Mich., surveyed the possible solutions to his looming budgetary catastrophe, all of them various flavors of bad. He could lay off firefighters or police officers, whose services comprise nearly two-thirds of the city's $18 million annual expenditures. Their unions, however, had already absorbed substantial hits and would surely fight back. Public safety, too, would suffer -- no minor consideration in this suburban community bordering Detroit. As he confronted the ugly prospect of municipal bankruptcy, Cooper focused on the few programs he considered discretionary, beginning an awkward, even bewildering process of nickel-and-diming his city back toward solvency.  It has come to this in states and cities throughout the nation, many still absorbing crippling budget shortfalls in the wake of the worst economic downturn since the Great Depression. Amid nearly double-digit unemployment and weakened economic opportunities, many municipal governments are capturing significantly-diminished tax revenues and facing stark choices as they try to balance their books.

    Train, train, go away: Tea Party Governor-elect Walker compels business to leave state after he kills high-speed rail in Wisconsin - Even before taking office, Republican Govs.-elect John Kasich (OH) and Scott Walker (WI) swiftly delivered on their “promises to kill America’s future” by rebuking a total of $1.2 billion in stimulus funding for high-speed rail projects in their states. Shunning the $810 million for the long-planned Wisconsin rail project, Walker promised to kill the Milwaukee-Madison link if President Obama tried “to force this down the throats of the taxpayers.” But campaign rhetoric has very real consequences, as this ThinkProgress cross-post makes clear. Last Thursday — on the same day the World Congress for High Speed Rail announced the next HSR Congress will be held in America for the first time — Transportation Secretary Ray LaHood pulled the funding from Ohio and Wisconsin, offering it instead to states more eager to spur economic development. What’s more, because of Walker’s narrow-minded politics, the Spanish train manufacturing company Talgo, which moved into Wisconsin for this project, is closing its Milwaukee plant and taking the much-needed jobs with it:

    Bloodbath in Muni Bond Funds; Reasons for the Muni Selloff; Will it Continue? - Inquiring minds are watching a huge selloff in Municipal Bond Funds. Here are a few charts.My first thought is good grief, how many freakin' muni funds does one need? Nuveen offers at least 10 different ways to invest in munis. That is just Nuveen. Is there a bubble in the number of muni funds? Reasons for the Muni Selloff:
    1. Unwinding of the "sure-thing" Quantitative Easing trade
    2. Selloff in bonds in general because of budget and inflation concerns
    3. End of the Build America Bond program (BABs)
    4. Increasing default risk

    Default and bankruptcy in the municipal bond market - One of the more frustrating aspects of muni market coverage in the news and blogosphere is the tendency to talk about municipal debt as if only one type of bond is issued and traded.  There is actually considerable diversity among borrowers in the muni market (e.g., they are not all government entities), and by extension, the types of commitments that are made for the repayment of the debt.  Although the relative health of the muni market has macroeconomic consequences, this is in many ways a market that defies generalization.  The defaults that have taken place both before and during the economic downturn are what finance-types would refer to as storied credits.  I often see people describing Jefferson County, Alabama, as the “canary in the coal mine” of muni defaults.  Suggesting that Jefferson County, which was the center of a widely-publicized securities fraud case, is a typical muni credit is kind of like portraying Enron as a typical corporate credit.  Another example would be Florida dirt bonds, which are backed by special assessments on property in a severely depressed market.  .

    Bond Girl: Default and bankruptcy in the municipal bond market - There have been quite a few bearish articles recently about the muni market. Not long ago there were even some "scary charts" showing a sharp sell off for the muni market, and at that time Bond Girl pointed out the correction was not because of imminent muni defaults, but because of the end of the Build America Bond (BAB) program. For those who want to know more about munis, here is an ubernerd post from Bond Girl at Default and bankruptcy in the municipal bond market (part one) I am just writing this post to demystify a process that evidently needs demystifying. ...

    The Richest Counties in America - Today the Census Bureau released the latest American Community Survey numbers, which contain all sorts of delicious data nuggets. I’ll probably blog a few choice items from this release over the next few days. Here’s the first, a look at the median household income by county for 2005-9. Click on the image below to see the interactive map.The counties with the three highest median household incomes are all in the Virginia suburbs of Washington. Falls Church led the pack with $113,313 per household, an increase of 17 percent since 2000. The county with the lowest median household income was Owsley, Ky., at $18,869.

    Interactive Map Showing Where $130 Billion in Earmarks Went, by State, District, and Politician

    Laffer’s Flawed Analysis on State Taxes - If you plotted a chart showing that every single day, a rooster crows at dawn and then the sun comes up, would you have proven that the rooster caused the sunrise?  Of course not.  Unfortunately, some of the “analysis” purportedly showing that state taxes are bad for a state’s economy is similarly lacking in rigor — and can be terribly misleading. David J. Shakow, professor emeritus at the University of Pennsylvania Law School, took a close look at one such study, which Arthur Laffer presented in the Wall Street Journal in October.  He found that Laffer not only made the rookie mistake of confounding correlation and causation but relied in part on questionable data.  

    Florida's Budget Hole Now at Least $3.5 Billion - Florida’s budget shortfall hit at least $3.5 billion Tuesday as analysts dialed-back the state’s revenue forecast, saying sluggish tax collections and a still-faltering economy are complicating the balancing act facing Gov.-elect Rick Scott and legislators. This year’s collections shrunk by $585.7 million, while next year’s forecast was trimmed by $612.2 million, with sales-tax and corporate income tax declines leading the retreat. Reserves are available to patch this year’s reduction, although once they do, the state’s rainy day fund will dwindle to a meager $249 million at mid-budget year.

    Brown wants to fast-track budget agreement within 60 days.- Gov.-elect Jerry Brown said Tuesday that he wants to complete a budget agreement within two months of unveiling his budget, an accelerated timeline that would allow a late-spring special election for potential tax increases or other revenue generation. "We'll present a budget on Jan. 10. It will be a very tough budget, but it will be transparent," he said. "We'll lay it out as best I can. We've been living in fantasy land. It is much worse than I thought. I'm shocked." A spokesman later sought to play down the timeline, calling it "an ambitious goal." Brown has refused to publicly discuss his budget plans, but he has met privately with lawmakers and interest groups. People involved in the meetings expect him to enact an austerity budget in the spring, then hold a special election in which voters can decide whether to raise taxes or other revenues in order to restore services. He pledged during the campaign not to increase taxes without voter approval.

    California Teachers Fear `Amputations' as Brown Seeks to Cut $28 Billion - California teachers and school administrators asked Governor-elect Jerry Brown to increase taxes and refrain from cutting their budgets at a forum he convened on closing projected deficits of $28.1 billion.  The two-hour meeting, attended by more than 300 people, illustrated the dilemma Brown may face as he tries to close the largest state budget gap in the nation. The 72-year-old Democrat takes office Jan. 3.  The governor-elect benefited from tens of thousands of dollars in donations from state teacher unions in his battle to defeat billionaire businesswoman Meg Whitman. The 120,000-member California Federation of Teachers plans to lobby Brown to extend $8 billion in temporary taxes to help limit budget cuts, said Fred Glass, a spokesman. Last week, Brown said the state faces budget deficits of $28.1 billion over the next 18 months.

    Universities encouraging students to receive welfare benefits - Many American colleges and universities are steering their students toward a new source of “financial aid”: food stamps. In Oregon, for instance, both Portland State and Pacific University encourage their students to apply for food stamps. “Many students are surprised to learn that they may be eligible for Food Stamps,” explains Portland State’s website. This may be a little surprising given that food stamps were created to help struggling poor people, not heavily-subsidized and frequently-idle college kids. But have no fear, assures Portland State: “Being a college student is hard work! Not just academically, but financially too.” Far from framing the decision to apply for food stamps as a last resort, the university’s website makes taking government handouts sound like a moral imperative.

    College, Jobs and Inequality - Searching for solace in bleak unemployment numbers, policy makers and commentators often cite the relatively low joblessness among college graduates, which is currently 5.1 percent compared with 10 percent for high school graduates and an overall jobless rate of 9.8 percent. A college education is better than no college education and correlates with higher pay. But as a cure for unemployment or as a way to narrow the chasm between the rich and everyone else, “more college” is a too-easy answer. Over the past year, for example, the unemployment rate for college grads under age 25 has averaged 9.2 percent, up from 8.8 percent a year earlier and 5.8 percent in the first year of the recession that began in December 2007. That means recent grads have about the same level of unemployment as the general population. It also suggests that many employed recent grads may be doing work that doesn’t require a college degree.  Even more disturbing, there is no guarantee that unemployed or underemployed college grads will move into much better jobs as conditions improve. Early bouts of joblessness, or starting in a lower-level job with lower pay, can mean lower levels of career attainment and earnings over a lifetime. Graduates who have been out of work or underemployed in the downturn may also find themselves at a competitive disadvantage with freshly minted college graduates as the economy improves.

    Educational Institutions Succeeding Despite (Because of?) Weak Economy - Sageworks, an analytics company that tracks financial data for privately held businesses, sent  the following chart on Thursday. It shows the percentage change in sales in each industry from one year to the next, for private companies earning no more than $10 million in annual revenue: As you can see, in many industries private companies are still seeing their revenues shrink. Transportation and warehousing in particular do not appear to be doing well, as the sector’s revenues have decreased by 14.77 percent so far in 2010. But privately held businesses in several major industries have posted gains, including utilities, real estate, finance and health care. The biggest winner this year, according to Sageworks, is educational services, whose revenues rose 8.19 percent so far in 2010.With so many Americans out of work and looking to upgrade their skills, it may not be surprising that privately held educational institutions are seeing strong demand for their services. The industry’s revenue growth was primarily driven by technology and trade schools, which are posting a 10 percent growth rate in revenues over the last 12 months.

    Columbia Eminent Domain Case Will Not Be Heard - So the Supreme Court will not hear the eminent domain case involving Columbia University, which finagled the state into seizing local land and transferring it to the school.  That means that the landowners who don't want to sell have no recourse.  Worse, it reinforces the precedent of Kelo--that the government can take land and transfer it to private actors even when there's only a trivial and dubious public gain involved.  In the case of Columbia, there's a tangible public loss--they're going to tear down one of the few gas stations in Manhattan in order to give Columbia's privileged students more space.  And what public benefit does the city get?  We're talking about taking taxpaying private properties and transferring them to a non-profit which will not pay taxes, and will turn a large swathe of Manhattan into a quasi-compound for some of the wealthiest and most privileged people in the city. Which is, of course, the most sick-making aspect.  I am not against eminent domain for public uses like hospitals or railroads.  But by no stretch of the imagination could Columbia University be called a public accommodation.  One's gut and one's social conscience rebel at the seizure of private property which is taken precisely because it serves, or is owned by, poorer people.  One's gut and one's social conscience positively riot at the thought of taking this seized land and handing it over to wealthy private institution that almost exclusively serves the affluent class.

    Public Pensions Face Underfunding Crisis (ABC news video) - Two professors of finance are giving a sharp rap on the knuckles to Philadelphia, Boston, Chicago and other major cities.  Their warning: Better fix your pension problems fast.  An analysis by Robert Novy-Marx of the University of Rochester and Joshua Rauh of the Kellogg School of Management finds that public pension plans for America's 50 biggest cities and counties are underfunded by $382 billion--or $14,000 for every household in those same cities. Some of the biggest plans may run out of money to pay promised benefits in as little as five to eight years.  Click here for a table of 50 municipalities with the biggest underfunded pensions. The table is at the end of the report.

    Atlanta Pension Fund Rescue Will Assume Lower Return Rate, Adviser Says - Atlanta, which runs the world’s busiest airport, may lower the assumed rate of return on pension assets as it confronts a $1.5 billion deficit in the funds.  An advisory board developing the city’s options is basing them on an expected earnings rate of 7.25 percent, down from 8 percent, in calculating the size of contributions needed to pay retirees, said John Mellott, chairman of the Atlanta Pension Panel, at a city hall meeting yesterday.  Atlanta, home of Hartsfield-Jackson International, joins public pensions from California to New York that cut their assumed rate of return on assets or are weighing such a move. The recession left 50 top municipal pensions $382 billion short of meeting promised benefits, according to a Northwestern University study in August.

    Virginia Retirement System underfunded, JLARC says The combined unfunded liability of the Virginia Retirement System and other state-supported pension plans amounts to $17.6 billion, a report by the legislature's watchdog agency concluded Monday. That means that contributions by the state and local governments likely will have to increase in the next biennium, said Tracey Smith, an analyst with the Joint Legislative Audit and Review Commission. The rate of return would have to be 44 percent for contribution rates to remain where they are, she said. The rate of return this year has been 11 percent, which is good, she added.

    Why a Payroll Tax Holiday Could Destroy Social Security -- Bruce Bartlett is an economics expert, a former Domestic Policy Adviser in Reagan Administration, and a former Treasury Official during the George H.W. Bush Administration but he was also an outspoken critic of George W. Bush. He worked for Jack Kemp and was an early proponent of supply-side economics but after becoming disillusioned with Republican leaders he wrote 'Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy' and 'The New American Economy: The Failure of Reaganomics and a New Way Forward.' He is, in short, a rare example of a Republican economics expert and a straight-shooter that is not blinded by ideology. So when Bruce Bartlett says that a payroll tax holiday will undermine or destroy Social Security we should listen.

    QOTD: "Sets the System Up for Cuts Down the Road" - Economics professor Mark Thoma of the University of Oregon, who noticed the problem as soon as the details of the deal became known:  The estate tax and the extension of high end tax cuts are causing the most heated reactions, and the payroll tax cut is generally being applauded. But I see the payroll tax reduction as potentially troublesome as well. Though the revenue the Social Security system loses due to the tax cut will be backfilled from general revenues, the worry is that the tax cut will not expire as scheduled -- temporary tax cuts have a way of turning permanent. That's especially true in this case since labor markets are very unlikely to recover within the next year and it will be easy to argue against the scheduled "tax increase" for workers. In fact, it will never be a good time to increase taxes on workers and if the tax cut is extended once, as it's likely to be, it will be hard to ever increase it back to where it was. That endangers Social Security funding -- relying on general revenue transfers sets the system up for cuts down the road

    Will the Tax Deal Kill Social Security? - Last week, when the tax deal emerged, some commentators said we would be better off if the proposal contained a smaller income tax break (notably less for the upper class), and a larger cut in the payroll tax. That structure, some said, would produce 500,000 more jobs for the same price. Well, it turns there could be a huge potential downside to cutting payroll taxes: It could kill Social Security.Payroll taxes at least in name provide the funding for Social Security and Medicare. So cutting the tax that is associated with Social Security could put the program already thought to have money problems in worse shape, and potentially lead to its demise. Here's why: For many the idea that the tax plan could put Social Security in jeopardy may seem a little silly. It's like telling someone with a few days left to live it's time to cut back on the sweets. The truth is Social Security is not nearly as deep in the red as many people think. The federal program used to fund itself and then some through the payroll tax. That mostly ended this year when it had to dip into its trust fund for $40 billion to help pay benefits. But even on its current course it will still be another 27 years before Social Security exhausts its current reserves and will actually be in financial trouble. At least that was the situation before the tax deal.

    Is Obama endangering Social Security? - There’s a meme doing the rounds on the left, that giving employees a 2% break on their Social Security contributions for a year is, in Ryan Grim’s words, “a hidden threat to Social Security.” At the heart of the logic is a quotation from FDR: “We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program.” This logic is now being applied in reverse. It’s going to be politically difficult to increase employees’ payroll contributions by 50% in a year’s time — that’s a tax hike, and nobody likes tax hikes. So there’s a decent chance that they will remain at 4.2% rather than 6.2%, with the extra Social Security contributions being paid not by employers, and not by employees, but rather by the general fund. Rep. Keith Ellison picks up the narrative, quoted in Grim’s story: We’ll replace the loss of money from Social Security with general fund money, but in the past Social Security has been raided to help fund general fund programs. So how long will it be before somebody says Social Security is not sustainable and we need to cut the program?

    Bleak health care scenario on retirees - Got a spare $5,500 lying around that you want to get rid of? If every single San Franciscan coughed up that amount, we could pay City Hall's retiree health care bill - for now, anyway. A new report from the controller's office shows the city has an unfunded health care liability of $4.36 billion. That means it'll cost that much to pay the promised health care benefits for every current employee and retiree - and that number will keep growing as health care costs rise. By 2033, the tab will be a whopping $9.7 billion. Guess how much the city has saved to pay down the costs so far? You guessed it. Nuthin'

    Wash. gov seeking pension, health care savings -  Washington Gov. Chris Gregoire is asking the Legislature to make changes to the state's health care and pension systems to help address costs as the state grapples with a projected $5 billion deficit for the next two-year budget. Gregoire told reporters Monday she is proposing ending automatic yearly pay increases for some state pension plans, a move she says would save the state $368 million for the 2011-2013 budget and would cut the state's unfunded pension liability of $7 billion by nearly 60 percent. Gregoire also wants to end early retirement incentives for future state employees who are in later pension plans and choose to retire before age 65. She says doing so will save the state and local governments $2.2 billion over the next 25 years.

    Minnesota faces 'unsustainable burden' for long-term care - Minnesota faces an "unsustainable burden" on taxpayers for nursing homes and other long-term care as the population ages, but it can significantly lower those costs by making it easier and more attractive for people to invest in their own care, a new report from the Citizens League says. To do so, the report recommends revamping the federal-state Medicaid program -- which it says now encourages people not to save for their care -- and adding new products to help people use home equity or savings to pay for long-term care. Without action, as the older population doubles and health care costs continue rising, the government cost of long-term care in Minnesota will soar from about $1.1 billion this year to $5 billion by 2035, the report says. A person has a 70 percent chance of needing some type of long-term care after age 65, costing an average of $48,000, the report said. For about 6 percent of those people, costs will exceed $100,000.

    Ind. may cut Medicaid services to check costs— The General Assembly likely will cut some optional Medicaid services rather than resort to raising taxes to check the overall growth in the government health insurance program at a time Indiana revenues still lag behind current overall spending, a key legislative budget writer said Wednesday. State Senate Appropriations Chairman Luke Kenley, R-Noblesville, said he and other members of the State Budget Committee were "speechless" after the state Medicaid actuary projected Indiana's share of the program's costs will rise by about 25 percent this fiscal year and next, or by $1.46 billion and $1.84 billion respectively, and by nearly 9 percent, or $2.00 billion, in the 2013 fiscal year unless some services are cut. Actuary Robert Damler of the private firm Milliman said the Legislature can cut some optional services such as chiropractors, podiatrists and adult dental services to reduce its overall Medicaid bill.

    Medicaid costs surge past $10 billion, devouring uptick in tax receipts -  Massachusetts taxpayers have delivered more revenue to the state Treasury nearly every month since October 2009, but the Patrick administration still faces a significant budget gap largely because of soaring costs in the state Medicaid program, which has attracted almost a quarter million new enrollees since June 2006 while playing a major role in helping Massachusetts achieve the lowest rate of uninsured individuals in the nation. In addition, 75 percent of the estimated 410,000 individuals newly insured in Massachusetts since passage of the 2006 health reform law under Gov. Mitt Romney have found coverage through publicly subsidized programs, including the expanded Medicaid or MassHealth system, according to a state report released on Friday. Only 25 percent of the newly insured got coverage through employers, of which 76 percent offer insurance in Massachusetts, or by purchasing coverage on their own.

    S.C. Health-Care System Headed For Disruption, Dhhs Director Says - The state is moving close to a "catastrophic disruption" of the state's health-care system because of funding shortfalls for Medicaid, the director of the state's Medicaid agency says. And while there are some suggestions to save money, including cutting provider rates and eliminating some adult optional services, those savings total only a fraction of the $228 million deficit the Department of Health and Human Services now faces, its director says. With the loss of federal dollars tied to the $228 million, the state is facing a $1 billion loss in Medicaid funding. Yet legislative leaders are unwilling yet to recognize the deficit, preferring to wait until Gov.-elect Nikki Haley proposes her answers to the crisis, which could come after she takes office next month.

    The Annual Drama of the 'Doc Fix' - “Medicare fees to be cut by 25% in 2011,” was the alarming headline in Internal Medicine News on Nov. 3. “Unless Congress acts,” the story continued.  After much suspense and breathless media reports, Congress did act.  So on Wednesday, just in the nick of time, President Obama signed into law a delay of one year for such a disastrous cut. Once again, near disaster had been averted in a recurring drama that reminds one of nothing so much as Kabuki theater. After all, we had been near the brink many times before, several times in 2010 alone, and each time Congress shrank back from the abyss. By now, the movement is predictable.  But who, then, are the misanthropes who so frighten the daylights out of our senior citizens and the physicians who treat them — or may not? It turns out not to be a human being at all!  Instead, it is just an innocent formula that Congress imposed on itself as part of the Balanced Budget Act of 1997.

    Will National Health Care Improve Our Economic Health? - During the latter half of the debate over the health care bill, you started to hear an intriguing argument about the effects of the bill.  Where conservatives claimed that it would stifle the economy, liberals countered that in fact, it would unleash the entrepreneurial power of people "locked into" their jobs by fear of losing their health coverage.  David Leonhardt rehearses this argument in his most recent column: Guaranteeing people a decent retirement and decent health care does more than smooth out the rough edges of capitalism. Those guarantees give people the freedom to take risks. If you know that professional failure won't leave you penniless and won't prevent your child from receiving needed medical care, you can leave the comfort of a large corporation and take a chance on your own idea. You can take a shot at becoming the next great American entrepreneur. But while I think that Leonhardt's narrative about freedom from fear is certainly one possible outcome of passing health care reform, there are also quite a few reasons to think that it might not be true.  I worked through a bunch of them earlier in the year, and still believe, as I noted then, that "the number of people who wish to start businesses, but are held back by the health insurance problem, cannot be zero."

    Federal Judge to Rule on Health Law’s Constitutionality - A Virginia federal judge is expected to rule Monday on whether the Obama administration's health law violates the Constitution, opening a new stage in the administration's defense of its biggest legislative achievement.The ruling by District Judge Henry E. Hudson is perhaps the most significant so far among a slew of state-based legal challenges to the law, which also faces attack by newly resurgent Republicans in Congress. More than 20 federal lawsuits have been filed against the health overhaul since President Barack Obama signed it in March.  While the cases differ somewhat, they largely rest on the argument that Congress lacks constitutional authority to require most Americans to carry health insurance or pay a fee. The Obama administration counters that three clauses of the Constitution gave Congress the power to put the requirement, known as the individual mandate, in the law as part of regulating how people pay for health care.

    Judge Voids Key Element of Obama Health Care Law - A federal judge in Virginia ruled on Monday that the keystone provision in the Obama health care law is unconstitutional, becoming the first judge to invalidate any part of the sprawling act and ensuring that appellate courts will receive contradictory opinions from below.  The judge, Henry E. Hudson of Federal District Court in Richmond, said the law’s requirement that most Americans obtain insurance exceeded the regulatory authority granted to Congress under the Commerce Clause.  Judge Hudson, who was appointed by President George W. Bush, declined the plaintiff’s request to suspend the act’s implementation pending appeal, meaning there should be no immediate effect on its rollout.

    Obamacare: Now Legally as Well as Politically Unstable - The decision on the individual mandate handed down today by U.S. District Judge Henry Hudson in the Eastern District of Virginia makes it clear that Obamacare is on extremely shaky legal ground. That’s fitting, because it’s been on shaky political ground for well over a year now. Today’s decision — possibly joined by others in the weeks ahead — is going to strengthen the already strong perception that this law was ill-advised from the get-go and needs to be repealed to make way for a more sensible, consensus-driven program. Specifically, the judge’s ruling today found that the new law’s requirement that all Americans must purchase government-approved health insurance or face a fine was not a permissible use of the lawmaking authority granted to Congress under the Constitution. In other words, Congress doesn’t have unlimited authority to do anything it wants. Its powers are carefully enumerated. And among them is not the power to force Americans to buy something they would otherwise forgo.

    WAKE UP: This Ruling Is Terrible News For The Health Insurers - The health insurance companies like United Healthcare and Aetna are up in knee-jerk fashion on the news that a judge has struck down the individual mandate aspect of Obamacare. Investors should wake up: If this were ultimately upheld, it would be horrible news for the insurers. The individual mandate is a necessary component of the system, because the new deal bans the exclusion of customers with pre-existing conditions. If the individual mandate goes, but insurers still have to accept anyone, then you have the same problem you've always had -- negative self-selection. The insurers don't get the benefit of the diversified risk pool, and are stuck insuring a disproportionately sick share of the population. Those betting on the insurers in the wake of this ruling aren't thinking this through.

    Is the Hudson ruling good news for health reform? - District Court Judge Henry E. Hudson, a George W. Bush appointee, has, as expected, ruled the individual mandate unconstitutional. So why are health reformers so unexpectedly pleased? There are two reasons, but first, let's put this into context. Hudson's ruling is the third from a district court so far. Previously, Judge Norman Moon found the mandate constitutional, and so too did Judge George Steeh. Both Steeh and Norman were Clinton appointees, which is to say that so far, the rulings are proceeding along predictably partisan lines.  Hudson ruled against the government, but he didn't stop it (you can read the full opinion here). He refused the plaintiff's request for an injunction against the legislation's continued implementation. The construction of the bill's infrastructure will continue. And second, he refused to overrule anything but the individual mandate itself. The real danger to health-care reform is not that the individual mandate will be struck down by the courts.  The danger is that, in striking down the individual mandate, the court would also strike down the rest of the bill. In fact, that's exactly what the plaintiff has asked Hudson to do.

    The Insurance Market Without a Mandate -  A recent research paper by Jeffrey Clemens of Harvard helps to quantify what might happen if the federal government forbade insurers from taking people’s health into account when deciding whom to cover and how much to charge — but the government did not mandate that everyone had insurance. The paper makes a more rigorous version of the point about Massachusetts that’s in my column today. Without a mandate, insurance regulations can sometimes be quite problematic.

    Judge Who Ruled Health Reform Law Unconstitutional May Have Conflict of Interest - District Court Judge Henry E. Hudson, who issued the ruling that the new health reform law's individual mandate is unconstitutional, has at least a $15,000 ownership interest in the Republican consulting firm ''Campaign Solutions, Inc." Since 2003, Judge Hudson has pocketed dividends between $32,000 and $108,000 from that interest. Campaign Solutions played a big part in the 2009 elections in helping Republican legislators like John Boehner, John McCain and Michele Bachmann devise public messages to help turn public opinion against health care reform. All three legislators made dismantling health reform a part of their campaign platforms. In another potential conflict of interest, Virginia Attorney General Tom Cuccinelli, who challenged the new health reform law and on whose case Hudson ruled, paid Campaign Solutions $9,000 in the last election, so Judge Hudson decided a case in which one of the litigants was a client of a company he owns.

    Florida judge considers 20-state challenge of health-care law‎ - Three days after a federal judge in Virginia voided a key provision of the U.S. health-care overhaul, attorneys for 20 other states will ask a federal judge in this Florida city to do the same.  As in the Richmond case, Thursday's hearing before Judge Roger Vinson of the U.S. District Court for the Northern District of Florida largely centered on whether Congress has the constitutional authority to require virtually all Americans to obtain health insurance or pay a fine.  However, the multistate case being heard in Florida is one of the few among the two dozen pending challenges to the law that also contests its expansion of eligibility requirements for Medicaid, the joint federal-state health insurance program for the poor.

    Obama Health Law Should Be Completely Thrown Out, States Argue in Florida - The Obama administration’s health- care reform should be thrown out because it overreaches the federal government’s authority, opponents argued in a Florida lawsuit three days after a judge in Virginia ruled part of the law unconstitutional. “The entire act has to fall,” Deputy Florida Attorney General Blaine Winship told U.S. District Judge C. Roger Vinson in Pensacola yesterday. Vinson heard arguments from lawyers for 20 states and the U.S. government on whether the act exceeds legitimate federal power. Led by Florida Attorney General Bill McCollum, the states sued the day President Barack Obama signed the legislation in March, arguing it burdens state budgets and unconstitutionally compels people to buy coverage.

    Is RyanCare a version of Obamacare? - More or less, Ezra says: The Ryan-Rivlin plan basically turns Medicare into Obamacare. And in that context, Republicans love the idea behind ObamaCare and think it'll save lots of money. Under the Ryan-Rivlin plan, the current Medicare program is completely dissolved and replaced by a new Medicare program that "would provide a payment – based on what the average annual per-capita expenditure is in 2021 – to purchase health insurance." You'd get the health insurance from a "Medicare Exchange", and "health plans which choose to participate in the Medicare Exchange must agree to offer insurance to all Medicare beneficiaries, thereby preventing cherry picking and ensuring that Medicare’s sickest and highest cost beneficiaries receive coverage."

    Ezra Klein - Republicans embrace ObamaCare, call it Ryan/Rivlin - If you're looking for a description of the Ryan/Rivlin Medicare reforms that have gained so many admirers on the right, Matt Yglesias has a good write-up of the idea. But I'd add another way of explaining the proposal: The Ryan-Rivlin plan basically turns Medicare into Obamacare. And in that context, Republicans love the idea behind ObamaCare and think it'll save lots of money. Under the Ryan-Rivlin plan, the current Medicare program is completely dissolved and replaced by a new Medicare program that "would provide a payment – based on what the average annual per-capita expenditure is in 2021 – to purchase health insurance."Sound familiar? As Matt says, this doesn't save money. In theory, it actually costs money, as private insurance is more expensive for Medicare -- and that's true both in the private market, and in the quasi-private Medicare Advantage market. What saves money is capping the amount paid to seniors, so they either have to pay more for their care or get less.

    Government Arguing that Health Insurance Premiums are Really Taxes? - The arguments on the health care mandate in Florida went forward today, with the government trying to clarify how the mandate is a tax, (though not in a way that would mean Barack Obama lied about raising taxes on people with incomes below $250,000 a year), and not an attempt to grossly exceed the enumerated powers of the legislature.  This led to a rather novel formulation of what, exactly, the mandate is for, as chronicled by the Official Asymmetrical Information SpouseAccording to an Obama administration lawyer, you don't have to worry about the precedent set by ObamaCare's individual mandate to purchase health insurance. The government isn't going to make you buy vegetables or new cars. After all, with the mandate, the government isn't really forcing you to buy a "product," because insurance is just a way of financing health care.

    Guest Post: Most Driven Into Debt by Medical Bills HAVE Health Insurance - Most driven into debt and bankruptcy by medical bills have health insurance. For example, Reader’s Digest notes: Between 2000 and 2003, seven in ten adults who were driven into debt by medical expenses had insurance at the time. Similarly, as of 2009: More than 2.2 million California adults report having medical debt, and two-thirds of those incurred the debt while insured, . And as the Washington Post pointed out last year: Sixty-two percent of all bankruptcies filed in 2007 were linked to medical expenses, according to a nationwide study released today by the American Journal of Medicine. That’s nearly 20 percentage points higher than that pool of respondents reported were connected to medical costs in 2001. Of those who filed for bankruptcy in 2007, nearly 80 percent had health insurance. Why is this happening? (1) People think that they are covered, and so authorize more health care than they would if they knew in advance that they would have to pay for it out of their own pocket; and (2) People are underinsured, and can’t afford to buy an adequate level of insurance for their needs.

    S&P: US Healthcare Costs Rise 6.70% Over the 12-Months Ending October 2010 - Data released today by Standard & Poor's for the S&P Healthcare Economic Composite Index indicates that the average per capita cost of healthcare services covered by commercial insurance and Medicare programs rose 6.70% over the 12-months ending October 2010. This is a deceleration from the 7.08% reported for the 12-months ending in September 2010.  Claim costs associated with hospital and professional services for patients covered under commercial health plans rose 8.21% over the year ending in October, as measured by the S&P Healthcare Economic Commercial Index.  Looking at the S&P Healthcare Economic Medicare Index, Medicare claim costs for services rendered by hospitals and physicians rose at roughly half that growth rate, up 4.18%.  This is the lowest annual growth rate for Medicare claims costs since January 2008, when it was +4.02%. These two indices both saw growth deceleration versus their September reports of 8.53% and 4.68%, respectively.

    State of Working America preview: A staggering rise in health insurance costs - Family health insurance premiums more than doubled between 1999 and 2009, far outpacing the growth in workers’ earnings and overall inflation. The Figure, from EPI’s forthcoming State of Working America Web site, plots the rise in health insurance premiums against both inflation and hourly earnings for nonsupervisory and production workers, who comprise 80% of the private-sector workforce. While family health insurance premium costs grew 131% over the past 10 years, inflation over that same period rose just 28.8% and hourly earnings rose by 38.1%. Since health insurance premiums are often shared between workers and their employers, this disproportionate rise in the cost of health insurance helps illustrate why it is increasingly difficult for both employers and their workers to afford.

    Why good practices really matter in healthcare - Governments globally face a healthcare bill of around $7 trillion – and set to rise. This column argues that the need to focus on productivity has never been greater. With data from 1,200 hospitals across seven of the world’s wealthiest countries, it suggests that improvements in hospital management practices can help bring about improvements in hospital productivity as well.

    Women’s Health in the U.S. Fails to Make the Grade – Women's health initiatives in America are largely failing, according to the latest report card released by the National Women's Law Center and Oregon Health and Science University. Overall, the nation received a grade of Unsatisfactory, with 23 of the 26 goals outlined in the government's Healthy People 2010 initiative — a decade-long effort to monitor the progress of the nation's health objectives — remaining unmet. This is the fifth and final report card for the decade, and its findings uncovered some troubling trends about the state of women's health. Most notably, more women report binge drinking and fewer report being screened for cervical cancer than in 2007. On these two important indicators, the nation's grade dropped to an F: the percentage of women who reported consuming five or more drinks at a time in the past month jumped more than 3% since 2007, to 10.6%, while the percentage of women who received annual pap smears dropped nearly 10% to 78% over the same time period. (More on Health Check-Up: Women & Health) Additionally, more women reported obesity, hypertension and diabetes than in 2007. And more have tested positive for chlamydia, a sexually transmitted infection that can cause infertility. State-by-state findings reveal similar trends.

    We’re living longer… but not healthier: Children born today will suffer an extra year of disabilities than those born three decades ago - Living longer is not necessarily a bed of roses – it may mean more years spent struggling with disability, researchers say. Figures show life expectancy is rising but that in return people born now will have to cope with disability or a long-term illness for an extra year compared with those born 30 years ago. The gender gap is also closing, with women losing their traditional advantage in having better health for longer as they enjoy greater life expectancy. Researchers predict that men born in 2007 will have an average 13.7 years of disability in their life, compared with 12.8 years for those born in 1981. For women, the figures are 17.1 years and 16 years.  Men born in 2007 are likely to spend an even greater proportion of their life in poor health, 8.7 years compared with 6.4 years in 1981.  Women today spend 11 years in poor health compared with 10 years in 1981, according to figures from the Office of National Statistics.

    Save the Children Breaks With Soda Tax Effort - Over the last year, Save the Children emerged as a leader in the push to tax sweetened soft drinks as a way to combat childhood obesity. The nonprofit group supported soda tax campaigns in Mississippi, New Mexico, Washington State, Philadelphia and the District of Columbia.   In October, Save the Children surprised activists around the country with an e-mail message announcing that it would no longer support efforts to tax soft drinks.  In interviews this month, Carolyn Miles, chief operating officer of Save the Children, said there was no connection between the group’s about-face on soda taxes and the discussions with Coke. A $5 million grant from PepsiCo also had no influence on the decision, she said. Both companies fiercely oppose soda taxes.

    Can economists make the system for organ transplants more humane and efficient? - The Council of Europe's allegations about Kosovo Prime Minister Hashim Thaçi's involvement in kidney harvesting are as grisly as they are startling: "When the transplant surgeons were confirmed to be in position and ready to operate, the [Serbian] captives were brought out of the 'safe house' individually, summarily executed by a KLA gunman, and their corpses transported swiftly to the operating clinic," the report says, according to the Guardian. Though these allegations are unusually grotesque, a black market for kidneys thrives—and not only in poor or lawless nations. Last month, for instance, a private South African hospital group admitted taking about $500,000 from an organ trafficking syndicate. Brazilians and Romanians, including five children, were reportedly paid $6,000 each to give up a kidney. Selling your organs—eyes, bone marrow, parts of livers, skin, or, yes, kidneys—is illegal in every country except Iran. But the World Health Organization describes the black market as massive and estimates one in every five kidneys transplanted per year comes from it.

    Tuberculosis thriving in ‘Victorian’ London, says expert - Tuberculosis, the "white plague", is returning to London, which risks the sort of serious outbreaks that occurred in New York and California in the 1990s, an article in the Lancet medical journal warns today. Nowhere else in Europe have TB rates continued to rise. "The incidence in the UK has gradually increased over the past 15 years," he writes. Last year more than 9,000 cases were reported in the UK, with nearly 40% in London. "This pattern is striking when compared with the general decline in other European countries," he says. TB, known as the white plague in Victorian Britain because of the pallor of the patients, who were often confined to sanatoriums and usually died, was thought to have been conquered by the early 1980s. Antibiotic drugs, improved health services and the BCG vaccination brought it firmly under control. In recent years, however, it has undergone a resurgence, worsened by the prevalence of HIV, which damages the body's defensive immune system. Currently 1.7 million people die of TB every year around the world. Because of the difficulties in complying with a six-month regime of antibiotic treatment, strains of TB bacteria have become resistant to the commonly used drugs.

    Cheap Shots Aimed at Scientists A Political Movement? - In a prior post I described a politically motivated cheap shot aimed at a computer scientist at Northwestern. I looked closely at the circumstances that fed the situation. I concluded that the charges lacked merit. Was that an isolated example? No, it was not. In this short post, I point towards another recent example with many similar features.Look, people differ in their priorities, and that is why governments have policy issues to debate. What we observe here, however, is not a rational policy debate about the governance of science. Rather, we are observing a debate characterized by cheap shots, misleading headlines, and juvenile argumentation.This is bad news for anyone who values the contributions of science to the US economy.

    Florida Governor Declares Emergency for Farm Crops on Cold - Orange-juice futures jumped to the highest price in more than three years after Florida, the biggest grower after Brazil, declared a state of emergency because of the threat of severe cold and crop damage.  Governor Charles Crist said “extreme temperatures” and possible crop destruction threatens the state with a “major disaster.” Some areas may be subject to freezes through Dec. 15, Crist said in a Dec. 10 statement posted on the Florida government’s website, citing National Weather Service forecasts. Prices jumped as much as 6.2 percent.  “This kind of temperature will freeze the fruit,” “The market will remain bullish until we are able to ascertain the extent of damage.”

    Leaked document shows EPA allowed bee-toxic pesticide despite own scientists’ red flag - An internal EPA memo released Wednesday confirms that the very agency charged with protecting the environment is ignoring the warnings of its own scientists about clothianidin, a pesticide from which Bayer racked up €183 million (about $262 million) in sales in 2009. Clothianidin has been widely used on corn, the largest U.S. crop, since 2003. Suppliers sell seeds pre-treated with it. Like other members of the neonicotinoid family of pesticides, clothianidin gets "taken up by a plant's vascular system and expressed through pollen and nectar," according to Pesticide Action Network of North America (PANNA), which leaked the document along with Beyond Pesticides. That effect makes it highly toxic to a crop's pests -- and also harmful to pollen-hoarding honeybees, which have experienced mysterious annual massive die-offs (known as "colony collapse disorder") here in the United States at least since 2006.

    The FDA finally reveals how many antibiotics factory farms use—and it’s a shitload | Grist - Animals in factory farms get daily doses of antibiotics, both to keep them alive in their stressful, unsanitary conditions and to make them grow faster. What's the annual volume of antibiotic use on factory farms? The question is a critical one, because the practice has given rise to a novel strain of antibiotic-resistant staph (MRSA), known as ST398, that's widely present in our vast hog and chicken factories. Well, federal regulators have for years ignored the question and refused to release estimates of just how much antibiotics the livestock industry burns through. But that ended yesterday, when the FDA released its first-ever report on the topic. The answer: 29 million pounds in 2009. According to ace public-health reporter Maryn McKenna, that's a shitload. (I'm paraphrasing her.)

    Bloomberg's "Chart Of The Day" Warns Of Coming Surge In Wheat, Corn Prices - Now that the Chairman's new mandate is not to prevent disinflation but to generate inflation, he may soon be patting himself on the back... but for all the wrong reasons. As the Bloomberg chart of the day indicates, the world may very soon see a surge in wheat and corn prices, pushing such staples as bread and corn flakes through the roof. The reason, in addition to Bernanke's flawed monetary policy: "bad weather and a shortage of farmland threaten to create supply shock waves." As the chart below shows the price of a basket of grains and palm oil has risen almost 50 percent since the 50-day moving average passed through the 100-day line. On the two previous times this occurred the past decade, prices about doubled or tripled over the following two years before peaking. In other words, if history is any indicator, we may see a quadrupling of input prices from here as the last "food inflation" bubble is recreated. Are double digit prices for a loaf of bread in the immediate future for what will soon be a hungry US middle (what's left of it), and not-so middle class?

    Senate approves biofuel and clean tech tax break extensions - The US renewable energy and biofuel industries were celebrating yesterday after the Senate overwhelming approved plans to extend crucial green tax breaks and grant programmes. Senators voted 81 to 19 in favor of the controversial bi-partisan tax bill, which extends the Bush-era tax cuts supported by Republicans, but in return extends federal unemployment benefits for 13 months and provides a raft of incentives to clean energy projects. In particular, the package includes extensions to the existing research and development tax credit, ethanol tax credit, biodiesel and renewable diesel tax credit, and energy efficient homes tax . Significantly, it also extends by one year the Treasury’s popular Section 1603 program, which offers large scale renewable energy projects and upfront cash grant to help cover construction costs in lieu of a 30 per cent tax break.

    Ethanol's Three Headed Monster -  It looks like Congress is keeping the three-headed monster, which I dub Cornzilla, alive cuz we know that ethanol is simply a wiz-bang product that's going to be hugely profitable.  This is why it needs government to 1. subsidize it, 2. protect it from foreign competition, and 3. force people to buy it. Private investors?  We don't need no stinkin' private investors!  Who needs private investors when we've got politicians willing to keep Cornzilla alive?

    A Green Detroit? No, a Guzzling One - Now, nearly a year and a half after the two automakers exited bankruptcy, the administration has defined down the goals of the bailout, focusing on G.M.’s and Chrysler’s return to profitability and job creation. Though these are promising developments that show the bailout has not been an unmitigated short-term failure, the new emphasis shows just how far the industry is from the kind of transformation we were promised.  In particular, what Mr. Obama called his “one goal” — having Detroit “lead the world in building the next generation of clean cars” — is nowhere near being achieved. While the idea of improving G.M.’s and Chrysler’s fuel efficiency was doubtless a politically popular justification for the bailout, American consumers have not embraced the goal with equal fervor. Sales of fuel-sipping compact and subcompact cars have actually dropped this year, while pickup and sport utility vehicle sales grew by double-digit percentages.

    Russian billionaire Prokhorov Backs Yo, a New Hybrid Car - Mikhail D. Prokhorov, the Russian billionaire who owns the New Jersey Nets basketball team, rolled out another pet project on Monday: Russia’s first gas-electric hybrid car.  It is called the Yo, for the Russian letter “ë,” and it can use either gasoline or natural gas to generate its electric power.  Proponents say the Yo makes use of Russian engineering innovations but can be priced for mass consumption because of its bare-bones approach to hybrid automotive technology.  While two electric motors propel the Yo, a small petroleum engine that can burn either gasoline or natural gas will run nearly continuously to generate the electricity they consume. Instead of charging a battery, as in the hybrid Toyota Prius, the generator in the Yo either powers the motors directly or fills a bank of capacitors that can hold only a small charge.  The designers say that at about 67 miles per gallon, the Yo will achieve better fuel economy than the Toyota Prius (about 51 miles per gallon), in part because it is lighter. Like other gas-electric hybrids, it will also have a total range far beyond that of a pure plug-in electric car like the newly introduced Nissan Leaf.

    Video Gamers Use as Much Energy as San Diego - When playing the same video game, Nintendo's Wii system uses a sixth of the power of Microsoft's Xbox 360 and Sony's Playstation 3, according to research from the Electric Power Research Institute. That doesn't tell the whole story, because the latter two systems have more sophisticated graphics and computing power. That's how Jess Dols, a project engineer at EPRI, explained it. EPRI said if the heaviest gamer plays about six hours a day over a year -- a figure found by Nielsen Co. in 2006 -- then his Wii would consume 29 kilowatt-hours, his Playstation 178 kWh, and his Xbox 360 184 kWh. A plasma TV, by comparison, averages 242 kWh a year. That makes gaming a formidable energy user. U.S. homes have about 63 million video game consoles, and together they use about as much energy as San Diego does in a year, according to a 2008 study by the Natural Resources Defense Council. Much of the energy use isn't even from playing video games, according to NRDC -- it's from the idling that goes on after the gamer has left the room. The group said idling uses about as much energy as playing.

    2010 on Pace to Be Warmest on Record, NASA Says - An analysis of average global temperatures through November by NASA’s Goddard Institute for Space Studies shows 2010 on pace to become the warmest year since the collection of temperature data began 130 years ago. NASA previously ranked 2005 as its warmest year ever.The record-breaking temperatures appear to have resulted from a combination of man-made climate change and natural warming in the tropical Pacific Ocean earlier this year from El Niño, said Kevin Trenberth, head of climate analysis at the National Center for Atmospheric Research in Boulder, Colo. “When you have natural variability going in the same direction as the human influence on climate, that’s when you break records,” Dr. Trenberth said.Some of the year’s most striking warming was again seen in the Arctic. Canada’s Hudson Bay, for instance, is typically half-covered by ice by the end of November. By Nov. 30, however, only 17 percent of the bay was iced over. The lack of sea ice appeared to be playing a major role in warming the atmosphere in the region, scientists said.

    NASA: 2010 Meteorological Year Warmest Ever - The 2010 meteorological year, which ended on 30 November, was the warmest in NASA's 130-year record, data posted by the agency today shows. Over the oceans as well as on land, the average global temperature for the 12-month period that began last December was 14.65˚C. That's 0.65˚C warmer than the average global temperature between 1951 and 1980, a period scientists use as a basis for comparison. The 2010 meteorological year was slightly warmer than the previous warmest year, the 2005 calendar year, when the average temperature was 14.53˚C. In 2010, temperatures measured over land alone were also the warmest ever, with instruments showing a December-November average of 14.85˚C. Combining this warming with above-average ocean temperatures led to the global average of 14.65˚C. November brought frigid temperatures to certain areas of Europe. But the data, compiled by the NASA Goddard Institute for Space Studies in New York City, show that, globally, last month was the warmest November ever recorded, nearly 0.96˚C warmer than the 1951 to 1980 average for the month.

    Jeff Masters: Hot Arctic-Cold Continents -- Hemispheric Impacts of Arctic Change by Jim Overland - One talk I attended yesterday was called, "Hot Arctic–Cold Continents: Hemispheric Impacts of Arctic Change.” The talk was given by Dr. Jim Overland of NOAA's Pacific Marine Environmental Laboratory, one of the world's experts on Arctic weather and climate. Dr. Overland discussed the remarkable winter of 2009–2010, which brought record snowstorms to Europe and the U.S. East Coast, along with the coldest temperatures in 25 years, but also brought the warmest winter on record to Canada and much of the Arctic. He demonstrated that the Arctic is normally dominated by low pressure in winter, and a “Polar Vortex” of counter-clockwise circulating winds develops surrounding the North Pole. However, during the winter of 2009–2010, high pressure replaced low pressure over the Arctic, and the Polar Vortex weakened and even reversed at times, with a clockwise flow of air replacing the usual counter-clockwise flow of air around the pole. This unusual flow pattern allowed cold air to spill southwards and be replaced by warm air moving poleward. This pattern is kind of like leaving the refrigerator door ajar – the refrigerator warms up, but all of the cold air spills out into the house.

    Deep ocean heat is rapidly melting Antarctic ice - Oceanographer at AGU: Western Antarctic Peninsula is seeing "the highest increase in temperatures of anywhere on Earth." “Warm waters carried by the Antarctic Circumpolar Current are brushing the ice front in the western part of the continent, in the area of the Bellingshausen Sea.” [Click to enlarge.] Antarctica is disintegrating much faster than almost anybody imagined — see “Nothing in the natural world is lost at an accelerating exponential rate like this glacier.” In 2001, the IPCC “consensus” said neither Greenland nor Antarctica would lose significant mass by 2100. They both already are.  As Penn State climatologist Richard Alley said in March 2006, the ice sheets appear to be shrinking “100 years ahead of schedule.” A presentation Monday at the fall meeting of the American Geophysical Union sheds some light on the underlying cause of this rapid melt — the ice is being attacked from the bottom.  Discovery News has the story:

    Cancun climate summit agrees deal - UN talks in Cancun have reached a deal to curb climate change, including a fund to help developing countries. Nations endorsed compromise texts drawn up by the Mexican hosts, despite objections from Bolivia. The draft documents say deeper cuts in carbon emissions are needed, but do not establish a mechanism for achieving the pledges countries have made.  BBC environment correspondent Richard Black said the meeting did not achieve the comprehensive, all-encompassing deal that many activists and governments want. But he said it was being "touted as a platform on which that comprehensive agreement can be built".

    Successful Outcome of Climate Negotiations in Cancun - As I said in my November 19th essay – Defining Success for Climate Negotiations in Cancun – the key challenge was to continue the process of constructing a sound foundation for meaningful, long-term global action (not necessarily some notion of immediate, highly-visible triumph).  This was accomplished in Cancun. The Cancun Agreements – as the two key documents (“Outcome of the AWG-LCA” and “Outcome of the AWG-KP”) are called – do just what was needed, namely build on the structure of the Copenhagen Accord with a balanced package that takes meaningful steps toward implementing the key elements of the Accord.  The delegates in Cancun succeeded in writing and adopting an agreement that commits all major economies to greenhouse gas (GHG) cuts, launches a fund to help the most vulnerable countries, and avoids some political landmines that could have blown up the talks, namely decisions on the (highly uncertain) future of the Kyoto Protocol.

    Cancún Agreement Signals a New Pragmatism in Global Climate Policy - In the end, it came down to Bolivia. The South American country — whose President Evo Morales was one of the few world leaders to attend this meeting — had raised angry objections throughout the two-week-long U.N. climate-change summit in Cancún, Mexico. On Friday night, with the draft texts of an agreement prepared and every other nation ready for a deal, Bolivia wouldn’t budge. “We reject this document,” Bolivia’s U.N. Ambassador Pablo Solon told the assembled representatives of more than 190 nations at the final plenary session, “and therefore there is no consensus for its adoption.” That spelled trouble, because the rules of the U.N. Framework Convention on Climate Change (UNFCCC) — the body to guide global-warming action — require decisionmaking by consensus. That gives an effective veto to even a single obstinate country: a handful of holdouts blocked adoption at last year’s summit of the Copenhagen Accord, a last-minute agreement brokered by President Barack Obama. “Showdown at the Bolivian pass coming up soon,” tweeted Andrew Light, a senior fellow at the Center for American Progress who followed the negotiations.

    Seeing REDD on Climate Change - George Soros - The official communiqué from the Cancún climate-change conference cannot disguise the fact that there will be no successor to the Kyoto Protocol when it expires at the end of 2012. Japan, among others, has withdrawn its support for efforts simply to extend the Kyoto treaty.This sounds like bad news, because it means that there will be no international price on carbon, and, without a market price, it is difficult to see how the reduction of carbon emissions can be efficiently organized. But appearances can be deceiving.Even as the top-down approach to tackling climate change is breaking down, a new bottom-up approach is emerging. It holds out better prospects for success than the cumbersome United Nations negotiations. Instead of a single price for carbon, this bottom-up approach is likely to produce a multiplicity of prices for carbon emissions. This is more appropriate to the task of reducing carbon emissions than a single price, because there is a multiplicity of sectors and methods, each of which produces a different cost curve.

    Global Warming Deal Decades Away as `Dysfunctional' U.S. Delays Commitment - Delegates at the United Nations climate talks stayed up two nights in a row last week to agree on a proposal to slow global warming. Next year’s negotiations may be even tougher.  The plan approved on Dec. 11 creates a climate fund to channel as much as $100 billion a year in aid to developing nations by 2020, protects forests and outlines methods to verify cuts in fossil fuel emissions. No new targets for curbing greenhouse gases were set, and debate on the future of the Kyoto Protocol, which limits emissions by developed countries until 2012, was put off until the next meeting in Durban, South Africa, in December 2011. With President Barack Obama struggling to salvage his energy agenda and richer and poorer nations in conflict over extending Kyoto’s emission limits, a new worldwide climate treaty may be 20 years away, said Tim Wirth, who in 1997 led the U.S. delegation in Kyoto, Japan. Such a delay endangers the future of $2.7 billion a year in pollution credits sold under a UN program based on the Kyoto agreement.

    Climate Talks Might Need a Profit Motive - Evidence of green-business profits and more direct industry engagement may be needed to push United Nations climate talks out of stale rich-poor rivalries and into a global agreement.  Negotiations like the talks that concluded here early Saturday do not give businesses or investors a formal role in climate policy, consigning them instead to hold side events in hotels far from the conference center.  More business engagement is the key to unlocking real progress, said Yvo de Boer, who stepped down this year as executive secretary of the U.N. Framework Convention on Climate Change.  “We’re trying to get away from a zero-sum logic,” Robert B. Zoellick, president of the World Bank, said in an interview. “From my own experience in trade negotiations, if you see it as one guy wins, the other guy loses, you’re going to have a hard time getting a deal, frankly, because nobody wants to go home the loser.”

    U.N. Security Council urged to tackle climate change - Germany, which will join the UN Security Council in January, believes the body should start dealing with climate change as a potential global threat, its UN ambassador said on Monday. Peter Wittig told an audience at a think tank in Berlin that Germany shared the view of the more than 40 island states represented at the United Nations that global warming was an urgent security issue. “We are of the opinion that it would be worth the effort to consider strategically — in the Security Council as well — which effects climate change could have on the security situation in the broadest sense including defence assistance, resource assistance, the disappearance of entire island states, the rising of sea levels,” he said.

    Ecosystem Services: Pricing to Peddle? - The good news from the Green New Deal is that ecological microeconomics (such as valuing ecosystem services) has risen from the recesses of academia into the realm of international diplomacy.  The bad news is that ecological macroeconomics (such as limits to growth) apparently has not.  Let’s take a look at the implications. The primary distinction of ecological economics, in contrast with conventional or “neoclassical” economics, is that ecological economists recognize limits to growth and a fundamental trade-off between economic growth and environmental protection.  The economic pie can only get so big even if all its pieces are correctly priced, including ecosystem services.  Because the economic pie can only get so big, society must also pay greater attention to fairly distributing the pieces.  In order to protect the environment, and to help allocate resources in the fairest manner, it helps to recognize the economic value of ecosystem services.  That’s what ecological microeconomics is all about; estimating the value of natural capital and ecosystem services.

    EPA Could Eliminate 55 GW of Coal Power with Regulations - By far the greatest threat coal poses is to future climate. But even regulations that only seek to reduce its more immediate health threats could cut coal plants in the US by 20%, according to a report from coal industry consulting firm The Brattle Group, via Electricity Forum. Even aside from regulations specifically to lower greenhouse gas emissions, if the EPA mandates further reductions in sulfur dioxide, nitrogen oxide, particulates, mercury and other harmful emissions by 2015, 40 to 55 Gigawatts will likely be retired. Another 11-12 Gigawatts would be shut down, if cooling towers are required, with 75% of the reduction coming from the oldest, dirtiest coal plants, that are mostly in the Midwest. New mandates in combination would reduce the number of coal power plants by about 20%. This would be even without greenhouse gas regulation. To replace coal power from the oldest dirtiest plants, natural gas power plant conversions would likely increase.

    Deepwater Wind Energy to Build Giant Wind Energy Center in Atlantic Waters - Shortly after the announcement made by the Obama administration, which supports the offshore wind-power development, Deepwater Wind Energy has great plans regarding the building of a “Wind Energy Center” that according to the company would supply electricity for several East Coast states. Deepwater Wind Energy also stated that more than 200 offshore wind turbines would be assembled in southern Rhode Island Sound. The turbines will be capable of generating around 1,000 MW of clean energy, most of them being located in deep waters (20-25 miles from the coastline).As officials said, the northeastern United States now has one of the largest renewable energy projects ever proposed. “This ‘second generation’ of offshore wind farms will be larger and farther from shore, and will produce lower priced power, using more advanced technology than the offshore projects announced to date. We expect the offshore wind industry in the United States to follow the European experience, where a more mature industry is building larger projects farther from shore,” Deepwater Wind CEO William M. Moore said in a press release

    To Conquer Wind Power, China Writes the Rules - With their government-bestowed blessings, Chinese companies have flourished and now control almost half of the $45 billion global market for wind turbines. The biggest of those players are now taking aim at foreign markets, particularly the United States, where General Electric has long been the leader.  The story of Gamesa in China follows an industrial arc traced in other businesses, like desktop computers and solar panels. Chinese companies acquire the latest Western technology by various means and then take advantage of government policies to become the world’s dominant, low-cost suppliers.  It is a pattern that many economists say could be repeated in other fields, like high-speed trains and nuclear reactors, unless China changes the way it plays the technology development game — or is forced to by its global trading partners.

    Corroding pipelines - — A natural gas pipeline exploded Sept. 9 in the San Francisco Peninsula suburb of San Bruno, shooting a wall of fire hundreds of feet into the sky for more than 90 minutes as Pacific Gas & Electric utility crews had to fight rush hour traffic to reach manual shut-off valves, one of them more than 30 miles from the blast. Many survivors in the surrounding area told reporters they had no idea that a 30-inch, high-pressure pipeline laid in 1956 ran through their neighborhood. Neither did city officials, says Mayor Jim Ruane, even though federal safety rules require that pipeline operators periodically alert residents to the presence of pipelines and train first responders. Nationwide, pipeline blasts and fires kill a person every three weeks and burn or injure someone more than once a week.  Those are small numbers, as the pipeline industry emphasizes. But they reflect luck more than serious safety planning. As open spaces where pipelines were laid decades ago become developed, aging pipelines remain in use, and inspections have lagged, the risk of deadly blasts that can wipe out a block of homes, offices, stores or even schools and hospitals, grows

    Regulation is deficient in Canada’s oil sands - Reclamation in Canada’s oil sands is not keeping pace with rapid development and that could leave the public vulnerable to major financial burdens in years to come, a scientific panel said Wednesday. The study by Royal Society of Canada scientists, the latest report on the effects of the country’s multibillion-dollar oil sands sector, also concluded that governments and regulators are lagging world standards in their ability to oversee the industry and monitor its environmental impact. “Current government of Alberta policy on financial security for reclamation liability leaves Alberta vulnerable to major financial risks, which are exacerbated by the current state of reclamation, which is not keeping pace with the rate of land disturbance,” the panel said in its report. Alberta’s oil sands are the largest source of crude outside Saudi Arabia, and are the target of billions of dollars of spending by the world’s oil industry.

    BP Oil on Gulf Floor Draws Concern - Oil from BP PLC's blown-out well has lodged in the sediment of the Gulf of Mexico at levels that may threaten marine life, according to a federal report released Friday. Heavy contamination from the oil spill is limited to a few locations in the Gulf relatively close to BP's Macondo well, officials said. Chemical tests have confirmed that oil in some sediment there matches oil from the BP well, according to the report by scientists advising federal spill-response officials. There is no practical way to clean up the spilled oil that has settled deep in the Gulf, officials said, adding that microbes in the water could eventually eat it up.

    Fake-Out Thursday – Oil Scam Continues Unabated - First of all, the NYMEX contracts for January delivery close on Tuesday and there are still 132,168 open contracts or 1,000 barrels each (132M) scheduled for delivery to Cushing, OK, a facility that can handle at most, 45Mb of crude and is, at the moment, full.  The price of those barrels surged from $86.82 all the way back to our shorting target of $89 yesterday, where we once again had a nice ride down.  Now, in pre markets, it is back over $89 again and we'll short it again so I'm not complaining about the action but I am upset that this blatant rip-off of the American consumer can go on right under our "leadership's" noses.   Logic alone dictates that if 132M barrels are on order for delivery to a storage facility that can only handle 45M barrels that the orders are mostly bogus.  You can track the open interest every day right here so don't take my word for it, watch what happens over the next few days as the people who are currently pretending to demand oil in January, roll their contracts to pretend demand for February (already at a ridiculous 268M barrels), March (172Mb) and April (60Mb).

    Understanding The Oil Markets — 2010 Version - I'm starting to think that the oil markets in 2010 are just a more chaotic version of the markets as they were in 2007. You will recall that the price was rising, demand was outstripping supply, OPEC said the markets were well-supplied, and would not raise output quotas and the Venezuelans were saying $100/barrel was a fair price for oil. Most of this has happened just in the past week. Consider these two statements made in a recent Bloomberg report

    • Global oil demand has exceeded supply by more than 900,000 barrels a day on a seasonally adjusted basis since May, Goldman Sachs Group Inc. said in an e-mailed report today. Goldman expects the world oil market to remain in deficit in the first half of next year, it said.
    • OPEC maintained its output quotas, forecasting demand growth will slow as the global economy struggles to recover amid ample supplies. Oil supply and demand are “in balance,” and $70 to $80 is “a good price” for oil, Saudi Arabian Oil Minister Ali al-Naimi said at the group’s meeting in Quito, Ecuador, on Dec. 11.

    Who are you going to believe? Well, you should never believe Goldman Sachs, given their constant efforts to drive up the oil price to support their index-trading money-making machine. But you should never believe OPEC either, given their constant efforts to drive up the oil price by withholding oil from the market. If $70 to $80 is a "good price" for oil, why did OPEC maintain their quotas just as the price touched $90/barrel on the NYMEX last week? One thing we do know is that OPEC producers are breaking their quotas left and right—

    OPEC Dismisses $90 Oil Price as 'Blip,' Maintains Production Targets Again - OPEC discounted last week’s $90 oil price and kept its output targets unchanged yesterday, betting supplies in storage and a fragile global economic recovery will prevent crude from surging.  Supply and demand are “in balance,” and $70 to $80 is “a good price” for oil, Saudi Arabian Oil Minister Ali al-Naimi said at the group’s meeting in Quito, Ecuador. OPEC forecasts demand growth will slow as the economy struggles to recover, amid ample supplies, according to a group statement.  “The issue they looked at was whether $90 is a blip or a trend,” said Bill Farren-Price, founder of consultant Petroleum Policy Intelligence, based in Winchester, U.K. “They’ve taken the view that there are one-off factors such as the cold snap, a weak dollar, that won’t be sustained in the new year.”

    Update on Iraqi Oil Production - Time for an update on the progress, or rather lack of it, in Iraqi oil production.  Recall that following decades of neglect, sanctions, and war damage, the Iraqi oil ministry under Hussein al-Shahristani is trying to massively expand production, supposedly to 12mbd within 7 years (though probably Dr al-Shahristani is the only person on the planet who thinks that target will be hit in full).  The graph above shows the latest data from four different sources, together with an average index.  The data are current as of September to November depending on source.  As you can see, there was a small drop in early 2010, and then it's been roughly flat since then.This interesting UPI story gives some field level detail on what's going on with the new projects, most of which are only just getting started:

    Update on Saudi Oil Production - While I'm updating my OPEC spreadsheet, it seems like a good idea to look at Saudi Arabian oil production.  This will be an interesting thing to watch in coming months.  The flow of US economic news has been turning a little more positive recently, and global oil production is increasing again.  In that environment, I would expect oil prices to increase (albeit probably fitfully), and then it becomes a very interesting question at what price Saudi Arabia will restore the production they cut at the onset of the great recession. Looking at the graph above, three out of four data sources claim Saudi production has already started to increase (specifically, the IEA, OPEC, and the EIA, the latter particularly strongly so).  The increase only amounts to a few hundred kbd, and the Saudi's themselves (via their self reports to JODI), do not say they are increasing production.  Still, I'm inclined to wonder if the beginning of a slow trend to increasing Saudi production has begun.  The highest value of production Saudi Arabia has been able to demonstrate in recent years is 9.5mbd (based on the average index - black line - above).  They are about 1.3mbd below that today. On the other hand, rig counts have continued to drift down through most of 2010, suggesting that Saudi Aramco doesn't currently anticipate their capacity coming under pressure:

    Prospects for a New Peak in Crude & Condensate - I pointed out on Friday that there provisionally appeared to be a new peak in global liquid fuel production, at least based on reports from OPEC and the IEA, and subject to confirmation by the third agency (the EIA) and the inevitable revisions to the series. Predictably, this led to a chorus of comments that the full liquid fuel series includes various things that aren't really oil, such as biofuels, and natural gas liquids (things like butane and propane).  A more conservative definition of oil would still show a peak in the past, some suggested.  There are decent arguments on both sides of what exact definition of oil one should use.  If we look at one more conservative but reasonable definition - crude plus lease condensate (C&C) - we see the picture above (according to the EIA).  I have shown the full liquid fuel series in blue, and only the C&C component in red. Now, the EIA is only up to September as of today, whereas OPEC and the IEA have just released November numbers.  So the big leap up in October/November is not apparent in the graph above. 

    The Myth of Peak Oil Demand and the Example of Loma Prieta - The peak of oil demand in the OECD is of course misunderstood. Oil and gasoline users in the developed nations did not freely decide to change their habits. Instead, price has forced that change upon them. But this has not stopped groups like Cambridge Energy Research Associates or new-energy gurus like Amory Lovins from trying to spin the change as a broad, discretionary event. But it’s not discretionary and to portray it as such is just wrong. Instead, the demand-shift is best explained by two much more important, much more revealing phenomena that began to show up in the last decade. The first, of course, has been the inability of global crude oil production to exceed its annual peak of 73.781 mbpd (million barrels per day) set back in the year 2005. That fact alone, both simple and incontrovertible, has been powerfully deterministic in reducing OECD oil demand growth through the mechanism of price. But the more complex dynamic at play is that the older user of oil in the OECD runs into affordability barriers more easily than the new user of oil in the developed world. The reason is as follows: the old oil user historically consumes a lot of oil. The new user is coming online using much less.

    The Peak Oil Crisis: The Future of Government - As we all know by now, a new crowd has descended on Washington vowing to make everything right again by cutting taxes, reducing the size and the role of some parts of the government. Above all the folks are committed to getting government regulation off our backs so that free enterprise, the entrepreneurial spirit, merchant capitalism, or what have you can flourish as it did in the past. What all those calling for reduced government fail to grasp, however, is that 200 years of cheap abundant fossil fuel energy has transformed this country into something completely different. Take food as an example, 200 years ago, some 90+ percent of us were involved in its raising or otherwise procuring food -- or we would simply not eat. Now, thanks to cheap fossil fuels, less than 3 percent of us are engaged in agricultural endeavors and I suspect only a fraction of our "farmers" still have all the requisite skills to feed themselves and their families in the style to which they have become accustomed. Take away the diesel for the tractors and farming is going to become mighty different. Has anyone yoked an ox lately?

    Peak Oil, Then Coal - When will production of oil and coal peak?  After the peak, production will decline because supplies are being depleted and no new sources are to be found.  Peak oil is the point in time when the maximum rate of global petroleum extraction is reached, after which the rate of production enters terminal decline.  Optimistic estimations of peak production forecast the global decline will begin by 2020 or later, and assume major investments in alternatives will occur before a crisis, without requiring major changes in the lifestyle of heavily oil-consuming nations. These models show the price of oil at first escalating and then retreating as other types of fuel and energy sources are used. Pessimistic predictions of future oil production operate on the thesis that either the peak has already occurred, that oil production is on the cusp of the peak, or that it will occur shortly.  The most recent edition of the respected science journal Nature contemplates the end of cheap coal with an analysis of the decline of global coal supplies by Post Carbon Institute Fellows David Fridley and Richard Heinberg.  The estimates for global peak coal production vary wildly. Many coal associations suggest the peak could occur in 200 years or more, while scholarly estimates predict the peak to occur as early as 2010. Research in 2009 by the University of Newcastle in Australia concluded that global coal production could peak sometime between 2010 and 2048.

    Is coal a backstop fuel for oil? - Usually when I draw the standard price path graph--say that 3 times fast--for the oil/renewable transition, I don't think to put coal as a transition fuel between oil and renewables. Maybe I should. Coal may be the last thing on earth that many investors would consider putting a dime into. But the world is on course to transition back to coal. You may wish it wasn’t the case, but it’s inevitable. Coal isn’t as clean of a fuel source as other options – but there is room for clean coal technologies to improve, and I believe they will.

    Crude Rises as China Imports More Oil, Increases Refining Rates to Record - Crude advanced after a government report showed Chinese refineries ran at record rates last month, signaling oil demand will continue to increase in the world’s largest energy user.   China’s refiners increased crude processing to a record in November, according to the China Mainland Marketing Research Co., which compiles data for the National Bureau of Statistics. The Organization of Petroleum Exporting Countries maintained production quotas at a Dec. 11 meeting.  China, which last year overtook the U.S. as the world’s biggest energy user, boosted net imports of crude by 26 percent in November from a month earlier as refineries ramped up processing rates to ease a diesel shortage. Net purchases were 20.3 million metric tons, or 5 million barrels a day, the highest since September’s record 22.9 million tons, data from the Beijing-based General Administration of Customs showed.

    One Company Holds at Least 90% of London Metal Exchange Copper Stockpiles - One unidentified company holds 90 percent or more of copper stockpiles in warehouses monitored by the London Metal Exchange, the latest bourse data shows.. The figure includes stockpile holdings and open positions for the next three trading days. Each warrant represents one lot of metal, equal to 25 metric tons.  The fee to borrow copper for next-day delivery, also known as the tom-next spread, jumped to a premium of as much as $13 today, the most since July 2009. It was last at a discount of 50 cents. LME rules oblige holders of dominant positions to lend metal at fixed rates.  “The dominant long is even longer than they were previously, and it’s having an impact,” “It’s forcing short-term rates to borrow metal to go higher.”

    China To Raise Tariffs On Certain Rare Earth Exports In 2011 (Xinhua) -- China will raise export tariffs on certain rare earths in 2011, said a statement on the website of the Ministry of Finance (MOF) Tuesday. From Jan. 1, 2011, China will adjust tariff rates on certain exports and imports and the changes have been approved by the State Council, or the Cabinet. The statement, however, did not specify what types of rare earth products would be included in the readjustment. China will levy relatively lower yearly temporary imports tariffs on about 600 resources-related products, basic raw materials and key parts in 2011 to boost energy-saving and environmental protection, it said.

    Rare Earth Production Revs Up as Shortage Looms -  A crunch in "rare earth" minerals may be on the way, and that has miners scrambling to boost production. Used in everything from LCD screens and offshore wind turbines to missile navigation systems and automobiles, rare earths are critical for many of the world’s high-tech industries.  “Any modern electronic has some trace of these elements,” The 17 rare earth elements are valuable because of their ability to react with other elements, particularly metals like iron and cobalt, to form magnetic fields. Jeff Green, a consultant in the magnetic metals industry, says rare earths are like vitamins: "They make things lighter, faster and stronger...They are efficiency boosters across the board." A supply shortage of about 30,000 tons is expected next year. The vast majority of rare earths, about 97 percent, are mined in China, and the country has been steadily cutting exports. Ed Richardson, president of the U.S. Magnet Materials Association (USMMA), compares the worldwide hunger for rare earths to “unobtainium,” the mythical element sought in James Cameron’s “Avatar.”

    Economy Vulnerable to Rare Earth Shortages, Report Says - The United States is too reliant on China for minerals crucial to new clean energy technologies, making the American economy vulnerable to shortages of materials needed for a range of green products — from compact fluorescent light bulbs to electric cars to giant wind turbines.  So warns a detailed report to be released on Wednesday morning by the United States Energy Department. The report, which predicts that it could take 15 years to break American dependence on Chinese supplies, calls for the nation to increase research and expand diplomatic contacts to find alternative sources, and to develop ways to recycle the minerals or replace them with other materials.  At least 96 percent of the most crucial types of the so-called rare earth minerals are now produced in China, and Beijing has wielded various export controls to limit the minerals’ supply to other countries while favoring its own manufacturers that use them.  “The availability of a number of these materials is at risk due to their location, vulnerability to supply disruptions and lack of suitable substitutes,” the report says, which also mentions some concerns about a few other minerals imported from elsewhere, such as cobalt from the Congo.

    Energy Department Seeks 'Rare Earth' Security - A senior Energy Department official on Wednesday will discuss efforts to ensure U.S. access to rare-earth elements, critical to manufacturing a range of low-carbon energy technologies including wind turbines and electric vehicles. The remarks come amid growing fears that China could restrict access to the materials. Some lawmakers and U.S. officials fear the absence of domestic rare-earth production, and heavy reliance on China, could limit the growth of clean energy. The big worry: trading reliance on foreign oil for reliance on foreign rare earths. Assistant Secretary for Policy and International Affairs David Sandalow will speak at a forum on rare earths hosted by the Center for Strategic and International Studies. He said this fall the DOE was nearing completion on a strategy on the materials.  The forum is expected to focus on diversifying supply sources, U.S. production, greater recycling and re-use, and developing substitutes.

    Wind power for Boston made in China - Goldwind USA and A-Power Energy Generation Systems are not the only big Chinese-owned wind energy companies setting up shop in this country. Sinovel, a state-owned company based in Beijing that is China’s largest wind turbine manufacturer, has signed a contract with the Massachusetts Water Resources Authority to provide a 1.5-megawatt wind turbine. The machine will provide electricity for a wastewater pumping station in the Charlestown neighborhood of Boston. The turbine accounts for about half of the $4.7 million cost of the project, which is still in development and is being financed with money from the federal economic stimulus package. Sinovel, with a $6.5 billion line of credit from banks owned by the Chinese government, has said its goal was to become the world’s largest manufacturer of wind turbines by 2015. It also said it intended to eventually realize half of its sales beyond China’s borders.

    China fact of the day - “The money supply is too large,” said Andy Xie, an economist based in Shanghai who formerly worked at Morgan Stanley. “They increased the money supply to stimulate the economy. Now land prices have jumped 20 times in some places, 100 times in others. Inflation is broad-based. Go into a supermarket. Milk is more expensive in China than it is in the U.S.” In Shanghai, where the average monthly wage is about $350, a gallon of milk now costs about $5.50. The article is a good survey of some Johnny-come-lately China skeptics

    And Now Presenting: Amazing Satellite Images Of The Ghost Cities Of China# (20 slides) The hottest market in the hottest economy in the world is Chinese real estate. The big question is how vulnerable is this market to a crash.One red flag is the vast number of vacant homes spread through China, by some estimates up to 64 million vacant homes. We've tracked down satellite photos of these unnerving places, based on a report from Forensic Asia Limited. They call it a clear sign of a bubble: "There’s city after city full of empty streets and vast government buildings, some in the most inhospitable locations. It is the modern equivalent of building pyramids. With 20 new cities being built every year, we hope to be able to expand our list going forward."

    Fears Mount That China Is Headed for a Slowdown - For nearly two years, China’s turbocharged economy has raced ahead with the aid of a huge government stimulus program and aggressive lending by state-run banks.  But a growing number of economists now worry that China — the world’s fastest growing economy and a pillar of strength during the global financial crisis — could be stalled next year by soaring inflation, mounting government debt and asset bubbles.  Two credit ratings agencies, Moody’s and Fitch Ratings, say China is still poised for growth, yet they have also recently warned about hidden risks in its banking system. Fitch even hinted at the possibility of another wave of nonperforming loans tied to the property market. A sharp slowdown in China, which is growing at an annual rate of about 10 percent, would be a serious blow to the global economy since China’s voracious demand for natural resources is helping to prop up growth in Asia and South America, even as the United States and the European Union struggle. And because China is a major holder of United States Treasury debt and a major destination for American investment in recent years, any slowdown would also hurt American companies.

    China to raise inflation target in dovish signal (Reuters) - China will set a 4 percent target for consumer inflation next year, up from this year's 3 percent objective, state television said on Tuesday, an indication that the government will desist from aggressive tightening even as price pressures mount. The slightly higher threshold for inflation was consistent with another report in official media earlier in the day that China will aim to cap new loans at about 7.5 trillion yuan ($1.1 trillion) next year, a more generous ceiling than many in the market had been expecting. "The main targets for economic and social development set by the central government for next year are that GDP will grow by about 8 percent and the consumer price index will be capped at about 4 percent," CCTV quoted Zhang Ping, head of the powerful National Development and Reform Commission, as saying.The 8 percent growth target is, as in past years, likely to be a moot point. Most economists think the world's second-largest economy will grow about 9 percent next year.

    China Leader Says Anti-Inflation Measures Needed - One of China’s top leaders said at a government meeting that measures needed to be taken to tamp down inflation in the coming year, according to a report on Friday by Xinhua, the state news agency. The comments were one of the clearest signs yet that Chinese leaders are increasingly concerned about popular resentment arising as a result of soaring living costs.  The leader, Li Keqiang, vice premier of China, said in comments made Thursday that “more efforts should be provided to stabilize prices next year.” Over the next five years, economic growth rates should be defined “reasonably,” he added, an indication that leaders could be anxious about an overheated economy.  Mr. Li’s remarks were made at a work meeting in Beijing in which the State Council, China’s cabinet, discussed policies and goals of a five-year plan for development that will begin next year.

    China's inflation problem and the perils of unconventional policy - The only thing that surprises me about China's spike in inflation is that it took so long to show itself. Some economists had been worried for a while that a combination of rapid growth, giant stimulus, a mammoth credit expansion and the effect of high commodity prices would cause an inflation problem for China. Inflation hit 5.1% in November, the fastest clip since the pre-crisis boom months of 2008. Though much of the increase is in food (up 11.7% from a year earlier), the inflationary pressures are spreading to more aspects of the economy. According to Goldman Sachs, housing-related prices (such as rent, management fees, etc.) rose an annualized 21.6% in November. Inflation is a serious matter in China, since the still-poor populace gets hit very hard when inflation rises, both due to higher living expenses, but also since it eats into the value of their large savings. Chinese policymakers have been struggling to stamp out inflationary pressures for several months, but without much impact. In part, that's because they've been reluctant to raise interest rates -- the usual inflation-fighting tool used by central bankers.

    Chinese Confusions - Krugman - Basic economics says that by deciding to keep the renminbi undervalued, the Chinese put themselves under inflationary pressure; and sure enough, inflation is rapidly becoming a serious problem. But political considerations seem to be ruling out all the reasonable responses. They won’t revalue, because that would hurt politically influential exporters. They’re reluctant to raise interest rates, because that would hurt politically influential real estate developers. They’re trying to impose quantitative limits on credit, but are finding that borrowers have enough influence to circumvent the limits. And now they’re trying price controls — which will inevitably come apart at the seams unless they do something about the underlying pressures.

    China and US interest rates continue higher - Large consumer (5.1%) and producer price (6.1%) gains in China was not immediately met with an interest rate hike from the PBOC, at least not yet, and the lack of one sent the Shanghai index up almost 3% and the rest of Asian markets followed. That strength spilled over into Europe and has the S&P futures also higher. Copper prices are rising to fresh record highs. The consequence though of all of the above is another rise in interest rates where the US 10 yr yield is at another fresh 6 month high. Tomorrow, the FOMC gets together for the 1st time since Nov 3rd when they announced more asset purchases for the sole purpose of suppressing interest rates. Instead since then, the 10 yr yield is up 78 bps and the average 30 yr mortgage rate is up by 66 bps. Oh to be a fly on the wall of that meeting.

    IPhone Adds $1.9 Billion to U.S.-China Trade Deficit - One widely touted solution for current U.S. economic woes is for America to produce more of the high-tech gadgets that the rest of the world craves. Yet two academic researchers have found that Apple Inc.’s iPhone — one of the most iconic U.S. technology products — actually added $1.9 billion to the U.S. trade deficit with China last year. ( Read the research)How is this possible? Though the iPhone is entirely designed and owned by a U.S. company, and is made largely of parts produced by other countries, it is physically assembled in China. Both countries’ trade statistics therefore consider the iPhone a Chinese export to the U.S. So a U.S. consumer who buys what is often considered an American product will add to the U.S. trade deficit with China.

    Accumulating foreign reserves: private or public? -The global imbalances that we have witnessed over the last years have led to significant changes in the net investment position of some countries. Those with persistent current account deficits (e.g. the US) have seen their net investment position deteriorate, while those with persistent current account surpluses have seen their net investment position improve (such as China). An improvement in the net position represents an increase in the foreign assets held by that country relative to its liabilities (domestic assets held by foreigners).  In some of the surplus countries (certainly in China), the majority of the accumulation of foreign assets has resulted in large increases in the amount of foreign assets held by the public sector (government or central bank), what is known as foreign reserves. Have they gone too far? Is there an optimal amount of foreign reserves for a country such as China? SAFE (the State Administration of Foreign Exchange in China) provides on its web site an interesting list of FAQs regarding the current level of foreign reserves in China. To the question "What is the appropriate scale for China's foreign reserves?" they provide an intriguing answer. They start with the assertion that "Too much foreign exchange reserves can be bad."

    LA Port Traffic in November: Exports Increase - Notes: this data is not seasonally adjusted. LA area ports handle about 40% of the nation's container port traffic. The following graph shows the loaded inbound and outbound traffic at the ports of Los Angeles and Long Beach in TEUs (TEUs: 20-foot equivalent units or 20-foot-long cargo container). Although containers tell us nothing about value, container traffic does give us an idea of the volume of goods being exported and imported - and possible hints about the trade report for November. There is a strong seasonal pattern for loaded inbound traffic, and traffic was up about 15% compared to November 2009.  After stalling out over the summer, loaded outbound traffic is up sharply over the last two months, and was up 19% YoY from November 2009.

    Why Not Double Imports or Just Total International Trade Over the Next Five Years to Create Jobs? -- Huffington Post > "Buoyed by strong demand from China and India, the U.S. trade deficit dropped to its lowest level in 9 months, as exports rose to their highest level in two years. These numbers should please the Obama Administration, who've set out to double exports over the next five years to combat high unemployment rates and encourage domestic manufacturers. Analysis by the Economics and Statistics Administration indicate that exports in will this year support close to 9.4 million jobs, an increase from a 2009 estimate that put the number at 8.5 million' MP: Isn't there an underlying mercantilist, fixed-pie assumption here that exports create jobs, and imports destroy jobs? As the chart above shows, more than half of U.S. imports are inputs (industrial supplies, raw materials and capital goods) that were purchased by U.S. firms and will become part of some production process in the U.S. that will help support or create jobs in the U.S.  Why shouldn't we have a goal to double imports over the next five years, or simply to double international trade in general over the next five years (see post below)? 

    Ruble-Renminbi Trading to Start in Russia –Russia and China are poised to take a small but symbolic step in their expanding economic relationship, a move that in the long term could make the dollar less relevant to business between the two nations.  On Wednesday, a Moscow securities exchange is scheduled to open direct trading between the Chinese currency, the renminbi, and the Russian ruble. If the market develops, it could eventually cut the dollar out of a portion of Russian and Chinese trade.  Although China’s business with Russia is only a sliver of what it does with the United States, there is room to grow: Russia is the world’s largest energy exporting nation, and China a big consumer as the world’s second-largest economy, behind the United States. And yet when a railroad tanker of Russian oil crosses the border into China, the transaction is settled in dollars.  The new currency exchange is meant to start changing that. .

    The contribution of human capital to China's economic growth - This paper develops a human capital measure in the sense of Schultz (1960) and then reevaluates the contribution of human capital to China’s economic growth. The results indicate that human capital plays a much more important role in China’s economic growth than available literature suggests, 38.1% of economic growth over 1978-2008, and even higher for 1999-2008. In addition, because human capital formation accelerated following the major educational expansion increases after 1999 (college enrollment in China increased nearly fivefold between 1997 and 2007) while growth rates of GDP are little changed over the period after 1999, total factor productivity increases fall if human capital is used in growth accounting as we suggest. TFP, by our calculations, contributes 16.92% of growth between 1978 and 2008, but this contribution is -7.03% between 1999 and 2008. Negative TFP growth along with the high contribution of physical and human capital to economic growth seem to suggest that there have been decreased in the efficiency of inputs usage in China or worsened misallocation of physical and human capital in recent years.

    Two Reasons India Will Overtake China By 2025 - Interesting article here making big predictions about two of the BRIC economies, India and China. One of the major issues China faces (along with much of the developed world) is a declining birth-rate and an aging society and the strain this situation will put on the economy in terms of productivity and government finances. On the other hand, India has a young and vibrant workforce “giving India a very important advantage over China as it has a much healthier dependency ratio.” See graphic below.  Furthermore, the “IT services industry in India is thriving on their cheap labour costs, educated and English-speaking workforce, and their entrepreneurial bosses.” It seems companies from developed countries are tapping into this resource and according to this report, India was “ranked third place in global foreign direct investments in 2009 and will continue to remain among the top five attractive destinations for international investors during 2010-11.” With this in mind, perhaps such a bold prediction is not so far from the truth!

    Mexico asks IMF to boost credit line to over $70 billion (Reuters) - Mexico asked the International Monetary Fund to extend a credit line to Latin America's No. 2 economy to more than $70 billion on Tuesday as a safety net in case of more global financial market turmoil. President Felipe Calderon said Mexico had asked the International Monetary Fund to boost the country's current credit line with the IMF from $48 billion to around $72 billion. "This is a financial insurance policy that will fully protect the economy from any external turbulence," Calderon said after meeting with IMF Managing Director Dominique Strauss-Kahn."This is a credit line of a precautionary nature that, just like in past instances, Mexico does not plan to use," Calderon added.

    Bond Market Signals No End to Deflation for Eight More Years: Japan Credit - The Bank of Japan’s forecast for an end to deflation in 2011 and 35 trillion yen ($417.8 billion) of spending have done little to change the thinking in the bond market, where investors see eight more years of falling prices.  Bonds designed to protect investors against inflation show that money managers in Japan anticipate prices will decline at an average 0.6 percent pace over the next five years and 0.4 percent annually through 2018. Japan is the only country where bonds linked to price changes show entrenched deflation expectations, according to data compiled by Bloomberg.  “Japan is not going for any aggressive reflationary policy mix and therefore is likely to prolong Japan’s deflation,”

    Reconsidering Japan and Reconsidering Paul Krugman - The New York Times is doing a series on Japan, which the Times describes as an examination of "the effects on Japanese society of two decades of economic stagnation and declining prices." Reading the series is about as cheery a task as rubbernecking at a car wreck on I-95, but, unfortunately, the Times series simply repeats the "conventional wisdom" about Japan put out by the same economic experts who have been wrong on most of the big economic issues over the past two decades. How, then, should we regard a country that has 5 percent unemployment, health care for all of its people, the lowest income inequality and is one of the world's leading exporters? This country also scores high on life expectancy, low on infant mortality, at the top in literacy, and low on crime, incarceration, homicides, mental illness and drug abuse. It also has a low rate of carbon emissions and is doing its part to reduce global warming. In all of these categories, this particular country beats both the US and China by a country mile. Doesn't that sound like a country from which Americans might learn a thing or two about how to get out of the mud hole in which we are stuck?

    Evolution of Eurozone Trade Balance - The OECD has a new survey out of the Euro area economy, including some slides (slides) from Pier-Carlo Padoan: Among other things, you see here another illustration of the point that there’s something very simplistic about the “Germany has high net exports because we make good cars” theory of global trade flows. BMW made good cars in the 1990s, too, but Germany ran modest trade deficits at that point. And if Germans (and Dutch, Austrian, Swedish, etc.) households started buying more consumer goods (or, equivalently, taking more vacations) the growth outlook for neighboring countries would be better. But this wouldn’t just be a favor to the people of Spain, Germans would actually have more stuff. The Schröder government undertook a lot of politically difficult reforms in order to boost German productive capacity. But presumably the point of this was to actually reap more rapid increases in living standards and not just to try to win some kind of global exports championship.

    Economists: Europe Needs to Take Further Action - Europe still needs to take further action to put its debt crisis behind it, according to most economists in the latest Wall Street Journal forecasting survey.Of the 55 economists polled, most of whom are based in the U.S., just seven said the euro zone doesn’t need to take more steps to stem the debt crisis on its periphery. Twelve respondents said the bloc should boost its bailout funds, while eight suggested much higher bond purchases by the European Central Bank. Seven economists think the euro zone should issue collective bonds, while six want to see a debt restructuring of the most troubled nations.

    My name is Bond, Euro Bond - The recent proposal by Luxembourg’s prime minister Jean-Claude Juncker and the Italian finance minister, Giulio Tremonti to provide European governments with Eurobonds has sparked debate. According to this column, it will help through financing infrastructure and increasing market liquidity. But because it requires highly-indebted countries to surrender a large chunk of fiscal sovereignty, it is a good idea whose time has not yet come.

    How the E-bond plan would work - The proposal to issue E-bonds, made in the FT by Jean-Claude Juncker and Giulio Tremonti, has sparked widespread controversy. Some observers (for example, Wolfgang Münchau) have said that it contains the kernel of a solution to the European debt crisis - which, under some circumstances, it might. But the initial response from Angela Merkel has been negative, exactly as it has been in many earlier rounds of this particular debate. The E-bond idea will obviously go nowhere without the support of Germany. But they have never before faced the real possibility that there could be a break-up of the euro if the sovereign debt crisis is not overcome. Maybe it is time for them to think again. All previous versions of the E-bond plan have fallen at the first fence because of the budgetary guarantee which Germany would implicitly offer to other member states if E-bonds are backed with a “joint and several” guarantee from all of the member states. In effect, this would mean that, in extremis, the strong economies would become liable for all of the government debt issued within the EMU bloc. Germany has always regarded this as a non-starter, for very understandable reasons. An alternative is to offer only a “proportionate” guarantee for the E-bonds, under which each member state would simply stand behind a fraction of the bond issue, with this fraction being broadly proportionate to GDP. Under this form of guarantee, Germany would not have to bail out other countries if they defaulted

    How a mini fiscal union could end instability - How do you square this one? Most economic historians and international economists I know believe a monetary union would fail unless it develops into a fiscal union. Yet, almost all political and legal experts who specialise in the European Union believe a fiscal union is Utopian. If both are right, a fiscal union is simultaneously necessary and impossible. And that would mean – again if both are right – that the euro is doomed to fail. Of course, it is not clear that both are right. But we should not be surprised to find that investors, when confronted with such informed opinion, avoid the bond markets of peripheral Europe. This is a perfectly rational response to even minimal uncertainty. I am hearing accounts of wealthy families switching their entire savings portfolios into Swiss banks. A quiet bank-run is under way in large parts of the eurozone, not only in Ireland. The return of investor confidence requires clarity about the future of the euro and the future institutional set-up. This is why the debate about fiscal union is so important. I have yet to be convinced that any rules-based system, that obsesses with fiscal deficits and nothing else, can prevent private sector imbalances and financial instability. A well-constructed fiscal union, by contrast, could deal with the sources of instability. Here is how.

    Schäuble open to discussions about a fiscal union - In an interview, German finance minister says the EU will have a political union in ten years time; Wolfgang Münchau says the case for a small, but well targeted fiscal union, is overwhelming; the EU is consider a number of reform proposals for the EFSF, including an option to purchase government bonds, and make short-term loans; eurozone government will have to refinance more debt in 2011 than in any year since the start of the euro; peripheral bonds had another bad day on Friday as the effect of the ECB’s reinvigorated bond purchasing fades; the BIS says the Franco/German agreement at Deauville triggered the latest phase in the eurozone’s financial crisis; Spain is anxious about its exposure to Portugal; UMP senate leader Gerard Longuet, meanwhile, says France faces the choice of increasing the 35-hour week, or leave the euro. [more]

    EU Permanent Bailout Mechanism Leaked to BBC – Bad Outcome for PIIGS Gov’t Bondholders? - The BBC has obtained a leaked copy of the EU draft communique on the so-called permanent bailout mechanism. Attentive readers may recall that current programs extend only to 2013, leaving a big question mark as to what would happen next, given the high odds that the countries perceived to be at risk would not be out of the woods by then.The result, which is not out of line with previous ideas that have been voiced, may nevertheless rattle the relevant bond issues further. Key points:New bailout funds would be senior to existing government debt (this is a standard feature of IMF rescues and bankruptcy financings) - Restructuring is a requirement in the “unexpected” instance the government in question is determined to be insolvent - Future government bonds (from 2013) will need to include terms that make restructuring less difficult. Note that these changes would require an change in the EU treaty, which in turn means a referendum in Ireland. In addition, the treaty wording change is broad, and would allow for the creation of senior e-bonds. In other words, it would represent a major step towards fiscal union.

    Fiscal Follies: Nouriel Roubini - To avoid a persistent and destructive recession, the fiscal and structural reforms imposed by the bond vigilantes should be accompanied by other euro-zone policies that restore growth and prevent vicious debt dynamics. The European Central Bank should ease monetary policy in order to weaken the value of the euro and bootstrap the periphery’s growth. And Germany should cut taxes temporarily – rather than raising taxes, as planned – in order to increase disposable income and stimulate German demand for the periphery’s goods and services. In short, an optimal path of fiscal austerity would, in most countries, imply a back-loaded but credible commitment to medium-term consolidation, together with short-term additional stimulus when necessary and allowed by market conditions, thereby avoiding the prospect of a deflationary and recessionary spiral. Unfortunately, the main advanced economies are following a divergent path – which, in some cases, will lead them in the opposite direction in 2011. As a result, the risks of debt deflation and eventual disorderly sovereign and private-sector defaults are rising.

    Economies want to adjust - THIS week's cover Leader discusses the three-way split in global economic performance that's defined recent months and which will likely characterise growth in 2011. In America, growth is picking up, but unemployment remains high and the prospects for deficit-reduction are uncertain. In Europe, recovery is weak, especially on the periphery, and austerity and debt crises loom. Among emerging markets, growth is scorching, and leaders are struggling to deal with inflation. The biggest emerging market question mark is China, of course. China's economy has been among the principal engines of global growth, and its expansion roared to near 11% this year. But observers are growing increasingly fearful that the Chinese government will be unable to contain inflation without producing a too-rapid growth slowdown, which could harm rich world economies. Here's the New York Times: But a growing number of economists now worry that China — the world’s fastest growing economy and a pillar of strength during the global financial crisis — could be stalled next year by soaring inflation, mounting government debt and asset bubbles.

    ECB stepped up bond purchases to 2.67 bln euros  (MarketWatch) -- The European Central Bank stepped up its government bond purchases to 2.667 billion euros ($3.56 billion)in the week ended Dec.10 after settling 1.965 billion euros the previous week. The ECB on Dec. 2 promised to keep its bond-purchasing program active in an an effort to calm markets nervous about European governments' ability to reduce their budget deficit. The ECB on Monday said it has bought a total of 72 billion euros in government bonds since May

    Alexander Gloy: Funeral music for the Euro? - This week, EU leaders will try to agree on limited EU treaty changes at a summit (December 16-17). The aim is to establish a permanent rescue mechanism for countries in financial difficulties. On Monday and Tuesday (December 13-14) foreign affairs ministers will meet in Brussels to prepare draft conclusions. The BBC claims to have obtained a draft communiqué. We will analyze if a new European Stability Mechanism (ESM) has any chance to save the Euro. It will be interesting to see how far the idea of eBonds (supra-national bonds issued by the EU to funnel money towards countries in difficulties) will get amidst opposition from the two largest contributors – Germany and France. It is unclear why it took a French-German summit[1] to state the obvious, namely that bankrupt entities, including sovereigns, should be allowed to go bankrupt. “Bankrupt” not as in “the end of the world”, but rather as a way of making a debt problem manageable by restructuring it. Orderly bankruptcy proceedings, by the way, are in the interest of creditors (since otherwise creditors would create more damage in a “first-come-first-served” rush to secure collateral at the detriment of others).

    The Eurozone Is In Bad Need Of An Undertaker - The EU’s Franco-German "Directoire" and the European Central Bank have between them ruled out all plausible solutions to the eurozone’s debt crisis.  There will be no Eurobond, no increases in the EU’s €440bn (£368bn) rescue fund, and no mass purchases of Spanish and Italian bonds by the ECB. Nothing. The system is politically and constitutionally paralysed. Spain and Portugal will be left nakedly exposed before their funding crunch in January. It is entirely predictable that Angela Merkel and Nicolas Sarkozy would move so quickly to shoot down last week’s Eurobond proposal, issuing pre-emptive warning before this week’s EU summit that they will not accept “a bundling together of all Europe’s debts”.

    Euro has 'one in five chance' of collapse, warns CEBR - The chances of the euro surviving in its current form have been put at "one-in-five" by one of the UK's leading economics consultancies. In a research paper published today, the Centre for Economics and Business Research (CEBR) claims that keeping "the euro alive will require cuts in living standards greater than the UK faced in the Second World War" for weaker eurozone members. "There is no modern history of falling living standards in peacetime on the scale necessary to keep the euro in its current form. This is why I think there is at best a one-in-five chance that the euro will survive as it is," Douglas McWilliams, CEBR chief executive, said.

    Riots break out in Rome -Protesters set fire to cars, threw paint and smoke bombs at the Italian parliament and clashed with riot police today in Rome's worst violence for years after prime minister Silvio Berlusconi survived a confidence vote. Via del Corso, the main street stretching through the historic centre, near Mr Berlusconi's office and home to some of the capital's smartest shops, was a battle scene of smoke, teargas and bloodied faces. Smoke rose from the Pincio Hill above the famed Spanish Steps as protesters set fire to private cars, overturned heavy trash bins and prevented fire crews from putting out the flames. At least 50 people were injured, including several policemen, and more than 40 protesters were detained, police said. . The protesters were mostly students but also included workers and immigrants. Television pictures showed dozens of people throwing stones at police, with officers in riot gear beating the protesters back and chasing them among narrow cobblestoned alleys.

    Video of Unrest on Rome's Streets After Berlusconi Wins VoteUpdated | 3:43 p.m. Following a narrow vote of confidence in Italy’s Prime Minister Silvio Berlusconi from the Italian Parliament on Tuesday, protesters on Rome’s streets — demonstrating against austerity measures and a variety of government failings — clashed with police and set cars on fire in several parts of the city. Dramatic images and video of the anger on the streets was posted online by witnesses to the unrest. We are piecing together an idea of where these events took place, based on some caption information and a limited knowledge of Roman geography — readers with a good understanding of Rome’s streets are invited to weigh in on where these events took place in the comment thread below. (Thanks to those who have already done so.) “Hooded protesters set up flaming barricades as police baton-charged demonstrators in several parts of the capital’s historic center. Cars and council vehicles were set alight, and officers fired teargas at protesters, The Guardian’s Rome correspondent John Hooper reported. “By mid-afternoon,” he added, “two thick columns of smoke rose from the remnants of a barricade at the entrance to the historic Piazza del Popolo.”

    Greek Strikers Halt Flights, Buses as Bailout Bites - Greek unions grounded flights, kept ferries docked at ports and shut down public services today to protest wage cuts as the government sticks to conditions of an international bailout. Protesters clashed with police in Athens. Air-traffic controllers walked off the job, canceling all flights to and from Athens International Airport. Public transport workers, whose salaries were cut 10 percent under a bill approved early today in parliament, worked on and off between 9 a.m. and 5 p.m. to carry protesters to rallies. About 20,000 people heeded a call from the country’s two biggest union groups to protest in Athens, according to police estimates. Some protesters threw fire-bombs at officers deployed outside parliament and at the Finance Ministry in the center of the capital. Police responded with tear gas and flash grenades. Former transport minister Kostis Hatzidakis was attacked by protesters and led to safety after receiving cuts to the face, television footage showed.

    Riots in Athens and Rome (videos for each) Athens. Via: Toronto Star: Protesters clashed with riot police across Athens on Wednesday, torching cars, hurling gasoline bombs and sending Christmas shoppers fleeing in panic during a general strike against the government’s latest austerity measures. Police fired tear gas and flash grenades as the violence escalated outside parliament and spread to other parts of the capital. The strike also grounded flights, closed factories, disrupted hospitals and shut down trains, ferries and buses across the country. Rome. Via: Guardian: Against an alarming background of violence inside and outside parliament, Silvio Berlusconi today scraped through confidence votes in both houses of the Italian parliament. The survival of his rightwing government was greeted by widespread disturbances in Rome where hooded and helmeted protesters set up flaming barricades, attacked police with sticks and bars, smashed the windows of shops and banks, and set alight cars, police vans and local authority vehicles. Police responded with baton charges, teargas and, in some cases reported by witnesses, indiscriminate beatings. Ninety people, including 50 police, were reported injured. According to police, there were 41 arrests.

    Europe should rescue banks before states (George Soros) The architects of the euro knew that it was incomplete when they designed it. The currency had a common central bank but no common treasury – unavoidable given that the Maastricht treaty was meant to bring about monetary union without political union. The authorities were confident, however, that if and when the euro ran into a crisis they would be able to overcome it. After all, that is how the European Union was created, taking one step at a time, knowing full well that additional steps would be required. With hindsight, however, one can identify other deficiencies in the euro of which its architects were unaware. A currency supposed to bring convergence has produced divergences instead. That is because the founders did not realise that imbalances may emerge not only in the public sphere but also in the private sector. That lack of a common treasury first became apparent as a problem after the bankruptcy of Lehman Brothers on October 15 2008, when the threat of a systemic collapse forced governments to guarantee that no other systemically important financial institution would be allowed to fail.

    Europe Staggers as Critical Summit Looms - Europe’s smoldering financial crisis flared up on Wednesday, with riots over austerity spending in Greece, new signs of troubles in Spain and little indication that European leaders were moving any closer to agreement on a systemic approach to long-term stability.  The day’s events emphasized the complex social, political and economic challenges facing government leaders at a European Union summit meeting on Thursday and Friday in Brussels. The meeting is expected to focus on the financial crisis, but there was no sign of the emergence of the sort of comprehensive plan that financial experts say is needed to beat back the unfolding turmoil.  In remarks to the German Parliament on Wednesday, Germany’s chancellor, Angela Merkel, tried to reassure the markets and answer some of her own critics by allaying fears about the future of the 16-nation monetary union.  “No one in Europe will be left alone, no one in Europe will be abandoned,” Mrs. Merkel said,“Europe succeeds when it acts together and, I would add, Europe succeeds only when it acts together.”

    EU Should Pull Financial Support If Targets Missed, OECD Says - The European Union should be ready to withdraw financial support from countries such as Greece if the conditions attached to bailouts aren’t met and such terms should be part of any permanent aid facility, the OECD said.  “A credible mechanism for fiscal crisis management is required,” the Organization for Economic Cooperation and Development said today in one of its regular regional Economic Surveys. “This should involve a permanent liquidity-support mechanism subject to strong conditionality. If conditionality is not fulfilled, financing support should be withdrawn.”  The comments underline the stakes for EU leaders as they prepare to gather in Brussels later this week to hash out a permanent crisis-resolution mechanism to replace the 440 billion-euro ($580 billion) stability fund created in May in an attempt to halt the spread of the region’s sovereign-debt woes. The current mechanism is scheduled to expire in 2013.

    Euro Will Not Fail, Say Wolfgang Schaeuble And John Major - Germany's finance minister Wolfgang Schaeuble has warned those who bet against the euro that they "will not succeed".  The single currency won’t fail, and the region’s nations are determined to defend it, Mr Schaeuble told German newspaper the Bild am Sonntag in an interview published on Sunday.  "All those responsible in Europe agree: the euro is to all our advantage. And that’s why we will successfully defend it,” Mr Schaeuble was cited as saying.  “ His comments come ahead of a European Union summit this week that is to focus on establishing a permanent rescue mechanism starting in 2013 for crisis-hit eurozone nations. The euro has come under pressure since Ireland followed Greece in tapping into the region's €750bn rescue fund.  Separately, John Major on Sunday gave the single currency his vote of confidence.

    European Central Bank Plays Cat and Mouse Over the Euro - On one side is the , 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 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. “The game now is one now of cat and mouse,” said Mohamed A. El-Erian, chief executive of the bond giant Pimco.

    ECB eyes seeking capital hike - sources (Reuters) - The European Central Bank is considering requesting an increase in its capital from euro zone member states, euro zone central bank sources told Reuters, as a cushion against any potential losses from its bond buying. One source said among the options being discussed was a doubling of the ECB's capital. The other source said it was not yet clear how much the bank would ask for. One of the sources told Reuters the bank was planning to ask for its capital to be raised. A second source confirmed the plan was being discussed, adding: "The issue is that the ECB is worried about potential losses from its bond buying." "At the moment we are buying very modest amounts, but what if that is increased, and what if the bonds you buy are suddenly worth 30 percent less?" The ECB declined to comment.

    Trichet Calls for `Maximum' Flexibility of Region's Rescue Fund - European Central Bank President Jean-Claude Trichet said European governments should consider extending and broadening the region’s bailout fund, stepping up pressure on leaders to fight the fiscal crisis.  “We’re calling for maximum flexibility and maximum capacity, quantitatively and qualitatively,” Trichet told reporters at an event in Frankfurt late yesterday, responding to a question whether the European Financial Stability Facility should be able to buy government bonds.  The ECB is pushing governments to shoulder more of the burden in tackling the fiscal crisis after Ireland was forced last month to seek a bailout, sparking concern that contagion will spread through the euro region. The ECB last week bought the most sovereign debt since June and Spanish bonds today fell for a seventh day as it paid more in a debt sale.

    And now for some real money: ECB is considering a capital increase - ECB may ask national governments to increase its capital – a sign that it is concerned about the effect of its bond purchase programme; Reuters Breakingviews says ESCB has similar leverage as Lehman Brothers before it went bust: the real risk is a default; Peter Garber of Deutsche Bank does the math on an intra-eurozone capital flight; Moody’s casts doubts on the solvency of the Spanish financial sector; European Commission’s crisis fund is to expire in 2013; Bart de Waver calls Belgium a failed state; bonds spreads move sideways, and euro strengthens; Mario Monti, meanwhile, criticises the European Council as short-termist. [more]

    Official: Germany Willing To Boost ECB Capital - Germany would be willing to support the European Central Bank with more capital if the bank said that was necessary, a government official said - a step that would reinforce the ECB's finances as it tries to contain the continent's debt crisis.  Should the ECB ask eurozone governments to boost its capital base, it would be the first capital increase for the Frankfurt-based central bank in its 12-year history.  The bank's balance sheet has been strained over the past year as it has bought up bonds from governments with shaky finances such as Greece, Ireland and Portugal. The bond purchases, which drive down yields and stabilize bond markets, have been a key step in the easing of market turmoil in recent weeks.  The bank has been under pressure to step up its purchases to help keep surging funding costs from pushing Portugal, or more dangerously much larger Spain or Italy, into seeking an international bailout.

    ECB Boosts Capital Base by $6.6 Billion to Protect It From Losses on Bonds - The European Central Bank will almost double its capital base to help protect it from losses as the institution buys bonds of governments from Portugal to Ireland to fight the sovereign-debt crisis.  The Frankfurt-based central bank will boost its capital by 5 billion euros ($6.6 billion) to 10.76 billion euros, it said in a statement today. The change will take effect from Dec. 29.  The capital increase suggests the ECB is concerned that its program to buy bonds of strained governments, which now totals 72 billion euros, may saddle its balance sheet with losses. Policy makers have increased pressure on governments to do more to end Europe’s debt crisis on concern the ECB is shouldering too much of the burden.

    European Central Bank arms itself for Spanish crisis - The European Central Bank (ECB) is to double its capital base to cope with "credit risk" stemming from the eurozone debt crisis, paving the way for direct action to shore up the Spanish debt markets if necessary.  The ECB said it would raise its subscribed capital by €5bn (£4.2bn) to €10.76bn, the first increase since the launch of the monetary union.  "Basically they are insuring themselves in case they have to step up bond purchases, and that probably implies Spain," . "They have to be ready to dig the fire-break early on this because Spain is too large to handle, and there is risk of contagion to Italy."  The ECB's move came as Spain braved the debt markets following a downgrade alert by Moody's. Madrid paid the highest interest rates for a decade with yields on 10-year bonds rising to 5.45pc, compared with 4.63pc in November.  Spain's government and banks have to refinance almost €300bn of debt next year, leaving the country prey to a buyers' strike.

    SPD in favour of eurozone bonds – as crisis worsens ahead of summit - Steinmeier and Steinbrück break ranks with Merkel – and accept the principle of eurozone bonds; favour a three-step solution: haircuts for Greece, Ireland and Portugal, ringfencing of Spain and others, and the introduction of eurozone bonds, up to some ceiling of GNP; shift in position undermines government’s claim that eurozone would never find majority in Bundestag; Asselborn says Merkel’s behaviour had been “theatrical”, and accuses Germany and France of arrogance; the crisis yesterday spread further to Spain, as bond yields reached new eurozone records; the good news from Spain are data showing a reduced reliance on ECB funding; S&P put Belgium on a downgrade watch because of a lack of government; Germany accepts the principle of an ECB capital increase; Wolfgang Münchau, meanwhile, compares the political response to the crisis to Hans Christian Andersen’s Emperor.[more]

    Germany defiant as Europe suffers - Germany has refused to give any ground on Europe's rescue machinery despite the escalating political and economic crisis across much of the eurozone periphery, guaranteeing a bitter clash with EU partners at a crucial summit in Brussels on Thursday. Chancellor Angela Merkel pledged that no euro member would be "left on their own", but dug in her heels against the creation of eurobonds and demands to boost the EU's €440bn (£372bn) bail-out fund. "We must not make the mistake of thinking that collectivising risk is the answer," she told a stormy session of the Bundestag.  The defiant stand came as Moody's issued a downgrade warning on Spain owing to "high refinancing needs in 2011" and the risk of further bank bail-outs. It said central and regional governments must finance €200bn next year. Spanish lenders have to roll over a further €90bn.  "These needs are now rendered more challenging by the fragile confidence of international capital markets. Foreign investors have typically funded around 5pc of Spain's funding requirements. They may be less willing to do so in the immediate future given recent speculation about the treatment of bondholders should Spain be pushed to seek support from the EU/IMF," it said.

    Why German opposition to the common eurobond proposal is mistaken - By differentiating between responsible and irresponsible borrowing, a eurobond creates a market incentive for fiscal probity. By distinguishing between senior (European) and junior (national) debt, a eurobond gives clear signals to the markets on how to price risk. By making it easier for governments to roll-over existing debt while still making it harder for them to borrow irresponsibly, a eurobond would stabilize both debt markets and inter-bank lending. [more]

    Germany is rising up against Merkel’s euroscepticism - An extraordinary debate in the Bundestag yesterday: A united opposition attacks Merkel over her complacent crisis resolution policy; Green leader calls her a “Teutonic Savings Monster”; Steinmeier says she is turning ECB into a bad bank; the Left says see is mixing up Germany’s interest with those of its banks; criticism undermines Merkel’s position at today’s EU summit, as Spain will push for an extension of the ceiling and remit of the EFSF; Der Spiegel calls on Germany to “dare more Europe”; Mohamed El Erian says Germany should adopt a holistic approach to crisis resolution; Kevin O’Rourke says resolution must combine restructuring, fiscal burden share, and ECB support; Willem Buiter says resolution must include a massive increase in EFSF ceiling and big-league bank restructuring; Calculated Risk calls the eurozone a slow motion train wreck; Moody’s issues downgrade warning for Spain amid concerns over funding pressures next year, sending the euro lower against the dollar; violent protests erupt in Athens against austerity; in 2015, meanwhile, southern Europe will adopt the silvio as its new currency, according to a scenario game by FT Deutschland. [more]

    Merkel wins – slow motion train wreck can now proceed unhindered - EU leaders fail to take any measures to boost the EFSF, as Angela Merkel gets her way with an extremely limited, ultima ratio crisis management system; Barroso says the EU’s anti-crisis consists of economic growth, and low inflation; Moody’s downgrades Irish bonds by five notches; Lorenzo Bini Smaghi rails against the advocates of restructuring, citing social and historical reasons; ECB raises capital to protect against default of the bonds it bought; Thomas Mayer argues why a eurozone bond would not solve the problem, and might trigger a collapse of the eurozone; Germany’s FDP leader Guido Westerwelle is likely to be ousted as party leader; Ireland registers a small increase in quarterly economic growth; bond spreads, meanwhile, went up overnight, as the markets digested the impact of the European Counci’s non-decisions. [more]

    Germany is not the only one facing backlash for EU bailout - Due to its size and importance, Germany has taken all of the criticism for enforcing a hard line on the austerity quid pro quo which allowed the euro zone bailouts to proceed. However, policy makers from a number of other countries share similar concerns about the negative political effects that bailouts for those perceived as fiscally profligacy will have. At varying times, we have heard this in Finland, Slovakia, and Austria to name a few countries within the euro zone. Politicians from Sweden and Latvia have also expressed reservations. In the Netherlands, it looks as if the government could receive a voter backlash for its support of the bailouts if things continue as they have. David Tweed of Bloomberg reports. It is this domestic pressure which ties the hands of governments in the EU – and not just in Germany. This pressure also makes an eventual default in the periphery likely.

    Buiter: ‘European sovereign debt kerfuffle’ - We posted some fairly bombastic extracts from Buiter’s sovereign debt crisis essay on November 30. And at a Citi roundtable event on Wednesday, he further elucidated his avuncular apocalypticisms. Musing on the ‘European sovereign debt kerfuffle’, he repeated that ‘in all likelihood’ we’d see sovereign defaults in the eurozone, it’s only a question of when. Who’s likely to fall? The usual suspects, of course, according to Buiter — Greece, Ireland, Portugal. Spain ‘might be salvageable’ but needs to deal with its ‘deep structural problems’ and the fiscal state of its sub-autonomous regions. He added that even the cross-border Spanish banks – as opposed to the cajas that were so toxic that five of them even failed the stress tests – have ’significant domestic exposure’ to troubled housing assets, and ‘large numbers of unrecognised losses’. So it’s not quite all about the banks, but they are critical. It doesn’t stop there. Buiter argues that Italy and Belgium, too, should be covered by an expanded EFSF.

    Slovak Remark Renews Eurozone Breakup Talk - Last in, first out, when it comes to the euro? That's the question getting attention in Slovakia, the newest member of Europe's common currency, after the speaker of its parliament said that the country should be ready to abandon the euro if the continent's widening debt crisis keeps spreading. The comments marked a turn from recent speculation centering on the possibility that one of the eurozone's larger economies might get fed up with the euro. But while a smaller member might see reasons to leave amid the threat of a debt meltdown, any departure would be extremely disruptive — first and foremost to the country heading for the exit, as well as the currency bloc. "The market perception now is the eurozone not going to break up," : "We can safely say that if a country left the euro, it would be economically disruptive" — no matter what the member's size.

    Portuguese Borrowing Costs Rise at Year's Last Bill Auction (Bloomberg) -- Portugal’s borrowing costs rose at a sale of 500 million euros ($666 million) of 3-month bills today as Moody’s Investors Service put neighboring Spain’s debt rating on review, increasing pressure on peripheral euro-area nations. The securities due March 18 were issued today at an average yield of 3.403 percent, the country’s debt management agency said. That compares with an average yield of 1.818 percent at a previous sale of 3-month bills on Nov. 3. "

    Portugal May Be Frozen Out in Issuance 'Avalanche' - (Bloomberg) -- Portugal risks being frozen out of the bond markets next year amid a wave of auctions from higher- rated governments and agencies that threaten to force the nation into seeking a bailout to pay its debts. “It has become the market consensus that Portugal’s ability to fund on a standalone basis is fairly constrained,”  “People have investment alternatives.” Portugal has 11 billion euros of debt payments to make in the first quarter, according to data compiled by Bloomberg. Total euro government issues may reach 863 billion euros ($1.1 trillion) next year, said Morgan Stanley strategist Elaine Lin in London. While that’s down from 925 billion euros in 2010, it is “elevated compared to historical levels,” and higher than the average from 2000 to 2008, she said.

    EU Leaders Commit To Bail-Out Fund - European heads of government vowed on Friday that the eurozone’s bail-out fund would always have enough financial wherewithal to rescue any faltering country, but the leaders stopped short of saying they would increase its size. The promise, contained in their summit communiqué after two days of meetings, was the most explicit commitment to date by European Union leaders about their willingness to back a bail-out of even larger eurozone economies such asSpain and Italy, should those countries get cut off from the financial markets.But their unwillingness to enlarge the fund, which had been proposed by some EU finance ministers, was a sign that they believed setting a new, higher limit would only lead bond traders to assume EU leaders believed a Spanish or Italian bail-out was inevitable. The commitment came on the same day Moody’s cut Ireland’s credit rating five levels and said the outlook for Irish debt was “negative”. The downgrade was expected following last month’s €85bn Irish bail-out, but the severity of cut was more than anticipated. .

    Euro rescue summit fails to impress - European Union moves to set up a permanent rescue mechanism to bolster the euro are unlikely to satisfy sceptical markets anticipating more trouble and bailouts to come, analysts warned Friday. At a summit Thursday, leaders of the 27-nation bloc agreed on a permanent emergency rescue fund from mid-2013 to replace a one-trillion-dollar joint EU-IMF facility set up after the Greek debt crisis hit the eurozone in May. Leaders pledged to do "whatever is required" to defend the single currency but were short on details -- whether the fund would be increased or not, how it would operate and what conditions would come attached. For Jonathan Loynes, chief European economist at Capital Economics, the outcome of the last summit of tumultuous 2010 was "unlikely to ease pressures in the peripheral bond markets," suggesting Portugal was sure to come under renewed pressure in the New Year.

    Expensive Spanish, Belgian Auctions Suggest Tough Tenders Ahead - Spain and Belgium were forced to pay sharply higher yields at separate Treasury bill auctions Tuesday, painting a bleak picture for debt sales from Spain and Portugal later this week. Investors are closely watching government debt tenders in Spain and Portugal amid fears that spiralling borrowing costs could eventually lock out both countries from the market, prompting them to seek external help. Government officials from both countries have expressed confidence that such a situation won't arise but given the current backdrop, investors aren't likely to drop their guard. Spain sold EUR2.513 billion of 12-month and 18-month T-bills, comfortably within the EUR2 billion to EUR3 billion target range, but the average yield on the 12-month T-bills rose 46% to 3.449% from 2.363% at the previous auction, Nov. 16, while for the 18-month T-bills, it increased almost 40% to 3.721% from 2.664%.

    Spain's Lenders May Need Additional $120 Billion in Capital, Moody's Says - Spanish banks that helped spur the country’s property boom with mortgages and loans to developers may need as much as 90 billion euros ($120 billion) in capital, Moody’s Investors Service said.  That estimate is based on a scenario in which lenders would need a Tier 1 capital ratio, a measure of their financial strength, of as much as 12 percent to tap funding, Moody’s said in a statement. Spanish banks declined today, led by Banco Santander SA, the country’s biggest.  “Given the situation after Ireland where the banks will have to be recapitalized to a much higher capital level, to a core Tier 1 ratio of 12 percent, we ran stress tests to see what that would mean in the context of Spain, if Spanish banks had to be recapitalized to a higher level in order to retain market confidence,”

    Huge financial challenge for Spain - Moody's highlights three substantial financial challenges for Spain, in explaining why it may downgrade the kingdom's credit rating. First is simply that the central government has to raise and refinance a very substantial sum in 2011, some €170bn. That won't be particularly easy at a time when investors' appetite for eurozone debt isn't what it was - especially since the Spanish government has historically been dependent on overseas buyers for about 50% of all the money it raises. On top of that €170bn is €30bn of regional debt that needs to be refinanced next year, and a further €90bn of long term borrowings by the banks which has to be replaced. So if nothing bad were to happen to force Spain to raise even more money, it will need to borrow €290bn next year, equivalent to a non-trivial 27% of the country's GDP.

    Spain Aa1 Rating Put on Review by Moody's on Eve of Bond Sale -- Spain’s credit rating may be cut from Aa1, Moody’s Investors Service said, as the government prepares its final bond sale of the year tomorrow amid concern it may follow Greece and Ireland in seeking a bailout.Spain has to raise 170 billion euros ($226 billion) next year, while refinancing needs for its regions total 30 billion euros and for banks around 90 billion euros, Moody’s estimates. “Spain’s substantial funding requirements, not only for the sovereign but also for the regional governments and the banks, make the country susceptible to further episodes of funding stress,”

    Ratings agency Moody's warns it may downgrade Spanish public debt ...Ratings agency Moody's on Wednesday warned it may downgrade Spain's debt because the government is vulnerable to a borrowing crunch next year, when the recapitalization of weak banks could prove more costly than expected for public finances. The agency, which lowered Spain's rating from Aaa to Aa1 in September, says it will review the rating again because of high financing needs in 2011 but does not expect the country to need a bailout. The government's bond yields have risen to high levels in recent weeks amid Europe-wide debt market turmoil. Investors fear that countries like Spain or Portugal will have trouble handling heavy debt loads and require emergency help, like Greece or Ireland. Spain is considered a risk because it is still struggling to emerge from nearly two years of recession, has the highest unemployment rate in the eurozone and a swollen deficit.

    Spain Oct bad loan ratio highest in nearly 15 yrs (Reuters) - The bad loans ratio for Spanish banks rose to its highest level in almost 15 years in October, the Bank of Spain said on Friday, as a stagnant economy and high unemployment weighed on debt repayments. The level of unpaid loans as a ratio of total lending by Spain's financial sector -- including banks, financial cooperatives and retail credit cards -- rose to 5.66 percent in October from 5.49 percent a month earlier. Unpaid loans on Spanish banks' books have been rising steadily since the bursting of a decade-long property bubble sent shock waves through the economy and left around one in five Spaniards out of work

    Newly Built Ghost Towns Haunt Banks in Spain -It is a measure of Spain’s giddy construction excesses that 250 row houses carpet a hill near this tiny rural village about an hour by car outside of Madrid. Most of these units have never sold, and though they were finished just three years ago, they are already falling into disrepair, the concrete chipping off the sides of the buildings. Vandals have stolen piping, radiators, doors — anything they could get their hands on. The Bank of Spain says the banks have about $240 billion in “problematic exposure” out of $580 billion invested in real estate and construction, a situation, they say, the banks are capable of handling. The boom and bust of Spain’s property sector is astonishing. Over a decade, land prices rose about 500 percent and developers built hundreds of thousands of units — about 800,000 in 2007 alone. Developments sprang up on the outskirts of cities ready to welcome many of the four million immigrants who had settled in Spain, many employed in construction.

    Eurozone Debt Crisis Spreads To Belgium On Rising Political Risk - Europe's debt woes have moved closer to the core of monetary union after Standard & Poor's threatened to downgrade Belgium over the failure of Flemings and Walloons to form a government. The yield spread on Belgian 10-year bonds has ballooned to 102 basis points over German Bunds, raising fears of a funding squeeze next year. S&P said the country needs to refinance debt equal to 11pc of GDP next year, leaving it "exposed to rising real interest rates". "It's ugly for our reputation," said Jean Deboutte, head of Belgium's debt office. "This is bearable but the premiums are mounting little by little."

    Moody’s Slashes Ireland’s Credit Rating - Having pledged late Thursday to do “whatever is required” to contain the debt crisis and defend their embattled currency, European Union leaders reconvened for the final day of a summit meeting. In the draft of a closing statement, the leaders welcomed the “impressive progress” in Dublin toward meeting the stiff conditions set for its recent bailout, including adoption of steep budget cuts.  Moody’s Investors Service had a different assessment, however. It cut Ireland’s credit rating by five notches to Baa1, with a negative outlook, from Aa2 and said further downgrades could follow.  The downgrade represented a further blow for a county that has enacted deep austerity cuts — and it is likely to raise questions about whether the rating agencies are exacerbating the efforts of struggling euro countries to emerge from the crisis.

    Ireland Credit Rating Slashed To 3 Grades Above Junk - Moody's slashed Ireland's credit rating five notches on Friday and warned of further downgrades if the country cannot regain command of its debts and tame its deficit.  Moody's dropped Ireland's rating to Baa1 – just three steps above junk-bond status – in a move similar to last week's BBB+ downgrade by rival ratings agency Fitch. The other major agency, Standard & Poor's, cut Ireland two notches to A on Nov. 23 and is expected to drop its grade further in coming days. Dietmar Hornung, the senior Ireland analyst for Moody's, said it remained an open question whether Ireland could sharply reduce its deficit from its eurozone-record levels while taking tens of billions from a new EU-IMF bailout fund.

    Celtic Creditors and the Future of Europe and the Euro - The struggle within the EU and the European Central Bank (ECB) over the nature of European project continues. The EU continues to be dominated by the French/German tandem. The Euro, once the great hope of the periphery – with Ireland as its brightest star – now poses a triple threat to the periphery. The Euro removes the ability to devalue a national currency. The European stability pact (which Germany and France see as essential to maintain the value of the Euro) sharply limits the use of fiscal policies to respond to a severe recession. The ECB’s sole mandate is to restrict inflation – regardless of its impact on unemployment – so monetary policy may also be pro-cyclical in a recession. Economists warned, before the Euro was adopted, that it would impair the ability of nations to respond to a serious recession and that this impairment could eventually undermine the value of the Euro. The global competition in laxity for national currencies has compounded the EU’s inherent triple threat. The EU is “losing” this competition.

    Monetary Policy Can Save the Eurozone, For Now - The Weekly Standard has an article on the challenges facing the Eurozone.  It is an interesting article that has as its main thesis the following: Europe’s countries now face the choice of giving up either their newfangled money or their ancient national sovereignties. It is unclear which they will choose. This is a conventional view, but is it correct? Are the choices really limited to saving the Euro or preserving national sovereignties?  For the long-run the answer is probably yes. It is difficult to make a monetary union work without a political union.  For many of the economic shock absorbers needed to make a monetary union work--common treasury, fiscal transfers, labor mobility, price flexibility--either require a political union or would be more effective with one. In the short-run, though, there is another option: more monetary easing by the ECB.  As Ryan Avent explains, further easing by the ECB would cause a real depreciation for the Eurozone periphery vis-a-vis the Eurozone core:

    No solutions, if they can help it - IF YOU haven't been following Charlemagne's tireless coverage of Europe's efforts to negotiate something like a real solution to the ongoing debt crisis, let me recommend that you go have a read. The big accomplishment, if you want to call it that, is a seeming agreement on the change in the Treaty text to allow for sovereign rescues, which will likely read: The Member States whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro as a whole. The granting of any required financial assistance under the mechanism will be made subject to strict conditionality. But don't expect markets to consider the situation handled: On all the other measures proposed in recent days to shore up the euro – Eurobonds, increasing the size of the EFSF or making it more flexible – the Germans shut down the debate. A seven-point declaration on economic policy for the euro-area was skewered too. It is now to be used only as “speaking points” by EU officials, even then in curtailed form. The Financial Times reports that Germany was not alone in its resistance

    Nouriel Roubini: ‘the economic policy is still lend, pray and hope’ - Nouriel Roubini, a New York professor of Iranian origin, expects China, India and Brazil to collectively grow at 6.3pc in 2011, more than triple the 2.1pc he predicts the developed economies will muster.  "The good news about advanced economies is that the tail-risk of a double-dip recession has receded," Mr Roubini said as he presented his outlook for 2011 at the office of Roubini Global Economics in Greenwich Village, New York.  The picture echoes the consensus forming in financial capitals that it will again be the emerging economies that are sprinting, while consumers and governments elsewhere repair balance sheets that were stretched to breaking point during the crisis.  Mr Roubini, who rejects the accusation that he is a natural pessimist, says the greatest risks to this scenario unfolding lie in the next six months and come from the troubled eurozone.  "The risk of something disorderly happening is still significant," he explained. "At the moment, the policy is still lend, pray and hope this is a liquidity problem and not a solvency problem."

    A Survival Strategy for the Eurozone - Nouriel Roubini - Short of full fiscal unification – or a variant of it in the form of eurozone bonds – this increase in official resources would occur through a much-enlarged European Financial Stability Facility and a much greater commitment by the European Central Bank to long-term bond purchases and liquidity operations to support banks. Since quasi-fiscal union implies that the eurozone’s core economies could end up systematically bailing out those on the periphery, only a formal loss of fiscal sovereignty – a credible commitment by the peripheral countries to medium- and long-term fiscal discipline – could overcome the current political resistance of Germany and others. But even a larger envelope of official resources is not sufficient to stem the insolvency problems of Greece, Ireland, and, possibly, Portugal and Spain. Thus, a second set of policies and institutional reforms requires that all unsecured creditors of banks and other financial institutions need to be “treated” – that is, they must accept losses (or “haircuts”) on their claims. This is needed to prevent even more private debt being put on government balance sheets, causing a fiscal blowout. If orderly treatment of unsecured senior creditors requires a new cross-border regime to close down insolvent European banks, such a regime should be implemented without delay.

    Europe's debt crisis: An uglier 2011? - At this point in the never-ending euro crisis, it should be clear to Europe's leaders that their piecemeal approach to the debt problems of the Eurozone's weakest members has been a failure. Rescues for Greece and Ireland have not stopped the contagion. Moody's recently threatened to downgrade its credit rating on Spain, and on Friday, lowered Ireland's rating by five notches, even after that nation's European Union/IMF bailout. Standard & Poor's warned of a downgrade for Belgium. In a bond auction this week, Portugal's borrowing costs nearly doubled in the just the past month. But that's still not enough evidence to convince Europe's leaders to change their policies. In a summit on Thursday, European leaders agreed to form a permanent bailout framework, set to become effective in 2013. But once again, they dodged proposals for new approaches to the crisis. The continued resistance to more proactive, comprehensive solutions to Europe's debt crisis will just make it more likely the Eurozone will continue to suffer bailout after bailout.

    Bank warns of eurozone and other dangers - The Bank of England, famously, did not pay enough attention to its own twice-yearly Financial Stability Report ahead of the crisis. There's no danger of that happening again, is there? In its latest report, the Bank is worried about eurozone contagion affecting Britain and about the return of the "search for yield" that proved so damaging. This is a summary: "Since June sovereign and banking system concerns have re-emerged in parts of Europe. The IMF and European authorities proposed a substantial package of support for Ireland. But market concerns spilled over to several other European countries. At the time of writing, contagion to the largest European banking systems has been limited. "In this environment, it is important that resilience among UK banks has improved over the past year, including progress on refinancing debt and on raising capital buffers. But the United Kingdom is only partially insulated given the interconnectedness of European financial systems and the importance of their stability to global capital markets.

    Global Banks Far Short of Capital Rules, Basel Report Shows… The largest global banks, especially those in Europe, may be hundreds of billions of dollars short of the capital reserves needed to comply with new regulations and may face pressure to shed risky assets as a result, according to figures released Thursday by two influential regulatory panels.  One of the panels, the Basel Committee on Banking Supervision, also provided a more detailed description of the rules it was developing for global banks, prompting some critics to complain that the definition of banks that are too big to fail seemed to be narrowing.  Based on their 2009 financial results, the 94 largest banks would have been 577 billion euros, or $769 billion, short of the risk-free capital they will need to hold under new rules endorsed by the Group of 20 countries, the committee said.  The banks have until Jan. 1, 2019, to fully comply with the new rules, and many have already started bolstering their reserves.

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