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

Saturday, December 25, 2010

week ending Dec 25

Fed Assets Rise to Record $2.43 Trillion on Bond Purchases - The Federal Reserve’s total assets grew $42.2 billion to a record $2.43 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 $39.7 billion to $1 trillion as of Dec. 22, according to a weekly release by the central bank today. The Fed’s holdings of mortgage-backed securities fell by $445 million to $1 trillion and federal agency debt securities fell by $424 million to $147.5 billion.  The Fed has bought $155.7 billion in Treasuries on its way to purchasing $600 billion in government debt through June 2011. The Fed is also reinvesting the proceeds of its maturing mortgage holdings.

US Fed Total Discount Window Borrowings Wed $45.1 Billion -  The Fed's asset holdings in the week ended Dec. 22 climbed to $2.431 trillion, from $2.389 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities rose to $1.007 trillion on Wednesday from $967.55 billion. Much of the increase stems from purchases of securities set to mature over one to 10 years. Thursday's report showed total borrowing from the Fed's discount lending window slipped to $45.1 billion Wednesday from $45.75 billion a week earlier. But borrowing by commercial banks rose to $54 million Wednesday from $ 21 million a week earlier. Thursday's report showed U.S. government securities held in custody on behalf of foreign official accounts rose to $3.358 trillion, from $3.340 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts grew to $2.625 trillion from $2.612 trillion in the previous week. Holdings of agency securities grew to $732.65 billion from the prior week's $ 728.47 billion. Further data on the Fed's balance sheet, including a breakdown of district-by- district discount window borrowing, can be found at

Federal Reserve Places 70% Per-Security Limit on Treasury Debt Holdings -The Federal Reserve said it will limit its purchases to 70 percent of any single Treasury security as part of its plan to expand its balance sheet that’s known as quantitative easing. The central bank had temporarily relaxed its 35 percent limit in November when announcing additional purchases of $600 billion of Treasuries through June. The New York Fed in a statement today gave allowable purchase percentages for three brackets in its system open market account, or SOMA, consisting of securities it holds, from more than 30 percent to 70 percent.  “This gives some clarification on what the end game is for the Fed with regard to individual security purchases,”

Fed extends dollar swap arrangements -- The Federal Open Market Committee of the U.S. Federal Reserve on Tuesday said it's extending through Aug. 1, 2011 its U.S. dollar liquidity swap arrangements with the Bank of Canada, the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank. The swap arrangements, established in May, had been authorized through Jan. 2011. The swap lines with the ECB, BOE, SNB and BOJ will provide these central banks with the capacity to conduct tenders of U.S. dollars in their local markets at fixed local rates for full allotment, similar to arrangements that had been in place previously. They are designed to improve liquidity conditions in global money markets and to minimize the risk that strains abroad could spread to U.S. markets, the Fed says

FAQ: Fed Explains Swap Lines With Foreign Central Banks - The Fed announced this morning that it’s extending its temporary dollar liquidity swaps with foreign central banks through August 2011. The following is a Q&A from the Fed explaining the program. Why has the Federal Reserve re-established temporary U.S. dollar liquidity swap facilities with foreign central banks? The swap facilities announced in May 2010 respond to the re-emergence of strains in short term funding markets in Europe. They are designed to improve liquidity conditions in global money markets and to minimize the risk that strains abroad could spread to U.S. markets, by providing foreign central banks with the capacity to deliver U.S. dollar funding to institutions in their jurisdictions

Extended Fed Currency Swaps Not Sign of Fresh Concern - The Federal Reserve’s extension of it currency swap arrangements with other major central bank reflects continued unease around the state of European financial markets. That said, the decision to maintain the swap lines with the Bank of Canada, Bank of England, the European Central Bank, the Bank of Japan and Swiss National Bank, should be viewed more as a protective action on the part of American officials. It is not, most economists reckon, a sign that some new problem is about to arise, even as it’s true investors remain worried by news out of Europe. Central bankers first launched the facility during the depth of the financial crisis, and it was heavily used to ensure major central banks would not run short of dollars. It was relaunched in May when Greek government financing woes began roiling world financial markets. So far, the currency swaps have been little used because even as unsettled as markets became, the overall health of the banking system is much improved.

Fed Extends Currency Swap Lines Over Eurobank Dollar Funding Concerns - Yves Smith - The party line is everything is fine in bank land….even Eurobank land. But some recent developments suggest otherwise. The business news on Europe has pretty much daily updates on the unfolding and linked sovereign debt/ bank solvency crisis. The officialdom insists this looming problem can be resolved but most observers think it can’t be in the absence of a fiscal union, which is a political bridge too far right now.  In a not-widely-noticed replay of pre-crisis conditions, the cost of swapping euros into dollars to the same high level observed last May, when sovereign crisis fears were at a peak. This is of concern because European banks have a dollar funding gap, meaning they will come under liquidity stress if they cannot roll dollar funding. And the friendly ECB cannot solve this problem unassisted; the ECB can only provide Euro funding. Not surprisingly, the Fed has extended the currency swap lines, due to expire in January. Per Bloomberg:

Transmission Channels for the Fed's QE2 - Rebecca Wilder - What are the channels for QE2? In a recent post, David Beckworth outlines his frustration:  "It has been frustrating to watch Fed officials explain QE2. The standard Fed story centers around the QE2 driving down long-term interest rates and stimulating more borrowing." On the tip of my tongue, I can think of three direct channels: (1) the interest rate channel, which is the source of his frustration, (2) the wealth effect channel, and (3) the weak-dollar channel.

  1. The interest rate channel: the Fed lowers current and expected real borrowing costs to firms and households, thereby stimulating domestic demand via increased consumption and investment.
  2. The wealth effect channel: the Fed drives up the price of riskless assets (bonds), forcing substitution toward risky assets (equities, corporate bonds, etc.), which raises household wealth (via asset price appreciation) and current consumption demand.
  3. The weak-dollar channel: the Fed prints money, thereby debasing the currency relative to global trading partners. The technicalities of a weak dollar policy prevent the Fed's actions as directly being a weak-dollar policy; however, the short-term effect on the dollar was quite strong. In the end, though, we see that the Fed's policy has had no accumulated impact on the dollar to date (see chart below). .

The chart below proxies the three channels using the 5y-5yr forward TIPS rate (1), the S&P 500 equity index (2), and the dollar spot index (3). The value of each channel is indexed to the September FOMC meeting for comparability.

Bond Market Rejects Fed’s Unconditional Love - How’s that QE2 working out for you?  To answer the question, we first have to establish the goals of a second round of quantitative easing as laid out by Federal Reserve Chairman Ben Bernanke. The Fed’s purchases of U.S. Treasuries “affect the economy primarily by lowering interest rates on securities of longer maturities,” Bernanke explained in a Nov. 19 speech in Frankfurt. Lower rates equate to more “accommodative financial conditions,” he said.  Oops.  Bernanke went on to say that QE is really a misnomer for what the Fed is doing. Quantitative easing works by increasing the quantity of bank reserves. Treasury purchases, on the other hand, “work by affecting the yields on the acquired securities” and forcing investors to buy higher-yielding, riskier assets, he said. Thanks for the clarification.  Based on those metrics, how is QE2 faring?  As for the primary intent of QE2, which is to lower long- term interest rates, that hasn’t worked out according to plan.  Not so, say some observers, who argue that the rise in long-term rates is prima facie evidence QE2 is working, that higher rates correlate with stronger growth.  That was quick. What happened to those “long and variable lags” with which monetary policy is said to operate?

Fed’s Bullard: QE2 ‘Modestly Successful,’ Expanding Bond Buying Unlikely - Recent market behavior suggests that the Federal Reserve’s new quantitative easing program has been “modestly successful so far,” James Bullard, president of the Federal Reserve Bank of St. Louis, said Monday.Bullard said the rally in stocks, the rise in Treasury yields and the increase in implied inflation expectations in that market since the Fed began its plan to purchase $600 billion in Treasurys showed signs of a “classic monetary easing” helping to boost economic expectations. He was speaking in an interview on CNBC. Bullard said he and the rest of the Federal Open Market Committee would be open to adjusting the $600 billion securities-buying program if conditions warrant it. He said he takes the initial pledge to review the plan on a meeting-by-meeting basis “very seriously.”

That was the year that was - They got away with it. The attempt by the world’s central banks and governments to “muddle through” the credit crisis has survived 2010 intact. A paralysing slump created by debt and deflation has been avoided, as has hyperinflation. Asset prices, whether bonds, equities, or commodities, are comfortably higher now than they were 12 months ago.  So the desperation tactic known as quantitative easing – buying bonds to push down their yields – has worked, and indeed driven world markets all year long. The spring swoon overlapped with concern, which showed up in tightening money markets, that the Federal Reserve would soon exit from easy monetary policies. The autumn recovery started when the Fed signalled that it would resort to a second round, the so-called “QE2”. Alternatively, employment and manufacturing data suggested robust growth until the spring, but then started to show a real risk of a double dip. In late summer, the economy picked up once more.  If QE was meant to spur employment, or breathe life into the US housing market, it has yet to work. But it has kept long-term bond yields lower than they were in January, despite a fresh lurch towards US deficit financing, while forcing up asset prices and pressing investors to take on more risk.

Is the Fed Printing Money? -  Is the Federal Reserve printing money to finance its bond buying? Or isn’t it? Ben Bernanke has given inconsistent answers, at times saying it is and at times saying it isn’t.In an exchange with readers on Time magazine’s website this past weekend, a reader asked Mr. Bernanke why the Fed is creating dollars “out of thin air.” Mr. Bernanke said it wasn’t. “These policies are not leading to increases in the amount of currency in circulation,” he said. He made a similar argument to CBS News’s Scott Pelley earlier this month in defense of the Fed’s plan to purchase $600 billion of U.S. Treasury bonds with money that the Fed creates. “People talk about the printing press. That’s not what this is about. This policy does not increase the amount of currency in circulation. It does not increase in any significant way the amount of money in broader terms, say, as measured by bank deposits,” he said. Yet back in March 2009 Mr. Bernanke told Mr. Pelley that the Fed was printing money to fund an earlier bond buying program. “It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It’s much more akin to printing money than it is to borrowing,”

Goldman Sachs Wants QE2 and Then Some - Few monetary policy moves by the Federal Reserve have elicited as much controversy as its decision early last month to engage in "quantitative easing" by buying some $600 billion worth of long-dated government bonds over the next eight months. Republican bigwigs have termed the move wildly inflationary, debauching the dollar by "monetizing the debt" in order to finance profligate government spending. Likewise, various foreign government officials -- led by finance types in China and Germany -- have accused the U.S. of using QE2 to beggar its trading partners and boost exports by cynically driving the value of the dollar lower. At the same time, critics have noted that rates on government bonds have gone up, not down, in the weeks since the Fed announced the plan.  Yet, no less a figure than Goldman Sachs' chief U.S. economist, Jan Hatzius, says that the attacks on QE2 are ridiculous; he thinks that perhaps even more quantitative easing may be called for to ensure that the U.S. economy achieves a self-sustaining recovery: "With short rates at near zero, quantitative easing is the last lever left, so it makes sense to employ it. The Fed isn't talking about flooding the world with dollars, after all."

Reply to Thoma on NGDP targeting, by Scott Sumner: Mark Thoma recently asked the following question:So, for those of you who are advocates of nominal GDP targeting and have studied nominal GDP targeting in depth, (a) what important results concerning nominal GDP targeting have I left out or gotten wrong? (b) Why should I prefer one rule over the other? In particular, for proponents of nominal GDP targeting, what are the main arguments for this approach? Why is targeting nominal GDP better than a Taylor rule?.Thoma raises issues that I don’t feel qualified to discuss, such as learnability.  My intuition says that’s not a big problem, but no one should take my intuition seriously.  What people should take seriously is Bennett McCallum’s intuition (in my view the best in the business), and he also thinks it’s an overrated problem.  I think the main advantage of NGDP targeting over the Taylor rule is simplicity, which makes it more politically appealing.  I’m not sure Congress would go along with a complicated formula for monetary policy that looks like it was dreamed up by academics (i.e. the Taylor Rule.)  In practice, the two targets would be close, as Thoma suggested elsewhere in the post.

 Monetary Freedom: Sumner and DeLong on Index Futures Convertibility Here DeLong begins to go wrong. He adds in 3 percent because he believes that is a proper target for the long run average nominal interest rate. His figure assumes a 3 percent average nominal interest rate between 2007 and 2011. Whether or not that would be desirable, it plays no role in determining what the Fed should be doing during either the 4th quarter of 2011 or the 4th quarter of 2010. He has effectively put NGDP on an 8 percent growth path. Neither $18.155 trillion nor its reciprocal should play any role in the system. Why does DeLong make this error? It is because he understands the proposal as automatically changing the quantity of money when futures are purchased and sold. In DeLong's view, when the Fed buys these contracts, it is providing money now, in the fourth quarter of 2010 and will receives the money back in the fourth quarter of 2011. The Fed is making a type of loan when it buys contracts. It makes sense that the Fed would charge interest on these loans. If the Fed charges 3 percent interest on the loans per year, then it provides dollar deposits (makes a loan of a dollar now) in return for (1+.03) times 1/$17.455 trillion of 4th quarter NGDP to be paid in one year.

Nominal GDP Targeting Via Index Futures - Let me try to explain what we want to do...Right now, in December 2010, we want to give people an incentive to take actions that expand the money supply if they think that nominal GDP at the end of 2011 is likely to be lower than $17.5 trillion and to contract the money supply if they think that nominal GDP at the end of 2011 is likely to be higher than $17.5 trillion. So the Federal Reserve announces an open offer to buy and sell: $1 in cash now in exchange for... some fraction of nominal GDP at the end of 2011. It seemed to me when I wrote that the fraction of nominal GDP should not be 1/17,500,000,000,000 because that gives people an incentive to take action to expand the money supply if they expect nominal GDP in a year to be $17.5 trillion because then the Federal Reserve is lending them money at 0% nominal. So if you want people to borrow from the Fed and so increase the money stock if they expect nominal GDP to be less than $17.5 trillion and lend and so shrink the money stock if they expect nominal GDP to be greater than $17.5 trillion, you need a different number than $17.5 trillion in the denominator.

Scott Sumner: "It's complicated." - My National Review piece has led a number of very smart bloggers to mull over my ideas, including Brad DeLong, Tyler Cowen and Ryan Avent.  . I’ve noticed is that it’s easier to see flaws in others than to see one’s own flaws.  For instance, I think I can see flaws in Paul Krugman’s analysis of China’s predatory trade policy, or his analysis of why Japan got stuck in a liquidity trap.  But strangely enough, I have trouble find major flaws in my own arguments (although I certainly see some modest weaknesses.) If I try to crawl out of my own ego and look at things dispassionately, then I need to take seriously an issue raised by not one but two highly respected bloggers.  I’m referring to a recent Ryan Avent post that favorably quoted a question Tyler Cowen recently asked me.   Here’s Ryan Avent, followed by the Tyler Cowen question:

The Case for Nominal GDP Targeting  - I am late getting to this, but Mark Thoma wants to hear the case for nominal GDP targeting.  This approach to monetary policy requires the Fed stabilize the growth path for total current dollar spending.  As an advocate of  nominal GDP level targeting, I am more than happy to respond to Mark's request.  I will  focus my response on what I see as its  three most appealing aspects: (1) it provides a simple and intuitive approach to monetary policy, (2) it focuses monetary policy on that over which it has meaningful influence, and (3) its simplicity makes it  easier to implement  than other  popular alternatives. Let's consider each point in turn.

Futures Market Forecast of a Federal Funds Rate Increase Likely to be Appropriate - John B. Taylor- According to the federal funds futures market, the Fed will begin raising rates sometime next year—with with the federal funds rate reaching about ½ percent by December 2011. In fact, rising rates next year has been the implicit forecast of the futures market for the past year—except for the month of October during which many FOMC members were promoting quantitative easing. As this chart of the price of a December 2011 futures contract shows, a year ago the forecast was for a funds rate of over 2 percent next by the end of 2011. (The implicit forecast is obtained by subtracting the price in the chart from 100). Expectations of tightening have been rising again since the start of November, though thus far by a small amount. This forecast is consistent with the Taylor rule and most recent forecasts for GDP growth and inflation. In fact, in my view it understates the interest rate that is likely to be appropriate by next December.  Most recent data (through the 3rd quarter) show that the inflation rate is about 1.2 percent (GDP deflator over the last four quarters) and the GDP gap is about 4.8 percent (average of San Francisco Fed survey). This implies an interest rate of 1.5 X1.2 + .5X(-4.8) + 1 = 1.8+ -2.4 +1 = .4 percent which is close to where we are now. But most likely GDP growth will turn out to be above potential growth in the 4th quarter bringing the gap down (Macro Advisers are projecting 3 percent with potential at 2.25 percent and JP Morgan is projecting 3.5 percent). Inflation is also very like to rise by this measure. For these reasons an increase in the federal funds rate next year is consistent with the Taylor rule.

Some lessons from recent global macro events - I've just attended a conference sponsored by the Reinventing Bretton Woods Committee, entitled "The International Monetary System: Old and New Debates", which took place against the backdrop of France's chairmanship of the G-20. Numerous topics were discussed, including the deficiencies of the international monetary system, externalities of international financial capital flows, multiple reserve currency regimes, and balance of payments adjustment. I was on the panel dealing with the last topic. I made the following comments: (Or, things I would not have thought two years ago)

    • Even surplus countries can be faced with unpleasant choices (the Trilemma strikes!)
    • Exchange rate adjustment can occur without nominal exchange rate changes
    • Exchange rates matter for trade flows
    • Difficulties in monetary/exchange rate coordination do not rule out positive outcomes.

Paleomonetarism - Krugman - I used that term — it’s probably not original, but who knows? — in a recent post about the increasingly obscure meaning of the money supply. The best example would surely be Ron Paul, who’s now going to have oversight over the Fed. If you read his stuff, it’s very clear: money is a well-defined quantity that the Fed controls, and inflation comes from — indeed is defined as — increases in that quantity. What he means, I guess, is monetary base. Here’s the actual relationship between monetary base and inflation: It’s also worth nothing that in normal times (not now), monetary base consists overwhelmingly of currency (bank reserves are normally very small), and the majority of US currency isn’t even being held in the United States. It’s kind of terrifying, in a way, to realize that the politically dominant faction in America right now has a view of money, what it is, and how it works that hasn’t been true since the early 19th century, if it ever was.

Velocity of money - I wanted to follow up on Menzie's recent observations about what's been happening to the supply and demand for money.These discussions are sometimes conducted in terms of the following equation: MV = PY. Here M is a measure of the money supply, V its velocity, and nominal GDP is written as the product of the overall price level (P) with real GDP (Y). We have direct measurements on nominal GDP. And once we agree on a definition of the money supply (no trivial matter), we have a number for M. But where do we come up with data on this concept of the velocity of money, V? The answer is, we don't have independent measures of the velocity of money. So if people talk about velocity as something they could measure, they're just referring to the value of V that makes the above equation true. That is, we measure the velocity of money from. V = PY/M. As alluded to above, different people come up with different answers for how we should measure the money supply. One measure is M1, whose key components include currency held by the public and checkable deposits. Another measure is the monetary base, which is currency held by both banks and the public plus deposits banks hold in their accounts with the Federal Reserve. So we could use M1 as the value for M in the above equation, and call the resulting value for V the "velocity of M1". Or we could put the monetary base in for M, and call the resulting V the "velocity of the monetary base". You get the idea-- use your favorite M to get your favorite V.

A Semi-Defense of the Money Multiplier -John Taylor approvingly cites a JPMorgan note criticizing economics textbooks' treatment of the money multiplier.  The money multiplier relates the monetary base, which is directly manipulated by the Fed's open market operations, to the money supply, which is what actually affects the economy in most economic models.  The very simple version of the calculation is that the money multiplier is 1/rr where rr is the "reserve ratio" of bank reserves to deposits. If one assumes a constant money multiplier, then the dramatic increase in the monetary base since mid-2008 implies a huge (and frighteningly inflationary) increase in the money supply. According to JP Morgan: The growth of the Fed’s balance sheet, which has been funded by an increase in commercial banks’ reserve balances at the Fed, has sparked fears that the “money multiplier” mechanism would translate those reserves into an explosion in bank lending, bank deposits, and inflation. None of these things has happened, because the money multiplier no longer makes sense given the institutional framework of the contemporary banking system. In spite of being almost totally divorced from reality, the money multiplier is still taught in undergraduate economics textbooks, with much resulting confusion.

Money and metaphysics -- Paul Krugman and Kevin Drum recently wrote about the problematic definition of “money” in the modern world.  I think this issue can be helpfully illuminating by dusting off one’s BA in philosophy and attempting a little metaphysical analysis that will help clarify what the actual issue is here. What is money? Well money is currency. And it’s easy to say what the currency of the United States of America is: dollars. So what’s a dollar? Well the word is ambiguous. But a dollar is a unit of account—you can give the price of things that aren’t dollars in terms of dollars. And a dollar is also a medium of exchange. One dollar, is a perfectly safe perfect liquid asset with a value of $1. Four quarters are a perfect safe investment in dollars. Four quarters are worth one dollar by definition so they can never lose value in dollar terms. And they’re perfectly liquid: as long as you’re in the USA, anyone will accept four quarters in exchange for goods or services valued at $1. The problem of the “broader aggregates” is that there are lots of things that have properties closely resembling those of dollars. My checking account with PNC Bank is basically perfectly safe (thanks to the FDIC) and it’s almost as liquid as quarters. The vast majority of stores will accept my debit card and there are ATM machines all over the place where I can exchange electronic checking account commitments for physical dollars.

Salvaging the Equation of Exchange - Jim Hamilton is not a big fan of this equation:  MV = PY, This is the famous equation of exchange where M is the money supply, V is velocity, P is the price level, and Y is real GDP.  Back in 2009 he questioned Scott Sumner's use of it in thinking about the economic crisis.  I replied that though it was just an accounting identity, it still shed some light on the economic crisis in its expanded form.  Now he is questioning its use as a way to measure velocity.  He correctly notes that  velocity is nothing more than a residual from this accounting identity, whose value can change based on what measure of the money supply one uses (i.e. V =[PY]/M). He further questions its usefulness by noting in several figures that M1's growth rates seem to be almost perfectly offset by changes in velocity's growth rate.  Here is a figure that reproduces Hamilton's M1 graphs for the 1980-2010 period.  Yes, it is rather striking in this figure that the growth rate of M1 and M1 velocity tend to move in almost perfectly opposite directions.  But why should the growth rates of M1 and M1 velocity necessarily move in opposite directions?

Senator Sanders's Socialism - Senator Sanders, who describes himself as a democratic socialist, describes the United States economy as “socialism for the rich.” Earlier in the year, he allied with Representative Ron Paul, Republican of Texas, to win support for new legislation requiring an unprecedented level of disclosure of the Federal Reserve’s specific emergency lending activities.With that process of disclosure now under way, Senator Sanders can offer details from the Fed’s “bailout files” to substantiate his claim that the $700 billion Troubled Asset Relief Program was pocket change compared with the trillions of dollars in low-interest loans the central bank provided both to American corporations and foreign agencies. No such assistance was offered to small businesses in need of capital or homeowners going through foreclosures. Senator Sanders’s criticisms of the Fed go well beyond the observation that it bailed out only institutions it considered too big to fail. In a recent public letter to the Fed chairman, Ben Bernanke, he points to major conflicts of interest: Senior executives of General Electric, JPMorgan Chase, Goldman Sachs, Banco Popular, Sun Trust and Fifth Third Bank served as directors of regional Federal Reserve Banks even as they doled out funds to their firms.

Dennis Kucinich: Delete The Fed - I'm stunned. Really. Dennis Kucinich, which many people have (properly) labeled as one step removed from a communist in the past, and who has a reputation as having a hard-core left slant in his politics, has just written up and introduced a bill that will fundamentally restore the free market - for real - to banking and credit. We're about to find out if people like Ron and Rand Paul really stand for what they claim, or if they're empty suits. If they do, then I expect to see them on the Tee Vee within hours demanding passage of this bill, and joining with Mr. Kucinich in making sure that it is immediately reintroduced in the new Congress - and passed. If that does not happen then these two claimants of a demand for "sound money" have been immediately and permanently exposed as FRAUDS, as will any so-called "Tea Party" members of Congress. This is a bill that must become law.

Senate Adjourns Without Voting on Fed Nominee - The U.S. Senate adjourned for the year without voting on Nobel Prize-winning economist Peter Diamond’s nomination to the Federal Reserve Board, placing his nomination in further jeopardy. Several Republican senators have argued that Diamond lacks sufficient macro-economic policy experience at a time when the agency is facing the challenge of trying to simultaneously stimulate the U.S. economy and tackle concerns about future inflation.

When Zombies Win, by Paul Krugman - When historians look back at 2008-10, what will puzzle them most, I believe, is the strange triumph of failed ideas. Free-market fundamentalists have been wrong about everything — yet they now dominate the political scene more thoroughly than ever. For two years we’ve been warned that government borrowing would send interest rates sky-high; in fact, rates have fluctuated with optimism or pessimism about recovery, but stayed consistently low by historical standards. For two years we’ve been warned that inflation, even hyperinflation, was just around the corner; instead, disinflation has continued. The free-market fundamentalists have been as wrong about events abroad as they have about events in America.  But such failures don’t seem to matter. To borrow the title of a recent book by the Australian economist John Quiggin on doctrines that the crisis should have killed but didn’t, we’re still — perhaps more than ever — ruled by “zombie economics.” Why? Part of the answer, surely, is that people who should have been trying to slay zombie ideas have tried to compromise with them instead.

Economists are creating new methods for tracking prices - A shopping cart full of goods that help determine the Consumer Price Index.At some 23,000 retailers and businesses in 90 U.S. cities, hundreds of government workers find and mark down prices on very precise products. And I'm not kidding when I say "very precise." Say the relevant worker is finding the price for a motel room. She might write a report like this: Occupancy—two adults; Type of accommodation—deluxe room; Room classification/location—ocean view, room 306; Time of stay—weekend; Length of stay—one night; Bathroom facilities—one full bathroom; Kitchen facilities—none; Television—one, includes free movie channel; Telephone—one telephone, free local calls; Air-conditioned—yes; Meals included—breakfast; Parking—free self parking; Transportation—Transportation to airport, no charge; Recreation facilities—an indoor and an outdoor pool, a private beach, three tennis courts, and an exercise room. This mind-numbingly tedious process goes on for a dizzying panoply of items: wine, takeaway meals, bedroom furniture, surgical procedures, pet dogs, college tuition, cigarettes, haircuts, funerals. When all of the prices are marked down, the workers submit forms that are collated, checked, and input into massive spreadsheets.

A Higher Frequency CPI - Not content with a monthly CPI, an article in Slate looks at the prospects for an even higher frequency CPI in the US. According to the article, the US CPI costs $US234m a year to compile at a monthly frequency, which works out at about US$0.75 per capita. The ABS tells us that a monthly CPI in Australia would cost $A25m a year compared to the $A10m it spends compiling the existing quarterly release, which works out at around $A1.11 per capita.  There must be economies of scale in compiling the CPI. Otherwise, the ABS quote looks expensive, even at PPP exchange rates. I recall a certain market economist in the late 1990s who would embarrass the ABS by pointing out the above-CPI increases in the cover price of the ABS CPI publication.

Treasuries Fail to Recoup Loss as Commodities Signal Inflation - Treasuries failed to climb back from a loss yesterday as commodities rose to a 26-month high, feeding speculation the Federal Reserve will be successful in its efforts to spur inflation.  Demand for the relative safety of U.S. government securities ebbed after Chinese Vice Premier Wang Qishan said his nation had taken “concrete action” to help the European Union with its debt problems. Fed Bank of St. Louis President James Bullard said on CNBC yesterday he is concerned about the influence of central bank actions on commodity prices.  “The Fed is trying to create inflation and inflation expectations,”  “Commodity prices seem to be picking up."

An inflation (or lack thereof) chart show - Atlanta Fed's macroblog - Over at TheMoneyIllusion, Scott Sumner takes a shot at what he refers to as "Disinflation Denial." His point is that prior to the recent run-up, "commodity price indices fell by more than 50%." Thus, if the run-up in commodity prices suggests loose policy now, they must have been signaling tight policy earlier. I am hesitant to endorse the view that any subset of prices gives us a clear view of inflation trends. What I do endorse in the Sumner piece is the advice that "the Fed look at a wide range of indicators." I can tell you that is exactly what we do at the Atlanta Reserve Bank and, as just one example within the Fed System, in this post I'll review the battery of indicators that we are currently looking at here. Most of these will be no surprise, but I find it useful to occasionally see them in one place. So here we go. (Note that throughout this blog post I will focus most of my comments on the consumer price index [CPI], but most of what I say also applies to the personal consumption expenditure [PCE] price index as well.)

Mixed Messages in the Yield Curve - The Treasury yield curve is at its steepest since February. That's a widely recognized sign that the economy is set to strengthen. Researchers have recognized for years that the slope of the yield curve has proven itself a worthy leading indicator. That suggests we should take comfort in the wider spread. As Bloomberg reported over the weekend, "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." But here's a reason for wondering how much good news is really embedded in the spread these days. The Cleveland Fed advises that the yield curve predicts "real GDP will grow at about a 1.0 percent rate over the next year, the same projection as in October and September."

The $4 trillion question: What explains FX growth? - In April this year, 53 central banks and monetary authorities participated in the eighth Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity (BIS 2010). The 2010 Triennial shows a 20% increase in global foreign exchange (FX) market activity over the past three years, bringing average daily turnover to $4 trillion (Table 1 and Figure 1, left panel). The data show that 85% of the growth in FX market turnover since 2007 reflects the increased trading activity of “other financial institutions” – a broad category that includes smaller banks, mutual funds, pension funds, hedge funds, and other financial institutions. For the first time, activity by other financial institutions surpassed transactions between reporting dealers (i.e. inter-dealer trades), reflecting a trend that has been evident over the past decade (Figure 1, centre panel).

Chicago Fed: Economic Activity Slowed in November - This is a composite index based on a number of economic releases. From the Chicago Fed: Index shows economic activity slowed in November Led by declines in employment-related indicators, the Chicago Fed National Activity Index decreased to –0.46 in November from –0.25 in October. Three of the four broad categories of indicators that make up the index deteriorated from October to November, with only the production and income category improving.  This graph shows the Chicago Fed National Activity Index (three month moving average) since 1967. According to the Chicago Fed:A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth.

Why The Upward Revision in Third Quarter GDP Growth is Not Good News - The growth rate for GDP for the third quarter was revised upward from 2.5 percent to 2.6 percent, but a closer look at the numbers reveals it’s actually not such good news. Dean Baker explains why: Inventories and the Wonders of GDP Accounting... The news stories are coming out on the Commerce Department’s release of revised data on 3rd quarter GDP and it seems that almost everyone has missed the story. The headlines of the articles are telling us that GDP growth was revised up slightly from 2.5 percent to 2.6 percent. While that may sound like at least somewhat positive news a more careful review of the data shows the opposite. While the rate of GDP growth was revised up, the rate of final demand growth was revised down. Final demand, which is GDP excluding inventory accumulations, grew at just a 0.9 percent annual rate in the 3rd quarter, the same as its growth rate in the second quarter. The reason that GDP growth was revised upward was a more rapid reported growth in inventories. It is very unlikely that this pace of inventory growth will be sustained…

PIMCO Investment Outlook - Allentown - Bill Gross -

  • The global economy is suffering from a lack of aggregate demand. With insufficient demand, nations compete furiously for their share of the diminishing growth pie.
  • In the U.S. and Euroland, many policies only temporarily bolster consumption while failing to address the fundamental problem of developed economies: Job growth is moving inexorably to developing economies because they are more competitive.
  • Unless developed economies learn to compete the old-fashioned way – by making more goods and making them better – the smart money will continue to move offshore to Asia, Brazil and their developing economy counterparts, both in asset and in currency space.

Inventories and the Wonders of GDP Accounting - The news stories are coming out on the Commerce Department's release of revised data on 3rd quarter GDP and it seems that almost everyone has missed the story. The headlines of the articles are telling us that GDP growth was revised up slightly from 2.5 percent to 2.6 percent. While that may sound like at least somewhat positive news a more careful review of the data shows the opposite. While the rate of GDP growth was revised up, the rate of final demand growth was revised down. Final demand, which is GDP excluding inventory accumulations, grew at just a 0.9 percent annual rate in the 3rd quarter, the same as its growth rate in the second quarter. The reason that GDP growth was revised upward was a more rapid reported growth in inventories. The reported rate of inventory accumulation in the 3rd quarter was $121.4 billion (in 2005 dollars), the fastest pace ever. This added more than 1.6 percentage points to the rate of GDP growth in the quarter. It is very unlikely that this pace of inventory growth will be sustained.

4th quarter Real GDP - With the release of the November data on real personal consumption expenditures it looks like real PCE growth in the fourth quarter will be over 4% (SAAR) as compared to growth rates of 0.9%, 1.9%,2.2% and 2.8% over the last four quarters, respectively. October real PCE increased 0.5% and November was up 0.3%. So if December is only up only o.1% the fourth quarter real PCE growth rate would be 4.1%. This would be the strongest growth in real PCE since the first quarter of 2006. You can make your own guesses about the other component of real GDP but it now looks like fourth quarter growth will exceed almost everyone's expectations.

The balance sheet recession - Mark Thoma has a good piece up on at the Fiscal Times about why the particular causes of this recession have led to a slow recovery: Recessions can occur for a variety of reasons...One way to distinguish recessions is through differences in their effects on balance sheets, in particular those of households and banks. For households, the collapse of a housing bubble, which also tends to cause a stock market crash, results in a decline in home equity as well as the loss of retirement and education savings. Monetary policy can help us recover in a recession like this by increasing nominal asset and income values relative to average debt, some portion of which is nominally fixed. But cleaning up household balance sheets while unemployment remains high is difficult. I don’t see any good way to do this, but as Mark points out banks have repaired their balance sheets, and if there was a good way for some of that wealth to be transferred to households with poor balance sheets I think it would help the recovery. The only thing that comes close to that is mortgage cramdowns, which I am not optimistic could be done without lots of unintended consequences.

Balance Sheet Recessions - Mark Thoma writes that we need to get better at responding to balance sheet recessions:  I agree with the conclusion, but I actually disagree with this analysis. Imagine a recession that begins at a time when nominal interest rates are 9 percent. What’s the right response? Cut nominal interest rates to lower real interest rates and spur growth! Everyone knows that. And this analysis holds true whether or not you think it’s a balance sheet recession, since lower real interests rates are in fact a way of helping households. So if you enter the recession with high nominal rates, the prescription is the same whether or not it’s a “balance sheet recession.” Of course we entered the current recession at a time when pre-recession nominal interest rates weren’t high. That meant nominal interest rates went to zero while still leaving real interest rates higher than they should be. What to do about this has proven to be controversial. But that—the existence of controversy over how to handle the low nominal interest rate situation—is what’s different about this recession.  I think the best thing we could do is helicopter drops of money onto households. But that’s not because of special features of a balance sheet recession, it strikes me as in general the best way to respond when the “conventional” monetary toolkit is out of tools

Here's The Triple Threat That Could Spin The Globe Into A Deeper Recession - For now, major governments such as the US and EU have been able to continue to borrow and spend licentiously to fend off the threat of deflation and keep their economies stimulated (the US is by far the greater offender). But three surprising and powerful changes threaten the viability of a long-promised "exit strategy." First, international investors are beginning to become net sellers of sovereign debt. Second, the credit agencies, stung by their failure to warn investors about the banking crisis, are now emboldened enough to threaten the triple-A ratings of member states within the EU, and even of the United States itself - now the largest debtor in the world. Third, there is considerable and growing political pressure on governments to cut spending. There is a growing awareness among Western voters that government largesse can't be maintained forever, and that it will likely cost the next generation if not the present. Many pet spending programs, including defense, healthcare, welfare and even public pensions, are getting ready for haircuts - if not scalpings.

The Making of International Monetary Reform - The run-up to the G-20’s summit in Seoul was marred by a series of currency controversies, bringing international monetary reform to the fore. Whereas French intentions to reform the international monetary system had initially been received skeptically, suddenly reform looks like the right priority at the right time. The task is anything but simple. The subject is abstruse. No one outside academia has taken any interest in it for the last 20 years. Accordingly, there are hardly any comprehensive proposals on the table. The United States, for which international monetary reform is synonymous with diminution of the dollar’s global role, is lukewarm. China, which launched the idea, is happy to see the discussion gaining momentum, but lacks precise ideas. As time is on its side, it sees no reason to hurry. Emerging countries hold a similar opinion: they want their current problems to be solved but are not ready to re-write the rules of the game. Japan is keen, but its views on regional monetary cooperation do not match China’s. And Europe is distracted more than ever with its internal crises.

Drama needed to jolt Americans into tackling debt - Why has Britain managed to boldly go into fiscal territory which the US has hitherto ducked? That is the $800bn question hanging in the air in New York this weekend, after George Osborne, chancellor, visited the city. As he schmoozed he was greeted with emotions ranging from respect to rapturous applause. What provokes respect is the way London has not only created a multi-year fiscal reform plan, entailing a striking £110bn worth of adjustment – but, more importantly, started to implement it. After all, in the US – like the UK – national debt is surging. And a bipartisan commission recently produced some sensible medium-term proposals to reduce this debt by almost $4,000bn, using a policy mix similar to the UK’s. But last month these bipartisan US proposals were in effect shot down amid political gridlock; and last week President Barack Obama was forced to cut an $858bn deal with Republicans to extend the Bush-era tax cuts. That threatens to increase the US debt burden again. To jaded New Yorkers, the contrast with the UK could hardly be more stark.

Morici: Downgrade US Treasuries to Junk (CNBC) As Washington spends and borrows, the Treasury will have to offer higher rates on new 20 and 30 year bonds, making comparable securities issued in 2010 and earlier worth less in the resale market. That interest rate risk makes U.S. Treasury securities lousy investments. For rating agencies, Washington’s monopoly on printing dollars makes difficult assigning a conventional rating between AAA and D on its bonds. Those can’t default but investors’ capital is still at grave risk.Perhaps a special grade: “F” –flee now before you get stuck—is appropriate for the junk sold by the U.S. Treasury."

$24.5 Trillion In US National Debt, $144 Trillion In Unfunded Liabilities In... 2015 - By now everyone has seen and played with the US debt clock via whereby anyone who so wishes, can find every little detail about America's current sad fiscal state. The fact that America currently has just under $14 trilllion in national debt should be no surprise to anyone who professes to having an even modest interest in the state of the US economy. Yet a new feature on the "debt clock", namely one which extrapolates future debt at current rates of advancement (instead of one based on the always completely inaccurate CBO estimates), and looks at US debt in the year 2015 will probably make many stop dead in the their tracks. If anyone thought that $14 trillion in 2010 debt is bad, just wait until we hit $24.5 trillion in total US national debt in 2015. And it gets even more surreal: total US Unfunded Liabilities are estimated at $144 trillion, roughly $1.2 million per taxpayer... Was that a pin dropping? As Zero Hedge has long been predicting, we anticipate roughly $2 trillion in incremental debt per year. Surprisingly we are not far too off from where the "debt clock" sees US leverage in 5 years. At an estimated $24.5 trillion in federal debt, our $2 trillion per year run rate is spot on. Another thing that is spot on: our prediction that the US will need not one but two debt ceiling increases in 2011. And probably 6-8 over the next 5 years.

2010 Financial Report of the US Government - Since the mid-1980s, when a number of cranks argued that the balance sheet of the US needed to be laid bare, including off balance sheet items like Social Security and Medicare, there came a statutory requirement that there would be a Financial Report of the US Government. Here is fiscal 2010′s report.  Page with more options here. Now let me give you my summary of the 2010 report. Note the large drops in net liability for Medicare parts A & B.  This is the effect of the “Affordable Care Act.” (My, what an Orwellian name.)  Yes, Obamacare, in order to get the bill passed, said that there would be reductions made to reimbursements for Medicare. The benefits from Medicare are statutory, and are not rights, per se.  Yet there are human needs that prompt the estimates, at least on average. That is why I don’t think that the 2010 report is accurate, and they agree with me in their verbiage:

Government liabilities rose $2 trillion in FY 2010: Treasury - The U.S. government fell deeper into the red in fiscal 2010 with net liabilities swelling more than $2 trillion as commitments on government debt and federal benefits rose, a U.S. Treasury report showed on Tuesday. The Financial Report of the United States, which applies corporate-style accrual accounting methods to Washington, showed the government's liabilities exceeded assets by $13.473 trillion. That compared with a $11.456 trillion gap a year earlier Unlike the normal measurement of government intake of receipts against cash outlays, accrual accounting measures costs such as interest on the debt and federal benefits payable when they are incurred, not when funds are actually disbursed.

US to Keep Note Auction Sizes Unchanged on Deficit Concern, Dealers Say - The Treasury will sell $99 billion of two-, five- and seven-year notes next week for a third straight month amid prospects for a rising budget deficit, according to the Federal Reserve’s primary dealers. The U.S. had scaled back auction sizes after earlier expanding debt sales to finance annual budget deficits exceeding $1 trillion. It sold $118 billion in two-, five- and seven-year debt at each of six monthly sales of the three maturities from November 2009 through April. The $858 billion bill President Barack Obama signed Dec. 17 extending tax cuts for two years spurred speculation federal borrowing will need to increase. “The Treasury had been cutting issue sizes, but there is no room to cut further given that the budget will be higher than it would have been a few months ago before the tax legislation,” “It’s going to be very hard for them to cut amounts any time soon.”

Republican House Rules Makes It Harder to Increase Debt Limit, Raise Taxes - The new Republican House rules proposal is out, and people are rightly guffawing about the vow to read the Constitution on the House floor at the beginning of the session. But if silliness like this is the worst that the GOP House can do, we’ll all be happy to get out of the next two years intact. The actual threats come from things like this: House Republicans set to release their recommended rules changes Wednesday will change the names of several committees and repeal a rule making it more difficult to raise the debt ceiling. They will also require that all bills be posted online three days before a vote [...] The draft rules would repeal the “Gephardt Rule” that allows the House to raise the debt limit automatically when a conference report on the budget is approved. If the rule is repealed, a separate vote on raising the debt ceiling must be held.

2011 Budget Debate Will Make "The Perils Of Pauline" Look Like A Romantic Comedy - The question I got over the weekend was whether the inevitable decision to go with a continuing resolution that keeps the federal government funded only until March means there won't be a big fight over the debt ceiling next year.  Because the existing debt ceiling currently is assumed to be reached close to the same date the the CR will expire, won't the two issues be combined into a single piece of legislation? First, all projections of when the debt ceiling will be reached should be considered to be highly subject to change. This is especially the case now because of the substantial upward revisions in GDP growth that are being made on Wall Street and elsewhere.  Faster growth implies lower spending and higher revenues than was previously assumed and, therefore, reduced borrowing needs by the federal government.

Bipartisan Ball Gets Rolling on Debt Reduction - Add the duo of Saxby Chambliss and Mark Warner to the bipartisan teams looking to shake up the conversation about the national debt. The two senators—Republican from Georgia and Democrat from Virginia, respectively—said Monday they’ll introduce legislation next year drawing on the debt commission report that came out Dec. 3. The report proposed taking out $1.1 trillion in cherished tax breaks—including deductions on mortgage interest—while imposing a gas tax, raising the retirement age in Social Security and cutting Medicare Can a deeply divided Congress pass anything like that? Messrs. Chambliss and Warner, who weren’t on the commission, say it’s worth a try. But they think the outlines of a deal had better be in place by the end of 2011. Otherwise, the 2012 presidential campaign is likely to make the issue too hot to handle.

The Three Wise Men of Fiscal Responsibility? - My boss, Bob Bixby, offers this perspective on how to achieve bipartisan compromise that would reduce the federal budget deficit down to sustainable levels in this CNBC op-ed: If [President] Obama and [incoming House Budget Committee chairman Paul] Ryan join [Senate Budget Committee chairman Kent] Conrad’s call for a summit to negotiate a joint budget plan—building on the solid groundwork of the two commissions—they may be able to achieve a game-changing breakthrough. That assumes, however, that they want the game to change and that they could get other party leaders and partisan guardians and to go along with the idea. The commissions showed that people of differing perspectives can reach consensus if they enter into the process with a determination to reach an agreement for the common good. Moreover, the public is willing to accept the necessary sacrifices to build a better future if they understand the magnitude of the problem and the realistic trade-offs among the options. The missing element is political leadership. Obama, Ryan and Conrad can fill the void.

Ex-IMF official still lost in the incredulous void - Sometimes ex-IMF officials shed the burden of having been associated with that institution and make a creative contribution to the public debate. More often they do not and continue to perpetuate the errors that underpin almost all of the IMF’s output. If there was ever an institution that has passed its use-by date it is the IMF. Today, ex-IMF Chief Economist Simon Johnson (now at MIT) claimed that the way to assess fiscal sustainability is “whether a country has the political will to raise taxes or cut spending when under pressure from the financial markets”. So for all those readers who have written in saying “doesn’t Johnson have credibility” and “therefore is what he is saying sensible” I have three words – No and No. In a Bloomberg opinion piece – Tax Cutters Set Up Tomorrow’s Fiscal Crisis – Johnson claims that the recent tax decision pushed through the US Congress by a beleagured president: … moved us closer to a fiscal crisis, just as the euro zone now is experiencing.  Did it? Answer: definitely not!

Senate Approves $725 Billion Defense Spending Bill - As the busy lame duck session of Congress winds down, the Senate Wednesday approved a defense spending bill, authorizing the Pentagon to spend $725 billion in fiscal 2011, including nearly $160 billion to fight the wars in Iraq and Afghanistan.  The Senate passed the 2011 Defense Authorization bill by unanimous consent, but it will need to go back to the House for final approval, as the Senate version stripped out a provision to provide reparations to World War II survivors in Guam. Senate Majority Leader Harry Reid, D-Nev., said, "Supporting our troops and giving them the resources they need to succeed is one of our most important duties."

Senate votes to defund health-care reform and financial regulation - The Senate passed the Continuing Resolution 79-16 this afternoon. Another way of saying that: The Senate voted to defund the implementation of both health-care reform and financial-regulation reform. The good news is that law will keep the government's lights on until early March. The bad news is that the law does it by extending 2010's funding resolution -- and that resolution didn't include provisions for implementing the bills that were passed as the year went on. Republicans had been talking about attacking the health-reform law by defunding it, but few thought they'd succeed without a fight. The assumption was that Democrats would shut down the government before they let Republicans take that money. But as it happened, there was no fight at all. The omnibus spending bill collapsed, and the continuing resolution compromise was reached within a few days. Most senators probably don't even know the implications their vote had for the implementation of bills passed over the past year.

Obama to blink first on Social Security - The tax deal negotiated by President Barack Obama and Senate Republican leader Mitch McConnell of Kentucky is just the first part of a multistage drama that is likely to further divide and weaken Democrats.  The second part, now being teed up by the White House and key Senate Democrats, is a scheme for the president to embrace much of the Bowles-Simpson plan — including cuts in Social Security. This is to be unveiled, according to well-placed sources, in the president’s State of the Union address. The idea is to pre-empt an even more draconian set of budget cuts likely to be proposed by the incoming House Budget Committee chairman, Rep. Paul Ryan (R-Wis.), as a condition of extending the debt ceiling.

Social Security on the Table? – Krugman - Bob Kuttner must have some source for this story, about Obama planning to propose Social Security cuts in the State of the Union. Let’s hope it’s just a trial balloon. I’ve written about this many, many times on the substance: this is absolutely the wrong place to cut if you’re serious about fiscal issues. It’s where the money isn’t; and in terms of securing Social Security itself, it’s deeply illogical: in order to avoid the possibility of future benefit cuts, we’re cutting future benefits. But just to repeat what Digby and others have said. this would be a political disaster on two levels. It’s not just that progressive activists would sit on their hands in disgust; Republicans would, inevitably, run ads attacking Democrats for cutting Social Security. You think that’s crazy? They just won the House in part by accusing Democrats of cutting Medicare.

Cutting Social Security to Prevent Cuts in Social Security? - There is a report that Obama is considering featuring Social Security reform, including benefit cuts, in his State of the Union address:... The tax deal negotiated by President Barack Obama and Senate Republican leader Mitch McConnell of Kentucky is just the first part of a multistage drama that is likely to further divide and weaken Democrats. The second part, now being teed up by the White House and key Senate Democrats, is a scheme for the president to embrace much of the Bowles-Simpson plan — including cuts in Social Security. This is to be unveiled, according to well-placed sources, in the president’s State of the Union address. The idea is to pre-empt an even more draconian set of budget cuts likely to be proposed by the incoming House Budget Committee chairman, Rep. Paul Ryan (R-Wis.), as a condition of extending the debt ceiling. Bad idea. Dean Baker suggests another route: ...supporters of Social Security and Medicare have to ... push President Obama to announce in advance that he will never sign a debt ceiling bill that includes cuts to Social Security and Medicare, the countries two most important social programs.

What Once was Naivete is Now Idiocy - Update: Brad DeLong appears to confirm that Obama's inner circle would be best served by being placed in a circular firing squad, given live ammo, and being told to "do what is right." The plethora of disingenuous claims that Barack Obama "won" with the McConnell-Obama "compromise" are legend. See, for instance, the idiocy of Andrew Sullivan (of which Andrew Samwick is too generous when he describes it as "poor political tactics"; see also Brad DeLong), and the Administration's disingenuous "what 'we' won" chart. The big question was how this is supposed to stimulate the economy. Those of us who argued that it would do damage noted that it was the first move. Obama has so far played (as I noted earlier): 1 g4 e5 Now, Mark Thoma discovers that he really does intend 2 f3 and then will wait for the Republican's next move: The second part, now being teed up by the White House and key Senate Democrats, is a scheme for the president to embrace much of the Bowles-Simpson plan — including cuts in Social Security. This is to be unveiled, according to well-placed sources, in the president’s State of the Union address.

State of the Union to Include “Focus on Deficit” - We’re getting our first indication of how the President will use the State of the Union address. With Speaker John Boehner behind him, President Obama will address a solidly Republican House of Representatives and a Senate with a 53-47 Democratic split. In his press conference yesterday he alluded to his persistence and unfinished business on a variety of issues, particularly surrounding the federal budget, the first wave of which will need to be completed by March to avoid a government shutdown. According to spokesman Robert Gibbs, the State of the Union will have a focus on the budget and deficits. Gibbs made the statement on Twitter, where he was taking reader questions Thursday, in response to a question about whether Obama would push the recommendations from his fiscal commission during the State of the Union speech: Yes – POTUS will use both SOTU & budget 2 talk about priorities & focus on our deficit/debt – team looking thru deficit comm recs 2 @mwfreel. Gibbs said the speech would come in late January:

Late Night: Triangulation by Any Other Name - Via Greg Sargent, the New York Times today offered a look ahead at President Obama’s political preparations for the next two years: Mr. Obama discussed the pitfalls — and opportunities — of divided government with former President Bill Clinton during a long meeting this month. . . . Despite all his time studying the Clinton administration, Mr. Obama told his aides that he had no intention of following the precise path of Mr. Clinton, who after the Democratic midterm election defeats of 1994 ordered a clearing of the decks inside the White House, installed competing teams of advisers and employed a centrist policy of triangulation. In fact, several advisers confirmed, the word “triangulation” has been banned by Mr. Obama because he does not believe it accurately describes his approach. This has the potential to be the most notable linguistic self-deception by a Democratic president since Clinton claimed that oral sex wasn’t really sex

Birth of a Zombie - While doing research for today’s column, I more or less by accident came across the trail that explains how a zombie lie gets into the discourse, and stays there.If you read what right-wingers say about the economy — and even alleged moderate conservatives, like Tim Pawlenty — you see, over and over again, the assertion that under Obama, government employment has risen sharply even as private employment has fallen. And you even get numbers, like Pawlenty’s assertion that 590,000 public sector jobs have been added. Yet the data say otherwise. What’s going on? Well, the answer turns out to be that during the summer, a number of the usual suspects made assertions of a big increase in government employment; here’s a sample. And as of the summer, there were in fact substantially more government employees than there had been in early 2009. Why? The Census, which temporarily employed a lot of people, as it does every decade.

Obama Tried to Placate Liberal Economists - At a White House news conference on December 7 in which he announced a deal to extend the Bush tax cuts, Barack Obama chastised his liberal base for sticking unrealistically to their “purist” positions. What the president didn’t say was that a few hours earlier he had met with and tried to assauge some his most vociferous liberal critics -- economists Paul Krugman, Joseph Stiglitz, Jeffrey Sachs, Alan Blinder, and Robert Reich, the former Labor secretary. In what two participants describe as a somewhat-argumentative one-hour discussion, Obama tried to convince the group that his compromise would deliver more bang for the buck to the economy and to people most in need of help than any other politically feasible option. Alongside Obama were Austan Goolsbee, the chairman of his Council of Economic Advisors, and Jared Bernstein, Vice President Joe Biden’s chief economist.  Bernstein is considered a left-of-center economist, as is Goolsbee to some extent.

At Least My Dog Didn’t Die This Weekend - So the first time the Bush tax cuts were signed into law (by President George W. Bush), my beloved golden retriever “Sunny” (short for “Sunshine”) unexpectedly and very suddenly died in my backyard under her favorite tree. From the signing ceremony (video above), there’s a lot of happy talk about “bipartisanship” and “compromise.”  But it’s easy to “compromise” when you don’t have to give up anything–when instead you just have to stop resisting what the other side wants.   But that’s not exactly the “barter”–or “give and take”–kind of “compromise.”  It’s the easier “take and take” kind that policymakers have mastered over the past decade that has resulted in such fiscally irresponsible policymaking, where seemingly-free deficit financing becomes the easiest “bipartisan” way out of gridlock.  As I’ve said before, it’s not mutual sacrifice; it’s mutual grabbing. We can do this kind of policy making with our eyes closed. But like I said (optimist that I am), at least my dog didn’t die.

Recent Trends in Government Spending - Paul Krugman - I’ve written a lot lately about the great government job explosion myth; I thought I’d put down a bit about the dollars and cents side of things, in part so that I have the data ready at hand for future reference. So how does one debunk the exploding government spending story? It’s not quite as easy as the employment issue — but it remains true that the idea that we’ve seen a surge in the size of government is basically wrong. Let me walk through the issues. What you often see, for starters, is a chart like this, showing government spending (federal, state, and local) as a percentage of GDP: So, why doesn’t this graph show a surge in government? First of all, look at the fact that the ratio of government spending to GDP always rises during recession. That’s largely not because spending is up, it’s because GDP is down.  We can correct for this by using estimates of potential GDP, the level of GDP that the CBO estimates would be produced if we were at full employment; we can get a nominal estimate by multiplying it by the GDP deflator, which lets us produce government spending as a percentage of potential GDP, a much better indicator of government size:

51 million, mostly lower-income, will do worse under new tax law - Consumer Reports -  The federal tax bill passed by Congress yesterday includes some extras for the middle class and lots of goodies for the wealthy. But individuals making less than $20,000 and households making less than $40,000 a year will actually get less tax relief in 2011 than they got in 2010 and 2009. That's because the Making Work Pay credit, a temporary tax credit that's been in effect for the past two years, is going away as of January 1. That credit provides up to $400 per individual, $800 per household, for all eligible workers. And it adds more to the pockets of households making between $20,000 and $40,000 than the new, 2-percent drop in the Social Security payroll tax. Why is the payroll-tax cut not as beneficial to those workers? Because at lower income levels, a 2-percent decline doesn't add up to much. The Tax Policy Center, a non-profit, non-partisan research organization, estimates that 51 million households, including many making $40,000 or less, would do worse under the new law.

The 2% (non) Solution: Part One - As part of the Tax Cut deal Obama cut with Republicans there was included a one-year cut of 2% of payroll out of the 6.2% employee share of the overall 12.4% of payroll sent to Social Security. This cut was ostensibly designed in a way that held harmless the Trust Funds, the dollars not being sent from paychecks instead being replaced by transfers from the General Fund. Plus the diversion is on paper only temporary. But in reality this deal not only should have raised red flags, it also should have blown reveille and set off the disaster warning klaxons. This deal represents a terrible danger to Social Security in at least two ways and is terrible policy besides. More below the fold. If the so-called Payroll Tax Holiday stood on its own, you could argue that it is mildly progressive in that for one year it reduced the taxes of everyone on their first $106,800 of income while paying for it out of taxes that are mostly incident on the top 50%. Unfortunately it effectively replaced the expiring Making Work Pay tax credit which directed all of its benefits to families making at most $70,000. The net result may be a tax hike for as many as one in three workers. The whole grim business is described in this Huff Post piece: Obama-Republican Deal Could Mean Tax Hike For One In Three Workers by the appropriately named Ryan Grim. From my point of view the fact that the tradeoff was suggested by Republicans is all you need to know, millionaires will get a tax cut ten times of that of a single person working at FPL in a minimum wage job.

The 2% (non) Solution: Part Two - In Part Two I want to discuss a quite different threat. In this scenario the employee share of the payroll tax is allowed to reset to it 6.2% but as a seeming sweetener taxpayers will be allowed or perhaps required to divert it into a Personal Savings Account with the explanation that it really wasn't a tax increase at all! Nope the money is still 'yours', just tucked away for your own future use rather than being co-mingled in the Trust Funds where you don't have an ownership interest at all, why the Supreme Court said so in Flemming .v. Nestor. Well a visit to the link shows that this doesn't mean what opponents often take it to mean, but the idea that the PRAs would be in any fundamental sense different is illusory, but before getting to that I want to point out a curious coincidence (or not). The 2% payroll tax holiday is the same amount of diversion proposed in most straight PRA proposals out there. Cynical people might suggest that this number was not just plucked out of the air, or back computed to approximate the typical effect of the expiring Make Work Pay tax credit which it is replacing, but instead to put in place elements of say Obama advisor Jeff Liebman's Liebman-MacGuineas-Samwick Non-Partisan Social Security Reform Plan or even the more recent Galston-MacGuineas Plan which has a mandatory diversion of exactly this amount.

CBO Sleight-of-Hand - I'm late to seeing this, and Bruce has probably already covered it, but Doug Elmendorg at the CBO inadvertently gives away the game on the Administration's approach to—let alone opinion of—the Social Security "Trust Fund": The balances in trust funds have accrued because income associated with those programs has exceeded the expenses; when that happens, the surplus cash flow is used to finance the government’s ongoing activities, and the trust fund is credited with a corresponding amount of Treasury securities. Although trust funds have an important legal meaning, in that they may constrain the amount a program can spend, they are essentially an accounting mechanism and have little relevance in an economic or budgetary sense. The value of Treasury securities held by trust funds and other government accounts measures only some of the commitments the government has made, and it includes some amounts that may not represent future obligations at all. Pay particular attention to that last; it's the closest you'll find to an acknowledgement from a government official that There is No Crisis.

Social Security prediction - Here is a related Paul Krugman post.  In my view, Obama may propose slowing the rate of benefit increase, but he won't propose an actual cut in Social Security benefits.  Use of the word "cuts" is thus likely to prove misleading.  I've already argued it is better to cut Medicare than Social Security (in-kind vs. cash), but it shouldn't come as a shock if reindexing benefits is part of a bipartisan budget deal.  It's an easier policy "to do" than fixing Medicare, though again I prefer the latter.It's a common argument that we need not cut benefits now, simply to prevent benefit cuts in the future.  The reality is that the long-term budget (don't look at SS alone) is way out of whack, and reindexing now is one way to get larger spending cuts in the future than could be done on a one-time basis.  Unless you do reindexing of something, at some point in time, it is very very hard to institute large spending cuts on a dime. Reindexing is one signal of a longer-term political time horizon.

How the Tax Deal Helps Manhattan Real Estate Developers In the Name of 9/11 - Why is Congress continuing to subsidize lower Manhattan real estate developers nearly a decade after the 9/11 terrorist attacks on the World Trade Center? While the Senate continues to squabble about whether to provide medical care to first responders, lawmakers have had no second thoughts about continuing special tax-exempt bond financing for high-end builders. A provision that gives developers yet another year to put together these bond deals is buried deep in the just-passed $858 billion tax cut and unemployment bill.  The Liberty Bond program was supposed to be temporary when Congress created it in 2002. It authorized up to $8 billion in special tax-exempt bonds for a designated neighborhood south of Canal Street on the tip of Manhattan. Nearly all the financing has been used to build high-end commercial and residential projects. For instance, one-bedroom apartments in one bond-financed building—10 Liberty Street--rent for $3,695-a-month. “Modern living meets classic charm” at Two Gold St—another Liberty Bond project—where an 819 sq. ft. unit rents for $3,000-plus. The cost to taxpayers for continuing the subsidies that make deals such as these possible—more than $100 million.

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

Support for Tax Deal Is Broad-Based - The tax-cut deal between President Barack Obama and congressional Republicans gets generally high marks in the latest CNN poll – 75% of all respondents said they approved. That figure is generally in keeping with other recent polls, including a Wall Street Journal/NBC poll that found 59% of the public approves of the deal, compared with 36% who disapprove. The makeup of that support is surprisingly diverse, underscoring how politically appealing the deal has been across ideological and demographic lines. In the CNN poll, The highest approval margin of all came among people in the antitax South, at 81%. No big surprise there. But that’s followed closely by moderates and Democrats, both at 78%. Next at 77% come urban residents and those making under $50,000. Those who attended college came in next at 76% and self-described conservatives at 75%.

Down and Out on $250,000 a Year - By most measures, a $250,000 household income is substantial. It is six times the national average, and just 2.9 percent of couples earn that much or more. “For the average person in this country, a $250,000 household income is an unattainably high annual sum — they’ll never see it,” says Roberton Williams, an analyst at the Tax Policy Center, a nonpartisan think tank in Washington, D.C.  But just how flush is a family of four with a $250,000 income? Are they really “rich”? To find the answer, The Fiscal Times asked BDO USA, a national tax accounting firm, to compute the total state, local and federal tax burden of a hypothetical two-career couple with two kids, earning $250,000. To factor in varying state and local taxes, as well as drastically different costs of living, BDO placed the couple in eight different locales around the country with top-notch public school districts, using national data on spending. The bottom line: It’s not exactly easy street for our $250,000-a-year family, especially when it lives in high-tax areas on either coast.

Thanks for the Tax Cut! - THERE is a God! It passed! The Bush tax cuts have been extended two years for the upper bracketeers, of which I am a proud member, thank you very much. I’m the last person in the world I’d want to be beside, but I am beside myself! This is a life changer, I tell you. A life changer!  To begin with, I was planning a trip to Cabo with my kids for Christmas vacation. We were going to fly coach, but now with the money I’m saving in taxes, I’m going to splurge and bump myself up to first class. First class! Somebody told me they serve warm nuts up there, and call you “mister.” I might not get off the plane!

The rich get richer - America’s wealthiest households in 2009 had net worth that was 225 times greater than the median family net worth.  As the Figure shows, that ratio between those at the top and everyone else reached a record high in 2009. Wealth, or net worth, is a measure of a family’s total assets, including real estate, bank account balances, stock holdings, and  retirement funds, minus all of their liabilities such as mortgages, student loans, and credit card debt. Although economic inequality is often described in terms of income inequality, the distribution of wealth is actually more unequal than the distribution of wages and income. And, while wages and income provide some indication of a family’s ability to afford essentials like housing, food, and health care, accumulated assets, or wealth, can make it easier for them to invest in education and training, start a business, fund a retirement, and otherwise invest in their future. Since accumulated assets also provide a cushion against job loss and other financial emergencies, this growing wealth disparity shows why some households are more devastated by unemployment, illness, and other factors that cause a temporary loss of income.

Giving tax breaks to the rich will add to the deficit - This sentence is given as an example of "obfuscation through language distortion," in a column by Kathleen Parker. She goes on to say: "Pardon? How does money in someone's own pocket add to another's debt?" Umm, is this one really hard? I owe my bank $200,000 for my mortgage. I don't pay the money. Is it hard to understand that my decision to keep the $200,000 in my own pocket adds to the bank's financial woes? More practically, the deficit is the difference between spending and tax collections. Anything that reduces tax collections adds to the deficit just as anything that increases spending adds to the deficit. We all may not like certain taxes just as we don't like some areas of spending, but that doesn't change this accounting identity.

No Taxes On the Non-Rich - We must get over any and all fixations on “good government”. We face a terminal kleptocracy. That means lots of things, including the fact that all the nice-sounding things in the civics textbooks and progressive training primers are no longer valid. They’ve been hijacked.  It’ll never happen again that this government will extract taxes and then trickle the money back down in a fair, constructive way. From here on, any taxation will only go down the corporate rathole. Every cent taken from the productive people is stolen. So a basic slogan and absolute demand must be: No Taxes On the Non-Rich. That means no new taxes (e.g. a VAT), no expansion of existing taxes. It means we should seize anything like a payroll tax holiday as a good thing (though of course we shouldn’t be grateful to the criminals who “let us keep” a little extra of the wealth we and only we produced, and did so only under extreme political duress).

2011 Income Tax Withholding Tables - IRS employees must have had a busy weekend, as they already have the 2011 withholding tables that take into account the tax compromise bill signed into law by President Obama on Friday. Key changes are the end of the Making Work Pay credit and the 2 percentage point reduction in payroll taxes. Check out the tables here (PDF).

Obama-GOP Compromise Tax Plan on TPC’s Tax Calculator - In a flurry of lame-duck activity, Congress quickly passed the Obama-GOP compromise tax plan and the president signed it into law. TPC has incorporated the new law into its Tax Calculator so you can see how the act will affect individual tax bills. The Tax Calculator lets you compare tax liabilities under the new tax law against what taxes would have been if Congress had simply extended all of the 2001-03 tax cuts or had allowed them to expire as scheduled. As in earlier versions of the calculator, you can look at ready-made examples or create your own case. See what taxes will be this year and what they’ll be in 2011. Turn on the AMT patch or see what would happen without it. There’s no better way to see how the new law will affect taxpayers.

The Tax Vox 2010 Lump of Coal Award, Job-Killing Edition - Tax Policy Center -It’s time for Tax Vox’s fourth annual Lump of Coal Award, given to 2010’s worst moments in fiscal policy. Bad law, outrageous rhetoric, and months of inaction made it tough to choose, but here are our Top 10 nominees:

And To All a Good Night -  At this time of year, who can fail to understand the wish to forget all the woes and fiascos of our time, and to retreat into the cozy firelit nooks of Christmas, where a pint or so of grog, or egg-nog, or even seven fingers of Williams 'Lectric Shave in an empty jam jar might avail to wash away the frightening specters of debts, and banks, and, trade imbalances, and countries with economies composed mostly of losses?  For now, America is a rug stretching from Maine to California, under which we've swept the filthy detritus of money matters and governance. It worked most of the year, though the rug has grown as lumpy as a landfill. Nothing is more important for the moment than provoking millions of people with no means for carrying their current obligations to ply the malls in search of Christmas merchandise, so the little ones will not be disappointed on the Great Day. Who could fail to understand this, too, since the sorrows of children only magnify the failures of the adults who love and fear for them.   President Obama's tax deal with the corn-and-pork-fed mental defectives of the Red States has been spun into an historic act of political ju-jitsu - a sharp trade to great advantage for the slick city operator against the avaricious rubes - but to me it was just another act of Santa Claus Theater. You have to love the conceit that all this fuss about money is finally settled.  So we can settle back in the raptures of flat screen high-def 3-D TV and imagine that we're like the characters in Frank Capra's It's A Wonderful Life - which, by the way, in case you never noticed, is a story about a banker who gets into big trouble financing the first larval manifestations of suburban sprawl. If only Frank Capra had lived to see the Federal Reserve's Maiden Lane portfolio, a sack of shit so monumental it would make the fabled swag-bag of Kris Kringle himself look like the descending colon of a pygmy marmoset.

Reasons, Rule and Riots: Our Societal Panic - On the surface, what's going on with tax policy in Washington right now seems crazy. A Democratic president whose enemies call him a socialist makes a deal with Republicans that sells out both his party and the very tax promises that won him the election, while Republicans leaders who say that debt is our overwhelming domestic problem insist on borrowing tens of billions of dollars to give tax savings to the richest among us. The polls, at the same time, show the public overwhelmingly favors ending tax cuts for high earners.  What we are witnessing, however, is much more profound than political, economic, or fiscal insanity. And it goes much deeper than disputes over whether extending temporary tax cuts for two years and long-term jobless benefits for 13 months is politically or economically smart. Those are mere manifestations of a much more pervasive problem. America is in the grip of a full-blown societal panic. Crazy, irrational, contradictory ideas about tax policy are just the most obvious symptom.

Is the Mortgage Interest Deduction a “Middle-class” benefit? - Yesterday, I was on the Larry Mantle program on KPCC debating Lawrence Yun, chief economist of NAR, about the merits of the mortgage interest deduction.  He sort of dissed renters, by saying they pay only five percent of federal income taxes, ignoring the fact that they pay FICA, state and local taxes.  One would think Realtors would like renters, since they do, after all, pay rent to property owners.  But he also characterized the mortgage interest deduction as being a "middle-class" deduction.  This all depends on the defintion of "middle-class." Let me turn to Eric Toder and colleagues: The percentage reduction in after-tax income from eliminating the deduction would be largest for taxpayers in the 80th to 99th percentiles of the distribution. These upper-middle-income households would be affected more than tax units in the bottom four quintiles because they are more likely to own homes and itemize deductions and because the higher marginal tax rates they face make deductions worth more to them than to lower-income taxpayers.  The bottom 80 percent don't benefit much, because their marginal tax rates are low, they are more likely to be renters and perhaps don't itemize their tax deductions.  My guess is that people between the 80th and 99th percentile don't need a lot of encouragement to become homeowners.

It’s Time to Rethink the Charity Deduction - NOW that Congress has actually managed to enact tax legislation, it may be time to consider some bigger issues. I hope that broad-based tax reform will be high on the list of both major parties.  Any meaningful reform will face intense lobbying from those who stand to lose. The tax deduction for charitable giving is a case in point. Although changes will be fought both by the givers and the receivers of tax-deductible donations, there is good reason to disregard their pleas.  In light of our prolonged economic doldrums, a decision to cut taxes for now is both popular and justifiable. But, eventually, Congress will have to face up to the fact that to deal with the long-run deficit problem we have to raise tax revenue as well as cut spending. Two deductions are likely to be central in any debate on tax reform: those for mortgage interest and for donations to charity. With the housing market still suffering, it is hard to persuade anyone to consider changing the mortgage deduction right now, so I will concentrate on charitable giving.

The FT supports massive corporate tax reform - Tax Justice Network - The Financial Times is running an editorial entitled a taxing world which is mostly very good. First, though, after a brief exploration of the UK Uncut phenomenon ("the group has a point") there is something we'd disagree with. The FT says this: "Tax avoidance is legal and legitimate. Unlike tax evasion, it is not obviously immoral to exploit the tax code to pay the least that is legally required."  It is up to government to plug the leaks, the FT says. No. For starters, as we constantly argue, what is legal is not necessarily what is legitimate - slavery was legal once. And also remember the "golden rule" - who has the gold, makes the rules. Corporations punch loopholes into the tax code so that they can get out of paying tax. Other corporations then enter those holes. We have to hold these corporations' feet to the fire, as well as keeping government on its toes. So far, so familiar. But then the FT gets onto something interesting.

Congress Threatens to Sow the Seeds of Our Next Banking Crisis - I wrote recently about the Bank of England sowing the seeds of their next banking crisis by deciding to reduce bank examinations. Spencer Bachus (R. Ala.), the incoming Chair of the House Financial Services Committee, told the Birmingham News: "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 (R. Tex.), asked to comment on Bachus' statement, said: "I don't think we need regulators. We need law and order. We need people to fulfill their contracts. The market is a great regulator, and we've lost understanding and confidence that the market is probably a much stricter regulator."These comments share several characteristics. First, they demonstrate that many people in positions of power have not only learned the necessary lessons from the ongoing crisis -- they have learned the worst possible lessons. Second, the comments reprise disastrous approaches that allowed the crisis to occur. Third, the comments represent the continuing triumph of ideology over facts. Fourth, the comments rely on false dichotomies that are the enemy of reasoning and good policy.

A Smarter Bailout Could Have Shortened the Recession - As this year comes to a close, and as we finally begin the recovery stage of the recession, it’s a good time to look back and ask how policymakers could have improved their response to the downturn. What can we learn from this recession? How can we do better the next time a large financial shock hits the economy?  There are many ways policy could have been improved; providing more help for state and local governments is high on the list, but I’ll focus on another way: using fiscal policy to help households make up for losses from the recession. This is an important, but too often ignored aspect of recovering from what are known as “balance sheet recessions.”

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.The SEC's budget was $1.12 billion in the fiscal year ended Sept. 30. Under the budget proposed by President Obama, funding for the agency would climb to $1.26 billion for the current fiscal year. In the meantime, the SEC is operating under the "continuing resolution" that temporarily extended last year's $1.1 billion budget at the agency. But even that spending level is stretching SEC officials as they continue revving up a broad crackdown on wrongdoing during the financial crisis and deal with a bigger workload triggered by the Dodd-Frank financial-overhaul law.

US Congress Blunts Agency Fund Request to Enforce Dodd-Frank - U.S. financial regulators, struggling for months with budgets unequipped to handle new responsibilities imposed by the Dodd-Frank Act, will be forced to go another 10 weeks without a funding increase.  Federal lawmakers agreed yesterday to fund the government at current levels through March 4, denying budget increases sought by the Securities and Exchange Commission and Commodity Futures Trading Commission after the regulatory overhaul was enacted. Agreement on the stopgap funding measure came hours before the expiration of an earlier temporary spending bill.  “Anytime you have a short-term measure to fund the yearlong capacity of the government, it creates complications,” White House press secretary Robert Gibbs said in his daily briefing yesterday. The temporary accord is “something far less than ideal in providing the needed certainty,” he said.

Incentives Matter: Bank Regulatory Edition - Tyler Cowen explains why he doesn't think we are going to get the banking system that either left or right dream of:  one where bankers and their creditors take a bath when there's a crisis, and the incentives for risk-taking are properly aligned.  Read the whole thing, but for me here's the critical paragraph:  Let's say a no-bailout policy was credible, as indeed it was in the 19th century (there were no bailout facilities). What does the equilibrium look like? Is there less long-term lending to banks and more short-term lending? Would that make banks more or less stable? Few people think this is a positive development for countries. Would banks be more subject to "capital flight" risk?  We also could expect greater mutualization of banks, as was the case before deposit insurance, and we could expect experimentation with corporate forms other than limited liability. My view is this is what would be required to limit excess bank risk-taking. Yet I believe that, for better or worse, it it is politically impossible. In a nutshell,big government needs big finance (or much higher taxes).

Is regulation really for sale? - Relationships between London banks and their regulators are not especially warm just now. The latest bonus rules issued by the Committee of European Banking Supervisors (soon to morph into the European Banking Authority), have left those sensitive souls on the trading floors feeling rather bruised and unloved. In the future, 70% of their bonuses will have to be deferred. Imagine living on only $3 million a year, with the other $7 million paid only if the profits you earned turn out to be real? It is a shocking turn of events. Yet, in narratives of the financial crisis, regulatory capture is often an important part of the story. Will Hutton, a prominent British commentator, has described the Financial Services Authority, which I chaired from 1997-2003 (the date things began to go wrong!) as a trade association for the financial sector. Even more aggressive criticism has been advanced about American regulators – and, indeed, about Congress – alleging that they were in the pockets of investment banks, hedge funds, and anyone else with lots of money to spend on Capitol Hill. How plausible is this argument? Can benign regulation really be bought?

How effective will Basel be? - Not very: The Basel committee adopted a 3 percent leverage rule in July, meaning that for every $3 of capital, a bank can borrow no more than $97. While the percentage is tentative and subject to review before it goes into effect, it has since come under attack by banks in Europe and Asia, which say it will restrict their borrowing capacity and inhibit lending.The EU may exclude the leverage ratio when it converts Basel rules into law next year. Several member nations have advocated dropping the rule, people close to the discussions said last month. A majority of the 27 EU countries oppose adopting the ratio, these people said. The article offers much more detail on other questions of interest.

More on the lunacy of the Basle Accords - I was looking at the preferred asset classes under the Basle Accords in my previous post, and realised that every single asset class that is given less than a 100 percent credit risk weighting is now tainted by widespread default or impairment. The credit risk weightings mean that instead of reserving the standard 8 percent of capital in respect of a debt, the bank can cut that by the weighting applied to the asset class. Effectively, the reduction in credit risk weighting operates as a powerful subsidy to the borrowers and equally powerful incentive to over-leveraging the lenders. As a baseline, all financial, consumer and corporate debt must be reserved at a credit rating of 100 percent of 8 percent, unless explicitly discounted. A weighting of 50 percent, for example, means that instead of holding $8 reserves on a loan of $100, the bank only needs to hold $4 of reserves. A zero weighting means they lend $100, but hold no reserves at all.

Basel liquidity rules, going neo-medieval - Can we talk a bit more about the scandal of Basel III allowing banks to give government bonds a zero risk weighting on their books? This time regarding Basel’s liquidity rules. Actually, can we talk about the related global shortage of AAA-rated assets and what that means for sovereign debt as well? Buried in recent regulations on Basel’s liquidity coverage ratio, we’ve found a few interesting new provisions on what are called Level 1 and Level 2 liquid assets. Banks have to hold enough of these to be able to withstand 30 days of net cash outflows under a stress scenario (think Lehman-level stress, bank runs, general end-times, etc). The provisions basically present a ‘post-sovereign’ view of acceptable assets, if you will, worthy of contrasting with those zero risk weights.

Banks Best Basel as Global Regulators Dilute or Postpone New Capital Rules - More than 500 representatives from 27 nations, including top regulators and central bankers, met dozens of times this year to hammer out 440 pages of new rules to govern the world’s banks. What’s not in the documents published by the Basel Committee on Banking Supervision, and the escape hatches that are, may have more impact on how financial institutions will operate following a global credit crisis that led to $1.8 trillion in bank losses and writedowns. The committee’s most significant achievement, members say, an agreement to increase the amount of capital banks need to hold, won’t go into full effect for eight years. Other measures that regulators had hoped would prevent future crises -- liquidity standards, a capital surcharge on the biggest lenders and a global resolution mechanism for failing firms -- were postponed, allowing banks to escape the toughest rules that would force them to change the way they do business.

On the Gutting of Financial Services Reform -- Yves Smith - Bloomberg has a well done but disheartening account of the watering-down-to-meaninglessness of financial services industry reform, with the case example being Basel III. Basel III is the latest iteration of capital standards for banks, which is hoped to be implemented more or less true to form by various national bank regulators. Richard Smith has been ably covering the substance of this beat (see here and here for earlier posts) and the details are indeed more that a bit convoluted. However, Basel III has been touted in the US as the fix for the shortcomings in bank reforms such as Dodd Frank. As Treasury argues, if banks have more than enough capital, you have a lot of room for error on other fronts. But Basel III preserves too many bad ideas of its predecessor, Basel II, such as risk-weightings for various types of assets that lend themselves to gaming; along with risk weighting, a preservation of the problematic role of unreformed rating agencies; allowing big banks to use their own idiosyncratic and often widely varying risk metrics; an obsession with the asset side of the balance sheet, and not enough to the way that liabilities can also blow out when asset prices are under stress. Basel III thus preserves the architecture of Basel II. Andrew Haldane of the Bank of England described how regulation could best contend with a world of uncertainty, meaning risks that cannot be measured:

Mandel Responds on Innovation, Growth and the Regulatory State. - Michael Mandel responds to a previous post I wrote: The economy doesn’t care whether regulations were passed by Republicans or Democrats.  An over-regulated country is not going to be innovative, whether the regulations are red or blue. An important point about Mandel’s paper, Reviving Jobs and Innovation, which argues “Don’t add new regulations on innovative and growing sectors during economic downturns… In fact, the evidence suggests that 2000–2007, under the Bush Administration, was actually a period of rising government influence over the economy.” There’s a slight increase in the regulatory state when you exclude Homeland Security – on the order of 0.002% of the labor force.  But we pointed out in our response that there wasn’t a general increase in regulators across the board during the past 10 years – the increases were in very specific places, and it is important to look at each.  Mandel’s paper assume an across the board increase or implies an increase in something like the ”Department of Barbers”, killing small-scale innovation.   But the places that put on regulators are markets that need regulators.

The Curious Incident of Financial Theft in the Broad Daylight -  Several days ago I read Tyler Cowen’s piece in The American Interest. It deals nominally with inequality but is mostly about financial profits. I have been mulling it over ever since. Today, I read this by Krugman in response to the current obsession over European debt levels. A lot of this is self-serving, of course. But there’s also a strong element of trying to shoehorn whatever happens into an ideological frame; it must have been about fiscal irresponsibility, because isn’t everything? In the wake of Cowen’s piece Will Wilkinson wrote this I’ve long had the sense that folks in finance are getting spectacularly rich by somehow gaming the system, but the nature of the system is too inscrutable for me to formulate a sufficiently informed hypothesis on my own. But it’s not so inscrutable to Mr Cowen. He offers what sounds to me a quite plausible story about the way the financial-regulatory-political system has been, and continues to be exploited and destabilized. Both Krugman and Wilkinson are keying off of the same phenomenon. The world is extremely complicated and doesn’t make sense – at least not in the way we want it to. We don’t want to understand the world simply by following some complex routine of intellectual gymnastics. We want it to makes sense intuitively. We want it to bound up in a single completely digestible ball. The world, sadly, does not always comply.

'Tis the Season... - Maxine Udall -  I started blogging a little over a year ago. Last night over dinner, a friend asked me why I do it. The answers I gave him were: I love to write and I want to be part of the really exciting conversation about economics and economic thought that has been a byproduct of the financial sector's mismanagement of risk. I didn't say it last night, but I think I also started blogging because I grew up in a family business and have become increasingly appalled over the last 10 years or so by what seems to me to be a very limited view of the duties, obligations, and responsibilities of business. Now, after a year of blogging, I'm discouraged and puzzled. I can understand that someone who has managed to capture a privileged economic and political position, one where they are backed by US taxpayers as they gamble for personal gain in financial casinos, will do whatever they must to maintain it. What I can't understand is the willingness of the citizenry to protect and reward someone who has harmed or is continung to harm them. I do not understand voting for politicians who support tax cuts for and neutered regulation of these same destructive speculators. Nor do I understand voters' apparent willingness to eviscerate all of the social programs and safety nets that are all that stand between them and what can only be regarded as neo-feudalism.

The Fed enters the skirmish over debit card fees. -The Federal Reserve's proposed regulation governing transaction fees for debit cards is best understood as the latest skirmish between bankers, merchants, and consumers over the future of money. In the beginning—well, maybe not the very beginning, but, say, prior to 1950—there were two ways to buy most items. You could pay cash, or you could write a check. After 1950 you could pay with a charge card like Diners Club, Carte Blanche, or American Express. These were all cards where you could run up a tab, but only for one month. Then, in 1958, there appeared, like the tree of knowledge in the Garden of Eden, the credit card. With BankAmericard (later Visa) and Master Card, you could run up a tab for as long as you liked, up to some dollar limit established by the issuer. Monthly payments were required but they didn't have to cover what you owed; indeed, the bank preferred that you didn't cover what you owed, because then it could charge you interest on that.

Mirabile Dictu! Ernst & Young Faces Fraud Charges in Lehman Collapse -- Yves Smith - I had given up on the idea that anyone associated with Lehman would be charged with fraud, even though it was blindingly obvious even before the investment bank failed that it was up to no good. So tonight’s report in the Wall Street Journal, that the New York attorney general Andrew Cuomo is about to file a lawsuit against Lehman accountants Ernst and Young, is welcome news indeed. Your humble blogger was among the Lehman critics. It was pretty easy to connect the dots simply from public information, particularly the not credible marks on highly visible positions like real estate garbage barges SunCal and Archstone. If you are cooking the books in ways third parties can readily detect, it suggests you have run out of not-so-blatantly obvious things to mismark so as to not freak out investors about your unsavory financial condition. Another big red flag was the company’s simply not credible claim in 2008 that it had deleveraged across all geographies and all books when some were far more liquid than others. But it was nevertheless astonishing to see the media fall for the most part run with the company’s PR, and even more stunning to see how large the black hole in the balance sheet turned out to be. The suit appears to target only the famed Repo 105, a device Lehman used to move exposures off balance sheet at quarter end and thus look sounder than it really was. But any investigation into dubious accounting ought to open other cans of worms and could well lead to further charges.

Cuomo Sues Ernst & Young Over Lehman - The New York attorney general on Tuesday sued Ernst & Young, accusing the accounting firm of helping Lehman Brothers, its client, “engage in a massive accounting fraud” by misleading investors about the investment bank’s financial health. The lawsuit, filed more than two years after Lehman collapsed and the global economy buckled, is the first major legal action stemming from Lehman’s demise. Ernst & Young, Lehman’s longtime outside auditor, certified the bank’s financial statements from 2001 until it filed for bankruptcy in September 2008. The suit focuses on Ernst & Young’s approval of a much-criticized accounting maneuver that shifted debt off the books before the close of financial quarters. The transactions involved “the surreptitious removal of tens of billions of dollars of securities from Lehman’s balance sheet to create a false impression of Lehman’s liquidity, thereby defrauding the investing public,” the complaint said. The lawsuit seeks the return of more than $150 million in fees that Ernst & Young collected for work performed for Lehman from 2001 to 2008, plus investor damages.

FT Alphaville » Cuomo files suit against Ernst & Young - It’s official — Repo 105 will have its day in court (flash from Reuters): Accounting firm Ernst & Young was sued by New York regulators on Tuesday, accused of helping to hide financial risks at Lehman Brothers Holdings Inc before the Wall Street firm’s 2008 collapse. The civil fraud case was filed by New York Attorney General Andrew Cuomo, a statement from his office said. Ernst & Young was Lehman’s outside auditor from 2001 until the investment bank filed for bankruptcy in September 2008. Unless they settle, of course.

Cuomo’s parting shot - Andrew Cuomo has decided, reports the WSJ, to file civil fraud charges against Ernst & Young in the waning days of his tenure as New York’s attorney general — news which has been received with delight by Yves Smith, on the grounds that it might strengthen a criminal case against Dick Fuld.But what does this mean for E&Y, and for David Einhorn’s theory, as recounted to Andrew Ross Sorkin, that the government has held back on crisis-related prosecutions because of “an embedded belief that they did the wrong thing with Enron and with Arthur Andersen — the criminal prosecution, particularly of Andersen”?One way of looking at the news is that Cuomo is stepping up where federal prosecutors fear to tread, and is filing the suit now precisely because he knows that if he doesn’t, the chances are that E&Y will suffer no consequences at all for the way that it signed off on Lehman’s books.On the other hand, a civil fraud suit is not a criminal prosecution. Even if E&Y fights the charges and loses, it probably won’t find itself on the receiving end of the kind of criminal charges which brought down Andersen.

Crisis Dominoes Start Falling With Lehman Auditor - It took more than two years, but there might finally be some capital sentences handed out for crimes committed during the financial crisis. That’s metaphorically speaking, of course. Like the accounting firm Arthur Anderson, whose head was sacrificed during the Enron debacle, the once-proud financial auditing firm Ernst and Young now looks poised to take a spin down the toilet of history thanks to its role in the Lehman Brothers debacle. New York State Attorney General Andrew Cuomo is about to file civil fraud charges against E&Y for the work it did helping Lehman cook its books during 2007 and 2008. The short version of what happened goes something like this. Lehman Brothers, like all the other big banks on Wall Street in those years, was nearing insolvency and desperate for cash. In advance of its quarterly reports in 2007, the firm executed a series of something called Repo 105 transactions in an attempt to make their balance sheet look healthier than it was. These Repo 105 transactions are just loans that Ernst and Young and Lehman Brothers conspired to book as revenue from sales...

Embedded financial journalism at its worst - Today’s biggest financial news story was that the New York attorney-general is suing the accountancy firm Ernst & Young for fraud following its alleged role in the cooking the Lehman Brothers books in the years prior to the investment bank’s September 2008 collapse. I’d like to focus here on the way in which the Financial Times covered this momentous story. A Lex column on the fraud suit against E&Y, opened by saying:- Accountants, just about the only people not yet blamed for the banking crisis, are about to feel the heat. My initial reactions on reading this sentence was to this was to say “Hello…?!” and “What planet are these guys living on?

Inside Job’s Charles Ferguson on the Corruption of Academic Economics - (video) Readers may have seen the movie Inside Job (if you haven’t, you really need to) or a clip from the movie that got quite a bit of attention on finance blogs, that of director Charles Ferguson grilling former Federal Reserve vice chairman Frederic Mishkin on some dubious work he did touting Iceland as a well run banking center not long before its implosion. The film’s director Charles Ferguson speaks with Rob Johnson, director of the Institute for New Economic Thinking, and former chief economist for the Senate Banking Committee and senior economist for the Senate Budget Committee. Enjoy!

Bond Fund Investors Pull Most Money in Two Years - Bond mutual funds had the biggest client withdrawals in more than two years last week as a flight from fixed-income investments accelerated. U.S. bond funds experienced withdrawals of $8.62 billion in the week ended Dec. 15, up from $1.66 billion the week before, according to a release from the Investment Company Institute, a Washington-based trade group. Last week’s withdrawals were the largest since the week ended Oct. 15, 2008, when investors yanked $17.6 billion from bond funds.  Investors are retreating from bond funds after signs of an economic recovery and a stock market rally increased speculation that interest rates may rise. The selloff in Treasuries accelerated after the Federal Reserve last month pledged to buy $600 billion in assets to revive the economy. The 10-year note yields 3.35 percent, up from 2.49 percent Nov. 4, according to data compiled by Bloomberg.

What Are Ratings Agencies For? - There's no question that the credibility of the ratings agencies has been called into question by the performance of the enormous amount of toxic sludge that they rated AAA during the housing bubble.  So I do understand the complaints that they're still around, influencing markets by what they say, without having ever really explained very well how they got it so monstrously wrong in the first place.  However, I don't really understand this complaint: I think that's basically a reference to the rating agencies -- it's not the most clearly written piece, though it makes up for that with passion. Anyway, he's right: the rating agencies, and in general the poo-bahs of finance, brought this crisis on the world -- and are now solemnly lecturing nations about the evils of the deficits incurred mainly to fight the crisis. I don't really read Moody's, et al. as "lecturing" anyone about the evils of their deficits. Moody's job is not to make countries into better, more fiscally responsible people.  It's to advise people about the risk of default of the bonds they might buy.

Guest Post: Assange Confirms that Bank of America Is the Target of Bank Leak - There has been widespread speculation that WikiLeaks would target Bank of America. This has now been confirmed. Specifically, Agence Press France is reporting:Assange also confirmed that WikiLeaks was holding a vast amount of material about Bank of America which it intends to release early next year.

Hundreds of anti-BofA web sites registered - Hundreds of website addresses that disparage Bank of America executives and board members were registered in recent days in an apparent effort to protect the bank and its senior leaders, according to internet companies who track the buying and selling of such domain names. More than 300 addresses that disparage BofA officials using variations on “sucks” and “blows”, including and, referring to the bank’s chief executive, were registered on December 17.

This Bonus Season on Wall Street, Many See Zeros - Bonus season is fast approaching on Wall Street, but this year the talk does not center just on multimillion-dollar paydays. It’s about a new club that no one wants to join:  the Zeros, as they have come to be called, are facing a once-unthinkable prospect: an annual bonus of ... nothing.  In some ways, a zero bonus should not come as a surprise to many bankers. As a result of the 2008 financial crisis, Wall Street firms like Goldman Sachs and banks like Citigroup raised base pay substantially in 2009 and 2010. They were seeking to placate regulators who had argued that bonuses based on performance encouraged excessive risk.  At Goldman, for instance, the base salary for managing directors rose to $500,000 from $300,000, while at Morgan Stanley and Credit Suisse it jumped to $400,000 from $200,000.  Even though employees will receive roughly the same amount of money, the psychological blow of not getting a bonus is substantial, especially in a Wall Street culture that has long equated success and prestige with bonus size. So there are sure to be plenty of long faces on employees across the financial sector who have come to expect a bonus on top of their base pay.

What's not to like about your big, fat bonus? - Managers have long believed that the prospect of a bonus can motivate young workers to work harder and smarter, even in a year like this one, when bonuses are expected to fall. By making a huge amount of an employee's compensation - possibly even twice his or her regular salary - dependent on the firm's results and the individual's performance, managers hope to align workers' incentives with those of the larger company. Yet, in reviewing the roughly 800 essays our students handed in this year, we see a different story. Students increasingly distrust the bonus system and contend that annual bonuses are too large a part of the way they are managed, often serving as a substitute for thoughtful supervision or meaningful reviews

Bankers' Pay on the Line Again - Simon Johnson - The people who run big banks in the United States have had a good year. They pushed back hard on financial regulatory legislation during the spring and were able to defeat the most serious efforts to constrain their power. They and their colleagues outside the United States scored an even bigger win at Basel this fall, where the international committee that sets financial safety standards decided to keep the required levels of equity in banks at dangerously low levels. And the counternarrative for the 2008 financial crisis, “Fannie Mae made me do it,” gained some high-profile Republican adherents closely aligned with the men who will control the House Financial Services Committee in 2011-12. Yet a potential lump of coal in their stockings may be in store for the biggest banks, in the form of restrictions of pay – both its structure and perhaps even the amounts (although officially the latter is not currently on the table).

Underbelly: Felix Salmon Channels Tim Geithner - Felix Salmon has certainly matured into one of our most helpful and generally instructive commentators on the mare's nest that is modern finance.  Such a surprise, then, to hear him utter flapdoodle like this: Balance sheets have two sides, of course: assets and liabilities. And I suspect that what Mark might have in mind here is attacking the liability side of things, through pushing principal reduction on mortgages or allowing them to be reduced in bankruptcy.  But there’s a problem with trying to reduce liabilities: when the markets lose faith in credit instruments, as we saw during the crisis, the repercussions can reverberate around all markets and all countries. So governments around the world made a conscious decision to keep most bondholders whole, while injecting new capital and diluting equity holders in their attempt to shore up balance sheets.

Who Committed Excess Borrowing? - With a hat tip to Rebecca's post below, normalized borrowing growth in several sectors over the past 25 years. (Source: FRB Flow of Funds data) Yes, there are three very similar (shades of blue) lines—but they are all household and non-profit data. (The growth in "credit market instruments" is, presumably, primarily driven by the non-profit sector.) Note also that borrowing in the non-financial sector (the red line) has the flatest line of all (it's at the top through the early 1990s and near the bottom as of last year. Compare this with Mike Konczal's graphic of corporate profit shares over the same period (h/t Brad DeLong) and there is a fairly clear case that accusations from bankers that consumers are suffering because of their foolish, excessive borrowing is a case of a very grimy pot talking to a copper kettle.

Drop the corporate saving rate, please...Rebecca Wilder - The Federal Reserve Flow of Funds showed a third quarter shift in the financial sector balances: the corporate saving rate declined 0,25% to 2,7% of GDP; the household saving rate fell 0,13% to 3,8% of GDP; the current account fell 0,11% to 3,5% of GDP; and the government increased its saving rate 0,27% to -10,0% of GDP. Basically, the government was able to increase saving slightly, even as foreigners increased surpluses against the US, at the cost of reduced household and firm saving. The chart above illustrates the 3-sector financial balances approach, which is the identity that the private sector and public sector saving rates must equal that of the foreign sector (the current account). The private sector is broken into the household and corproate sectors. For a discussion of the 3-sector financial balances, see Scott Fullwiler, Rob Parenteau; and I've written on this as well. Some people may see the large government deficit, still -10% of GDP, as the 'problem child' of the sectoral financial balances. Me, I see the government deficit as a red herring of the corporate saving rate, which remains stickily in the 2-3% range. Until the corporate saving rate falls markedly, the unemployment rate is to remain high, and the household deleveraging process slower than would otherwise be...

Moody's: Commercial Real Estate Prices increase in October - Moody's reported today that the Moody’s/REAL All Property Type Aggregate Index increased 1.3% in October. Note: Moody's CRE price index is a repeat sales index like Case-Shiller - but there are far fewer commercial sales - and that can impact prices and make the index very volatile. Below is a comparison of the Moodys/REAL Commercial Property Price Index (CPPI) and the Case-Shiller composite 20 index. Beware of the "Real" in the title - this index is not inflation adjusted.  The Case-Shiller Composite 20 residential index is in blue (with Dec 2000 set to 1.0 to line up the indexes).  According to Moody's, CRE prices are about 42% below the peak in 2007.

AIA: Architecture Billings Index shows expansion in November - This index is a leading indicator for new Commercial Real Estate (CRE) investment.  From the American Institute of Architects: Firm Billings Rebound in November At 52.0, the AIA’s Architecture Billings Index (ABI) recorded a three point gain from the previous month, and reached its strongest level since December 2007. With ABI scores above the 50 level in two of the past three months, the prospects of a sustainable recovery in design activity are enhanced. This graph shows the Architecture Billings Index since 1996. The index showed expansion in November (above 50) and this is the highest level since December 2007. Note: Nonresidential construction includes commercial and industrial facilities like hotels and office buildings, as well as schools, hospitals and other institutions.

Housing-Finance Head Faces Unlikely Confirmation - The White House's pick to head the agency that oversees Fannie Mae and Freddie Mac appears unlikely to win Senate confirmation before Congress adjourns due to a sharp policy disagreement between the White House and Senate Republicans over how to regulate the mortgage-finance giants. Senate Republicans are pressing to delay the confirmation of Joseph A. Smith, the North Carolina banking commissioner, to head the Federal Housing Finance Agency. They are concerned he might allow Fannie and Freddie to participate in an Obama administration initiative to write down loan balances, say people familiar with the matter.

Brad Delong’s analysis of the housing crisis - Delong makes it sound like the bubble started in 2002 or maybe 2004. Here is the Case-Shiller housing price indices for the nation and for the ten largest cities: The boom in housing prices began in the mid to late 1990s. It does accelerate sometime in the early 2000s. Next, let’s ask the question, when did loans start getting really risky. In 2001, Josh Rosner chronicles the deterioration in underwriting standards in this paper. Rosner notes (writing in 2001) that Fannie Mae had begun a push toward low downpayment loans, away from 20% down and was beginning to buy loans with 5% down and 3% down. Here are the data: The chart, from my paper, shows Fannie and Freddie’s purchases of owner-occupied loans where the loans have less than 5% down. Having Fannie and Freddie purchase these loans means that a lot more people are going to be able to buy houses than before. It also means they are willing to pay more for a given house. This helped create the housing bubble. In 2004, Fannie and Freddie did “pull back” as Delong mentions and as Krugman has claimed as well, in the sense that they did buy fewer low downpayment mortgages in 2004 relative to 2003. But it was still about triple what they bought in 1999. And the number rises steadily between 2004 and 2007. Not really a pull back. Delong says Fannie and Freddie were “small players by 2004.” No. They weren’t. Here is the picture of Mark Thoma’s that Krugman cites to show that “Fannie and Freddie pulled back sharply after 2003.”

A Convenient Myth -- This sounds about right: ...the global economy’s arsonists have become prosecutors, and accuse the fire fighters of having provoked flooding. ... There is pressure to re-write the history of this crisis by depicting effects as if they were causes, and to blame the governments that managed the crisis for starting it. ... The effort has already been successful. There is now a story for the anti-government types to tell, one that blames the government for promoting housing, creating Fannie and Freddie, and keeping interest rates too low. That story won't be dislodged no matter how much logic is used to try and pry it free from those who have shaped the narrative to fit their preconceptions.

Fannie Mae, Freddie Mac, and the Federal Role in the Secondary Mortgage Market - CBO Director's Blog - The cost to taxpayers of taking over Fannie Mae and Freddie Mac, and the structural weaknesses that contributed to the institutions’ financial problems, have prompted policymakers to consider various alternatives for the government’s future role in the secondary (resale) market for residential mortgages. To provide a context for those options, CBO has prepared a study entitled Fannie Mae, Freddie Mac, and the Federal Role in the Secondary Mortgage Market. That study examines the rationales that are often cited for federal involvement in the secondary mortgage market, the problems with Fannie Mae and Freddie Mac that existed before the recent financial crisis, and alternative approaches for the future of the secondary mortgage market.

CBO Weighs in on Fannie and Freddie - Yesterday, the Congressional Budget Office released its long-awaited report on the future of Fannie Mae and Freddie Mac. Fannie Mae, Freddie Mac, and the Federal Role in the Secondary Mortgage Market (written with input from a cast of dozens — including, full disclosure, me as an outside reviewer) provides an outstanding overview of Fannie and Freddie’s history, the arguments for and against a government role in the secondary mortgage market, the flaws of the precrisis structure of Fannie and Freddie, and the pros and cons of possible reform models. Readers may recall that last spring Phill Swagel and I proposed a reform in which Fannie and Freddie would be privatized, the government would sell guarantees on mortgage-backed securities composed of conforming loans, and that this guarantee would be available not only to Fannie and Freddie but also to qualified new entrants. (Here’s the blog version; here’s the full paper.)

CBO on GSE Reform - I am currently drafting something on the same general topic, so I will add comments based on my current thinking. The folks at CBO discuss three options--purely public, purely private, and a hybrid. They find drawbacks to every option. They explain the hybrid option: Many proposals for the future of the secondary market involve providing federal guarantees of certain mortgages or MBSs that would qualify for government backing. ...However, a hybrid approach would depart from the precrisis model in three main ways: A potentially different set of private intermediaries would be established to securitize federally backed mortgages, the federal guarantees on those mortgages would be explicit rather than implicit, and their subsidy cost would be recorded in the federal budget.  The prospect of "a potentially different set of private intermediaries" with federal backing should strike terror into your heart. I think that if we are going to have a hybrid option, I would rather go back to Freddie and Fannie than try something new. Just because Freddie and Fannie have earned bad names does not mean that you will gain something by creating a new structure.

Fannie Increases Restrictions on Lender Processing Services, Other Technology Middlemen; LPS Document Shows Degree of Influence Over Law Firms  - Yves Smith - We’ve discussed Lender Processing Services, which serves as an outsourcer to the mortgage servicing industry, primarily via a software platform, as well as other companies with similar business models.  One of LPS’s major activities is acting as a middleman in the foreclosure process, reportedly hiring and firing foreclosure mills in the name of servicers. LPS is under fire in two national class action lawsuits for alleged impermissible fee splitting with foreclosure firms. A recent story in Reuters confirmed details we supplied in late October as to how LPS works with foreclosure mills, in particular, the very tight control it exercises over them. Fannie Mae issued a directive today which effectively eliminates the payment of certain types of fees to firms like LPS. In LPS’s Default Services Group, which accounts for nearly half the firm’s revenues. Per Housing Wire: Attorneys and trustees assigned a Fannie Mae mortgage loan can no longer be charged any technology or electronic invoice submission fees by the servicer or a third-party vendor used by the servicer effective Feb. 1, 2011. Fannie Mae made the announcement Monday. On Sept. 1, Fannie limited the amount vendors could charge attorneys for technology and invoicing fees to $25 per loan and $10 for submitting electronic invoices. It also prohibited any servicer from requiring or encouraging attorneys to use specified vendors.

Open Letter to Bank Regulators on Mortgage Securitization and Servicing Practices - Yves Smith - Today, a letter urging fundamental changes in the mortgage securitization markets, signed by 50 individuals with expertise in this arena, was sent to the Chairmen of the FDIC, the Fed, and the SEC, and the Secretary of the Treasury and the Comptroller of the Currency.  Despite widespread evidence of failings, abuses, and outright fraud in the securitization process, reform measures have been halting at best. The FDIC has proposed far-reaching and well thought out measures in the face of considerable industry opposition. By contrast, the Treasury has taken the position that it has little authority over servicers, despite its considerable influence over both the banks in which most of them reside, and their biggest customers, Fannie and Freddie.  The letter points out that the continued failure to address this issue is detrimental to homeowners, investors, and the broader economy. It urges the adoption of new standards as part of these regulators’ duties under Dodd Frank and makes specific recommendations. Securitization Standards Letter

More on the FDIC’s Fight Versus Other Bank Regulators on Servicer Abuses; Rep. Miller Backs More Aggressive Action - Yves Smith  - We’ve mentioned that the FDIC has been pushing to reform the securitization process, including imposing standards on servicers. That has put it at odds with the bank-friendly Treasury and Office of the Comptroller of the Currency (the SEC has proposed securtization reforms but of a much more modest nature than the FDIC’s). This behind the scenes battle is heating up further because Dodd Frank calls on bank regulators to draft new rules to improve the operation of the mortgage securitization market. The FDIC intends to include mortgage servicer behavior in those provisions and want the rules ready in January.  The pressure to take action has increased with a spate of hearings last month (two Senate Banking Committee, one House Financial Services, the Senate Judiciary Committee, HUD, plus the release of a blistering COP report and related chat with Geithner) and the FCIC report due out next month. The publication of a letter to banking regulators signed by 50 experts urging action was joined by a letter by Representative Brad Miller, which is apparently also garnering Congressional support. The trigger for both missives is the failure of the authorities to act on provisions in Dodd Frank related to securitizations: Representative Brad Miller 941 Letter

Fraud Ruling Against Wells Fargo in Minnesota Points to Widespread Abuses in Securities Lending Program - Yves Smith - A fraud and breach of fiduciary duty ruling against Wells Fargo in a major scandal in Minnesota may have much broader ramifications for this sanctimonious bank. The facts are not pretty. Wells Fargo, in its investment management operation, used securities lending to boost returns. But the returns it increased appeared to be only those of the bank. Institutional investors in various programs lost money as a result of this activity. Four Minnesota plaintiffs, including two of the state’s high profile charities, sued. A jury had already awarded the plaintiffs $29.9 million for fraud. A post trial ruling by the judge has added costs, interest, and reimbursement of fees that looks set to more than $15 million to the total. District Judge M. Michael Monahan concurred with the jury’s main findings: Wells Fargo breached its duty of full disclosure by not adequately disclosing that it was changing the risk profile of the securities lending program, that it breached its duty of impartiality by favoring certain participants over other participants, and that it breached its duty of loyalty by advancing the interest of the borrowing brokers to the detriment of the plaintiffs.  What makes this ruling interesting is that although it set aside a minor part of the jury award, a $1.6 million issue, to be subject to a new trial, is that it was punitive as a result of the judge’s determination that the fraud was systematic. The basis for awarding attorneys’ fees? The bank is such a menace to society that having counsel root it out is a public service. From the Minneapolis Star Tribune.

Please Visit to Stop Servicer Fraud - - Yves Smith - As readers may know, the banking industry is trying to prevent the FDIC from moving forward with its proposed reforms on securitizations and is also attacking related SEC reforms, namely amendments to Rule A/B. To further the effort to curb servicer abuses, please visit the website, StopServicerScams, and sign the petition. As we have written, and as experts and foreclosure defense lawyers have reported in Congressional testimony, and as pending lawsuits by attorneys general in Arizona and Nevada allege, servicer abuses are a significant cause of foreclosures. These include including delaying and misapplying payments, using false hopes of pending mods to extract more payments from consumers, and applying compounding junk fees.  We will submit the signed petition in early January. Thanks for your support in this important effort.

Joseph Mason on the Myth of Good Servicers - Yves Smith - Joseph Mason has a post up at Housing Wire that not only struck both of us as more than a tad off beam, but even elicited critical e-mails from real estate industry participants. In addition, at a couple of junctures is it so unclearly written as to be difficult to parse.  The post is misguided from at least three perspectives. First, Mason claims that his take on servicing as of October 2007 was so correct that there is virtually nothing to be added. That is tantamount to saying a recommendation for urban planning for New Orleans made pre-Katrina is the pretty much the only thing worth considering now. Like New Orleans, the servicing industry has been hit by devastation, in this case a level of foreclosures that has overwhelmed the industry, that with the benefit of hindsight should have been anticipated. Mason’s 2007 paper did foresee a large increase in delinquencies, but his estimate of the cost of the crisis was $150 billion, consistent with the prevailing “subprime is contained” forecasts.  Moreover, his view of borrowers was based on the subprime ARM resets of 2007 and 2008. Many of those borrowers were simply not viable once a reset hit. Many of them have already lost their homes. One of his premises in that paper, that a mod might not leave the investors any better off, is quite different now, when loss severities are now averaging over 70%.

The Next Banking Crisis - Evidence coming to light suggests that as subprime loan -- origination mills went into overdrive during the boom, they got very sloppy. As loans were turned into securities, many of the trusts that supposedly hold the documents have neither the actual promissory notes nor the liens that give the lender the right to foreclose. The problem was compounded when lenders created an electronic database called the Mortgage Electronic Registration System, or MERS. Often, physical notes were eliminated in favor of electronic ones; however, the law in most states requires that the original note be endorsed -- in "wet ink" -- to each new owner at every step of securitization. Katherine Porter, a law professor at the University of Iowa and an expert in mortgage servicing, recently testified to the Congressional Oversight Panel for the Troubled Asset Relief Program (TARP) that according to lawyers for both home-owners and banks, "a very large number (perhaps virtually all) securitized loans made in the boom period in the mid-2000s contain serious paperwork flaws, did not meet underwriting or other requirements of the trust, and have not been serviced properly as to default and foreclosure." So, this legal morass doesn't just gum up foreclosures; it calls into question whether several trillion dollars worth of mortgage-backed securities are worth anything close to their face value.

How the mortgage industry polices HAMP - American Banker’s Kate Berry uncovers a stunning factoid today: the nonprofit Homeownership Preservation Foundation, the official body charged with resolving disputes over HAMP modifications, was founded by ResCap and to this day is run by GMAC and other finance officials from within the mortgage industry.No one involved even bothers to dispute the conflict of interest, one of many that have plagued the Treasury Department’s Home Affordable Modification Program, or Hamp. “Because we’re supported by the industry, are we really working for the homeowner?”

Opening the Bag of Mortgage Tricks - ALL the revelations this year about dubious practices in the mortgage servicing arena — think robo-signers and forged signatures — have rightly raised borrowers’ fears that companies handling their loans may not be operating on the up and up.  But borrowers aren’t the only ones concerned about potential mischief. Investors who hold mortgage securities are increasingly worried that servicers may be putting their interests ahead of those who own the loans.  A servicer might, for example, deny a loan modification to a borrower because it also owns a second mortgage on the same property and doesn’t want to write down that asset, as required in a modification. Levying outsize default fees is another tactic — the fees typically go to the servicer, not the lender, but they can still propel a property into foreclosure more quickly. And foreclosures aren’t a good outcome for investors.  Last week, a jury in federal district court in Reno, Nev., awarded a group of 50 mortgage investors $5.1 million in punitive damages against defendants in a loan servicing case. Although the numbers in the case aren’t large, its facts are fascinating

MBIA May Use Statistical Sampling in Bank of America Fraud Suit - Bank of America Corp. lost a bid to prevent MBIA Inc. from using statistical sampling to pursue repurchase demands in a lawsuit claiming it was fraudulently induced to insure $21 billion in mortgage-backed securities. MBIA asked New York State Supreme Court Judge Eileen Bransten to allow company lawyers to develop evidence using samples from 368,000 mortgages in 15 securitized pools to establish its fraud claims, rather than go through each loan. Proceeding loan by loan might lead to “a delay of several years before trial,” Philippe Z. Selendy, an attorney for Armonk, New York-based MBIA, said in an Oct. 13 letter to the judge. “The court does not find any prejudice in deciding the motion before it and allowing the use of statistically significant samples of the securitizations at issue,” Bransten ruled yesterday. She said the defendants could also choose to use their “own sampling chosen in a statistically valid manner” to rebut MBIA’s arguments.

Risky Mortgages and Mortgage Default Premiums - SanFran Fed - Mortgage lenders impose a default premium on the loans they originate to compensate for the possibility that borrowers won't make payments. The housing boom of the 2000s was characterized by increasing riskiness of the borrowers approved for mortgages and the structures of the loans themselves. Despite these changes in risk, a pricing model can justify the spreads contained in mortgages made during this period based on what at the time seemed to be reasonable expectations for house price appreciation. Contrary to those expectations, prices fell dramatically.

Inside the Mortgage Monster - Back in the days of the home-loan boom, loan officers at Ameriquest Mortgage worked hard and played hard. They put in ten- and twelve-hour days punctuated by “Power Hours”—frenzied telemarketing sessions aimed at sniffing out borrowers and separating the real salesmen from the washouts. A frat-house mentality ruled, with liquor and cocaine flowing freely. “It was like college, but with lots of money and power,” one former Ameriquester, Travis Paules, recalls. In this excerpt from his new book, The Monster: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America--and Spawned a Global Crisis, investigative reporter Michael W. Hudson tells the story of Travis Paules’ first year and a half inside America’s biggest—and most predatory—subprime mortgage empire.

Federal Reserve Blocks New Foreclosure Regulations -- Top policymakers at the Federal Reserve are fighting efforts to rein in widely reported bank abuses, sparking an inter-agency feud with the FDIC and the Treasury Department. The Fed, along with the more bank-friendly Office of the Comptroller of the Currency, is resisting moves to craft rules cracking down on banks that charge illegal fees and carry out improper foreclosures. The FDIC supports such rules, according to an FDIC official involved in the dispute. The new regulations would rein in debt collection, loan modification and foreclosure proceedings at bank divisions called "mortgage servicers." Servicers have committed widespread fraud in the foreclosure process. While the recent robo-signing of fraudulent documents has received the most attention, consumer advocates have complained about improper fees and servicer mistakes that lead to foreclosure for years. "Given that we've seen a massive failure in servicing practices and a massive failure to address servicing in an honest way, I think this is important,". Last week, the National Consumer Law Center and the National Association of Consumer Advocates published a survey of 96 foreclosure attorneys from around the country, attesting that servicers have pushed 2,500 of their clients into the foreclosure process, even as the borrowers were negotiating loan modifications with the same servicers.

In a Sign of Foreclosure Flaws, Suits Claim Break-Ins by Banks - When she finally got into the house, it was empty. All of her possessions were gone: furniture, her son’s ski medals, winter clothes and family photos. Also missing was a wooden box, its top inscribed with the words “Together Forever,” that contained the ashes of her late husband, Robert.  The culprit, Ms. Ash soon learned, was not a burglar but her bank. According to a federal lawsuit filed in October by Ms. Ash, Bank of America had wrongfully foreclosed on her house and thrown out her belongings, without alerting Ms. Ash beforehand.  In an era when millions of homes have received foreclosure notices nationwide, lawsuits detailing bank break-ins like the one at Ms. Ash’s house keep surfacing. And in the wake of the scandal involving shoddy, sometimes illegal paperwork that has buffeted the nation’s biggest banks in recent months, critics say these situations reinforce their claims that the foreclosure process is fundamentally flawed.  “Every day, smaller wrongs happen to people trying to save their homes: being charged the wrong amount of money, being wrongly denied a loan modification, being asked to hand over documents four or five times,”

Bank Break Ins Leading to Litigation - Yves Smith - Even though banks piously insist that every one of their foreclosure actions is fully justified, evidence in the court system continues to prove that claim to be false. We pointed out this sorry development in October, that of banks entering and changing the locks on homes they had not foreclosed upon. Per a report from the Sarasota Herald Tribune: The process of banks hiring people to break into homes, even when occupied, is just the latest oddity of the messy foreclosure crisis in Florida. Some property owners are reporting the break-ins to law enforcement as burglaries. Yet investigators consider the disputes a civil matter because the contractors do not display criminal intent.That essentially leaves the property owners without recourse… “It is vastly underreported; it is happening in counties all across the state,” said St. Petersburg foreclosure defense attorney Matt Weidner. “The more this occurs, the more prevalent it’s going to become.” The lack of willingness of the local police to deem destroying property and unauthorized entry as criminal acts leaves wronged parties with litigation as their only recourse. And some are filing suits.  Per the New York Times these suits likely represent only a small fraction of the actual cases of bank miscreance, since few of the victims are likely to have the financial wherewithall and intestinal fortitude to sue a bank.

Homeowners use 'show me the note' to fight foreclosure - In 2009, the Geweckes filed a lawsuit to block their foreclosure. At the heart of their case is this question: Who owns their mortgage? They allege the investor trust that claims to doesn't because there's no proper record of the mortgage's transfer to the trust. Their complaint also alleges that the mortgage didn't get to the trust until 18 months after the trust closed to new loans. If US Bank, the trustee, can't prove ownership, it can't foreclose, the Geweckes say. Their argument is one that more borrowers are making as they fight foreclosures in courts nationwide. Their attorneys allege that companies used shoddy practices at the height of the subprime lending boom when reselling mortgage loans in rapid-fire fashion, leaving questions now about mortgage ownership as foreclosures mount.

States Sue Bank of America: Bank Employees Dish, and Other Highlights - On Friday, Arizona and Nevada both filed suit against Bank of America, saying it deceived homeowners trying to avoid foreclosures. The suits allege that Bank of America knowingly misled homeowners in the loan modification process, regularly promising quick help when the process instead dragged out [1] over months if not years, foreclosing on homeowners during the modification process [2] despite promises that homeowners would be safe and making “false” promises to homeowners that their trial modifications would become permanent, among other complaints [3]. A Bank of America executive told the Arizona Republic that he was “disappointed [4]” in the suits and said the bank is already working to improve its processes and programs. “We and other major servicers are currently engaged in multistate discussions to address foreclosure-related issues more comprehensively,” he said.

Homes at Risk, and No Help From Lawyers - In California, where foreclosures are more abundant than in any other state, homeowners trying to win a loan modification have always had a tough time.  Now they face yet another obstacle: hiring a lawyer. Lawyers throughout California say they have no choice but to reject clients like Ms. Bell because of a new state law that sharply restricts how they can be paid. Under the measure, passed overwhelmingly by the State Legislature and backed by the state bar association, lawyers who work on loan modifications cannot receive any money until the work is complete. The bar association says that under the law, clients cannot put retainers in trust accounts. We had questioned the cheery assumption of the major banks regarding their robo signing abuses, namely, that they could simply resubmit their improper court documents and proceed as if nothing had happened.

Major Servicers Face Possible Suspension of Foreclosures in New Jersey Over Robo Signing -- Yves Smith - Improper affidavits are a fraud on the court, and robo signing is the mass, deliberate production of fraudulent submissions. Some jurisdictions, like New York and Florida, are requiring that attorneys certify the accuracy of documents presented in foreclosure. New Jersey is going one step further by having a Supreme Court justice demand an appearance by six major servicers to explain why their foreclosure operations should not be suspended. I suspect the sort of sanctimonious explanations we’ve seen in Congressional hearings, “We act to correct mistakes as soon as they come to our attention,” would not go over well.  From Associated Press: Six lenders who have combined to file nearly 30,000 foreclosure actions in New Jersey this year face the possible suspension of their operations next month under a court order announced Monday by state Supreme Court Chief Justice Stuart Rabner. OneWest and five other lenders were ordered to appear in state Superior Court in Trenton on Jan. 19 to demonstrate why the state shouldn’t suspend their foreclosure actions

Florida Judge Cancels All Foreclosure Sales in His Division Through Year End -- Yves Smith  - Per the order below (hat tip Matt Weidner) a judge in Broward County appears to have cancelled all foreclosure sales in one of the foreclosure division from December 20 to December 31: Broward County Judicial Order Canceling Foreclosure Sales. One might think this has something to with the Fannie and Freddie foreclosure halts, with run from December 20 to January 3. But the GSEs’ suspension started right after Thanksgiving and runs through January 3 and it has made similar Thanksgiving to New Years suspensions before, so this seems unlikely to be the trigger.  Moreover, this action, at least based on the account of Florida foreclosure procedures per Lisa Epstein of ForeclosureHamlet, could not impact evictions that were due to take place over the holidays. It turns out that there is usually a significant lapse between the foreclosure sale and the loss of possession.

New York Foreclosures Are Down 88% Since Robo-Signing Gate - On October 20 a New York judge ruled that foreclosures require a signature from bank's attorneys affirming that they have checked all paperwork. Since then weekly foreclosures have tumbled from 800 to 100, according to the New York Law Journal.  The 88-percent decline is more than foreclosure lawyers expected. It's also much greater than the normal Christmas slowdown. Other rulings have clogged the filings, including a Dec. 1 ruling in Suffolk county that threw out 127 foreclosures for failing to file affirmations, according to Daily Finance. A similar phenomenon is happening nationwide, with foreclosures at a two-year low after new regulations and uncertainty following with foreclosure-gate. Remember, every week toxic assets are stuck on bank balance sheets adds to servicing costs and may delay the housing recovery.

Yves Smith on foreclosures (video interview)

Who Receives a Mortgage Modification? - SanFran Fed - Abstract: Loan modifications offer one strategy to prevent mortgage foreclosures by lowering interest rates, extending loan terms and/or reducing principal balance owed. Yet we know very little about who receives loan modifications and/or the terms of the modification. This paper uses data from a sample of subprime loans made in 2005 to examine the incidence of loan modifications among borrowers in California, Oregon and Washington. The results suggest although loan modifications remain a rarely used option among the servicers in these data, there is no evidence that minority borrowers are less likely to receive a modification or less aggressive modification than white borrowers. Most modifications involve reductions in the loan’s interest rate, and an increase in principal balance. We also find that modifications reduce the likelihood of subsequent default, particularly for minority borrowers.

Are Banks Afraid to Foreclose on the Rich? - Yves Smith - I got this report from an attorney who is doing work in one of the top five foreclosure states. I’m relying this account in a somewhat sanitized form; he provided far more in the way of specifics.  One of his colleagues has a monthly mortgage payment considerably above $20,000 a month. He has not made a single payment in over 18 months. He has also not received a foreclosure notice or even as much as a call from his servicer. He knows of 20 people personally in his community who have mortgages of over $20,000 a month who have not made a payment in over a year. As with his case, there has not been a peep from the bank about the failure to pay. Some are nevertheless freaked out, concerned that the sheriff will show up any day, and have moved out.  The only theory my contact could come up with is that the high end appliances in these homes would make them particularly attractive targets for stripping, and the banks figure it’s cheaper to keep the nominal homeowner in place rather than pay for security. Another possibility is that the market for $5 million and over homes in this area is so thin (as in non-existant) that they are afraid to take over and put any homes on the market out of concern for revealing where prices are now.

November Existing Home Sales: 4.68 million SAAR, 9.5 months of supply  - The NAR reports: Existing-Home Sales Resume Uptrend with Stable Prices Existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, rose 5.6 percent to a seasonally adjusted annual rate of 4.68 million in November from 4.43 million in October, but are 27.9 percent below the cyclical peak of 6.49 million in November 2009, which was the initial deadline for the first-time buyer tax credit. Total housing inventory at the end of November fell 4.0 percent to 3.71 million existing homes available for sale, which represents a 9.5-month supply at the current sales pace, down from a 10.5-month supply in October. This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.   The second graph shows nationwide inventory for existing homes. The all time record high was 4.58 million homes for sale in July 2008.

Existing Home Inventory increases 5.4% Year-over-Year - Earlier the NAR released the existing home sales data for November; here are a couple more graphs ... The first graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Inventory is not seasonally adjusted, so it really helps to look at the YoY change.  The key is to recognize the seasonal pattern, and watch the YoY change in inventory. The year-over-year increase in inventory is especially bad news because the reported inventory is very high (3.71 million), and the 9.5 months of supply in November is well above normal.  By request - the second graph shows existing home sales Not Seasonally Adjusted (NSA). The red columns are for 2010. Sales NSA were slightly above the level in 2008, but well below the level in other years. The bottom line: Sales were weak in November - below consensus and close to Tom Lawler's forecast - and existing home sales will continue to be weak for some time.  The high level of inventory will continue to put downward pressure on house prices.

New Home Sales weak in November - The Census Bureau reports New Home Sales in November were at a seasonally adjusted annual rate (SAAR) of 290 thousand. This is up from a revised 275 thousand in October. The first graph shows monthly new home sales (NSA - Not Seasonally Adjusted or annualized). Note the Red columns for 2010. In November 2010, 21 thousand new homes were sold (NSA). This is a new record low for November. The previous record low for the month of November was 26 thousand in 1966 and 2009; the record high was 86 thousand in November 2005. The second graph shows New Home Sales vs. recessions since 1963. And another long term graph - this one for New Home Months of Supply. Months of supply decreased to 8.2 in November from 8.8 in October.  This is still high (less than 6 months supply is normal).  The final graph shows new home inventory.  The 290 thousand annual sales rate for November is just above the all time record low in August (274 thousand). This was the weakest November on record and below the consensus forecast of 300 thousand.

Home Sales: Distressing Gap - Here is an update to a graph I've been posting for several years. This graph shows existing home sales (left axis) and new home sales (right axis) through November. This graph starts in 1994, but the relationship has been fairly steady back to the '60s. Then along came the housing bubble and bust, and the "distressing gap" appeared (due mostly to distressed sales).  Initially the gap was caused by the flood of distressed sales. This kept existing home sales elevated, and depressed new home sales since builders couldn't compete with the low prices of all the foreclosed properties.  The two spikes in existing home sales were due primarily to the homebuyer tax credits (the initial credit in 2009, followed by the 2nd credit in 2010). There were also two smaller bumps for new home sales related to the tax credits.

MBA: mortgage applications down 18.6% last week - Mortgage application volume continues to decline with a huge drop last week, as interest rates remain on an upward swing and demand for refinancings plummets. The Mortgage Bankers Association said its market composite index decreased 18.6% for the week ended Dec. 17 on a seasonally adjusted basis. Unadjusted, the index fell 20% from the prior week. Refinancing applications have decreased for six consecutive weeks and volume is at the lowest point since the end of April after another 24.6% drop last week. The seasonally adjusted purchase index fell 2.5% last week. The unadjusted purchase index declined 4.9% and was 8.4% lower than a year earlier. In four-week moving averages, the seasonally adjusted market index is down 9.8%, the purchase index is down 1.2% and the refinance index is down 12.7%. The refinancing share of all mortgage applications fell to the lowest point since early June at 72.3% down from 76.7% the week earlier.

Lawler: Overall Housing Stock Growth Likely to Slow Even Further in 2011 - From economist Tom Lawler: Overall Housing Stock Growth Likely to Slow Even Further in 2011 Given recent and likely first half housing starts numbers, it seems highly likely that the growth in the US housing stock – which this year was the slowest in US history – will slow even further in 2011, even if housing starts begin to increase next year. Generally there is an average 7-8 month lag between SF housing starts are SF housing completions, and for MF housing starts the average lag is a little over a year. Given what housing starts have done, and given near-term indicators point to low levels of new housing production in the early part of next year, it seems highly likely that overall housing completions will be down in 2011.

Housing Market Will Continue To Decline As Prices Slide In Softer Markets - There isn’t a sufficient floor of buyers in those markets to stop further declines and foreclosure sales that appear to be on the horizon. It depends on the market. For example, the recent Case-Shiller 20 cities report shows that coastal California has had a positive trend: Los Angeles +4.4%; San Diego +5.0%, and San Francisco +5.5%. Another area of strong growth is Washington DC (+4.5%) which is an island of government transfer payments in a sea of trouble. The bad news is that estimates of homes underwater and likely to default have gone up, depending on who you wish to listen to. The most recent and scariest number floating around is from Laurie Goodman at Amherst Securities: I estimate the housing overhang to be more than 7 million units -- these loans are likely to be liquidated and are creating a huge shadow inventory. Adding borrowers with substantial negative equity but who have not yet become delinquent, I place the total size of the problem at 11 million to 12 million units; in other words, at the current trajectory, more than one in every five borrowers could face foreclosure if stronger policy measures are not taken. Clearly, the biggest problem for these borrowers is negative equity.

Economists See Slower Housing Recovery - The recovery of housing prices will take at least four more years, according to a monthly survey of 110 leading economists and real estate experts, significantly longer than previously estimated. Housing prices will rise only 7.2 percent by 2014 and the aggregate value of U.S. single-family homes four years from now will be roughly $1 trillion less than the economists projected in May, said Terry Loeb of MacroMarkets, the firm conducting the survey, which is based upon the projected path of the S&P/Case-Shiller U.S. National Home Price Index over the coming five years.   ”For the first time, in this month’s survey, our panelists provided their expectations through 2015. Less than 3% of the panel expects negative change in 2015,   Yet, at +7.2%, the average projection of cumulative home price performance through 2014 reached its lowest point since survey inception for the second consecutive month,”

About that 90% drop in home prices...One of the few things that Stoneleigh and I occasionally disagree on -and there really are but a few- is the rate at which real estate prices will decline. I proudly and steadfastly maintain that it will be 80+%, while she insists it will be 90%. Once you do the math, it’s obvious that's no basis for a healthy disagreement. We basically even agree on this one. Bummer! The reactions to the fact that Stoneleigh mentioned her 90% prediction in her latest interview with Max Keiser are amusing. Not least of all Max' own immediate one, jokingly suggesting the segment may need to end up on the cutting room floor for being too extreme. Mostly, though, I've seen tons of people say that Stoneleigh is a loony doomer who has no idea what she says. Thing is, that would make me a loony doomer as well, and no, you ain't getting away with that one.  Of course we see where people are coming from; no-one who hasn‘t thoroughly thought this through could possibly see an 80-90% drop in home prices, and most who have can't either. However, that's where the Big Picture enters, stage left in five.

Las Vegas: A tour of the Preposterous - A couple of excerpts at the Las Vegas Sun: Boom-bust era leaves architectural scars across valleyNow we’re on Gibson Road in Henderson, up the hill from Interstate 215, and there sits Vantage, a boxy, glassy modernist condo development; a historical artifact of the era of the credit boom, and, perhaps, delusional exuberance. It was a $160 million project, but no one lives there. It sits on the hill, surrounded by suburbia, like a hipster who’s stumbled into a church that he thought was a nightclub....We drive east on 215 to ManhattanWest on Russell Road, another half-finished mixed-use development. Dense, high-rise urbanism plopped down in the suburbs, its name a great irony. Some windows are covered with plywood, like an abandoned property in a city that suffered a natural disaster.It’s like a Hollywood set. But of what? It imagines that it’s supposed to look this way because somewhere, there’s something that’s cool and authentic and looks like this, perhaps? But there is no such place. This quote from the article captures the bubble insanity: "It seemed any project, no matter how preposterous, could make money." They were wrong.

Housing Disaster Update - Is the Housing Market the forgotten crisis, as columnist Rex Nutting recently asserted? It depends. If you check in with Calculated Risk everyday, then you receive the same updates on the disaster I do. But if you look for mainstream media reports, there are few new stories making the rounds because glowing reports are hard to come by. There are no new initiatives to "save" the market because all the previous ones, such as HAMP, were miserable failures. Here's Nutting—  For typical Americans, two things determine their financial well-being: Their job and the equity they have in their home [left]. They get almost all of their income from wages and salaries, while most of their wealth is tied up in their house. When wages and house prices are rising, they are confident. When wages and house prices are falling, they are fearful. Policy makers may have rescued the banks, but they haven’t figured out a way to bring back the jobs that were lost, nor have they found any answer to the problem that was the nucleus of the crisis: housing...

Households likely to deleverage debt with underwater mortgage defaults: Report - Bank of America Merrill Lynch analysts said the most likely way households will deleverage roughly $1 trillion in excess debt is through the default of more underwater mortgages. Home prices in the Standard & Poor's/Case-Shiller 20-city index have dropped 28.6% from the peak in the summer of 2006. This has led to more than 10.8 million homes, or 22.5% of the entire U.S. market in negative equity as of the third quarter, according to the analytics firm CoreLogic (CLGX: 18.26 0.00%). And while that percentage is down from the 50 basis points from the previous quarter, negative equity remains the primary factor holding back a recovery in the housing market and the overall recovery. Analysts said the collapse in home prices means the asset value supporting Americans' debt is no longer there.

Buy vs. Rent: An Update - Below is an updated list of rent ratios — the price of a typical home divided by the annual cost of renting that home — for 55 metropolitan areas across the country. We last covered this subject about eight months ago, and you’ll notice that most ratios have not changed much since then. A good rule of thumb is that you should often buy when the ratio is below 15 and rent when the ratio is above 20. If it’s between 15 and 20, lean toward renting — unless you find a home you really like and expect to stay there for many years. It’s pretty amazing when you think about it. The country has suffered through a terrible crash in home prices, yet buying a house remains an iffy proposition in many markets. The data comes from Mark Zandi of Moody’s Analytics and covers the second quarter of this year. Home prices haven’t changed very much since then, so I would expect ratios in most places to be quite close to the numbers you see here.

The Effect of Falling Home Prices on Small Business Borrowing  FRB Cleveland: Small businesses continue to report problems obtaining the financing they need. Because small business owners may rely heavily on the value of their homes to finance their businesses (through mortgages or home equity lines), the fall in housing prices might be one of the causes of their difficulty. We analyze information from a variety of sources and find that homes do constitute an important source of capital for small business owners and that the impact of the recent decline in housing prices is significant enough to be a real constraint on small business finances.A persistent issue throughout the recovery has been the reported inability of small businesses to get the financing that they need. To better understand the sources of any shortfall, the Federal Reserve System undertook a project in 2010 to meet with representatives from banks and small businesses.1 In some of the focus groups..., participating small business owners explained that the reduced value of their homes has made it difficult for them to provide the necessary collateral for small business loans. Other participants said that the reduced value of homes has made home equity borrowing as a source of business capital more difficult to come by, also contributing to the difficulty many small businesses face in obtaining sufficient capital to finance their operations.

Analysis: Decline in home prices impacting small business borrowing - From the Cleveland Fed: The Effect of Falling Home Prices on Small Business Borrowing. The researchers analyze small business borrowing, and note that homes equity borrowing is an "important source of capital for small business owners and that the impact of the recent decline in housing prices is significant enough to be a real constraint on small business finances." Here is their conclusion:  Everyone agrees that small business borrowing declined during in the recession and has not yet returned to pre-recession levels. Lesser consensus exists around the cause of the decline. Decreased demand for credit, declining creditworthiness of small business borrowers, an unwillingness of banks to lend money to small businesses, and tightened regulatory standards on bank loans have all been offered as explanations.While we would agree that these factors have had an effect on the decline in small business borrowing through commercial lending, we believe that other limits on the credit of small business borrowers are also at play and could be harder to offset. Specifically, the decline in home values has constrained the ability of small business owners to obtain the credit they need to finance their businesses.

Bankruptcies Falling Again - Here's something I didn't expect to see when I moseyed by the bankruptcy statistics at Credit Slips: Bob Lawless, who made the graph, expects them to decline further in 2011, to about 1.45 million.  Not what I would have expected with the financial crisis a few years behind us--I would have expected to see filings still rising, as families ran to the end of their resources.  1.45 million is fewer bankruptcies than the US saw in 2004 with a booming housing market and an economy and a job market growing at a pretty decent clip. This may be evidence on a question that has puzzled bankruptcy experts--was the precipitous decline in bankruptcies after the 2005 bankruptcy reform act real, or was it simply a lull before the storm?

The Last Christmas in America - As noted here many times before, the purchasing power of American wage-earners reached a plateau around 1973 and has been declining ever since. One key point which is usually overlooked when comparing "The Last Christmas in America" circa 1974 and TLCIA circa 2010: the wealth distribution in the U.S. was much flatter then. CEOs of financial institutions did not earn $10 million each; there were no hedge funds with chiefs pulling down $600 million each (yes, that was the average "compensation" for the top ten fund managers at the hedgies' glorious peak), and even minimum wage ($1.60/hour in the late 60s, I know because my wage stub recorded it) bought far more goods (purchasing power) then than minimum wage does now. Not only was gasoline cheap, but housing was far and away cheaper than it is today. Just about any G.I./Vet could buy a house with his/her V.A. benefits (3% down), and anyone else could scrimp and save for a few years and then buy a house for 2 or 3 times their annual wage at an interest rate around 6%.

A Tale Of Two Christmases - The government propaganda machine has been particularly busy as Christmas approaches. Retails sales were said to be up 0.8% in November, which yields a year-over-year increase of 7.7%. These sales are not inflation-adjusted, so they're up "only" 6.9% excluding gasoline sales. (Average national gas prices have gone up about 10 cents per gallon over the last month, and now stand at $2.984.) And if we "deflate" retail sales using the price producer index (PPI) instead of the consumer price index (CPI), sales are actually falling. The official "good news" has led some commentators to debunk the "myth" of deleveraging, whereby it is now said that American "consumers" are actually re-leveraging, not shedding debt. If you really want to understand the debt issues, read my posts The Worst Is Yet To Come In Housing and Descending The Household Debt Mountain. Even if spending is not rising at nearly the rate the official propaganda suggests, and may actually be falling, the natural question which arises is who is doing all this spending? Both anecdotal evidence and polling data suggest that the well-off are doing most of it. Consider Economic recovery leaving some behind this Christmas by a staff reporter at the Washington Post. I hope you have a strong stomach, or lacking that, a handy place nearby where you can throw up.

The economic outrage of 2010: Cowardly leaders failed to help working people -- and coddled the rich - As we look back on 2010, the most significant economic event of the year was what didn't happen: Unemployment failed to come down, stubbornly hovering around 9.5% almost four years after the bubble broke, three years after the beginning of the recession and more than two years after the collapse of Lehman Brothers. And, above and beyond any other reason, this stagnation persisted because our political leaders failed to muster the requisite courage to tackle our problems at their source.With one of six Americans who would like a full-time job still not able to get one, with more than 40% of those unemployed being without a job for more than six months - a level not seen since such records were kept - but with the bankers who caused the whole mess receiving the same megabonuses as before the crisis as if nothing had happened, no wonder the anger within the country is palpable.

"The Economy" — America's Great Lie - The greatest tragedy to emerge from the Great Recession and its aftermath is the accelerating destruction of America's Middle Class and the swelling ranks of the poor. This tendency was well underway in the decades leading up to 2008, but the recession cemented the deal. It's A Great Time To Be Rich, says Business Week, but there's never been a worse time to be anything else. Those in the media and the government always refer to "The Economy" as a monolithic entity in which we all participate. That's the Great Lie, for there are two economies in the United States, one where the wealthy or well-off live and another where everyone else struggles to survive. I have called this America's New Gilded Age. 77% of those living in the "Main Street" economy live paycheck-to-paycheck, but you would never know it listening to glowing reports about November's retail sales numbers. As I demonstrated in A Tale Of Two Christmases, it is spending by the rich that is driving those numbers.

Notes On Government Employment – Krugman - First, what we’ve seen under Obama is a small rise in federal employment, swamped by a larger fall in state and local employment — reflecting the budget woes of the states, and the inadequacy of federal aid in the slump. So you see a small rise if you look only at the feds, but a decline if you look at the overall picture.Second, most government workers are at the local level, and most of the rest are state workers; the federal government is a small piece of the total. And if you look at what they do, a lot of them are teachers; many of the rest are firefighters, police, and other occupations we sort of like. Third, why has government employment grown over time? Because, um, we have a growing population. Here’s government employment as a share of the population: Yes, government got bigger under those socialists Dwight Eisenhower, LBJ, and Nixon. Since then, however, there has been no trend relative to population.And bear in mind, again, that the representative government employee isn’t a bureaucrat trampling on your liberty; he or she is a schoolteacher.

Another Lie Conservatives Need To Explain. Government Employment - A constant meme one hears is how the government has been adding so many employees.  It’s just another example of the government ‘gone wild’ super meme of which this is a component.  The problem with this particular complaint is that it’s basically not true.   The number of government employees as a share of the population hasn’t risen since the mid-1970s.  We have more government employees because we have a bigger nation with more people. As an aside, the huge jump in employees that Republicans used this summer against Democrats in the mid-terms, came about because of the census hiring.  Now that those employees are gone, not a peep from Republicans.   The cynical ploy worked on the public.  And that’s what’s most important if you’re a Republican. From Paul Krugman over at the New York Times. “Third, why has government employment grown over time? Because, um, we have a growing population. Here’s government employment as a share of the population:

Middle Class Stuck with Bad Times - Over the past two years, millions of Americans have been reeling from high joblessness and the collapsing housing bubble. A comprehensive new analysis of economic data and attitude surveys released last week finds that 93 percent of Americans took a big financial hit over the last 18 months. Researchers defined that hit as unemployment, a substantial income drop or large new expenses that most often were caused by medical costs or family obligations. No, it’s not just the recession. That loss of economic security is magnified by the erosion of defined-benefit plans, which makes retirement less secure. Another factor is the rise in the number of “contract employees” who have no job security. That’s helped create unprecedented year-to-year swings in family income.

Losing Hope About a Recovery - When will the economy begin to recover? The National Bureau of Economic Research’s Business Cycle Dating Committee says the recovery began in June 2009, but unemployed Americans beg to differ: That pie chart is from a new report from Rutgers’s Heldrich Center for Workforce Development, which has periodically resurveyed the same group of American workers who were unemployed at some point in the year after the financial crisis hit (and many of whom are still unemployed). In November 2010, the center asked these workers when the economy would “begin to recover.” As you can see, 13 percent of these respondents said the economy would begin to recover more than five years from now, and another 15 percent said it would “never” begin to recover.

How the government rebuilt household balance sheets - Mark Thoma makes a familiar complaint: that the government’s response to what he characterizes as a “balance sheet recession” has done wonders for the balance sheets of banks, but much less for the balance sheets of the population as a whole. What the government should have done, he says, is “use fiscal policy to help households make up for losses from the recession”: Mark doesn’t go into any detail on exactly how the government should have done “a better job of helping households”. But it seems to me that, quietly and largely invisibly, it’s actually done exactly that. Balance sheets have two sides, of course: assets and liabilities. And I suspect that what Mark might have in mind here is attacking the liability side of things, through pushing principal reduction on mortgages or allowing them to be reduced in bankruptcy. But there’s a problem with trying to reduce liabilities: when the markets lose faith in credit instruments, as we saw during the crisis, the repercussions can reverberate around all markets and all countries.

The Holiday Stimulus Package - With Christmas each year comes lessons about the role of demand in the economy. Retail sales are typically 15 to 20 percent higher in December than they are in September, October and November, and 30 percent higher than they are in the following January (as averages show for 1939 to 2009). In dollar terms, that means that retail sales rise and fall by roughly $90 billion in a single month. A $90 billion change in spending in a single month is larger than even the American Recovery and Reinvestment Act, the fiscal-stimulus legislation that was increasing federal government spending by about $50 billion a quarter (less than $20 billion a month). Likely a consequence of December retail spending, December employment is high each year. Retail employment in December is typically 3.9 percent higher than in October and 5.2 percent higher than in the following January. Although the holiday spending surge is clearly associated with a high level of employment, it also shows how spending is a rather indirect way of creating jobs. That holiday spending of roughly $90 billion more in December is associated with about 500,000 additional jobs for a month – that amounts to $180,000 per job per month!

Number of the Week: Outsize Importance of Holidays for Retailers - 34%:

The share of annual sales that hobby, toy and game stores record during November and December. As the holiday shopping season draws to a close, the apparent strength this year is good news for retailers who make a disproportionate amount of their sales during November and December. Though the two months make up just a sixth of the year, sales during the holiday season account for about 20% of all retailers’ annual sales, and that number is even higher for some specialty sectors. Unsurprisingly, toy stores top the list with more than a third of their annual sales recorded during November and December. Jewelry stores come in second with about 31% of their sales coming in the final two months of the year. Department stores also rely on the holiday season for about a quarter of their annual sales.

Huh? Post-Christmas Sales Four Days BEFORE Christmas -This holiday shopping season got off to a start with Black Friday sales starting way before Black Friday, and continued with Black Friday sales lasting way after Black Friday. Based on this kind of logic, it should come as no surprise that retailers are offering after-Christmas sales well before Christmas.The WSJ reports strong retail sales as Christmas nears, thanks in large part to an onslaught of big discounts, sales, and promotions.Because shoppers are accustomed to hefty markdowns, it's harder and harder to get consumers excited for yet another 30% off sale. So one retailer, Aeropostale, is jumping the shark by doing some time travel, offering "After Christmas Prices Now" in select styles.

Economy brightens as consumers spend and layoffs slow - Economic reports Thursday suggested that employers are laying off fewer workers, businesses are ordering more computers and appliances, more people are buying new homes, and consumers are spending more confidently. Combined, the latest data confirm that the economy is improving, though the job market remains a problem with unemployment at a stubbornly high 9.8 percent. "The recovery is moving into higher gear," The reports added to a run of better-than-forecast data that have prompted economists to raise their estimates for economic growth. The extension of Bush-era income-tax cuts for two years, a reduction in the payroll tax next year, and the Federal Reserve's plan to buy $600 billion of Treasury securities is adding to the optimism

Update on Personal Saving Rate - According to the BEA, the personal saving rate declined in November to 5.3%:  Personal saving -- DPI less personal outlays -- was $614.8 billion in November, compared with $622.8 billion in October. Personal saving as a percentage of disposable personal income was 5.3 percent in November, compared with 5.4 percent in October. This graph shows the saving rate starting in 1959 (using a three month trailing average for smoothing) through the November Personal Income report.  It is possible the saving rate has peaked, or it might rise a little further, but either way most of the adjustment has already happened and consumption will probably mostly keep pace with income growth next year.

Has Spending & Income Hit a Ceiling? - Personal income and spending continued rising at a moderate pace last month, the U.S. Bureau of Economic Analysis reports. Disposable personal income rose by 0.3% for the second consecutive month and personal consumption expenditures gained 0.4%, logging the fifth straight month of higher spending. . Good news, to be sure, but is there also a glimpse of the new normal in the data? As always, there’s value in stepping back and looking at the rolling 12-month percentage change. By that benchmark, the spending and income renaissance in the wake of the recession’s end in June 2009 seems to have hit a ceiling at roughly 4% annual growth.  It’s possible, of course, that we’ll see higher rates of growth in the months and years to come. But given what we know about the heavy debt load weighing on household balance sheets, it’s reasonable to wonder if the 4% ceiling will hold for the foreseeable future.  Again, a 3%-to-4% rate of growth in spending and income is far from the end of the world, but keep in mind that we’re talking here of nominal rates of growth. Fortunately, inflation is minimal these days, but that’s not a permanent state of macro affairs.

ATA Truck Tonnage Index decreases slightly in November - From the American Trucking Association: ATA Truck Tonnage Index Fell 0.1 Percent in November The American Trucking Associations’ advance seasonally adjusted (SA) For-Hire Truck Tonnage Index edged 0.1 percent lower in November after increasing a revised 0.9 percent in October. In September and October, tonnage increased a total of 2.8 percent. The latest reduction put the SA index at 109.7 (2000=100) in November from 109.9 in October This graph from the ATA shows the Truck Tonnage Index since Jan 2006.  The line is added to show the index has been mostly moving sideways this year.

DOT: Vehicle miles driven increased in October - The Department of Transportation (DOT) reported that vehicle miles driven in October were up 1.9% compared to October 2009: Travel on all roads and streets changed by +1.9% (4.9 billion vehicle miles) for October 2010 as compared with October 2009. Travel for the month is estimated to be 259.5 billion vehicle miles. Cumulative Travel for 2010 changed by +0.6% (16.0 billion vehicle miles). This graph shows the rolling 12 month total vehicle miles driven.  On a rolling 12 month basis, vehicle miles driven have only increased 1.2% from the bottom of the recession.  Miles driven are still 1.4% below the peak in 2007. This is another indicator of a sluggish recovery.

Tourism Spending Increases in 3rd Quarter by 8% - From today's BEA report: "Real spending on travel and tourism increased at an annual rate of 8.0 percent in 2010:3, following an increase of 3.4 percent in 2010:2. By comparison, real gross domestic product (GDP) increased 2.5 percent in 2010:3 after increasing 1.7 percent in 2010:2. While tourism spending outpaced overall growth in the economy, it still remains below its peak set in 2007:3 (see chart above). xamining the components of real travel and tourism spending, passenger air transportation increased sharply, accompanied by accelerated growth in accommodations. During this period, prices for passenger air transportation fell, while prices for accommodations rose. Direct tourism-related employment continued to grow, increasing 2.0 percent in 2010:3 after increasing 2.1 percent (revised) in 2010:2. By comparison, overall U.S. employment fell 0.1 percent in 2010:3 after increasing 2.2 percent in 2010:2."

$305 On Gas This Month - Bah! Humbug! - Holiday shoppers will need to bump up their budget for one purchase this year, and they can't even put it under the tree: gasoline. The price of fuel is up 13.6% from last December and 76% higher from December 2008, according to a new study from the Oil Price Information Service. Nationwide, drivers spent $305 on gasoline in December. Who's hardest hit? People in Montana. Montana households are estimated to spend over $449 on gas in December, representing a 12.74% slice of their overall household budget. It's common that people in rural states spend a higher percent of their salary on gas, as incomes tend to be lower. They also often have further to drive for work, and tend to buy larger vehicles

Interpreting the Beveridge Curve - The Beveridge curve (BC) refers to the relationship between job vacancies and unemployment. There are really two types of BCs: one empirical, and one theoretical. The empirical BC is simply a scatterplot of vacancy and unemployment data. Think of data as the entrails of a gutted animal. The theoretical BC is an interpretation of those entrails, as divined by an economic haruspex.  The empirical BC is usually negatively sloped. Except for when it isn't. (You know how it is.) The theoretical BC is a very intuitive creature. If some measure of general business conditions improve, especially in terms of economic outlook, businesses will generally want to expand their investments. And this includes investment in the form of replenishments to their labor force. If the labor market is subject to search frictions, the hiring process will take time. But an increase in job openings will generally make it easier for unemployed workers to find a job, so we would expect unemployment to decline as job vacancies rise.   Sometimes, however, the BC appears to "shift" its position (e.g., if the BC looks like a shotgun blast). These apparent shifts are sometimes interpreted to be the consequence of shocks that somehow lead to increased search frictions (let me label these "structural" shocks).

U.S. Manufacturing Productivity Strong in 2009 - The U.S. had the sharpest increase in manufacturing productivity — output per hour of work — in 2009 of the 19 industrialized economies for which the U.S. Bureau of Labor Statistics keeps data: 7.7%. Japan had the steepest decline, 11.4%. For the first time since the BLS began keeping tabs, both output and hours worked in manufacturing declined in all 19 economies, a reflection of the unusually deep global recession. Manufacturing productivity declined in 12 of the 19 economies. Unit labor costs — a measure of the cost of the worker required to produced one unit of output — increased in all but four of the economies, measured in their local currencies, with the largest increases in Germany and Finland. Due to the strength of the dollar in 2009, unit labor costs measured in the U.S. currency fell in 12 of the foreign economies. Compared to other countries, the labor-cost competitiveness of U.S. manufacturing decline versus 10 economies and rose versus eight.

For the Unemployed, the Dream’s a Nightmare - Work hard and play by the rules and you'll get ahead. That's been an article of faith, since at least the birth of this nation, in what has come to be called the American dream. That's now a shattered dream for millions of Americans, according to a new study released by Rutgers University. "This recession is not as bad as the Great Depression, but it's a close cousin," said Carl Van Horn, director of Rutgers' John J. Heldrich Center for Workforce Development, and co-author of The Shattered American Dream: Unemployed Workers Lose Ground, Hope, and Faith in their Futures. "This study reveals what happens when you have a long, tough recession," Van Horn said. "It changes people's thinking and people's attitudes. There is now an air of resignation and pessimism."

The Year Washington Became "Business Friendly" -So the White House caved in on the Bush tax cuts for the wealthy, and is telling CEOs it will be on their side from now on. As the President recently told a group of CEOs, the choice “is not between Democrats and Republicans. It’s between America and our competitors around the world. We can win the competition.” There’s only one problem. America’s big businesses are less and less American. They’re going abroad for sales and employees. That’s one reason they’ve showed record-breaking profits in 2010 while creating almost no American jobs. Consider one of most popular Christmas products of all time – Apple’s iPhone. Researchers from the Asian Development Bank Institute have dissected an iPhone whose wholesale price is around $179.00 to determine where the money actually goes.Some shows up in Apple’s profits, which are soaring. About $61 of the $179 price goes to Japanese workers who make key iPhone components, $30 to German workers who supply other pieces, and $23 to South Korean workers who provide still others. Around $6 goes to the Chinese workers who assemble it. Most of the rest goes to workers elsewhere around the globe who make other bits. Only about $11 of that iPhone goes to American workers, mostly researchers and designers.

Temporary employment - This year, 26.2 percent of all jobs added by private sector employers were temporary positions. In the comparable period after the recession of the early 1990s, only 10.9 percent of the private sector jobs added were temporary, and after the downturn earlier this decade, just 7.1 percent were temporary. Here is more.  And this: Temporary employees still make up a small fraction of total employees, but that segment has been rising steeply over the past year. “It hints at a structural change,” said Allen L. Sinai, chief global economist at the consulting firm Decision Economics. Temp workers “are becoming an ever more important part of what is going on,” he said.

As Hiring Falters, More Workers Become Temporary - Temporary workers are starting to look, well, not so temporary.  Despite a surge this year in short-term hiring, many American businesses are still skittish about making those jobs permanent, raising concerns among workers and some labor experts that temporary employees will become a larger, more entrenched part of the work force.  This is bad news for the nation’s workers, who are already facing one of the bleakest labor markets in recent history. Temporary employees generally receive fewer benefits or none at all, and have virtually no job security. It is harder for them to save. And it is much more difficult for them to develop a career arc while hopping from boss to boss.  “We’re in a period where uncertainty seems to be going on forever,”  “So this period of temporary employment seems to be going on forever.” This year, companies have hired temporary workers in significant numbers. In November, they accounted for 80 percent of the 50,000 jobs added by private sector employers, according to the Labor Department. Since the beginning of the year, employers have added a net 307,000 temporary workers, more than a quarter of the 1.17 million private sector jobs added in total.

US Follows Japan: The Rise of Freeters, aka Temps -  Yves Smith - One of the post-bubble era trends in Japan that has caused consternation within the island nation is the rise of an employed underclass. The old economic model was lifetime employment, even though that was a reality observed more at large companies than in the economy overall. Nevertheless, college graduates could expect to find a job without much difficulty and look forward to a stable career if they performed reasonably well.  In the new economic paradigm, wages are compressed among full-time salaried workers. And even worse from a societal standpoint is the rise of “freeters” or workers hired into temporary jobs. Some of them can work for the same company for a very long time, but they are not only paid less, but are also not in the hierarchy of permanent worker. Many become freeters right out of college, and are never able to get back on track with their peers, since companies in Japan, as in the US, prefer to hire new college or professional school graduates into their entry level positions. Many freeters can’t afford to live by themselves, and therefore become “parasite singles” staying with their parents. The delay in or inability to support oneself further suppresses Japan’s birthrate, worsening its demographic crisis. A recent article by Charles Hugh Smith depicts the rise of freeters as directly related to growing income disparity:

Temporary Help and Structural Unemployment: The Unskilled Can Always Become Economists - The NYT showed that there were still good paying jobs for unskilled workers in the economics profession by citing two economists who touted the growth in temporary employment as evidence for the growth of structural unemployment in the economy. Structural unemployment results when there is a mismatch between skills and the available jobs. Economists with skills would have noted that temporary employment plummeted in the downturn and is only now beginning to recover lost ground. After the recent gains in hiring in temporary employment the number of jobs in the sector is still down by almost 20 percent from its pre-recession level. In the real world, this is not evidence of structural unemployment.

Excessive worries about temporary jobs - There has been a large number of articles suggesting that rapid hiring of temporary employees may imply structural problems in US employment. There are more than enough substantial issues to worry about with the US employment situation; this is not one of them. Currently 1.7% of jobs are in “temporary help services” and, although the fraction rose steeply following the crisis, it remains far below peak levels of the past decade.  At least since January, Calculated Risk has been repeating a comment along the lines of, there has been some evidence of a shift by employers to more temporary workers, and the saying may become “We are all temporary now!”  Yesterday the New York Times had a long article worrying out loud about temps becoming a permanently larger fraction of the work force: And today, Naked Capitalism took it a step further, comparing the US to Japan, where a large class of underprivileged workers seems to be stuck in a career path where quality jobs remain always out of reach. Hang on just a minute. It is always possible that the US will move to a situation where there is a large class of permanent temps, but we are a long way from such a dire situation. Here is a graph of the fraction of all jobs (non-farm payrolls) that are classed as “temporary help services”.

Explaining the Statistics on Temporary Hires - Reading my article on temporary workers in Monday’s Times, Daniel Indiviglio, an associate editor at The Atlantic, questions whether companies are really behaving that much differently than they have in previous recessions, when temporary jobs were the first to come back.  Mr. Indiviglio wonders about statistics showing that this time around, employers are relying more heavily on temporary workers — those hired through agencies like Adecco, Kelly Services and Manpower — than in comparable periods after the two earlier recessions.It’s true that companies typically hire temporary workers before they commit to permanent workers. The chart that accompanies the article compared three time frames — February 1992 to January 1993, July 2003 to June 2004, and December 2009 through November 2010 — all 11-month periods that followed the troughs of private-sector employment after each recession. Mr. Indiviglio used starting points six months after the  end of each recession, and came up with different percentages. I would argue that measuring from the trough of employment, rather than the technical end of the recession, is a more accurate period to examine, given that employment often lags the technical end of a recession.

Long-Term Unemployed: 6 In 10 Jobless Have Searched For More Than A Year, As Hopelessness Sets In - Of the nation's unemployed workers, nearly six in 10 have been job-hunting for more than a year, according to a survey released Thursday by the John J. Heldrich Center for Workforce Development at Rutgers University. A third have searched for more than two years. The unemployed, which comprise nearly 10 percent of the nation's workers, are seeing their financial situation worsen. A full 80 percent of the survey respondents said they've had to spend less on something formerly fundamental in their lives -- things like food, housing or health care -- with 40 percent having to forgo essentials entirely. By a margin of nearly two to one, most unemployed workers believe they will not return to the condition they were in before the Great Recession began.

Emergency Unemployment Benefits Reauthorized - Thousands of Washington’s jobless workers may continue to receive up to 99 weeks of benefits, now that Congress and the president have reauthorized a federal unemployment benefits program that expired last month. “This is welcome news for unemployed workers who are having a hard time finding a job,” said Joel Sacks, Deputy Commissioner for the Employment Security Department. “We need to keep a safety net in place until the economy gathers more steam.”For the past year, eligible jobless workers could receive up to 99 weeks of unemployment benefits, collected in this order: up to 26 weeks of regular benefits, up to 53 weeks of emergency unemployment compensation (EUC) and up to 20 weeks of extended benefits.  Today’s action extends the EUC program, but does not expand the total weeks available. Therefore, people who have already collected all of their EUC benefits are not eligible for these additional benefits. Depending on where individuals are in their claims cycle, they will fall primarily into two categories – those who are eligible for more benefits and those who are not.

How Long Is Each State’s Unemployment Extension? -  Last week Congress approved an extension of a program to provide unemployment benefits for up to 99 weeks, but there’s a wide variance in how long an unemployed person can receive benefits depending on their state.  During the recession, Congress created a program allowing up to 99 weeks of unemployment benefits backed by the federal government — an addition of 73 weeks to the traditional 26 offered by the states. The duration varies from state to state, based on how bad the unemployment situation is in the region. There are three main levels to unemployment insurance right now: state benefits, federal emergency unemployment compensation and joint state-federal extended benefits. The basic state benefits are usually 26 weeks and are unaffected by the federal program. When that time is up, the EUC program offers benefits in four tiers. Tier 1 (20 weeks) and tier 2 (14 weeks) are available in all states. Tier 3 (13 weeks) and tier 4 (6 weeks) are only available in states with higher unemployment rates, with 47 states and Washington DC qualifying for tier 3 and 25 states and Washington DC allowed to take part in tier 4. When EUC expires, some states offer either 13 or 20 weeks of extended benefits beyond that point.The following chart shows how many weeks are available in each state, according to the latest data from the Department of Labor.

A strange model of the economy, ctd - Ryan Avent at the Economist explains much more clearly than I the wrongness of the claim that low population growth will make us better off: The point concerning government spending is simply bizarre. Projected growth in federal spending is largely due to rising spending on entitlements, especially Medicare and Medicaid. Slower population growth isn’t going to limit this spending growth; it will just increase the dependency ratio and the expected per capita burden of taxation…. Also in the comments Andy Harless tries to provide an explanation for what Johnson may be thinking: (1) fewer immigrants mean less competition for jobs in the short run (assuming immigrants don’t create enough domestic demand to support their employment), and (2) fewer children mean less drain on governments. Of course fewer children do also mean less demand and therefore fewer jobs, but this is obviously endogenous: all the first argument is really saying is that it’s a good thing people aren’t dumb enough to keep coming to the US when there are no jobs.

Sunshine: at the IMF, of all places - So, here we are, after a 2010 of economic horrors. There is extensive debate as to whether the standard tools of economics are even valid. But is anyone at least trying to do something original with the standard toolkit? The DSGE model may be one of John Quiggin’s zombies..., but zombies are notoriously resilient.  The answer on this occasion is yes, at least as far as Michael Kumhof and Romain Ranciére, go. In a new paper, they present a DSGE model... Then, they run a simulation of the macro-economy assuming that there is a negative shock to the bargaining power of labor resulting in a shift in the income distribution. The simulation results were that the financial sector balloons in size, that total private debt in the economy expands hugely, and that credit acts as a substitute for rising average wages in the short run. Eventually, the model produced a massive financial crisis and a brutal recession, followed by a blow-out of the government budget. Your keen and agile minds will not have missed that flat real wages, an increased share of national income going to the top 5%, enormous growth in the financial sector, and a credit-financed consumer boom are exactly what happened to the macroeconomy in the last 30 years.

Modeling Sunshine and Shadows: Inequality, long hours and crisis - Now I haven't read Bob Reich's new book but I did the next best thing. I saw him talk about it at a book tour event in Point Reyes Station in October. Reich's argument is that 1. incomes have stagnated since the early 1980s 2. the first response of households was to increase hours supplied to the labor market to maintain purchasing power but when that strategy ran up against its limit, 3. households began to borrow aggressively. I think Reich has the ingredients right but they're in the wrong chronological order. That can be crucial when you're baking a cake or explaining history. Long before incomes began to stagnate, hours of work ceased a century long trend of decline, a trend that BLS economist Joseph Zeisel had called "one of the most persistent and significant trends in the American economy in the past century." Not to put too blunt a point on it, Americans suddenly stopped taking part of the gains of technology in the form of leisure. It's not as if they "just decided" to do this, either. There were all sorts of structural changes in the U.S. labor market that broke the trend. Just to name a few, there was the abandonment of the shorter hours employment strategy by organized labor in favor of promoting economic growth fueled by government spending, there was the explosion of per-employee benefits (quasi-fixed costs) as a proportion of total compensation and there was the FLSA provisions themselves which, in effect, were a double-edged sword with regard to the incentive of overtime pay.

NJ Turnpike Authority Privatizes Toll Collection.  More than 200 union members and leaders packed the New Jersey Turnpike Authority's meeting Wednesday to oppose a plan to outsource toll collectors' jobs on the Garden State Parkway and Turnpike to private contractors next spring. "Over the years, the union has worked together to help the Turnpike solve its problems," said Franceline Ehret, president of Local 194 of the International Federation of Professional and Technical Engineers, which represents 1,200 authority employees. "We urge you to hold off putting out the request for proposal and allow us to work it out." Ehret and other speakers said outsourcing will take what are now middle-class jobs and reduce them to minimum-wage jobs, which would negatively affect the state and local tax bases and the economy. Authority officials said the union will have a chance to submit a proposal as a private contractor.

Grand Rapids Michigan Outsources Airport Parking Operations To Private Firm - The trend towards dumping public unions continues to escalate in cities across the country. Latest on the list is from Michigan where a board votes to outsource parking operations at Grand Rapids airport Airport leaders unanimously selected a private firm to take over parking operations at Gerald R. Ford International Airport today, despite impassioned pleas by employees who will now have to reapply for their jobs and likely face pay and benefit cuts.Finance Director Brian Picardat and airport leaders said the decision was difficult and based on a projected savings of $1.5 million over five years, even after a wage concession offered by current parking employees was factored in. In an article just prior to the decision, the Grand Rapids Press noted ...Parking agents who do maintenance and assist customers can make between $14 to $19 an hour, not including tips. Those jobs also come with nearly a 33 percent medical and fringe benefit package.

Toil and Trouble - When economists and policy types and members of Congress talk about older Americans working past normal retirement age, an increasing theme of late, we tend to think they mean a few years beyond age 65, right? Working until ages 68 or 69, that is — maybe even 70, though that might be pushing it.  I was intrigued to hear from the ace data-crunchers at AARP that in the past 20 years the oldest group of workers, the 75-plus work force, has increased enormously. Seventy-five! And not only because there are simply more people that age around, but also because a higher percentage of them are participating in the labor force. Sifting through the data from the Bureau of Labor Statistics, AARP analysts found that the number of workers ages 75 and older (meaning they’re employed or seeking employment) has grown to about 1.3 million in 2009, from just under half a million in 1989. That’s still a small sliver of the population over age 75, just 7.3 percent, but a big jump from the 1989 labor force participation rate of 4.3 percent. We know that a growing proportion of this work force, almost 44 percent, are women. And a just-released Census Bureau report adds this surprising fact: of workers ages 75 to 84, more than 42 percent hold full-time jobs.

Older Workers and the Lump of Labor Fallacy - Paula Span writes an excellent piece about older workers in the NY Times: Toil and Trouble. Paula Span notes that this trend has been going on for some time, and can't just be blamed on necessity. This graph is from my posts on Labor Force Participation Rate: What will happen? and Labor Force Participation Trends, Over 55 Age Groups  The graph shows the participation rate for several over 55 age groups. The red line is the '55 and over' total seasonally adjusted. All of the other age groups are Not Seasonally Adjusted (NSA). The participation rate is trending up for all older age groups.Span concluded:  So to that Wisconsin reader who grumped, “Too many older people (professors, Morley Safer, etc.) continue to work for selfish reasons, thereby taking jobs from the young and unemployed” — I’m afraid you ain’t seen nothin’ yet. That is a classic lump of labor fallacy. This is a common error people make with immigration - that immigrants displace other workers, when in fact immigration increases the size of the economy.

Older Workers and the Phony Lump of Labor Fallacy - I have written two published scholarly articles examining the lump-of-labor fallacy claim and its history; the ONLY two scholarly articles published that have investigated the status of the claim. My conclusion is that the so-called fallacy is a canard, a fraud, a libel. There is no fallacy because, in the first place, people DO NOT assume a fixed amount of work. They may assume a given amount of unemployment, but in the face of persistent high levels of unemployment such an assumption is hardly "fallacious". Second, there is no "fallacy" in the sense of a canonical, demonstrated logical fallacy because economists who proclaim the fallacy are all over the map when it comes to explaining the "implicit" assumption of a fixed amount of work that they allege people make. Third, there is no economic fallacy, because the fallacy claim originated as a journalistic propaganda line that was only subsequently absorbed uncritically into economics textbooks. Fourth, there is no fallacy because modern accusations of the fallacy leave out a key component of the original -- the heinous motive of the unions to restrict output so that they could impose their dictatorial socialistic will on honest, innocent hard-working employers.  Without some sinister "ulterior design" to restrict output, the lump-of-labor fallacy claim is incoherent drivel. With it, it is a foaming-at-the-mouth, reactionary conspiracy theory.

Recession forces rise in low-wage families, report says - The Great Recession, responsible for boosting unemployment to its highest levels in a generation, has sharply increased the percentage of working people who earn wages so paltry that they are struggling to survive, according to a new report. The share of working families earning less than double the official poverty threshold - $43,512 for a family of four - increased from 28 to 30 percent between 2007 and 2009, according to a report released Tuesday by the Working Families Project, a nonprofit group that advocates on behalf of the working poor. Overall, the report said, the number of people living in low-income working families increased by 1.7 million to 45 million between 2008 and 2009. In November, the jobless rate rose to 9.8 percent, and has hovered near 10 percent for more than a year. "Clearly, we are going in the wrong direction,"

Employed But Struggling: Report Finds 1 in 3 Working Families Near Poverty - Almost a third of America's working families are now considered low-income, earning less than twice the official poverty threshold, according to a report released Tuesday by the Working Poor Families Project. The recession, which has incited layoffs and wage cuts, reversed a period of improvement: Between 2007 and 2009, as the recession set in, the percentage of U.S. working families classified as low-income grew from 28 percent to more than 30 percent.Workers who once focused on career advancement now live paycheck to paycheck. The American middle class, in effect, is eroding."They're no longer working actively, with a chance to advance and gain more experience and skills," said Brandon Roberts, manager of the Working Poor Families Project and a co-author of the report. "They're just putting pieces together to stay afloat, to meet basic needs."Last year, 45 million people, including 22 million children, lived in low-income households, according to the report. As breadwinners lost jobs or suffered pay cuts, the report notes, the number of low-income families grew to 10 million last year, an increase of almost a quarter-million from 2008. The problem is worse among minorities: 43 percent of America's working families with a minority parent are low-income, the report finds, compared to 22 percent of white working families.

One-in-Three Working Families Considered ‘Low Income’ - Nearly one in three working families earned less than 200% of poverty line last year, as a bad economy pushed 250,000 families below that threshold, according to a new analysis of Census Bureau data. The recession’s effects extended beyond the millions who lost jobs, according to a report released Tuesday by the Working Poor Families Project, which researches and advocates for working families. Among those who were working, more than 10 million families earned less than 200% of the poverty level, which the researchers considered “low income.” The low-income threshold for a family of four with two children last year was $43,512. “Working families are taking it hard during the great recession,”  “We’ve got a whole lot of middle-income families, middle-class families that have now fallen back into low-income working families.” More than 22 million children were part of low-income families last year, a troubling indication for their future, according to the report. “For many children, poverty persists into adolescence and adulthood, and is associated with higher risks of dropping out of school, teens having children and lower earnings for young adults,” the report states.

Chart of the day: The working poor - This chart comes from a Working Families Project report, and it underscores how the Great Recession has hit the working classes just as much as it has the unemployed. The baseline here — 200% of the poverty level — might sound high enough to be comfortable, but it isn’t: we’re talking a total household income of $36,620 for a family of three, or $44,100 for a family of four. (I’ve put the full chart, taken from here, over to the right.) As the report says, Nearly 1 in 3 working families in the United States, despite their hard work, are struggling to meet basic needs. The plight of these families now challenges a fundamental assumption that in america, work pays. The workers in these families have a much greater risk of becoming unemployed than the population as a whole, and of course they’re financially much less prepared for any period of unemployment than most of the rest of us. Michael Fletcher has a good write-up of the report, describing the working poor starkly as “people who earn wages so paltry that they are struggling to survive”, and showing that they’re unlikely to get much help from the government:

Food stamp use spikes: One in seven rely on them - The use of food stamps has increased dramatically in the U.S., as the federal government ramps up basic assistance to meet the demands of an increasingly desperate population.The number of food stamp recipients increased 16% over last year. This means that 14% of the population is now living on food stamps. That's about 43 million people, or about one out of every seven Americans. In some states, like Tennessee, Mississippi, New Mexico and Oregon, one in five people are receiving food stamps. Washington, D.C. leads the nation, with 21.5% of the population on food stamps."The high unemployment rate caused the high participation rate,"

Poverty Programs Embattled in the South - Now, however, states everywhere are grappling with how to save money, and the problem is particularly potent in the South because those states already had some of the lowest spending on programs such as food stamps and Medicaid. At the same time, states across the former Confederacy routinely rank among the poorest in the nation. Poverty is especially widespread among the black and Latino populations across the South (the poverty rate for black families in Mississippi is 44 percent), and as the economy crawls slowly out of the Great Recession those groups are likely to be hit hardest by any cuts the newly elected legislatures want to make.  It's too soon to tell exactly which programs are most vulnerable, but it's certain that spending cuts are a budget priority. Every politician this year promised to balance the state budget and cut jobs, but none in the South sounded the clarion call for raising taxes on the campaign trail. "There's definitely more of an anti-tax sentiment in many of these states, even in ones where Democrats have the upper hand," says

The Humbug Express, by Paul Krugman - Hey, has anyone noticed that “A Christmas Carol” is a dangerous leftist tract? I mean, consider the scene, early in the book, where Ebenezer Scrooge rightly refuses to contribute to a poverty relief fund..., instead of praising Scrooge for his principled stand against the welfare state, Charles Dickens makes him out to be some kind of bad guy. How leftist is that? As you can see, the fundamental issues of public policy haven’t changed since Victorian times. Still, some things are different. In particular, the production of humbug — which was still a somewhat amateurish craft when Dickens wrote — has now become a systematic, even industrial, process. Let me walk you through a case in point...

Krugman Misstates Dickens's Point - This is from Paul Krugman's column, "The Humbug Express," in the New York Times, December 23. Krugman has misstated the point of Charles Dickens's classic, A Christmas Carol. The Scrooge whom Krugman and I dislike at the beginning of the story is the Scrooge who actually defended the welfare state and, because he thought it was working so effectively, refused to give his own money to charity. The Scrooge whom I (and, I assume, Paul Krugman) like at the end of the story is the one who gives his own money to charity.

Mayors Issue Annual Report on Hunger, Homelessness in 27 Major Cities - The issues of hunger and homelessness still remain major challenges in U.S. cities according to a U.S. Conference of Mayors (USCM) report on the status of Hunger and Homelessness in 27 cities in America (listed below) that was released today by the U.S. Conference of Mayors on a news conference call.  “Each year, the U.S. Conference of Mayors’ report helps us understand the state of homelessness in our communities, as well as how communities are responding” “While there is currently an historic effort to restore America’s economy, the effects of hunger and homelessness are clearly evident in America’s cities and urban centers. This is why mayors have been so proactive in supporting and encouraging local food programs and why federal programs like the Supplemental Nutrition Assistance Program (food stamps) are so critical,” said Asheville, NC Mayor Terry Bellamy who chairs the USCM Hunger and Homelessness Task Force and participated in the press conference call. “The ‘food stamp’ program is an integral safety net for hungry families in our cities. Mayors want to ensure that the recent cuts made to the food stamp program are restored; and we support the Administration’s efforts in this regard. With respect to addressing homelessness, collaboration is essential.

Homeless Families In America Increase By 9 Percent -  Released Tuesday, the U.S. Conference of Mayors 2010 Status Report on Hunger & Homelessness in American Cities -- in their annual assessment of 26 American cities -- has tallied a 9 percent overall increase in the number of homeless families in the U.S in the past year. Fifty-eight percent of the cities analyzed showed an increase in family homelessness.  Based on this survey, on an average night, 1,105 family members are on the streets, 10,926 find refuge in an emergency shelter, and 15,255 stay in transitional homes.  Trapped in this deteriorating economy, low-income families find themselves stuck in financial sinking sand and, though they have work, must move out of their homes, and onto the streets because of low wages.  Peggy Rivera, the Oxnard Commission on Homelessness' chairwoman, spoke with the Ventura County Star about the homeless families in their city:

22000 students in state reported homeless- The number of homeless students in Washington state continues to rise, with nearly 22,000 reported this past school year, up from roughly 14,000 just four years earlier. The Office of Superintendent of Public Instruction attributes the higher number to better reporting as well as the economy. But the agency also cautions that many homeless students probably weren't counted. "We still have some reporting issues," Melinda Dyer, OSPI's supervisor for the education of homeless children and youth, said in a prepared statement. Because of the stigma, she said, "some families don't tell others they are homeless." In King and Snohomish counties, 14 school districts reported increases in the number of homeless students from 2008-09 to 2009-10. Some of the biggest increases were in Darrington, Snoqualmie Valley, Northshore and Bellevue.

Hunger and homelessness stalk U.S. cities - With the Great Recession continuing to take a toll on America's middle class, it should come as no surprise that homelessness and hunger remain tough problems for America's cities, as the annual report by the U.S. Conference of Mayors points out. In the 2010 Hunger and Homelessness Survey, 27 large and medium sized cities throughout the nation were studied and the report found that homelessness increased by 2 percent across surveyed cities and family homelessness increased by 9 percent. According to the mayors' conference, every city surveyed reported that requests for emergency food assistance increased by an average of 24 percent over the past year. Among those requesting emergency food service, 56 percent were families and 30 percent were employed. When asked to report on the three main causes of hunger, respondents cited unemployment, housing costs and low wages.

Mayors: Hunger, Homelessness Major Challenge  - The U.S. Conference of Mayors said hunger and homelessness continue to be major challenges facing big cities.  The group released a report on the issues in 27 U.S. cities, including Philadelphia.  It said more than half of cities expect a moderate decrease in resources for fighting hunger.  At the Greater Berks Food Bank, they said they're concerned, too.  "We really don't know where funding is going to go for the state food purchase program," said Doug Long, Greater Berks Food Bank. "Over the past three years, it's been fairly constant. In fact, I think it has slightly even decreased in the past three years, even while food banks are seeing these incredible increases in the amount of people that they're serving."  Demand at the Greater Berks Food Bank is up 25 percent this year.

Vigil marks the deaths of 101 homeless in Philadelphia - Hundreds of people gathered in Love Park Tuesday evening to remember the homeless -- and formerly homeless -- who died in Philadelphia this year. The event was part of a nationwide memorial that took place in 150 cities. Those who gathered held candles, while the names were read. "Deborah Adams, Barbara Barr, Yvonne "Blue" Basey...." One hundred and one homeless people died in the city this year. That number includes those who were formerly homeless, men such as Keith Williamson and Kevin Minor. A recent survey of the city's homeless population found 352 people living on the streets.

Fight against hunger in LA tougher - In the past year, Los Angeles has cut its emergency food budget by half, while demand has risen 21 percent, according to a report released Tuesday.  A survey by the U.S. Conference of Mayors said two out of three major cities showed decreased emergency food supplies while demand is up an average 24 percent.  Of those across the nation asking for food aid, 56 percent were families, 19 percent seniors, 30 percent had jobs and 17 percent were homeless.  "This year's survey makes it clear that even working families are increasingly at risk for hunger and homelessness as a result of the crippled economy and rising unemployment," said Los Angeles Mayor Antonio Villaraigosa, vice president of the conference, in a statement.  Among the findings:  Hunger was caused by unemployment, followed by high housing costs, low wages, poverty and nonaccess to food stamps.  All but one of the cities expect emergency food demand to increase, with decreasing resources - especially from federal and state funds - the biggest challenge to addressing hunger.

Number Of Hungry Grows In San Francisco‎ - Hunger is on the rise in San Francisco with city officials turning away 30 percent of those asking for food assistance in 2010, according to a U.S. Conference Of Mayors study released Tuesday. According to the study on homelessness, request for food assistance climbed by 41 percent in 2010, but the local food pantries did not have enough funds or supplies to fill all the requests. While the number of food requests have increased, San Francisco officials told the mayors organization that the actual number of homeless individuals and families had remained stable during the year. According to the report, 42,160,932 pounds of food was distributed in San Francisco compared to 57,426,899 In Los Angeles, 69,325,902 in Phoenix and 77,792,101 in Chicago. That was a 16 percent increase for San Francisco over 2009.

Homeless Squatting In Foreclosed City Homes (Video) - Legally, they’re known as “squatters,” people who live in a place without a deed or tenant agreement. They’ve been living in the houses for months without anyone noticing. “It’s just wonderful to have a house, to have heat, to have food in your refrigerator,” said a woman who moved into a three-bedroom house last week with her two children, including a 3-week-old newborn. The homeless individuals and families didn’t move into the houses on their own. They were helped by Take Back the Land Rochester, a local chapter of a national organization. The group identifies foreclosed properties in good condition and becomes a sort of landlord, arranging to have the utilities turned on and securing the houses. CNN Money featured the group's efforts in Rochester. Take Back the Land has taken over four city houses in the last four months. Three are occupied by individual families and another is occupied by five unrelated people. “We think that houses should be used for people,”

Homeless center loses lease - Efforts to open a warming center for the homeless suffered a setback Thursday when a warehouse owner backed out of leasing space for the project. Heather Grenier, special projects officer for the nonprofit Human Resource Development Council, said the property manager told her "all his tenants are threatening to move out." Grenier said she felt frustrated that people think "anyone who's homeless is unsafe or a threat." The warehouse was just around the corner from the Gallatin Valley Food Bank on Bond Street. Grenier said four other warehouse owners had already turned down the warming center.

Officials Warn of Catalytic Converter Thefts - After a rash of catalytic converter thefts in the Columbus area, Ohio Department of Insurance Director Mary Jo Hudson released a list of ways to protect yourself from becoming a victim.  According to a press release issued by Hudson's office, thieves have been stealing catalytic converters and selling them for scrap metal.The converters contain precious metals such as palladium, platinum and rhodium. Converters can be sold for up to $200.   Hudson offered the following tips to protect your vehicle:

    • Always park in well-lit or protected public parking lots.
    • Park your car at home in your garage
    • Ask your mechanic to weld the heads on the catalytic converter bolts or shear them off
    • Install a cage around the converter
    • Take part in future catalytic etching events

Thefts of metal - About 188 news stories past week

A Little More on Prisons, Incapacitation and Conservative Thought - A little bit more for the previous post. First check out this post about conservatives and crime by Adam Serwer. It’s important to expand on why, especially in the late 1970s and 1980s, how much the ascendant conservative approach to crime involved a large prison population.  Here’s the big quote from James Q. Wilson in the closing to his 1975 book, Thinking About Crime (my bold):. . . some persons will shun crime even if we do nothing to deter them, while others will seek it out even if we do everything to reform them. Wicked people exist. Nothing avails except to set them apart from innocent people. And many people, neither wicked nor innocent, but watchful, dissembling, and calculating of their opportunities, ponder our reaction to wickedness as a cue to what they might profitably do. Go Team Social Science!  I’m going to go out on a limb and say that the statement “wicked people exist” (when they were born?) and there’s nothing to be done about them other than to store them is neither rigorously thought out or proven, but it’s been the de facto approach to crime for the past 30 years.

Yes, There Are Prisons - Krugman - In answer to Scrooge’s question, yes indeed there are. And lots and lost of prisoners. Mike Konczal has an interesting post showing that there’s a quite strong correlation between conservative economic policies and large prison populations:  I’ll have to think about exactly what’s going on here. But the discussion brings to mind something I ponder on now and then: what happened to the inevitable collapse of American society? All through the 70s and 80s, and some way into the 90s, it was almost a given that all of America would turn into something like the South Bronx, or worse. It was practically a cliche of popular culture; only a return to traditional moral values could arrest our decline.  And then a funny thing happened. Values continued to shift: we kept on having premarital sex and getting divorces, gay and lesbian couples went out in public, relatively few Americans went to church (although a larger number claimed that they went.) Yet crime declined sharply, big cities (New York in particular) became safer than they had been in many decades, and in general society seemed to hold together.

State debt for jobless benefits looming - Although the battle over extending unemployment benefits has been solved in Washington, Ohio still has no way to repay the $2.3 billion borrowed from a federal loan fund to continue the jobless benefits through the recession. Without a reprieve from Congress, that bill comes due next year, at the same time state leaders will be grappling to close a projected $8 billion shortfall in the two-year state budget that begins in July. Rising unemployment and lingering recession in many parts of the country have drained state unemployment funds across the nation. Thirty states, including Ohio, and the Virgin Islands currently are borrowing from the federal fund, owing a combined $41.7 billion as of Dec. 13, according to the U.S. Department of Labor. Four other states have paid back their loans. California has needed the most help, more than $9 billion, while Midwestern states, including Ohio, make up four of the top eight borrowers.

Federal Government Cuts Off Recession Relief Money To States - Despite soaring unemployment and the 19 million Americans currently living in "deep poverty," federal funds for the Temporary Assistance For Needy Families (TANF) program have entirely dried up for the first time since 1996, leaving states with an average of 15 percent less federal funding for the coming year to help an ever-increasing number of needy families.  TANF, the federal program that replaced welfare under the Clinton Administration, provides a lifeline for families and workers who have exhausted all of their unemployment benefits. According to a new report by the Center for Budget and Policy Priorities, "more homeless families will go without shelter, fewer low-wage workers will receive help with child care expenses, and fewer families involved with the child welfare system will receive preventive services" now that Congress has passed legislation that will end funding for the TANF Contingency Fund in 2011. Congress also failed to reauthorize an emergency fund for a subsidized job program on September 30 that would have allowed states to provide emergency help to needy families and place low-income people in subsidized jobs.

Employers Seek To Avoid Higher State Taxes On Jobless Benefits - As U.S. employers brace for higher state unemployment insurance taxes next year, business groups are urging Congress to delay interest penalties on $42 billion states have borrowed to continue paying jobless benefits during the recession. Thirty states and the Virgin Islands have exhausted their unemployment insurance trust fund reserves and are using U.S. treasury funds to maintain benefit checks for millions of workers who lost jobs through no fault of their own. So far, only Maryland, New Hampshire, South Dakota and Tennessee have paid back their loans in full, according to the National Conference of State Legislatures. California, with an unemployment rate of 12.4 percent, leads all borrowers with more than $9.1 billion owed. Hard-hit Michigan is a distant second and owes more than $3.8 billion. A provision of the stimulus bill waived interest on the loans for the past two years, but that respite expires on Dec. 31 and interest begins accruing on the outstanding loans in 2011.

The Dismal State of Long-Term State and Local Government Finance - The disturbingly large present and prospective fiscal deficits of the federal government receive much attention, and deservedly so. Yet the financial situations of many state and local government finances are also in bad shape, and in many respects they are far more difficult to solve than are the federal fiscal problems. California provides a dramatic example. It has a current annual budget deficit of over $20 billion, which amounts to about 20% of its annual spending. My home state of Illinois is not far behind, with a fiscal deficit also of about 20% of total spending. States like Nevada even have much bigger deficits. Tax revenues will recover as the American economy recovers, and that will help reduce state and local fiscal deficits. For many states, however, such as California and Illinois, the increased tax revenues from an economic recovery are unlikely to eliminate their deficits because they have a structural gap between spending and revenues. They cannot easily cut spending because a sizable fraction of their spending goes to education, welfare, health, roads, and criminal justice. All these activities have strong political support. Nor is it easy for states and cities to greatly raise taxes.

State and Local Government: The Fiscal Crisis - I pointed out that a realistic assessment of the federal government’s finances, conducted in the first issue of a Morgan Stanley newsletter called Sovereign Subjects (published on August 25), and modeled on the kind of assessment required of private companies, concluded that the federal government probably is insolvent. Not that the federal government could be forced to declare bankruptcy.  If it refuses to pay its contractual creditors—the individuals, firms and other private institutions, and foreign countries, that own Treasury securities or other federal debt—or if inflates the currency in order to reduce its real debt burden, it will find it difficult to borrow in the future without having to pay a very high interest rate, which will further deepen the federal government’s insolvency. Inflation and default are only short-term measures for staving off financial disaster. The federal government has at present a very large and growing deficit, and few ideas for reducing it that command widespread support. Many of our state and local governments also have huge deficits—Illinois, California, and New York are insolvent by the methodology of the Morgan Stanley study, and doubtless other states and a number of cities as well—but their fiscal situation is, I believe, less dire than that of the federal government.

Fears grow of euro-style debt crisis in US states - No sooner has the last crisis ended, than warnings about the next one begin. In the dying days of the year, with the sub-prime mortgage debacle entering the rear-view mirror, economy-watchers are warning 2011 could see US states and municipalities plunge into a debt crisis of that type that has wrought chaos in Europe. Although the US economy is slowly getting to its feet after a brutal recession, state and local budgets are still prostrate.To the west, California faces a budget shortfall of over 25 billion dollars. To the east, New York faces a nine-billion-dollar deficit. The north, south and center of the country are not faring much better. Only four of the fifty US states are currently keeping their heads above water; Arkansas, Montana, North Dakota and -- thanks to oil revenues -- Alaska, according to the Center on Budget and Policy Priorities (CBPP). Across the country the shortfall is expected to be at least 130 billion this fiscal year.

State Budgets: Day of Reckoning (60 Minutes News Video)

Christie Says 'Day of Reckoning' Has Arrived for State Budgets -- New Jersey Governor Chris Christie said U.S. states face a “day of reckoning” as they contend with looming budget deficits in the wake of the longest recession since the 1930s. Christie, who cut $1.3 billion in aid to schools and municipalities this year to close a $10.7 billion deficit, said states’ pension and debt costs have grown to be “unsustainable.” Benefits, education and health care will be reduced in many states, he said in an interview aired last night on CBS Corp.’s “60 Minutes.” “The day of reckoning has arrived,” said Christie, 48, a first-term Republican. Areas such as education and pensions “were third rails of politics. We are now left with no alternatives.”

Debt at Every Turn: New Governors Attack the Debt Crisis - "The Day of Reckoning has come!" So said New Jersey’s new governor-elect. New Jersey is hardly unique. Practically every government in the developed world faces the same problem. National. State. Local. Expenses grew during the boom years. We all know why. Politicians prefer to spend then to save. They buy votes with other people’s money. That’s why they like programs for poor people. They come cheap. But the votes they buy on credit are even cheaper. Give a job…a handout…free drugs…housing subsidies – and send the bill to the next generation.   With declining interest rates and an expanding economy, governments could get away with it. Low interest rates made deficits easy to finance and reduced the cost of refinancing existing debt too. The trend was always unsustainable, even when things were going well. You can’t spend more than you can afford forever. Everyone knew that a day of reckoning would come. And guess what…here it is.

CBS News Joins the Attack on Public Employees - On Sunday night, the CBS News show 60 Minutes joined this campaign. The piece begins by telling viewers that: "in the two years, since the "great recession" wrecked their economies and shriveled their income, the states have collectively spent nearly a half a trillion dollars more than they collected in taxes." That's not what the data show. If we look to the Commerce Department's National Income and Product Accounts we find that in total state and local government spent $45 billion more than they took in (line 27). CBS does not give a source for the "nearly half a trillion" number. It is also worth noting that any shortfall is due almost entirely to the recession caused by the collapse of the housing bubble. If revenue had increased in step with normal growth (2.4 percent real growth, plus inflation), state and local governments would have had an additional $290 billion since the start of the downturn.

Some Right, Some Wrong in “60 Minutes” Story on State Budgets, CBPP: Last night’s CBS "60 Minutes" piece on state budgets made some important points but also — through some big mistakes and omissions — gave a deeply misleading impression of the state budget situation. Here’s what it got right:

  • As correspondent Steve oft put it, “The ‘great recession’ wrecked [states’] economies and shriveled their income.” State revenues are about 12 percent below pre-recession levels, after adjusting for inflation, yet the cost of basic services like education and health care — the two largest areas of state and local spending — is rising.
  • The real pain from states’ current fiscal problems has been visited on the most vulnerable people, from low-income families needing medical care in Arizona to recipients of mental-health assistance in Illinois. That’s because states are required to balance their budgets — they cannot borrow to cover operating expenses. States have responded to the loss of revenues, in part, by cutting health care services and payments to nonprofits that serve the needy.
  • Fiscal year 2012 (which will begin next July 1 in most states) will be the most challenging year yet for state budgets. States have largely drawn down their reserves, revenues are still depressed, and emergency aid from the federal government is expiring.

The United States of Disintegration - The story of the day must be Steve Kroft's 60 Minutes segment that aired yesterday under the title “The Day of Reckoning” (see video below). While it’s sort of a shame Kroft didn't interview, say, California's outgoing and incoming governors Arnold Schwarzenegger or Jerry Brown, there's still plenty of good stuff in the show, in particular his conversations with Meredith Whitney and New Jersey Governor Chris Christie.  Whitney predicts -at least- between 50 and 100 municipal and county defaults in the US within the next year. "You could see 50 sizeable defaults. Fifty to 100 sizeable defaults. More. This will amount to hundreds of billions of dollars' worth of defaults."  Christie is his usual "lovable" blunt self: "I have no money". Or this gem about public employee pension systems: “I think the general public thinks: I can't believe anyone gets a pension anymore". And on the same topic: "If you don't partner with me to get this done, in 10 years you won't have a pension". Only the Federal Government can go over budget -seemingly- as much as it wants; lower levels of government need to balance their budgets. And they can't.

Voting with their wallets - IN A post titled "Voting with your feet", Greg Mankiw quotes evidence that confirms his priors: [Population] growth tends to be stronger where taxes are lower. Seven of the nine states that do not levy an income tax grew faster than the national average [over the past 10 years]. The other two, South Dakota and New Hampshire, had the fastest growth in their regions, the Midwest and New England.  Altogether, 35 percent of the nation's total population growth occurred in these nine non-taxing states, which accounted for just 19 percent of total population at the beginning of the decade. Of course, 30 percentage points of that 35% occured in just three states: Florida, Texas, and Nevada. The statement that low taxes drive population growth boils down to the idea that lower taxes in a state increase the demand for that state; you can essentially substitute "low taxes" for "sun-related amenities" and arrive at a similar conclusion. And research from Mr Mankiw's colleague, respected urban economist Ed Glaeser, indicates that diverging growth patterns often have as much to do with supply issues as demand:

Texas state services unlikely to escape budget ax The hard choices Texas legislators start making on the state budget next month could mean harder times for Texas residents who rely on state services. That is the bottom line as lawmakers draft a budget for the next two years in the face of a shortfall that some put at well over $20 billion, thanks to the recession, past state budget decisions and the demands of a growing population. The ensuing debate over how to meet the expected shortfall will be caught squarely in the intersection of policy and politics as legislators wrangle over what constitutes a spending cut, a tax increase, even the extent of the money gap. With state leaders saying the November election sent a no-new-taxes, lean-government message, no program is expected to escape the knife - including education and health and human services, which take up the bulk of state dollars. For some programs, the budget crunch will mean spending cuts.  College financial aid could be cut; class-size limits could be eased in public schools; universities are reducing faculty; reimbursement rates for those who provide care for Medicaid patients have been slashed; a medley of grant programs could be put on hiatus; state payroll could be cut; and some leaders have raised the specter of employee furloughs and shutting some state agencies.

How much ripple effect will state job cuts create? - The Oregon government will have to cut back to deal with that $3 billion deficit, and some people are worried that the cuts will send Salem's economy spiraling back down into recession. The Statesman Journal is working on a series of articles aimed at assessing the depth of these economic fears and judging whether or not they are founded. We're already seeing some of the scrambling that the state will have to do to keep providing services. Last week's meeting of the E-Board featured legislators shifting around millions of dollars in state and federal money to make sure that services such as day care and senior care remain in effect and prisons and Oregon Youth Authority centers continue to hold offenders who otherwise would be released to the streets. The impact will start with folks who work for the state. All the sources I talk with on a regular basis figure that layoffs at state agencies are inevitable. That $3 billion is just too daunting a number to contemplate without including some job losses.

Revenue stop is big challenge for Pennsylvania budget - At first it seems like a paradox. The current $28 billion state budget is reasonably close to being in balance. State revenue growth is picking up as far as corporate taxes and sales taxes are concerned. Cost-cutting measures such as layoffs of state employees have yielded savings. So an assumption could be made that Pennsylvania's years of fiscal turmoil are nearing an end. That's not the case. A huge deficit ranging from $3 billion to $4 billion is projected for the 2011-12 budget, the first one for incoming Gov. Tom Corbett. The reason things are still headed south is that chunks of revenue that propped up the last two painful state budgets are disappearing. The biggest loss will come with the end of $2.6 billion in federal stimulus aid to Pennsylvania and another $750 million in one-time revenue transfers from other special state funds.It's a predicament facing other states as well. "While state revenues are starting to pick up, the growth is unlikely to be sufficient to replace expiring ARRA (American Recovery and Reinvestment Act) funds or cover projected increases in program areas such as Medicaid and K-12 education," said the National Conference of State Legislatures in a recent report.

Banks Use Swaps to Exploit Woes of US States, Cities, WSJ Says - The worsening finances of U.S. states and cities offer banks the opportunity to profit by means of credit derivatives, the Wall-Street Journal reported.  UBS AG has started making markets in credit-default swaps linked to municipal bonds and other securities; sellers of the swaps are obliged to compensate buyers if a city or state government misses an interest payment or reorganizes its debt, the newspaper said.  Last month, Bank of America Merrill Lynch, Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley met in New York to discuss standardized paperwork for “muni CDSs,” the Journal said.

Chicago Magazine Asks Why Illinois is So Corrupt -- Chicago Magazine has an interesting article on the sore subject of Illinois corruption. Owing to historical factors, Illinois developed a labyrinthine governmental structure that offered fertile ground in which corruption could sprout. The Illinois constitution of 1870, in effect until 1970, limited the amount of debt counties and municipalities could carry and taxes they could levy. When cities needed to fund improvements, they got around those constraints by creating new units of government with the capacity to borrow—a library district, for example, would be created to build and administer a new library. “The 1870 constitution almost forced you into multiple units of government if you were going to deliver services beyond your municipality or modernize your municipality,” says Redfield. Today the state contains almost 7,000 separate governmental fiefs—far more than any other state—ranging from counties, towns, and school and fire districts to water reclamation and mosquito abatement districts. Most have budgets to protect and authority to wield. “It’s very hard to stay on top of it all, and it creates many more opportunities for patronage,” says Cindi Canary. “It creates ways for small islands of graft and corruption to stay hidden.” It appears that Illinois’ luck is running out. According to Forbes, Illinois is number two on the list of states Americans are fleeing behind New York:

Municipal Bond Sales Hit Record In 2010 -- States and local municipalities sold more debt in 2010 than any prior year, boosted in large part by sales of taxable Build America Bonds before the program expires at the end of this month. Sales of municipal bonds rose to $424.8 billion this year, topping the prior record of $424.2 billion set in 2007, Thomson Reuters said Tuesday. Nearly a third of the sales -- $116.3 billion -- were BABs, a federally-subsidized form of taxable muni bonds that issuers have liked. In 2009, municipal bond sales totaled $406.8 billion

What are the chances of muni doomsday? - Meredith Whitney took her muni-doomsaying to 60 Minutes this week: “There’s not a doubt in my mind that you will see a spate of municipal bond defaults,” Whitney predicted. “You could see 50 sizeable defaults. Fifty to 100 sizeable defaults. More. This will amount to hundreds of billions of dollars’ worth of defaults.” … Whitney’s appearance on the telly has prompted another round of rebuttals from those who think that the threat to the muni market is massively overblown. Cyrus Sanati, for one, reckons that there’s “a myriad of safeguards” in place to prevent a big round of defaults. And first on the list is the standard logic that we’ve been getting from California, especially, for years: States are not people or corporations — they cannot declare bankruptcy. A large portion of California’s debt is in general obligation bonds, which are mandated to be paid first before anything else in the state – period. This is true, but I don’t find it particularly reassuring. A bond is a promise to pay; the mandate that Cyrus is talking about is essentially a promise to keep that promise. If you can break your promise when you default, you can break your promise to privilege bonded debt over other obligations. The other big argument in Cyrus’s piece is that munis won’t default in the future because they haven’t defaulted in the past:

The Huge Threat To Muni Finances That Hardly Anyone Is Talking About Yet - Thanks to 60 Minutes, the public is starting to understand a problem that's been discussed in financial circles for a long time, namely the horrible state of muni finances. But even within that discussion, one issue hasn't actually been discussed that much, and that's the effect of falling property prices on property taxes. WSJ noted that property tax changes generally lag housing prices by about three years, due to the timing of assessments. So we've seen big hits to housing that haven't even shown up yet in tax receipts for cities. Hedgeye charted the data, showing tax receipts against Case-Shiller, with a three-year lag.

$2tn debt crisis threatens to bring down 100 US cities - More than 100 American cities could go bust next year as the debt crisis that has taken down banks and countries threatens next to spark a municipal meltdown, a leading analyst has warned. Meredith Whitney, the US research analyst who correctly predicted the global credit crunch, described local and state debt as the biggest problem facing the US economy, and one that could derail its recovery. "Next to housing this is the single most important issue in the US and certainly the biggest threat to the US economy," Whitney told the CBS 60 Minutes programme on Sunday night. "There's not a doubt on my mind that you will see a spate of municipal bond defaults. You can see fifty to a hundred sizeable defaults – more. This will amount to hundreds of billions of dollars' worth of defaults."

16 U.S. Cities That Could Face Bankruptcy in 2011 - 2011 will be the year of the municipal default. At least that's what analysts like Meredith Whitney predict, as do bond investors that have been fleeing the muni market. There are many reasons to be worried. First, the expiration of Build America Bonds will make it harder for cities to raise funds. Second, city revenues are crashing and keep getting worse. Property taxes haven't reflected the total damage from the housing crash. High joblessness is cutting into city revenues, while increasing costs for services. The next default could be a major city like Detroit, or it could be one of hundreds of small cities that are on the brink. Did we leave off your ailing city?

Revenue sharing at risk for Ann Arbor as state officials look to trim budget, consultant says - Michigan lawmakers have difficult budget decisions to make in the upcoming legislative session, and cities like Ann Arbor are "clearly at risk" of losing state aid.That was the message Kirk Profit, the city's consultant in Lansing, delivered to the Ann Arbor City Council during a brief report Monday night. "When I appeared before you a year ago now, I was here kind of with my tail between my legs because I had to report to you how you had just lost — much to our chagrin — $1.1 million in revenue sharing that you had to eat," Profit told council members.Ann Arbor receives about $9.3 million a year from the state in revenue sharing payments — which is down from more than $12 million it used to receive, Profit said.The city was fortunate there weren't further cuts to revenue sharing this year, Profit said. But he predicts continued challenges ahead under incoming Republican Gov. Rick Snyder and the new Republican-controlled Legislature.

Meredith Whitney Overreaches in Muni Default Call - There will be between 50 and 100 “significant” municipal bond defaults in 2011, totaling “hundreds of billions” of dollars.  So said banking analyst and new municipal bond expert Meredith Whitney on the “60 Minutes” show on Sunday, in perhaps the boldest, most overreaching call of her career.  Hundreds of billions of dollars? The one-year record, set in 2008, is $8.2 billion. You can see how an estimate of “hundreds of billions” would get people’s attention.  There are a lot of reasons to be doubtful about the health of the municipal market right now, as elucidated by “60 Minutes” correspondent Steve Kroft. Tax revenue is down, public pension and health-care liabilities are up, the federal government’s bailout money to the states is running out and the chances that those funds will be replenished are remote.  And yet -- hundreds of billions of dollars in default? The number is in the realm of the fabulous. If pressed, I would say that we might see between 100 and 200 municipal defaults next year, maybe totaling in the $5 billion or $10 billion range.

Meredith Whitney Getting Trashed Eight Ways To Sunday For Terrifying Muni Default Call - Meredith Whitney continues to get thumped by everyone under the sun for predicting on 60 Minutes that 50-100 American cities will go bust next year, triggering the next leg down in the financial crisis. Whitney’s competitors, for example, are outraged (in part, no doubt, because she was on 60 Minutes, not them). Journalists and research firms are scrambling to refute her. Towns and cities are furious. Muni bond holders want blood. And so on. Which means that Meredith Whitney has done it again. Great Wall Street analysts make big, bold calls that make people think. And, right now, Meredith Whitney is the best in the business at that. Regardless of whether Whitney’s latest default-doomsday prediction comes true, the whole country is now aware that hundreds of towns, cities, and states face massive budget shortfalls that have to be addressed.  Dozens of analysts are now frantically gathering data to figure out whether Meredith Whitney is right or wrong. And we’ve all gotten a lot better informed about our slow-motion municipal trainwreck.

New Jersey to Issue $2 Billion of Debt to Terminate Interest-Rate Swaps - New Jersey’s Economic Development Authority plans to issue as much as $2 billion of bonds early next month to refinance school-construction debt and terminate $1.7 billion of interest-rate swaps.  The agency will pay an estimated $296 million to end the swaps, which it entered into beginning in 2002. The refinancing will save the state about $278 million in debt payments, which will cover all except $18 million of the termination fees, said Andrew Pratt, a spokesman for Treasurer Andrew Sidamon-Eristoff. The transaction also will allow the state to reduce its risk as it projects higher costs next year for letter-of-credit- backed agreements amid new financial regulations, Pratt said. It’s unclear how much the rules, which require banks to set aside money to back such borrowing, may raise the state’s costs, he said.

Debunking the Journal, Oregon Edition - The Wall Street Journal returns to one of its favorite arguments: Oregon raised its income tax on the richest 2% of its residents last year to fix its budget hole, but now the state treasury admits it collected nearly one-third less revenue than the bean counters projected. One reason revenues are so low is that about one-quarter of the rich tax filers seem to have gone missing. The state expected 38,000 Oregonians to pay the higher tax, but only 28,000 did. Funny how that always happens. Funny, indeed. Unfortunately, as the Oregon Center for Public Policy's Chuck Sheketoff says, "the claim is just baseless": The explanation for why in 2009 there were actually 10,000 fewer tax returns subject to the new rates than had been projected in mid-2009 is obvious: the Great Recession was worse than the state economists had thought in mid-2009.

Schwarzenegger Leaves California's Brown Burdened With Bonds  (Bloomberg) -- Arnold Schwarzenegger swore after his first month as California governor that he'd rip up the state's credit cards. Instead, the Republican former action- movie hero pushed through at least $52 billion of borrowing. Debt of the world's eighth-largest economy almost tripled in Schwarzenegger's seven years, to $91 billion on June 30 from $34 billion in 2003, state Treasury figures show. Californians owed $2,362 per person last year, up from $977 before he went to work. Under Schwarzenegger, the state's workforce grew 9.9 percent to 348,213, according to his finance office. When Democrat Jerry Brown takes over the biggest U.S. municipal borrower on Jan. 3, he'll inherit interest and principal payments that consume 7.1 percent of general-fund spending, twice what greeted Schwarzenegger. That will rise to 10 percent in 2012, leaving less for services and to tackle a budget deficit that may reach $28 billion in 18 months

Miami-Dade Mayor Faces Recall After Property Tax Raised to Balance Budget - Carlos Alvarez, mayor of Miami-Dade County, Florida’s largest municipal borrower, faces a recall election after opponents gathered sufficient signatures to trigger a new election, the court clerk said.  The drive to recall Alvarez came after the county raised the property-tax rate to balance its fiscal 2011 budget. The county commission must call an election in 45 to 90 days under the county charter, Miami-Dade joins Omaha, Nebraska and Chattanooga, Tennessee in mayoral recall attempts after proposed levy increases.  The increase in the property-tax rate follows a 22 percent slump in the county’s taxable-property values from 2007 to 2010, according to documents provided by the property appraisers’ office. The county closed budget gaps of $1 billion in the past four years as revenue declined, Alvarez said.

Colorado's Assessed Property Values Projected To Drop For The First Time Since The Late 1980S - Assessed property values in Colorado are expected to fall for the first time since the late 1980s. The latest forecast from legislative economists projects that overall assessed property values will drop 5.3 percent this year. Assessed values are expected to dip another 6.9 percent next year. The report blames a drop in oil and gas prices, the economic downturn and the slow real estate market. The 1980s decline was blamed on the oil bust and the savings-and-loan collapse. Property taxes help fund school districts and The Denver Post reports that the latest decline will cost the state. According to the forecast, lawmakers, already facing a budget shortfall of up to $1 billion, will have to come up with another $140 million to subsidize schools.

Hay Springs Schools will move to 4-day week - The Hay Springs school board voted unanimously last week to move to a four-day school week for the 2011-12 academic year. Superintendent Steve Pummel said the switch will save the district money and should have attendance and academic benefits as well. State aid to education will fall drastically over the next two years as stimulus funds run out, and districts across the state are preparing for 10-20 percent in cuts. Hay Springs has already taken steps to reduce its approximately $3 million a year budget. The district closed a rural school last year, sold an empty theater building the school used for limited storage, sold extra busses and went from two offices to one and from three libraries to one.

Inside Arizona Politics: Budget deficit posing even bigger threat to education?  - As bad as the state’s financial problems have been the past two years, the crisis is likely to come to a head in 2011. When state legislators are sworn in on Jan. 10, they will immediately start working on solutions to wipe more than $2.2 billion in red ink off the books. And, unlike in past years, the federal government won’t be opening up its checkbook to give the state money in order to stave off deep budget cuts. The first order of business will be an estimated $840 million deficit in the current fiscal year. Legislative leaders are already crafting a plan to fill that hole and lawmakers will likely vote on it by the end of January. Attention will then shift to a $1.4 billion shortfall in the upcoming budget year, which begins in July. And, despite what voters were told earlier this year when they headed to the polls in overwhelming support of a temporary sales tax increase, there are almost certain to be massive cuts to education.

Philadelphia Schools Facing Big Budget Shortfall - Philadelphia School District officials are staring down a gap of $430 million or more in next year's budget, and the deficit could surpass the half-billion mark under worst-case scenarios, according to officials briefed on the district's finances.  In October, the district's chief financial officer, Michael Masch, warned the public that the 2011-12 budget could be grim, with $234 million in stimulus money drying up without funds to replace it. Additional costs for staffing, health benefits and charter schools have made the situation worse, according to one of the sources briefed on the looming crisis. Each district department head may be asked to come up with reduction proposals of 12 percent, 24 percent, and 36 percent

Maryland Considering Cuts To Education Funding - Gov. Martin O'Malley is considering a 5 percent across-the-board cut in state aid for public education.  State Budget Secretary T. Eloise Foster has proposed the cut, which the governor's office says would save more than $200 million. Maryland is facing a $1.3 billion budget shortfall in the upcoming fiscal year. The possible 5 percent cut was revealed in a letter from Foster to Prince George's County Schools Superintendent William Hite, who has asked the state for an additional $139 million in funding. Foster notes that Prince George's receives more education funding than any other jurisdiction in Maryland.

For California schools, next year stands to be worse  -- School districts already have crammed more students into classrooms, shortened the school calendar and stopped buying new textbooks. As bleak as things are for California schools, however, next year stands to be worse. K-12 schools and community colleges could receive at least $2.2 billion less because of lower state tax rates in 2011, state budget analysts say. To make matters worse, many districts will have less federal aid to rely upon. The reduction seems to be a foregone conclusion at the Capitol because the state's projected 18-month budget shortfall – as great as $29 billion – would otherwise be higher. So districts are bracing for another round of teacher furloughs, school closures and the elimination of programs outside the core teaching mission.

California's teaching force shrinks, as K-12 population set to grow - The formulas are both as simple at second-grade arithmetic and as advanced as a college economics course.  Just as California's K-12 population is beginning to nudge up, the state is poised to lose a wave of teachers to baby-boomer retirements, layoffs and burnout. Meanwhile, the number of people seeking teaching credentials to fill those spots is dropping dramatically. "This is the steepest decline we've seen," It all feeds concern that California -- whose school-age population is predicted to grow 4 percent in eight years -- will soon lack an adequate pool of qualified teachers, particularly those who can teach science, math and elementary school. Although some of the teaching-force decrease is the result of declining enrollment in schools, Gaston said, "The changes we're seeing in the classroom reflect a budget crisis that is much more severe than we've seen before."

Students bear brunt of state budget deficit - Parents in Colorado may want to start putting more money into their kids' college fund. Almost all of the universities and colleges in our state are considering double digit tuition increases next year to overcome cuts in state funding. Jill Brake of the Colorado Commission on Higher Education worries that the legislature's decision to balance the state budet on the backs of colleges and universities is already pricing out students. "Our college system really will be only for the elite because we will not be able to offer funding for financial aid and (the College Opportunity Fund) and some of those things," Brake said. Senate Majority Leader John Morse, (D) Colorado Springs says he and his fellow lawmakers must balance the budget, and with a billion dollar deficit, higher education is low hanging fruit."Everything has gotten big cuts, but higher education isn't constitutionally or federal law protected and so therefore it is a pot of money that we have the option of cutting,"

"Wow" result of the day - TEACHING matters: A teacher one standard deviation above the mean effectiveness annually generates marginal gains of over $400,000 in present value of student future earnings with a class size of 20 and proportionately higher with larger class sizes. Alternatively, replacing the bottom 5-8 percent of teachers with average teachers could move the U.S. near the top of international math and science rankings with a present value of $100 trillion.Adam Ozimek offers commentary here.

When Good Teaching Pays Off - Earlier this year my colleague David Leonhardt wrote about a new study that found that a good kindergarten teacher could greatly improve students’ future earnings. On that basis, an especially strong kindergarten teacher is arguably worth about $320,000 a year, which is the present value of the additional earnings that a full class of students can expect to earn over their careers. Now another working paper, by Stanford’s Eric A. Hanushek, gets similar results, arguing that a minor improvement in teacher quality could have a big effect on test scores, especially as they compare to those of other countries.

What's a Good Teacher Worth to You? Try $400,000 - In 2009, McKinsey released a report finding that if we raised our education performance to the level of Korea, we would improve the US economy by a sixth of GDP, or more than $2 trillion. In other words, if our students could read and multiply as well as South Korea, our GDP would add the economic equivalent of Italy. Here's a new report from NBER. reaching a similar conclusion, that the benefit of a good teacher over an average teacher can add more than $400,000 to a student's future earnings. Multiply that out over an economy, and you would see gains in the hundreds of billions. A teacher one standard deviation above the mean effectiveness annually generates marginal gains of over $400,000 in present value of student future earnings with a class size of 20 and proportionately higher with larger class sizes. Alternatively, replacing the bottom 5-8 percent of teachers with average teachers could move the U.S. near the top of international math and science rankings with a present value of $100 trillion. In this stratified, winner-takes-almost-all economy, where the middle class has hollowed out and earnings among the college-educated far outstrip high school graduates, the marginal gains from an above-average education will only increase.

Those Teacher Numbers - Adam points to a new study estimating a 400K social value of a good teacher. This is in line with other recent estimates. I want to make a couple of notes on how to think about that. 1) Social value isn’t a feel good concept. Hanuschek limits himself to future earnings of the students. The other big drivers are always crime reduction and public assistance reduction. So we are saying better teachers lead to higher wages, lower crime and less welfare. This is a far cry from trying to put numbers on soft factors like civic engagement. 2) As big as these numbers are they actually accord with the way people behave. In areas where private school dominates, parents obsess over getting Johnny into the right private school. There are obviously some peer factors at work here but at its heart a school is primarily a collection of teachers and classrooms. Unless we think the classrooms are really, really good, then the parents are implicitly obsessing over getting the right teachers.

The Attack on American Education - Robert Reich - You’ve probably seen the reports. American students rank low on international standards of educational performance. Too many of ours schools are failing. Too few young people who are qualified for college or post-secondary education have the opportunity. I’m not one of those who thinks the only way to fix what’s wrong with American education is to throw more money at it. We also need to do it much better. Teacher performance has to be squarely on the table. We should experiment with vouchers whose worth is inversely related to family income. Universities have to tame their budgets, especially for student amenities that have nothing to do with education. But considering the increases in our population of young people and their educational needs, and the challenges posed by the new global economy, more resources are surely needed. Here’s another reason why the $858 billion tax bill — including a continuation of the Bush tax cuts to the richest Americans and a dramatic drop in their estate taxes — is so dangerous. By further widening the federal budget deficit, it invites even more budget cuts in education, including early-childhood and post-secondary. Pell Grants that allow young people from poor families to attend college are already on the chopping block

Training College Graduates for Dependency By Counterfeiting Genuine Accomplishment - Some excerpts from "The College Degree Fraud," by Robert Weissberg, Professor of Political Science-Emeritus, University of Illinois: "For more than a half-century, government has tried to close racial gaps in educational attainment. Sad to say, those gaps have proven intractable. Nevertheless, the impulse remains as heartfelt as ever (perhaps due to its financially lucrative character), but the emphasis is now shifting from actual learning to equality of graduation rates. President Obama has spoken of adding 5 million graduates to the workforce by 2020, and credential-mania is now all the rage. This shift is a disaster in the making; imparting knowledge is commendable, but just handing out diplomas is harmful deception. A cynic might aver that the shift from knowledge to graduation rates is a tacit admission that the gap-closing quest is futile. That today's college degrees, regardless of the recipient's race, are increasingly "manufactured" versus reflecting real learning is strongly suggested by a recent Bureau of Labor Statistics report. Specifically, contemporary "college graduates" are increasingly employed in positions once occupied by high school graduates.

46 Percent Of Federal Loans Paid To For-Profit Institutions Will Go Into Default -A whopping 46.3 percent of federal loans distributed to students at for-profit colleges in 2008 would go into default, according to new Education Department data.  This figure is significantly larger than the rate of default on student loans overall, which in 2008 amounted to 15.8 percent. The staggering percentage of defaulted loans at proprietary institutions may garner support for federal efforts to regulate such colleges and provide a boost for the DoE's proposed "gainful employment" rule, which would screen for-profit institutions according to their students' ability to repay loans. Essentially, the rule would test the likelihood that students will graduate and then become gainfully employed. Colleges that fail the tests will not be allowed to receive tuition in the form of federal aid -- which is the source of up to 90 percent of most proprietary institutions' current revenue.

Serious Mental Health Needs Seen Growing at Colleges - Rushing a student to a psychiatric emergency room is never routine, but when Stony Brook University logged three trips in three days, it did not surprise Jenny Hwang, the director of counseling. It was deep into the fall semester, a time of mounting stress with finals looming and the holiday break not far off, an anxiety all its own.  On a Thursday afternoon, a freshman who had been scraping bottom academically posted thoughts about suicide on Facebook. If I were gone, he wrote, would anybody notice? An alarmed student told staff members in the dorm, who called Dr. Hwang after hours, who contacted the campus police. Officers escorted the student to the county psychiatric hospital.  Stony Brook is typical of American colleges and universities these days, where national surveys show that nearly half of the students who visit counseling centers are coping with serious mental illness, more than double the rate a decade ago. More students take psychiatric medication, and there are more emergencies requiring immediate action.

New Jersey Pension Gap Hits $54 Billion. - New Jersey’s pension gap grew to $53.9 billion in the last fiscal year, up from $45.8 billion, thanks to market losses and a lack of state funding, according to figures released Thursday. Gov. Chris Christie’s administration said the gap, which reflected the state’s investment positions as of June 30, highlighted the need for proposed cuts to current public workers’ pensions. The $53.9 billion figure reflects the difference between the retirement benefits the state has promised to roughly 780,000 state and local workers over the next few decades and the amount on hand to pay those benefits. In addition, an accounting practice called “smoothing” allows the state to factor market gains and losses over several years — meaning pension funds, on paper, are still feeling the effect of the 2008 market crash.
Christie, a Republican, wants to reverse a 9% pension bump workers received in 2001 under a Republican administration.

Pensions Push Taxes Higher - Cities across the nation are raising property taxes, largely citing rising pension and health-care costs for their employees and retirees. Property-tax increases aren't unusual, in part because the taxes are among the main sources of local revenue. But officials say more and larger increases are taking hold. "This year we have seen a dramatic increase in our cities and towns having to increase property taxes" for pensions and other expenses, Local officials and government workers say a confluence of factors is driving the increases, including the need to make up for staggering investment losses from the financial crisis and rising costs as more workers retire. In addition, benefit increases promised in flush times are coming due as revenue flounders, and some cities have skipped payments to their pension funds over the years.

Parker taking city pension cuts battle to Legislature - Instability in its three pension systems is the greatest threat to Houston's financial solvency, city officials and financial analysts say. Within three years, according to an actuarial study commissioned by the city, the pension for firefighters will require the city to contribute 45 percent of its payroll costs for that retirement plan, a burden Mayor Annise Parker says is unsustainable. The other two plans are in even worse shape. The police and municipal employee pensions are underfunded by $2.1 billion, roughly the equivalent of what the city spends annually for public safety and general operations. "The bottom line is the whole system is completely unsustainable with current benefit levels and the city's financial position,"

City, county debate pension problems - Even as Cincinnati City Council grappled with plans to erase a $54 million budget deficit, two meetings Wednesday at the opposite end of Downtown began shaping the next major financial challenge - one involving sums with considerably more zeroes - that will confront council in 2011. Both meetings - one at the Hamilton County Courthouse, the other at City Hall - dealt with the financially troubled Cincinnati Retirement System, and the outcomes in each will have much to say about how, even whether, the city can dig out of a projected $1 billion-plus long-term pension hole. "With retirees' basic pensions protected by law, City Hall views spiraling health costs as the one major existing expense that could be trimmed to help stabilize the $2 billion city pension fund, which experts warn could become insolvent within 20 years unless major changes are made

Alabama Town’s Failed Pension Is a Warning - This struggling small city on the outskirts of Mobile was warned for years that if it did nothing, its pension fund would run out of money by 2009. Right on schedule, its fund ran dry.  Then Prichard did something that pension experts say they have never seen before: it stopped sending monthly pension checks to its 150 retired workers, breaking a state law requiring it to pay its promised retirement benefits in full.  Since then, Nettie Banks, 68, a retired Prichard police and fire dispatcher, has filed for bankruptcy. Alfred Arnold, a 66-year-old retired fire captain, has gone back to work as a shopping mall security guard to try to keep his house. Eddie Ragland, 59, a retired police captain, accepted help from colleagues, bake sales and collection jars after he was shot by a robber, leaving him badly wounded and unable to get to his new job as a police officer at the regional airport.  Far worse was the retired fire marshal who died in June. Like many of the others, he was too young to collect Social Security. “When they found him, he had no electricity and no running water in his house,” said David Anders, 58, a retired district fire chief. “He was a proud enough man that he wouldn’t accept help.”

Pension Insurance for Public Employees? - The New York Times' story about the insolvent pension plan of Pritchard, Alabama notes that while the Pension Benefit Guaranty Corporation (PBGC) partially insures private employers defined-benefit pension plans, it does not insure public employers' defined-benefit pension plans ("government plans" in ERISA-speak).   This left me wondering why? From an employee's perspective, such insurance is seems desirable--an employee with a defined-benefit pension plan has a large, undiversified risk in the plan itself.  I don't see any strong employee-side objections. Maybe there are insurance issues that explain the exclusion of public employer plans, but they don't leap out at me.  There are moral hazard concerns with any sort of insurance program, but are they substantially different with public employers? There could also be adverse selection problems if public pension insurance were optional.

Underfunded pensions dwarf deficit -  It's one of the simpler guidelines in politics: Be careful what you promise; someone might ask you to pay up.As the state of Connecticut prepares to face a gaping deficit in its budget for the next two fiscal years, lawmakers and Gov.-elect Dan Malloy also will be forced to reckon with an equally challenging and even bigger problem: the long-term cost of the pensions and health care the state has promised its retirees.The challenge is one inherited from past legislators and governors, who despite occasional periods of reform and investment have repeatedly failed to set aside money for pension accounts - accounts that will owe tens of billions of dollars to retired workers over the next 30 years.The reason isn't just the collapse in stock market investments, said State Treasurer Denise Nappier, whose office manages the investment of pension funds. That collapse only exacerbated an underlying, older problem, she said: The state for years has failed to set aside the funds it will one day be compelled to pay.

Reality Check: Why Truth Will Protect Social Security - It is clear from the comments on our last piece that we might have raised more questions than we answered. Above all, we want to make clear that when we discuss the funding aspects of the Social Security program, we are doing so in a way that is designed to safeguard it, not eliminate it. We believe that fictions are not necessary, because the truth will protect the program better than distortions, however well-intended. Enemies have lied enough; supporters do not need to battle fictions with more fictions. Here we will deal with a dozen issues surrounding the proposed payroll tax holiday, and illustrate why we do not believe that the holiday is a danger to the program — as long as we understand the facts.

Medicaid to Consume 50% of Texas State Budget Within Next 30 Years - Long-term projections in TPPF report show severe threat to Texas' fiscal solvency "Even before the U.S. Congress substantially expanded Medicaid as part of ObamaCare, the Medicaid program was financially unsustainable," said Arlene Wohlgemuth, Director of TPPF's Center for Health Care Policy. "These new projections make clear that Medicaid will bankrupt Texas – and every other state – unless major structural changes are made." Prior to the passage of ObamaCare, Texas' Medicaid spending was projected to grow by $44 billion in General Revenue and $112 billion in All Funds between 2014 and 2023. That means Medicaid will absorb every penny of new state revenue during those 10 years if general revenue grows at the 4.3% annual rate that it has over the last decade. Furthermore, the Medicaid expansion required by ObamaCare will increase that obligation by at least $31.2 billion in General Revenue during that decade, and possibly as much as $38.6 billion if the U.S. Congress reduces the enhanced federal cost sharing rate for newly eligible individuals to the current rate.

Medicaid Demands Push States Toward `Cliff' Even as Governors Cut Benefits - Governors nationwide are taking a scalpel to Medicaid, the jointly run state and federal health-care program for 48 million poor Americans, half of whom are children. The single biggest expense for states, Medicaid consumes about 22 percent of their total $1.6 trillion in expenditures, more than what is allocated to elementary and secondary education, according to a National Governors Association report. With federal stimulus funds to help states pay higher Medicaid costs running out June 30, “we’re heading for a cliff in July,” said Brian Sigritz, director of state fiscal studies at the National Association of State Budget Officers in Washington. Medicaid enrollment has jumped 13.6 percent since the recession began in 2007, according to the Henry J. Kaiser Family Foundation based in Menlo Park, California. The 2009 federal stimulus bill and a supplemental appropriation this year allocated a total of $103 billion for Medicaid. With that funding ending, state health-care expenditures may climb as much as 25 percent in fiscal 2012, according to a Kaiser report.

The GOP's Strange Ideas About Helping the Poor -Rep. Bill Cassidy of Louisiana is not just a Republican. He's also a doctor. And that means he has not one but two reasons to dislike Medicaid. Not only does it cost the government a lot of money. It also serves a lot of its beneficiaries poorly. Cassidy explained in a Dec. 16 column for Politico that Medicaid is the stingiest payer in our health care system. For most services, it reimburses less than both Medicare and private insurance. The people who provide medical care -- doctors, hospitals, and so on -- are well aware of this and they structure their practices accordingly. Some won't see Medicaid patients at all. Some will see only a few. As a result, the people who have Medicaid frequently end up at places like Earl P. Long hospital in Baton Rouge -- a public hospital where, I gather, Cassidy has worked. "The hospital has dedicated and caring doctors, nurses, technicians and support staff," Cassidy writes, "But its physical plant is in disrepair." Four patients to a room, asbestos in the structure, missing doors -- the people of Baton Rouge only go there if they have no other option, according to Cassidy. And that means people with Medicaid, even though they technically have insurance.

Fees, Volume and Spending at Medicare -  My post last week on Medicare’s payment of physicians ended with the observation that from 2000 to 2009, Medicare raised physician fees only 7 percent (an average of 0.75 percent a year), while the Medicare Economic Index (or M.E.I.), which tracks costs incurred by medical practices, rose  34 percent (an average of 3.3 percent annually). Even so, Medicare’s spending on physician services per beneficiary rose 61 percent, an average annual compound rate of 5.4 percent a year. The difference between the tiny increases in physician fees and the large increase in spending on physician services reflected, of course, a sizable increase in the volume of physician services per Medicare beneficiary. It grew by 46 percent over the period, at an average annual compound rate of 4.3 percent a year. As is shown in the chart below, the growth in the volume of services varied considerably by type of service.

Health Care: Regulatory Inconsistency - When an elderly patient is in the hospital suffering from dementia, depression or schizophrenia, the hospital nurses may administer any psychoactive or anti-psychotic drug ordered by the physician within normal protocols and practices. When the patient becomes a nursing home resident a few days later, the resident will often be denied the medication (even possibly anti-seizure meds) because the medication is assumed to be a "chemical restraint," and the facility needs time to clear the regulatory hurdles.  (The federal government assumes nurses drug residents into stupors so the nurses don't have to work as hard, ignoring that nurses cannot administer a vitamin without a physician's order.)

Why Did the Feds Need to Do Health Care? - The chances of a Supreme Court ruling overturning one key provision in our new health care law--the mandate--are looking stronger.  Not good, mind you--libertarians I know are saying it's a perhaps 40% chance, while obviously everyone else is considerably more pessimistic.  But the chances are high enough that progressives are now giving more thought to questions that were mostly ignored (by everyone but crazy libertarians preparing for a court challenge) during the debate last year.  "How does the Commerce Clause allow the federal government to regulate inactivity?"  "Where does the mandate penalty fit into its regulatory or taxing powers?" "Why does this have to be done by the federal government?" Mostly, proponents of the law seem to have figured that the answer to the first was, "D'uh!", which meant it wasn't necessary to answer the second or the third.  My understanding is that even the rulings from friendly judges have indicated that they're on shaky ground regulating inactivity (though they're more open to the claim that the government is actually regulating the activity of seeking health care that follows the inactivity of not buying health insurance).  This has made it somewhat more urgent to answer the other two questions.

Why Healthcare is So Expensive Part MMDCLVI Competition in (increasing) service quality doesn’t reduce costs: Dane County’s two hospitals that deliver babies are each spending close to $40 million to spruce up maternity units and related facilities for a simple reason: Young women are key health care consumers, often deciding where their families will seek medical services for decades. “If you don’t cater to women, you lose your market share,” said Kathy Kostrivas, Meriter’s assistant vice president of women’s health. Many pregnant women tour both hospitals before choosing where to give birth, some bringing birth plans for each step of labor and delivery, said Holly Halberslaben, director of St. Mary’s family care suites. “They really do their homework,” Halberslaben said. “It can be their first time in a hospital. You want to retain them.” The somewhat buried exculpatory case for these investments is that the facilities have been operating near capacity, and the Madison area is the fastest-growing part of Wisconsin apart from some areas in the Twin Cities’ exurban fringe. Nevertheless, the hospitals fairly evenly split a market of just over 7,000 annual births, so $80 million is not an insubstantial cost to recover.

It's Not the prices, after all? -- Uwe Reinhardt's latest: The difference between the growth in Medicare fees and the growth in Medicare spending is, of course, the growth in the volume of services sold, so to speak, to Medicare.  The chart that accompanies his post shows that Medicare spending has soared, although reimbursement rates for doctors have not. I wonder how he will reconcile this with his most famous article.

Rising Health Insurance Premiums Prompt New Rules — Pushing to restrain skyrocketing health insurance premiums, the Obama administration Tuesday set out new rules requiring insurers to justify any increase of more than 10% a year. And administration officials outlined new efforts to increase federal review of premiums if state regulators do not have the capacity to protect consumers.  "Year after year, insurance company profits soar, while Americans pay more for less healthcare coverage," Secretary of Health and Human Services Kathleen Sebelius said Tuesday in announcing the regulation, which was authorized by the new healthcare law President Obama signed in March. "The Affordable Care Act is bringing unprecedented transparency and oversight to insurance premiums to help rein in the kind of excessive and unreasonable rate increases that have made insurance unaffordable for so many families." The reporting requirement falls short of the kind of rate review that many Democrats, including the president, wanted to put into the healthcare law.

What Does the Class War Mean for Research and Development? - We have a permanent Depression setting in, the normalization of 20%+ unemployment, and it’s clear that the kleptocracy views the health care system as nothing but a rent extraction machine. The legislated policy is to use the IRS as a strong-arm goon to extort protection money in exchange for a worthless Stamp, while there will be no credible cost controls or realistic regulatory restraints on the health insurance rackets. Under those circumstances, it’s hard to imagine how, for as long as this system endures, the actual care available to the non-rich won’t continue to rapidly deteriorate. So we must ask about something like medically necessary research (publicly subsidized, of course): What difference does any medical advance make if it will increasingly be the monopoly of the predatory rich? In that case, don’t even medical advances become weapons against us? Weapons we pay for, to add insult to injury. Gibbon depicts the plight of conquered people doing forced labor in metal shops, “forced to forge the implements of their own destruction”. Is this the case with all technological R&D by now?

Mobile phone masts linked to mysterious spikes in births - Do mobile phone towers make people more likely to procreate? Could it be possible that mobile phone radiation somehow aids fertilisation, or maybe there's just something romantic about a mobile phone transmitter mast protruding from the landscape? These questions are our natural response to learning that variation in the number of mobile phone masts across the country exactly matches variation in the number of live births. For every extra mobile phone mast in an area, there are 17.6 more babies born above the national average. This was discovered by taking the publicly available data on the number of mobile phone masts in each county across the United Kingdom and then matching it against the live birth data for the same counties. When a regression line is calculated it has a "correlation coefficient" (a measure of how good the match is) of 98.1 out of 100

You are what your father ate — Scientists at the University of Massachusetts Medical School and the University of Texas at Austin have uncovered evidence that environmental influences experienced by a father can be passed down to the next generation, "reprogramming" how genes function in offspring. A new study published this week in Cell shows that environmental cues—in this case, diet—influence genes in mammals from one generation to the next, evidence that until now has been sparse. These insights, coupled with previous human epidemiological studies, suggest that paternal environmental effects may play a more important role in complex diseases such as diabetes and heart disease than previously believed.  "Knowing what your parents were doing before you were conceived is turning out to be important in determining what disease risk factors you may be carrying," said Oliver J. Rando, MD, PhD, associate professor of biochemistry & molecular pharmacology at UMMS and principal investigator for the study, which details how paternal diet can increase production of cholesterol synthesis genes in first-generation offspring.

What is Truth in Science? - In the “Annals of Science,” Jonah Lehrer asks “is there something wrong with the scientific method?” He poses the question in an article entitled “The Truth Wears Off” in the December 13, 2010 issue of The New Yorker (pp. 52-57). The problem is that across disciplines “claims that have been enshrined in textbooks are suddenly unprovable.”It is a problem of being unable to reproduce results in subsequent experiments.  Even scientists who perform the original experiment cannot reproduce their own results.  The pattern is that, over time, results become less strong or even disappear. Again, it is occurring in many disciplines but is especially acute in medicine. For instance, the original tests showed great promise for second-generation antipsychotic drugs and they became the most profitable products for some drug companies. New tests show the second-generation drugs no more effective than first-generation antipsychotics in use since the 1950s. In some cases, the new drugs perform worse.The same thing is happening with cardiac stents, vitamin E therapy, and antidepressants. The decline in the efficacy of antidepressants is especially dramatic.

Ingredient Costs Expected To Push Food Prices Up - As previously reported here, more large packaged-food makers have announced and/or implemented price hikes to their product lines. In the meantime, the US largest, Kraft Foods is in the process of rolling out price hikes on about 40 percent of it’s line-up.  Analysts are suggesting the rate of inflation on food could more than double in the next year. General Mills hasn’t raised food prices in 3 1/2 years.  The maker of Bisquick, Betty Crocker, Pillsbury and Gold Medal flour has stated it will raise prices on 25% of it’s cereal line on Monday. Last month, McDonald’s said it is planning on raising prices in order to offest rising costs. Kellogg is expected to raise cereal prices along with Unilever and Nestle who have signaled increases are likely in the near future. “The USDA doesn’t like to break bad news” says one agricultural economist that expects at a least a doubling in food inflation next year.Coffee, sugar, wheat and corn are at all highs not seen in 2 to 20 years on the commodity markets. 

Old, high grain prices near - Grains are all approaching their recent highs. Wheat, corn, and soybeans are within striking distance of the two-year highs made for all three crops.  Grains have some great examples in the commodities of just how volatile things can be, as sugar, cotton, and coffee all are giving the grains a sign of the type of strength that commodities can get when people are short supplies.   Coffee prices ran to new highs today, running above their recent highs and now at all-time highs for coffee prices, well above 2008 price levels. Cotton has rallied to new highs as well, impressive after a huge price dip of about 20% from the highs made in November.  Since then, cotton prices have rallied back to new highs, above the November highs, and the volatility seems to be accelerating (limit up Tuesday and limit down Wednesdday).  These are indeed interesting times, especially when one realizes that cotton competes with corn, soybeans, and wheat acreage in the cotton belt.  Surely there will be more cotton acres in 2011, and that will come at the expense of the other 3 major crops when they have no room to give up acreage.  That makes for some interesting times as we go into spring - with the battle for acreage heating up between the big 4 crops.

Sugar May Reach 40 Cents as Weather Hurts Global Crops, Thai Miller Says - Raw sugar in New York may climb to 40 cents a pound by January on concern dry weather in Brazil, the biggest exporter, and record rainfall in Australia may tighten supplies, said the Thai Sugar Millers Corp.  “Bad weather conditions are threatening crops around the globe,” said Vibul Panitvong, executive chairman of the company that represents the country’s 46 millers. Thailand is the world’s second-largest exporter. Raw sugar in New York yesterday gained to the highest level in 30 years on speculation that shipments from Brazil and India, the top producers, may be too low to meet demand. Rain in Queensland state this month after Australia’s wettest spring on record forced producers to leave some cane unharvested. “Frost in Florida and heavy snow in Europe will also worsen the supply situation,”

Mexico hedges against corn inflation - Mexico has taken the unusual step of insuring itself against the effect of rising corn prices on tortilla, a food staple for millions in the country, in the latest sign of growing concern about food inflation in emerging countries.  Rising food inflation has become a big headache in countries from Mexico to China and India as bad weather has ruined crops, forcing prices up.  Food accounts for up to half of all household spending in emerging countries, compared to just 10 to 15 per cent in Europe and the US.  The move by Mexico, disclosed by its economic minister, came as the quoted price of corn in Chicago hit a two-year high on the back of a smaller-than-expected harvest in the US, which accounts for more than half of the world's exports.  Bruno Ferrari told local media on Wednesday the government had bought futures contracts to fix the cost of corn. "The prices are guaranteed," he said. "The supply is also guaranteed ... until the third quarter of the next year." A government official confirmed his comments.

U.S. Ethanol Subsidies: A Bad Policy That Refuses to Die - U.S corn farmers and ethanol distillers are among those celebrating passage of last week's tax bill. A little-noticed provision of the law extends ethanol tax credits ($.45 per gallon, plus a bonus for small producers) and tariffs on ethanol imports ($.54 per gallon), previously set to expire at the end of 2010. Should the rest of us also celebrate? I think not. U.S. ethanol policy contradicts every principle of sound economics. It encourages use of fuels whose opportunity costs are high while discouraging use of those whose costs are low. It promotes trade flows that run opposite to comparative advantage. It creates new market failures instead of correcting those that already exist.

The Touch and Feel of Record Cotton Prices - Cotton prices hit another record earlier today. As noted by the San Francisco Chronicle: Cotton futures in New York jumped to a record, gaining by the daily limit for a third day, on signs that growers may struggle to meet mounting demand from China, the world’s biggest consumer. Cotton for March delivery gained 2.7 percent to $1.5412 a pound. Prices have more than doubled this year, heading for the biggest annual gain since 1973. What’s behind this move? Well, judging by everything I’ve read so far, it sounds like good old-fashioned demand (up) and supply (down). But just to be sure, I decided to check in with two famous economic commentators. I tracked down the talking “bunnies” over on YouTube (ht SK) and, sure enough, they agree that supply and demand fundamentals are what’s driving the cotton market.* Unfortunately, the critters have a much more serious tone than in their famous explanation of QE2 (except for some gratuitous language at the very end, which tries to pay homage to their earlier work). But they do speak with authority

A Physicist Solves the City - West illustrates the problem by translating human life into watts. “A human being at rest runs on 90 watts,” he says. “That’s how much power you need just to lie down. And if you’re a hunter-gatherer and you live in the Amazon, you’ll need about 250 watts. That’s how much energy it takes to run about and find food. So how much energy does our lifestyle [in America] require? Well, when you add up all our calories and then you add up the energy needed to run the computer and the air-conditioner, you get an incredibly large number, somewhere around 11,000 watts. Now you can ask yourself: What kind of animal requires 11,000 watts to live? And what you find is that we have created a lifestyle where we need more watts than a blue whale. We require more energy than the biggest animal that has ever existed. That is why our lifestyle is unsustainable. We can’t have seven billion blue whales on this planet. It’s not even clear that we can afford to have 300 million blue whales.” The historian Lewis Mumford described the rise of the megalopolis as “the last stage in the classical cycle of civilization,” which would end with “complete disruption and downfall.” In his more pessimistic moods, West seems to agree: he knows that nothing can trend upward forever.“The only thing that stops the superlinear equations is when we run out of something we need,” West says. “And so the growth slows down. If nothing else changes, the system will eventually start to collapse.

Dreaming of a trashy Christmas - In the period between Thanksgiving and New Year's, American households generate 25% more waste. That's about 1 million extra tons of trash each year, according to the Environmental Protection Agency. That includes everything from food to wrapping paper, holiday decorations, packaging, and old cellphones and laptops that are unceremoniously dumped as soon as the latest models emerge from under the Christmas tree. "The holiday season is especially important for us because all of the festivities, gift giving and traveling does create a lot more waste than at other times of the year," said Jennifer Berry, spokeswoman with Scottsdale, Arizona-based Earth911.

Success of Appliance Rebate Program Raises Questions about Environment, Economy - In Thursday’s press release (“Appliance Rebate Program Exceeds All Expectations, Benefits Thousands of Marylanders”), the Maryland Energy Administration (MEA) applauds the success of the Energy Efficient Appliance Rebate Program.  This program “encouraged residents to replace outdated, inefficient appliances in their homes with ENERGY STAR-rated equivalents,” according to the press release.  The MEA administered rebates for “more than 18,500 clothes washers, 4,500 refrigerators and 6,000 central air conditioners and air sources heat pumps,” according to Thursday’s press release.  Funded by the American Recovery and Reinvestment Act, the MEA estimates the program will save $19.6 million and 9,000 MWh.   The program, which ended on November 12, 2010, does more than demonstrate the commitment of Marylanders to saving energy.  It also raises a few important questions.   What role should the federal and state government play in promoting energy efficiency and responsible environmental stewardship?  Can programs to promote energy efficiency help enliven our economy? 

EPA Takes Control of Texas Carbon Permits as Perry Rejects U.S. Regulation - Bloomberg - The U.S. Environmental Protection Agency said it will take control of carbon-emission rules in Texas after Governor Rick Perry rejected new federal regulations intended to combat climate change.  The EPA will decide directly on greenhouse-gas permits for companies seeking to build or upgrade power plants and oil refineries in Texas, the agency said today in a statement. The EPA’s nationwide carbon rules, imposed under the Clean Air Act, take effect Jan. 2.  Texas is the only state that has refused to implement the new rules.

A Coming Assault on the E.P.A. - Republicans in the next Congress are obviously set on limiting the Environmental Protection Agency’s authority under the Clean Air Act to regulate a wide range of air pollutants — even if it means denying the agency money to run its programs and chaining its administrator, Lisa Jackson, to the witness stand. Fred Upton, who will become the next chairman of the House Energy and Commerce Committee, says he plans to call Ms. Jackson so often for questioning that he’ll guarantee her a permanent parking space on Capitol Hill. President Obama’s political advisers have shown little enthusiasm for environmental issues. On the other hand, his chief environmental adviser is Carol Browner, herself a former E.P.A. administrator whose aggressive clean-air initiatives in the Clinton years would never have prevailed without Oval Office support.  Which is just what Ms. Jackson will need in the months ahead. On her plate is: a proposed rule reducing pollutants like sulfur dioxide, the acid rain gas, from power plants east of the Mississippi River; a first-of-its-kind rule limiting toxic pollutants like mercury, which the agency has been ducking for years; and, most problematic, proposals imposing new “performance standards” on power plants to limit greenhouse gases.

Terminating Climate Change - In an interview with editors at the Los Angeles Times, the outgoing California governor said he was in "no rush" to find a new job when his term ends next month. But asked specifically whether he'd consider a post working for President Obama, he said yes and began to "riff on his credentials," according to the Times' David Lauter. Schwarzenegger, who counts legislation combating global warming as one of his signature achievements in office, suggested he might be interested in a post dealing with energy or the environment. "I'm a big believer in environmental issues," Schwarzenegger said, who added that he wanted a post where he could use his "celebrity power … knowledge and experience" to impact public policy. "I've traveled the world. … I'm very familiar with the world."

Cold Burn There is now strong evidence to suggest that the unusually cold winters of the past two years in the UK are the result of heating elsewhere. With the help of the severe weather analyst John Mason and the Climate Science Rapid Response Team(1), I’ve been through as much of the scientific literature as I can lay hands on. (Please also see John Mason’s article, which explains the issue in more detail(2)). Here’s what seems to be happening. The global temperature maps published by NASA present a striking picture(3). Last month’s shows a deep blue splodge over Iceland, Spitsbergen, Scandanavia and the UK, and another over the western US and eastern Pacific. Temperatures in these regions were between 0.5 and 4 degrees colder than the November average from 1951 and 1980. But on either side of these cool blue pools are raging fires of orange, red and maroon: the temperatures in western Greenland, northern Canada and Siberia were between two and ten degrees higher than usual(4). NASA’s Arctic oscillations map for December 3-10 shows that parts of Baffin Island and central Greenland were 15 degrees warmer than the average for 2002 to 2009(5). There was a similar pattern last winter(6). These anomalies appear to be connected.

2010 Extreme Weather: Deadliest Year In A Generation - This was the year the Earth struck back. Earthquakes, heat waves, floods, volcanoes, super typhoons, blizzards, landslides and droughts killed at least a quarter million people in 2010 - the deadliest year in more than a generation. More people were killed worldwide by natural disasters this year than have been killed in terrorism attacks in the past 40 years combined.  "It just seemed like it was back-to-back and it came in waves," said Craig Fugate, who heads the U.S. Federal Emergency Management Agency. It handled a record number of disasters in 2010.  "The term '100-year event' really lost its meaning this year."

The year of living dangerously. Masters: “The stunning extremes we witnessed gives me concern that our climate is showing the early signs of instability” - Munich Re: "The only plausible explanation for the rise in weather-related catastrophes is climate change" - A year of deadly record-smashing weather extremes from Nashville to Moscow, from the Amazon to Pakistan, ended with staggering deluges from California — “Rainfall records weren’t just broken, they were obliterated” — to Australia: More than a year’s rain fell in Carnarvon in just 24 hours this week.  A monsoonal low hovering over the Gascoyne dumped a 24-hour record 204.8mm, smashing the previous record of 119.4mm set on March 24, 1923. NASA reported that it was the hottest ‘meteorological year’ [December to November] on record and likely to be the hottest calendar year. Uber-meteorologist and former NOAA Hurricane hunter Dr. Jeff Masters of Weather Underground reported, “The year 2010 now has the most national extreme heat records for a single year–nineteen. These nations comprise 20% of the total land area of Earth. This is the largest area of Earth’s surface to experience all-time record high temperatures in any single year in the historical record.”

NOAA: Future of Arctic Sea Ice and Global Impacts -The diagram in Figure 2 (right) explains the Arctic climate feedback and its global implications.  As the earth warms, the warming is amplified in the Arctic. More sea ice melts in the summertime, and with more open water, heat from the sun is absorbed in the ocean. With the warmer Arctic, winter freezeup is delayed, resulting in thinner wintertime ice.  The heat absorbed into the ocean in summertime is released to the atmosphere in the fall, warming the atmosphere and changing the atmospheric pressure surfaces over the pole.  This dome of warm air and elevated atmospheric pressure surfaces over the pole changes the Arctic atmospheric wind patterns, allowing outbreaks of cold Arctic air to the south.

Growing Hypoxic Zones Reduce Habitat for Billfish and Tuna, which could increase vulnerability to fishing - Billfish and tuna, important commercial and recreational fish species, may be more vulnerable to fishing pressure because of shrinking habitat according to a new study published recently in the journal Fisheries Oceanography by scientists from NOAA, The Billfish Foundation, and University of Miami Rosenstiel School of Marine and Atmospheric Science. An expanding zone of low oxygen, known as a hypoxic zone, in the Atlantic Ocean is encroaching upon these species’ preferred oxygen-abundant habitat, forcing them into shallower waters where they are more likely to be caught. While these hypoxic zones occur naturally in many areas of the world’s tropical and equatorial oceans, scientists are concerned because these zones are expanding and occurring closer to the sea surface, and are expected to continue to grow as sea temperatures rise.

Ocean acidification may disrupt the marine nitrogen cycle - Ocean acidification, the result of roughly a third of global CO2 emissions dissolving into the seawater and lowering its pH, has complicated and poorly understood consequences for ocean ecosystems. Scientists already know that a drop in ocean pH affects the carbon cycle, reducing the carbonate ions that organisms like corals, mollusks and crustaceans use to build shells and external skeletons. Now, a new study shows that a CO2-induced increase in acidity also appears to disrupt the marine nitrogen cycle. The finding, to be published December 21 in the Proceedings of the National Academy of Sciences, could have ramifications for the entire ocean food web. The authors of the study examined a specific step in the marine nitrogen cycle, called nitrification, in which microorganisms convert one form of nitrogen, ammonium, into nitrate, a form plants and other marine microorganisms require to survive.

EIA Projects Climate Catastrophe - The U.S. Energy Information Administration has projected that the United States will lead the world into catastrophic global warming over the next twenty five years. In its 2011 Annual Energy Outlook, the EIA predicts that energy-related CO2 emissions will “grow by 16 percent from 2009 to 2035,” reaching 6.3 billion metric tons of carbon dioxide equivalent (or 1.7 GtC): The fuel mix the EIA projects remains predominantly coal and oil, with a moderate rise in renewable energy, whose pollution benefits are offset by growth in energy demand: This pathway would almost certainly commit the world to catastrophic climate change, including rapid sea level rise, extreme famine, desertification, and ecological collapse on land and sea. Right now, the United States, with less than five percent of global population, produces 20 percent of global warming pollution. Center for American Progress senior fellow Joe Romm published in Nature in 2008 that humanity “must aim at achieving average annual carbon dioxide emissions of less than 5 GtC [5 billion metric tons of carbon, or 18 billion metric tons of carbon dioxide] this century or risk the catastrophe of reaching atmospheric concentrations of 1,000 p.p.m.”

More scrapped plans, retirements for U.S. plants in 2010 - Over the course of this year, more U.S. coal-fired power plants were tapped for retirement and more proposed plants were canceled than in 2009, according to an end-of-year report by the Sierra Club, which is fighting the continued use of coal. Data collected by the advocacy group show that 38 coal plant projects were dropped or delayed in 2010, up from 26 the year before and 27 in 2008. Meanwhile, power producers announced plans to retire 48 existing plants this year, four times as many as in 2009 and 12 times as many as in the year before that. The retirements announced this year would take 12,000 megawatts of coal-fired power off the grid — roughly 4 percent of the nation’s total coal-fired capacity and enough electricity to power about 6 million American homes.

African Huts Far From the Grid Glow With Renewable Power - Every week, Ms. Ruto walked two miles to hire a motorcycle taxi for the three-hour ride to Mogotio, the nearest town with electricity. There, she dropped off her cellphone at a store that recharges phones for 30 cents. Yet the service was in such demand that she had to leave it behind for three full days before returning.  That wearying routine ended in February when the family sold some animals to buy a small Chinese-made solar power system for about $80. Now balanced precariously atop their tin roof, a lone solar panel provides enough electricity to charge the phone and run four bright overhead lights with switches.

Spain’s Cuts to Solar Aid Draw Fire - A group of international investors has called on the Spanish government to reconsider plans to cut costly subsidies for solar power, saying they would cause a wave of defaults and more bad loans for Europe’s banks. Tom Murley, head of the renewable-energy team at U.K. private-equity firm HgCapital, said the changes represented a “breach of trust” that would increase regulatory uncertainty in the Spanish renewables industry.

The long and the short of energy efficiency - Originally on Market Forces: David Owen asks a provocative question in the current New Yorker: If our machines use less energy, will we just use them more? He more or less says yes. The real answer comes in two parts. For now—over days, weeks, months, and even years—energy efficiency will decrease energy use and emissions. Screw a compact fluorescent light (CFL) bulb into a socket that used to hold an incandescent and your energy use will go down. Chances are you won't leave the lights on four times as long just because light now costs a quarter. Over time—years, decades, centuries, and millennia—more energy efficient lights and appliances will indeed mean that more people use more of them. CFLs make light more affordable. That doesn't matter to the typical U.S. household, where few light sockets remain unused because of energy costs. But globally—and over time—it does make a difference.

‘Resisting The Green Dragon’: Religious Right Attacks Environmentalism As ‘Deadly’ And ‘Destructive’ In New DVD Series - Various conservative Christian leaders have united with the Cornwall Alliance for the release of a shocking new 12-part DVD series, "Resisting The Green Dragon," that attempts to debase and discredit the environmental movement by portraying it as "one of the greatest deceptions of our day" that is "seducing your children" and "striving to put America and the world under its destructive control." The hyperbolic accusations spewed throughout the video give it the appearance of a ridiculous parody, calling environmentalism "deadly," a "cult" and a "spiritual deception." Unfortunately, the comical PSA is anything but a joke.In the video, David Barton, founder of WallBuilders, attests that environmentalists' "false assertions are based more on their own morbid pessimistic fears, not on any good science," while the president of the Southern Baptist Convention's Ethics and Religious Liberty Commission, Dr. Richard Land, says, "Environmentalists have a long history of believing and promoting exaggerations and myths" -- statements both so steeped in irony that they are hardly worth parrying.

The U.S.S. Prius - And what could save America’s energy future — at a time when a fraudulent, anti-science campaign funded largely by Big Oil and Big Coal has blocked Congress from passing any clean energy/climate bill — is the fact that the Navy and Marine Corps just didn’t get the word.  God bless them: “The Few. The Proud. The Green.” Semper Fi.  Spearheaded by Ray Mabus, President Obama’s secretary of the Navy and the former U.S. ambassador to Saudi Arabia, the Navy and Marines are building a strategy for “out-greening” Al Qaeda, “out-greening” the Taliban and “out-greening” the world’s petro-dictators. Their efforts are based in part on a recent study from 2007 data that found that the U.S. military loses one person, killed or wounded, for every 24 fuel convoys it runs in Afghanistan.  Mabus’s argument is that if the U.S. Navy and Marines could replace those generators with renewable power and more energy efficient buildings, and run its ships on nuclear energy, biofuels and hybrid engines, and fly its jets with bio-fuels, then it could out-green the Taliban — the best way to avoid a roadside bomb is to not have vehicles on the roads — and out-green all the petro-dictators now telling the world what to do.

U.S. Demand For Gas At Start Of Long-Term Decline - The world's biggest gas-guzzling nation has limits after all. After seven decades of mostly uninterrupted growth, U.S. gasoline demand is at the start of a long-term decline. By 2030, Americans will burn at least 20 percent less gasoline than today, experts say, even as millions more cars clog the roads. The country's thirst for gasoline is shrinking as cars and trucks become more fuel-efficient, the government mandates the use of more ethanol and people drive less. "A combination of demographic change and policy change means the heady days of gasoline growing in the U.S. are over," said Daniel Yergin, chairman of IHS Cambridge Energy Research Associates

Can Natural Gas Replace Oil for Diesel? - In a series of posts (most recent here), I’ve noted that oil and natural gas prices have become unhinged from each other. Oil (denominated in $ per barrel) used to trade at 6 to 12 times the price of natural gas (denominated in $ per MMBtu). But lately that ratio has been north of 20, thanks to a surfeit of new gas in the United States (and elsewhere) and, recently, growing global demand for oil. The wide spread between oil and natural gas prices provides a tempting incentive for any innovators who can figure out how to use natural gas, rather than oil, to make transportation fuels. Over at the New York Times, Matthew Wald identifies one possibility, using natural gas to produce diesel:

Neb. lawmakers: Pipeline route is out of our hands - The State of Nebraska should explore enacting regulations to protect landowners and taxpayers from problems associated with pipelines, three state senators said Wednesday.  But the state is probably powerless to tell a Canadian company to reroute a proposed 36-inch crude-oil pipeline around the sensitive, groundwater-rich Sand Hills region, they said.  "I think the siting is a federal issue," said State Sen. Annette Dubas of Fullerton.

Will shale gas turn out to be an energy sink? - If you externalize the costs of a business activity, it means other people pay the costs--environmental, social and otherwise--and you get the profits. It goes on all the time in extractive industries such as oil and natural gas and mining. And, it is also a natural strategy for manufacturers who dump their pollution into the air and the water. It's even practiced in finance where the executives of Wall Street banks have managed to collect the bonuses made off a phony boom in the last decade and saddle taxpayers with the losses of the inevitable bust caused by bad and often fraudulent loans, misleading derivative contracts, and leveraged speculation in stocks and commodities. If the loopholes are there, you can be assured that people in business will take advantages of them. That's exactly what is happening in the business of shale gas drilling. Drillers are exempt from federal clean air and water regulations under a bill shepherded through Congress in 2005 by none other former Halliburton CEO Dick Cheney in his capacity as the then vice president of the United States. (Halliburton is one of the world's largest providers of drilling fluids for shale gas drilling and other oil and gas drilling operations.) That means the drillers can externalize the environmental costs of these hazardous fluids and other materials needed to fracture the shale and thereby free the natural gas. They can foist those costs on nearby residents in the form of ruined water supplies, toxic air pollution, poisoned land, and health problems for humans and animals.

Tech Talk: When oil isn’t crude and gas isn’t gas, the Eagle Ford Shale play - There are two figures that keep cropping up when folk write about the production of oil, one number is the daily flow rate for crude oil, and while the EIA report that the peak production year to date was in 2005, when the world produced 73.72 mbd, the IEA have reported that the peak occurred in 2006. Yet just last week the IEA raised their forecast for next year’s oil demand to 88.8 mbd and there is about 15 mbd difference between the two numbers. So you might ask what causes this, where do these additional liquids come from and what is their future, relative to that of crude alone.  Part of the answer comes from what are known as refinery gains, the fact that when you crack a high-carbon crude into lower carbon products in a refinery then there is a gain in volume. In Oil 101 Morgan gives this processing gain in volume to be around 2.2 mbd. In addition there is the rising level of bio-fuel production, about 900,000 bd of ethanol in the US alone, for example. But the largest volume comes from the liquids associated with the production of natural gas.  These are collectively described as Natural Gas Liquids (NGL) and condensate.

Central Arkansas growing weary of relentless tremors - Although drilling for natural gas has been ruled out as a cause for the quakes, experts want to continue looking at salt water disposal wells, said Scott Ausbrooks, geohazards supervisor for the Geological Survey. Disposal wells occur when drilling waster is injected back into the earth after drilling.  Earlier this month, the Arkansas Oil and Gas commission issued an emergency moratorium on permits for new disposal wells. The commission will ask for a six-month extension for the moratorium at a January regulatory meeting.  The state also will soon become one of a few to require companies to disclose the chemicals used in fracking fluid, the water-and-chemical solution used in high-pressure drilling operations, said Shane Khoury, deputy director and general counsel for the Arkansas Oil and Gas Commission.

Big Oil Money Working to Rewrite History of Gulf Oil Disaster - Big polluters have spent years funding think tanks to give a veneer of credibility to their push for profit. I mean, if the CEO of Exxon Mobil comes out and says Congress should roll back the Clean Air Act, it would just rally people behind pollution limits. So instead, Exxon Mobil has given more than $2 million to the Competitive Enterprise Institute to say it for them. Now the polluter-funded think tank-media complex has a new target – whitewashing the Gulf oil disaster. Robert Nelson has an opinion piece made up to look like a news article in the Weekly Standard claiming the Gulf oil disaster caused little damage and calling anyone who would claim otherwise “secular equivalents to the devil.” Why would a public policy professor at the University of Maryland write something not just so wrong, but with such an angry, combative tone? A look at Nelson’s extracurricular activities reveals a web of connections to big polluters like Koch Industries & Exxon Mobil:

Chevron to Spend $4 Billion on U.S. Gulf Discovery - Chevron Corp., the second-largest U.S. oil company, plans to spend $4 billion to get crude and natural gas from its Big Foot discovery in the U.S. Gulf of Mexico.The field, which contains the equivalent of 200 million barrels of crude, is scheduled to come online in 2014, the San Ramon, California-based company said in a statement today. It will be capable of producing 75,000 barrels of oil and 25 million cubic feet of gas a day, the company said. The discovery is about 225 miles (360 kilometers) south of New Orleans in waters 5,200 feet deep.

Saudi Aramco LPG exports to fall 24% in 2011 to 6.5 million mt - Saudi Aramco's LPG export for 2011 will slump 23.5% to anywhere between 6 million mt and 6.5 million mt as it diverts product to meet local demand, term customers and trade sources said Tuesday. The Middle Eastern oil giant is expected to close 2010 with total exports of anywhere between 8 million mt and 8.5 million mt, in line with the volumes it shipped out in 2009.  "The reduction in export volume is led by the need to meet domestic demand, particularly, from Saudi Kayan Petrochemical Company," Kayan's steam cracker complex located in Jubail Industrial City, centers around a naphtha- and LPG-fed steam cracker, which has a nameplate capacity of 1.33 million mt/year of ethylene. Saudi Aramco produces around 18 million mt/year of LPG of which, the lion's share -- that is not shipped out -- finds use in the domestic petrochemical industry.

Interactive: The Global Oil Diet - The United States is the third-largest producer of oil in the world, but it is by far the world's largest consumer of oil, using about twice as much oil as it produces. The highly-localized distribution of oil around the world and differences in regulatory approaches to drilling mean that among large economies there is enormous variation in the ratio of oil produced to oil consumed: Japan, Germany and South Korea must import practically all the oil that they use, while Canada and Russia are heavy users as well as net exporters of oil.

Russian Oil Production Stats  - We seem to be having Oil Production Update Week here at Early Warning, and today it's Russia (currently the largest oil producing nation in the world).  In the 2007, 2008 timeframe it appeared that the Russian resurgence was over with production peaking and starting to go down, as Russia struggled to maintain production from all the worked-over Soviet-era oilfields in West Siberia, with limited new projects to bring on line.  But then in 2009 there was another half mbd increase (apparently mainly from East Siberia).  Now in 2010, it appears this latest increase has been slowing down again, though I certainly wouldn't want to call peak on it.

Iranian Oil Production Stats  - The graph above shows Iranian oil production according to four data sources: the Oil and Gas Journal (but only updated through 2008), the International Energy Agency (IEA), the US Energy Information Agency (EIA), and the Joint Oil Data Initiative (JODI). There is considerable dissension over what Iranian production has been doing. The Iranians themselves reported to JODI that their production fell sharply about 0.5mbd when OPEC decided to cut back production to support prices in the great recession. However, the US EIA and the IEA in Paris report that any cutback was non-existent (EIA) or small and uneven (IEA), with production recently presumably being pretty much Iranian capacity. Since the current Iranian regime is clearly dishonest and corrupt about other matters (its nuclear facilities, its presidential elections), I'm inclined to believe the international agencies.  Therefore, I wouldn't expect large increases in Iranian production any time soon.

Cuts in Subsidies Quadruple Gas Prices in Iran - After midnight on Sunday, the price of subsidized gasoline jumped to 38 cents a liter from 10 cents a liter. Similar increases went into effect for compressed natural gas and diesel fuel, with subsidy reductions for other commodities expected to be phased in gradually. Security forces with riot shields took positions at gas stations in Tehran, bracing for a possible repeat of the unrest that followed the introduction of gasoline rationing in 2007, but there were no reports of violence.  Policy makers have described the program as a “rationalization” or “targetization” of Iran’s vast and inefficient subsidies system, but some analysts fear it could increase living costs for millions of middle- and low-income households.

Iran's experiment with Reaganomics --- Within hours of speaking with the BBC and Voice of America, both in Persian, Fariborz Raisdana, a leading Iranian economist, was arrested by the security forces of the Islamic Republic. On both these occasions, Raisdana was severely critical of Iranian President Mahmoud Ahmadinejad's program of substantially cutting governmental subsidies, in what amounts to "the biggest surgery" to the Iranian economy in 50 years. Initiated on Sunday, the government's actions introduced a four-fold rise in the price of gasoline and seriously cut government food subsidies, including, literally, people's daily bread. The current 20% inflation rate, some economies believe, will in fact increase after these new "austerity measures." Even economists sympathetic to Ahmadinejad's policies warn of higher inflation and characterize his claim of "zero inflation" as disingenuous.

The value of a nuclear Iran - By far the most interesting leak that surfaced from the US cable disclosures is the repeated insistence of the Saudi king exhorting the United States to withdraw from Iraq by taking a detour through Iran. There is something deliciously self-serving about Saudi exhortations for the US to act on Iran to prevent the rise of a new power in the Middle East, especially if the US were to step back and ask a tougher question about the role of "other snakes".  In case that is too obtuse, what I am referring to is the "snake" of religious terrorism, and in particular the problem of disaffected youth in predominantly Sunni kingdoms such as Saudi Arabia, Kuwait et al; as well as those in anarchies such as Iraq, Afghanistan and Pakistan. It is not entirely clear that the natural enemy of such youth is necessarily the Americans; more likely, it is the established order of the Middle East, where the wealth of nations is controlled by a bunch of aging monarchies.

Oil Passes $90 as Supplies Tighten - Crude-oil futures prices settled above $90 a barrel Wednesday, as declining supplies and an improving economy have pushed prices to their highest level in more than two years. The U.S. has hemorrhaged 19.3 million barrels of oil since late November, with supplies dropping at their fastest pace since May 2008, when oil prices were well into record territory above $100 a barrel. Oil futures have rallied 13% since mid-November, putting crude on a track back towards triple digits.  Light, sweet crude for February delivery settled at $90.48 a barrel, up 66 cents on the New York Mercantile Exchange, after rising as high as $90.80 earlier in the session. Brent crude on the ICE futures exchange traded 49 cents higher at $93.69 a barrel. "A settlement over $90 is a pretty key level. Now we're starting to see prices at the pump make really big moves," The move higher was sparked by another big drop in U.S. oil inventories in the latest Department of Energy report. Crude stocks fell by 5.3 million barrels in the week ended Friday, following a 9.9-million-barrel plunge in last week's report, the largest decline in eight years.

Oil Hits 2-Year High After Supplies Drop More Than Forecast - Bloomberg - Crude oil rose to the highest level in more than two years after government reports showed that U.S. supplies dropped and the country’s economy grew more than previously estimated in the third quarter.  Stockpiles fell 5.33 million barrels to 340.7 million, the lowest level since February, the Energy Department said. A 3.4 million-barrel decline was forecast, according to the median of 14 responses in a Bloomberg News survey. The Commerce Department said gross domestic product expanded 2.6 percent in the third quarter, up from a previous estimate of 2.5 percent. “Today’s crude numbers were very bullish,” . “The GDP numbers point to extended growth in the U.S. Previously, we were seeing economic and demand growth in China and emerging markets, now it’s spreading here.”

Oil tops $90 for first time in more than two years - Crude oil rose to its highest closing price in more than two years today after government reports showed that U.S. supplies dropped and the country’s economy grew more than previously estimated in the third quarter. Stockpiles fell 5.33 million barrels to 340.7 million last week, the Energy Department said. A 3.4 million-barrel decline was forecast, according to the median of 14 responses in a Bloomberg News survey. The Commerce Department said gross domestic product expanded 2.6 percent in the third quarter, up from a previous estimate of 2.5 percent.

Oil prices climb again today to over $91 - The national average for a gallon of regular gasoline topped $3 on Thursday. It's the first time that the average retail price has been above $3 a gallon at Christmas. The average pump price rose about a cent and a half a gallon overnight, to $3.01, according to AAA, Wright Express and Oil Price Information Service. That's 14 cents more than a month ago and 43 cents higher than a year ago. Pump prices have traditionally dropped after the peak summer driving season and into the winter, because fewer people are on the road.

Oil Rises in London as Snowstorm Returns, Inflation Spurs Commodity Demand - Crude oil in London traded within 1 percent of a two-year high, as the return of snowstorms to parts of Europe buoyed expectations that fuel demand will increase.  Brent crude climbed to its highest since October 2008 earlier today after a report yesterday showed confidence among U.S. consumers improved. Prices will extend gains next week, according to a Bloomberg News survey of analysts. OPEC’s seven Arab-country members are due to meet in Cairo tomorrow.  Brent crude oil for February settlement rose as much as 49 cents, or 0.5 percent, to $94.74 a barrel on the London-based ICE Futures Europe exchange, the highest since Oct. 2, 2008. It traded for $93.90 a barrel at 11:12 a.m. London time. Prices have gained 2.4 percent this week, and 20 percent this year.  West Texas Intermediate oil for February delivery advanced $1.03 to $91.51 a barrel yesterday on the New York Mercantile Exchange, the highest settlement since Oct. 3, 2008. Prices are up 15 percent this year. Electronic and floor trading is closed today because of the Christmas holiday.

Oil Consumers Wary as Some in OPEC Target $100 Crude Before Cairo Meeting - Oil importers are growing wary of the impact of prices near two-year highs as some OPEC members foresee a further rally to the $100-a-barrel level and Arab oil ministers gather for a meeting in Cairo.  Japan’s economy minister said today the government needs to keep an eye on climbing prices while the deputy governor of the Chinese central bank said inflation pressures are rising.  Shokri Ghanem, chairman of Libya’s National Oil Corp., was the latest OPEC official to forecast $100. Iran and Venezuela have also said that represents a fair price while Saudi Arabia, the group’s biggest exporter, said it prefers prices centered on $75, a level that oil has traded above since September.

World economy can withstand $100 oil price: Kuwait (Reuters) - The global economy can withstand an oil price of $100 a barrel, Kuwait's oil minister said on Saturday, as other exporters indicated OPEC may decide against increasing output through 2011 as the market was well supplied. Analysts have said oil producing countries are likely to raise output after crude rallied more than 30 percent from a low in May because they fear prices could damage economic growth in fuel importing countries. European benchmark ICE Brent crude for February closed at $93.46 on Friday after hitting $94.74 a barrel, its highest level since October 2008. Arab oil exporters meeting in Cairo this weekend said they saw no need to supply more crude as stocks were high and prices had been inflated temporarily by cold weather in Europe.

Crude oil at $250 per barrel? - Last month Mr Alexei Miller, CEO of Russia’s and world’s largest gas company OAO Gazpron predicted that the oil price would shoot up to $250 per barrel in the near future and the gas prices will follow similar upward trend. The new Russian President Dmitry Medvedev also commented, in a manner gentler than his predecessor’s but quite clearly, that the world has to get adjusted to the new reality of stronger Russian and weaker US economic power in view of high oil and gas prices. Let us contemplate the scenario in which oil price does rise to $250 per barrel and stays there for an extended period. It would lead to a major global economic recession and possibly a depression. In the US, gasoline prices would rise to $10 per gallon and in India, the price of petrol could rise to Rs 75 to Rs 150 per litre, depending on the subsidy levels, with serious negative economic consequences. The high oil price will also further fuel the inflationary fires all over the world. Central banks will be forced to raise interest rates to fight inflation and thereby slowing the economies even further. The increased diversion of agricultural outputs to produce biofuels and high cost of fertilisers could lead to very high food prices and shortage of food. The worst affected will be the poorer countries which will be faced with recession, high inflation and shortage of food perhaps ever famines.

America's Childlike Desire to Avoid Making Trade-Offs - We want everything and we want it now, and we don't want to sacrifice anything to get it. Our solution is pathetically childlike: just borrow trillions of dollars every year to buy what we want, so no adult trade-offs are ever required. Just buy our energy from somewhere else so we don't have to make any sacrifices or balance competing demands...We want abundant, cheap energy, and we want someone else to supply it to us so we don't have to make any difficult trade-offs. We want all our entitlements and we also don't want higher taxes. Isn't this the acme of childish fantasy? When pressed about energy, we want to hide behind fantasies of fusion, or algae-based fuels, or some other technology which has been "10 years away" for the past 30 years or which is 20 years away from scaling up to industrial production, if ever. Our ignorance of the actual science is breathtaking, but we refuse to consider the possibility that breeder reactors and algae-based fuels may not pan out. At some point, probably within the next 5-6 years, the oil exporters will stop shipping their hydrocarbons to us in sufficient quantities to meet our demands, and bond buyers will stop trading their capital for absurdly low rates of return on U.S. Treasury bonds. Once it costs $1 trillion just to pay the interest on existing (and rapidly ballooning) debt, then we won't be able to borrow enough to fund the Empire and the Savior State and the interest. Trade-off time will finally be forced upon us.

Peak Oil And Population Decline - A solution that is sometimes proposed for the dilemma of fossil-fuel decline is a global campaign for the humane implementation of rapid population decline (RPD). With all due respect for the attempt to find a satisfying answer to the question of overpopulation, such a proposal would conflict with the available data on the rate of decline in fossil fuels. The annual rate of population decline, in a civilization in which fossil fuels are the principal source of energy, must roughly equal that annual rate of fossil-fuel decline, which is probably about 6 percent. Unfortunately there is no practical humane means of imposing a similar 6 percent annual rate of decline on the world’s population. If we let Nature, i.e. loss of petroleum, take its course, a decline of 6 percent would result in a drop in world population to half its present level, i.e. to 3.5 billion, by about the year 2020, a mere decade from now. The only means, however, would be a rather grim one: famine.

Copper hits record high; gold ends with gains Metals Stocks - MarketWatch — Copper futures closed at a record high Tuesday after Chile’s Collahuasi copper mine, one of the world’s largest, said it had halted shipments of copper concentrate. Port facilities for the Collahuasi mine, mostly owned by Anglo American PLC /quotes/comstock/23s!e:aal (UK:AAL 3,273, +131.00, +4.17%) and Xstrata PLC /quotes/comstock/23s!a:xta (UK:XTA 1,506, +51.00, +3.51%) , halted exports of copper concentrate after an accident reportedly killed three workers and prompted the mine operators to declare force majeure. Read more on Anglo American, Xstrata. The ability to declare force majeure, an event that cannot be reasonably anticipated or controlled, is typically written in many commodity contracts to protect producers from breaching contracts in situations such as rebels blowing up pipelines or damage arising from lightning strikes. Read full story on halted Chilean copper shipments.

Trader Holds $3 Billion of Copper in London - As commodity prices soar to new records, the ability of a few traders to hold huge swaths of the world's stockpiles is coming under scrutiny. The latest example is in the copper market, where a single trader has reported it owns 80%-90% of the copper sitting in London Metal Exchange warehouses, equal to about half of the world's exchange-registered copper stockpile and worth about $3 billion. The report coincided with copper prices reaching record highs Tuesday. Commodities prices rallied along with stocks. The Dow Jones Industrial Average gained 55.03 points, or 0.5%, to 11533.16, its highest level since August 2008. Crude oil jumped to its highest level in more than two years and topped $90 a barrel in late electronic trading in New York. Corn and soybeans rose amid worries about hot weather in Argentina. Copper soared to a new record of $4.2705 per pound Tuesday in New York and is up more than 28% this year.

A Single Trader, JP Morgan, Holds 90% Of LME Copper - When a week ago we reported that JP Morgan has denied it owned more than 90% of the copper positions on the LME, we suggested that this could very well mean that Blythe Master's firm could just as easily control 89.999% of the copper and still not misrepresent the truth per that non-commital press release. Turns out our unbridled cynicism was spot on as usual. The Wall Street Journal has just reported that in the copper market "a single trader has reported it owns 80% to 90% of the copper sitting in London Metal Exchange warehouses, equal to about half of the world's exchange-registered copper stockpile and worth about $3 billion." Oh and yes, while JP Morgan technically is not singled out, we will be delighted to issue a retraction the second JP Morgan approaches us with a refutation that it is not the trader in question. And while we are at it, we also will repeat our claim that it was indeed JP Morgan that reduced its massive silver position, as per the recent FT article: as above we will immediately issue a retraction and apologize should JPM's legal department contact us that we are wrong on this. Somehow we don't think that will be an issue.

Copper Rises in London After China's Inventories Decline, Port Disruption -  Copper rose for the first time in three days in London after stockpiles declined in China, the world’s largest buyer, amid supply disruptions in Chile.  Copper stockpiles in warehouses monitored by the Shanghai Futures Exchange fell 5.8 percent this week, the exchange said on its website today. Prices have climbed 3.2 percent this week after owners of the Collahausi mine in Chile indicated they may not be able to supply all customers after a port accident.  “A drawdown in Shanghai inventories and ongoing concerns over Collahuasi’s main exit route for its concentrates are keeping copper supported,”

China's Gas Imports More Than Double on Rising Demand for Winter Heating - China more than doubled imports of natural gas last month because of increased demand for heating during winter, the nation’s top economic planner said.  Purchases jumped 150 percent from a year earlier to 1.9 billion cubic meters, the National Development and Reform Commission said on its website today, without giving comparative figures. Imports gained 17 percent from October, it said.  The country has increased gas production and imports to meet rising demand in winter since last month, according to the commission. Beijing’s gas demand surged fourfold to 770 million cubic meters from a month earlier, it said.

China Car Market to Extend Gains Over U.S., Automakers Say - Sales growth in China may outstrip the U.S. again in 2011 even as the Asian nation’s government is set to end incentives this month that helped boost its auto sales by 34 percent to 16.4 million through November. Next year, auto sales in China may reach 20 million in China, according to Booz & Co. and Nomura Holdings Inc. analysts, while light-vehicle sales in the U.S. may be as much as 12.8 million units,

Consumption, Imports and the Prospects for US External Balances - Most forecasts incorporate a resurgence in the US trade and current account deficits. This projection makes sense to the extent that the US is expected to grow faster than Europe and Japan, and the estimated income elasticity of US imports exceeds that of US exports (the Houthakker-Magee finding [0]). Here’s a summary of forecasts for the current account. The only forecast that indicates a CA deficit reduction is the IMF's. (The Fed's forecasting framework has similar predictions [1], [paper]) What would alter the basic thrust of these projections? Changes in the assumed income growth rate and value of the US dollar would obviously have an impact. But higher price elasticities (as discussed here), or a reduction in the income elasticity asymmetry could also imply a different path for the external accounts. With regard to the latter, a change in the behavior of consumers with respect to imported goods (see previous discussion here). So, while total real consumption has almost returned to its pre-recession peak in 2007Q4 (per capita is still below), total consumption of goods has not (it's about 1% below peak).

U.S. challenges China wind power aid at WTO (Reuters) - The United States on Wednesday accused China of illegally subsidizing the production of wind power equipment and asked for talks at the World Trade Organization, the first step in filing a trade case. U.S. trade officials said they were concerned Chinese manufacturers of wind turbines and related parts and components could have received several hundred million dollars in questionable government grants in 2008 under China's Special Fund for Wind Power Manufacturing. They said the grants appeared to violate WTO rules by requiring Chinese manufacturers to use only Chinese-made parts and components. U.S. wind turbine manufacturers such as General Electric and United Technologies are eager to compete in China's fast-growing market, although the United Steelworkers union was the driving force behind the case. .

Chinese growth in 2011 - For the past two months there have been very strong rumors in the markets that next year’s new lending quota was going to be set somewhere between RMB 6.5 trillion and RMB 7.0 trillion.  For comparison’s sake, total new lending last year amounted to RMB 9.6 trillion, and this year the quota was RMB 7.5 trillion.But to me RMB 6.6-7.0 trillion seemed likely to be low (and ”low” is a relative word here – compared to the years before 2009 these are actually very large numbers).  We have been telling clients for months, for example, that even ignoring the reportedly large amounts of loans shifted off bank balance sheets this year, it was very unlikely that 2010 would end with new lending below the RMB 7.5 trillion quota.  In fact by the end of November we were already over RMB 7.4 trillion, so I suspect we are going to finish the year with total new lending at pretty close to RMB 8 trillion.  Add in the loans taken off bank balance sheets and we have easily blown through the 2010 quota. Tuesday’s South China Morning Post has an article suggesting that we may have been right:

China and Inflation: A Higher Currency Stems Inflation - The NYT reported that inflation in China is higher than its leadership's targets. It might have been worth noting that a higher valued currency helps to lower inflation. This is for two reasons. First, insofar as inflation is driven by excess demand, a higher valued currency will reduce exports (it makes them more expensive for foreigners) and thereby bring demand more in line with potential output. A higher valued currency will also make imported items, like food and oil, less expensive. This will directly reduce inflation. For some reason China is apparently not considered this obvious path for addressing its problems with inflation.

Is there a bubble in the Chinese housing market? - For many analysts, the Chinese economy is spurred by a bubble in the housing market, probably driven by the fiscal stimulus package and massive credit expansion, with pos-sible adverse effects to the real economy. To get insights into the size of the bubble, the house price evolution is investigated by panel cointegration techniques. Evidence is based on a dataset for 35 major cities. Cointegration is detected between real house prices and a set of macroeconomic determinants, implying that a bubble exhibits mean-reverting behaviour. The results indicate that the bubble is about 25 percent of the equi-librium value implied by the fundamentals at the end of 2009. The bubble is particularly huge in the cities in the southeast coastal areas and special economic zones. While the impact of real house prices on CPI inflation appears to be rather strong, GDP growth may not be heavily affected. Thus, a decline of the bubble will likely have only modest effects on the real economy.

Beijing’s housing price fury goes viral - The anger harboured by Beijingers about sky-high housing prices has been captured in a sardonic e-mail spreading in Chinese cyberspace calculating how long it would take peasants, thieves and prostitutes to buy a home. The e-mail, which has gone viral in various versions, provides unscientific but entertaining estimates of how long citizens would need to work to afford a 100-square-metre apartment in central Beijing, which currently sells for about Rmb3m ($450,000). As long as there were no natural disasters, a peasant farmer working an average plot of land would just have been able to afford an apartment if he or she somehow had worked since the Tang dynasty, which ended in 907AD, until today. If a Chinese blue-collar worker had been on the average monthly salary of Rmb1,500 since the opium wars in the mid-19th century and had given up weekends, then he or she might just have been able to afford a place of his or her own. Prostitutes, the e-mail says, would have to entertain 10,000 customers – a marathon feat requiring them to service one customer a night from the age of 18 until the age of 46 without an evening off. The thief would need to conduct 2,500 robberies to find the funds to buy a home. Of course, the e-mail notes, such calculations do not count interior decoration, furniture or household electronics.

The ghost towns of China: Amazing satellite images show cities meant to be home to millions lying deserted - These amazing satellite images show sprawling cities built in remote parts of China that have been left completely abandoned, sometimes years after their construction. Elaborate public buildings and open spaces are completely unused, with the exception of a few government vehicles near communist authority offices. Some estimates put the number of empty homes at as many as 64 million, with up to 20 new cities being built every year in the country's vast swathes of free land. The photographs have emerged as a Chinese government think tank warns that the country's real estate bubble is getting worse, with property prices in major cities overvalued by as much as 70 per cent.

China plans 900 billion yuan deficit in 2011 to fuel economy - China drafted a 900 billion yuan ($134.85 billion) deficit plan for 2011, a report said Monday, citing an anonymous government official. The plan, which will be submitted to the National People's Congress for approval in March next year, calls for the allocation of a 700 billion yuan ($104.88 billion) deficit for the central government and 200 billion yuan ($29.97 billion) for local governments. And the report also said that there would be a 1 trillion yuan ($149.83 billion) financial revenue surplus for the whole of this year, which will provide a sound basis for next year's deficit.

China Fails to Complete 91-Day Treasury Bill Sale as Cash Crunch Worsens  -     China’s government failed to draw enough demand at a bill sale for the second time in a month as seasonal demand for funds and higher reserve-requirement ratios left banks with less cash.  The finance ministry sold 16.76 billion yuan ($2.53 billion) of 91-day securities, falling short of the planned 20 billion yuan target, according to a statement on the website of Chinabond, the nation’s biggest debt-clearing house. The average winning yield was 3.68 percent, higher than the 3.22 percent rate for similar-maturity debt in the secondary market yesterday.  “Banks are badly short of cash,” “Given the cash squeeze, the central bank probably won’t announce any tightening measure by the end of this year.”  The cash shortage has also sapped demand for bills sold by the central bank. The monetary authority has sold 1 billion yuan of one-year bills at each of its last four weekly auctions, the lowest sales amounts since October 2007.

China Raises Rates Amid Inflation Fight  China raised interest rates for the second time in slightly over two months, signaling the authorities' resolve to combat rising inflation. Beijing's latest move also suggests the world's second-largest economy may be entering a relatively formal monetary tightening cycle and that policy-makers may have been convinced that the weapons used so far, such as credit rationing and artificial price controls, have failed to cool politically sensitive consumer price pressures. The People's Bank of China said Saturday that effective Sunday, it will raise the one-year yuan lending rate by a quarter of a percentage point to 5.81% from 5.56%

China, Pakistan To Formalize Another US $10 Bil In Deals - China and Pakistan are set to conclude another US$10 billion (S$13.1 billion) worth of deals on Saturday, the latest signings on a trade-focused trip to South Asia by Chinese Premier Wen Jiabao. Business leaders are scheduled to formalize the deals - adding to the US$20 billion worth of deals inked Friday - at Islamabad's five-star Marriott Hotel, where a huge suicide truck bomb killed 60 people in 2008. Boosting trade and investment have been the main focus of the first visit in five years by a Chinese premier to the nuclear-armed Muslim nation on the front line of the U.S.-led war on al-Qaida. Pakistan regards China as its closest ally and the deals are seen locally as incredibly important to a moribund economy, which was dealt a massive blow by catastrophic flooding this year and suffers from sluggish foreign investment.

Seoul Unveils Levy on Banks' Foreign Debt - South Korea unveiled its plan for a levy on banks' foreign-currency debt, joining its Asian neighbors in trying to stem speculative foreign capital inflow. Seoul will impose a levy on the balance of foreign-currency-denominated debt, excluding foreign-currency deposits, of Korean banks and local branches of foreign banks, possibly from the second half of next year, financial authorities said in a joint statement Sunday. The announcement came after the International Monetary Fund gave its blessing for emerging economies to adopt capital-control measures at the latest summit of the Group of 20 industrial and developing nations in early November. It also follows two plans by Seoul this year to lower the adverse effect of rapid flows of foreign capital.

Asia's baby shortage sets demographic timebomb ticking - East Asia's booming economies have for years been the envy of the world, but a shortfall in one crucial area -- babies -- threatens to render yesterday's tigers toothless. Some of the world's lowest birth rates look set to slash labour forces in Singapore, South Korea and Taiwan, where fewer workers will support more retirees and their ballooning health care and pension costs. Shuffling along in the vanguard of ageing Asia is Japan, whose population started slowly shrinking three years ago, and where almost a quarter of people are over 65 while children make up just 13 percent. On current trends, Japan's population of 127 million will by 2055 shrivel to 90 million, its level when it kicked off its post-war boom in 1955, warns the National Institute of Population and Social Security Research. Asian population giant China may still be near its prime, with armies of young rural workers flocking to its factories. But, thanks to the 30-year-old one-child policy, its demographic timebomb is also ticking.

U.S. Approved Business With Blacklisted Nations - Despite sanctions and trade embargoes, over the past decade the United States government has allowed American companies to do billions of dollars in business with Iran and other countries blacklisted as state sponsors of terrorism, an examination by The New York Times has found.  At the behest of a host of companies — from Kraft Food and Pepsi to some of the nation’s largest banks — a little-known office of the Treasury Department has granted nearly 10,000 licenses for deals involving countries that have been cast into economic purgatory, beyond the reach of American business.

13 Products Most Likely To Made By Child Or Forced Labor - There are some 128 goods among the products that most commonly use child labor, according to newly updated data from the U.S. Department of Labor (DOL). The broad definition of exploitive labor by underage workers used by the DOL includes "slavery or practices similar to slavery, the sale or trafficking of children, debt bondage or serfdom; the forcible recruitment of children for use in armed conflict; the commercial sexual exploitation of children; the involvement of children in drug trafficking; and work that is likely to harm children's health, safety, or morals." The vast majority of the explotiive labor done by children is in agriculture (60 percent), followed by services (26 percent), and industry (7 percent), according to the DOL. But some industries are definitely worse than others.  We sifted through the latest report from the DOL's "List Of Goods Produced By Child Labor or Forced Labor" to find some of the most common products that are manufactured or harvested using these deplorable practices. We ranked each product by the number of countries that use child or forced labor to produce each good.

Are polluters racing to the bottom? - Vox EU - For the environmentally minded, globalisation reflected in rising trade shares in world GDP is worrisome. Globalisation is a direct concern because the activity of trading itself generates pollution through the transport of goods (Hummels 2009 and Grether et al. 2010a), and an indirect concern because lower environmental standards generate a comparative advantage in "dirty" industries for developing countries. Environmentalists have long feared that globalisation will harm the environment by allowing heavily polluting industries to migrate to countries with lax environmental standards. This column presents new evidence from several industries across many countries for all the major pollutants. It suggests that lax policy has only had a small effect on the pollution content of trade.

Going against the flow: Dealing with capital flows to emerging markets - Two years after the most severe global financial crisis in decades, financial markets are flush with liquidity, aided by ample monetary stimulus from central banks around the world. Emerging market economies are experiencing large inflows of capital that drive up their exchange rates and inflate asset prices. Capital flows to emerging markets are controversial territory. This column argues that they create externalities that make the recipient economies more vulnerable to financial fragility and crises. It adds that policymakers can make their economies better off by regulating and discouraging the use of risky forms of external finance – in particular short-term dollar-denominated debts.

Maybe LDCs Aren't Being Inundated w/ Capital (Yet) - The general impression you get from certain developing countries is that easy money policies emanating from reserve currency-issuing ones like the unbelievably profligate United States are driving up their exchange rates and threatening to inflate various bubbles. It may be some surprise that, in 2009 at least, this scenario did not really happen as capital flows to the developing world fell from 2008 according to a just-released World Bank report: Net global capital flows to developing countries fell 20 percent in 2009 to $598 billion (3.7 percent of gross national income [GNI]), from $744 billion in 2008 (4.5 percent of GNI) and were a little over half the 2007 peak of $1.11 trillion. This according to a new comprehensive dataset launched by the World Bank today on international capital flows titled “Global Development Finance 2011: External Debt of Developing Countries,” which reveals the impact of the financial crisis on 128 developing countries.

Blunt or blunter? Emerging markets (try to) return in kind - The one thing we can’t accuse central banks of these days is lack of creativity. The latest gem came from the Central Bank of Turkey (CBT) last week, when, on one hand, it cut its policy rate by 50bps to 6.50%, while at the same time increased the reserve requirement ratios (RRR) for short-term bank funding (deposits and repo) to help lengthen the maturity structure of banks’ liabilities. I don’t want to dwell exclusively on the Turkish example, which, in my view, is fraught with confusion about what exactly the authorities are trying to achieve. What I do want to do is examine under what conditions, if any, a hike in reserve requirements can be effective in tightening monetary conditions. This is particularly relevant at a time when many emerging markets think they can “get away” with avoiding raising interest rates by employing alternative tools, to avoid attracting further capital flows from abroad.

More bullish Brazil - Interest rates might need an “adjustment” to stem the rise in consumer prices, Brazil’s central bank has said. The country’s key selic rate has increased several times since the cuts that followed the financial crisis, but levelled off at 10.75 per cent in June. The Bank’s inflation report, released yesterday, suggested such a rise was imminent: Under the inflation targeting regime, deviations in projected inflation from the target of such magnitude suggest the need for implementation, in the short-run, of an adjustment in the basic interest rate, in order to control the growth pace mismatch between the domestic demand and the productive capacity of the Brazilian economy, as well as to reinforce the anchorage of inflation expectations. Some analysts have interpreted this as a January rate rise.

Currency tensions: What historical parallels teach us - While it is true that currency tensions often arise between countries with flexible exchange rates, the potential for conflict is sharper among economies that “manage” their currencies and, perhaps even more so, between these countries and those that let their currencies float (such as the US and Japan). Fixed exchange rates are common; about 50 countries peg (or quasi-peg) their currencies to the dollar and nearly 30 peg to the euro (IMF 2009). Germany, the world’s second largest exporter, shares a currency with about half of its export markets and benefits from major competitiveness divergences with them as well as with Eastern European countries that peg to the euro. Viewed through this prism, the turmoil that preceded the collapse of history’s two fixed-exchange rate regimes – the gold standard in 1936 and the fixed-dollar rate regime in 1973 – provides three useful lessons.

Is Japan the next major world economy to tank? - When the financial world tries to anticipate the next meltdown, all eyes turn to Europe. Greece needed a bailout, then Ireland did. Talk is that Spain will follow, though the country denies that it has a problem. But a few contrarians think everyone is looking in the wrong direction. Forget Europe, they say. Check out Japan instead. "A global fiasco is brewing in Japan," . "It's like the Titanic has already hit the iceberg and you know it's going to sink, you just don't know how long it will take to go down," Today the popular perception is that Japan is stagnant but stable. After the economy slowed down, the Japanese government lowered taxes and increased spending, sending deficits, and also government debt, way up. But the debt hasn't been a problem, because Japan's risk-averse populace—which became even more risk averse after the collapse of the technology bubble a decade ago—has sunk its considerable savings into government bonds, known colloquially as JGBs. What could be safer than government debt?

Mauldin: Kicking the Can Down the Road - “Kicking the can down the road” is a universally understood metaphor that has come to mean not dealing with the problem but putting a band-aid on it, knowing we will have to deal with something maybe even worse in the future. While the US Congress is certainly an adept player at that game, I think the world champions at the present time have to be the political and economic leaders of Europe. Today we look at the extent of the problem and how it could affect every corner of the world, if not played to perfection. Everything must go mostly right or the recent credit crisis will look like a walk in the Jardin des Tuileries in Paris in April compared to what could ensue.

European financials see dollar funding gap widen - Mounting concerns over the eurozone have forced the cost of swapping euros into dollars to the highest level since May, sparking fears that European banks could run into funding difficulties as they need the US currency to repay loans. The costs have been pushed higher because of the strong demand for the dollar, seen as a haven amid the ongoing debt crisis in the eurozone, and the reluctance of some US banks to lend to European banks, dealers say.This is reflected in the so-called basis swap market, where an investor can exchange euros for dollars over a period ranging from one day to 50 years.Although the strains are nowhere near the levels seen at the time of the collapse of Lehman Brothers in September 2008, strategists warn a fresh crisis could blow up next year because of the funding gap.European banks currently have an estimated funding gap of about $500bn, which means they have to raise this amount from the markets to fund dollar loans, meet swap arrangements and pay for trading book transactions that require the US currency. The dollar funding gap was estimated at more than $1,000bn at the time of Lehman’s bankruptcy.

EU Plans $17 Billion of Bond Sales for Ireland Bailout, FT Says - The European Union will unveil in the next few days plans to sell bonds for as much as 13 billion euros ($17 billion), as part of its effort to raise money for Ireland’s bailout, the Financial Times reported.  Bankers have told EU officials they should act quickly, to beat the usual high volume of bond sales by eurozone governments in January, the newspaper said. The first bond, to be sold by the EU, will raise as much as 5 billion euros; the second, to be sold by the European Financial Stability Facility, will raise 8 billion; both will be triple-A rated, the FT said.

Irish bail-out’s unintended consequences - It is usually the case that changes in policy lead to some unintended consequences. What is unusual about the measures taken to deal with the Irish banking crisis is they seem to have only unintended consequences.  A key part of the most recent “bail-out” or “rescue” of Irish finances is the country’s Credit Institutions (Stabilisation) Bill 2010. This has now been enacted into law, and a close reading leads me to believe its effects will soon confirm the Irish public’s opinion of its leaders. It appears that the bill will manage to anger the investors in Irish banks, while making it possible for them to earn a speculative profit. It puts unprecedented, wartime-like powers into the hands of the Minister for Finance, while allowing for judicial reviews of his possible upending of the troubled banks’ capital structure. So you could have the arbitrary exercise of authority leading not to finality, but to disruptive delay. The public, as taxpayers, will likely have their equity investments secured by money squeezed out of them in their role as bank customers. As one Irish establishment friend of mine says: “There is zero support for what the government has done and are doing. Every time they had a chip they threw it away. If a mad dog government came in and reversed their policies, it would have substantial popular support.” While Irish public opinion, European officialdom, this column, and all sorts of other right thinking people have come round to the position that bank investors must be exposed to the risk of loss, the Credit Institutions law does so by inverting the priorities established by centuries of bankruptcy (or bank resolution) law.

Is the Ireland Bailout About to Become Bear Redux? - - Yves Smith - Not being an expert in either the Lisbon Treaty or the rules governing the ECB, I’m restricted in my ability to interpret an article in the Financial Times and the underlying position paper at the ECB on the legality of the Irish bailout. The Irish finance minister asked for a reading on the “draft law”, which is the Credit Institutions (Stabilisation) Bill 2010. There is a certain amount of grumpy harrumphing in the ECB response, namely, that it should have been consulted earlier and its preliminary reading has been made in more haste than it would like.  Regardless, it does not take a lot of expertise to get the drift of this gist: In particular, the ECB has serious concerns that the draft law is insufficiently legally certain on a number of critical issues for the Eurosystem. For example, problems of legal uncertainty relate to the impact of, inter alia, Article 61 (effects of orders on certain other obligations) of the draft law on the rights of the Central Bank, the ECB and possibly other central banks within the ESCB, the scope of collateral rights of central banks given as security against ELA, as well as other issues. The ECB would expect that nothing in this Act would affect operations, rights or entitlements of the Central Bank or the European Central Bank, or any other central banks within the ESCB. The FT reads the big issue as being the adequacy of collateral for lending:

Lloyds writes off half of Irish loans - Lloyds Banking Group and Royal Bank of Scotland shares tumbled on Friday after Lloyds said it had effectively written-off more than half of its outstanding loans to Irish borrowers. In a statement, Lloyds said it had seen a "further significant deterioration in market conditions" in Ireland and that a further 10pc of its £26.7bn portfolio of Irish loans would be impaired by the end of the year.  "We are concerned that any economic recovery in the Republic of Ireland may take longer to achieve, and that asset prices will remain depressed for longer than previously anticipated," said Lloyds.

Moody's downgrades ratings on Irish banks  -- Ratings agency Moody's on Monday downgraded four Irish banks and an insurer, dropping two of them to junk status -- a reminder of the financial mess the country faces at it looks to draw on an international rescue loan. Moody's Investors Service said it had lowered ratings on bank deposits and senior debt for Allied Irish Banks, Bank of Ireland, EBS Building Society, Irish Life & Permanent and Irish Nationwide Building Society. It also downgraded their bank financial strength ratings and most of the groups' junior securities. The move came after Moody's on Friday downgraded Ireland's sovereign credit rating by five notches to Baa1 -- just three steps above junk-bond status

Another nasty surprise from Ireland’s AIB, via the EC - Tucked away in the EC’s press release on aid for Irish banks, we find this little gem: Anglo Irish Bank will furthermore receive a guarantee covering certain off-balance sheet liabilities (derivatives, clearing transactions and transactional arrangements) that will ensure that Anglo Irish Bank can continue its daily activities as a going concern. There’s nothing here that tells us how big these newly-disclosed liabilities might be, though. AIB’s EUR70Bn on-balance sheet liabilities might provide some sort of calibration point, though. Half as much again, for the off-balance sheet stuff, if you were feeling gloomy? One hopes it will be much less than that, but it’s possible, and perhaps the EU will quell speculation by releasing the figure. Secondly, note that the EC hasn’t quite made its mind up whether Allied Irish Bank (not Anglo, the other one) will turn out to have been worth helping:

Ireland Seizes Allied Irish, Fourth Bank Nationalized -… Ireland’s High Court said Allied Irish Banks Plc can be taken over by the government without shareholder approval as the lender became the fourth bank to fall under state control since 2008.  Finance Minister Brian Lenihan secured approval from the Dublin-based court today to inject 3.7 billion euros ($4.8 billion) into the lender by Dec. 31 and raise its stake to 92 percent from 19 percent, the Finance Ministry said in a statement. Allied Irish, Ireland’s largest company by market value in 2007, recorded its biggest share price drop in 22 months in Dublin trading. Valued at almost 21 billion euros at its peak, the bank’s market capitalization today was 347 million euros.  “We wouldn’t have had Allied Irish Banks on the 1st of January if this investment wasn’t made,” Lenihan said in an interview with Dublin-based broadcaster RTE Radio after the ruling.

Iceland Offers Economic Lessons For Ireland - "We are not Greece" has been a constant refrain from euro zone countries to nervous bond investors. The consoling thought for Ireland’s put-upon taxpayers has been "at least we’re not Iceland," whose outsize banks failed spectacularly in 2008. But that comfort is fading. Evidence of economic recovery in Iceland means the Irish can no longer convince themselves that things are worse elsewhere. Figures released on Dec. 7 showed that Iceland’s gross domestic product rose by 1.2 per cent in the third quarter. (Ireland’s third-quarter GDP rose by 0.5 per cent, according to figures published on Dec. 16.) The Icelandic central bank’s benchmark interest rate has fallen to 4.5 per cent, from a peak of 18 per cent. The halving of the dollar value of the Icelandic krona at the height of the crisis pushed inflation as high as 18.6 per cent. It has since fallen close to the central bank’s 2.5 per cent target. The "misery index," a crude grading that sums unemployment and inflation rates, suggests Iceland is now doing better than Ireland.

French AAA Grade at Risk as Downgrades Sweep Europe - France risks losing its top AAA grade as Europe’s debt crisis prompts a wave of downgrades that threatens to engulf the region’s highest-rated borrowers, with Belgium also facing a possible cut.  Moody’s Investors Service said Dec. 15 it may lower Spain’s rating, citing “substantial funding requirements,” and slashed Ireland’s rating by five levels on Dec. 17. Standard & Poor’s is reviewing its assessments of Ireland, Portugal and Greece. Costs to insure French government debt rose to a record today with the country’s credit default swaps more expensive than lower-rated securities from the Czech Republic and Chile.  “Every sovereign may get penalized in the year ahead,”

How Spain Can Avoid the Irish Error - In seeking solutions for the euro zone debt crisis, the more manageable Irish and Spanish cases should be distinguished from the much less tractable Greek case of egregious budget profligacy. Years of fiscal irresponsibility make it almost certain that Greece will default on its sovereign debt and exit from the euro zone, absent a massive fiscal transfer from the EU. Greece’s public debt (already approaching an unsustainable 150% of GDP and still rising) simply cannot be repaid.  Indeed, by plunging the Greek economy into the deepest of economic recessions, the austerity program is worsening Greece’s debt service ability. The struggles of Ireland and Spain do not reflect fiscal recklessness. That should allow for a much more favorable resolution than in the Greek case. Neither country had large preexisting amounts of sovereign debt relative to GDP, as neither had engaged in unsustainable spending or dishonest public accounting practices during the pre-2007 boom. In contrast to Greece, both countries also enjoy much healthier political systems and lower levels of corruption and tax evasion; and both countries also boast records of global success for key domestic enterprises.

Financial Interests Dictate Sovereign Policy - Interview with Michael Hudson - 1. A recent article of yours, “Schemes of the Rich and Greedy,” cites the bailouts in Europe among such schemes. What are the main faults with bailouts, and for whom are they designed? 3. How do you explain the IMF’s role in Europe’s debt crisis? Is it that the EU lacks the technical expertise to deal with sovereign debt issues, as some have suggested, or because it is a junior partner of multinational finance capital?

IMF Chief Worried About Europe Domino Effect (Reuters) - The head of the International Monetary Fund said on Thursday he was worried that EU leaders' piecemeal approach to Europe's debt crisis was encouraging markets to pick off weak countries one by one. Dominique Strauss-Kahn appeared to endorse the idea of common euro bonds, saying they could be a useful tool, but added the political will to give power to the center of Europe was the main hurdle to their creation. "I am worried, and that's why I am urging the Europeans ... to provide a comprehensive solution because this piecemeal approach ... obviously doesn't work," Strauss-Kahn told Reuters. "The markets are just waiting for what's next." Due to its cumbersome decision-making structure, the euro zone has tended to offer countries such as Greece and Ireland rescues only once they were "at the edge of the cliff," he said. That approach has created a domino effect.

German Obstructionism Heightens Euro Fears - Speaking in front of the German parliament in Berlin, Merkel sang the praises of the "extraordinary ideas of peace and freedom which provide the foundation of European unity." It is a legacy, she went on, "to which I feel personally beholden." Fine words, to be sure. But there are some in Germany who have found cause to doubt the sincerity of Merkel's commitment to the European Union. The German chancellor, after all, has become a stick in the deep mud of the ongoing euro crisis, one which has seen country after country fall victim to skyrocketing interest rates on government bonds, making borrowing on the international financial markets virtually impossible.

Germany's robust economy not enough to stop record debt - Germany is facing a record level of debt this year despite its economic recovery being better than expected, the finance ministry said today. Federal debt in Europe's biggest economy will hit a new high despite the government requiring less than €50 billion (£42 billion) new borrowing for the year, a drop of €30 billion on initial expectations, the ministry said in its monthly report. “The government will however be required to record the highest level of indebtedness in the history of the federal republic, in order to counter the effects of the economic and financial crisis,” it said. The German taxpayers association estimates debt levels to be around €1.7 trillion (£1.4 trillion). EU data collected by Eurostat estimates total debt of €1.9 trillion for the year, or 75.4% of GDP.

Berlin’s goal is limited liability - I have rarely seen a political victory as total and far-reaching as that of Angela Merkel, the German chancellor, last week. As one seasoned observer put it, Ms Merkel was the only one in the European Council who knew what she wanted. And she got exactly that. She got an amendment to the Lisbon treaty, which says that any crisis mechanism can only be triggered as a last resort option. She got agreement on her nine points on a future crisis mechanism – intergovernmental, with preservation of the national veto, with collective action clauses to wipe out bondholders, and with strict conditionality. And she utterly defeated any attempt to extend the ceiling and the scope of the existing crisis mechanism. Not one of the other leaders dared suggest a eurozone bond. Last week, the EU became a fully paid-up subscriber to the German version of crisis management – adjustment through deficit-cutting, and if necessary, through deflation. I would expect that the EU will choke on it.  The reason the Council acts this way is as alien to observers outside the EU as it is natural to insiders. The economic governance of the eurozone is based on three pillars: price stability, fiscal stability and flexible labour markets. In some idealised setting, these should be sufficient criteria to ensure sustainability, though not at a time like this. So when José Manuel Barroso, president of the European Commission, on Thursday outlined his vision of how the eurozone would get out of this crisis, the three predictable points he made were: more price stability, more fiscal discipline and more structural reforms.

Self-righteous Germany must accept a euro-debt union or leave EMU - If Germany and its hard-money allies genuinely wish to save the euro – which is open to doubt – they should stop posturing, face up to the grim imperative of a Transferunion, and desist immediately from imposing their ruinous and reactionary policies of debt deflation on southern Europe and Ireland.  One can sympathise with the German people. Their leaders in the 1990s told them "famine in Bavaria" was more likely than the preposterous suggestion that Germany might have to bail out countries as a result of EMU.  But events have moved on and, rather than striking tones of Calvinist righteousness, the Teutonic bloc might do well to acknowledge equal responsibility for the capital flows, trade imbalances, and cumulative errors that caused the EMU debacle, and therefore accept that the honourable course is to meet the struggling south halfway.  Readers may have a better menu, but here is my own rough sheet: a debt union, funded by Eurobonds; a calibrated jubilee on traditional IMF lines for Ireland, Greece, Portugal, and if necessary Spain, to occur in parallel with austerity cuts; and a monetary blitz by the European Central Bank to prevent the victims tipping into core deflation, even this stokes inflation of 4pc or 5pc in northern Europe.

Debt Riots Break out in Greece - In Greece, demonstrators staged a protest of their own. Thousands took to the streets yesterday, rallying against government cutbacks and corruption. The protests started out as peaceful affairs; by afternoon, things had gotten nasty. When the mob arrived at the Greek Parliament building, they spotted a well-known politician, Kostis Hatzidakis (pictured right). His fellow Athenians proceeded to stone the former MP. That's right, they stoned him. The politician survived, but Greece and the EU may not. Not as we know them anyway. The riots were violent, as shown in this footage. Riot cops can be seen clashing with large groups of protesters. Gov't troops launch volleys of tear gas at protesters, who are busy launching their own attack — a barrage of Molotov cocktails. In another display of populist anger, English protesters attacked a Rolls Royce carrying Prince Charles and his wife last week. Some in the crowd could be heard chanting "off with their heads". The Royals escaped unharmed, save some damage to their Rolls Royce; rowdy protesters did manage to bust out a side window and ding up the exterior. There are lessons for the EU and United States in this mess.

Greeks go on strike before austerity budget vote (Reuters) - Greek unions called a general strike on Wednesday and Athens was paralyzed by a 24-hour public transport stoppage in protest against the government's 2011 budget, set to pass later as part of an EU/IMF bailout. The budget, meant to help stem a debt crisis that has shaken the euro zone, includes further tax hikes and wage cuts in state-run enterprises, especially in public transport. Fitch said on Tuesday it may cut Greece's credit rating next month to junk as both other major rating agencies have done. "Even though this news was expected, it will go down badly with the markets, there is widespread fear about downgrades coming,"

Bloomberg Sues ECB to Force Disclosure of How Greece's Swaps Hid Deficit - Bloomberg News filed a lawsuit against the European Central Bank, seeking the disclosure of documents showing how Greece used derivatives to hide its fiscal deficit and helped trigger the region’s sovereign debt crisis.  The lawsuit asks the European Union’s General Court in Luxembourg to overturn a decision by the ECB not to disclose two internal documents drafted for the central bank’s six-member executive board in Frankfurt this year. The notes show how Greece used swaps to hide its borrowings, according to a March 3 cover page attached to the papers obtained by Bloomberg News.  ECB President Jean-Claude Trichet withheld the documents after the EU and International Monetary Fund led a 110 billion- euro bailout ($144 billion) for Greece. The dossier should be disclosed to stop governments from employing the derivatives in a similar way again and to show how EU authorities acted on information they had on the swaps, according to the suit, filed by Bloomberg Finance LP, the parent of Bloomberg News.

Greece's Debt Ratings Put On Watch by Fitch for Possible Downgrade to Junk - Greece may have its credit rating cut to non-investment grade by Fitch Ratings within six weeks after a review of the nation’s “fiscal sustainability.”  The assessment will focus on government measures to lower the budget deficit, the economic outlook and the “political will and capacity of the Greek state” to push through austerity measures, the company said in a statement today. Greece is rated BBB- at Fitch, its lowest investment-grade rating.  Greece, the first euro-area nation to seek international aid this year, already has non-investment grade ratings at Moody’s Investors Service and Standard & Poor’s.

EU's Rehn Vows To Contain Debt "Forest Fire" (Reuters) - The European Union's top economic official said the bloc needs to keep its options open about the possibility of issuing a common euro zone bond to fight its debt crisis, an idea that Germany publicly opposes. Olli Rehn, the EU's economic and monetary affairs commissioner, told Reuters Insider Television in an interview on Tuesday that the European debt crisis was akin to a "forest fire," and said the EU was determined to contain the fire. "We will do whatever it takes to safeguard the financial stability in Europe," said Rehn, who was in Beijing for annual EU-China trade talks. "I'm certain that economic recovery in Europe is solid and sustainable. We will contain the financial turbulence so that it will not erode the foundation of the recovery." On the chance of the EU expanding the size of its fund used to bail out euro zone countries, the European Financial Stability Facility (EFSF), Rehn hinted discussions were still ongoing.

The crisis is already back - Eurozone bond spreads have shot up since the European Council on Friday, due to Moody’s downgrade, and disenchantment with the eurozone’s political leadership; Spanish and Portuguese spreads are up by 50 basis points, Irish spreads by 70 basis point; the euro tanked against the dollar; another factor has been the IMF’s assessment of Ireland, in which it expresses doubts about the country’s solvency; German banks have the greatest exposure, Belgium has the greatest exposure relative to its own GDP; the ECB raises concern about Dublin’s bailout legislation, fearing about status of its collateral; Pimco says the delay of crisis resolution until 2013 ensures that the crisis will continue; Phillipe Mabille says the periphery will not be able to cope with the high interest rates; Estonia opposes a single bond; Wolfgang Munchau argues that the maxim of German policy is not the preservation of the eurozone, but limited liability. [more]

Eurozone crises left to fester - When the European Council met on 16 and 17 December 2010, they faced a menu of new ideas on how to better manage the Eurozone crisis. The ideas were suggested by economists and political leaders alike: Eurobonds, allowing the European Financial Stability Facility/Fund to buy debt on the secondary market, increasing the role of the ECB, to name just a few examples. The EU heads of state chose to ignore all of them. Here is the sum total of what they contributed to the resolution of the Eurozone crisis – a 46-word amendment to EU Treaty Article 136: “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 area as a whole. The granting of any required financial assistance under the mechanism will be made subject to strict conditionality." Nothing new was said on how this mechanism will look.

Guest Post: Eurocrisis: We knew all we needed to know… - Yves here. The alternative title for this post could be “No ‘whocouldanode’ excuses for the Eurozone crisis.” Many policymakers have reacted to both the financial crisis and the recent Eurozone sovereign debt problems as though they were unexpected. This column argues that we knew more than enough to anticipate both problems, that the evidence was easily accessible, and that the institutional and political weaknesses of the Eurozone were hardly a mystery either. We have long known that financial market stability cannot automatically be achieved. There is historical evidence aplenty (Kindleberger 1989; Galbraith 1993, 1995), and adequate theoretical explanations of the phenomenon1. Scholars have long debated the costs and benefits of financial openness (Bordo et al. 2001; King and Levine 1993; Demetriades and Hussain 2006) and/or possible systems of regulation and supervision (Steil 1994; Barth et al. 2006). As I argue in a recent CEPR Discussion Paper (Underhill 2010), the writing was all over the library walls.

A Warning to Portugal as Spain Sells Bonds — Yields at Spain’s final debt auction of the year were higher than the rates at an equivalent sale a month ago, and analysts warned of tough times ahead in 2011 even as the country slashed its state deficit.  Tuesday’s auctions came shortly after Moody’s, the ratings agency, put Portugal on review for a possible downgrade, almost a week after doing the same to Spain, and having cut Ireland by five notches last week.  At the debt issues, Spain’s Treasury sold 3.9 billion euros ($5.1 billion) of its three- and six-month bills, at the top end of its three to four billion euros range.  The yield on the three-month issue was 1.804 percent, up from the 1.743 percent at the last auction on Nov. 23, while the six-month rose to 2.597 percent from 2.111. The higher yield, analysts said, reflected market concerns that Spain will end up needing a rescue package like Ireland and Greece.

Rollover is all, Moody’s fears for Portugal edition -There’s something (other than an unusual frequency) about recent Moody’s ratings actions on eurozone peripheral sovereigns. They’re all increasingly focused on whether the sovereigns can actually maintain market access in the first place, as a ratings red flag. Exhibit A — Moody’s placed Portugal’s A1 credit rating on review for downgrade on Tuesday, possibly removing one or two notches. As the agency explained (emphasis ours): The main triggers for the review include:

    • (1) Uncertainties about Portugal’s longer-term economic vitality, which will be exacerbated by the impact of fiscal austerity;
    • (2) Concerns about Portugal’s ability to access the capital markets at a sustainable price; and
    • (3) Concerns about the possible impact on the government’s debt metrics of further support for the banking sector, which may be needed for the banks to regain access to the private capital markets.

A fiscally-unified plan for European defaults - There are basically two ways that the European crisis might end up resolving itself. Either the peripheral countries start defaulting, or else the eurozone becomes a fiscal union as well as monetary union. Both are politically unacceptable, of course. And George Soros, in a lucid column today, reckons that both might be in the cards:The lack of a common treasury is now in the process of being remedied, first by a rescue package for Greece, then by creating a temporary emergency facility, and – the financial authorities being a little bit pregnant – eventually by establishing some permanent institution… Structural changes may not be sufficient to provide the eurozone countries in need of rescue an escape route from their predicament. Additional measures, such as “haircuts” for holders of sovereign debt, may be needed. Soros’s solution to the crisis involves recapitalizing the banks, and bringing them under a single European regulator. I like that idea—Europe’s banks have been far too leveraged for far too long, and Europe’s member states will always look forgivingly on their domestic institutions, setting off a regulatory race to the bottom. If a tough regulator can turn the banking systems in countries like Ireland and Spain into something strong and credible, that will help enormously in terms of reducing tail risk in the eurozone.

The European Sovereign Debt Crisis - The euro zone is not an optimal currency area given the pre-Euro differences in fiscal and monetary policy as well as the language barriers and differing socioeconomic levels in the zone. Nevertheless, to ensure political cohesion after German reunification, Europeans felt the Euro was a must.  After the Berlin Wall fell in 1989 and the talk of a reunified Germany began, there was widespread angst about what the new Germany would look like and whether to even permit its coming into being. The Germans were forced to make a number of political concessions for re-unification to proceed. Germany was to accept the Oder-Neisse Line as the unequivocal legal eastern frontier with Poland; any discussion of Germany’s 1937 borders had to be stopped. Germany was to pay the Russians 55 billion deutsche marks in order to remove Russian troops from German soil. And the Germans had to anchor themselves into the western European monetary-political system via a common currency.

Markets Ponder China Bailing Out Europe (Again) - OK, OK, so I am using the term "bailing out" in a very loose sense: For instance, China has not quite said that its continued patronage of US debt in the wake of the financial crisis is specifically to bail out America. Rather, it's always couched in diplomacy-speak such as preserving "stability" in the global financial system as a certain Yankee diplomat-beggar would put it. I almost missed the clip above of LSE IDEAS' very own Niall Ferguson arguing that the Chinese should help bail out China on Fareed Zakaria's GSP programme. (Despite what our school paper says, he does work here.) This theme has been a continuing one: former IMF Chief Economist Simon Johnson even went so far as to suggest its headquarters should be in Beijing if and when the Chinese become the largest shareholders. Somewhat less far-fetched, China has indeed voiced support for the idea of diversifying its holdings by purchasing sovereign debt of troubled eurozone members (which ares still denominated in euros). So it is that newswires are abuzz with news that the Chinese are once again making noises to similar effect:

China ready to buy 4-5 bln euros of Portugal debt-paper (Reuters) - China is ready to buy 4-5 billion euros ($5.3-$6.6 billion) of Portuguese sovereign debt to help the country ward off pressure in debt markets, the Jornal de Negocios business daily reported on Wednesday. The paper said, without citing any sources, that a deal reached between the two governments will lead to China buying Portuguese debt in auctions or in the secondary markets during the first quarter of 2011. China's central bank declined to comment on the report, while Portuguese government officials were not immediately available for comment. It is unclear whether China's government would be prepared to take on so much fresh exposure to Portugal in such a short space of time, given that Beijing has faced domestic political pressure to invest the country's foreign reserves more carefully.

How desperate can you get: EU places hopes on China to rescue euro - China promises to support the eurozone “if necessary”, sending the euro temporarily higher; Reuters Breakingviews says China makes an unlikely Santa Claus for the eurozone – a Santa Claus who would soon face the ignomy of a public haircut; Moody’s place Portuguese government debt on a downgrade watch, due to the negative impact of austerity on growth; Peter Ehrlich takes a closer look at promises of closer Franco-German economic policy co-operation, and finds that there are no proposals in the drawers; Martin Wolf says the problem for the eurozone is not Germany’s pursuit of its perceived self-interest, but Germany’s inability to understand the nature of the crisis; Wolfgang Munchau says replacing Guido Westerwelle as FDP leader is a necessary condition for a revival of the party, but not a sufficient one; international speculators, meanwhile, are increasingly shorting the euro as they expect the crisis to go and on. [more]

Spanish €3.88 Billion T-Bill Auction Results: Weak Despite China Support - One look at the overnight EURUSD chart shows a straight vertical line up earlier in the session (at least before an almost comparable and equal line straight down following the Portugal action by Moody's), which was driven by news that Chinese vice premier Wang Qishan expressed his support for EU efforts to ensure financial stability. Yet the biggest indicator of just how bad sentiment in Europe continues to be, China support or not, are the results from the Spanish T-Bill auction. And after auctioning €3.88 billion in 3 and 6 Month T-Bills off earlier today, the yields rose once again to record highs. The 3-month T-Bill auction for €3Bln came at a bid to cover 2.14 vs. Prev. 2.34, at a yield 1.804% vs. 1.743% previously. Just as disappointing the 6-month T-Bill for €0.88bln, came at a bid to cover of 5.15 vs. 2.65 previously, importantly at a yield of 2.597% vs. Prev. 2.111%. In other words, despite billions of ECB sovereign bond purchasing, and despite the recent shift in sentiment that Europe is not in free fall, arrested after Reuters spread false rumors that the IMF would bail out Europe, things are once again turning ugly for the continent, as there is no way that a country can sustain its funding needs when the 3 Month cost of credit is at such a huge differential over 3M Euribor, which today clocked at 1.022%.

Debt Struggles Set to Deepen for Peripheral Europe: Euro Credit -- Europe’s most indebted nations, already struggling to find buyers for their bonds, will face more competition as the region begins issuing new securities to fund Ireland’s rescue package. The European Financial Stabilization Mechanism and European Financial Stability Facility will raise as much as 34.1 billion euros ($44.6 billion) for Ireland in 2011, the European Commission said Dec. 21. So-called peripheral nations also will vie for funds against AAA-rated Germany and France, which plan to sell a combined 486 billion euros of debt next year. Spain’s funding needs are 90 billion euros and Portugal may require 19 billion euros, analysts at Credit Agricole SA estimate. Portuguese 10-year bond yields rose by almost half a percentage point in the past two weeks as investors bet the country may follow Ireland in seeking aid after European Union officials deferred a decision on whether to let the EFSF buy bonds of the most indebted countries. EU leaders also failed to agree on topping up the temporary 750 billion-euro emergency fund of which the EFSM and the EFSF form the main pillar. “The crowding out effect is a big problem for Spain as they have to come to the market pretty quickly and they have lots to do,”

Citigroup warns of fresh wave of bank defaults in Europe - Citigroup has warned of a fresh wave of bank failures and sovereign defaults in Europe unless EU leaders come up with a credible response to the crisis.Prof Willem Buiter, the bank's chief economist, said the eurozone was paralysed by a "game of chicken" between the European Central Bank and EMU governments. Both sides are trying to shift responsibility on to the other for shoring up southern Europe and Ireland, raising the risk of contagion spreading. "The market is not going to wait until March for the EU authorities to get their act together. We could have several sovereign states and banks going under. They are being far too casual," he said. Mark Schofield, Citigroup's credit chief, said Portugal would need an EU rescue soon and that it was "highly likely that Spain will go the same way". This risks overpowering the €440bn (£373bn) bail-out fund. "Restructuring of some sovereign debt is inevitable. There is a chance that Spain could still make it, but the debt trajectory looks unsustainable if a broader EU-wide solution isn't found,"

Will France Be the Next Euro Nation to Fail? - While Spain and Italy are getting the most attention, you also need to pay attention to France. With the country’s negative economic numbers and wide exposure to both Greece and Spain, the future doesn’t look good for Les Bleus, which is even worse news for the euro. Not surprisingly, the markets are in agreement with this bleak picture. The cost for insuring French debt soared to a record on December 20 – rising above insurance costs for the Czech Republic and double that of Europe’s largest economy, Germany. Since the beginning of the year, the French economy has just barely crawled along. Growth has been kept to a minimum, with quarterly gross domestic product figures barely above 0.5%. Even worse is the fact that the country’s recovery is lagging far behind Europe’s other two powerhouses – Germany and the United Kingdom. Both countries have bounced back better than France, even as their governments raise taxes to offset government spending. Market analysts estimate a rapid 3.7% pace of growth for Germany and a 2% expansion for England.

Europe’s Financial Alchemy -– It is universally recognized that a key factor underlying the 2007-2008 financial crisis was the diffusion of collateralized debt obligations (CDOs), the infamous special-purpose vehicles that transformed lower-rated debt into highly rated debt. As these structures lost popularity on Wall Street, however, they gained popularity on the other side of the Atlantic. After all, the European Financial Stability Facility (EFSF), created by the eurozone countries last May, is the largest CDO ever created. As with CDOs, the EFSF was marketed as a way to reduce risk. Unfortunately, the outcome could be similar: the entire banking system sent into a tailspin. CDOs are a form of financial alchemy: special-purpose vehicles that buy the financial equivalent of lead (low-rated mortgaged-backed securities) and finance themselves mostly with the financial equivalent of gold (highly sought-after AAA bonds). This transformation is based on one sound principle and two shaky ones. The sound principle is excess collateral. If there is $120 of collateral guaranteeing a $100 bond, the bond is safer, no doubt. How much safer, however, depends upon the returns on the pool of bonds that compose the CDO.

The case for a small fiscal union - The key issue is not the size of a fiscal union but its content. A simple increase in the EU’s budget, with lots of cash for research and development, motorways and environmental projects, would be counterproductive, creating resentment among net contributors and not dealing with the underlying problem. The latest co-ordination proposals by German chancellor Angela Merkel and French president Nicolas Sarkozy are of the same category. More tax harmonisation, or industrial policy co-operation, may solve their problem, but not those of a eurozone torn by internal imbalances. Any sensible fiscal union must deal with economic instability directly. Its three most important sources are the financial sector, asymmetric real economic shocks and a lack of incentives to avoid excessive and persistent current account imbalances. Wholesale banking is genuinely cross-border. German and UK banks have crippling exposures to Ireland, French and German banks to Greece, Spanish banks to Portugal. If one peripheral country defaulted, we would see a contagious banking crisis that would overwhelm some governments’ ability to cope.

Harsh winter threatens economic recovery - Winter retail sales are falling below expectations as retailers warn about the consequences of snow and ice; France is holding up well, while retail sales in Spain are collapsing; there is also criticism of the lack of preparedness by European railroad and airport operators; the ECB wants the next round of stress tests to take greater account of liquidity positions, an idea opposed by Germany; Nicolas Veron says systemic banking crises are rarely self-correcting, and that the EU needs to pursue a relentless policy of rigorous stress tests, recapitalisation, and restructuring. The first stress tests have clearly failed in this respect; Reuters Breakingview wonders how investors can be certain of their Irish bond holdings, when even the ECB is not; wages in the north of the eurozone are sinking faster than in the south; only 24% of the French want Sarkozy to focus on deficit reduction; after a week of excitement, the ECB’s bond purchasing programme is fading; the OECD, meanwhile, has written a critical report of the Spanish economy, warning about a lack of competitiveness.[more]

European bank stress tests: Third time lucky? - While politicians have hailed the bailouts of Greece and Ireland as necessary and responsible, there are many who feel that burdening taxpayers is grossly unfair. This column argues that Europe’s governments should lead a process of ruthless triage, recapitalisation, and restructuring of the region’s most important banks. It adds that while this will be extremely disruptive, the alternative may threaten the political fabric of the EU.

Euro Becomes Increasingly Popular Choice to Fund Carry Trades -The euro’s struggles could become more pronounced in coming months as traders increasingly use the beleaguered currency to fund so-called “carry trades.” That may sound surprising, given the yen and the dollar’s singular appeal as currencies is that they cost next to nothing to borrow. But the euro is perceived to be so vulnerable to further declines on the foreign exchange market that big market participants are zeroing in on trades to bet against it. “The main emphasis is a short euro play,” said Phil Streible, senior market strategist at Lind-Waldock. Streible said the lack of a plan to solve the ongoing sovereign debt crisis, more than interest rates, is the deciding factor in the carry trade right now. The euro is expected to continue its decline against other major currencies because its economy will likely remain weak.

Hard Currencies, Soft Heads - Krugman - Oh, wow: it seems that European hard-money types really are proposing Latvia as a model for Ireland to emulate. The line goes like this: sure, Iceland has begun to recover, but so have Latvia and Estonia, even though they held their currencies firm. To quote from the article — which is bluntly titled Irish should look to Baltics, not Iceland: Both Estonia and Latvia revised up their third-quarter GDP figures Thursday leading analysts to pronounce that, as for Iceland, a corner had been turned. Exports are growing in both countries and domestic demand in Latvia has finally started to pick up. The Baltics have done much worse than Iceland. And the employment numbers are just part of it. Iceland, as even the IMF says, has been able to “preserve the Nordic social model”; there has been a lot of distress, but not much extreme hardship. Meanwhile, the impact on Baltic society has been devastating.  Anyway, the idea that a country suffering a 25 percent fall in GDP, a 20 percent fall in employment, and mass emigration can be hailed as a policy triumph boggles the mind.

Text: Fitch Downgrades Hungary to BBB-; Outlook Negative - Fitch has downgraded Hungary's long-term currency issuer rating to BBB- from BBB. Furthermore, he outlook for the rating remains 'Negative', suggesting that a further downgrade may be forthcoming. The following is the verbatim text issued by the rating agency outlining the reasons for the downgrade:  "The downgrade of Hungary's ratings reflects a material worsening in the underlying medium-term budget position, while relatively high levels of public, external and domestic foreign-currency bank debt leave the country vulnerable to negative shocks," says Ed Parker, Head of Emerging Europe in Fitch's Sovereigns team.

Bond Sale Pulled as Rate Bets Send Yield to Four-Month High: Russia Credit - Russia scrapped a sale of ruble bonds for the second time this month as the prospect of rising interest rates sent yields to the highest in at least four months and threatened plans to double borrowing next year. The Finance Ministry yesterday canceled its last sale of so-called OFZs for 2010, an auction initially scheduled for Dec. 1 and delayed until today, citing “unfavorable market conditions” in a statement on its web site. The government pulled a sale of OFZs due 2016 last week after yields reached 7.78 percent, the highest since the debt began trading Aug. 5, prices on Bloomberg show

The British Mess (III): Bank of England Tiptoes Around Sovereign Risk Worries - The latest Bank of England Financial Stability Report is worth decoding. My last post on the UK sketched a scenario in which the very large 2011 funding programme for UK banks, discussed in the June BoE FSR (back issues all available here), could be quite problematic, in adverse markets. I hinted that if there was sufficient disorder, we might find the limits of the Implicit Sovereign Guarantee Moral Hazard Trade. It looks as if the Bank of England agrees, and it has sharpened its commentary, though you still have to read between the lines a bit, perhaps with the assistance of Robert Peston: According to the Bank of England, up to £500bn of wholesale debt is due to mature by the end of 2012. That includes something over £200bn effectively owed to taxpayers through the Treasury’s Credit Guarantee Scheme and the Bank of England’s Special Liquidity Scheme. Of that £500bn or so, between £350bn and £400bn falls due for payment this year.

Fiscal squeeze will squash the poor - In many other countries it would be a recipe for civil unrest, perhaps even revolution. Britain, though, is a placid place and it takes quite a lot to get this country's dander up. Sure, we've had protests from students this autumn but the latest forecasts of expected trends in poverty were greeted with a resigned shrug of the shoulders. Make no mistake, the findings from the Institute for Fiscal Studies (IFS) make depressing reading. Child poverty? Going up over the next three years. Poverty from working-age adults with children? Going up. Poverty for working adults without children? You guessed it. Going up also. And these – lest you get the wrong end of the stick – are not increases in relative poverty. They are increases in absolute poverty: the number of people living on less than 60% of the national income adjusted for inflation. And they are not nugatory increases either: by 2013-14 an additional 900,000 people will have slipped below the breadline.

Mortgage lending to hit 30-year low in 2011 from a £110bn-a-year peak down to just £6bn - The mortgage freeze will continue next year, with net lending expected to slump to its lowest level in 30 years, the Council of Mortgage Lenders warned yesterday. It predicts that net mortgage lending will hit a low of only £6billion, a paltry amount compared with the peak year of 2006 when £110billion was handed out. Net lending is the total amount lent by banks and building societies after subtracting the money paid back by homeowners. The lending slump means that millions of first-time buyers will continue to find it very difficult if not impossible to get a mortgage at a reasonable interest rate. Homeowners wanting to remortgage will face similar problems. Only the rich, the well-paid or those with generous parents happy to put down a deposit are able to get a loan at an affordable rate.

Interest rates 'will have to rise sixfold in two years' - Interest rates will have to rise almost sixfold over the next two years to cope with rising inflation, business leaders have warned. It will bring financial pain to seven million home owners with floating interest rates who will see a jump of almost £200 on a typical monthly mortgage payment. Charities have already warned that repossessions are likely to rise next year and the threat of a succession of quick interest rate rises will exacerbate their fears.
The Confederation of British Industry predicts that higher than anticipated rises in the cost of living will push the Bank of England (BoE) to begin increasing interest rates in the spring. It predicted that the Bank base rate – the interest rate at which the BoE lends to other banks – will rise more than two percentage points by the end of 2012. Mortgage rates are expected to follow closely behind. "Many households have been benefiting (from the low interest rates) in terms of mortgage payments, but that will start to turn over the next couple of years," The organisation predicts that the Consumer Prices Index, the Government’s preferred measure of inflation, will reach 3.8 per cent within the first three months of next year and that it will still be well above the Bank’s 2 per cent target two years from now.

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