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

Saturday, December 4, 2010

week ending Dec 4

Fed Balance Sheet Rises by $908 Million on Treasuries Purchases‎ - The Federal Reserve’s balance sheet rose $908 million to $2.35 trillion as the central bank increased its holdings of Treasury securities. Treasuries held by the Fed increased by $16.2 billion to $917.5 billion as of Dec. 1, according to a weekly release today, while mortgage-backed securities on the balance sheet fell by $15.2 billion to $1.02 trillion and federal agency debt securities were unchanged.  The Fed today bought $8.309 billion of Treasuries as part of plan to purchase $600 billion of government debt through June 2011 and to reinvest maturing mortgage holdings. M2 money supply rose by $10.3 billion in the week ended Nov. 22, the Fed said. That left M2 growing at an annual rate of 3.1 percent for the past 52 weeks, below the target of 5 percent the Fed once set for maximum growth. The Fed no longer has a formal target.  For the latest reporting week, M1 rose by $18.3 billion, and over the past 52 weeks M1 rose 6.9 percent, according to the central bank. The Fed no longer publishes figures for M3.

US Fed Total Discount Window Borrowings Wed $46.85 Billion‎ - The U.S. Federal Reserve's balance sheet continued to grow in the latest week as the central bank kept buying up government bonds in an effort to stimulate economic growth. The Fed's asset holdings in the week ended Dec. 1 crept up to $2.350 trillion, from $2.349 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities rose to $917.45 billion Wednesday from $901.24 billion a week earlier. Thursday's report also showed total borrowing from the Fed's discount lending window climbed to $46.85 billion Wednesday from $46.69 billion a week earlier. Still, borrowing by commercial banks slid to $40 million Wednesday after spiking to $1.04 billion a week earlier. Thursday's report also showed U.S. government securities held in custody on behalf of foreign official accounts grew to $3.345 trillion, from $3.336 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts expanded to $2.611 trillion from $2.602 trillion in the previous week. Holdings of agency securities fell to $733.80 billion from the prior week's $ 734.36 billion.

Fed Details Emergency Lending - As a result of the Dodd-Frank financial-overhaul law passed in July, the Federal Reserve must reveal a trove of information about the banks, securities firms, other companies and central banks that were helped by various emergency programs created during the financial crisis. The data released Wednesday include short-term liquidity moves for financial institutions and companies made as part of the Fed’s traditional role as lender of last resort, liquidity injections directly to borrowers and investors in key credit markets and financial support for Bear Stearns Cos. and American International Group Inc. (See all the data from the Fed) Fed officials reported details on more than 21,000 transactions from December 2007 to July 2010. The emergency programs caused the size of the Fed’s balance sheet to swell. (See a history of the Fed’s lending) While some of the programs have been wound down as the health of financial markets improved, the Fed still holds most of the assets it took on during the crisis. As of Nov. 17, the Fed had $2.3 trillion in assets.

Fed Documents Reveal Scope of Aid to Stabilize Economy -— As financial markets shuddered and then nearly imploded in 2008, the Federal Reserve opened its vault to the world on a scope much wider and deeper than previously disclosed.  Citigroup, struggling to stay afloat, sought help from the Fed at least 174 times during one remarkable 13-month period. Barclays, the British bank, at one point owed nearly $48 billion to the Fed. Even better-off banks like Goldman Sachs took advantage of Fed loans offered at rock-bottom rates.  The Fed’s efforts to stave off a financial crisis reached far beyond Wall Street, touching manufacturers like General Electric, the Detroit automakers and Harley-Davidson, central banks from Britain to Japan and insurers and pension funds in Sweden and South Korea.  Under orders from Congress, the Fed on Wednesday released details of more than 21,000 transactions under the array of emergency lending programs and other arrangements it conjured up in response to the crisis.  The disclosures, which the Fed had resisted, offer the most detailed portrait of a panicky period in which the Fed lent money to banks, brokers, businesses and investors to keep the financial system functioning.

Federal Reserve Data Disclose Big Loans To Financial Organizations - Federal Reserve data provide listed details of more than 12,000 transactions made between December 2007 and July 2010. The data include short-term liquidity measures for financial institutions, liquidity injections directly to borrowers and investors in key credit markets and big financial help to many organizations. The Federal Reserve data disclose the enormous financial help provided to various banks and companies. . Let's see the list of emergency programs reported by the Fed run during the financial Crisis.

  • Term Auction Facility (TAF): Run in December 2007 to provide relief to strained bank funding markets.
  • Primary Dealer Credit Facility (PDCF): Created in March 2008, offering funds to primary dealers aimed to support overall financial markets.
  • Term Securities Lending Facility (TSLF): The TSLF issued Treasury securities to certain investment firms for one month on account of pledged collateral.
  • Central bank liquidity swaps: The Fed signed agreements with 14 central banks across the world to maintain liquidity in U.S. dollars in foreign markets.
  • Commercial Paper Funding Facility (CPFF): Meant for commercial paper market.
  • The Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF): Aimed to boost asset-backed commercial paper market.
  • Money Market Investor Funding Facility (MMIFF): Created to restore liquidity in the money markets.
  • Term Asset-Backed Securities Loan Facility (TALF): Designed to revive the asset-backed securities market.

Money For Nothing: Wall Street Borrowed From Fed At 0.0078 Percent -- For the lucky few on Wall Street, the Federal Reserve sure was sweet. Nine firms -- five of them foreign -- were able to borrow between $5.2 billion and $6.2 billion in U.S. government securities, which effectively act like cash on Wall Street, for four-week intervals while paying one-time fees that amounted to the minuscule rate of 0.0078 percent. That is not a typo. On 33 separate transactions, the lucky nine were able to borrow billions as part of a crisis-era Fed program that lent the securities, known as Treasuries, for 28-day chunks to the now-18 firms known as primary dealers that are empowered to trade with the Federal Reserve Bank of New York. The program, called the Term Securities Lending Facility, ensured that the firms had cash on hand to lend, invest and trade. The European firms -- Credit Suisse (Switzerland), Deutsche Bank (Germany), Royal Bank of Scotland (U.K.), Barclays (U.K.), and BNP Paribas (France) -- borrowed $5.2-6.2 billion in Treasuries 20 different times. The one-time fees they paid on each transaction ranged from $403,277.78 to $481,110. Deutsche led the way with seven such deals. On each transaction, the fee paid for the 28-day loan is equal to a rate of just 0.0078 percent.

Interactive: Which Banks Got Emergency Loans from the Fed During the Financial Meltdown?

Hedge Funds Tapped Rescue Program -- Hedge funds and investors whose bearish trades on housing helped them profit amid the credit crisis were among those that benefited from a U.S. government emergency rescue program to kick-start lending, according to Federal Reserve data released Wednesday. That program, known as the Term Asset-Backed Securities Loan Facility, or TALF, and established during the financial crisis, provided low-cost loans from the Federal Reserve to investors buying bonds backed by student, auto and commercial-property loans and other assets. The program, which lasted from March 2009 until June 2010, was aimed at helping banks move loans off their books by repackaging them into bonds and selling them. Funds managed or backed by Magnetar Capital, Tricadia Capital and FrontPoint Partners, which made large profits from the downturn in the U.S. housing market, were among those who obtained loans from the Fed to buy securities during the ensuing credit crisis, according to the Fed data.

Many TALF Investors Wealthy and Unknown - One investor, Kenneth H. Dahlberg, is a World War II flying ace who, as a volunteer in President Richard M. Nixon’s re-election campaign, was a minor figure in the Watergate scandal.  Another investor, Magalen O. Bryant, runs a horse farm in Virginia and is active in steeplechase racing circles. A third, Ward W. Woods, is the chairman of the nonprofit organization that runs the Bronx Zoo.  They were among scores of wealthy but lesser-known investors in an emergency lending program the Federal Reserve announced in November 2008, three weeks after President Obama’s election, to support the market for student, auto, credit card and small-business loans.  The investors, whose identities were disclosed as part of a trove of 21,000 records released on Wednesday at the direction of Congress, are a cross-section of America’s wealthy — investors who, in the midst of the worst financial crisis since the Great Depression, heard about an opportunity and weighed the risk.  The list, not surprisingly, includes famous Wall Street financiers like J. Christopher Flowers, John A. Paulson and Julian Robertson, demonstrating the extent to which the Fed relied on fast-moving hedge funds to keep credit flowing through the markets.  There were also institutional investors like the Ford Foundation and the pension plan for Major League Baseball. And there were wealthy businessmen like the computer executive Michael S. Dell and the home builder Bruce E. Toll.

How Banks Pawned Junk to the Fed - Lehman Brothers’ collapse in the fall of 2008 inspired panic on Wall Street, but it also presented a little-noticed opportunity for the country’s remaining elite banks: They could now receive cheap Federal Reserve loans without posting quality collateral. As part of an emergency loan program, the Fed accepted as collateral more than $1 trillion in junk-rated investments from Citigroup, Morgan Stanley and others, according to data released Wednesday by the Fed. Banks pledged more than $490 billion in particularly risky collateral –  which credit rating agencies classified as Triple-c or below. Some collateral included mortgage-backed securities and other risky investments. The Central Bank’s program, known as the Primary Dealer Credit Facility, was a cheap overnight loan system for banks that was similar to the Fed’s discount window. The day after Lehman’s collapse JPMorgan, Goldman Sachs, Citigroup and Morgan Stanley collectively pledged more than $100 million in collateral that was rated Triple-c or below. On a $4 billion loan that day, Morgan Stanley posted $32 million in junk-rated collateral. The week after, Bank of America started pledging junk and never looked back.

Foreign banks and the Fed - I am surprised this has not really hit the U.S. headlines yet: The biggest cumulative borrower from the Term Auction Facility was Barclays of the UK, which bought the US broker-dealer unit of Lehman Brothers out of bankruptcy in September 2008. Barclays borrowed a cumulative $232bn from the TAF through various subsidiaries. The TAF provided one or three-month loans to banks from December 2007 until it closed this year. ..Bank of Scotland and RBS of the UK, Societe Generale of France, Dresdner Bank and Bayerische Landesbank of Germany, and Dexia of Belgium were all amongst the top 10 users of TAF. The second largest user was Bank of America, which bought Merrill Lynch during the financial crisis, and borrowed a cumulative $212bn. The biggest seller of commercial paper to the Fed’s Commercial Paper Funding Facility, which bought up illiquid paper, was UBS of Switzerland followed by the insurer AIG. Five of the top 10 CPFF users were European banks.

Fed aid in financial crisis went beyond U.S. banks to industry, foreign firms - The financial crisis stretched even farther across the economy than many had realized, as new disclosures show the Federal Reserve rushed trillions of dollars in emergency aid not just to Wall Street but also to motorcycle makers, telecom firms and foreign-owned banks in 2008 and 2009.  The Fed's efforts to prop up the financial sector reached across a broad spectrum of the economy, benefiting stalwarts of American industry including General Electric and Caterpillar and household-name companies such as Verizon, Harley-Davidson and Toyota. The central bank's aid programs also supported U.S. subsidiaries of banks based in East Asia, Europe and Canada while rescuing money-market mutual funds held by millions of Americans.  The biggest users of the Fed lending programs were some of the world's largest banks, including Citigroup, Bank of America, Goldman Sachs, Swiss-based UBS and Britain's Barclays, according to more than 21,000 loan records released Wednesday under new financial regulatory legislation.

Fed Data Shows Foreign Banks Huge Beneficiaries of Emergency Lending Programs, Hedge Funds, McDonald’s, Harley-Davidson and Others Also Bailed Out - Under orders from Congress pursuant to the Dodd-Frank financial legislation, the Fed has finally released details of its emergency lending starting in 2007. As Bloomberg notes: Bank of America Corp. and Wells Fargo & Co. were among the top borrowers from the Term Auction Facility [TAF]... Bank of America had three loans for $15 billion each , while Wells Fargo had three loans for $15 billion each ...Bloomberg notes that foreign banks borrowed heavily from TAF as well: Banks with headquarters outside the U.S. were among the first to begin using the facility in December 2007 and were also among its heaviest borrowers. These included the U.S. affiliates of banks such as Manama, Bahrain-based Arab Banking Corp., Madrid-based Banco Santander SA, and Paris-based Societe Generale SA. Beginning on June 18, 2009, Barclays Bank Plc had two loans totaling $23.45 billion outstanding.  In a second article, Bloomberg points out that despite Goldman's statements that it would have survived even without help from the Fed, Goldman was a big borrower as well:

Fed Opens Books, Revealing European Megabanks Were Biggest Beneficiaries - The Federal Reserve on Wednesday reluctantly opened the books on its monumental campaign to save the financial system in the midst of the recent crisis, revealing how it distributed some $3.3 trillion in relief. The data revealed that the Fed's aid was scattered much more widely than previously understood. Two European megabanks -- Deutsche Bank and Credit Suisse -- were the largest beneficiaries of the Fed's purchase of mortgage-backed securities. The Fed's dollars also flowed to major American companies that are not financial players, including McDonald's and Harley-Davidson, through unsecured short-term loans. The measure led the nation's central bank to purchase more than $1.1 trillion in mortgages packaged into the form of securities. The mortgage bonds are backed by Fannie Mae and Freddie Mac, the twin mortgage giants now owned by taxpayers. Deutsche Bank, a German lender, has sold the Fed more than $290 billion worth of mortgage securities, Fed data through July shows. Credit Suisse, a Swiss bank, sold the Fed more than $287 billion in mortgage bonds.  The data had previously been secret. It was released Wednesday per the recently-enacted law overhauling the federal financial regulation. The Fed, ferociously backed by the Obama administration, fought lawmakers' desire for full disclosure throughout the financial reform debate.

European Banks Dominated Use of Fed’s Commercial Paper Program - The U.S. subsidiaries of European financial institutions, led by Zurich-based UBS AG and Brussels- based Dexia SA were among the largest users of a government program to provide emergency short-term funding to U.S. companies and banks during the credit crisis.  Six European banks were among the top 11 companies that sold the most debt overall to the Commercial Paper Funding Facility. They sold a combined $274.1 billion, according to data made public today by the U.S. central bank. UBS sold $74.5 billion, the most among all borrowers. The largest U.S.-based user was insurer American International Group, selling $60.2 billion.  UBS’s figure of $74.5 billion represents the company’s total sales over the life of the program. The bank’s CPFF borrowings peaked at $37.2 billion, an amount the firm rolled over, or re-sold at maturity, once. Other companies rolled over debt in the program as well.

Meet The 35 Foreign Banks That Got Bailed Out By The Fed (And This Is Just The CPFF Banks) - One may be forgiven to believe that via its FX liquidity swap lines the Fed only bailed out foreign Central Banks, which in turn took the money and funded their own banks. It turns out that is only half the story: we now know the Fed also acted in a secondary bail out capacity, providing over $350 billion in short term funding exclusively to 35 foreign banks, of which the biggest beneficiaries were UBS, Dexia and BNP. Since the funding provided was in the form of ultra-short maturity commercial paper it was essentially equivalent to cash funding. In other words, between October 27, 2008 and August 6, 2009, the Fed spent $350 billion in taxpayer funds to save 35 foreign banks. And here people are wondering if the Fed will ever allow stocks to drop: it is now more than obvious that with all banks leveraging the equity exposure to the point where a market decline would likely start a Lehman-type domino, there is no way that the Brian Sack-led team of traders will allow stocks to drop ever...

Fed Loans to Foreign Central Banks Justified - Well, now we know how much the Federal Reserve loaned under 10 different programs during the depth of the financial crisis, and to whom. Fed critics such as Independent Sen. Bernie Sanders, a self-proclaimed socialist from Vermont, called the information "incredible and jaw-dropping" and wants an investigation. Actually, it is incredible and jaw-dropping. At various points between Dec. 1, 2007 and July 21 of this year, the Fed had loaned--or purchased assets--worth $3.3 trillion to try to stabilize financial markets on the verge of collapse. Not only was the effort remarkably successful, so far the central bank hasn't lost a dime. Yes, billions of dollars were loaned to key foreign central banks, such as the European Central Bank and the Bank of England, so they could in turn lend dollars to banks in their jurisdictions. Some loans went directly to foreign banks that active in U.S. markets. However, with the interbank lending market frozen, and those foreign banks unable to borrow dollars, they could have been forced to dump many U.S. assets and do severe damage to American institutions.

Empire of schmucks - With the news this week that the Fed pumped money into European institutions during the darkest hours of the recent and continuing economic crisis without so much as a press release or a demand for better cheese prices, it is clear that even with all those big geopolitical shifts we have been hearing so much about, the United States remains the world's sole Schmuck Superpower.  Oh sure, whoever it was that was stamping "Approved" on all those requests at the Fed's "Foreign Banks Only" teller window no doubt thought it was in the self-interest of the United States to keep the global economy from imploding. But look at all the grumbling that Europeans do when asked to help preserve their own common currency and the economic health of their own neighborhood. Or, if you wish to look in the other direction, consider the not exactly Kumbaya spirit of the currency "wars" that define trans-Pacific monetary relations. In the end, you've got to wonder, what're we thinking? After all, if China is the country sitting on the biggest pile of cash and the EU is China's number one trading partner, shouldn't they have responsibility for footing the bill for all those overly cushy European pension plans that promised retirement seemingly within weeks of graduating from college?

Oh, the Outrage... -A part of the Fed's mandate is to serve as lender-of-last-resort. What does this mean? It means that it stands ready to discount what it perceives to be good quality paper at a rate less than the market discounts such paper. This means lending cash at a lower-than-market interest rate on a short-term loan, if the debtor is in a position to put up high-grade collateral. This is what happens at the Fed's discount window. This is what happened with the Fed's other emergency lending facilities. The Fed was doing what Congress (representing the wishes of its citizens) has mandated.  What was the result? All the loans due have been paid back with interest. Yes, that's right. Contrary to the impression one gets from the media, the Fed did not "give" people or firms money. It lent them the money on a short term basis and in exchange for high-grade collateral (even if ascertaining the quality of collateral in emergency conditions can sometimes lead to mistakes).

Fed Withholds Collateral Data for $885 Billion in Financial-Crisis Loans - The Federal Reserve withheld details on individual securities pledged as collateral by recipients of $885 billion in central bank loans, denying taxpayers a measure of the risks they faced from its emergency aid.  The central bank yesterday released data on 21,000 transactions from $3.3 trillion in emergency lending to stem the financial crisis. July’s Dodd-Frank law required the Fed to disclose the names of borrowers, the size and interest rates of loans, and “information identifying the types and amounts of collateral pledged or assets transferred.”  For three of the Fed’s six emergency facilities, the central bank released information on groups of collateral it accepted by asset type and rating, without specifying individual securities.

Dallas Fed’s Fisher Defends Emergency Actions - Dallas Federal Reserve President Richard Fisher defended the Fed’s actions amid the financial crisis, saying the central bank “stepped into the breach” in its role as a lender of last resort. “That’s what we are paid to do,” he said. “We took an enormous amount of risk with the people’s money,” he acknowledged. But the crisis lending programs are now all closed, he said, “and we didn’t lose a dime and in fact we made money on every one of them.” In posting the data on its website, the Fed was complying with the Dodd-Frank financial regulation law passed in July which, among other things, aims to boost transparency at the U.S. central bank. Fed officials said it’s the biggest release of crisis lending data that a central bank has ever done.

Some Thoughts On The Fed and Bank Bailouts - The US Federal Reserve has been forced to open its books to reveal to whom it lent trillions of dollars and against what collateral. In my view, the Federal Reserve is as much a political organisation as it is a financial organisation. The real power behind the Fed rests with the Federal Reserve Board and the New York Fed in Washington D.C. and New York City respectively, owing to its dual financial and political roles.  The Board of the New York Fed, which is responsible for most of the Fed’s market-making and crisis-preventing activity, is comprised of the very bankers which control America’s private sector financial resources. This puts the Fed in an untenable position, the outgrowth of which is regulatory capture by the financial services sector. My view is that the Fed’s role should be circumscribed. Nevertheless, the Fed serves an important function in the US and global economy in providing liquidity, as we have witnessed during the crisis. It is the American – and in many respects, the global – lender of last resort

Your One-Stop Guide To Frontrunning Monday's Double POMO - For the first time ever the New York Fed will hold not one but two monetization procedures. Incidentally both will focus on the part of the curve that in the past two weeks has been performing best: the sides of the belly. The two operations, expected to be about $2 and $7 billion, will focus on bonds in the 10-17 Y and 2.5-4 Y sector. In keeping with the tradition of sharing with our readers the bonds that Sack will almost certainly end up monetizing, we present the 10 cheapest bonds that will likely end up being acquired on Monday. As the Fed is now the largest single holder of Treasurys (since the announcement of the SOMA reinvestment program on August 10, the NY Fed has purchased a total of $124bn Treasuries / TIPS: of the $105bn scheduled for the current month, the Fed has purchased $48bn per MS) expect to see increasingly more detailed analyses of the Fed's SOMA composition as cartoons about how to front run the Fed become increasingly more popular.

$6.8 Billion POMO Closes: Brian Sack Monetizes $1.1 Billion Of Bonds Issued Last Week - Today's POMO has closed, with Brian Sack monetizing $6.8 billion of bond. This is a 3.5x Submitted to Accepted ratio as PDs realize various blogs are on their POMO funding needs and thus moderate their Submission amount. Yet what is simply surreal is that the second most monetized bond was PJ3, due 11/30/2015. This is the same issue that was just auctioned off by the Treasury last week! There is no longer even a pretense of avoiding direct monetization. It is time for Bernanke to go out and just buy bonds at auction. A one week turnaround is nothing less than criminal fraud which if anything is unnecessary and pads the PDs pockets. For just holding the bond a whopping 168 hours, PDs made a few million dollars. This is criminal. But who cares. Eric Holder has still to prove that he is anything besides an organ donor.

$8.2 Billion POMO Closes: Most Monetized Issue Is 7 Year Bond Auctioned Off Last Week - The Fed-Primary Dealer scam continues in plain view. After today's $8.2 billion POMO closed at a 3.7x Submitted to Accepted ratio (below median ratio - surge in stocks right on schedule), a quick look at the most monetized POMOs confirms that the near-immediate monetization of just auctioned off bonds continues. To wit: as can be seen on the table below, the highlighted CUSIP most monetized is PK0 (as we speculated earlier) to the tune of $1.4 billion or 17.3% of the entire operation. This is the 7 Year bond auctioned off on November 24. That's one week ago. And the market continues to pretend that the Fed does not buy bonds at auction. Why should it: the Fed continues to hand out billions to Primary Dealers courtesy of their transitory intermediation via the bid/ask spread and price-notional differences. Pathetic.

The "Buy The Dip" Scheme Explained - Just because a cartoon can explain QE and POMO better than the mainstream media and blogosphere combined, here is all you needed to know about making money. In short: "Buy the fucking dip."

Fed Discount-Rate Minutes Show 2 Banks Want Higher Rate - Federal Reserve officials characterized the pace of the U.S. economic recovery as slow according to minutes of meetings before the rollout of a big plan intended to spur growth, according to minutes released Tuesday of central bank discount rate meetings. The minutes showed the directors of 10 of the 12 banks voted to hold the discount rate steady. The directors of the Kansas City and Dallas banks dissented, as they had at a previous meeting on the interest rate charged on emergency loans to U.S. lenders. The dissenting bank directors called for an increase in the discount rate, to 1.0%. The discount rate meetings were held prior to the Fed’s latest policy-setting meeting Nov. 2-3. At that key meeting, policymakers again agreed to hold the Fed’s more important rate at which banks lend to each other–the federal-funds rate–at a record low near zero. However, the Federal Reserve unveiled a plan to buy $600 billion in U.S. Treasurys through June, hoping to spur growth in the sluggish economy. Fed officials said the bond purchases would be roughly equivalent to cutting short-term interest rates by three quarters of a percentage point.

The politics of the Fed: Bernanke in the crosshairs | The Economist - REPUBLICANS have trumpeted their victory in the mid-term elections as a revolt against big government, from bail-outs to fiscal stimulus. Having made short work of the Democratic Congress, it was inevitable that they would next turn their sights on the Federal Reserve, a perennial target of the wilder-eyed. On November 3rd the Fed said it would buy $600 billion-worth of Treasury bonds over the next eight months with newly printed money. This second round of quantitative easing (QE), the Fed hopes, will nudge down long-term interest rates, thus stimulating spending and fending off the threat of deflation.  Republicans and “tea-party” activists erupted in criticism. “Cease and desist,” cried Sarah Palin, a former vice-presidential candidate. “Currency debasement and inflation,” declared a gaggle of conservative economists and commentators in an open letter published as a full-page ad in leading newspapers. Republican leaders in Congress wrote to Ben Bernanke, the Fed chairman, to express “deep concerns”; and two of their colleagues proposed stripping the Fed of its statutory responsibility to promote growth and employment, leaving it to occupy itself only with controlling inflation.

Fed's Pianalto: Asset Purchases Were Right Thing To Do - The Federal Reserve's now-embarked upon plan to flood markets with liquidity was the right thing to do, a top Fed official said Thursday.  Federal Reserve Bank of Cleveland President Sandra Pianalto said her vote on the Fed's policymaking committee to support the $600 billion in Treasury purchases would support the U.S. economic recovery, while guarding against deflation.  Not only did Pianalto launch a defense of the asset purchases, but she said removing stimulus too early could risk stymieing a recovery, as it did during the Great Depression of the 1930s and in Japan's more recent experiences with protracted deflation.  Amid heated debate over whether the Fed is erroneous in trying to jolt growth with its so-called quantitative easing program, Pianalto said the Fed was not targeting a weaker dollar in an effort to "manipulate" the U.S. currency.

Fed's Plosser 'Skeptical' Of Bond Buying Benefits - Federal Reserve Bank of Philadelphia President Charles Plosser on Thursday said he was "still somewhat skeptical" about the benefits of the US central bank's new round of bond buying, adding any benefits from the program are likely to be modest. Plosser also warned that expanding the Fed's balance sheet will further complicate the exit strategy from the bank's accommodative monetary policy setting. "One might ask why adding $600 billion of additional excess reserves would help anchor expectations of inflation any more so than the $1 trillion currently in the system," he said in Rochester, New York. Plosser said the Fed is developing and testing a range of tools to curb the effects of quantitative easing from fueling inflationary pressures, but warned the effectiveness of such tools will only be known for certain when they are implemented during the central bank's exit strategy.

Oh No, QE2 Might Actually Work! - Lawrence Lindsey is concerned that QE2 might work as intended.  He is afraid that if QE2 actually spurs an economic recovery there will be higher interest rates that, in turn, will create a fiscal crisis: Lindsey is correct that an economic recovery will raise interest rates. In fact, rising yields will be a sure sign of economic recovery. His concerns, however, about a fiscal crisis seem rather misplaced on several fronts.  First, it would be easier to deal with fiscal problems in a growing economy created by QE2 than in a Japan-style economic slump created by an aborted QE2.  Second, keeping monetary policy tight by having no QE2 would create other problems that his analysis ignores, like further pressure for trade protectionism.  Third, tight monetary policy would increase the likelihood of more fiscal deficits and fiscal problems. Consequently, I will cast my lot with QE2 and pass on the Lindsey prescription of tighter monetary policy.

Ben Bernanke, the Fed, and quantitative easing - The German and Chinese governments, Republican congressmen, the liberal economist Joseph Stiglitz, and Sarah Palin don’t agree on much. But they’re united in their opposition to the Federal Reserve’s second round of quantitative easing—or, as it’s known, QE2. According to various of the Fed’s critics, QE2—which involves the Fed’s buying six hundred billion dollars in government bonds over the next eight months—could start a global currency war, weaken the dollar, spark inflation, and create price bubbles in asset classes around the world. Next thing you know, dogs and cats will be living together. This huge uproar might make you think that QE2 represents some radical shift in the Fed’s mission. It doesn’t. The Fed’s job is to manage the country’s money supply, and it ordinarily does so by manipulating short-term interest rates, lowering rates when it wants to give the economy a push and raising rates when the economy seems to be overheating and needs to be cooled down. At the moment, though, short-term rates are already near zero and can’t be cut further. So instead the Fed is buying longer-term government bonds. The hope is that this will help keep long-term interest rates low, pump more money into the economy, and make investments other than government bonds more appealing.

New Economic Perspectives: Is Bernanke’s QE2 an act of desperation? - In his scholarly work Bernanke has clearly stated that governments like those in the U.S. and Japan (but unlike those in the European Union) do not have a solvency problem.  He also seems to understand that only fiscal policy produces net new financial assets in the private sector. By contrast, purchases of government securities by the Fed only replace interest-earning financial assets (bonds) with non-interest earning assets (reserves), leaving the net wealth position of the private sector unchanged. Yet, paradoxically, in his congressional testimonies over the last two years he has continually raised concerns with the sustainability of the debt and the deficit.  If Bernanke believes that the U.S. government cannot become insolvent and that fiscal policy should be allowed to dominate in recessions, why is he talking at cross purposes and fueling the misguided deficit hawk rhetoric about government spending? As a policy maker, he has failed to lend his support to any meaningful and sizeable fiscal response, which is why his latest QE2 move seems like an act of desperation.  All this and more is explained in Professor Tcherneva’s paper “Bernanke’s Paradox” and her Bloomberg radio interview with Kathleen Hays on The Hayes Advantage

What might monetary policy success look like? - Atlanta Fed's macroblog - As 2010 nears its end, my colleagues and I are beginning the process of evaluating performance in the past year and setting goals for the year ahead. In that process, one question is pressed: What does success look like? It is a good question for monetary policy, and one I touched on a couple of posts back. As in that post, I'll cite my boss, Atlanta Fed President Dennis Lockhart: "I think it is important to stress that our experience in dealing with inflation versus deflation is not symmetric. In the event of a policy overshoot, inflation containment requires the implementation of the mostly familiar strategy of raising short-term interest rates. In the event of an undershoot, however, dealing with a deflationary spiral and the attendant real consequences would be far less familiar territory for policymakers." So, in President Lockhart's view, there is the statement of objective—insurance against an unwanted deflationary spiral. And the measure of success? Again from President Lockhart, as quoted in my previous post: "In regard to price stability, this policy has already shown some signs of success by altering inflation expectations and reducing the risk of unwanted disinflation. To explain, inflation expectations extracted from Treasury inflation-protected securities, or TIPS, spreads over like-duration Treasury securities were declining persistently over the course of late spring through summer.

Fed could launch third round of printing money, warns economist - The US Federal Reserve may have to embark on a third round of printing money next year, a leading Wall Street economist has warned. Alan Levenson, chief economist at T Rowe Price, the investment management firm, said he did not expect the second round of quantitative easing to have a significant impact on the American economy. As a result, and with unemployment and the rate of inflation wide of the Fed's targets, he said it was possible that a third round of monetary easing -- QE3 -- would be launched. "The unemployment rate is unacceptably high for the Fed, and inflation is way too low," Mr Levenson said.  "If unemployment remains at 9pc next year and inflation stays at 1pc, when QE2 runs out in the middle of next year, then, judging by the Fed's thought processes, we'll get QE3. I wouldn't rule it out."

Bernanke Won’t Rule Out More Bond Buys - Federal Reserve Chairman Ben Bernanke told CBS in an interview to be aired Sunday that he’s not ruling out purchasing more bonds to aid the U.S. economy, the network said in a release Friday. In an interview taped Tuesday in Columbus, Ohio, Bernanke defended the central bank’s program to buy $600 billion in U.S. Treasury notes, which was attacked by senior politicians in the U.S. and abroad. Top Republicans charge the bond purchases, due to end in June, could bring high inflation and may weaken the U.S. dollar excessively. Like he did in 2009 to defend the government’s actions to fight the financial crisis, Bernanke is going to appear for the second time on “60 Minutes,” the CBS News show, this Sunday to discuss the most pressing issues facing the U.S. economy.

Too Much Focus on Interest Rates - Though much needed, QE2 it is far from perfect.  One problem with QE2 is that it is being marketed as a monetary stimulus program that works by lowering long-term interest rates.  Dropping long-term rates, the story goes, will in turn spur interest-sensitive spending and jump-start the economy.  This marketing strategy seems wrongheaded to me because it (1) ignores other  important channels through which monetary policy can work and (2) creates the wrong expectation that QE2 will only be successful if it maintains long-term interest rates at a low level.  The emphasis on the so called "interest rate" channel through which monetary policy actions are transmitted to the economy is pervasive in QE2 discussions.  For example, here is Greg Ip explaining how QE2 works It is understandable that journalists would invoke this monetary transmission channel when explaining QE2 since Fed officials are doing the same.

Richard Alford: “Quantitative Easing Explained” And Its Critics - Richard Alford; former economist, NYFed -The YouTube video “Quantitative Easing Explained” has surpassed 2.9 million views. The video is both entertaining and unremittingly critical of the Fed. In defense of the Fed, numerous economists, bloggers and mainstream media pundits have pointed out errors in the video. In doing so, the critics have missed the forest for the trees. While there are errors and oversimplifications in the video, it has resonated with the public because: a) it tapped into widely held perceptions about the Fed and b) the video deftly treated troublesome aspects of Fed policy with comedic license. In fact, the defensiveness of the critics of the video has only served to convince many skeptics of QE2 that its proponents are unwilling to or incapable of seeing the troublesome dimensions attached the bailout packages and the decision to go forward with QE2. The critics of the video and the Fed itself also appear unaware of how much the stature of the Fed has suffered as a result of the financial crisis, the recession, and the bailouts. It behooves the Fed and its defenders to move past narrow definitional/legalistic responses and address the underlying concerns of many citizens and market participants.

An Open Letter to Ben Bernanke - Ours is not an economics column, nor do we profess to grasp the mechanics of how it is, exactly, that you do what you do.  Nonetheless, while we admit to not being schooled enough to grasp the finer points of your job as Fed Chairman, we do have a strong opinion about your persistence in bemoaning the state of the current unemployment rate, as well as your determination to plow ahead with the purchase of billions of dollars of Federal debt at negligible interest rates in order to, somehow, cure that high unemployment rate.  Our opinion is that your plan it is doomed to look foolish thanks to an impending rise in employment, and corresponding drop in unemployment, that we think will happen even without you buying a single government bond.  How, you may ask, do we dare argue given our own lack of schooling in your own chosen field?

Bernanke: Job Creation Is Top Problem - Federal Reserve Chairman Ben Bernanke Tuesday said job creation is probably the most important problem facing the U.S. economy right now. “We’re not growing fast enough to materially reduce the unemployment rate,” Despite some recent improvements in labor markets, Bernanke underlined how only one million jobs have been recouped after 8.5 million were lost due to the recession. The slow economic recovery has kept about one in 10 Americans unemployed since the recession ended in June 2009. Fed officials predict the jobless rate could still be around 9.0% in a year from now, with Bernanke having already cautioned it could even rise if growth remains at the current sluggish level.

Brad DeLong - Uncertainty and aggregate demand - The future is always uncertain--and how uncertain it is fluctuates. When the future is more than unusually uncertain, economic players want the security of extra financial asset holdings before they are willing to spend to put people to work. It is, then, the business of the government to make sure that they have the amount and the kinds of financial assets they need to sleep easily. That was one of the insights of John Maynard Keynes. That was one of the insights of Milton Friedman. Uncertainty about the future cannot be eliminated. But its harmful macroeconomic consequences can be neutralized.

Monetarism: the hegemony that need not speak its name by Nick Rowe - Paul Krugman does not feel the Monetarist hegemony he swims in. The only part of Monetarism that he does feel, and that he now identifies with Monetarism, is that one small part of Monetarism that failed to achieve hegemonic status. Milton Friedman in 1970's believed that M2 growth ought to be kept small and constant - the k% rule. Milton Friedman lost that battle. But he won every other battle. He won the war. Here's Paul:  "I’ve always considered monetarism to be, in effect, an attempt to assuage conservative political prejudices without denying macroeconomic realities. What Friedman was saying was, in effect, yes, we need policy to stabilize the economy – but we can make that policy technical and largely mechanical, we can cordon it off from everything else. Just tell the central bank to stabilize M2, and aside from that, let freedom ring!

Conversations with a banker: ATMs and the Money Supply - I met a friend of mine last weekend who holds a regional manager-type position at a bank.  We got to talking about banking and economics (go figure) and she described a particularly interesting problem they were discussing at work: What is the optimal policy to refill an ATM with cash? I've never really thought about it before - I guess I always assumed that once the ATM starts to run out of cash, they send a truck over and refill it.  Turns out, that's not the case - at least for this particular bank in this region.  The ATMs are filled up such that they run out of money around 1% of the time before they are refilled.  This happens when the amount of money taken out is 2.5 standard deviations from the average (where the mean and sd will differ based on seasonality and day-of-the week).  If an ATM typically dispenses $30,000 over a period of time with an s.d. of $10,000, then we'd see it filled up to $55,000.

Let’s Take Back Our Money - Our goal should be total relocalized control of money. The optimal amount of centralized (“federal”*) currency and taxes is zero. Even at this early stage we should look to pioneering projects like the Brixton pound (which can be used to pay local taxes). (We also ought to think in terms of economic relocalization in the form of co-ops. This would have many advantages which I’ll discuss in future posts, but the one I want to mention here is the possibility of bringing as much diversification and exchange as possible under the rubric of cooperative share schemes, so that the parasitic central structure would have trouble getting after us even through trying to tax barter.)Before I get to my affirmative ideas on money reclamation, let me quickly dispose of some negation, what I’m not really advocating. As I wrote in my MMT posts (parts one and two), I do want the knowledge to spread, that in principle deficit spending is unconstrained and beneficial where the economy is depressed. There Is No Deficit Problem. It’s a fiscal terrorist lie. We know for a fact that no one among the elites who claims to care about the deficit of the debt actually does. The Bailout, the wars, the Pentagon budget, Big Ag subsidies, and corporate welfare in general, all prove this.

Rep. Paul Ryan (R-WI) against $600 billion cash infusion by Federal Reserve - Rep. Paul Ryan (R-WI) joined his voice to the chorus of opposition to the plan concocted by the Federal Reserve to infuse the economy with $600 billion in cash to lower long-term interest rates and increase consumer spending.  The plan, although well received by a number of prominent economists, has been the subject of intense criticism by fiscal conservatives, including Ryan, heads of foreign countries, and politicians from both sides of the aisle. Ryan, who in January will assume the position of chairman of the powerful House Budget Committee, came out on the attack against this proposed plan, citing long-term negative consequences to the economy.  Representing Wisconsin’s 1st Congressional District since 1999, Ryan’s constituents have been battered by higher than average unemployment rates.  The district has an unemployment rate of 8.2% compared with 7.3% for the state of Wisconsin.

Ron in Reserve - For decades, libertarian Rep. Ron Paul has criticized the Federal Reserve Bank, putting him outside both parties: Democrats who hoped the central bank could manage sustainable growth and Republicans whose policy idol was conservative monetary economist Milton Friedman.  Now, when Congress reorganizes in January, Paul is likely to be placed in charge of the House panel that oversees the Federal Reserve, and his fellow Republicans, led by Rep. Paul Ryan, are mounting an extensive critique of the Fed's latest policy, even suggesting it's time to rewrite the institution's operating mandate. But Paul is still not exactly on the same page.  "I think they're missing the whole point," he says. "I don't want the Fed to have any power!"   Paul is correct that few in the GOP entirely share his perspective. The Republican establishment hopes to use Paul's aggressive critique of the Fed to bolster their political ambitions, while Paul hopes Republican politicos can create broader support to abolish the institution.

Here Comes The Skulldruggery (Fed) -- Well that didn't take long: It may have taken 34 years, but Ron Paul has arrived, and he doesn't plan to squander the moment. His agenda includes landing the chairmanship of the House Financial Services Committee panel that oversees monetary policy—a job that will give him the power to push legislation reining in the central bank and to haul Fed governors up to Capitol Hill for hearings. The prospect has Wall Street, Fed officials, and even Republican House leaders worried that Paul's agenda could roil the markets and make a mockery of the U.S. financial system.  Notice the slant: Ron Paul will make a mockery of the financial system. Not expose the mockery that is the US Financial system. No lawmaker on a committee can "make" an industry a mockery of that thing.  That takes the acts of real people in the actual industry.

Fed Thumbs Its Nose at Audit the Fed; Withholds Data Required on $885 Billion of Collateral -- Yves Smith - Well, even under the compulsion of law, the Fed chooses not to comply. Should we be surprised that it continues to refuse to make mandated disclosures? In this case, as reported by Bloomberg, the Fed has withheld information that was of the collateral posted by borrowers to secure $885 billion of loans. Without this information, it is impossible to ascertain the risks undertaken in various emergency facilities. Dodd Frank specifically requires this detail be released: In other words, there is no way to pretend that this information was not part of the stipulated disclosure. The terms of the various types of support extended are to be revealed by borrower, in particular the details of the various types of support extended, including the collateral posted. Instead, the Fed provided the data on an aggregated basis, by asset type and rating and then only for three of six facilities.So what is the Fed trying to hide? A number of experts correctly pointed out that this is inadequate: One expert argued that the data needed to be withheld because it might spur bank runs. This is simply barmy. These loans took place during the crisis; this exercise is about past, not current exposures.  There’s no risk here, save to the Fed’s reputation and its secrecy.

Fed’s Delay on Release of Transcripts Will Be Reviewed by Issa - The prospective head of the U.S. House Oversight Committee said he will consider whether the five-year lag time for the release of transcripts of Federal Reserve meetings should be shortened.  “If the Fed’s full transcripts can be released sooner, they should be,” said Representative Darrell Issa, a California Republican who’s set to chair the panel in January, in an interview. “If they’re going to have some definable negative effect on their deliberations or ability to do their job and on markets, then we have to be cautious.”  Issa’s proposal comes amid rising criticism of the central bank by Republicans, who won control of the House in November elections. John Boehner, the presumptive House speaker, and three other Republican leaders have criticized the Fed’s plan, announced a day after the election, to buy $600 billion of assets to boost the economy, saying it risked weakening the dollar and fueling asset bubbles.

Fed's Plosser Says QE Will Complicate Withdrawal of Stimulus - Federal Reserve Bank of Philadelphia President Charles Plosser said the central bank’s program to expand its assets by $600 billion will hinder future efforts to withdraw stimulus and avert a rise in prices.  “One cost of expanding the Fed’s balance sheet is that it will complicate our exit strategy from a very accommodative monetary policy, when that time comes,” Plosser said in a speech today in Rochester, New York.  Policy makers led by Chairman Ben S. Bernanke plan to meet in Washington on Dec. 14 to review a program to buy Treasury securities to spur growth and keep inflation from falling too low. Such “quantitative easing” may provide stimulus for too long, fueling inflation, Plosser said to a seminar sponsored by the University of Rochester’s Simon Graduate School of Business.  “Even with the best of intentions, if we don’t act aggressively and promptly, we may find ourselves behind the curve and at risk for substantial inflation,”

Fed’s Kocherlakota Wants Inflation Expectations Increase - The Federal Reserve would welcome a small rise in inflation expectations as a result of its bond-buying program, a U.S. central banker said Tuesday. To a limited extent, this should be a good thing in some sense, to have more expected inflation,” Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said.He explained that when monetary policy is set essentially at 0% and the Fed wants to stimulate demand, a small rise in inflation expectations could help spur activity. Central bankers believe what people think about the future of inflation is a big influence on what price pressures will do in the near term.Kocherlakota explained he believes “very efficient, very rational” financial markets understand what the Fed is doing and don’t see the action as the harbinger of an inflation meltdown. When it comes to a price pressure breakout, the policy maker said, “I don’t think traders really embed that in a major way.”

I Didn’t Realize How Influential I Was :) - I noticed this chart in David Beckworth’s blog. Here’s what I see. On June 16, I warned of the danger of deflation. The expected inflation rate immediately began to fall, and it fell by a total of about 50 basis points over the next two-and-a-half months. Then on September 1 (with the expected inflation rate near its low), I urged the Fed to take quick action as bond yields were getting dangerously low, leaving increasingly little margin for the potential effectiveness of monetary policy. The Fed then began hinting at policy changes (partly realized in the QE2 announcement), largely as a result of which the expected inflation rate has since risen by about 40 basis points.  OK, I can see I’m going to have to start writing some more blog posts, so you all will know what to do next. (By the way, Mr. Bernanke, I second what David Beckworth said in the post where the chart appeared.)

And This Is Going to Lead to High Inflation? - I struggle and struggle to understand the fear of near-term, rapid inflation that is being stoked by the likes of commentators noted here and here. This struggle becomes even more profound when I examine actual data. Below I plot the series that are purportedly of most concern, namely measures of the money stock. Below I plot the standard M1 and M2 series, plus the M3 series that the Fed discontinued, all divided by real GDP.  The logic that some individuals seem to be using is that greater money creation must induce greater price increases. Even by this model (so to speak), it hardly seems like high inflation is around the bend.

Is Housing Messing Up Inflation Measures? Yes, But … Here’s the simplest argument in favor of the Fed’s decision to restart quantitative easing:  the economy is struggling, inflation appears tame, and the Fed is the only game in (Washington) town. Items (1) and (3) are, I suspect, not controversial. Moderate economic growth is moving us in the right direction, but has done little to create jobs or reduce the yawning output gap. And given the Republican’s election gains, it’s hard to imagine a new round of fiscal stimulus (except an extension of the expiring tax cuts – a form of anti-anti-stimulus). Item (2), however, is highly controversial. Some commentators argue, for example, that it’s not appropriate to focus on core measures of inflation, which exclude volatile food and energy prices. Others argue that the government systematically (and, perhaps, intentionally) understates inflation.I will leave those old debates to the side today and focus on a third, more contemporary question: Is housing messing up inflation measures?

The financialisation of commodities - In recent years, hundreds of billions of dollars of investment has flowed into commodities markets. According to a CFTC staff report (2008) and Masters (2008), the total value of various commodity index-related instruments purchased by institutional investors has increased from an estimated $15 billion in 2003 to at least $200 billion in mid-2008. A recent report by the US Senate Permanent Subcommittee on Investigations (2009) argues that the dramatic index investment flow had distorted prices of some commodities such as wheat. This column describes why and how commodities markets have grown so rapidly and discusses some policy implications.

Commodity investment hits record high - Commodity assets under management rose US$19 billion to a record US$340 billion last month, led by demand for index-linked investments, Barclays Capital said. Investment flows into products linked to commodity indexes reached US$7 billion in October, the bank’s analysts said in a report late Thursday. Total inflows into indexes, medium-term notes and exchange-traded products were US$50.6 billion in the year to October.  The Federal Reserve has kept its benchmark interest rate near zero since December 2008 and plans to pump another US$600 billion into the economy through June by buying government bonds, known as quantitative easing. It purchased US$1.7 trillion of securities in a first phase that ended in March. “QE2 has provided a tonic to commodity markets over the past few months that even the re-emergence of sovereign-debt concerns has not entirely canceled out,” the Barclays analysts said in the report.

Recessions are on the Margin - John Mauldin - And the data out over the last few weeks tells us it is getting better. Does this take us out of the double-dip woods, even as the Fed is lowering its forecast? And what is a recession? Yes, we all know it’s when the economy doesn’t grow, but we are in a rather unique economic environment, this time. Maybe things are getting better, but is it enough to get us back on the road to full employment?  There is a theme to a lot of the positive news we’ve been getting lately: it is positive, but not by much. Normally at this time in a recovery we would be seeing 4-5% (or more!) GDP growth and some real recovery in employment. Still, 2% is not a recession. And given what we have seen, there should now not be a recession in 2011, barring some “exogenous” shock. Something that is from outside the normal system. I have written for a long time that the one thing I really am concerned about is that the 2001-03 tax cuts will not be kept. If the 2001-03 tax cuts on the middle class are not kept, it seems a lock to me that we’ll be in recession rather soon in 2011.

Gauging the Odds of a Double-Dip Recession - FRB Dallas - Public sentiment says the recession isn’t over. Never mind that the National Bureau of Economic Research (NBER), the arbiter of recessions, declared that the Great Recession of 2008 and 2009 officially ended in June 2009. An unrelenting pessimism constrains the recovery as consumers spend reluctantly while paying down debt, gripped by persistent fears of unemployment. The economy grew at a 2.5 percent annualized pace in the third quarter, according to the second estimate of real gross domestic product (GDP), a moderate improvement after two quarters of decelerating growth during the recovery. This tepid expansion has raised concern that things could get worse again before getting better and that the likelihood of another recession may have risen. Does the slow growth necessarily foretell a double dip? Just as a bicycle requires momentum to stay upright, history tells us that once the economy slows to a sluggish growth rate, it will likely fall into a recession. This “stall speed” appears to be 2 percent annual real GDP growth. Every recession since 1970 has been preceded by expansion of less than 2 percent, though there was a false alarm in 1995. The second estimate of third-quarter GDP shows real output rising 3.2 percent over the past year (Chart 1).

GDP Is Almost Worthless - There has been some good economic news lately. Weekly jobless claims, which are volatile, fell to "only" 405,000 last week. The BEA's advance estimate for GDP showed that the economy grew 2.0% in real terms during the third quarter. More than once, I said that I expected the GDP estimate to be revised downward, for that's what the BEA almost invariably does. But, no! The estimate was revised upward instead. The economy grew at a 2.5% annualized pace in the quarter, revised up from the initial estimate of 2.0%, the government said in its second estimate of quarterly gross domestic product. GDP growth was 1.7% during the second quarter. Perhaps you did not notice an increase in your general economic happiness. Most likely, you did not notice that increase because it did not occur. And yet here is the government telling us that the economy is expanding at a pretty good clip. In fact, real GDP is now only 0.65% less than it was in the 4th quarter of 2007, which was its pre-recession peak. The "size" of our economy is basically the same as it was before the downturn. Now you must ask yourself some critical questions—

Is America Following the Same Path as Japan? - Ever since the U.S. financial crisis in 2008 there have been many comparisons to Japan and their "lost decade." Most comparisons mark the start of each financial crisis as the end of 1989 for Japan and 2007 for the U.S. We believe each deserves some clarification: Not only does the lost decade need to be pluralized, but the U.S. financial crisis is more appropriately dated to 2000, when we entered our secular deflationary bear market in the wake of the bursting of the dot-com bubble. The resemblance between two of the greatest financial stock market bubbles in history cannot be easily dismissed. Japan’s financial bubble (peaking in late 1989) and the U.S. stock market bubble (peaking in early 2000) compare with some of the greatest bubbles in history. Let’s take a look at the similarities of the busts in both nations following the respective peaks of their cycles. We believe you will be amazed at just how similar our credit crisis was to Japan’s.The total debt of Japan relative to GDP in late 1989 was 270%. The U.S. total debt relative to GDP in 2000 was 270%. The total debt eight years later was 385% (1998) for Japan and 375% for the U.S. (2008). Presently, the total debt to GDP in Japan is 325% and it would be much lower if government debt hadn’t tripled while private debt (mostly non-financial corporate) declined. Presently, the total debt in the U.S. is 360% and is probably on track to lower numbers as our government debt is rising while the private debt (mostly household debt) is declining.

As The Euro Goes The Way Of The Dodo, Where Does That Leave The Dollar? - The Eurozone is heading for a crash—anyone saying otherwise is either stoned, works in Brussels, or hasn’t checked the European bond market action lately: All hell is breaking loose there. And if, as I have argued here, the Irish Parliament decides not to pass the austerity budget next December 7—that is, decides not to take the European Central Bank bailout—then hell is going to break out in Europe just in time for Christmas: Satan and Santa Claus just might be squaring off on the Rue Belliard before year’s end. Therefore, the smart money starts thinking about what’s going to happen after the euro-crisis-climax happens. In other words, what’s going to happen to the dollar, once the euro goes the way of the dodo. First, we have to understand how we got here, in order to figure out what’s going to happen next.

Putin says dollar hegemony ‘dangerous’ and calls for Russian-EU economic trade zone - Russia and Germany should increase their economic co-operation. This is the message Russian Prime Minister Vladimir Putin delivered to some of Germany’s top business leaders in Berlin. Putin went so far as to suggest a Russian-EU free trade zone "from Lisbon to Vladivostok." The under-current from Putin’s remarks has much to do with anti-US Dollar sentiment because he said specifically that having the U.S. dollar as the sole reserve currency "is definitely something negative." Putin is serious about ditching the dollar. But will this gain any traction? RT video below. Watch the last portion as well in which Max Keiser says the re-emergence of Germany as a super power is the trend to watch.

Volcker Says Dollar's Role in Danger as U.S. Influence Declines - Former Federal Reserve Chairman Paul Volcker, who is chairman of President Barack Obama’s Economic Recovery Advisory Board, said the U.S. dollar is in danger of losing its role as a global benchmark currency.  “The growing question is whether the exceptional role of the dollar can be maintained,” Volcker told a gathering of New York civic leaders at the University Club of New York last night.  The decline of the U.S. economy, political gridlock at home, U.S. involvement in two wars and “festering” geopolitical issues in the Middle East and Asia have undermined the ability of the U.S. to influence global events, Volcker said.  Volcker offered no prescriptive solutions as he spoke in broad terms of the country’s loss of stature.

Pondering the Next Phase of the Debt Crisis - - The Fed’s latest round of monetary easing—QE2—has stabilized inflation expectations at a modestly higher level of late. Since mid-October, the inflation forecast based on the yield spread between the nominal and inflation-indexed 10-year Treasuries has bounced around in the low-2% range. That represents a victory of sorts from the summer plunge in the market’s inflation outlook, when fears of a new recession were on the rise. It’s tempting to declare that QE2 has been a success and that all’s well. But that’s premature. It will take many more months to assess the impact on the economy. Meantime, we’re in a precarious state of stability. For all the Fed’s monetary maneuverings of late, it’s still not clear if the higher inflation represents a fundamental change or a temporary bounce. Indeed, the forces of disinflation/deflation are still swirling in the global economy, as the debt troubles in Europe remind. What’s more, it’s not obvious that the current remedies are enough to ease worries of default.

Fiscal Responsibility and Global Rebalancing - Janet Yellen - Charting a sensible course for the federal budget is an essential but formidable task for U.S. policymakers.  Since the onset of the recent recession and financial crisis, the federal budget deficit has soared as the weak economy has depressed revenues and pushed up expenditures and as necessary policy actions have been taken to help ease the recession and shore up the financial system.  At 9 percent of gross domestic product (GDP), the budget deficit in fiscal year 2010 was a little lower than it had been a year earlier, but it was still considerably above the average of 2 percent of GDP during the pre-crisis period from fiscal 2005 to 2007.  As a result of the recent deficits, federal debt held by the public has increased to around 60 percent of GDP--a level not seen in 60 years.  For now, the budget deficit seems to have topped out.  So long as the economy and financial markets continue to recover, the deficit should narrow relative to GDP over the next few years as a growing economy boosts revenues and reduces safety-net expenditures and as the policies put in place to provide economic stimulus and promote financial stability wind down.  That said, the budget situation over the longer run presents some very difficult challenges, in part because the aging of the U.S. population implies a sizable and sustained increase in the share of the population receiving benefits from Social Security, Medicare, and Medicaid.

Sheila C. Bair - Will the next fiscal crisis start in Washington? - Even as work continues to repair our financial infrastructure and get the economy moving again, we need urgent action to forestall the next financial crisis. I fear that one will start in Washington. Total federal debt has doubled in the past seven years, to almost $14 trillion. That's more than $100,000 for every American household. This explosive growth in federal borrowing is a result of not just the financial crisis but also government unwillingness over many years to make the hard choices necessary to rein in our long-term structural deficit.  Retiring baby boomers, who will live longer on average than any previous generation, will have a major impact on government spending. This year, the combined expenditures on Social Security, Medicare and Medicaid are projected to account for 45 percent of primary federal spending, up from 27 percent in 1975. Unless something is done, federal debt held by the public could rise from a level equal to 62 percent of gross domestic product this year to 185 percent in 2035. Eventually, this relentless federal borrowing will directly threaten our financial stability by undermining the confidence that investors have in U.S. government obligations. Financial markets are already sending disquieting signals. The cost for bond investors and others to purchase insurance against a default by the U.S. government rose markedly during the financial crisis, from an annual premium of less than 2 basis points in January 2007 to 100 basis points in early 2009, before falling to the current level of 41 basis points.

Taming the Fiscal Monster – Zandi -Of all our nation's economic worries, none are scarier than the federal government's record budget deficits and mounting debt load. Unless we find a way to make big changes to Social Security, Medicare, and other government programs, and also fix our tax code, the economy will break. The vitriol of the midterm elections and the seemingly broken political process only add to the anxiety.  It may seem odd given all this, but I'm optimistic. Our problems are big, but they are manageable. As the economy improves (believe me, it will) the deficit will narrow, tax revenue will grow, and the extraordinary government spending used to combat the Great Recession will wind down. Under reasonable assumptions, the annual deficit will shrink from its current $1.3 trillion to $800 billion. Unfortunately, this isn't good enough. We have to knock an additional $350 billion off our annual deficit, otherwise the interest payments on our outstanding debt will swamp us. This will be difficult - for context we spend more than $100 billion a year in Iraq and Afghanistan - but it is doable.

Fiscal Commission Expectations Are Too High. - There's just too much distance between Commission Republicans and Democrats on raising revenue and cutting spending. That doesn't mean the effort will be wasted. Far from it. Starting the public debate on these issues is what's important. When that debate gets widespread and when it gets taken seriously by enough Americans, it will open up the possibility of adopting some of the many good ideas already broached by Commission Co-Chairs Erskine Bowles and Alan Simpson. Even if a deficit reduction package was endorsed miraculously by the Commission, the deal would have to be recut by Congress next year, and it would have a difficult time passing. My concern is that we could easily waste next year and the year after in political gridlock with no deficit reduction. That would be bad for the economy as the markets start raising interest rates in anticipation of burgeoning future deficits with no restraint in sight. It's important to demonstrate that economic reality has set in on Capitol Hill.

Deficit Commission Will Have Failed If There's No Agreed-Upon Plan - I have to strongly disagree with Pete on this one: the only appropriate measure of whether the Bowles-Simpson commission has succeeded is whether it comes up with a deficit reduction plan supported by 14 of its 18 members.  That was it's only charge; anything less-- including having up to 13 members support something--will be a failure. Pete says that the commission should be considered a success if it does nothing more than raise the awareness of the deficit, increase the understanding of the magnitude of what needs to be done, and starts a vigorous debate.  Sorry, but a big debate on the budget not only was underway when the commission was created (that, after all, is why it was created), but that vigorous debate had been going on for decades.  Awareness of what needed to be done to deal with the deficit wasn't the problem: the refusal to do those things is what this was all about.  Without 14 votes, the refusal will continue.

Sure, the government is just like your family -So your mortgage payment's overdue and you're lying awake at 4 a.m. wondering where the money's going to come from when the kitchen smoke alarm starts beeping. What to do? If you're like the two jokers who jumped the gun on President Obama's ballyhooed deficit reduction commission while he was visiting Asia, you'd jump out of bed, ignore the fire, back the car out of the garage and slap a "For Sale" sign on the windshield. Mission accomplished! Never mind that the nation currently has 9.6 million unemployed, and upward of 25 million either out of work, struggling to make do with part-time jobs, or who have simply given up. The really big problem facing the nation is that Social Security may exhaust its reserves 25 years from now. Why, it's an emergency.

Deficit commission plan would kill 4 million jobs, analysis finds - The preliminary deficit reduction plan recently released by the co-chairmen of the National Commission on Fiscal Responsibility would kill four million jobs over the next three years, according to a recently published analysis by the Economic Policy Institute (EPI). "Using the rule of thumb that a 1% increase in GDP increases payroll employment by 1 million jobs, we estimate that Co-Chairs’ Proposal would thus reduce payroll employment by roughly 723,000 jobs in 2012, 1.4 million jobs in 2013, and 1.9 million jobs in 2014," economists Josh Bivens and Andrew Fieldhouse said in their report, "Fiscal commissioners’ proposal would cost millions of jobs." Bivens and Fieldhouse said in their report that the proposal drafted by former Sen. Alan Simpson (R-Wy.) and Erskine Bowles, President Bill Clinton’s former chief of staff, plays "lip service" to future economic conditions in America.

Thomas Friedman, the High Priest of Austerity -Thomas Friedman told Congress to just shut up and reduce the living standards of the vast majority of the population. In his column today Friedman said that Congress should quickly embrace the cuts in Social Security and Medicare proposed by Erskine Bowles and Alan Simpson. Friedman has apparently decided there is no other way to move forward than to force moderate-income retirees to take big cuts in their living standards. Of course others might point out that there are enormous potential savings to Medicare and Medicaid from allowing beneficiaries access to the more efficient health care systems in other countries. The government and private sector could also saving hundreds of billions of dollars a year from replacing the system of patent support for drug research with more efficient mechanisms. In addition, the government could easily raise more than $100 billion a year from taxing the excesses in the financial sector, a route even advocated by the International Monetary Fund. And, those who know basic economics (forget Friedman here) know that the current deficits pose no burden whatsoever. Deficits run in times of high unemployment do not displace private sector production; they simply utilize resources that would otherwise be idle.

Alan Simpson and Erskine Bowles try to scare America into doing something about the deficit. - Wonkish, crotchety, and mostly bald, the co-chairs of President Obama's National Commission on Fiscal Responsibility and Reform want you to care about the deficit the way cable television wants you to care about pedophiles. The threat might be remote, but when it comes, it comes closer than you think—and it is horrible. At a press conference this afternoon, Alan Simpson and Erskine Bowles described debt as a "cancer." They called it "dangerous." Bowles warned that if Congress really gets into a fight about the debt ceiling in the next few months, all financial hell will break loose.  Since the co-chairs released their proposal for getting America back in the black, Simpson says, it's been "the same old crap." People have responded with "emotion, fear, guilt, and racism." And the "far left" and "far right" are rounding up their "minions" to attack the plan as cruel or infeasible or insufficient or whatever. But Bowles and Simpson—they don't care. They just want to talk numbers and to scare the living bejesus out of you about debt.

Deficit Commission Moves the Goalpost, Disses Leading Progressive Member - Rep. Jan Schakowsky, D-Ill., says that as of this morning she had not been shown the latest proposal of the White House deficit commission, even as she says it is being "shopped around" by its co-chairs in an effort to get the support of a simple majority of its 18 members—not the support of 14 members as was its original goal. Schakowsky confirmed this shift in an interview with after giving a private briefing to members of the Tuesday Group, a meeting of progressive organization leaders convened by the Campaign for America's Future. The deficit commission—formally known as the National Commission on Fiscal Responsibility and Reform—was scheduled to hold a public meeting today in advance of its planned release of its recommendations Wednesday, but the meeting was abruptly canceled. Instead, its co-chairs, Erskine Bowles and Alan Simpson, were tweaking the deficit reduction plan they made public earlier this month, which includes proposals to cut Social Security benefits, Medicare and Medicaid, and other key programs.

Ezra Klein - The best and the worst of the fiscal commission's final report - We won't know until Friday whether the final proposal from Alan Simpson and Erskine Bowles can attract the votes of 14 of the commission's 18 members. Right now, the outlook is doubtful. But we do have the final proposal, so we know the policy options they're offering. Here are the four best and five worst parts of the plan:

The Obama Deficit Panel’s Tax Reform Version 2.0 -The chairs of President Obama’s fiscal commission have refined—in some key ways—their broad-based tax reform plan. Erskine Bowles and Alan Simpson didn’t change their basic framework from what they unveiled last month. However, the plan they released this morning—due to be voted on by panel members on Friday-- is both more specific and more realistic than their initial plan.  Their first draft suggested three different reform options. And one of those—a plan that started with the radical concept of wiping out all deductions, exemptions, and exclusions—itself included multiple alternatives that would have preserved many of the $1 trillion in tax expenditures that now litter the revenue code.  By contrast, the plan released today narrows the playing field quite a lot, although it remains more of a concept than a proposal. It retains the original’s defining principle—a 1986-like reform that would preserve the income tax structure but dramatically broaden the tax base and lower the rates. While a competing reform plan from the independent Bipartisan Policy Center’s deficit commission chaired by Pete Domenici and Alice Rivlin proposed a Value-Added Tax to help reduce the deficit, Bowles and Simpson passed up the opportunity to propose a broad-based consumption tax.

Social Security cuts are part of deficit plan - Divisions remain within President Barack Obama's deficit commission on politically explosive budget cuts and slashes in Social Security benefits, even as the panel's co-chairmen go public with a revised plan to tame the runaway national debt.The new plan by co-chairmen Erskine Bowles and Alan Simpson, unveiled Wednesday, faces an uphill slog. Resistance is certain, not only because of the idea of raising the Social Security retirement age, but also because of proposed cuts to Medicare, curtailment of tax breaks and a doubling of the federal tax on a gallon of gasoline. Though the plan appears unlikely to win enough bipartisan support from the panel to be approved for a vote in Congress this year or next, Bowles has already declared victory, saying he and Simpson have at least succeeded in initiating an "adult conversation" in the country about the pain it will take to cut the deficit.

Destroying Retirement In Order To Save It - Paul Krugman - Bowles-Simpson, the revision, is out. It has not improved. I think it is worth pointing out that like so many proposals from that side of the political spectrum — for this is, very much, bipartisanship as a compromise between the center-right and the hard right — this one involves a fundamental piece of strange logic. Namely, it argues that in order to head off the dire prospect of future cuts in Social Security benefits, we must cut future Social Security benefits. Also: in response to the point many of us have made about raising the retirement age — that only the affluent have seen life expectancy rise faster than the retirement-age rises already in the law — the plan promises special exemptions for those with physical hardships. Right now we have a retirement system that has the great virtue of not being intrusive: Social Security doesn’t demand that you prove you need it, doesn’t ask about your personal life, doesn’t make you feel like a beggar. And now we’re going to replace that with a system in which large numbers of Americans have to plead for special dispensation, on the grounds that they’re too feeble to work for a living. Freedom!

Debt Panel to Delay Vote Until Friday -The chairmen of President Obama’s debt-reduction commission say they will release a final plan by Wednesday morning, technically meeting the president’s deadline, but they delayed the panel’s vote until Friday to give members time to consider the far-reaching tax and spending proposals. Talks with people familiar with the panel’s deliberations indicate that the 18-member commission is far from consensus. The two chairmen and perhaps three appointees who are not elected officials are said to be in general agreement, but the 12 members of Congress are described as split along party lines – the six Republicans opposed to tax increases and the six Democrats to reductions from future health-care and Social Security benefits.  “We just finished the plan; we’re putting the final touches on it now.” It would not be fair, he added, “to not give people a chance to review it before they’re asked to vote.”

What Happens Next on the Deficit Commission - As Joan already blogged, The Catfood Commission, also known as the National Commission on Fiscal Responsibility and Reform, released a list of budget recommendations today. (59-page PDF) In terms of process, here is what happens next: The commission will not issue a final report - While the members of the deficit commission will vote on today’s recommendations on Friday, when they do so they will just be 18 people holding a vote on something, and not the formal deficit commission created by President Obama. This is because the deficit commission ceases to exist at midnight, tonight. As commission co-chair Alan Simpson said: To those who just wish the commission would go away, Simpson had one bit of good news: “That’s exactly what we’re going to do December 2.”  Further, the by-laws of the commission state: The Commission shall vote on the approval of a final report containing a set of recommendations to achieve the objectives set forth in the Charter no later than December 1, 2010. The issuance of a final report of the Commission shall require the approval of not less than 14 of the 18 members of the Commission.

Bowles and Simpson Violate Commission Charter -The Washington Post, which long ago abandoned rules of journalistic objectivity in pushing its agenda for cutting Social Security and Medicare, today covered up the plans by deficit commission's co-chairs to violate the commission's charter. The Post reported that the commission expects to delay voting on a plan until December 3. This means that the commission will miss the December 1 deadline for a final report specified in both its by-laws and its charter. If the Post were not so committed to Bowles and Simpson's agenda then it would have called readers attention to the fact that they are violating the rules under which the commission was established.  It also would have pointed out that the huge long-term projected deficits are entirely attributable to the broken health care system. If the United States paid the same amount per person for health care as countries with longer life expectancies we would be facing huge budget surpluses, not deficits. However, because it editorial position dominates its news section, almost no readers of the Post would know this simple and important fact.

A plan to bury Social Security, not to strengthen it - Under the plan released December 1, 2010 by the co-chairs of President Obama’s National Commission on Fiscal Responsibility and Reform, most workers, including most low earners and workers approaching retirement, would see significant cuts in Social Security benefits. Even current retirees would see cuts due to a proposed reduction in the annual cost-of-living adjustment. According to an analysis of the plan by Social Security’s chief actuary (Goss 2010a), middle-class workers with average earnings over the course of their careers (around $43,084 in 2010) would see a 22% cut in benefits by the end of the 75-year projection period, not significantly different from the 23.5% cut in benefits these workers would face in 2085 if nothing were done to shore up Social Security’s finances. Because these cuts would fall on top of earlier cuts implemented in 1983, including a gradual increase in the normal retirement age from 65 to 67, the share of a middle-class worker’s pre-retirement earnings replaced by Social Security would fall from 49% in 1980 to 28% in 2080 if the worker retired at 65 (see Figure A).  If anything, this understates the problem, since most workers retire before age 65. Read Issue Brief 191

No Representation Without Taxation! - Erskine Bowles, co chair with Alan Simpson of the president's fiscal commission, has announced with stupefying self-satisfaction that whatever the legislative outcome, "We've won big: The era of deficit denial in Washington is over." Enjoying the victory, Republican leaders Mitch McConnell and John Kyl have written to Majority Leader Harry Reid saying they will permit no business to proceed in the Senate unless the Bush tax breaks for the rich are extended.  Deficit denial may be over, but tax denial is reaching warp speed. Bowles and Simpson address the deficit first of all by proposing more tax cuts. America's deficit crisis has been presented as a puzzle that can be solved only through zero-sum spending cuts. Can't do a thing with revenues, that would require taxation. Yet, truth is, the deficit crisis and the Social Security crisis and the Medicare crisis and the jobs crisis and the stimulus crisis can all be solved without cutting a single dollar from the budget: Just (don't gag when you say it)... R... R... RAISE TAXES!

Deficit-cut plan falls short but offers framework for future - A bold plan to slash the U.S. budget deficit fell short on Friday of winning support needed from a presidential commission to trigger congressional action, but it was expected to help shape future budget debates. The plan found more backing than many anticipated, from Democrats and Republicans, and parts of it could be used in President Barack Obama's next budget, due in February, as well as in congressional proposals to follow. A formal commission vote did not occur, but 11 members said they supported the plan and seven said they did not. It needed 14 votes to be sent to Congress for legislative action. As Europe wrestles with a government debt crisis, the commission's work appeared to have galvanized lawmakers around the need to take firm action soon on reducing the $1.3-trillion deficit and the $13.8-trillion national debt. "We've crossed an important hurdle here and laid out a plan that will be resurrected because it must be," said Democrat Kent Conrad, chairman of the Senate Budget Committee, at the commission's last meeting where backed the plan.

The fiscal commission’s failure - I’m fascinated by the various headlines reporting the deficit commission’s 11-7 vote. Some treat the plan as some kind of independent entity which was lobbying for votes: the WSJ runs with “Deficit Plan Fails to Win Panel Support,” while Reuters plumps for “Deficit-cut plan falls short, offers framework” and Fox News has “Deficit Commission Report Fails to Advance to Congress.” The Washington Post goes long: “Deficit plan wins 11 of 18 votes; more than expected, but not enough to force action.” Other headlines concentrate on the panel as the key actors, and the range of views here is very wide. Bloomberg says bluntly that “Debt Panel Rejects $3.8 Trillion Budget-Cutting Plan,” in line with the FT’s “Panel reject US budget deficit plan”. Politico is a bit softer — “Debt panel falls short on votes” — while NPR is positively upbeat: “Majority Of Deficit Commission Endorses Plan; Not Enough To Make It Automatic.” Ezra, too, looks on the bright side, plumping for “The fiscal commission succeeded — sort of.”

The Big Economic Story, and Why Obama Isn't Telling It - Robert Reich - Quiz: What’s responsible for the lousy economy most Americans continue to wallow in? A. Big government, bureaucrats, and the cultural and intellectual elites who back them. B. Big business, Wall Street, and the powerful and privileged who represent them. These are the two competing stories Americans are telling one another. Yes, I know: It’s more complicated than this.  B is closer to the truth. But A is the story Republicans and right-wingers tell. It’s a dangerous story because it deflects attention from the real problem and makes it harder for America to focus on the real solution – which is more widely shared prosperity. (I get into how we might do this in my new book, Aftershock.) A is also the story President Obama is telling, indirectly, through his deficit commission, his freeze on federal pay, his freeze on discretionary spending, and his waivering on extending the Bush tax cuts for the rich. Most other Washington Democrats are falling into the same trap.

New Deficit-Cutting Plans to Come From Liberal Groups - As President Obama’s fiscal commission faces a deadline this week for agreement on a plan to shrink the mounting national debt, liberal organizations will unveil debt-reduction proposals of their own in the next two days, seeking to sway the debate in favor of fewer reductions in domestic spending, more cuts in the military and higher taxes for the wealthy. The proposals from two sets of liberal advocacy groups highlight the deep ideological divides surrounding efforts to deal with the nation’s budgetary imbalances, even as Mr. Obama’s bipartisan commission works to finalize its recommendations by Wednesday — and struggles for a formula that would get the backing of at least 14 of its 18 members, the threshold for sending its proposal to Congress for a vote.

The Left Opposition Has a Budget-Balancing Plan » And it is a very good one--a much better one than the amateurish, unthought-through and far-right Simpson-Bowles or the professional but inequality-increasing and right-wing Domenici-Rivlin. Matthew Yglesias has beat me to the punch and already written about the thing: Yglesias » The Left and the Budget: Liberals didn’t like the Simpson-Bowles deficit plan largely because neither Simpson nor Bowles is a liberal.... Today the Our Fiscal Security coalition, comprised of Demos, the Economic Policy Institute, and the Century Foundation have released their fiscal blueprint which shows you would that liberal take would look like... the heavy (and appropriate) emphasis in the short term on mobilizing excess capacity to increase growth and decrease unemployment rather than austerity budgeting that will only increase resource-idling... No Cost Shifting, namely: Policies that simply shift costs from the federal government to individuals and families may improve the government’s balance sheet but may worsen the condition of many Americans, leaving the overall economy no better off... Document at:

A Budget Blueprint for Economic Recovery and Fiscal Responsibility - Demos, EPI and The Century Foundation have produced a budget blueprint for economic recovery and fiscal responsibility. The blueprint prioritizes a strong economic recovery because widespread job creation and robust economic growth are essential to successful deficit reduction. Investing in America's Future is a project of Demos, EPI and The Century Foundation. More information is available on the project's homepage at Download the report [PDF] View the report - Related Materials - Executive Summary

The Progressive Deficit Plan - Krugman - A coalition of progressive think tanks has released a plan for dealing with the deficit. It’s at least as responsible as any of the other plans being advanced, with a very different emphasis: more reliance on revenue, no attack on Social Security. Some of the revenue comes from indirect taxes — green taxes and fuel taxes — but the rest comes from measures that would raise taxes mainly on upper-income Americans. I’ll need to work through the proposal, but one thing it clearly does is to explode the myth that there is no alternative to the Bowles-Simpson-type regressive proposal. A lot of inside-the-Beltway types have been trying to sell the notion that a severely weakened social safety net is the only possibility; it isn’t. And it’s definitely worth noting that even with the revenue measures in the progressive plan, the US would have lower overall taxation than almost any other advanced country.

Jobs First! Any Other 'Deficit Plan' Sells America Short - The Citizens' Commission On Jobs, Deficits And America's Economic Future is releasing its report today, and its recommendations will be very different from those of the self-described "bipartisan" plans now dominating Washington conversations. (They are bipartisan in a way, come to think of it, since polls show that many of their ideas are disliked by both Democrats and Republicans.)  There is an urgent need to broaden the policy debate. Plans like the Simpson/Bowles and Rivlin/Domenici proposals rely on a narrow range of unpopular policy ideas - ideas that fail to address the causes of either current or projected deficits. What's more, they fail to recognize that a healthy government budget depends on a healthy economy, and a healthy economy depends on jobs. The Citizens' Commission's proposals bring deficit spending under control while investing in a future based on jobs and economic growth.  Don't believe the naysayers: It can be done.

Report And Recommendations Of The Citizens’ Commission On Jobs, Deficits And America’s Economic Future - This report was written by Jeff Madrick, a member of the commission and Senior Fellow at the Roosevelt Institute, with contributions from Roger Hickey, Robert Borosage and Richard Eskow of the Institute for America’s Future, Dean Baker of the Center for Economic and Policy Research, Robert Kuttner of The American Prospect and Demos, and Robert Pollin of the Political Economy Research Institute, with additional work by other members of the commission.

The Impoverished, and Impoverishing, Debate about Fiscal Deficits - It is like living in a dream—a very bad dream. Everything seems at once real and imaginary, serious and deliriously impossible. The language is familiar and incomprehensible. And it seems there is no waking up, ever. I’m talking about the “debate” over America’s fiscal deficits, which is what I stumbled into after a night of much happier visions. Now, according to this morning’s New York Times, the left has weighed in with its own plans to achieve deficit stability. Of course, it is more reasonable than the pronunciamenti of the Simpson-Bowles cabal, with a wiser assortment of cuts and more progressive tax adjustments. Still, it is part of the same bizarre trance, disconnected from the basic laws of income accounting. All you need to know is the fundamental identity. In its financial balance form, it appears as: Private Deficits + Public Deficits ≡ Current Account Balance. If the US runs, say, a 4% CA deficit, the sum of its net public and private deficits must equal 4%. You can’t alter this no matter how you juggle budgets.Add to this one more piece of wisdom, which we should have learned from the past three years, even if we were blind to everything else: private debts matter as much as public ones.

Americans Prioritize Deficit Reduction as an Economic Strategy -  Americans are most likely to choose deficit and debt reduction as the best approach for dealing with the economy over three widely discussed alternatives: raising taxes on the wealthy, cutting taxes, and increasing stimulus spending. These results are based on a USA Today/Gallup poll conducted Nov. 19-21 as the U.S. economy continues to suffer from sluggish growth and high unemployment. Americans do not show a strong consensus for any of the approaches, but clearly reject additional economic stimulus spending. The increased government spending in late 2008/early 2009 to bail out major U.S. corporations and attempt to jump-start the economy concerned many Americans and helped fuel the Tea Party movement, leading to significant Democratic losses in Congress in the midterm elections. That concern is also reflected in Americans' endorsing deficit reduction as an economic strategy over generally popular approaches like tax cuts or tax hikes on the wealthy. Both independents and Republicans choose deficit reduction as the preferred economic approach.

What's Wrong with This Picture? - Maxine Udall - A recent Gallup poll tells us that Americans Prioritize Deficit Reduction as a Strategy. Asked to choose the "best approach for Congress and the president in dealing with the economy, responses break down as follows: Reduce the deficit/debt - 39%; Increase taxes on the wealthy - 31%; Cut Taxes - 23%; Increasing stimulus spending - 5%.  The article goes on to say: The increased government spending in late 2008/early 2009 to bail out major U.S. corporations and attempt to jump-start the economy concerned many Americans and helped fuel the Tea Party movement, leading to significant Democratic losses in Congress in the midterm elections. That concern is also reflected in Americans' endorsing deficit reduction as an economic strategy over generally popular approaches like tax cuts or tax hikes on the wealthy. OK. Now I'm really confused. Last time I checked, a tax hike on the wealthy was estimated to reduce the deficit over the next 10 years by about $700-800 billion. (See Linda Beale's blog at ataxingmatter for an excellent summary.) So the 39% who favor deficit reduction should favor a tax hike on the wealthy, yes? But do they? Probably not all of them (based on the party line breakdown in the Gallup results).

“Principles and Guidelines for Deficit Reduction”: Joseph Stiglitz Proposes an Alternative Plan - This paper outlines proposals which should reduce the deficit by more than the goal of $4 trillion, increase growth, reduce the deficit/GDP ratio, and put the country on a more sustainable path. It offers an enunciated set of criteria against which we can judge the framework of shared sacrifice proposed by the Fiscal Commission. Key findings: Deficit reduction is not an end in itself, but a means to other objectives. Spending that increases debt but simultaneously (over the long run) increases GDP can lower the debt-to-GDP ratio. Proposals from the Fiscal Commission Chairmen will lead to a less progressive tax system and a more divided society. Deficit reduction goals must not be achieved on the backs of the less politically powerful or sacrifice the national interest to special interest groups. Read Working Paper 5: “Principles and Guidelines for Deficit Reduction

Millennials Tackle 21st Century Challenges With a Blueprint for America's Future - The largest-ever generation of Americans -- the Millennial Generation, born between 1980 and 2000 -- has designed the future that they want to inherit. A movement of young people nationwide convened in communities across the country and online to articulate their values, their priorities, and provide concrete answers to the questions about the American economy, as well as American education, energy policy, foreign policy, our democracy, social justice, and health care. Through the Roosevelt's Campus Network's Think 2040 program, thousands have contributed to a shared vision for 2040 -- A Blueprint for the Millennial America. Released today, The Blueprint paints a vision of an America that invests in jobs and infrastructure, that curbs the federal debt, and that strengthens a flexible social safety "trampoline" to better respond to the 21st century challenges Millennials face.  Read our vision at Roosevelt's Think 2040: Blueprint for the Millennial America

The Truth About the Federal Budget Deficit - Don’t get me wrong. The projected federal budget deficit will be a problem eventually. So it’s prudent to take steps so the federal government doesn’t go broke in the future. Let’s be clear about the long-term deficit problem. It’s not Social Security. Social Security’s shortfall is modest. It arises because so much income has gone to top earners in recent years that the payroll tax covers a smaller percentage of overall income than was planned for. I should know. I used to be a trustee of the Social Security trust fund. The obvious answer is to lift the cap on income subject to Social Security payroll taxes, now $106,800, to about $150,000. Nor is the real problem Medicare. It’s what lies behind Medicare’s projected growth: the explosive growth in medical costs. Attempts to cap Medicare without dealing with the underlying problem of soaring medical costs — as the deficit commission recommends — will cause a firestorm. Sarah Palin’s “death panel” scare was nothing compared to what will happen if Medicare payments are capped yet the underlying drivers of health-care costs aren’t addressed

“A World Upside Down? Deficit Fantasies in the Great Recession”: Thomas Ferguson and Robert Johnson Expose Unnecessary Deficit Hysteria - This paper demonstrates that the current hysteria over deficits in the US is unjustified. Markets for even long term US government debt are strong. Key findings:

  • · Claims that economic growth falls off at anywhere near current US levels of debt to GDP are untrue. Neither is it the case that cutting deficits magically stimulates the economy. And stories about 90% limits are untrue.
  • ·· The CBO August 2010 budget revision implies that the U.S. is less endangered than most analysts claim.
  • · Private oligopolies in health and defense spending, along with the possibility of another banking crisis, are the real threats to the deficit, not entitlements.
  • · Social Security is in essentially no danger for decades and does not require any fix.
  • · It would be easy to stimulate the economy with a program of public investment that would substantially reduce public debts in the long run.

NPR Does an Editorial for Deficit Reduction - NPR again abandoned journalistic standards in pushing deficit reduction by insisting that doing so is courageous. Given the wealth of the people pushing for cuts to Social Security and Medicare, and the fawning attention that these people get from media outlets like NPR and the Washington Post, it is difficult to see what it is courageous about trying to take away benefits for middle class retirees. It also wrongly described the deficit as "spiraling." Of course the deficit is not spiraling. The deficit rose in 2008-2010 because the housing bubble collapsed.  An honest discussion would point out that the deficit has temporarily ballooned because of the incompetence of people who carry through and report on economic policy. In the longer term the deficit is projected to rise, but that is because of the projected explosion of U.S. health care costs. Our per person costs are projected to rise from more than twice the average in countries with longer life expectancies to more than three times as much.

The Idiocy of Starve-the-Beast Theory - A prime reason why we have a budget deficit problem in this country is because Republicans almost universally believe in a nonsensical idea called starve the beast (STB). By this theory, the one and only thing they need to do to be fiscally responsible is to cut taxes. They need not lift a finger to cut spending because it will magically come down, just as a child will reduce her spending if her allowance is cut — the precise analogy used by Ronald Reagan to defend this doctrine in a Feb. 5, 1981, address to the nation. It ought to be obvious from the experience of the George W. Bush administration that cutting taxes has no effect whatsoever even on restraining spending, let alone actually bringing it down. Just to remind people, Bush inherited a budget surplus of 1.3 percent of the gross domestic product from Bill Clinton in fiscal year 2001. The previous year, revenues had been 20.6 percent of GDP, spending had been 18.2 percent, and there had been a budget surplus of 2.4 percent.

Obama Plans 2-Year Federal Pay Freeze - Civilian federal government employees will have their pay frozen for 2011 and 2012, according to a New York Times report: The president’s proposal will effectively wipe out plans for a 1.4 percent across-the-board raise for 2.1 million civilian federal government employees in 2011 and 2012. The military would not be affected. The president has frozen the salaries of his own top White House staff members since taking office 22 months ago. While a pay freeze will make only a small dent in the federal deficit, it represents a symbolic gesture toward public anger over unemployment, the anemic economic recovery and rising national debt By announcing it on Monday, the president effectively will preempt Republicans who have been talking about making such a move once they take over the House and assume more seats in the Senate in January.

Obama proposes pay freeze for federal workers (Reuters) - President Barack Obama proposed a two-year freeze on Monday on the pay of federal workers and vowed to work with Republicans to cut the ballooning U.S. budget deficit. The pay freeze is part of an effort by Obama to push back against Republicans, who have labeled the president and his Democrats big spenders while taking aim at his policies such as an $814 billion stimulus package and healthcare reform. The White House estimates the worker pay freeze would save about $2 billion in the current 2011 fiscal year and $28 billion over five years. It would require congressional approval. Republicans welcomed the pay freeze but it drew silence from most top Democrats. Obama said both Republicans and Democrats faced a challenge "to get federal spending under control and bring down the deficits that have been growing for most of the last decade." But he warned that an overly abrupt reduction in federal spending could harm the fragile economic recovery.

Obama calls for 2-year freeze on federal pay - President Barack Obama on Monday proposed a two-year freeze of the salaries of some 2 million federal workers, trying to seize the deficit-cutting initiative from Republicans with a sudden, dramatic stroke. Though signaling White House concern over record deficits, the freeze would make only a tiny dent in annual deficits or the nation's $14 trillion debt. "Small businesses and families are tightening their belts," Obama said in brief remarks at the White House. "The government should, too." The administration said the plan was designed to save more than $5 billion over the first two years. Obama's move was an attempt to get in front of Republican plans to slash federal pay and the workforce next year, when they will flex more legislative muscle than now. It came a day ahead of Obama's meeting at the White House with both Republicans and Democratic leaders — his first with Republicans since the midterm elections — and two days before the deadline for recommendations by his deficit-reduction commission.

Obama Turns On The Base — Freezes Federal Pay - The public employee unions the biggest institutional backers of the Democratic Party. They write huge checks, and they expect payback. Twelve of the top 21 institutional campaign donors tracked by the Center for Responsive Politics from 1989 to 2010 are labor unions, and almost all of that money goes to Democrats. Just a couple weeks ago, in a meeting behind closed doors with White House aides, Gerald McEntee of the American Federation of State Local and Municipal Employees, had tried to throw down a gauntlet, declaring "We went out on a limb. . . You need to protect us." [Update: The American Federation of Government Employees, the largest federal union, wins the outrage statement game, calling the President's decision both "a superficial panic reaction" and "political scapegoating."] Today, with Obama publically spurning their advances, they barely moderated their responses. AFL-CIO President Richard Trumka released a tart statement: "Today's announcement of a two-year pay freeze for federal workers is bad for the middle class, bad for the economy and bad for business. No one is served by our government participating in a 'race to the bottom' in wages." The head of the National Federation of Federal Employees, William Dougan, declared himself "deeply disappointed."

Show time - THINK there's a pretty good case to be made that, in America at least, deficit cutting should be a clear second priority after support for economic recovery, especially in labour markets. To the extent that deficit cutting is currently on the table, it should be of a medium-term nature, and explicitly paired with measures to support recovery in the short term. But I recognise that others disagree and think it's important to begin tackling America's long-run fiscal issues right now.Against either goal, the government's consolidation efforts to date have been a little pathetic, lacking in focus and effect. First, the Obama administration proposed a three-year freeze in non-defence discretionary spending. Then Congressional Republicans aimed to ban earmarks—not a terrible idea, but not deficit reduction. And now President Obama has announced his intention to freeze federal employee salaries for two years. The salary freeze will save a pittance, will mean a real wage cut for a lot of employees in high cost cities like Washington, and Mr Obama failed to negotiate any new stimulative measures in return for it. Ezra Klein has a good comment on this

President Obama Proposes Reducing Private Sector Employment by 7000 in 2011 and 18,000 in 2012 - Using the economic analysis that his advisers relied upon in designing the stimulus package, this would be the projected effect of President Obama's proposal to freeze the pay of federal employees. According the NYT, this will reduce the amount of money that federal employees have to spend by $2 billion in 2011 and by $5 billion in 2012.Following the multipliers in the Romer-Bernstein paper released by the Obama transition team, we can assume that roughly half of this money would be re-spent. This means that consumption would fall by $1 billion in 2011 and $2.5 billion in 2012. The Romer-Bernstein analysis assumed that an increase in GDP of 1 percent would lead to an increase in employment of 1 million. In this case, GDP will be about 0.007 percent lower in 2011 and about 0.018 percent lower in 2012, implying drops in private sector employment in these years of 7,000 and 18,000 jobs, respectively. The NYT should have noted the impact that the Obama administration's economic team expects to result from this proposed pay freeze.

A Temporary Federal Pay Freeze Might Be Part of an Acceptable Long-Term Deficit Reduction Deal with Republicans - But it makes no sense at all as a preemptive pre-negotiation concession. Larry Mishel: Federal pay cuts: A bad idea for what gain?: In the context of the deficit, Obama will get chump change from freezing federal pay, and will only enlarge the degree to which federal pay lags that of the private sector (a gap of 22%, according to the federal pay agent’s report. See Table 4.) This is another example of the administration’s tendency to bargain with itself rather than Republicans, and in the process reinforces conservative myths, in this case the myth that federal workers are overpaid. Such a policy also ignores the fact that deficit reduction and loss of pay at a time when the unemployment rate remains above 9% will only weaken a too-weak recovery.

Ezra Klein - Three ways to look at Obama's federal pay freeze… You can look at the president's announcement of a two-year pay freeze for federal workers in a few different ways, and they're not mutually exclusive.

  • 1) This is more unwise, unilateral bipartisanship: It's one thing for the president to concede something to Republicans in negotiations. It's a whole other to simply do it himself in return for nothing -- and that includes Republican support.
  • 2) This is a smart way to protect the federal workforce: Republicans don't have the votes or the will to really cut the deficit or undo Obama's policy achievements, but they'll probably get some major symbolic accomplishments in the early months of the next Congress. And the biggest, softest target for the anti-government party is, well, the federal workforce -- and they would've attacked it mercilessly, and conservative Democrats might have helped them.
  • 3) This is bad economics and bad policy: Federal workers buy things and stimulate the economy like anyone else.

Freezing Out Hope - Krugman - After the Democratic “shellacking” in the midterm elections, everyone wondered how President Obama would respond. Would he show what he was made of? Would he stand firm for the values he believes in, even in the face of political adversity? On Monday, we got the answer: he announced a pay freeze for federal workers. This was an announcement that had it all. It was transparently cynical; it was trivial in scale, but misguided in direction; and by making the announcement, Mr. Obama effectively conceded the policy argument to the very people who are seeking — successfully, it seems — to destroy him. So I guess we are, in fact, seeing what Mr. Obama is made of.  The truth is that America’s long-run deficit problem has nothing at all to do with overpaid federal workers. For one thing, those workers aren’t overpaid. Federal salaries are, on average, somewhat less than those of private-sector workers with equivalent qualifications. And, anyway, employee pay is only a small fraction of federal expenses; even cutting the payroll in half would reduce total spending less than 3 percent.

10 Questions for Austan Goolsbee - Austan D. Goolsbee, an economics professor on leave from the University of Chicago, became chairman of President Obama’s Council of Economic Advisers in September. He talked with John Harwood of the Times and CNBC at the White House recently about the state of the economy and Republican criticisms of the administration’s policies. Here is a condensed, edited version of their conversation:

Fed Officials Push For Fiscal Stimulus - Top Federal Reserve officials are pressing lawmakers to pair a long-term plan for deficit reduction with new short-term fiscal stimulus to boost an economy that the central bank admits needs more help than it can provide. Fed Chairman Ben Bernanke has tucked support for a two-part fiscal strategy into speeches, and has pushed it behind the scenes with lawmakers, offering a boost both to deficit hawks and to proponents of spending more or taxing less in the near term.  Fed Vice Chairman Janet Yellen, in a speech on Wednesday, amplified Mr. Bernanke's call. "We need, and I believe there is scope for, an approach to fiscal policy that puts in place a well-timed and credible plan to bring deficits down to sustainable levels over the medium and long terms while also addressing the economy's short-term needs." Ms. Yellen didn't elaborate on the latter. Even if the central bank's controversial bond-buying initiative works as its proponents hope, Fed officials acknowledge it will only do a little to boost growth and bring down unemployment. .

Stimulus Map - The White House’s Web site, which tracks how stimulus money has been spent, recently posted a new map animation by the visualization expert Edward Tufte that shows where Recovery Act grants have been awarded. (Click the photo above to see the full animation.)

Scientists, Tech Advisers Urge Obama to Spend More on Energy R&D - The U.S. government should review and update its energy policies every four years in the way that it does with its military policies, a group of scientists and technology experts who advise President Barack Obama said in a report today.  The administration should also more than triple the amount of money it spends each year on energy-related research, development and deployment – possibly through new fees or taxes on gasoline or electricity, the panel concluded. The findings by the President’s Council of Advisors on Science and Technology represent the latest effort by big names in academia and business to persuade Washington to spend more money on energy innovation. Similar exhortations have come in recent months from Microsoft Corp. founder Bill Gates, the American Enterprise Institute, the Brookings Institution and the Breakthrough Institute.

Hope and Change - The moral: If you want a lasting impact, don’t cut budgets. Cut agencies; my point is that these guys never made a permanent debt in the small stuff, let alone the big stuff. This time around, maybe — just maybe — things will be different, especially if the Tea Party continues to hold some feet to the fire. With that in mind, here are a few bits of advice for the freshman class: Like I said, cut agencies. And cut them in bunches, to dilute opposition. As I’ve said before on this blog, the department of commerce steals from workers and farmers to subsidize businesses; the department of agriculture steals from workers and businesses to subsidize farmers, and the department of labor steals from businesses and farmers to subsidize workers. Eliminate them all at once and every American will lose one friend and two enemies."

Call Americans Regressive - Just Don't Call Them European - Paul Krugman - There’s really no need to parody American politics — politicians parody themselves so well. Take Republican Eric Cantor, a congressman from Virginia who will probably be the majority leader in the House of Representatives in January, and who has rejected the idea of instituting a value-added tax in the United States because it sounds, well, too European. “I don’t think any of us want us to go the direction of the social welfare states around the world,” Mr. Cantor said to The Wall Street Journal.  Does he think Europeans are really that miserable? There is already a backlash in the United States against a new proposal for dealing with the deficit that was put together by a bipartisan group led by Pete Domenici, a former Republican senator, and Alice Rivlin, a Democratic budget expert. The plan suggests a significant value-added tax, which is similar to a sales tax, but is instead collected in stages as goods are produced and moved to the market.

How to cut the deficit without raising taxes -There is a way to cut budget deficits without raising tax rates. "Tax expenditures" are the special features of U.S. income tax law that subsidize mortgage borrowing, health insurance, local government spending and more. Although these subsidies are a form of government spending, they are counted as reduced tax revenue rather than increased government outlays. Yet tax expenditures increase the deficit by hundreds of billions of dollars a year, more than the total cost of all non-defense programs other than Social Security and Medicare.  A critical feature of the proposal recently unveiled by Erskine Bowles and Alan Simpson, the co-chairmen of the president's bipartisan fiscal commission, is to reduce tax expenditures rather than raise tax rates. That would increase revenue without reducing incentives to work, save or invest. Their most extreme suggestion is to eliminate all tax expenditures, raising $1 trillion a year in additional tax revenue, and then use all but $80 billion of that to cut tax rates. I think that devotes too little money to deficit reduction at a time when fiscal deficits are dangerously large.

Democrats’ Dwindling Options on Tax Cuts - Democrats have left themselves in a tough spot on the Bush tax cuts. After delaying the issue until after the election and then being trounced in that election, they find themselves with little leverage.  If they cannot come up with a plan that can win 60 votes in the Senate, which means at least two Republican votes, Republicans can filibuster any bill. All of the tax cuts would then expire on Dec. 31. When the new Republican House majority arrives in January, it will be able to make its first order of business a retroactive tax cut — forcing President Obama and Senate Democrats to choose between a purely Republican plan and an across-the-board tax increase.  So the big question is whether Democratic leaders can come up with any compromise that centrist Democrats and a couple of Republican senators — Scott Brown, who represents liberal Massachusetts? George Voinovich of Ohio, who is retiring? — are willing to accept.

Republicans say they'll block bills until tax cuts are extended - Senate Republicans threatened Wednesday to block virtually all legislation until expiring tax cuts are extended and a bill is passed to fund the federal government, vastly complicating Democratic attempts to leave their own stamp on the final days of the post-election Congress. "While there are other items that might ultimately be worthy of the Senate's attention, we cannot agree to prioritize any matters above the critical issues of funding the government and preventing a job-killing tax hike," all 42 GOP senators wrote in a letter to Majority Leader Harry Reid, D-Nev. The 42 signatures are more than enough to block action on almost any item he wishes to advance.

Reagan Budget Director: GOP Has Abandoned Fiscal Responsibility By Adopting ‘Theology’ Of Tax Cuts - As Congress prepares to take up extension of the Bush tax cuts during its lame duck session, Republican lawmakers have been unanimous in demanding that the cuts for the richest two percent of Americans be extended, claiming they are necessary for economic growth and that tax cuts (miraculously) pay for themselves. While independent economists have shown these arguments to be false, today on CNN’s Fareed Zakaria GPS, President Reagan’s former budget director took on his own party for pushing this faulty logic. David Stockman, who led the all-important Office of Management and Budget under Reagan and was a chief architect of his fiscal policy, criticized today’s GOP for misreading Reagan’s legacy by adopting a “theology” of tax cuts. Stockman has spoken out before, but took perhaps his strongest stance yet against his own party today, saying “I’ll never forgive the Bush administration” for “destroying the last vestige of fiscal responsibility that we had in the Republican Party.” He also broke with Republican orthodoxy on a number of key issues

The Bush Tax Cuts and Economic Growth - The evidence is not favorable. For example, according to this Census report (see table A1), median household income in 2007, adjusted for inflation, was lower than it was in 2000. And as the non-partisan Center on Budget and Policy Priorities reports based upon data from the Bureau of Labor Statistics, employment growth was particularly weak, “with employment and wage and salary growth … lower than in any previous post-World War II expansion. Employment grew at an average annual rate of only 0.9 percent from November 2001 to September 2007, as compared with an average of 2.5 percent for the comparable periods of other post-World War II expansions. In addition, real wages and salaries grew at a 1.8 percent average annual rate in the 2001-2007 expansion, as compared with a 3.8 percent average annual rate for the comparable periods of other post-World War II expansions.” Thus, there is little evidence to support that the Bush tax cuts had a significant effect on growth.  In addition, contrary to the argument that the tax cuts would pay for themselves being made at the time the tax cuts were enacted, the deficit ballooned as a result of the tax cuts.

Can We Do the Non-Crazy Thing with the Bush Tax Cuts? - I am no longer going to “let the perfect be the enemy of the good.”  I am no longer going to try to talk people into seeing that the “right” thing to do with the Bush tax cuts would be to let them all expire.  (The even “righter” thing would have been to never have enacted them in the first place.)  I am just going to urge the policymakers to avoid doing something with the Bush tax cuts that seems totally contradictory to the fiscal policy goals–both shorter-term and longer-term–that they claim to have.  In other words, let’s try to avoid doing something with the Bush tax cuts that seems totally crazy given what we say our fiscal policy goals are for both adequately supporting the (still fragile) short-term economy and better encouraging economic growth by reducing the deficit over the longer term. The fiscal policymaking in this town seems totally schizophrenic right now.  What a juxtaposition to have President Obama’s deficit-reduction commission release its final report while the Administration “negotiates” with Congress on whether all of the Bush tax cuts, or just most of them, should be permanently extended (and deficit financed).  The media has been reporting that whether the bulk of the Bush tax cuts will be extended or not is not the issue–it is whether the upper-bracket ones benefitting only the rich will be included as well, and what constitutes “rich.”

Increasing taxes on the rich - Sometimes a few letters to the editor can restore one's faith in the sensibleness of fellow Americans.  I particularly like Jerry Trupin's Nov. 25, 2010 New York Times letter responding to Nicholas Kristof's article on hedge funds.  In A Hedge Fund Republic, New York Times, Nov. 18, 2010, Kristof noted that the US has long surpassed familiar "banana republics" in rampant inequality, with plutocrats in the top 1%  controlling 24% of American income in 2007.  In that context, it simply doesn't make economic sense, Kristof says, for Congress to plan to give $700 billion in tax cuts to the wealthiest amongst us for the next ten years and yet not be willing to extend unemployment benefits for the long-term jobless as a result of this recession.  The richest 0.1% of taxpayers would get an average tax cut of $370,000--no way, Kristof says, that they will hire enough new groundskeepers and garage maintenance personnel to make that a good way to jumpstart the economy,  compared to getting money in the hands of those at the bottom. Tax cuts didn't work to create jobs in the Bush II regime, and they're not going to work now.  Getting money into the hands of the poor and middle class--especially the unemployed--does. 

Deficit Reduction. Tax Reform, and Budget Baselines -How can it be that one commentator can blast the tax reform plan proposed a few weeks by the co-chairs of President Obama’s fiscal commission as a tax cut for the rich while another, looking at exactly the same proposal, sees it as a tax increase?  It’s all about budget baselines. There is nothing more boring, even to budget wonks, but the reference point against which you measure tax changes is critical to how you see those proposals. It doesn’t help that in today’s fiscal debate there are at least three different baselines floating around. Unfortunately that makes it easy for politicians and their partisans to pick the one that helps advance whatever argument they want to make. And make no mistake: This is all about politics, not merit.  Do you want to compare tax changes to the law that applied in 2009? Or would you prefer to compare those revisions to the Tax Code of a decade ago? Or how about measuring it against your best guess of what the law will be five years from now?

Scoring Tax Reform: Budget Baselines Don’t Really Matter - My TPC colleague Howard Gleckman wrote the other day about the confusion caused by the multiple baselines advocates use to measure the effects of tax proposals. But baselines don’t really matter. What’s important is not where we start or how things change but where we end up.  Baselines are largely political. Partisans use whichever version strengthens their ability to bludgeon opponents in an essentially Inside-the-Beltway game. Voters, thoroughly confused by this arcane and complex scorekeeping, can’t figure out who’s telling the truth.  Because a baseline does give you a starting place from which to calculate change, it helps measure the effects of tax proposals. You can see that a new tax raises revenues compared to some prior year, or that it raises taxes for high-earners relative to what they paid at some time in the past. But those are often the wrong questions.  The trouble is that these starting points are entirely arbitrary. There is nothing inherently “right” or “wrong” about the tax law as it was in 2000, or in 2003, or this year. Nothing makes any of them more or less worthy as a basis for measurement.

The Kenny Rogers Theory of the Bush Tax Cuts - Did the Democrats make a tactical mistake by not being tougher on the Bush tax cuts for the affluent? Absolutely. High-income households have received by far the largest pre-tax raises of any group in recent years. They have also had their tax rates drop by far more. And the country is facing a huge budget deficit. Beyond these economic reasons, there are good political arguments too: Most of the country favors the expiration of the Bush tax cuts on households making more than $250,000 a year. But should the Democrats start getting tough now? That’s a very different question. Several other bloggers argue the answer is yes, and their arguments are worth reading. But I want to lay out, in more detail than I did in my recent column, what a hard line position for the Democrats would probably lead to. Once the full chain of events is clear, I’m left thinking the Democrats waited too long and could well compound their earlier mistakes by starting to get tough now.

Who Needs a Tax Cut? - Leaving aside the politics of the Bush tax cuts for a moment, let’s return to the economics. Below you’ll see charts showing what has happened both to pretax income for different groups and to total federal tax rates since 1980. Here’s the income data, courtesy of the Census Bureau (the median) and the economists Emmanuel Saez and Thomas Piketty (the high end). All the numbers here are adjusted for inflation: The chart shows the change in the various groups’ pretax income since 1980. A household that has been at the 99.99th percentile of the distribution over this period — that is, making more money than 9,998 out of 10,000 other households and less money than one out of 10,000 — has more than quadrupled its pretax income. Today, this household is making $9.1 million. Income for a household at the median has risen only 13 percent since 1980.  And what about tax rates? They have aggravated the trends in pretax incomes. Not only have affluent households received the largest pretax raises, but they’ve also benefited from a much larger cut in their tax rates.

Being Happy in a Sad Place - In these quantitatively grim times, with unemployment high and growth low, the Federal Reserve Bank of San Francisco has made something of a (small) cottage industry of examining existential questions, not the least what makes us happy, sad, and perhaps suicidal. So the San Francisco Fed released a working paper in September in which three economists argue that the rich are happier than the less rich, that wealthy nations have higher levels of satisfaction than less wealthy ones, and that as national economies grow, citizens tend to become happier. This happiness trend knows no boundary of nation and culture — happiness is related to per capita gross domestic product in 69 nations. And fast-growing societies tend to be happier than stagnant nations, even if the latter have a higher standard of living.

Tax Hikes, Status Competitiveness, and Social Stratification - Yves Smith - Taxes on top earners are the lowest they’ve been in nearly three generations, yet their complaints about the prospect of an increase to a level that is still awfully low by recent historical standards is remarkable. In my youth, if someone complained much about their taxes, it was taken as a sign that they either had no class or were under some financial stress. Some of this caviling no doubt reflects the degree to which the plutocrats are firmly in control of the political process. They can openly lobby for blantanly self-serving policies, and adopt a non-negotiable posture. But something else is afoot too, and these bitter protests seem to be another side effect of social stratification. As we’ve pointed out, highly unequal societies are unhealthy for their members, even members of the highest strata. Not only do they score worse on all sorts of indicators of social well-being, from crime rates to teenage births to average lifespan, but they exert a toll even on the rich. Not only do the rich have less fun, but a number of studies have found that income inequality lowers the life expectancy even of the rich.  Micheal Prowse explains in the Financial Times:

Taxing the Rich? It’s All Relative - IT’S not just Tea Party activists who are angry about taxes. A much larger and more diverse group appears outraged that Congress is considering allowing the Bush tax cuts to expire at year-end for families earning more than $250,000 and for individuals earning more than $200,000.  A financially prosperous friend of mine is a case in point. He watches a lot of angry talking heads on cable news, and he recently buttonholed me to ask whether I had any idea that our taxes were about to rise. Did I know that the president was not only planning to allow the Bush tax cuts to expire for relatively high-income people like us, but that he was also thinking of raising the ceiling for the payroll tax? Did I know that we might also face increases in Medicare and self-employment tax rates? And that taxes in New York State could go up, too? His face grew redder as he listed each outrage.  I said I knew all about the scheduled expiration of the Bush tax cuts but hadn’t heard much about the other proposals. When he expressed shock that I hadn’t, I tried to explain why I didn’t think it made sense to fret.

Bernie Sanders: Worth Listening To - A nice rant on the tax system. Unfortunately Bernie gets this one wrong.  Taxing rich people doesn't matter if the rich people can steal.  Tax 'em and they'll just steal more. The solution is to start stuffing those millionaires and billionaires who cheated people in prison where they make nothing and get to take some of the boffing personally they have served up on everyone else. Start calling for that Bernie and I'll support you.

Bush tax cuts: Past and future - EPI has produced extensive research and commentary about the Bush-era tax cuts, the impact they have had and the likely outcome of extending some or all of them. Attached are some highlights

Return of Estate Tax Looms as Final Impediment to Extending Bush Tax Cuts - Ending the uncertainty over extending Bush-era tax cuts may rest on resolving a decade-long debate over death and taxes. The federal levy on estates is set to increase the most of all as tax cuts expire Jan. 1, jumping from zero to 55 percent for fortunes worth more than $1 million at death. President Barack Obama and Democrats in Congress barely mention it as they spar with Republicans over whether to keep income-tax reductions for top earners. A new tax on multimillion-dollar estates may emerge as the final hurdle to a deal that preserves most or all of former President George W. Bush’s tax cuts, analysts said. Congress has unsuccessfully sought at least a half-dozen times to resolve the issue since 2000, including an abandoned effort last December to prevent the estate tax’s expiration.

Lobbying on the Estate Tax: Cui Bono? - When you think about it, the connection is obvious, but I confess I was surprised by this new report by Tim Carney and Dick Patten on who's lobbying for the estate tax.  The report was paid for by a small-business group that opposes the tax, and it outlines who's been opposing them behind the scenes. Answer: the life insurance industry.  In the halls of Congress.  With bushels of money.

  • The life-insurance lobby spent $10 million a month lobbying in the first half of 2010. During this same period, only three industries - pharmaceuticals, electric utilities, and oil and gas - spent more over the same period.
  • The leader of the life-insurance lobby, the American Council of Life Insurers (ACLI), spent $2.32 million in lobbying in 2010's second quarter. Only 10 industries spent more.
  • The life-insurance industry exercises bi-partisan influence on the estate tax issue. Through most of 2010, the two leading life-insurance lobbyists - and thus the two biggest advocates for the death tax - were a former Republican governor and the wife of a Democratic Senator.

The Mortgage Deduction Should Be Done Away With--But It Won't - Having recently entered into homeownership, I am now in the unhappy state of having to advocate against my own interest. As someone whose freelance expenses make it worthwhile to itemize, I plan to take the mortgage interest tax deduction until they phase the damn thing out, or I pay off the house, whichever comes first.  But as an economics journalist, I retain my deep hatred for the thing.   The idea behind the tax deduction is . . . well, actually, scratch that.  There is no idea behind the tax deduction.  The reason that we have a special deduction for mortgage interest is not that politicians sat down and calmly, reasonably, worked out a way to reach certain social goals they thought were desirable.  The mortgage interest deduction is an artifact of changes to the tax code in the 1980s.

The Unemployed Held Hostage, Again - It is hard to believe, as the holidays approach yet again amid economic hard times, but Congress looks as if it may let federal unemployment benefits lapse for the fourth time this year.  Lame duck lawmakers will have only one day when they return to work on Monday to renew the expiring benefits. If they don’t, two million people will be cut off in December alone. This lack of regard for working Americans is shocking. Last summer, benefits were blocked for 51 days, as senators in both parties focused on preserving tax breaks for wealthy money managers and other affluent constituents. This time, tax cuts for the rich are bound to drive and distort the debate again. Republicans and Democrats will almost certainly link the renewal of jobless benefits to an extension of the high-end Bush-era tax cuts. That would be a travesty. There is no good argument for letting jobless benefits expire, or for extending those cuts.

Republicans' opposition to extending unemployment benefits makes no sense - Washington seems determined to make this holiday season a celebration of austerity. On Monday, President Obama proposed a two-year pay freeze for nonuniformed federal employees. On Friday, the blue-ribbon deficit commission will vote on its final proposal, slashing trillions from the federal budget. And as of today, the federal extension of unemployment insurance benefits has expired. About 800,000 jobless workers will get dropped from the rolls by Dec. 4, and about 2 million by Christmas.  So they must be, Republicans say. Why? They have their reasons. But they're more rooted in politics than economics, because the economics of the unemployment benefits are pretty straightforward: They cost something, but they help the recovery along. Republicans' first line of argument against extending the benefits is that they're not paid for.

Obama Seeking Aid for Jobless in Deal on Tax Cuts - The Obama administration is holding out for an extension of unemployment assistance and of a variety of expiring tax breaks for low-wage and middle-income workers as part of a deal with Congressional Republicans to extend all the Bush-era tax cuts.  In a symbolic nod to President Obama’s pledge to let the tax cuts on upper-income brackets expire on Dec. 31, as scheduled by law, the House on Thursday approved a bill to continue the lower tax rates enacted during the Bush administration for Americans they described as “middle class.” The vote was 234 to 188, with three Republicans joining 231 Democrats in favor; 20 Democrats and 168 Republicans were opposed.  The bill, however, has no chance of passage in the Senate, where even some Democrats say the tax cuts should be extended for everyone, at least temporarily, given the continued weakness in the economy.

Lacking All Conviction - Krugman - Mark Thoma directs us to an appalling story — apparently Obama held a meeting after the midterm to debate whether our unemployment problem is cyclical or structural. What I want to know is, who was arguing for structural? I find it hard to think of anyone I know in the administration’s economic team who would make that case, who would deny that the bulk of the rise in unemployment since 2007 is cyclical. And as I and others have been trying to point out, none of the signatures of structural unemployment are visible: there are no large groups of workers with rising wages, there are no large parts of the labor force at full employment, there are no full-employment states aside from Nebraska and the Dakotas, inflation is falling, not rising. More generally, I can’t think of any Democratic-leaning economists who think the problem is largely structural. No wonder we’re in such trouble. Obama must gravitate instinctively to people who give him bad economic advice...

The Showdown On Tax Cuts for the Rich - The President met with Republican leaders at the White House this morning to talk about whether the Bush tax cuts should be extended to top taxpayers, as Republicans want. No decision has been reached, but this is the first test of the President’s resolve with the new Congress — and he should be tough as nails. The economics and politics both dictate it. Taxpayers in the top 1 percent don’t need it (they are now getting almost a quarter of all national income, the highest percent since 1928). They don’t deserve it (they got the lion’s share of the benefits of the 2001 and 2003 Bush tax cuts, and have had no reason to expect a continuation of their windfall).  They won’t spend it to stimulate the economy (top earners save a much higher proportion of their income than the middle class).  And giving it to them blows a giant hole in the budget (the Joint Tax Committee estimates the cost of extending the Bush tax cuts for the top 1 percent to be $61 billion in 2011 alone.)

Barack Obama fields tax-talk team -  President Barack Obama emerged from his two-hour bipartisan summit Tuesday, saying he was encouraged by the “extremely civil” atmosphere — and immediately assigned two cabinet members to hammer out a deal on Bush-era tax cuts.  "The American people didn't vote for gridlock," Obama said after the much-anticipated meeting, which went on longer than expected. “They will hold all of us — and I mean all of us — accountable,” said Obama, who told congressional leaders during the meeting that he hasn’t done enough to reach out to Republicans in his first two years in office. The president, saying he wants a deal before the cuts expire at year’s end, delegated Treasury Secretary Tim Geithner and Office of Management and Budget chief Jack Lew to immediately begin negotiations with representatives from both parties to reach an agreement.

Obama, GOP in quiet talks to extend tax cuts The White House and congressional Republicans have begun working behind the scenes toward a broad deal that would prevent taxes from going up for virtually every U.S. family and authorize billions of dollars in fresh spending to bolster the economy. Negotiations have accelerated in recent days as Congress has confronted deadlines for extending a series of tax cuts that expire at the end of the month, renewing emergency jobless benefits and keeping the government funded into next year. The talks mark the dawn of a new era on Capitol Hill, with resurgent Republicans holding far more leverage and commanding a more prominent role in crafting legislation. The private discussions, which parallel a more public set of talks, have left many Democrats grousing that President Obama is being too quick to accommodate his adversaries, who are still a month away from taking control of the House and expanding their presence in the Senate.

Obama, GOP in quiet talks to extend tax cuts - The White House and congressional Republicans have begun working behind the scenes toward a broad deal that would prevent taxes from going up for virtually every U.S. family and authorize billions of dollars in fresh spending to bolster the economy.  Negotiations have accelerated in recent days as Congress has confronted deadlines for extending a series of tax cuts that expire at the end of the month, renewing emergency jobless benefits and keeping the government funded into next year.  The talks mark the dawn of a new era on Capitol Hill, with resurgent Republicans holding far more leverage and commanding a more prominent role in crafting legislation. The private discussions, which parallel a more public set of talks, have left many Democrats grousing that President Obama is being too quick to accommodate his adversaries, who are still a month away from taking control of the House and expanding their presence in the Senate.

The Hill: "Senate rejects million-dollar tax-cut compromise in Saturday session" - Or more clearly, all Senate Republicans plus one Democrat reject a tax cut for incomes below one million dollars. From The Hill: Republicans had held firm in recent weeks that the tax cuts — designed to benefit the wealthiest Americans — should be permanently extended as a whole. Democrats had argued that only the cuts for the middle class should be extended, also blasting Republicans for failing to propose any spending cuts or revenue increases to pay for all of the cuts.

Delaying Tax Vote Could Crash Stock Market - Failure by Congress to extend the Bush tax cuts, especially locking in the 15 percent capital gains tax rate, will spark a stock market sell off starting December 15 as investors move to lock in gains at a lower rate than the 20 percent it would jump to next year, warn analysts. [See who gets the most money from the financial industry.] While it is unclear how bad the sell off could be, it could wipe out the year's gains, they warn. "Capital gains tax rate will increase from 15 to 20 percent if the tax cuts are not extended. The last time the capital gains tax rate increased--on Jan. 1, 1987 from 20 to 28 percent--investors realized their gains at the lower tax rate," said Daniel Clifton at a Washington partner at Strategas Research Partners. "We would expect a similar effect this time around as investors see the tax rate going up and choose to realize their gains and incur the 15 percent tax."

Signs Point to Extending Bush Tax Cuts Temporarily - Republicans and Democrats Wednesday sat down to negotiate a compromise on extending Bush-era income tax cuts—an effort that could be the first step toward a deal this month that many strategists in both parties believe will temporarily extend current tax rates for all income levels. No decisions were reported from the first meeting of the small group that was appointed by President Barack Obama and leaders of both parties in the House and Senate. Still, White House officials expressed optimism about prospects for a bipartisan compromise. "We're in the midst of productive discussions and negotiations around what I think everybody agrees is an issue that has to get done in taxes," said White House spokesman Robert Gibbs. "I think we can get some substantive agreements."

What About the Obama Tax Cuts? - Below are the tax cuts that the Republican plans omit. They’ll all expire at the end of December unless Congress extends them.

  • Child Tax Credit expansion. The 2009 Recovery Act allowed low-income working families to count more of their earnings in calculating the value of their Child Tax Credit. If Congress doesn’t extend this provision, 10.7 million families will lose part or all of their child credit. For example, a single mother with two children who works full time, year round at the minimum wage and earns around $14,000 would see her child credit plummet by nearly $1,500, from $1,725 to $263 (see graph).
  • EITC improvements for married couples and larger families. Some low-income working couples receive a smaller Earned Income Tax Credit if they marry than if they had remained single. The Recovery Act included marriage penalty relief that reduced this financial penalty by allowing married couples to receive somewhat larger EITC benefits. Families with nearly 5 million adults and more than 8 million children will be affected if this change expires.
  • The Recovery Act also expanded EITC benefits for families with three or more children. Prior to 2009, these families — which make up a disproportionate share of all low-income working families — received the same EITC benefits as families with two children. The Recovery Act, by boosting EITC benefits for larger families, strengthened work incentives for more than 3 million low-income working families with children.
  • Making Work Pay. Created in the Recovery Act, this tax credit reduces the amount the federal government withholds from the paychecks of more than 90 percent of working Americans; it’s worth up to $800 per couple. If Congress doesn’t extend it, working families would see their paychecks go down starting on January 1. For example, a nurse and a machinist who have two children and earn a combined $65,000 would have an extra $800 withheld from their paychecks over the course of 2011. (The tax bill that the House passed yesterday didn’t extend Making Work Pay, but it did extend the child credit and EITC improvements.)

A Proposal for Money Market Fund Reform - There were two major areas of financial regulation that Dodd-Frank left rather conspicuously unaddressed: the GSEs, and money market funds (MMFs). The reason they omitted GSE reform is obvious: GSEs are a fiercely partisan issue, and including GSE reform could easily have — and, I think, almost certainly would have — killed the entire financial reform package. There were two reasons the administration omitted MMF reform: one, the SEC was already in the process of adopting substantial new regulations for MMFs, and two, there was nothing approaching a consensus on MMF reform. With other areas of financial reform, there was generally broad consensus on what needed to be done: an FDIC-like resolution authority, a systemic risk regulator, central clearing for standardized derivatives, a CFPB, etc. But with MMFs, no one really knew what to do yet (myself included). So the administration directed the President's Working Group on Financial Markets (PWG), which consists of the Treasury Secretary, and the Chairmen of the Fed, SEC, and CFTC, to prepare a report on MMF reform options. I give the administration credit for acknowledging that they simply didn't know what to do about MMFs yet.

Credit Default Swap Volumes Fall Before Pending Rule Changes -  Yves Smith - From Bloomberg: Trading in credit-default swaps, Wall Street’s fastest-growing business before the credit crisis, has tumbled 40 to 60 percent from three years ago as banks prepare for new regulation of derivatives.  On the one hand, I’m being proven somewhat wrong in my dismissive views of the impact of Dodd-Frank. Credit default swaps, a product I’ve viewed as essential to rein in (it’s a fee machine for Wall Street that has produced clear harm and has almost no socially productive uses) have fallen markedly in volume prior to expected rule changes this summer. On the other hand, Wall Street is hammering out details (code for watering the legislation down by wrangling for favorable interpretation) and volumes are expected to partially rebound once this period of uncertainty has passed.

A Client Is Not a Counterparty - Jesse Eisinger put up an interesting piece yesterday at DealBook, reporting on a series of transactions conducted by Goldman Sachs in 2008 and 2010. He uses it to illustrate what he and many other people seem to view as an insoluble dilemma: how to distinguish between market-making by investment banks and proprietary trading. The distinction is an important one, as Mr. Eisinger explains, because the so-called Volcker Rule in the new Dodd-Frank financial regulation regime severely limits investment banks' proprietary trading and investment activities....First of all, we need to tease apart the various different roles Goldman Sachs played in this little drama. The fact that one firm played multiple roles does not prevent us from distinguishing among them, or pointing out the important differences each has.

The Economics and Politics of Elizabeth Warren - Simon Johnson - Congressional Republicans are apparently intent on a big showdown with Elizabeth Warren, who is currently building up the new Consumer Financial Protection Bureau (CFPB). This is very good news for the White House, if they use this opportunity wisely. Some Republicans seem to think that Ms. Warren is about “big government” or “intrusive regulation”.  But this is not the case – Elizabeth Warren’s approach is much more appealing and already popular with almost everyone on right and left: Transparency. Look carefully at Ms. Warren’s September speech to the Financial Services Roundtable and think about how this plays as a broader political message. Her political principle is clear and completely compelling: “…the best way, in my view, to strengthen those middle class families is to find solutions that are deep and lasting, that strengthen the markets, and that will create a robust, competitive consumer credit industry that works for families, not against them.” Her economic approach is also right on target – the market should work for the consumer.

Fed’s Bullard Concerned Over Consumer Agency Funding - There are major problems with the way Congress has decided to fund a new consumer protection agency, the head of the Federal Reserve Bank of St. Louis said Monday. James Bullard, president of the St. Louis Fed, noted the newly created Consumer Financial Protection Bureau will be housed within the Fed, but won’t be under its control. “The Fed’s only engagement with this independent bureau is to fund it” as it undertakes a very large mission that will see it watch over a wide swath of the financial system, the official said. Bullard said “the amount of money allocated in the law is not based on any careful assessment of what the needs of the Bureau will be as it attempts to fulfill the mandate of the Congress with regard to consumer protection.” Bullard also noted there is no mechanism for changing the agency’s funding level “should market conditions change, or if the needs of the Bureau change.”

The Political Economy of CFPB Funding - Federal Reserve Bank of St. Louis President James Bullard is kvetching about the CFPB's funding mechanism.  It seems that he doesn't like the CFPB having a claim on 12% of the Fed's budget.  That money might get used for effective consumer financial protection or something crazy like that, instead of for bailing out parts of the financial system.  CFPB funding isn't a poorly thought-through piece of legislation; a lot of thought went into this particular issue.  The concern that Congress and CFPB advocates had was that if CFPB were subject to the regular appropriations process, it would be too easy for CFPB to be strangled in the appropriations process, which is one of the least transparent parts of Congressional activity, and therefore the ideal place to ice an agency.  The whole point of giving the CFPB a percentage of the Fed's overall budget was to ensure that the CFPB will always have the financial wherewithall to be effective--consumer financial protection shouldn't be a politically dependent matter.  Congress acted deliberately and intentionally to bind its own hands in the future when political winds change. 

Elizabeth Warren: Consumer Bureau Must Fight For Survival - Elizabeth Warren pressed consumer advocates to fight on behalf of the newly created consumer protection bureaus she's heading up, warning that it is not yet established like popular cousins such as the Federal Aviation Administration, Food and Drug Administration or Consumer Product Safety Commission.  "When was the last time you heard a friend or colleague--Republican, Democrat, libertarian, or vegetarian--complain that the Federal Aviation Administration should do less to prevent plane crashes?" she said.  The Consumer Financial Protection Bureau, she said, has to fight its way to that solid position. "American families have the agency they need, but they may have to fight for its survival."

Is the Recession Over, or is Extend and Pretend More Pervasive? - Yves Smith - A hedge fund manager and I had a flurry of e-mails over the weekend, prompted by various “The recession is over” declarations, particularly one lauding Timothy Geithner’s skills as a forecaster. I think our shared view is that to call this recession over is tantamount to calling an operation successful when the patient is tethered to an oxygen tank and needs 24 hour nursing care. In other words, the designation may be technically correct, but also shows how low the threshold of “success” is considered to be. One of his comments: It’s weird, but even here in the heart of our wealthy suburb, and people APPEAR to be as affluent as ever, but scratch beneath the surface, and many are experiencing money strains. It’s like we just continue extend and pretend and then people use the recurrence of bad habits as a sign that Geithner was right. It’s nauseating. And somehow 10% unemployment doesn’t matter any more!!??? I also know of cases exactly like the situation he alludes to...

Report on the Troubled Asset Relief Program—November 2010 - CBO Director's Blog Today CBO released the fourth of its statutory reports on transactions undertaken as part of the Troubled Asset Relief Program (TARP)—the program established in October 2008 to enable the Department of the Treasury to promote stability in financial markets through the purchase and guarantee of “troubled assets.” The report discusses CBO’s estimate of the costs of transactions completed, outstanding, and anticipated under the TARP as of November 18, 2010. The report also provides a comparison of CBO’s estimate with that published by the Office and Management and Budget (OMB) in October. CBO estimates that the cost to the federal government of the TARP’s transactions (also referred to as the subsidy cost), including grants that have not been made yet for mortgage programs, will amount to $25 billion. That cost stems largely from assistance to American International Group (AIG), aid to the automotive industry, and grant programs aimed at avoiding mortgage foreclosures: CBO estimates a cost of $45 billion for providing those three types of assistance. Other transactions will, taken together, yield a net gain of $20 billion to the federal government, CBO estimates.

TARP expected to cost U.S. only $25 billion, CBO says - The Troubled Asset Relief Program, which was widely reviled as a $700 billion bailout for Wall Street titans, is now expected to cost the federal government a mere $25 billion - the equivalent of less than six months of emergency jobless benefits.  A new report released Monday by the nonpartisan Congressional Budget Office found that the cost of the program, known as TARP, has plummeted since its passage in October 2008, when policymakers thought that the world stood on the brink of an economic meltdown.

Crisis interventions: TARP on the instalment plan - THE Congressional Budget Office has once again revised down the estimated budget cost of TARP—the bank rescue bill passed in 2008. The government is now expected to get back all but $25 billion of the money dispensed under the bill. As of August, the total loss was anticipated to be around $66 billion, and back in March the cost was pegged at $109 billion. The revision has prompted another round of TARP praise. Ezra Klein writes this morning that, "There's an increasingly strong case that TARP may have been the most cost-effective economic policy ever passed". Jon Chait muses that, "TARP may end up going down as one of the most successful policy initiatives in American history". This is bad news. TARP was a necessity; the availability of a pool of funds to help recapitalise the banking system—and the message Congress sent in passing the measure—calmed markets that were on the verge of a meltdown. But to cite the dollar cost of the bill and declare it a roaring success is to totally misunderstand what TARP actually did.

Pro Publica and bailout lists - Barry Ritholtz at The Big Picture points to Pro Publica regarding Tarp and other bailout monies: Pro Publica has been maintaining a list of bailout recipients, updating the amount lent versus what was repaid. So far,  938 Recipients have had $607,822,512,238 dollars committed to them, with $553,918,968,267 disbursed. Of that $554b disbursed, less than half — $220,782,546,084 — has been returned. Whenever you hear pronunciations of how much money the TARP is making, check back and look at this list. It shows the TARP is deeply underwater.

Wall Street Owes its Survival to the Fed - For a brief, surreal moment, the prevailing narrative in Washington was that the 2008-09 bail-outs were not really so bad. In September, Treasury secretary Tim Geithner called the government’s troubled asset relief programme “one of the most effective emergency programmes in financial history”, claiming that the final cost to taxpayers would be less than $50bn. But Wednesday’s document dump from the Federal Reserve – a congressionally ordered “WikiLeak moment” – puts this bargain-bail-out patter in a new perspective. The post-Lehman rescues were far broader than Tarp, and far riskier for taxpayers, even if the alternative of a systemic meltdown would have been worse.  The Federal Reserve’s revelations underscore the might of unelected central bankers. The Treasury’s Tarp rescue fund, at $700bn, was considered so audacious that Congress at first refused to authorise it. But the Fed doled out no less than $3,300bn in loans to banks and companies without a congressional say-so.  What’s more, the Fed frequently ignored Walter Bagehot’s dictum that central banks should provide liquidity freely, but against good collateral and at high interest rates. The Fed’s borrowers included institutions such as Lehman and Citigroup, which were insolvent rather than illiquid. It accepted collateral that included toxic asset-backed securities, and it charged interest rates that were more palliative than punitive. Moreover, while the Fed took all these risks with US taxpayers’ money, a large chunk of its emergency lending went to foreign banks.

Jamie Dimon: Becoming Too Big To Save – Creating Fiscal Disaster - Simon Johnson - Roger Lowenstein profiles Jamie Dimon, head of JP Morgan Chase.  The piece, titled “Jamie Dimon: America’s Least-Hated Banker,” is generally sympathetic, but in every significant detail it confirms that Mr. Dimon is now – without question – our most dangerous banker. Mr. Dimon is not dangerous because he is in any narrow sense incompetent.  On the contrary, Mr. Dimon is very good at getting what he wants.  And now he wants to run a bigger, more interconnected, and more global bank that – if it were to fail – would cause great chaos around the world.  The problem with very big banks is not that they are “too big to fail,” in the sense that it is physically impossible for them to fail.  It is that they are so large and therefore so connected with each other — and with all aspects of how the modern economy operates — that the failure of even one such bank would cause great damage throughout the world. Lehman Brothers had a balance sheet of around $600 billion when it failed.  Its collapse helped trigger the worst financial crisis and deepest recession since the 1930s.  Imagine what would happen if JP Morgan Chase – even at today’s scale – were allowed to go bankrupt.

Too Big to Succeed - Thomas Hoenig, president of KC Fed - There is an old saying: lend a business $1,000 and you own it; lend it $1 million and it owns you. This latest crisis confirms that the economic influence of the largest financial institutions is so great that their chief executives cannot manage them, nor can their regulators provide adequate oversight.  Last summer, Congress passed a law to reform our financial system. It offers the promise that in the future there will be no taxpayer-financed bailouts of investors or creditors. However, after this round of bailouts, the five largest financial institutions are 20 percent larger than they were before the crisis. They control $8.6 trillion in financial assets — the equivalent of nearly 60 percent of gross domestic product. Like it or not, these firms remain too big to fail.  How is it possible that post-crisis legislation leaves large financial institutions still in control of our country’s economic destiny? One answer is that they have even greater political influence than they had before the crisis. During the past decade, the four largest financial firms spent tens of millions of dollars on lobbying. A member of Congress from the Midwest reluctantly confirmed for me that any candidate who runs for national office must go to New York City, home of the big banks, to raise money.

How The Bailouts Hurt Small Banks and Benefited Big Finance - I hope when Federal Reserve Bank of Kansas City President Thomas Hoenig is explaining to Republicans why they should be worried unemployment might come down too quickly, he takes a (very long) break from that argument to discuss this New York Times editorial, Too Big to Succeed. I still largely agree with the opinions he writes there, that the financial system is too concentrated and too top-heavy, leaving Too Big To Fail on the table, and this has been exacerbated by the bailouts. Matt Yglesias and others have pointed out that Hoenig “is an employee of a coalition of a medium-sized banks who don’t want competition.” That’s a fair point, but it is important to remember how much the bailouts were primarily a mechanism that benefitted the largest institutions at the expense of smaller ones. Community and medium-sized banks have a right to be pissed as a result of the recent bailouts.  They also should fear that future bailouts, when they come if Dodd-Frank and resolution authority doesn’t work, will wipe them out entirely.

Hoenig Gets It Right (But For The Wrong Reasons) - This is an interesting opinion piece: THE world has experienced a severe financial crisis and economic recession. The Treasury and the Federal Reserve took actions that saved businesses and jobs and may very well have saved the economy itself from ruin.  It did?  Does covering up fraud make it go away?  Does denying debt and insolvency make you less insolvent?  No, it in fact makes you more insolvent, since the new "money" you cover it up with is created via debt, and that debt comes with an interest cost.   Therefore, taking more debt to cover an incipient default makes you more insolvent, not less. Still, the public seems ungrateful, expressing anger at these institutions that saved the day. Why?  Americans are angry in part because they sense that the government was as much a cause of the crisis as its cure. Americans are angry because:

  • The banks knew they were making bad loans and didn't care.  The people who took those bad loans went under.  The lenders who made them got bailed out, which effectively means that the people got billed twice - first they got bilked, then they were assessed to pay for the losses that the robber created.  That's backwards - the robber should be fined (e.g. his yacht and home in the Hamptons confiscated) and jailed for his conduct, not bailed out.

  • The fraud hasn't stopped.  Not only were the robbers not punished they continue to steal.  Foreclosuregate anyone?  Foreclosing without the legal paperwork, telling people to intentionally default to get a modification and then refusing it, 150,000+ admitted cases of perjurous documents filed with state courts, the list goes on and on.

Big Banks as Bootleggers -- Here is a post on how the actions of the Fed and Treasury in the last few years have benefited the large banks and eroded the advantages of the smaller banks. Wouldn’t surprise me–it’s a perfect bootleggers and baptists scenario. But it’s not just that politics make strange bedfellows (government actions that supposedly reduce systemic risk are favored by many for altruistic reasons and the banks like it because it increases their profits. The nature of the intervention is what is key–it is always skewed toward cronies–the political powerful. My version take on Bruce Yandle’s deep idea is here.

Debunking the Myth That Bigger Banks are More Efficient and Necessary - Yves Smith - A very good op ed by Thomas Hoenig in the New York Times, “Too Big to Succeed” provides a solid recap of why the business of reining in the too big too fail banks is crucial. It isn’t simply that this is yet another version of “Mission Accomplished”; the bailouts actually made industry concentration worse, as Hoenig indicates.  Mike Konczal sheds more light on how the rescues helped the biggest banks at the expense of their smaller bretheren. However, what astonishes me is this drive by ad hominem by Matt Yglesias that Konczal links to in his post.  While Yglesias often has sound observations, I believe in not going beyond the limits of one’s knowledge, and Yglesias is out of his depth here. Yglesias is effectively saying smaller banks are less competitive, which is bunk. Every study ever done of banking efficiency in the US over the last 20 years shows that once a certain size threshold is reached banks show an increasing cost curve, meaning they are less, not more, competitive. So why has there been consolidation in the banking industry? Why would banks get bigger to become less efficient? Simple. Big banks don’t out-compete smaller banks; they simply buy them up. The acquiring bank managers get a pay increase; the managers of the purchased banks get a windfall.

Europe's Debt Woes Not a Top Concern for U.S. Banks - The largest U.S. banks aren't immune to Europe's credit woes, but analysts view the overall exposure as low on the list of concerns for the industry. Investor fears of contagion have subsided—at least temporarily—in the wake of indications from the European Central Bank that it would support any country in need. But if concern mounts again, the risk is "modest" and "manageable," said Jonathan Glionna, senior U.S. banking analyst for Barclays Capital. The U.S. banking industry's total exposure to Greece, Ireland, Portugal and Spain dropped to $146 billion in the second quarter of 2010, compared with $176 billion in the third quarter of 2009, according to figures compiled by Barclays Capital. The information, taken from reports made by banks to federal regulators, includes loans, debt, equity, foreign exchange and repurchase agreements. The top 10 U.S. banks held 96% of that risk, or $140 billion in the second quarter of 2010. The $140 billion represented 20% of total Tier 1 capital held by these institutions

Bailout datapoint of the day, Morgan Stanley edition - ProPublica is my favorite one-stop shop for presenting the Fed data dump in an at-a-glance format. The main thing that jumps out is that three banks, more than any others, were the primary recipients of the Fed’s lending facilities: I’ve included the banks in positions 4 and 5 just to make clear how big the gap is here: Citi, Merrill, and Morgan Stanley each borrowed more than $2 trillion from the Fed in total. No one else borrowed even $1 trillion. Of course, a lot of these were overnight loans being rolled over day after day: it’s not like the Fed ever lent this much money at any one time. But the sums involved are still astonishing, especially for Merrill Lynch and Morgan Stanley. We all know what happened to Citi and to Merrill, but this underlines just how rocky Morgan Stanley was at the height of the crisis.

Are The Banks Insolvent? Fair Question, Given This.... I've been going through The Fed's "data dump" that the WSJ has linked and made "easier" for us. And I've got lots of questions. Let's, for example, look at "Bank of Amer NA", otherwise known as BAC. They used the TAF a lot.  Here's a snapshot: Pay particular attention to that pink column I highlighted. Why? Well, BAC borrowed $15 billion an awful lot.  Maybe the same $15 billion.   Look at the face value of what they posted as collateral. $127 billion - or in one case $185 billion - to borrow $15 billion? What was being posted there - that's a more than 90% haircut! That's a fairly clear declaration by The Fed that these "Assets" were worth no more than $15 billion, right?  After all, that's all they got credit for when posting their collateral. Ok, two immediate questions:

  • •What was that, and at what value was that carried on their balance sheet at the time?
  • •Where is it now and what value is it being carried at TODAY on their balance sheet?

Wikileaks: It Could Take Down a Bank Or Two - Yes. We have one related to a bank coming up, that’s a megaleak. It’s not as big a scale as the Iraq material, but it’s either tens or hundreds of thousands of documents depending on how you define it. Yes, a big U.S. bank. It will give a true and representative insight into how banks behave at the executive level in a way that will stimulate investigations and reforms, I presume. Usually when you get leaks at this level, it’s about one particular case or one particular violation. For this, there’s only one similar example. It’s like the Enron emails. Why were these so valuable? When Enron collapsed, through court processes, thousands and thousands of emails came out that were internal, and it provided a window into how the whole company was managed. It was all the little decisions that supported the flagrant violations.

WikiLeaks' Next Target: Bank of America? - Wall Street was atwitter late on Monday when WikiLeaks’ founder, Julian Assange, disclosed in a Forbes interview that the organization’s next target was a major American bank, with a major data reveal to come early next year. Of course, he didn’t specify which bank; Mr. Assange is, among other things, skilled at building up suspense for his organization’s data dumps. But in this case, he may have let the cat out of the bag a year ago. In an October 2009 interview with Computerworld, Mr. Assange said that he had obtained copious amounts of data from a Bank of America executive’s hard drive

Did New Rules Worsen Pay Situation? - A study prepared for an influential shareholder group says rule changes meant to revamp Wall Street's pay culture have been negative, concluding that pay practices at six U.S. banks and securities firms have "worsened" since the financial crisis. The report, set to be released Tuesday and commissioned by the Council of Institutional Investors, which represents about 130 pension funds, contends that financial firms still tie too much of their compensation to short-term results and have increased salaries to offset the impact of recent regulatory curbs on pay. "Very little of any real import has changed"

Corporate profits in America: Gimme a “V” - The Economist - AMERICA’S recession was cruel to capital and labour: both employment and profit margins collapsed. The recovery has been a different matter. Employment has barely grown and unemployment is near its peak, but profits are on a tear. Pre-tax profits were $1.7 trillion, annualised, in the third quarter, just topping their 2006 peak, though as a share of gross domestic income they remain short of a record. Corporate earnings have benefited from both the return to profitability of the banks and the growing contribution of foreign operations—gross overseas profits now represent a third of the total. Robert Mellman of JPMorgan Chase eliminates the effects of both write-offs and foreign activity by examining only domestic profits as a share of corporate value added. The resulting picture is even starker. After falling to their lowest in over 50 years, profit margins are already back at levels exceeded only well into previous economic expansions (see chart). With the current expansion still young, Mr Mellman reckons profits by this measure are destined to reach their highest level since the 1960s.

Why Record Corporate Profits Aren't that Great - Tomorrow the government will announce the jobs number for November. Companies are expected to have added nearly 150,000 jobs last month. That's not a lot compared to the millions people who are out of work. Indeed, the unemployment rate is not expect to fall from its current 9.6%. But if the jobs number is even lower than expected, here's the reason: Corporate profits are not as strong as they look. What's more, it's not earnings growth that produces hiring. It's sustained earnings growth that produces hiring. And that's where we may have a problem. Here's why: Just before Thanksgiving we got the news that corporate profits hit a record high in the third quarter. All told, companies earned nearly $1.7 trillion in the third quarter. Some commentators have pointed out that if you inflation adjust the numbers, profits are not as high as they were back in 2006. That's fine. But even after that analysis it looks like profits are growing nicely. According to Standard & Poors, Profits at the companies in the Standard & Poors 500 rose an average of nearly 37%. Not bad at all. So why haven't those profits translated into more hirings?

Profits, Interest, and Inflation - US corporate profits set a record in the third quarter. As Matthew Yglesias points out, that’s not as impressive as it sounds: profits are measured in nominal dollars, and they normally rise during times of economic expansion, so there’s nothing at all unusual about seeing them make new highs. After taking a closer look at the data, Justin Fox is even less impressed: as a fraction of the national income, domestic nonfinancial corporate profits are nowhere near a new high; the big numbers are coming from financial corporations and from foreign earnings of US corporations. Kevin Drum is not quite so unimpressed, though: he looks at the data and sees domestic nonfinancial corporate profits recovering nicely in any case. Count me with the unimpressed, but for different reasons. It’s really not appropriate, in my view, to look at profits in isolation from the rest of the national income. Profits are a form of capital income. Capital income can be roughly divided into profits and interest, depending on how the capital was financed. If we’re interested in the general profitability of business activities, rather than the narrow question of whether current stockholders are getting rich, we should be looking at total capital income.

The Wall of Junk Bonds Grows Taller – The Federal Reserve’s data dump of more than 21,000 loan documents from the financial crisis provides a vivid reminder of how ugly it can get when the credit markets freeze up. In order to get crucial overnight loans, hundreds of banks had nothing else to give the Fed as collateral except junk-rated loans and bonds — valued at $1.3 trillion. Securities rated that low are risky because no one wants to buy them when the markets freeze up. As a result, many banks could not push these junk securities off their balance sheets by selling them. Could this happen again? Perhaps not on the same scale, but it would be a mistake to believe that the overhang of junk is lifting. New research from Moody’s Investors Service suggests that low-rated American companies have about $100 billion more in debt to refinance than analysts previously thought. This year has seen a boom in higher-yield leveraged loans — risky corporate loans with low credit ratings — and in their cousins, junk bonds. In fact, there has never been a bigger year than 2010 for junk bonds and leveraged loans, the high-risk debt that help companies with low credit ratings sustain their businesses.

Managing credit booms and busts - The global financial crisis has served as a powerful reminder that large credit and asset price booms often end in busts (Reinhart and Rogoff 2009). The ensuing financial turmoil has overwhelmed the capacity of governments to stem the economic slump through counter-cyclical fiscal or monetary responses. This grim outcome flies in the face of what used to be the received wisdom on how central banks should handle bubbles – namely, let them rip and concentrate on “mopping up after a crisis” The damage caused by the global crisis and fiscal crises in several developed countries has rejuvenated support for regulation and has reignited research interest. This column presents one recent proposal: A Pigouvian tax to help bring the amount of debt and capital held by the financial sector closer to the socially optimal level.

Bond Sales Tumbling in Worst Month Since Lehman Aftermath: Credit Markets - Corporate bond sales worldwide are tumbling on concern Ireland’s debt crisis will spread across Europe as returns on the notes approach their worst month since credit markets froze two years ago. Issuance has slumped 31 percent since Nov. 15, compared with the same period a year earlier, after surging 34 percent in the first half of the month, according to data compiled by Bloomberg. Plunging returns on debt of borrowers from France’s Credit Agricole SA to Bentonville, Arkansas-based Wal-Mart Stores Inc. are dragging bonds to a 1.08 percent loss in November, Bank of America Merrill Lynch index data show.

Credit Market Stress Intensifying: Corporate, High Yield Issuance Tanked in November - - Yves Smith - The US stock markets are harboring the fond notion that the sovereign-bank debt pile-up in Europe has no real implications across the pond, no doubt out of professional participants’ hope to retain solid gains thorugh year-end bonus setting. The debt markets are saying otherwise. Credit market risk aversion typically precedes a stock market correction, but bond markets can also send false positives.  What is noteworth is how pronounced the shift in sentiment was. From Bloomberg: Issuance has slumped 31 percent since Nov. 15, compared with the same period a year earlier, after surging 34 percent in the first half of the month, according to data compiled by Bloomberg. Plunging returns on debt of borrowers from France’s Credit Agricole SA to Bentonville, Arkansas-based Wal-Mart Stores Inc. are dragging bonds to a 1.08 percent loss in November, Bank of America Merrill Lynch index data show. And note that the jitteriness isn’t just for high yield paper, but across the board.

Number or the Week: Tiny Benefit of QE2 for Mortgage Holders  - $20: The typical mortgage holder’s potential monthly savings as a result of the Federal Reserve’s latest effort to bring down long-term interest rates. The country’s 53 million mortgage holders shouldn’t expect too much from the Fed’s latest bond-buying spree. Interest rates on mortgages are one of the channels through which the Fed’s second round of quantitative easing — in which the central bank aims to spend some $600 billion on Treasury bonds — is supposed to boost the economy. By pushing down rates, the stimulus makes buying a home more attractive, and also allows homeowners to improve their finances by replacing their existing mortgages with new, cheaper loans. In the three months before the Fed first signaled its latest round of stimulus, the interest rate on a 30-year fixed-rate mortgage averaged 4.61%. That’s one percentage point below the rate about 56% of the nation’s mortgage holders are currently paying, according to mortgage-data provider LPS Applied Analytics.

The Non-TARP Bailout - While everyone has been watching Fannie and Freddie, the administration has quietly shifted most federal high-risk mortgage credit initiatives to FHA, the government's original subprime lender. Along with two other federal agencies, FHA now accounts for about 60 percent of all U.S. home purchase mortgage originations. This amounts to more than $1 trillion and is rising rapidly. So far, the government has lost very little money buying troubled mortgage assets through TARP. That is because TARP never bought many troubled mortgage assets to begin with.  Meanwhile, we have this huge expansion of FHA. Should taxpayers be high-fiving about TARP's success if FHA winds up losing hundreds of billions instead?

The FHA as Predatory Lender - While everyone has been watching Fannie and Freddie, the administration has quietly shifted most federal high-risk mortgage initiatives to FHA, the government’s original subprime lender. Along with two other federal agencies, FHA now accounts for about 60 percent of all U.S. home purchase mortgage originations. This amounts to more than $1 trillion and is rising rapidly. The administration justifies this policy by saying it is necessary to support the mortgage market, yet borrowers are once again receiving high-risk loans… The Dodd-Frank Act, however, exempts FHA and other government agencies from appropriate standards on mortgage quality. This will give low-quality mortgages a direct route into the market once again; it will be like putting Fannie and Freddie back in the same business, but with an explicit government guarantee. For example, thanks to expanded government lending, 60 percent of home purchase loans now have down payments of less than 5 percent, compared to 40 percent at the height of the bubble, and the FHA projects that it will increase its insured loans total to $1.34 trillion by 2013. Indeed, the FHA just announced its intention to push almost half of its home purchase volume into subprime territory by 2014-2017, essentially a guarantee to put taxpayers at risk again.

GAO: Bank Regulators Not Even Looking At Foreclosure Practices « A rather nauseating statement from a Government Accountability Office report on foreclosures: Because they generally focus on the areas with greatest risk to the institutions they supervise, federal banking regulators had not generally examined servicers’ foreclosure practices, such as whether foreclosures are completed; however, given the ongoing mortgage crisis, they have recently placed greater emphasis on these areas. You read that right. Bank regulators in the United States were not even looking at foreclosure practices before the media latched onto the foreclosure fraud outbreak. The Office of the Comptroller of the Currency and the Federal Reserve acknowledged this in hearings two weeks ago, but it’s still harrowing to see the degree to which mortgage banking remains totally free of oversight, even after it drove the global economy off a cliff. The rest of the report is about banks abandoning properties instead of proceeding with a foreclosure sale. Kind of sick– throw a family out, then just abandon the house altogether, don’t even bother to sell it. The GAO says it’s not happening too much, but any sane businessperson would make sure that it never happens. A simple loan modification would cut everybody’s losses here, but the banks can’t be bothered with that. And nobody is bothering the banks about it.

Banks in Talks to End Bond Probe - U.S. securities regulators are in preliminary discussions with several major Wall Street banks aimed at reaching settlements to resolve a broad investigation of their sales of mortgage-bond deals that helped unleash the financial crisis, according to people familiar with the matter. The probe involves complex pools of mortgages and other loans called collateralized debt obligations, or CDOs, slices of which were sold to different investors.  Wall Street has come under intense fire from critics for its sale of the securities, seen as a central factor in the crisis. Settling the allegations would resolve one of the biggest law-enforcement threats hanging over leading banks. The Securities and Exchange Commission, after issuing subpoenas for documents and interviewing officials from nearly every bank that was a major player in creating, selling or trading CDOs, has begun negotiating with the companies, these people said.

The Fed and Foreclosures - There are two sides to every delinquent loan — a lender who made a bad lending decision and a borrower who cannot repay. Yet, banks have never acted as if they bear responsibility for the mortgage mess.  They have pursued foreclosures in violation of borrowers’ rights to due process, as revealed by the recent robo-signing scandal. And, despite having been bailed out for their mistakes, they have pursued their self-interest, not the public interest, when it comes to modifying bad loans. They have resisted reducing principal balances for troubled borrowers, for instance, because that could force them to take losses they would rather delay.  Now, despite mounting evidence of borrower mistreatment, the Federal Reserve has proposed a rule that would disable the most effective legal tool that borrowers have to fight foreclosures.

Lawmaker calls for end to Obama mortgage aid program (Reuters) - The incoming head of a House of Representatives panel overseeing the Obama White House on Thursday called for pulling the plug on a widely criticized program to help struggling borrowers stay in their homes. "This program seems to have outlived its usefulness," Representative Darrell Issa, the top Republican on the House Oversight and Government Reform Committee said, referring to the administration's Home Affordable Modification Program, HAMP. Issa, who is expected to head the panel when Republicans take control of the House in January, made the comments at a hearing of the House Judiciary Committee. Issa said the program, which has helped just under 500,000 homeowners get permanent loan modifications, has only managed to provide payments to financial institutions which would have modified those loans without the government's money.

Fannie, Freddie Fighting Banks On Mortgage Buybacks - As doubts continue over the legitimacy of mortgage documents, two government-owned mortgage companies are having trouble offloading loans onto the banks that originated them. And one employee inside Bank of America has raised further doubts about the bank's handling of crucial mortgage paperwork.  Fannie Mae and Freddie Mac, the government-sponsored companies that became taxpayer-owned during the worst of the financial crisis, are meeting resistance from big banks, who as of the end of September hadn't responded to requests that they buy back about $13 billion worth of mortgages, Bloomberg reports.  Fannie and Freddie, whose main function is to buy or guarantee mortgages from banks and thereby make it easier for banks to lend, claim these mortgages are missing key components, such as a verification of the borrower's income. The banks, for their part, say Fannie and Freddie are unfairly reevaluating loans they once thought were solid.

Mortgage Buybacks May Cost Banks $106 Billion, FBR's Miller Says - JPMorgan Chase & Co. and Bank of America Corp. are among U.S. banks that may face $54 billion to $106 billion in costs as more investors demand that issuers of mortgage-backed securities repurchase faulty loans, according to Paul Miller of FBR Capital Markets. Miller estimated in September that underwriters of mortgage-backed securities may face losses of $44 billion to $91 billion. The increase reflects that liabilities will rest with issuers of the securities, the analyst wrote today in a note to investors. Miller also said his new estimate reflected banks disclosing more about possible losses. Analysts have issued differing estimates on how much mortgage buybacks may cost banks, as the government-sponsored enterprises Fannie Mae and Freddie Mac press lenders to repurchase loans that may have been based on inaccurate data. Private investors in mortgage-backed securities are also pursuing claims.

"Inexcusable" breakdown of foreclosure process cited (Reuters) - Regulators have found widespread and "inexcusable" problems in the way banks have foreclosed on homes and a fix is needed, a senior Treasury Department official said on Tuesday. Michael Barr, assistant Treasury secretary for financial institutions, took mortgage service companies to task in summarizing the preliminary findings of a probe regulators have launched into how lenders have seized homes on which mortgage payments have fallen behind. "The bulk of the examination work to date focused on the foreclosure process has found widespread and, in our judgment, inexcusable breakdowns in the foreclosure process," Barr told the second meeting of the Financial Stability Oversight Council. Its task is to make the financial system less prone to systemic breakdowns. The task force includes the federal financial regulators, the Federal Trade Commission, the Department of Justice and the Department of Housing and Urban Development, as well as state attorneys general and bank supervisors.

Fed's Tarullo sees big costs for banks to fix foreclosures (Reuters) - Banks will have to make "significant investments" to clean up foreclosure practices and some lenders potentially face strong pressure from investors to buy back faulty mortgages, a top Federal Reserve official said on Wednesday. Fed Governor Daniel Tarullo was hesitant to put a number on the potential costs and told a Senate hearing regulators are trying to get a handle on the threat to the financial system. Tarullo's comments underline the problem banks are facing now as they wrestle with processing billions of dollars of foreclosures: many do not have the technology or personnel in place to follow proper practices, but are reluctant to invest in these areas while profits are under pressure. Tarullo told the Senate Banking Committee hearing regulators expanded their probe into foreclosure practices after a preliminary review suggested "significant weaknesses" in how banks dealt with millions of troubled mortgages.

Tarullo testifies putbacks could surpass robo-signing mortgage controversy - Major structural problems at the nation's largest mortgage servicers will continue to hinder operations, with potential financial exposure from putbacks perhaps trumping robo-signing, according to a Federal Reserve official's testimony Wednesday during a Senate banking committee hearing. Fed Gov. Daniel Tarullo also said a preliminary multiagency review of servicing companies found shortcomings at major shops. Findings "suggest significant weaknesses in risk-management, quality control, audit and compliance practices" related to mortgage servicing and foreclosure documentation, Tarullo said."We have also found shortcomings in staff training, coordination among loan modification and foreclosure staff, and management and oversight of third-party service providers, including legal services." As a result, the review has been expanded to include a look at past-due loans that are not yet in the foreclosure process.

BofA’s ‘Sloppy’ Prime Mortgages Add to Pressure for Buybacks - Bank of America Corp, battling demands for almost $13 billion of refunds from mortgage investors, reported that the fastest-growing group of claims involves loans to people with the best credit scores.  Claims for refunds on prime mortgages surged 150 percent to $3.6 billion in the first nine months of 2010, Claims on subprime loans, made to borrowers deemed more likely to default, were little changed at $579 million. Mortgage investors can demand refunds from a bank if a loan was based on faulty data about the home or borrower.  Overdue prime mortgages set a record this year, opening more loans to scrutiny for defects that could entitle investors to a buyback. The Congressional Oversight Panel said last month that too many repurchases could rattle the financial system, and Bank of America’s stock dropped 27 percent this year through yesterday, partly on concern that $4.4 billion of reserves stockpiled to cover such costs won’t be enough.  “It was just a very sloppy process” that wasn’t confined to subprime loans,  “Overlooking bits and pieces of the underwriting process can come back to hurt you, because investors sold a faulty bill of goods want to recover losses.”

More on BofA Employee Damaging Admissions re Failure to Convey Mortgage Notes -  Yves Smith - We’ve had a series of posts (see here, here, and here) on the judge’s decision in a case called Kemp c. Countrywide, which provided what appeared to be the first official confirmation of what we’ve long suspected and described on this blog: that as of a certain point in time post 2002, mortgage originators and sponsors simply quit conveying mortgage notes (the borrower IOUs) through a chain of intermediary owners to securitization trusts, as stipulted in the pooling and servicing agreements, the contracts that governed these deals. We say “appeared to be” because Bank of America’s attorney promptly issued a denial, effectively saying that the employee whose testimony the judge cited in his decision, one Linda DeMartini, a team leader in the bank’s mortgage- litigation management division. didn’t know what she was talking about. As we discussed, this seems pretty peculiar, since she was put on the stand precisely because she was deemed to be knowledgeable about Countrywide’s practices. Today, an article appears in Bloomberg, and it appears to be a rehash of this now week-old story, so I was puzzled to see it run now. But buried in the article is the probable reason for this piece, namely, that the Bloomberg reporters saw that BankThink had purchased and posted the trial transcripts, and quoted more of DeMartini’s testimony. And it isn’t pretty.

Servicer-Driven Foreclosures: The Perfect Crime? - Yves Smith - As much as I’ve seen a lot of financial services industry misconduct at close range, sometimes even a cynic like me is not prepared for how bad things can be. And mortgage abuse is turning out to be one of those areas. I’ve been in contact for over the last six months with attorneys involved in foreclosure defense. Unlike the foreclosure mills, which seem to coin money, the attorneys on this front are either laboring pro bono or making considerably less than they could in other lines of work. They also can back up their views with depositions and trial transcripts.  One thing they stress is that a significant number of their clients facing foreclosure has made every single mortgage payment. . Read that again. Now how can that be? How can that square with the banks’ assertion that in every instance, their foreclosures were warranted, that the borrower was hopelessly behind? It’s actually very simple. It’s called servicing errors and fraud. And whether by mistake or design, when a borrower gets caught in the servicer hall of mirrors of compounding fees and charges, there is no way to appeal and pretty much no way out.

Register of Deeds asks AG to investigate mortgage group - County Register of Deeds John O’Brien on Nov. 18 announced he has sent a letter to Attorney General Martha Coakley requesting that she investigate whether or not the Mortgage Electronic Registration Systems, Inc. has failed to pay the proper recording fees required when a lender assigns a mortgage to another entity. The MERS system includes such banking conglomerates as Bank of America, Countrywide Home Loans, Wells Fargo Bank and others, according to the Register of Deeds. O’Brien said it has come to his attention that a number of states have alleged in court filings that MERS intentionally failed to pay recording fees, and failed to disclose the transfer and assignments of interest in property, solely to avoid and decrease the recordation fees owed to the counties and the state. In addition, he said MERS may have wrongfully bypassed Massachusetts recording requirements thereby frustrating the borrower’s right to know the true identity of the holder of their mortgage.

WSJ: The Tail Wags the Foreclosure Dog - The Wall Street Journal's economics blog had a poorly thought-through take on foreclosures. The main point of the piece was that the time from default to foreclosure has grown much, much longer. (Not noted is that the timeframe varies significantly by state).  The piece has scant analysis, but it's conclusion is that longer times to foreclosure makes strategic default more attractive as in lengthens the time a home-owner can remain in the home and consume housing for free.  The blog concludes that therefore we need to speed up foreclosures.  This really gets the strategic default problem backwards. It has the tail wagging the dog. The problem is that the homes are underwater, not that foreclosures are taking too long, and strategic default actually plays a very important role in market clearing on housing prices.  If homes weren't underwater, the time to foreclosure matter very much.  Indeed, even when a home is underwater, I'm quite skeptical that the marginal difference in time to foreclosure from say 244 to 492 days is actually swaying anyone's decision to default. The WSJ piece certainly doesn't present any evidence that it matters...

Shortcuts on the foreclosure paper trail - To get a sense of the lawlessness in Florida's court-run foreclosure process, look no further than public records at the Sarasota and Manatee county courthouses. There, on foreclosure documents open to everyone, is the evidence that at least one law firm's employees repeatedly broke a state law in a rush to push cases through the courthouse so banks could seize people's homes. The evidence -- missing signatures and misdated documents that could not have been signed on the dates specified -- can be found on an important document called a "mortgage assignment." The paperwork helps prove a lender has the legal right to seize a property. Without it, a bank would have a costlier and more time-consuming legal path to foreclose, even if a homeowner never makes another mortgage payment.Faced with that prospect, employees in David J. Stern's law offices bent and broke the rules designed to ensure the documents judges rely on to award foreclosures are authentic, a Herald-Tribune investigation found.

Banks Seeking to Foreclose Face More Questions About Legal Standing - As we’ve noted, banks seeking to enforce foreclosures must demonstrate that they have proper documentation proving their right to enforce a foreclosure [1]—meaning they have the legal standing to enforce the foreclosure either as the holder of the note or as an agent acting on behalf of the holder. In bankruptcy court, this hasn’t always been easy for the banks. Over the weekend, a piece by Gretchen Morgenson of the New York Times noted that the United States Trustee Program—a Justice Department unit tasked with overseeing bankruptcy courts—has ramped up its scrutiny of banks’ foreclosure processes and is forcing banks to prove that they have the right to enforce foreclosures [2]. Morgenson points out two cases in federal bankruptcy court in Atlanta in which a U.S. trustee stepped in and asked bankruptcy judges to deny requests from Wells Fargo and Chase to allow them to proceed with foreclosure. In both cases, Walton filed motions saying that the bank had “failed to allege sufficient facts from which the Court can conclude that it is in fact the authorized agent” of the note holder.Issues of a note’s proper transfer and the bank’s right to enforce a foreclosure were also raised when a U.S. bankruptcy judge earlier this month rejected an attempt by Bank of America to foreclose on a New Jersey homeowner. According to a piece in Bloomberg today, the judge ruled that the bank had failed to properly transfer the note to its true owner [3] and therefore did not have legal standing to enforce the foreclosure.

American Securitization Forum Tells Monstrous Whoppers in Senate Testimony on Mortgage Mess -- Yves Smith - By way of background, we’ve discussed for some time the bigger implications of problems witnessed in foreclosure battles all over the US. Increasingly, consumer lawyers are recognizing that they can often successfully challenge foreclosures in which the loan was securitized by examining whether the party trying to foreclose really has the standing to do so, which is legal-speak for whether they are the proper party. If the loan was securitized, it is owned by a specific trust, and the trustee for the trust should be the party taking action. The trustee needs not only produce the note, but if questioned, also to demonstrate that it is the right party to enforce the note. The problem is that the pooling and servicing agreements, which governs the formation and operation of securitization trusts, have very specific provisions for how the notes were to be conveyed to the trust. The notes were to be conveyed through multiple entities, which each transfer being a “true sale” before getting to the trust (this was to create “bankruptcy remoteness” so that if the originator failed, its creditors would not be able to take notes back from the trust to satisfy their debts). The PSA called for the note to be endorsed by the intermediary parties (either in blank or specifically to the next party). The notes were also to be conveyed by a specified date, which in nearly all cases was no later than 90 days after the closing of the trust. The trusts were required to be organized under New York law, and New York trust law is unforgiving. Trusts can operate only as specifically prescribed; if the notes were not conveyed to the trust in the manner set forth in the PSA, it cannot deviate from its instructions and somehow make exceptions (it would be deemed a “void act”) .

John Taylor: Foreclosures Are the Mortal Enemy to Economic Recovery - There are those who believe that foreclosing rapidly on homes subject to defaulted mortgages is vital to clearing the market. Others believe we should do everything we can to keep people in their homes, urging loan modifications to forestall foreclosures. John Taylor, President and CEO of the National Community Reinvestment Coalition, falls solidly in the latter camp. Taylor would like to see widespread mortgage modifications that would allow homeowners in danger of defaulting to keep their homes. Taylor is on the board of directors of the Rainbow/PUSH Coalition and the Leadership Conference for Civil Rights. He has also served on the Consumer Advisory Council of the Federal Reserve Bank Board, The Fannie Mae Housing Impact Division as well as The Freddie Mac Housing Advisory Board. He is extremely passionate on why his idea is the right choice to help turn around the real estate market.

Will Thousands of Foreclosures Be Voided Because Non-Lawyers Prosecuted Them? - Yves Smith - If you thought robo signing was bad, you ain’t seen nothin’ yet.  The website 4ClosureFraud presents the gory details of a potential major new front in the foreclosure mess. A Pennsylvania foreclosure mill, Goldbeck McCafferty & McKeever, is accused by Patrick Loughren of allowing non-attorneys to file and prosecute foreclosures. A DailyFinance story gives the overview: If Loughren prevails, this case will prove to be vastly more significant than robo-signing. Robo signing, while a fraud on the court, does not necessarily invalidate the underlying legal action. The practice of law by non-lawyers is a far more serious matter. In Pennsylvania it is a crime. In the case against GMM and its apparently unsupervised paralegals, the plaintiff is seeking disgorgement of falsely billed “attorney’s fees”.  But even more important, the lack of attorney involvement would render the foreclosures void. Pennsylvania courts have found “proceedings commenced by persons unauthorized to practice law are a nullity”. Federal courts interpreting Pennsylvania law have supported this point of view.

Q3 Foreclosure Sales Volume Plunges As Discount On Foreclosed Homes Hits 5 Year High - RealtyTrac has just reported that even though the volume of foreclosed homes plunged by 25% from Q2 to Q3 and 31% from Q2 of 2009, the discount on foreclosed homes has hit a five year high, as interest in even ultra bargain properties has collapsed following the expiration of the homebuyer tax credit, and confirming yesterday's bad Case Shiller (remember that one?) number. Per RealtyTrac: "foreclosure homes accounted for 25 percent of all U.S. residential sales in the third quarter of 2010 and that the average sales price of properties that sold while in some stage of foreclosure was more than 32 percent below the average sales price of properties not in the foreclosure process — up from a 26 percent discount in the previous quarter and a 29 percent discount in the third quarter of 2009." Yet despite the major price drop, buying interest has evaporated as nobody there is no longer any purchasing power left in the lower and middle sections of the housing market: "a total of 188,748 U.S. properties in some stage of foreclosure — default, scheduled for auction or bank-owned (REO) — sold to third parties in the third quarter, a decrease of 25 percent from the previous quarter and a decrease of nearly 31 percent from the third quarter of 2009.

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 October. 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.

Falling again - MOST of the news out of the American economy has been relatively good, of late, at least by comparison to the news we were getting over the summer. Consumer confidence is up. Third quarter GDP rose by more than originally estimated. There are even hints that the labour market may be close to a recovery speed sufficient to actually bring down the unemployment rate. Except where housing markets are concerned. Prices, which had been leveling off, and in some cases rising again, sagged once more. That sag seems to have turned into a new, nationwide slump. The latest Case-Shiller home price data, for the month of September, is a three-month moving average of homes sold in July, August, and September. The data shows a monthly decline across all markets, with the single exception of the Washington metropolitan area. The 20-city index was off 0.7% in September, after falling just 0.2% the prior month. Fully 15 of the measured markets are down over the past year.

Case-Shiller: Broad-based Declines in Home Prices in Q3 - From S&P: Broad-based Declines in Home Prices in the 3rd Quarter of 2010 - Data through September 2010, released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices ... show that the U.S. National Home Price Index declined 2.0% in the third quarter of 2010, after having risen 4.7% in the second quarter. Nationally, home prices are 1.5% below their year-earlier levels. In September, 18 of the 20 MSAs covered by S&P/Case-Shiller Home Price Indices and both monthly composites were down; and only the two composites and five MSAs showed year-over-year gains The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000). The Composite 10 index is off 29.8% from the peak, and down 0.7% in September(SA). The Composite 20 index is off 29.6% from the peak, and down 0.8% in September (SA). The second graph shows the Year over year change in both indices. The Composite 10 is up 1.5% compared to September 2009.  The Composite 20 is up 0.5% compared to September 2009. Case-Shiller reported that nationally home prices are 1.5% below their year-earlier levels. The year-over-year increases in the composite indexes are slowing, and will probably be negative later this year.  The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

A Look at Case-Shiller, by Metro Area (November Update) - The S&P/Case-Shiller national home price index, which is released on a quarterly basis, posted a 2% decline from the previous quarter and are 1.5% below year-earlier levels. On a monthly basis, 18 cities notched declines from August, compared to 15 month-on-month drops in August and just eight the July report. Seasonal variations can distort month-on-month comparisons. Based on a seasonal adjustment calculated by S&P, no city posted a monthly home-price increase in September. Read the full story. Below, see data from the 20 metro areas Case-Shiller tracks, sortable by name, level, monthly change and year-over-year change — just click the column headers to re-sort.

Real House Prices, Q3 2010 - This morning, S&P reported that there were "broad based" house price declines in Q3. And earlier this month, CoreLogic reported that house prices declined 1.8% in September.  The following graph shows the Case-Shiller National index (quarterly), the Case-Shiller Composite 20 index, and the CoreLogic House Price Index in real terms (adjusted for inflation using CPI less shelter).In real terms, all three indexes are back to 2000 / 2001 prices. The real Case-Shiller national index is at a new cycle low, and the real Case-Shiller Composite 20 and real CoreLogic indexes are just above the cycle low (and will be at new lows soon). A few key points:
• In many areas - if the population is increasing - house prices increase slightly faster than inflation over time, so there is an upward slope in real prices.
• Even if real prices are still too high, they are much closer to the eventual bottom than the top in 2005. This isn't like in 2005 when prices were way out of the normal range.
• With high levels of inventory, prices will probably fall some more. (My forecast earlier this year was for 5% to 10% additional price declines on the repeat sales indexes).

Value Sinking Fastest at Homes Priced Low to Start - DURING the great housing bubble, it was the least expensive homes whose prices went up the most. And now it is those homes that are suffering the most.  The S.&P./Case-Shiller indexes released this week showed widespread declines in home prices in the third quarter of this year as the market suffered from the removal of temporary tax credits that had led to a small rally in home prices earlier in the year. No region had lost more than 5 percent in a quarter since mid-2009, but that happened to Phoenix in the third quarter.  For 16 major regional areas, S.& P. publishes separate indexes for the top, middle and bottom thirds of homes in the area, as measured by price. Those figures show that from the beginning of the decade through each area’s peak, prices of lower-value homes rose faster than either of the other groups.  The latest figures show that prices of lower-cost homes have fallen further from the peak in each of the 16 areas.  As a result, the pain of lower prices is being felt most strongly by homeowners who are most vulnerable, both because they may have taken out mortgages whose interest rates rose after initial teaser periods ended and because those owners are more likely to be facing prolonged unemployment.

Double Dip In Housing Largely Caused By Failure to Prosecute Mortgage Fraud - There’s a double-dip in housing prices (and see this). As CNN points outs: U.S. home prices fell 2% in the third quarter after having gained steadily since early 2009. The S&P Case-Shiller Home Price Index has recorded gains in four of the previous five quarters, including a 4.7% jump between April and June 2010. That leaves national home prices down 1.5% year over year and off 2% compared to the second quarter, according to the Index, which was released Tuesday. The inventory of homes is high with nearly 3.9 million on the market in October, according to the National Association of Realtors. That means it would take 10.5 months to sell through all of the current inventory. In a normal market, there is usually a six-month supply. Plus, there’s a massive shadow inventory of homes waiting in the wings. These are homes that are deeply in the foreclosure process or even repossessed by banks but not yet put back on the market. Much of the massive shadow inventory of homes is due to the fraud involved with mortgage documents. CNN notes in a second article: Big banks are having trouble restarting the foreclosure process after this fall’s “robo-signing” scandal, and the once booming market for foreclosed homes has been hit hard as a result.

Second Phase Housing Crash Hidden From Public – A hidden catastrophe is unfolding in the US housing market. Mainstream media outlets are not telling the story because they are focused on misleading data like the just released Case Shiller Index which showed only a small decline in September. In reality, real time market data indicates that the housing market is undergoing a renewed crash, bringing activity and sales prices to their lowest levels yet. Inventory to sales ratios are exploding, with the supply demand imbalance likely to lead to even steeper price declines in the months ahead. That will in turn lead to yet another wave of mortgage defaults and foreclosures, which will dramatically increase the stress on the financial system. This will lead to another systemic shock similar to that which occurred in 2008. The Fed will be under pressure to extend QE2 indefinitely, with undoubtedly horrific unintended consequences.

Pending Home Sales Rebound 10.4% in October - An index that measures the number of contracts to buy previously owned homes in the U.S. rose 10.4% in October month-over-month to a reading of 80.9. The index remains 20.5% lower than year-earlier levels. October 2009 saw the highest level of pending home sales since May 2006 when it hit a reading of 112.6.  Economists had expected the data to be flat after a 1.8% downtick in September. September's rate of pending home sales came in worse than expected and was 24.9% lower than in the year-earlier month.  Pending home sales are viewed as an indicator of future home sales.  "It is welcoming to see a solid double-digit percentage gain, but activity needs to improve further to reach healthy, sustainable levels."

Suze Orman: ‘The American Dream Is Dead’ - When asked about her financial fears, Orman said: “My only fear in life, when it comes to money, is what’s happening in the United States of America. The American dream is dead for the majority of America.” The dream she is referring to is not even a Cinderella story; it’s much more practical. Orman believes the hope of someday owning a home, of working one job for life and retiring at 65 has been crushed by the financial crisis. “The middle class has disappeared,” she continued. “We have a highway to poverty and no roads coming out. I fear for [those] who have been kicked out of their homes, could be living on the streets and don’t know how to get another job. Many of the millions of jobs lost I don’t think are coming back. I am really afraid for the majority of Americans today.”

Boom in Debt Buying Fuels Another Boom—in Lawsuits - Across the nation, there is a surge in lawsuits against people who aren't paying their bills, driven by the debt-buying industry that has boomed in the past three years as a sea of souring loans and credit-card obligations have become cheaper and cheaper to buy amid hard economic times. Handing debt over to collectors is an important step in cleaning up the financial system, but the explosion in lawsuits—many for small sums—creates problems for the legal system. "There exists a real danger that the courts will be perceived as mere extensions of collection agencies," says Thomas Donnelly, an associate judge in Cook County, Ill. There are no nationwide figures available, but a survey of 20 judges across the nation by The Wall Street Journal yielded anecdotes of court calendars choked with debt-collection suits. For example, Judge Donnelly says he has heard as many as 400 cases a day, filed by debt buyers, debt collectors and their attorneys who have often lugged their filings to his courtroom in crates.

U.S. Light Vehicle Sales 12.26 million SAAR in November - Based on an estimate from Autodata Corp, light vehicle sales were at a 12.26 million SAAR in November. That is up 13.2% from November 2009, and up slightly from the October 2010 sales rate. This graph shows the historical light vehicle sales (seasonally adjusted annual rate) from the BEA (blue) and an estimate for November (red, light vehicle sales of 12.26 million SAAR from Autodata Corp). This is the highest sales rate since September 2008, excluding Cash-for-clunkers in August 2009. The second graph shows light vehicle sales since the BEA started keeping data in 1967. Note: dashed line is current estimated sales rate. The current sales rate is still near the bottom of the '90/'91 recession - when there were fewer registered drivers and a smaller population.

GM Confirms, Yes, We’re Losing Money on Every Volt We Build - Doug Parks, vehicle line executive for the 2011 Chevrolet Volt, GM's range-extended electric vehicle, confirmed Tuesday that the company loses money on every Volt it sells. This should hardly be a surprise.  It's called R&D, folks. Every major automaker spends billions of dollars a year on research and development costs. And they know that when they launch certain new technologies, they will lose money for some years before costs fall and volumes rise to let economies of scale make a particular new feature or technology profitable. Toyota's investments in its hybrid program, which has given it roughly two-thirds of the global market for hybrid-electric cars, are estimated to have cost it upwards of $10 billion over 15 years.

Does more economic activity mean more driving? - Mark Perry is convinced that the recent uptick in vehicle miles is a good sign, economically speaking; Calculated Risk is not as convinced. Both, however, are working on the assumption that vehicle miles are an excellent proxy for economic activity as a whole, and that the more they rise, the better the economy is doing. Perry’s chart, in particular, would seem to back that up: The way in which vehicle miles fell steadily over the course of the recession is startling. But look at CR’s chart: And suddenly recessions don’t seem as big of a deal: vehicle miles simply tend to rise over time, except for during oil spikes.It’s worth remembering here that the recession started in December 2007, while oil prices were still rising; they didn’t reach their all-time (nominal) high until July 2008. Given that gas prices lag oil prices, a large part of the fall in miles can probably simply be attributed to high gas prices, rather than to the recession — especially since, as Nate Silver notes, “the cost of gas twelve months ago has historically been a much better predictor of driving behavior than the cost of gas today.”

ISM Non-Manufacturing index showed expansion in November -The November ISM Non-manufacturing index was at 55.0%, up from 54.3% in October - and slightly above expectations of 54.7%. The employment index showed expansion in November at 52.7%, up from 50.9% in October. Note: Above 50 indicates expansion, below 50 contraction. This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index. From the Institute for Supply Management: October 2010 Non-Manufacturing ISM Report On Business® Economic activity in the non-manufacturing sector grew in November for the 11th consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business

Bank Customers Choose Overdraft Protection - As the holiday-shopping season kicks off, there is one thing most consumers won't be leaving home without: an overdraft cushion. Rather than face the embarrassment of being declined a purchase, 75% of consumers are opting to pay a fee—sometimes as much as $34—each time they overdraw on their debit-card account, according to Moebs Services Inc. The choice is a recent one, thanks to new rules that came in as part of an overhaul of consumer-protection regulations. Since Aug. 15, banks have been required to ask consumers to "opt in" for overdraft protection on their debit cards and the added fees

Point of Purchase Bank Card Surcharges: Will They Help or Hurt Consumers? - Did you know that merchants are considering tacking on a point-of sale fee for purchases made with a debit or credit card?  In other words, at 2%, a $100 purchase would cost $100 in cash, but $102 when charged. I have seen this sort of thing in Europe, so will it happen here?  If so, who will it hurt and help?  The argument for imposing such a fee is that cash customers are now bearing part of the cost of processing all those bank card payments. In other words, the cost of goods is going up because without bank card purchase costs to absorb, merchants could charge all of us less for their products. As a credit card doubter and a vehement proponent of a cash economy, I was on board with this thinking. Why should I support all those card carry members of the debt society? Um…except that, my assumptions were all wrong. Cash users are not carry the water of card users; rather, it is the other way around. Shockingly, cash is more expensive to process than card payments.

Jim Quinn: Lies Across America - Yves here. While Quinn has a deliberately (some might say overly) provocative style and I quibble with some of his supporting arguments, his overarching observation, that America is wedded to an economic model past its sell by date, and that model has damaging social and political consequences, is one I believe will resonate with many readers. From Jim Quinn, of The Burning Platform -The increasingly fragile American Empire has been built on a foundation of lies. Lies we tell ourselves and Big lies spread by our government. The shit is so deep you can stir it with a stick. As we enter another holiday season the mainstream corporate mass media will relegate you to the status of consumer. This is a disgusting term that dehumanizes all Americans. You are nothing but a blot to corporations and advertisers selling you electronic doohickeys that they convince you that you must have. Propaganda about consumer spending being essential to an economic recovery is spewed from 52 inch HDTVs across the land, 24 hours per day, by CNBC, Fox, CBS and the other corporate owned media that generate billions in profits from selling advertising to corporations schilling material goods to thoughtless American consumers. Aldous Huxley had it figured out decades ago:Thanks to compulsory education and the rotary press, the propagandist has been able, for many years past, to convey his messages to virtually every adult in every civilized country.

Shocking Video Evidence of "Consumer Greed" - And more examples of "consumer greed" here: Exhibit B, Exhibit C, Exhibit D, and Exhibit E.   Next time you hear somebody talk about "corporate greed" or about how greedy corporations are only concerned with profits and their "bottom lines," or that corporations "put profits before people," etc. show them these shocking examples of money-grubbing, greedy consumers who seem only concerned about one thing: their household's bottom line, and they are so greedy that they'll even "put low prices before people" as they trample one another to enter Target and Wal-Mart on Black Friday to snatch up low-priced items before others do.       

Black Friday Results Point To Two-Tier Economy - The results from this past Thanksgiving weekend retail shopping blitz are in and consumer spending at real brick-and-mortar stores is barely up from a year ago. This is disappointing. What’s interesting is that traffic numbers were up and those who spent 6.4% more than last year. This suggests a two-tier economy for those who are back to normal versus those who are still being affected by the economic crisis.(Hat tip Barry Ritholtz)

Retailers Nov Sales Show Strong Start To The Holidays - According to 27 retailers tracked by Thomson Reuters, sales at stores opened more than a year rose 6% in November, above the estimated growth of 3.6% and the year-ago gain of 0.6%. Many retailers started the holiday season early in November, blitzing shoppers with promotions because of concerns that the still-uncertain economy would hold them back. "Retailers' game plan was aggressive promotions throughout the month," said John Long, retail strategist at Kurt Salmon Associates. "The results we are seeing are not solely the contribution of Black Friday sales." Black Friday is the retail nickname for the day after Thanksgiving. The strong early start has prompted some to wonder if the consumer will continue to spend throughout the holiday season. The National Retail Federation projects holiday sales will rise 2.3% this year after a 0.4% gain in 2009 and a 3.9% drop in 2008.

Eight million consumers stop using credit cards -- Credit card use is on the decline, as millions of Americans cut up their plastic or get cut off by their credit card companies. In the past year, more than eight million consumers have stopped using credit cards, according to TransUnion, a Chicago-based credit researcher. That means 78 million U.S. consumers do not have credit cards, compared to 70 million last year. The company said the decline is partly due to "charge-offs in the higher risk segments" and partly because of "more conservative spending in the low-risk segments." Gerri Detweiler of said it is "unprecedented" for consumers to "abandon" their credit cards. "I've been covering this since 1987 and I don't recall numbers like that ever going down," she said. "They've always gone up."

US Credit Card Debt Outstanding (graph)

Defining Structural Unemployment - Krugman - Here’s what economists mean by “a rise in structural unemployment”: a rise in the minimum unemployment rate you can get to before you start having inflation problems. There’s a story behind why that might happen — it might happen because unemployed workers have the wrong skills, or they’re in the wrong places, or they can live so well off the dole that they don’t really want to work, or whatever. But the measure of structural unemployment is that worsening of the inflation-unemployment tradeoff. Once you realize that’s what it’s about, you see that many of the things people say show a rise in structural unemployment don’t really bear on the issue. You say we had a big bubble in the past? OK, but that doesn’t explain why trying to raise employment now would cause inflation. You say that we’ve been living beyond our means? OK, but again, why does that limit the number of workers we can employ making stuff for somebody? So where’s the evidence of a structural rise in unemployment in America? Wage growth is slowing; core inflation is falling; clearly, we’re not hitting an inflationary wall right now.

Before Business Leaders, Bernanke Discusses Unemployment’s Toll on Americans - Yves Smith re NYTimes article: Do you see what is wrong with this picture? Bernanke is talking about job creation of a group that is dominated by mega corporations. Earth to base, in the last expansion, large and medium sized corporations shed jobs! And predictbly, one of the corporate chieftans, the head of IBM, is using his face time to lobby for more deregulation, when there is no reason to believe that will promote jobs (indeed, some types of regulation, for instance, for greater fuel efficiency, have actually spurred innovation. Detroit did itself a huge disfavor in fighting fuel economy rules, it ceded much of the global market for cars to manufacturers in countries that accepted these restrictions).

Mass layoff events and initial claims by industry, October 2010 - The total number of mass layoff events in October was 1,642 on a not seasonally adjusted basis; the number of associated initial claims for unemployment insurance benefits was 148,638. The 351 mass layoff events in the manufacturing sector accounted for 21 percent of all mass layoff events, and the 40,861 initial claims accounted for 27 percent of initial claims for unemployment insurance benefits filed in October.

Productivity Increased 2.3% - And This May Be Bad News - According to the Bureau of Labor Statistics (BLS),  labor productivity increased in 3Q2010 at an annual rate of 2.3%.  The headline: Nonfarm business sector labor productivity increased at a 2.3 percent annual rate during the third quarter of 2010, the U.S. Bureau of Labor Statistics reported today. Labor productivity is calculated by dividing an index of real output by an index of the combined hours worked of all persons, including employees, proprietors, and unpaid family workers.Do not confuse the above discussion with the “bean counter” productivity used by the BLS in this report.  Because, in addition to the factors allowed to be included in productivity analysis – bean counters allow the introduction of disconnects in vertical integration to be counted in productivity.  In layman’s terms, bean counters allow outsourcing to be counted as a productivity improvement.

Initial Claims Come At 436K On Expectations Of 424K, Previous Revised Higher Of Course To 410K - In addition to the deterioration in initial claims, continuing claims also missed expectations, coming in at 4270K on expectations of 4200K with the previous revised from 4182K higher to 4217K.

ADP: Private Employment increased by 93,000 in November - ADP reportsPrivate-sector employment increased by 93,000 from October to November on a seasonally adjusted basis, according to the latest ADP National Employment Report® released today. The estimated change of employment from September to October was revised up from the previously reported increase of 43,000 to an increase of 82,000. This month’s ADP National Employment Report shows an acceleration of employment and suggests the nation’s employment situation is brightening somewhat. November’s gain in private-sector employment is the largest in three years. This is the tenth consecutive month of gains, which have averaged 47,000 during that period. Nevertheless, employment gains of this magnitude are not sufficient to lower the unemployment rate, which likely will remain above 9% for all of 2011.

ADP November Jobs Improvement Not Enough - November 2010 private sector non-farm payrolls rose 93,000 – the largest increase so far this year.  The headlines: Private-sector employment increased by 93,000 from October to November on a seasonally adjusted basis, according to the latest ADP National Employment Report® released today. The estimated change of employment from September to October was revised up from the previously reported increase of 43,000 to an increase of 82,000. This month’s ADP National Employment Report shows an acceleration of employment and suggests the nation’s employment situation is brightening somewhat. November’s gain in private-sector employment is the largest in three years. This is the tenth consecutive month of gains, which have averaged 47,000 during that period. Nevertheless, employment gains of this magnitude are not sufficient to lower the unemployment rate, which likely will remain above 9% for all of 2011.

November Employment Report: 39,000 Jobs, 9.8% Unemployment Rate - From the BLSThe unemployment rate edged up to 9.8 percent in November, and nonfarm payroll employment was little changed (+39,000), the U.S. Bureau of Labor Statistics reported today.  The following graph shows the employment population ratio, the participation rate, and the unemployment rate. The unemployment rate increased to 9.8% (red line). The Employment-Population ratio declined to 58.2% in November matching the cycle low set in 2009 (black line).  The Labor Force Participation Rate was steady at 64.5% in November (blue line). This is the percentage of the working age population in the labor force. The participation rate is well below the 66% to 67% rate that was normal over the last 20 years.  The second graph shows the job losses from the start of the employment recession, in percentage terms aligned at maximum job losses. For the current employment recession, employment peaked in December 2007, and this recession is by far the worst recession since WWII in percentage terms, and 2nd worst in terms of the unemployment rate (only the early '80s recession with a peak of 10.8 percent was worse).

Unemployment rate reaches 9.8 percent as hiring slows – In a surprising setback, the nation's unemployment rate climbed to 9.8 percent in November, a seven-month high, as hiring slowed across the economy. The report was a reminder that the economic recovery is proceeding more slowly and fitfully than many economists had expected. It is likely to push lawmakers before year's end to pass an extension of long-term unemployment benefits, which expired this week. Employers added a net total of only 39,000 jobs last month, a sharp decline from the 172,000 created in October, the Labor Department said Friday. The weakness was widespread. Retailers, factories, construction companies, financial firms and the government all cut jobs. The disappointing figures caught economists off guard. They had predicted the addition of 150,000 jobs, based on a raft of positive reports that showed busier factories, rising auto sales and a good start to the holiday shopping season in November. Yet all that failed to translate into mass hiring.

The November Jobs Report Disappoints Broadly - The monthly report on employment, given out by the Labor Department, is the most important statistic of the month for the White House, the American household and the financial industry. The report released on Friday morning at 8:30 am didn't disappoint--it is already a big event around the world's markets--but it did disappoint in its content, delivering just 39,000 non-farm payroll  jobs in the past month. The private sector added only 50,000 jobs. These numbers are way below what financial market participants had expected. They were looking  for a gain of 150,000 non-farm payroll jobs and 160,000 private sector gains. Some of this shortfall is due to seasonal adjustments, but that 's only a partial explanation. To add agony to disappointment, the unemployment rate ticked up a bit, from 9.6% to 9.8%.

After All the Hype, Jobs Up an Anemic 39,000; Unemployment Rises to 9.8% - Today the BLS reports that jobs gained a mere 39,000 and the unemployment rate shot up to 9.8%, the highest rate since April. Private payrolls gained a mere 50,000 compared to expectations of +160,000. Both jobs and the unemployment rate were worse than every single economist estimate which has me noting once again that economists as a group are sure one optimistic lot. Check out these Grim Job Details courtesy of Bloomberg.

    • Payrolls increased 39,000, less than the most pessimistic projection of economists surveyed by Bloomberg News, after a revised 172,000 increase the prior month, Labor Department figures showed today in Washington.
    • The jobless rate rose to 9.8 percent, the highest since April, while hours worked and earnings stagnated.
    • The unemployment rate was forecast to hold at 9.6 percent, according to the median prediction of 83 economists surveyed by Bloomberg. Estimates ranged from 9.4 percent to 9.7 percent.
    • Overall payrolls were forecast to climb by 150,000, according to the survey median, with estimates ranging from 75,000 to 200,000.
    • Manufacturing payrolls dropped by 13,000 in November, the most in three months. Economists had projected an increase of 5,000.
    • The report also showed an increase in the number of long- term unemployed Americans. The number of people unemployed for 27 weeks or more increased as a percentage of all jobless, to 41.9 percent, the highest since August.

So Much for Momentum - For more than a month now, you could have made a case that the recovery was gaining momentum.  But you can’t make that case very well any more. This morning’s jobs report – the first broad look at the economy’s performance in November — was disappointing and weak. Overall employment growth fell to 39,000, from 172,000. Private-sector hiring fell to 50,000 — which isn’t nearly enough to keep up with normal population — from more than 100,000 in each of the previous four months. Average hourly pay rose just 1 cent, to $22.75, the smallest gain in five months. The average length of the workweek remained stuck at 34.3 hours. What’s causing this? No one knows, to be honest. But the most likely suspect is the same one that has been hurting the economy for much of this year. Financial crises do terrible damage, and the economic aftershocks from them tend to last longer and be worse than people initially expect.

Employment situation (7 graphs) Given the other recent economic data that suggested the economy was improving and that the economy might actually be achieving self-sustained growth the November employment report was a major disappointment as the unemployment rate ticked up from 9.6% to 9.8%. Non-farm employment was little changed as it only ticked up 39,000, less than half the average monthly gains so far this year. Moreover, private payroll employment only rose some 50,000. Payroll employment continues to look much like it did in the last two recoveries that were also jobless recoveries. Since the emergence of the "Great Moderation" the nature of economic recoveries has changed drastically as this chart demonstrates.The average workweek was unchanged at 34.3 hours so the index of aggregate hours worked barely changed. This index did move up sharply last month so the three month growth rate of hours worked is still 2.4%, about the same as it was last month.Compared to the last two jobless recoveries the index of hours worked is doing relatively well this cycle. But the gain in average hourly earnings only rose $0.01 so the increase in average hourly earnings continues to weaken. The year over year gain is only 1.6%. Moreover, with the weakness in the workweek last months strength in average weekly earnings reversed.

Where are the jobs? - ALMOST everywhere you look, the American recovery seems to be picking up pace. The economy grew faster in the third quarter than originally reported. Industrial production continues to grow. Spending has been surprisingly strong, and the latest figures on pending home sales suggest that even housing markets may be stirring from their deep slump. The growth seems to be everywhere except the place it matters most—labour markets. Employment in America turned in a surprisingly poor performance in November, indicating that recovery still hasn't gotten the job creation machine turning steadily. This morning, the Bureau of Labour Statistics reported a disappointing gain of only 39,000 jobs for the month of November. The figure came in well below expectations. In October, the economy grew by an (upwardly revised) 172,000 jobs, and on Wednesday a private employment report estimated that the economy added 93,000 private sector workers. Markets had expected one of the strongest reports of the recovery so far. That's not what they received.

Seasonal Retail Hiring: Retailers remain cautious - According to the BLS employment report - and combining October and November - retailers hired seasonal workers at above the pace of last year, but well below the pre-crisis levels. Typically retail companies start hiring for the holiday season in October, and really increase hiring in November. Here is a graph that shows the historical net retail jobs added for October, November and December by year (not seasonally adjusted). This really shows the collapse in retail hiring in 2008 and modest rebound in 2009.  Retailers hired 433 thousand workers (NSA) net in October and November. This is above the 367 hired last year in October and November, but well below the pre-crisis average of close to 550 thousand for the same two months.  Note: this is NSA (Not Seasonally Adjusted), retailers employed 28 thousand fewer workers in November than October seasonally adjusted.

Why Didn’t Retailers Hire? - There was widespread weakness in the November jobs report with state and local government, factories and construction firms cutting positions, but the biggest surprise came from a decline in retail jobs. Amid expectations of a better holiday season this year, economists were expecting retailers to ramp up hiring. But the Labor Department reported that on a seasonally adjusted basis the economy shed 28,000 retail jobs. The decline could be the result of retailers getting more sales growth from the Web, or a desire to do more with less in the face of squeezed margins. But there are also indications that the November decline could be reversed somewhat in December due to the way the Labor Department calculates the numbers. The first issue is the seasonal adjustments. Retailers generally hire workers in the lead up to the holiday season, so in an effort to smooth out the data for the year, the Labor Department adjusts those numbers downward late in the year. So, while the retail trade sector actually added about 300,000 workers on a nonseasonally adjusted basis, that’s less than the number the Labor Department was expecting them to add based on historical comparisons.

Explaining last Month's Jobs Upside Surprise and this Month's Downside Surprise - One reason economists are frequently surprise is they have a tendency to extrapolate every economic uptick perpetually into the future yet they seldom do the same for negative news. I have no idea why this is so, but history certainly suggests that it is so. Last month, economists were giddy over retail hiring but I commented several times that I did not think it was sustainable. Today Calculated Risk has a very nice chart that shows that to be the case. It's easier to see what is happening if you unstack the chart. I did not go back to the actual data but I did move the bars around. Looked this way, last months seasonal hiring was not that great.

Employment Summary and Part Time Workers, Unemployed over 26 Weeks - This graph shows the job losses from the start of the employment recession, in percentage terms - this time from the start of the recession.  In the previous post, the graph showed the job losses aligned at the bottom.  This is by far the worst post WWII employment recession. From the BLS reportThe number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) was little changed over the month at 9.0 million. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job. The number of workers only able to find part time jobs (or have had their hours cut for economic reasons) declined slightly to 8.972 million in November. This has been around 9 million since August 2009 - a very high level. These workers are included in the alternate measure of labor underutilization (U-6) that was steady at 17.0% in November. The high for U-6 was 17.4% in October 2009. Still very grim.  This graph shows the number of workers unemployed for 27 weeks or more.  According to the BLS, there are 6.313 million workers who have been unemployed for more than 26 weeks and still want a job. This was up from 6.206 million in October. It appears the number of long term unemployed has peaked, however the level is extremely high - and the increases over the last two months is very concerning.

Those dreadful new unemployment numbers are even worse than they look. - Unemployment clocked in at 9.8 percent in November, according to the Bureau of Labor Statistics, up from 9.6 percent in October. More than 15 million Americans remain jobless. And 6.8 million Americans report being out of work for more than six months. These are terrible statistics no matter how you look at them. But in some ways, the headline numbers do not go far enough in capturing just how bad the labor market is. Digging deeper into the report, the numbers do not get any better. It's miserable job growth, more so than a flood of re-entrants into the labor market, that accounts for the rising rate. The economy added a measly 39,000 jobs in November, down from 172,000 in October. It needs to add about 125,000 jobs a month just to keep up with new entrants to the labor market (recent graduates, for instance). Excluding workers hired for the decennial census, the economy has done so in only one month in the last three years. The private sector did add jobs for the 11th straight month. But it added just 50,000 positions, the worst number since January.  Plus, the report showed that many segments of the population already disproportionately hit by the recession got smacked again. The number of Americans out of work for more than six months increased as a percentage of all jobless, to 41.9 percent. Unemployment among college graduates, whose degrees often insulate them from jobs woes, hit its highest level in 40 years, at 5.1 percent. Moreover, the employment-to-population ratio—a broad measure of how economically productive the population is—fell back to its recession-era low.

Getting Obama's Drift - Krugman - I felt sorry for Jared Bernstein, who surely knows better, having to convey the administration’s attempt to downplay the terrible jobs numbers.  I know what’s going on: the administration decided, more or less a year ago, that rather than admit that its stimulus package was inadequate and call for more, it would put on a happy face and hope for better news. But here’s the thing: by now we know that this strategy has been a political disaster. So you would think that the administration would change its line. But to do that, someone at the top has to make the decision to change direction. And clearly, nobody has. I don’t think there was a deliberate decision to persist in an obviously losing strategy; I just think top management has gone missing. And so the administration drifts …

A Bad Jobs Day; Mancession and Education Revisited - There was a 2009 meme about how the recession was really a “mancession”, where male-dominated fields like construction and finance had a larger hit and unemployment was going to hurt men much more than women. This story had a lot of legs in 2009 when unemployed rose much more rapidly among men than women. I argued at the time that this was a false dichotomy, and that the evolving nature of families securing homes and benefits leads to “two-income traps” where either parent being unemployed in a family put the family at risk. Men being more vulnerable than women ignores how vulnerable households themselves have become. Here’s what those two look like now:As you can see, male unemployment has stayed the same or trended slightly down (down 0.4% over the 12 month period) and female unemployment continues to trend up (up 0.4% over the past 12 month period). So I think we are seeing a move towards a greater gender parity in unemployment. To whatever extent the recession was hitting men more than women, that is disappearing rapidly right now.

Persistence of Long-Term Unemployment Tests U.S. - The longer people stay out of work, the more trouble they have finding new work. That is a fact of life that much of Europe, with its underclass of permanently idle workers, knows all too well. But it is a lesson that the United States seems to be just learning.  This country has some of the highest levels of long-term unemployment — out of work longer than six months — it has ever recorded. Meanwhile, job growth has been, and looks to remain, disappointingly slow, indicating that those out of work for a while are likely to remain so for the foreseeable future. Even if the government report on Friday shows the expected improvement in hiring by business, it will not be enough to make a real dent in those totals.  So the legions of long-term unemployed will probably be idle for significantly longer than their counterparts in past recessions, reducing their chances of eventually finding a job even when the economy becomes more robust.  “I am so worried somebody will look at me and say, ‘Oh, he’s probably lost his edge,’ ” “I mean, I know it’s not true, but I’m afraid I might say the same thing if I were interviewing someone I didn’t know very well who’s been out of work this long.”

Will Today's Unemployed Become Tomorrow's Unemployable? - Lots of smart economists and policy makers have been debating whether the problems in the job market are primarily cyclical (that is, temporary, and related to slack demand) or primarily structural (that is, reflecting a deeper problem in the economy, such as a tougher mismatch between the skills employers want and the skills workers have). But this discussion largely misses an important point: Cyclical unemployment can become structural unemployment because perfectly good workers become less employable the longer they are out of work. Economists have long known this to be the case, and have documented that the likelihood of finding a job falls drastically the longer a person has been unemployed. The following chart, from a 2008 paper by the University of Chicago’s Robert Shimer, shows the percentage of each group of workers with various durations of unemployment who found work in the coming month:  The horizontal axis shows how long someone has been unemployed, and the vertical axis shows the likelihood that the person will find a job in the next month. Professor Shimer found that 51 percent of workers who had been unemployed for one week obtained work in the following month, but the share declined sharply after that.

Employers in U.S. Announce Most Job Cuts in Eight Months - Employers in the U.S. announced plans in November to cut 48,711 jobs, the most in eight months, as government agencies trimmed payrolls. “Job cuts that have been concentrated at the state and local level could expand to include federal workers in the new year,” John A. Challenger, chief executive officer of Challenger, Gray & Christmas, said in a statement. “Other sectors have seen significant declines in job cuts this year and, at the moment, there is little evidence of a possible resurgence in 2011.” Today’s report also showed that employers announced plans in November to hire 26,012 workers, down from 124,766 the prior month. Retail businesses led the gains, planning to add 15,900 workers. Government and non-profit agencies have announced plans to let go of 138,979 workers this year, which is 177 percent more than the 50,168 firings by the pharmaceutical industry, the next biggest job cutter, according to Challenger.

The American Jobs Emergency Requires Action -This is not a recovery. It’s a continuing jobs emergency and it demands action.We learned this morning that unemployment rose to 9.8 percent in November and employers added only 39,000 jobs. Private employers added 50,000 — the smallest gain since January. Government employment continued to shrink. We’re heading in the wrong direction. In October, the jobless rate was 9.6 percent, and employers added 172,000 jobs. Private-sector job growth totaled 160,000. At this rate unemployment won’t return to its pre-recession level for more than a decade, if ever. Over 15 million Americans were jobless in November. This doesn’t include those who are working part-time but would prefer to work full time. Nor does it include a record 1.3 million who are too discouraged even to look for work.   Nor does it take account of the fact that most families are dependent on two breadwinners. So to figure out the true impact on most families, all these numbers have to be doubled. Nor does it reflect the fact that the level of unemployment tracks level of education. Only 5 percent of those with college degrees are now unemployed, while more than 20 percent of everyone else is without work

Why "Recession-Proof" Jobs Are a Myth - When President Obama proposed a federal pay freeze recently, there must have been quite a few civil servants who thought, "Whoa! This isn't supposed to happen!"In private firms, pay freezes have become as common as Post-It notes. But government jobs, you'll recall, are supposed to be "recession-proof" and far less susceptible to the strains of a weak economy. The government has never said that, exactly, but lots of career experts have, and if the compact was never overt it was at least well understood: Government jobs tend to come with lower pay and prestige, but with benefits and job security that make up for it.[See 20 industries where jobs are coming back.] No longer. As with so many other things, many of the old assumptions about safe jobs and stable careers have been shattered by the grueling economic transformation we're still in the middle of. Yet the ubiquitous lists of best careers and recession-proof jobs continue to propagate the phony idea that some lines of work are immune to economic stress. Here are some of the careers recommended by outfits like CareerBuilder, Forbes, Time, HR World, and Associated Content, along with the more sobering reality:

How to boost employment - Given the urgency of boosting employment and reducing unemployment, we need much more than vague ideas about training and apprenticeship. The good news is that there are at least two very good ideas which could be implemented quite easily and which would have a direct effect on employment. The first—and this can’t be stressed enough—is simply extending the federal unemployment extensions. As Menzie Chinn notes, the CEA has scored this, and the numbers are enormous: already, the program has increased the level of employment by 793,000 jobs. If the extensions are kept dead, there will be 593,000 fewer jobs in a year’s time than there would be if they were resuscitated, including more than 46,000 jobs in Florida and more than 26,000 jobs in Michigan. This is not intuitive, especially to economist types who think that incentives matter and that at the margin, paying people to remain unemployed is not going to increase their chances of getting a job. But the fact is that those unemployment benefits are spent, and the extra economic activity naturally creates employment.

Hangover theory and morality plays - Make-work is not a path to prosperity, and effort is not production. Prosperity is a matter of the rate at which goods and services that are highly valued can be produced, whether the production is labor intensive or capital intensive, however much or little people are working. Employment is a more complicated issue than output. Under current (foolish) institutional and ideological arrangements, for most people, employment is our main source of claims on current or future production, and also a measure of our respectability and value as human beings. Holding institution and ideology constant, unemployment is harmful far beyond its effect on output. But let’s not confuse objectives. Employment and output are historically correlated, because it takes work to produce output, and also because the measured value of output is dollar weighted and there are few consumers to confer value without widespread employment. But the degree to which the production of any given thing is tethered to traditional employment is variable and technology dependent, and the ability to confer value through purchase could be distributed via means other than employment. Employment and prosperity are different things.

Marx on a global wage - What are the effects of these global shifts in manufacturing for the wage in all countries?  It turns out that Karl Marx had some remarkably prescient ideas about this question in the 1860s that still seem important today.  Here are some markedly current observations from Marx's Capital (link) on the wage in a competitive international context: A writer of the 18th century, often quoted already, the author of the "Essay on Trade and Commerce," only betrays the innermost secret soul of English capitalism, when he declares the historic mission of England to be the forcing down of English wages to the level of the French and the Dutch. [37] With other things he says naively: "But if our poor" (technical term for labourers) "will live luxuriously ... then labour must, of course, be dear.... When it is considered what luxuries the manufacturing populace consume, such as brandy, gin, tea, sugar, foreign fruit, strong beer, printed linens, snuff, tobacco, etc." [38] He quotes the work of a Northamptonshire manufacturer, who, with eyes squinting heavenward moans: "Labour is one-third cheaper in France than in England; for their poor work hard, and fare hard, as to their food and clothing. Their chief diet is bread, fruit, herbs, roots, and dried fish; for they very seldom eat flesh; and when wheat is dear, they eat very little bread." [39]

Wealthy people hire people? I didn’t know that. "Unemployed people hire people? Really? I didn't know that. The truth is the unemployed will spend as little of that money as they possibly can."(here) Rep. John Shadegg of Arizona and Economics Nobel Prize laureate Actually, of course, since Shadegg is right that the unemployed will spend as little of that money as they possibly can, and since as little of that money as they possibly can is, for most of the unemployed, all of the unemployment compensation they receive, unemployed people who receive unemployment compensation, unlike unemployed people who don’t, do hire people. Or at least prevent the layoffs of people. Shadegg might want to consult the waitress at the coffee shop he stops at in the morning. Or better yet, the real estate agent who’s trying to sell that house down the street from his that isn’t quite yet in foreclosure. Shadegg’s economics theory, of course, would make a perfect subject for our president to use as an object lesson for the public about the Republicans—and as a call to action, or rather anger, by the public. But then, he’d have to actually speak to the public about policy. And since that’s not in his repertoire of things he thinks a president should do, or is not in his repertoire of things he’ll trouble himself to do, Shadegg & Friends will win, on the policy itself and politically; when the economy begins to collapse again, no one will know why, and even then Obama won’t explain or remind them.

Millions Bracing for Cutoff of Unemployment Checks - More than two million jobless Americans are entering the holiday season seized with varying levels of foreboding, worry or even panic over what lies ahead as they cope with the expected cutoff of their unemployment benefits.  Their economic fates are now connected on a taut string to skirmishing between Democrats and Republicans in Washington over whether to extend federal financing for unemployment benefits for the long-term jobless.  Tuesday marked the expiration of a pair of federal programs that had extended unemployment benefits anywhere from 34 to 73 weeks on top of the 26 weeks already provided by the states.  Some recipients have already received their final checks. If the impasse remains unresolved, others will see their payments lapse in the coming days or weeks, depending on how long they have been receiving benefits.  By the end of December, more than two million are set to lose their extended benefits, according to estimates by the National Employment Law Project, and about a million more by the end of January.

2 million lose jobless benefits as holidays arrive - Extended unemployment benefits for nearly 2 million Americans begin to run out Wednesday, cutting off a steady stream of income and guaranteeing a dismal holiday season for people already struggling with bills they cannot pay. Unless Congress changes its mind, benefits that had been extended up to 99 weeks will end this month. That means Christmas is out of the question for Wayne Pittman, 46, of Lawrenceville, Ga., and his wife and 9-year-old son. The carpenter was working up to 80 hours a week at the beginning of the decade, but saw that gradually drop to 15 hours before it dried up completely. His last $297 check will go to necessities, not presents. "I have a little boy, and that's kind of hard to explain to him,"

My Agnosticism about UI - Greg Mankiw - I have avoided commenting on the topic because I am ambivalent on the issue, largely because I am agnostic about what economists know about optimal UI.  But perhaps it would be useful to explain my agnosticism. UI has pros and cons.  The pros are that it reduces households' income uncertainty and that it props up aggregate demand when the economy goes into a downturn.  The cons are that it has a budgetary cost (and thus, other things equal, means higher tax rates now or later) and that it reduces the job search efforts of the unemployed.  To me, all these pros and cons seem significant.  I have yet to see a compelling quantitative analysis of the pros and cons that informs me about how generous the optimal system would be. So when I hear economists advocate the extension of UI to 99 weeks, I am tempted to ask, would you also favor a further extension to 199 weeks, or 299 weeks, or 1099 weeks?  If 99 weeks is better than 26 weeks, but 199 is too much, how do you know?

CEA Assessment of the the Impact of Letting UI Extensions Expire - From the CEA's report "The Economic Impact of Recent Temporary Unemployment Insurance Extensions" released earlier today. These conclusions are depicted in Figure 5 from the report. ...CEA estimates that in December 2011, without a year-long extension:

  • Employment would be 593,000 lower than if there were an extension; and
  • GDP would be 0.6 percent lower than if there were an extension.

Food Banks Bracing For End Of Extended Unemployment Benefits - Food banks across the country are watching for the end of federally-funded extended unemployment insurance. "We are bracing for it," said Vicki Escarra, CEO of Feeding America, the nation's largest domestic hunger-relief charity, in an interview with HuffPost. Escarra said that Feeding America's 200 member food banks across the country feed nearly six million people every week.  "I can assure you, if these unemployment insurance benefits are not reinstated we'll see these numbers go way up," Escarra said.  Two federal programs -- Emergency Unemployment Compensation and Extended Benefits, which together provide up to 73 weeks of jobless aid on top of 26 weeks of state aid -- are set to begin to expire this week because Congress has not reauthorized them. According to the Labor Department, two million long-term unemployed will be dropped from the programs by the end of December if Congress does not act.

15 Mind-Blowing Facts About Wealth And Inequality In America lots of charts – see 2, 3, &4 !

Poverty and immigration in the U.S. and abroad - The incomes of American households at the low end of the distribution aren’t especially high, and haven’t increased much, when compared to those of their counterparts in other rich nations. But perhaps this is an unfair comparison. After all, hasn’t the United States absorbed a much larger flow of immigrants than any other affluent country. Actually, as the following chart shows, we’re not exceptional in this regard. Does the U.S. have more of the type of immigrants most likely to struggle in the labor market — those with limited education? Again no. As this next chart indicates, here too we’re in the middle of the pack.

States Lift Spending After Spell of Cuts - State government spending is growing again amid higher taxes and a slowly improving economy, although budgets continue to face severe pressure.  The total spending of all state budgets for fiscal 2011, which for most states began July 1, rose 5.3% to $645.1 billion from the year before, according to a report from the National Governors Association and the National Association of State Budget Officers to be released Wednesday. This follows two years of lower spending amid a grueling recession. States' budget gaps are likely to persist for at least the next few years as tax revenues, though edging up, remain far below their pre-recession highs. And federal stimulus funds—which helped states plug budget holes during the hard times—are declining and will be all but exhausted by fiscal 2012. In the current fiscal year, states are collecting more taxes as a result of rising income and sales taxes. They also enacted $6.2 billion in new taxes and fees. In fiscal 2010, states enacted far more new taxes and fees, $23.9 billion.

States face $41 billion budget gaps - The nation's battered state governments face a collective $41 billion budget gap next fiscal year, a survey released Wednesday found. State officials will have to contend with slow revenue growth, increased spending demands and the end of federal stimulus assistance next year, according to the semi-annual Fiscal Survey of States, released by the National Governors Association and the National Association of State Budget Officers. "Many budget and governor's offices are telling us that fiscal 2012 could be even worse because so many painful choices have already been taken and more need to be taken as we go further," said Scott Pattison, head of the state budget officers' group.  The start of the 2012 fiscal year is still seven months away for most states, but the gaps are already appearing.  Some 23 states are reporting a total of $41 billion in budget shortfalls. And 11 states must close $10 billion in deficits before the current fiscal year ends.

Illinois in $1.5bn bond sale to pay bills - Illinois on Monday begins a $1.46bn bond sale that will allow the cash-strapped state to use future payments from a legal settlement with tobacco companies to pay its bills. The sale comes at a nervous time for municipal debt markets. In the past two weeks, investors have withdrawn more than $5bn from mutual and exchange-traded funds that buy “munis”, according to Lipper, the fund tracker, as a rise in yields on benchmark Treasury bonds compounded fears of rising defaults by muni issuers. Illinois, along with California, is among the most troubled of the 50 US states, which are struggling with budget deficits and underfunded pension plans. Most of the proceeds from this week’s bond sale will pay $1.2bn to $1.3bn of overdue bills to vendors, who, under state law, would have to file claims in court if they are not paid by December 31, said John Sinsheimer, Illinois’ director of capital markets.

Property-Tax Collection Plunge May Make Michigan Towns Borrow or Default - Cities and towns across Michigan have seen property-tax collections plunge as much as 20 percent in the past year, the steepest drop since a 1994 state tax rewrite, forcing scores of communities to choose by March whether to borrow to pay bills or risk default on bonds. The municipalities rely on property taxes for as much as 60 percent of their revenue, according to the Michigan Municipal League. State support that typically composes another 20 percent to 35 percent of city budgets has been slashed by almost a third in the past year, during the longest recession since the 1930s. The end of a three-year federal stimulus worth $3.1 billion to Michigan -- a sum roughly equal to two annual budgets for Detroit -- will force “fundamental decisions,” according to a memorandum by the Michigan Senate Fiscal Agency. “This gets real bad in about 90 to 150 days,”

Wayne Co. imposes 20% wage cuts on workers - Wayne County Executive Robert Ficano today imposed what amounts to a nearly 20% wage reduction on 1,400 employees in the county’s largest union after two years of failed negotiations. Employees’ checks will be reduced 10% for not accepting wage cuts for the last budget year and an additional 10% for the 2010-11 budget. “Our efforts have been tireless, and unfortunately, it’s painfully clear this action must be taken due to the fiscal reality we’re all living in,” Ficano said. “These decisions are neither easy, nor taken lightly. We’ve continued to act in good faith throughout this process, which included rescinding layoffs, hoping proposed concessions would be accepted by the membership. Unfortunately, time and time again, they were not, and we’re left with a disappointing and devastating situation.”

Camden layoff plan targets a quarter of city's workforce - Camden will lay off nearly half of its police officers and a third of its firefighters, while eliminating positions in every other city office, according to a layoff plan approved Tuesday by the state. The 383 layoffs represent about a quarter of the city's workforce and touch all corners of city government - from 15 courtroom positions to 20 police dispatchers to all four animal-control officers. The elimination of 180 positions from a 373-member force means more bad news for a poor, violent city that has seen 37 homicides this year. A national survey recently named Camden the second-most dangerous in the United States, although police officials have pointed to some recent reductions in crime.Camden appears to be in a worse predicament than Newark, which laid off 167 of its 1,034 police officers this week after negotiations broke down between their union and the city. Cities and towns around New Jersey are struggling this year following cuts in state aid, with layoffs in public safety increasingly common.

Newark police layoffs are largest in 32 years - More than 150 police officers lost their jobs Tuesday after negotiations between their union and New Jersey's largest city broke off, reducing the police force as violent crime has started to rise after three years of decline. The layoffs began at midnight Monday and were to continue through 4 p.m. Tuesday when remaining officers finished their shifts, Police Director Garry McCarthy said. The 167 layoffs mark the city's largest force reduction in 32 years. Mayor Cory A. Booker criticized the Fraternal Order of Police for an "unwillingness to make one penny's worth of concessions in order to save jobs" and noted that all other city employee unions had made concessions in recent months. He also slammed the union's executive board for rejecting the city's demands without putting them to a vote by the full membership.

Brookings Global MetroMonitor - The global financial crisis of the late 2000s precipitated an economic downturn of such magnitude and reach that many now refer to the period as the “Great Recession.” According to the International Monetary Fund, global economic output, which had grown at an annual rate of 3.2 percent from 1993 to 2007, actually shrank by 2 percent from 2008 to 2009. A precarious economic recovery is now underway.  Aggregate views of the global economy, however, mask the distinct experiences of its real hubs—major metropolitan areas. Metro areas, which are economically integrated collections of cities, suburbs, and often surrounding rural areas, are centers of high-value economic activity in their respective nations and worldwide. And because metros form the fundamental bases for national and international economies, understanding their relative positioning before,during, and after the Great Recession provides important evidence on emerging shifts in the location of global economic resilience and future growth.  The Global MetroMonitor examines data on economic output and employment in 150 of the world’s largest metropolitan economies, located in 53 countries, from 1993 to 2010. View trends for individual metropolitan areas »

Dozens protest against LAUSD mass layoffs (KABC) -- Tuesday was the last day of work for hundreds of Los Angeles Unified School District employees who are losing their jobs because of budget cuts. Dozens of members from the United Teachers of Los Angeles joined concerned parents and teachers on Tuesday evening at the district headquarters in downtown Los Angeles to protest the layoffs. The district will be letting go of 680 classified workers including office technicians, secretaries, cafeteria workers and custodians. Nearly 3,700 more workers will be bumped to other positions or have their salaries cut. Many will be moved from one school campus to another mid-semester

The corporate takeover of American schools - The top positions in state education across the US – for example, Secretary of Education Arne Duncan, recent chancellors Joel Klein (New York) and Michelle Rhee (Washington, DC), and incoming Chancellor Cathleen P Black (New York) – reflect a trust in CEO-style leadership for education management and reform. Along with these new leaders in education, billionaire entrepreneurs have also assumed roles as education saviours: Bill and Melinda Gates, and Geoffrey Canada.  What do all these professional managers and entrepreneurs have in common? Little or no experience or expertise in education. Further, they all represent and promote a cultural faith in the power of leadership above the importance of experience or expertise. When Klein quit his post as chancellor in New York – soon after Michelle Rhee left DC – the fact that he was leaving for a senior position at News Corp and that his replacement would be a magazine executive sent a strong message. The implication was that the American public distrusts not only schools, but also teachers and education experts.

Suburban fire and police pensions underfunded by $5 billion - Suburbs from wealthy to working-class have combined to dig a $5 billion hole for taxpayers on the hook to pay for the pensions of police officers and firefighters. A Tribune analysis of the Depression-era pension system found that suburban leaders' failures and missteps have collectively helped create another staggering layer of crisis beyond the better-known problems that have the state and city of Chicago in a stranglehold. Some communities are now slashing budgets or even laying off workers as they try to reconcile the promises they made to cops and firefighters with the amount of money actually set aside for them. “I feel at the moment as if I’m lying to every new hire to the police and fire departments by promising them a pension I’m not sure I can deliver,” said Evanston Mayor Elizabeth Tisdahl. Of the 300-plus pension funds across the region, only about 20 are rated by the state as fully funded.

Washington elites making their move on Social Security - Alan Simpson and Erskine Bowles, the co-chairs of President Obama’s deficit commission ... released their proposal to reduce the federal deficit... In releasing their plan, the co-chairs went out of their way to make clear that they were proposing changes to Social Security “for its own sake, not for deficit reduction.” ... Simpson and Bowles just couldn’t keep their hands off the program. One thing they propose is increasing Social Security’s retirement age to 69. ... Increasing the age to 69 would cut benefits by one-quarter from a decade ago, when the retirement age was 65. The co-chairs also want to increase the early retirement age to 64. ...As a new General Accountability Office report concluded... Raising the early retirement age will shut out workers who are disproportionately low income and minority, potentially forcing them to seek disability benefits or welfare.  Over the last quarter-century, life expectancy of lower-income men increased by one year, compared to five for upper-income men. And lower-income women have experienced declines in longevity. ... In effect, the Bowles-Simpson plan says to America’s workers that they must work longer for less because the rich are living longer.

Winners and Losers Under the Simpson-Bowles Social Security Plan - Every Social Security proposal has relatively clear winners and losers, for the reason that Social Security is a simple income transfer program. The benefits it pays must (in the long run) be equal to the taxes it collects, and the distribution of both its tax burdens and its benefit payments are fairly straightforward to analyze. In my initial piece on the Simpson-Bowles Social Security plan, I explained its major provisions as well as the broader philosophical choices that it embodied. I thought it might be useful in this follow-up piece to explain in clearer terms who would be the plan’s winners and losers. A complete answer would be fairly complex given the broad array of Social Security’s distributional patterns by income level, sex, longevity, birth year, marital status and other factors. I will instead simplify and focus on three obvious categories of winners

Class And Social Security - Krugman  -Digby sounds the warning: a fair number of “centrist” Democrats – probably including the Incredible Shrinking President — seem willing, even eager, to join up with Republicans in cutting Social Security benefits and raising the retirement age. The question you have to ask is, why are Democrats such suckers on this issue? The proximate cause is that cutting Social Security is one of those things you’re for if you’re a Very Serious Person. Way back, I wrote that inside the Beltway calling for Social Security cuts is viewed as a “badge of seriousness”, which has nothing to do with the program’s real importance or lack thereof to the budget picture. But why Social Security?  The answer, I suspect, has to do with class. When medical expenses are big, they’re big; even the very affluent are grateful when Medicare pays the bills for their mother-in-laws bypass or dialysis. The importance of Medicare, in short, is obvious to all but the very rich.Social Security, by contrast, is something that matters enormously to the bottom half of the income distribution, but no so much to people in the 250K-plus club. A 30 percent cut in benefits would represent disaster for tens of millions of Americans, but a barely noticeable inconvenience for VSPs and everyone they know.

Very Serious Differences About Social Security - Paul Krugman suspects that cutting Social Security has become a badge of seriousness because Social Security . . .is something that matters enormously to the bottom half of the income distribution, but no so much to people in the 250K-plus club. A 30 percent cut in benefits would represent disaster for tens of millions of Americans, but a barely noticeable inconvenience for [Very Serious People] and everyone they know. So going after Social Security is a way to seem tough and serious — but entirely at the expense of people you don’t know. Certainty, I doubt anyone thinks about it in such crass terms. I take Paul to mean that subconsciously Social Security seems like something of a relic to the “Investor Class” who thinks about their retirement not in terms of pensions and government payments but their 401(k).  I would venture a perhaps more, perhaps less cynical view depending on your perspective. I think Very Serious People concentrate on Social Security because they can understand it. The program is relatively simple and the math straightforward. The ultimate driver of most projections – that there will be more retirees than workers – makes sense.

Social Security Fix Is To Raise Cap. Former Clinton Secretary of Labor, Prof. Robert Reich, makes quick work of dispensing with the phony ‘problem’ with Social Security.  Reich writes here. “Let’s be clear about the long-term deficit problem. It’s not Social Security. Social Security’s shortfall is modest. It arises because so much income has gone to top earners in recent years that the payroll tax covers a smaller percentage of overall income than was planned for. I should know. I used to be a trustee of the Social Security trust fund. The obvious answer is to lift the cap on income subject to Social Security payroll taxes, now $106,800, to about $150,000.”

Rising Medicaid costs mean service cuts likely - Indiana lawmakers likely will cut some Medicaid-provided services in the upcoming legislative session after learning Wednesday that the state's share of government health insurance program costs will balloon by $1.1 billion over the next two years unless checked.  The federal government pays about two-thirds of Indiana's Medicaid costs, but human services chief Michael Gargano told the State Budget Committee that the state's share has been growing by more than 10 percent each year. He said that's because the recession has made more people eligible for Medicaid, which serves those who are needy and disabled. Gargano, secretary of the Indiana Family and Social Services Administration, asked for an additional $900 million in state Medicaid funds over the two-year period starting next July 1. He recommended the General Assembly rein in the costs by cutting some optional services the state currently provides.

Arizona Cuts Financing for Transplant Patients - Even physicians with decades of experience telling patients that their lives are nearing an end are having difficulty discussing a potentially fatal condition that has arisen in Arizona: Death by budget cut.  Effective at the beginning of October, Arizona stopped financing certain transplant operations under the state’s version of Medicaid. Many doctors say the decision amounts to a death sentence for some low-income patients, who have little chance of survival without transplants and lack the hundreds of thousands of dollars needed to pay for them.  “The most difficult discussions are those that involve patients who had been on the donor list for a year or more and now we have to tell them they’re not on the list anymore,”

House could delay Medicare rate cuts - The House on Monday is scheduled to take up a $1-billion measure delaying by one month a 23 percent cut in federal Medicare reimbursements to doctors. The payment reduction is scheduled to go into effect Wednesday if members of the House don't act. The Senate approved the legislation earlier this month A 1997 law requires that doctors' Medicare rates be adjusted each year based on the health of the economy, with the goal of keeping the program in the black. Rate cuts have been blocked 10 times in the last eight years, including four times this year. The American Medical Association has said that if the cut is enacted, doctors may have to stop accepting Medicare patients. Some 43 million people, mostly senior citizens, receive Medicare benefits.

Congress Approves Bill To Delay Reduction to Medicare Physician Pay - On Monday, Congress voted to postpone for one month a scheduled 23% cut to Medicare physician payment rates, Reuters reports (Ferraro, Reuters, 11/29). The House-approved legislation (HR 5712) was passed by the Senate on Nov. 18 and includes a 2.2% payment increase to physicians that would be funded through a 20% reduction in payments for therapy services (Millman, "Healthwatch," The Hill, 11/29). The one-month delay would cost $1 billion over a decade, the AP/Atlanta Journal-Constitution reports.The bill would give lawmakers one month to consider long-term solutions after it is signed into law by the president. Senate Finance Committee Chair Max Baucus (D-Mont.) and ranking member Chuck Grassley (R-Iowa), who crafted the one-month delay, have pledged to develop a 12-month postponement that would allow time to create a new payment system. Changing the current formula is expected to cost $300 billion over 10 years (Abrams, AP/Atlanta Journal-Constitution, 11/29).If Congress does not act on another postponement before Jan. 1, 2011, a 25% Medicare payment cut for physicians will take effect. According to Cecil Wilson, president of the American Medical Association, the payment cut could cause a "Medicare meltdown" for beneficiaries

Congress Agrees to Delay Medicare Payment Cuts - Congress agreed Monday to a one-month delay in Medicare payment cuts to doctors, giving a short-term reprieve to a looming crisis over treatment of the nation's elderly.  The House, in approving by voice vote the bill passed by the Senate earlier this month, postponed a 23 percent cut in doctors' pay scheduled to take effect Dec. 1. That gives lawmakers a month to come up with a longer-term plan to overhaul a system that in recent years has bedeviled Congress, angered doctors and jeopardized health care for 46 million elderly and disabled.  “This bill is a stopgap measure to make sure that seniors and military families can continue to see their doctors during December while we work on the solution for the next year,” said Rep. Frank Pallone, R-N.J., chairman of the Energy and Commerce health subcommittee.  Health care payment formulas for military service members and veterans are tied to Medicare.
18 hours ago

Obamacare: where are we? - Tyler Cowen - I became so sick of blogging this topic, but it's time to revisit where matters stand: 1. The health care sector is becoming more concentrated, largely through mergers and acquisitions.2. It seems more obvious that requiring health insurance companies to limit their overhead costs is a mistake.  3. Contrary to my earlier expectations, the legal issues are not going away.  4. Negative trends in health care markets continue, and many of these will be blamed, by many people, on the new health care reform.  5. The differential payment rates across Medicare, Medicaid, and private insurance are becoming unsustainable more quickly than I had anticipated; 6. I am less worried about mandate enforcement than I used to be; Austin Frakt has had good posts on this at TheIncidentalEconomist. 7. I am more worried about employers shedding employees onto the subsidized exchanges than I used to be;  8. I have the new worry of uncooperative state governors trying to shed their Medicaid loads onto the federally-subsidized health insurance exchanges.  Could one or two rogue states on this issue create a crisis in the system?  9. The Republicans still don't have a good alternative plan or compromise to offer..

Erosion of Employer-Based Coverage Highlights Importance of Health Reform, CBPP: The health reform law (Affordable Care Act) includes a number of provisions to strengthen the employer-based insurance system and improve access to affordable health coverage in other ways. Recent Census Bureau data show why such step are so important, as a new report by my colleague Matt Broaddus explains. The number of uninsured rose by more than 4 million in 2009 to a total of 51 million, or more than one of every six Americans. The largest single-year increase on record (these data go back to 1987), it was the result of a continued decline in private health coverage — primarily in employer-sponsored insurance (ESI). Employer coverage rates fell precipitously for both children and working-age adults: ...These declines reflect both the large job losses resulting from the recession and the increasing difficulty that employers and workers are having in financing health care coverage as costs rise.

U.S. Senate Approves Biggest Food-Safety Overhaul in 70 Years - The biggest U.S. food-safety overhaul in more than 70 years won Senate passage as lawmakers sought to curb food-borne illnesses that cost the nation an estimated $152 billion a year.  The U.S. Food and Drug Administration would gain more power to police food companies under the bill that passed today in a 73-25 vote. The measure, backed by the food industry, public- health groups and consumer advocates, adds inspections and lets the FDA force recalls, rather than relying on companies to voluntarily remove contaminated foods from store shelves.

Senate passes sweeping food safety bill The Senate on Tuesday approved the biggest overhaul to the nation's food safety laws since the 1930s. The 73-to-25 vote gives vast new authorities to the Food and Drug Administration, places new responsibilities on farmers and food companies to prevent contamination, and -- for the first time - sets safety standards for imported foods, a growing part of the American diet.  The legislation follows a spate of national outbreaks of food poisoning involving products as varied as eggs, peanuts and spinach in which thousands of people were sickened and more than a dozen died.  The measure passed with support from Democrats and Republicans, one of the few pieces of legislation to bridge differences in an otherwise sharply divided body. The House approved a more stringent version of the bill more than a year ago.

House May Block Food Safety Bill Over Senate Error - A food safety bill that has burned up precious days of the Senate’s lame-duck session appears headed back to the chamber because Democrats violated a constitutional provision requiring that tax provisions originate in the House. By pre-empting the House’s tax-writing authority, Senate Democrats appear to have touched off a power struggle with members of their own party in the House. The Senate passed the bill Tuesday, sending it to the House, but House Democrats are expected to use a procedure known as “blue slipping” to block the bill, according to House and Senate GOP aides. The debacle could prove to be a major embarrassment for Senate Democrats, who sought Tuesday to make the relatively unknown bill a major political issue by sending out numerous news releases trumpeting its passage.

Food & Water Watch Analysis Reveals Surge in Potential Privatization Deals in 2010 -  Ravaged by the recent economic recession, more municipalities are considering selling or leasing their water systems in order to quickly infuse dwindling coffers with much needed cash. Analysis released today by the national consumer advocacy group Food & Water Watch reveals that as of October 2010, at least 39 communities in the U.S. were considering selling or leasing their water systems to private operators—more than five times the number of completed privatization deals in a typical year over the last two decades. The first comprehensive report to quantify and analyze municipal water system sales and concessions in the U.S., Trends in Water Privatization: The Post-Recession Economy and the Fight for Public Water in the United States also finds that the typical water system poised for privatization in 2010 served 45 times as many people as those leased or sold over the last twenty years. The average system up for privatization in 2010 served nearly 283,000 people, whereas those that had been privatized served an average of 6,285 customers.

Water, Wheat and Russia - In a time when there is much discussion of peak oil and the idea that other commodities are less abundant or more costly to access, one issue that might not get enough attention among investors is the shortage of water.  Some political scientists, for example, have suggested that the next war in the Middle East may be over water not oil. Grain is very water intensive.  Roughly speaking, it takes 1000 tons (100 cubic meters) to grow a ton of grain.  Find a country that is importing grain, and you’ll find a country that has a water deficit. There has been a drought around the Black Sea that has limited the wheat production in Russia and the Ukraine especially.  The price of wheat rose about 65% form late June through early August as the market priced in the export restrictions imposed in Russia and to a lesser extent Ukraine.  There was a drought in Australia and some flooding in Canada that also limited projections of the crop size.

New Threat to Global Food Security as Phosphate Supplies Become Increasingly Scarce - A new report from the Soil Association reveals that supplies of phosphate rock are running out faster than previously thought and that declining supplies and higher prices of phosphate are a new threat to global food security. ‘A rock and a hard place: Peak phosphorus and the threat to our food security’ [pdf 1.1mb] highlights the urgent need for farming to become less reliant on phosphate rock-based fertiliser. [1] Intensive agriculture is totally dependent on phosphate for the fertility needed to grow crops and grass. Worldwide 158 million tonnes of phosphate rock is mined every year, but the supply is finite. Recent analysis suggests that we may hit ‘peak’ phosphate as early as 2033, after which supplies will become increasingly scarce and more expensive. [2]This critical issue is missing from the global policy agenda - we are completely unprepared to deal with the shortages in phosphorus inputs, the drop in production and the hike in food prices that will follow. Without fertilisation from phosphorus it has been estimated that wheat yields could more then halve in coming decades, falling from nine tonnes a hectare to four tonnes a hectare.

Population, Food Supplies, and the Big Unasked Question - Speaking in Abu Dhabi on November 23, 2010, FAO Director-General Jacques Diouf stated, “The key to long-term food security lies in boosting investment in agriculture, particularly in low-income food-deficit countries.” He also noted, “The rapid increase in hunger and malnourishment since the food crisis of 2008 reveals the inadequacy of the present global food system and the urgent need for structural changes….The food price and economic crises have had a severe impact on millions of people in all parts of the world.”

Cargo preferences cost $140 million that could have helped the hungry - Cargo preferences are the regulations that require a large part of U.S. food aid to be shipped in U.S. ships.  The regulations are more cumbersome and expensive than you might think, leaving even some U.S. businesses out of luck, simply because they use other countries' ships for parts of a cargo's journey.  The losers from these policies are the world's hungry. We think of a food aid as a way to demonstrate American generosity to the world, but the governments of countries that receive the food aid instead see a tragically mixed message, a sort of gesture toward generosity combined with greed at the expense of some of the poorest people in the world. Cornell professor Chris Barrett in today's Washington Post explains:

UN Climate Conference: Global Warming Could Double Food Prices — Even if we stopped spewing global warming gases today, the world would face a steady rise in food prices this century. But on our current emissions path, climate change becomes the "threat multiplier" that could double grain prices by 2050 and leave millions more children malnourished, global food experts reported Wednesday. Beyond 2050, when climate scientists project temperatures might rise to as much as 6.4 degrees C (11.5 degrees F) over 20th century levels, the planet grows "gloomy" for agriculture, said senior research fellow Gerald Nelson of the International Food Policy Research Institute. The specialists of the authoritative, Washington-based IFPRI said they fed 15 scenarios of population and income growth into supercomputer models of climate and found that "climate change worsens future human well-being, especially among the world's poorest people."  Change apparently already is under way. Returning from northern India, agricultural scientist Andrew Jarvis said wheat farmers there were finding warming was maturing their crops too quickly.

Crop Failures and Drought Within Our Children's Lifetimes - Children today are likely to reach old age in a world that is 4C warmer, where the 10,000-year certainties of the global climate can no longer be relied on, and widespread crop failures, drought, flooding and mass migration of the dispossessed become a part of everyday life. This dire scenario could come as early as the 2060s - well within the lifetime of today's young people. It could mark the point when, for the first time since the end of the Ice Age, human civilisation has to cope with a highly unstable and unpredictable global climate. A series of detailed scientific assessments of this possible "four-degree world", published today, documents for the first time the immense problems posed if the average global temperature rises by 4C above pre-industrial levels - a possibility that many experts believe is increasingly likely.

In The Wake Of Victory -  This has not been an easy week for believers in a brighter future. As I write this week’s post, food prices in the global market are soaring toward levels that brought mass violence two years ago, driven partly by climate-driven crop failures and partly by the conversion of a noticeable fraction of food crops into fuel ethanol and biodiesel; the price of oil is bumping around somewhere skywards of $86 a barrel, or right around two and a half times the level arch-cornucopian Daniel Yergin insisted not that long ago would be oil’s long-term price; the latest round of climate talks at Cancún are lurching toward yet another abject failure; and bond markets worldwide are being roiled by panic selling as the EU’s Irish bailout has failed to reassure anybody, investors in US state and local bonds realize that debts that can’t be paid back won’t be paid back, and even the riskier end of commercial paper is beginning to look decidedly chancy.

When You Should Not Adapt in Place - Most of the people who take Adapting-In-Place, reasonably enough, are doing so because they intend to stay where they are or fairly nearby in the coming decades. They know that they may not be in the perfect place, but for a host of reasons - inability to sell a house, job or family commitments, love of name it, they are going to stay. Or maybe it is the best possible place for them. But I do think it is important to begin the class with the assumption that everything is on the table. Because as little as each of us likes to admit it, it is. There will be many migrations in the coming decades, many of them unwilling and unwanted. And it is always easier (not easy) to consciously choose to step away before you are forced to leave than it is to abandon in pain and storm and disaster your home and never be fully able to return. So it is important to ask - who should not stay in place?For some people, getting out of Dodge is the way to go. That is, I think that some people should absolutely consider leaving where they are, and doing sooner, rather than later, because they have little or no hope of successfully remaining in place.

End Ethanol Subsidies, Senators Say - Subsidies and tariffs to promote domestic ethanol production are “fiscally irresponsible and environmentally unwise” and should be ended, a bipartisan group of United States senators declared in a letter to the chamber’s leaders on Tuesday. “Eliminating or reducing ethanol subsidies and trade barriers are important steps we can take to reduce the budget deficit, improve the environment, and lessen our reliance on imported oil,” the senators wrote to the Democratic majority leader, Senator Harry Reid, and the Republican minority leader, Senator Mitch McConnell. The letter was circulated by Dianne Feinstein, Democrat of California, and John Kyl, Republican of Arizona. Supporters of domestic ethanol call it a cleaner-burning fuel than gasoline that offsets oil imports from autocratic regimes abroad and creates American jobs. But the growing appetite of ethanol refiners for the American corn crop has steadily driven up the price of food worldwide, while increased demand for corn has caused an rise in fertilizer use and pesticide-intensive agriculture in the United States.

Tuna group defies quota cut calls - Fishing nations have agreed a small cut in Atlantic bluefin tuna quotas, after meeting in Paris. The International Commission for the Conservation of Atlantic Tuna (ICCAT) set the 2011 quota at 12,900 tonnes, down from 13,500 tonnes.  Conservationists say the bluefin tuna is threatened by overfishing, and much deeper cuts are needed. They have criticised ICCAT in the past for failing to ensure that the species and others are fished sustainably. Correspondents say the 48 countries represented at the talks were divided over what action to take, with some calling for a lower quota or even a temporary suspension of bluefin fishing to allow stocks to recover

Ocean acidification may threaten food security: U.N. (Reuters) - Acidification of the seas linked to climate change could threaten fisheries production and is already causing the fastest shift in ocean chemistry in 65 million years, a U.N. study showed on Thursday. Production of shellfish, such as mussels, shrimp or lobsters, could be most at risk since they will find it harder to build protective shells, according to the report issued on the sidelines of U.N. climate talks in Mexico. It could also damage coral reefs, vital as nurseries for many commercial fish stocks. "Ocean acidification is yet another red flag being raised, carrying planetary health warnings about the uncontrolled growth in greenhouse gas emissions," said  "Whether ocean acidification on its own proves to be a major or a minor challenge to the marine environment and its food chain remains to be seen," he said in a statement.

Trust and Temperature - Trust lies at the heart of person perception and interpersonal decision making. In two studies, we investigated physical temperature as one factor that can influence human trust behavior, and the insula as a possible neural substrate. Participants briefly touched either a cold or warm pack, and then played an economic trust game. Those primed with cold invested less with an anonymous partner, revealing lesser interpersonal trust, as compared to those who touched a warm pack. In Study 2, we examined neural activity during trust-related processes after a temperature manipulation using functional magnetic resonance imaging. The left-anterior insular region activated more strongly than baseline only when the trust decision was preceded by touching a cold pack, and not a warm pack. In addition, greater activation within bilateral insula was identified during the decision phase followed by a cold manipulation, contrasted to warm.

Upper-class people have trouble recognizing others' emotions - Upper-class people have more educational opportunities, greater financial security, and better job prospects than people from lower social classes, but that doesn't mean they're more skilled at everything. A new study published in Psychological Science, a journal of the Association for Psychological Science, finds surprisingly, that lower-class people are better at reading the emotions of others. The researchers were inspired by observing that, for lower-class people, success depends more on how much they can rely on other individuals. For example, if you can't afford to buy support services, such as daycare service for your children, you have to rely on your neighbors or relatives to watch the kids while you attend classes or run errands, says Michael W. Kraus of the University of California-San Francisco. He co-wrote the study with Stéphane Côté of the University of Toronto and Dacher Keltner of the University of California-Berkeley.

NASA Finds New Life Form - At its conference today, NASA scientist Felisa Wolfe-Simon will announce that NASA has found a bacteria whose DNA is completely alien to what we know today. Instead of using phosphorus, the bacteria uses arsenic. All life on Earth is made of six components: carbon, hydrogen, nitrogen, oxygen, phosphorus and sulfur. Every being, from the smallest amoeba to the largest whale, shares the same life stream. Our DNA blocks are all the same. But not this one. This one is completely different. Discovered in poisonous Mono Lake, California, this bacteria is made of arsenic, something that was thought to be completely impossible. While Wolfe-Simon and other scientists theorized that this could be possible, this is the first discovery. The implications of this discovery are enormous to our understanding of life itself and the possibility of finding beings in other planets that don’t have to be like planet Earth.

NASA Discovers New Life: Arsenic Bacteria With DNA Completely Alien To What We Know - Astrobiology research funded by NASA has made a tremendous new discovery which could "fundamentally change the knowledge about what comprises all known life on Earth," according to NASA. (Scroll down for live video and updates.) The major finding announced today has fueled speculation recently that reached a fever pitch after the agency said the finding "will impact the search for evidence of extraterrestrial life." While the discovery is not extraterrestrial life, NASA has indeed uncovered an entirely new life form on our planet that "doesn't share the biological building blocks of anything currently living" on Earth, The New York Daily News reports. In a bombshell that upends long-held assumptions about the basic building blocks of life, scientists have discovered a a whole new type of creature: a microbe that lives on arsenic. It is unlike every other lifeform on the planet - from the simplest plant to the most complex mammal.

Science & the Public: Lakes are warming across the globe - Throughout the past quarter-century, inland lakes have been experiencing a small, steadily rising nighttime fever. Globally, the average increase has hovered around 0.045 degrees Celsius per year, but in some regions the increase has been more than twice that — or about 1 °C per decade.  In some regions — notably the Northern Hemisphere’s mid and upper latitudes — lakes have been warming faster than have surrounding air temperatures. No question, the upticks have been small. They also appear to have been inexorable since at least 1985. Indeed, these observations, published November 24 in Geophysical Research Letters, represent “a new independent data source for assessing the impact of climate change throughout the world,”  JPL’s thermal survey of 167 major lakes relied on satellites. Like hovering thermometers, those eyes in the sky have been collecting infrared — heat — measurements of surface features. Nighttime lake surfaces were surveyed during summer months in the Northern Hemisphere and in January through March in the Southern Hemisphere.

How Does Our Fiscal Security’s Fiscal Blueprint Work For Climate Hawks? - I consider myself a climate hawk, and one thing I really like about the term is that it emphasizes a multiple-front strategy on issues related to climate change. One front in the battle will definitely be budgetary policy. How does the Our Fiscal Security’s Investing in America’s Economy: A Budget Blueprint for Economic Recovery and Fiscal Responsibility (pdf here) handle issues important to climate hawks? Very well, it turns out. From the document: Further, one of the greatest challenges facing the United States and world economies going forward is global climate change, and this is a pure public bad – it is completely non-rival and non-excludable. This argues that carbon mitigation to stop (or at least slow down) climate change is a global public good and hence a prime candidate for addressing (at least partially) through public investments…Green revenue: cap and trade or carbon tax...Savings in 2015: $52.0 billion

Met Office says 2010 ‘among hottest on record’ - This year is heading to be the hottest or second hottest on record, according to the Met Office.  It says the past 12 months are the warmest recorded by Nasa, and are second in the UK data set, HadCRUT3. The Met Office says it is very confident that man-made global warming is forcing up temperatures.  Until now, the hottest year on record has been 1998, when temperatures were pushed up by a strong El Nino - a warming event in the Pacific. This year saw a weaker El Nino, and that fizzled out to be replaced by a La Nina cooling event. So scientists might have expected this year's temperatures to be substantially lower than 1998 - but they are not. Within the bounds of statistical error, the two years are likely to be the same.

2010 sets new temperature records - Temperatures reached record levels in several regions during 2010, the World Meteorological Organization (WMO) says, confirming the year is likely to be among the warmest three on record. Parts of Russia, Greenland, Canada, China, North Africa and South Asia all saw the mercury soar to record levels. The three main temperature records show 2010 as the warmest, or joint warmest, year in the instrumental record. The UK Met Office suggests 2011 will be cooler, as La Nina conditions dominate. This brings colder than average water to the top of the eastern Pacific Ocean, which lowers temperatures globally. The two leading US analyses of global temperature show that up until the end of October, 2010 was the warmest year in the instrumental record going back to 1850.

Deaths from climate-related disasters more than double in 2010 – Oxfam - Climate-related disasters killed 21,000 people in the first nine months of this year, more than double the number in 2009, the humanitarian organization Oxfam reported on Monday. Timed to coincide with the start of international talks tackling climate change in Cancun, Mexico, the report cited floods in Pakistan, fires and heat waves in Russia and sea level rise in the Pacific island nation of Tuvalu as examples of the deadly consequences of climate change.The new round of U.N. climate negotiations aims to agree on a narrow range of issues dividing rich and poor economies, specifically on funding, preservation of rainforests and preparations for a warmer world. The talks also will seek to formalize existing targets to curb greenhouse gas emissions.

Four degrees and beyond: the potential for a global temperature increase of four degrees and its implications - The papers in this Theme Issue were written by participants in the Four degrees conference, at the invitation of the editors. In many cases, authors were asked to combine their separate conference contributions into a joint paper synthesizing multiple viewpoints and results. We appreciate their enthusiasm in taking on this challenge.  Now, as we go to press with the Theme Issue a year on from the conference, the results of the research presented in its papers seem even more relevant than a year ago. We have no comprehensive climate-change ‘deal’, and Yvo de Boer, in his final remarks as head of the UNFCCC before stepping down in 2010, said that it could take up to 10 years for negotiations to deliver a robust and effective agreement. Voluntary and non-nation state emissions-reduction commitments might give us some breathing space, but still take us closer to four degrees than is comfortable. The papers in this issue that look at impacts and adaptation challenges in a four degrees world are sobering: the possible impacts are large, in some cases, transformational, and the challenges in understanding and developing responses to these impacts considerable. Hopefully, this Theme Issue will stimulate much-needed further research that explores the implications of and solutions to high-end climate warming.

Worst case study: global temp up 7.2F degrees by 2060s (Reuters) - World temperatures could soar by 4 degrees Celsius (7.2 degrees Fahrenheit) by the 2060s in the worst case of global climate change and require an annual investment of $270 billion just to contain rising sea levels, studies suggested on Sunday. Such a rapid rise, within the lifetimes of many young people today, is double the 2 degrees C (3.6 degrees Fahrenheit) ceiling set by 140 governments at a U.N. climate summit in Copenhagen last year and would disrupt food and water supplies in many parts of the globe. Rising greenhouse gas emissions this decade meant the 2 degree goal was "extremely difficult, arguably impossible, raising the likelihood of global temperature rises of 3 or 4 degrees C within this century," an international team wrote. The studies, published to coincide with annual U.N. climate talks in Mexico starting on Monday, said few researchers had examined in detail the possible impact of a 4 degrees C rise above pre-industrial levels.

Report: A Billion People Will Lose Their Homes Due To Climate Change - Devastating changes to sea levels, rainfall, water supplies, weather systems and crop yields are increasingly likely before the end of the century, scientists will warn Monday. A special report, to be released at the start of climate negotiations in Cancún, Mexico, will reveal that up to a billion people face losing their homes in the next 90 years because of failures to agree to curbs on carbon emissions. Up to three billion people could lose access to clean water supplies because global temperatures cannot now be stopped from rising by 4 degrees Celsius. "The main message is that the closer we get to a four-degree rise, the harder it will be to deal with the consequences," said Dr. Mark New, a climate expert at Oxford University, who organized a recent conference entitled "Four Degrees and Beyond" on behalf of the Tyndall Center for Climate Change Research. Tomorrow the papers from the meeting will be published to coincide with the start of the Cancún climate talks.

Worst case scenario: Can we adapt to a world 2 to 4 degree change? - Oxford scientists have contributed to a series of research papers about the impacts of global warming to coincide with the opening of the Climate Change Conference in Cancun, Mexico. One study, led by Niel Bowerman of the Oxford University's Department of Physics, warns that the conference will fail to meet its objectives unless it addresses not just how much the planet warms, but also how fast it warms. Potentially dangerous rates of global warming could outpace the ability of ecosystems and artificial infrastructure to adapt, it argues. Bowerman's study shows that to achieve their aims, negotiators must limit the maximum global emission rate as well as the total amount of carbon emitted through to 2200. He explains: 'Many people think that the reason why emissions need to peak soon is to save the climate of the 22nd century, but our research highlights a more immediate reason. We need to start cutting emissions soon to avoid potentially dangerous rates of warming within our lifetimes, and to avoid committing ourselves to potentially unfeasible rates of emission reduction in a couple of decade's time.'

Cancun and Climate: Government Won't Act, But Business Will - Over the next two weeks, Cancun will be in the spotlight for something other than spring break madness. As host of the annual climate summit that once saw such promise in Kyoto in 1997, Cancun in 2010 is framed by the spectacular failure of last year's Oslo talks and by the stark realization that nearly 200 nations simply cannot agree on anything of consequence. No matter how unequivocal the scientific evidence is that climate is changing and human activity is a central factor, nearly 7 billion people loosely represented by a few hundred governments are agreed on nothing. We know the reasons why action on climate is frozen: emerging countries such as China, India and Brazil will not accept limits that stifle their rapid emergence; developed countries such as the United States and the European Union can't or won't subsidize efforts abroad; and the U.S. federal government can't even agree on binding limits for America itself. While everyone shares the sentiment that they do not want to destroy the earth or ruin it for their grandchildren, there is no consensus on how to shift global economic activity in a more sustainable direction. That should be cause for despair, and much of the commentary this week will likely conclude that we are on an inexorable and negative path towards deleterious climate change. But that is only because we collectively focus too much on government and its failings rather than on business and its successes.

Climate Change Is Still About Chinese Coal - The climate change conference starting in Cancun Monday is doomed to failure. Many factors contribute to this, such as a healthy skepticism about how much should be spent to remediate climate change, but one alone guarantees failure: Chinese coal production and policy. When climate change soared up the American agenda with the election of President Obama, those not swept up in blind optimism were doubtful China could be convinced to go along. The debacle of the Copenhagen summit last year finally brought the administration and its supporters back to reality. Prior to Copenhagen, it was already clear that Chinese coal was an insuperable obstacle to an international agreement on greenhouse gases. The past year has made the situation that much starker.In 2000, the official figure for Chinese coal production was 880 million tons. In less than a decade, it more than tripled to 2.96 billion tons for 2009. In the first quarter of this year, coal production jumped another 28%. China, which was a net exporter of coal as recently as 2008, was the world’s largest importer of coal in the first three quarters of this year and far more in the way of imports are on the way.

Johann Hari: There won't be a bailout for the earth - Why are the world’s governments bothering? Why are they jetting to Cancun next week to discuss what to do now about global warming? The vogue has passed. The fad has faded. Global warming is yesterday’s apocalypse. Didn’t somebody leak an email that showed it was all made up? Doesn’t it sometimes snow in the winter? Didn’t Al Gore get fat, or something?  Alas, the biosphere doesn’t read Vogue. Nobody thought to tell it that global warming is so 2007. All it knows is three facts. 2010 is globally the hottest year since records began. 2010 is the year humanity’s emissions of planet-warming gases reached its highest level ever. And exactly as the climate scientists predicted, we are seeing a rapid increase in catastrophic weather events, from the choking of Moscow by gigantic unprecedented forest fires to the drowning of one quarter of Pakistan.  Before the Great Crash of 2008, the people who warned about the injection of huge destabilizing risk into our financial system seemed like arcane, anal bores. Now we all sit in the rubble and wish we had listened. The great ecological crash will be worse, because nature doesn’t do bailouts.

Switch to renewables will take generations, not years - The latest world energy outlook released by the International Energy Agency is a useful reminder of the enduring place of fossil fuels in the global energy mix. Energy demand and supply patterns change only slowly, and moving away from existing carbon-intensive energy systems will take generations, not years. Despite widespread worries about climate change, there is little evidence that the global energy picture is about to be transformed within the next two decades.  According to the IEA, even if governments around the world fully deliver on the commitments they have made to reduce greenhouse gas emissions and phase out fossil fuel subsidies – a very big ‘if’ – world primary energy demand is set to increase by 36 per cent between 2008 and 2035. Moreover, fossil fuels account for more than half of the growth in overall energy use, with oil remaining the dominant source of energy (albeit its share diminishes over time). Global oil demand rises by 15 million barrels to reach 99 million barrels per day by 2035, with 100 per cent of the incremental demand coming from emerging economies.

US Natural Gas, Oil reserves soar - U.S. natural gas reserves increased by the most in history last year, and crude reserves also rose, as companies drilled frantically into shale rock formations with new technology, the Energy Information Administration said in an annual report on Tuesday. U.S. net proved natural gas reserves rose 11 percent, or 28.8 trillion cubic feet (tcf), in 2009 to total 284 tcf, underscoring the dramatic impact that new gas pumped from shale rock formations is having on world energy supply. Louisiana, whose statewide reserves grew quickest, saw its economically viable gas reserves surge by 77 percent, or 9.2 tcf, led by developments in its Haynesville Shale. U.S. net proved crude oil reserves rose 9 percent, or 1.8 billion barrels, to 22.3 billion barrels in 2009. Texas saw its proved oil volumes rise most, by 529 million barrels, or 11 percent. North Dakota, home of the oil-rich Bakken Shale formation, saw its reserves jump by a whopping 83 percent, or 481 million barrels.

Disclosure of chemicals in gas fracking advances Interior Secretary Ken Salazar strongly suggested that a policy overhaul at his department would include new requirements for public disclosure of  chemicals used on federal lands that contain 11% of U.S. natural gas reserves. And three energy industry trade groups announced they will support efforts to create a registry where oil and gas companies can voluntarily post – well by well – what chemicals they use. Despite the continuing shift toward disclosure by the very industry they purport to protect, key GOP members of Congress engaged in some predictable caterwauling about how transparency will kill jobs and hurt an industry they laughably maintain is sufficiently regulated by the states. In essence, two lawmakers who will have a big say over public land management come January said: “over our (brain) dead bodies.” Hydraulic fracturing, commonly called fracking, is a widely-used process to stimulate production from oil and gas wells.  As its use has grown in combination with horizontal drilling, and as huge new natural gas fields have been developed to exploit shale gas formations from the northeast to Texas, public concerns have mushroomed about the chemicals being used and the possibilities of contamination of water supplies if fracturing fluid is spilled or escapes underground.

Deep-Water Dive Reveals Spilled Oil On Gulf Floor - When the BP oil well blew out earlier this year, the 4 million barrels that flowed into the sea didn't simply vanish. There's growing evidence that a good portion of it sunk to the bottom of the Gulf of Mexico, where some of it remains.  To get to the sea floor a few miles from the blown-out Macondo well, we clamber into a titanium-hulled submarine named Alvin. But when the Alvin scrapes the bottom, we discover we're not actually sitting on the usual dark gray mud that forms the seafloor. "There's oil on the bottom," Joye says. "If you look at the camera, you can see the brown coloration." We see this brown stuff on coral fans, hit like pine trees along a dusty dirt road. More slimy brown stuff hangs over some of the odd formations of frozen natural gas here half a mile below the surface. Crabs here normally pick at worms that actually live in this methane ice.

Guest Post: Scientists Confirm that Dispersants Are Increasing Contamination in the Gulf - I have repeatedly documented the detrimental impacts of dispersants on humans, wildlife and seafood safety. See this, this, this, this, this, this and this. As I noted in September, scientists from Oregon State University found elevated levels of polycyclic aromatic hydrocarbons (PAHs) in the Gulf, and blamed dispersants. Now, the website of the prestigious Journal Nature is also reporting on the increase of PAH contamination due to the use of dispersants in the Gulf: The problem, explains Hodson, is that the dispersed cloud of microscopic oil droplets allows the PAHs to contaminate a volume of water 100–1,000 times greater than if the oil were confined to a floating surface slick. This hugely increases the exposure of wildlife to the dispersed oil. As the Press Register notes: “These chemicals, these are PAHs that are carcinogenic. … These items are not in any way appropriate for anyone to eat,” said Ed Cake, an environmental consultant from Ocean Springs. “There’s no low-dose level that’s acceptable to eat.”…

U.S. Halts Plan to Drill in Eastern Gulf -The Obama administration announced on Wednesday that it had rescinded its decision to expand offshore oil exploration into the eastern Gulf of Mexico and along the Atlantic Coast because of weaknesses in federal regulation revealed by the BP oil spill.  Interior Secretary Ken Salazar said that a moratorium on drilling would be in force in those areas for at least seven years, until stronger safety and environmental standards were in place. The move puts off limits millions of acres of the Outer Continental Shelf that hold potentially billions of barrels of oil and trillions of cubic feet of natural gas.  The decision essentially reverses the much-disputed drilling plan announced in March, which would have initiated environmental studies and exploration activity in previously untouched areas off the Gulf Coast of Florida and along the East Coast from Florida to Delaware.  “As a result of the Deepwater Horizon oil spill, we learned a number of lessons,”

U.S. Product Supplied of Crude Oil and Petroleum Products… (monthly tables from 1963)

US_Oil_Production_and_Imports_1920_to_2005 – graphs

Oil Is Near A 25-Month High  - I have warned that oil was about to break $90/barrel in the past, but it didn't happen. Will it happen this time? God only knows. Given the troubles in Europe, the dollar may rally against the Euro. The problem with today's markets is that it seems that anything can happen. The markets were already distorted, but QE2, the debt crisis in Europe and other factors have made a mockery of apparent trends. Economist James Hamilton weighed in on commodity prices on November 10. He cites new evidence that commodity prices move together, which is certainly not a surprise. Hamilton concludes— In terms of concrete advice, I would worry about the potential for the policy to do more harm than good if it results in the price of oil moving above $90 a barrel. And we're uncomfortably close to that point already. Yes, uncomfortably close. I dont' think the Fed gives a damn about rising commodity prices and their effects on ordinary Americans. At the very least, there's no evidence I'm aware of that the Fed pays any attention to commodity prices. And Goldman Sachs makes money, so it's all good, right?

Jobless America Can't Survive The Pressures Of $90 Oil: "Oil is at 90 dollars a barrel. The governments of Europe, Japan, and the United States are saturated with debt. House prices in the US are falling again, and there’s no job growth in America. Put it all together, and for some reason, many are still imagining that we’re in an economic recovery. Today’s horrid jobs report contained some shock value in the sense that it missed expectations. But the novelty of a 39K print misses the larger point that, for a large population like the US, even a print of 100K or 125K would still be very bad news. The US needs to create at least 150K jobs per month just to soak up population growth. Meanwhile, we now have a tranche of 15 million out of work people. As you can see in the chart below, total employment falling back below 139 million to 138.88 million does nothing but maintain levels last seen in the early part of the previous decade. This is a huge hole. And now, three years after the start of the economic crisis, we can say resolutely that America has a structural unemployment problem. As other countries have discovered, that’s a hard problem to solve."

Oil and the Economy: Why it is important to figure out approximately where we are headed - The most popular view among the general public, including research scientists, is that growth will continue practically indefinitely. Let’s call this Scenario A. This forecast by Price Waterhouse Coopers might be typical of what one would expect: These growth rates don’t look all that high when presented on an annual basis, but they really add up over time. At an annual growth rate of 7.6%, India’s GDP in 2050 can be expected to be 27 times its real GDP in 2005. At an annual growth rate of 0.8% per year, by 2050, India’s population can be expected to 43% higher than in 2005. A second scenario, which I call Scenario B, is one that is held by quite a number of people who have been studying oil and gas depletion models. It is focused on an expectation that oil and gas production in the future will follow a pattern such as this one prepared by Colin Campbell, taken from the April 2009 ASPO-Ireland Newsletter.

The end of deep water drilling? Not in Brazil - The Deepwater Horizon oil spill brought deep-water drilling in the U.S. Gulf of Mexico to a halt, derailing decades of U.S. energy policy and casting a long-lasting pall over the industry that operates there. In other parts of the world, however, deep-water drilling has continued at a frenetic pace. The industry is moving full speed ahead in places like the Gulf of Guinea, the Mediterranean and the Turkish Black Sea. But nowhere is that more apparent than in Brazil, where state-run Petroleo Brasileiro SA, known as Petrobras, last month began production in one of the largest oil fields discovered in the Western Hemisphere in 30 years. And a recently discovered field nearby could contain the equivalent of 15 billion barrels of oil, say Brazilian regulators, equal to almost two-thirds of the total proven deposits of crude in the U.S. Petrobras and companies such as Chevron Corp., Norwegian oil giant Statoil ASA and Tullow Oil PLC of the U.K. are racing to drill thousands of feet below sea level because that is where the last remaining undiscovered reserves of oil are located.

BP to Sell Pan American Stake for $7.06 Billion - BP PLC said it is selling its stake in Argentina-based oil and gas company Pan American Energy for $7.06 billion as part of a divestment plan designed to pay for the Gulf of Mexico oil spill.  BP will sell its 60% interest in PAE to Argentina's Bridas Corp., which already owns 40% in the venture. The deal, which is expected to be completed in 2011, brings BP's total divestments since the spill to $21 billion. The deal is the latest in a series of asset sales aimed at raising money to cover the estimated $40 billion cost of the Gulf of Mexico oil spill. It is also another step in the expanding influence of Chinese companies in the energy sphere. Bridas Corp. is 50-50 a joint venture between the international arm of China National Offshore Oil Company, called Cnooc International Ltd., and Bridas Energy Holdings, which is owned by Argentina's Bulgheroni family. Cnooc acquired its 50% of Bridas Corp. for $3.1 billion in March.

In The Name Of Oil, Ghana Is Already Swimming In A Flood Of Debt - Ghana shall soon be owned by the Asians:  Since ExxonMobil's $4 billion offer for Kosmos Energy's 23.5% stake in the Jubilee field was rejected last month, Asian national oil companies have been rounding about in Accra, aiming to become GNPC's financier and operating partner. Kosmos, however, is contemplating a listing of its shares as an alternate way to go ahead with the project. ExxonMobil abandoned its offer on 17 August, opening the way for a GNPC bid backed by the China National Offshore Oil Corporation. Sources at GNPC told Africa-Asia Confidential that the deal would include a $5 billion loan to the GNPC. CNOOC would take a 10% stake, another major oil company 10% and GNPC 3% of Jubilee, which is estimated to hold more than 1.2 billion barrels of oil. CNOOC is in good terms with Accra due to previous promises by the China Development Bank to bankroll Ghana's oil infrastructure with billions of dollars in preferential loans.

Nuclear Boom in China Sees Reactor Builders Risk Their Know-how for Cash - Bloomberg The ballroom of the Grand Hyatt on Beijing’s East Chang An Avenue was packed. The occasion: the first-ever China International Nuclear Symposium, a gathering of China’s top nuclear players and the world’s nuclear power companies, including Westinghouse, Areva SA, and Hitachi-GE.  What brought the Chinese to the Hyatt on Nov. 24 and 25 was a hunger for the latest technology, Bloomberg Businessweek reports in its Dec. 6 issue. What brought the foreigners was money: According to Michael Kruse, consultant on nuclear systems for Arthur D. Little, the Chinese are ready to spend $511 billion to build up to 245 reactors.  “The market is being driven by the construction of new reactors, and it is no secret that most of those are right here in China,” says Fletcher T. Newton, an executive vice-president of Uranium One, a mining company.   The global nuclear industry is willing to take big risks to get a piece of China’s nuclear budget. The danger is that in landing those fat contracts -- and sharing technology with Chinese partners -- the industry will help build a formidable rival. Even though they lack the most advanced technology, the Chinese are rapidly becoming self-sufficient in reactor design and construction, according to the World Nuclear Association.

China's food crisis spells end of record highs - For all Ireland's woes, it hasn't yet seen empty supermarket shelves and long bread queues. In contrast, consumers in the world's most booming economy, China, are travelling miles to buy basic goods such as soy sauce and cooking oil, and watching prices increase while they wait in line at market stalls. Rampant food price inflation – of more than 10pc last month – is causing extreme concern and radical action from the Chinese authorities while the world's political and economic attention has been on Ireland, Spain and Portugal.

China's Dangerous Food Crisis - While we can argue all day long about whether the United States has significant "non-core" inflation in food and energy prices—it does —there is no doubt at all about what is happening in China. Tom Stevenson of the Telegraph (UK) reported on the situation. . The Xinhua news agency reported last week that a basket of 18 staple vegetables was 62% higher in the first 10 days of November than in the same period last year. Nothing instills the fear of God in a Chinese leader more than soaring food prices, which may be followed by food riots and general chaos in the streets, which may be followed by the Guillotine. Not lacking motivation, China's leaders are implementing price controls, subsidies and cracking down on hoarding. Unfortunately for them, China's economy is overheating and right now there appear to be more problems than China's government can reasonably be expected to handle. But that's the subject of another post. I will stick to their food problems today.

China- A Profiteers Bagunca (Mess)- For those of you who don’t remember the Hunt Brothers, here is the background.  Fast forward to today, and we see a “mystery holder” of copper stocks at the LME. Let’s see a massive manipulation at the same time China is blowing up, could get very interesting.  Just a thought, but does anybody care to wager that this is Chinese or a Chinese stooge?  Anyone in these markets should start reading so called obscure stories in the China Daily.  In the first the refiners are pointing finger at crony state oil aparatcheks for in effect profiteering. In the next China surveys the shortage landscape and decide to “crack down on profiteers”. I would surmise that a profiteer in China is anybody not paying large bribes or a who is not a well connected aparatchek. The third story shows how if you aren’t an exporter being crushed by input costs, the Gumnut will step in a slap prohibitive export tariffs on.  The idea here is to keep the product domestic where you can be looted  and prosecuted by aparatcheks as a profiteer. I am sure the regulation and exemption book is perfectly clear as well, just bring your bribe money. Here another bureau defends price increases and blames it on the end of a special Gumnut subsidy

Unsound Money in China - China is looming as a major threat to Australia's ongoing prosperity. The consensus view in this country is that China is going through a decades long boom and we'll continue to ride on their coat tails for years to come. I think that is a dangerously complacent viewpoint. Look, anyone with a minor understanding of history and economic development can see that the 21st century belongs to China. Just in the same way that the 20th century belonged to the US. But it wasn't smooth sailing for the US and it wont be for China either. One of the biggest myths about China is that its huge FX reserves (around US$2.65 trillion at last count) are a sign of strength. They are not. The reserves are a product of a mercantilist policy that is now starting to backfire.

How Chinese Inflation Policy Will Shape the Yuan-Dollar Exchange Rate - By freezing its exchange rate and pulling out all the stops on fiscal and monetary stimulus, China got through the global recession with only a mild slowdown in GDP growth. Now it is facing the inflationary consequences. Consumer price inflation, after rising steadily all year, hit a 4.4% annual rate in October, approaching the government's red line. How will China choose to deal with the inflation threat? The answer is important both for China and its trading partners, because anti-inflation policy will determine what happens to the exchange rate of the yuan over the coming months. Inflation is a key factor in exchange rate developments because the balance of trade depends on the real, not just the nominal, exchange rate--a fact that is not always clearly understood. Everyone knows that we need to adjust nominal wages for inflation to reveal trends in real wages, and adjust nominal interest rates for inflation to find real interest rates. For the same reason, we need to adjust nominal exchange rates for inflation to see what is really happening to the competitive balance between any two countries. In the case of the yuan vs the dollar, the simplest way to make the adjustment is to add the difference between the Chinese and U.S. inflation rates to the rate of nominal appreciation of the yuan. - Obama has to tell Beijing some hard truths - With policymakers failing to make progress on the critical issue of global imbalances, America has no alternative but to put China on notice. Privately but promptly, Washington has to inform Beijing it will label it as a currency manipulator, back legislation treating the manipulation as an export subsidy, and take it to the World Trade Organisation if it does not let the renminbi rise significantly.  The huge US budget deficit and the Fed’s easing have replaced the US private sector as “consumer of last resort” and trade is impeding rather than leading the recovery. China’s reserve hoard grew faster in the latest quarter than ever before. Its global trade surplus for the past six months is more than 50 per cent above last year’s. The trade imbalance between the two countries has recently hit record levels.The renewed increases in the external imbalances of the two main economies pose major risks. China’s surplus is again climbing while it tightens monetary policy because of concerns over overheating. It thus maintains its rapid expansion partly at the expense of other countries and damps global growth. It should instead let its currency rise and limit the cutback in domestic demand. That would help contain inflation and offset the resulting decline in its trade surplus.

Save Our World, Create Chinese Consumer Culture - So the post title is a bit hyperbolic, but not much. If global economic imbalances imperil the existence of the contemporary trade and globalization, then job#1 is alleviating them. In case you missed it, the New York Times Magazine had a very interesting article over the weekend on the challenges of getting China to move towards a consumer culture. While the US has swung too far in that direction, China is arguably at the opposite extreme. Both must change. There are certainly many examples of PRC noveau riche splurging (see the accompanying photo essay), but that's not what will get consumption up in China but Jiang average opening up his or her wallet. I have actually written an academic piece that makes similar points--it's in China's best interest to become less manufacturing intensive on environmental grounds, revaluation of the renminbi will encourage domestic consumption by increasing local purchasing power, etc.--but I'll save that for a later day. In the meantime, the NYT article gets the general outlines of this story right, although I have more to say about the marketing aspects of creating Chinese consumer culture:

Western or Chinese medicine for the yuan? - BOTH the Americans and the Chinese want to narrow China’s current-account surplus, which swelled to more than $100 billion (over 7% of China’s GDP) in the third quarter. But the two sides disagree about the means and the timetable for achieving this goal. In a speech last month (link in Chinese), Zhou Xiaochuan, the thoughtful governor of China’s central bank, proposed a metaphor that sums up these differences. He compared the rival approaches to China's exchange rate to Western and Chinese medicine. Western medicine, he said, is derived from theory and clinical trials. It prescribes a single, aggressive treatment (read: a revaluation of the yuan) which is expected to take effect quickly. The Chinese, however, prefer to rely on a variety of herbs and therapies (ie, higher wages, a stronger services sector, freer pricing of energy and natural resources), applied in varying combinations and dosages. This "Chinese medicine" relies on trial-and-error and is expected to work only gradually. It's a useful metaphor, which I'd like to extend a little further, because, of course, many Chinese people use both traditional and Western medicine quite freely.

Making peace in the US-China trade war - Trade disputes with China have been heating up lately, but there really is no reason for the hostility. Essentially, China's government is saying is that it has no better use for its money than subsidising the consumption of people in the United States and other wealthy countries, by propping up the value of the dollar. That may seem surprising since per capita income in China is less than $8,000 a year, while it is over $45,000 a year in the United States, but if this is what China's leaders insist, who are we to argue?But this is raising objections from the United States and other wealthy countries, since Chinese imports are displacing domestic output and thereby costing jobs. But it need not be this way, if governments in the United States and other countries were more effective in managing their economies

Beijing May Try to Cool Economy - China will tighten its monetary policy next year, the country’s leaders said Friday, a sign that they are increasingly concerned about inflation and an overheated economy. The move, announced in an article by Xinhua, China’s official news agency, comes as other nations, including the United States, continue to grapple with a global recession. Xinhua reported that the Politburo, the elite team led by nine members at the top of the Communist Party hierarchy, had decided that China’s monetary policy should shift “from relatively loose to prudent next year.” The article also said China “will continue its proactive fiscal policy,” meaning that investment spending would not be severely curbed.

China to Tighten its Monetary Policy Next Year China will tighten monetary policy next year, the country's Communist Party leadership said Friday, signaling the world's second-largest economy will likely slow down in the coming months to combat inflation and settle into a more sustainable pace of growth. The announcement by the nine-member Politburo, which was made through the state New China News Agency, said China would shift to a "prudent" monetary policy from a "moderately loose" approach. The decision comes after two years of unprecedented bank lending has flooded the economy with excess liquidity. Easy credit is being blamed for real estate prices that have doubled and tripled in some of China's leading cities in recent years. Led by soaring food prices, the country's inflation rate hit a 25-month high in October and is expected to have risen even more in November.

Currency Manipulation: Two Sides to Every Coin - Recently, currency manipulation has garnered headline attention. We have been constantly bombarded with rhetoric out of Washington: “China isn’t allowing its currency to appreciate fast enough”; “China’s exchange rate policies are stealing jobs from America”; “We’re playing fair, why can’t China?” More often than not, the more vociferous proponents come from politicians who, in our opinion, are simply posturing for votes; attempting to provide catchy sound bites they believe will resonate with their constituents, without fully grasping the underlying fundamentals at play. The situation itself is truly paradoxical – akin to a major corporation thanking its largest creditor by insulting them. The currency debate, just as every coin, has two sides. Let’s address each of the above concerns in turn...

Bridges to Growth, Not Roads to Nowhere: Scaling Up Infrastructure Investment in Low-Income Countries - iMFdirect - For low-income countries, the absence of reliable infrastructure—roads, railways, ports, but also power supply—has become an increasingly binding constraint on growth. And we know that investment in infrastructure can raise productivity, boost growth, and help reduce poverty. But as straightforward as it sounds, getting investment decisions right is no easy feat. For starters, low-income countries have massive investment needs. The World Bank has estimated that, in sub-Saharan Africa alone, the total financing need is around $93 billion per year. And one third of this still unfunded. Even when financing is available, there’s a raft of other issues to tackle. What investments offer the biggest boost to growth? How much investment is needed and by whom? How to finance this investment without taking on too much debt?

Indonesia’s growing allure – Indonesia is rarely mentioned in the same breath as the so-called BRIC economies that investors and exporters eye with envy.  Yet the country is home to the world's fourth-largest population, at 237 million, trailing only two of the BRIC countries, China and India, and the United States. Its economy grew 4.5% last year, the third-highest among the Group of 20 economies, and the momentum carried over into 2010, with first-quarter growth of 5.1% annualized followed by a 6.5% expansion for the April-to-June period.  And, according to the International Monetary Fund, Indonesia was the only G20 country to lower its ratio of debt to gross domestic product during the financial crisis. "It certainly has the size that you would think it should be among the BRICs," said Robert Simmons, chief representative for Export Development Canada in southeast Asia. "But it has never quite lived up to its potential."

Understanding India’s Microcredit Crisis - As Vivek Nemana reported here, the Indian microcredit industry has pitched into what appears to be a replay of the American subprime debacle. I just spent a week in India, talking to nearly everyone. I learned there were so many complexities—history, politics, institutional rivalries— that to just view events through the foreign lens of the subprime crisis is…actually about right.The microcredit industry indeed appears to have grown irresponsibly fast, partly out of pursuit of profit. But this is not a simple morality play. The state government’s response (an October 14 ordinance) is draconian, tantamount to banning mortgages after a mortgage crisis. Why such a crackdown? The rise of private microcredit threatened a big, World Bank–financed government program that provides credit and other services.

Sarkozy Seeking to Sell Military Aircraft, Nuclear Reactors on India Visit - Bloomberg French President Nicolas Sarkozy arrives in India tomorrow seeking a slice of its multi-billion dollar military spending and pushing Areva SA’s bid to sell at least two nuclear reactors.  Sarkozy will escort 50 chief executives, including those of aircraft-makers Dassault Aviation and EADS, on a presidential sales trip sandwiched between those of U.S. leader Barack Obama and Russia’s Dmitri Medvedev. Each has companies racing for contracts, including India’s planned purchase of $11 billion in jet fighters. “France is not a top player in India but it has had a steady and supporting role,” Gilles Boquerat, an analyst at the French Institute for International Relations in Paris, said in an interview. “India, for historical and obvious business reasons, has made France one of the top two countries on its list for future civil nuclear-energy deals.”

Japan to help India build 24 green cities - Japan will contribute in terms of credit and technology in an ambitious and ground-breaking infrastructure project which will build 24 green cities in India’s western region. The project is part of the proposed $90 billion Delhi-Mumbai Industrial Corridor mega-infrastructure project which aims at boosting the economic growth along the about 1500-km-long stretch that joins the most important cities of India, New Delhi and Mumbai. The aim of the green cities projects is to boost the basic infrastructure requirements in the smaller towns along this corridor so as to increase and expand the economic growth and prosperity. The improved infrastructure in these towns and cities would mean new generation and export capabilities which would immensely contribute to the economic development and GDP growth of India.

Japan passes new $61bn stimulus package - Japan's parliament has passed a stimulus package worth about $61bn (£39bn), designed to kick-start the country's fragile economic recovery. The stimulus was designed to create jobs, Prime Minister Nato Kan said, through measures to help small businesses and boost consumer spending.
Earlier, figures showed that Japanese consumer prices fell for the 20th month in a row in October. The vote in favour of the latest stimulus measures represents a victory for the government, which has struggled to get the package through parliament. The move is in marked contrast to European governments' policies, which are focusing on cutting spending to secure growth. Japan has been struggling with weak growth, a high yen and deflation. The core consumer price index fell by 0.6% in October compared with a year earlier, official figures showed. This was a slight improvement on the 1.1% price falls seen in September.

U.S., Korea Agree on Free-Trade Pact - The U.S. and South Korea struck a deal to revive a broad pact that could drop barriers on a wide array of goods and services, setting the stage for what would be the biggest nation-to-nation trade deal since the 1994 North American Free Trade Agreement. Negotiators for the U.S. and South Korea—the world's No. 1 and No. 12 economy, respectively—broke a three-year impasse over the bilateral agreement early Friday by reaching accord on a deal to gradually lower U.S. tariffs on Korean automobiles.  President Barack Obama now faces a difficult final push to bring the pact into force. The deal will have to win ratification from the incoming Congress in January, in what promises to be a pitched battle amid eroding public support for free-trade agreements of any kind.

Trade visualizer - world bank interactive site...

Global house prices: Clicks and mortar interactive | The Economist - Is housing the most dangerous asset in the world? Any explanation of the recent financial crisis would have the property boom in America as Exhibit A: according to Robert Shiller, an economist and bubble-spotter, house prices were virtually unchanged in real terms between 1890 and the later 1990s, before almost doubling in the ten years between 1997 and 2006. Because buying a house usually involves taking on lots of debt, the bursting of this kind of bubble hits banks disproportionately hard. Research into financial crises in developed and emerging markets shows a consistent link between house-price cycles and banking busts. The Economist has been publishing data on global house prices since 2002. The interactive tool above enables you to compare nominal and real house prices across 20 markets over time. And to get a sense of whether buying a property is becoming more or less affordable, you can also look at the changing relationships between house prices and rents, and between house prices and incomes

World-Wide Factory Activity, by Country - Manufacturing growth slowed in the U.S. in November but activity picked up in other major economics, including China and the euro zone. Strength in the euro zone was led by France and Germany. Contraction, meanwhile, continued in the factory sectors in Brazil, Greece and Japan. Click on the top of any column to resort the interactive chart.

The G-20’s New Thinking For the Global Economy -The Seoul G-20 summit was notable for the increasing political weight of the emerging economies. Not only was it located in one, but, in many ways, it was also dominated by them. In two crucial areas, macroeconomics and global economic development, the emerging economies’ view prevailed. And an excellent proposal to link the two agendas – macroeconomics and development – emerged from the summit, and should be implemented in 2011.A key feature of the world economy today is that it is running at two speeds. The United States and much of Europe remain mired in the aftermath of the financial crisis that erupted in the fall of 2008, with high unemployment, slow economic growth, and continuing bank-sector problems. Emerging markets, however, have generally surmounted the crisis. Whereas 2009 was a tough year for the entire global economy, emerging markets bounced back strongly in 2010, while rich countries did not.Recent data from the International Monetary Fund’s World Economic Outlook tell the story.

Europe and China: is this deja vu all over again? -The autumn of 2010 is in some ways a replay of what we saw last spring. Is what we saw then a guide to what's going to happen next?Last spring the yield on 10-year Greek sovereign debt spiked up 600 basis points as concerns rose about the country's ability and willingness to meet future interest payments. After a significant bailout from other European countries and the IMF, yields settled back down. They crept back up this summer, fell in September and early October, and are now back up almost to the peaks reached at the height of the crisis. Their long-term sovereign debt yields were up 100 and 200 basis points on the Greece concerns last spring, but have shot up much more than that over the last month. As Paul Krugman notes, the really scary thing is that Spain and Italy, which were relatively untouched by the fears last spring, have also seen dramatic moves up in their apparent risk premia. There's another interesting parallel with last spring's concerns. The developments in Europe have coincided with efforts by China to raise interest rates and tighten credit.

German imbalance and European tensions - Is Germany the model to imitate? If we consider its GDP growth in 2010 (more than 3.5%, against a rise of 1% in the rest of the Eurozone) and the success of its products in global markets, there should be no question. In Europe, so the argument goes, we should all try to do what the Germans do.  The global imbalances debate regularly singles out China as the champion of exporting countries, often neglecting the role of Germany. This column argues that if Germany does not adjust, it will keep dragging on EU growth. Europe’s other countries, for their part, should silence their rhetoric on manufacturing and go back to focusing on the service sector.

Chart of the Day: Deficits in the European Periphery

More Charts on Debt in Europe, Germany and the Periphery - A lot of other cool graphics from Spiegel, including debt and deficits throughout Europe. See sources at the bottom for more (like when periphery bonds come due, Italy included).

S&P Rating vs. CDS Implied Rating of European Sovereign Credit; Huge Flaws in the Bond Rating Methodology - An interesting article by Index Universe shows how Ratings Differences Highlight Eurozone Risk.The article compares risk as measured by a Standard and Poor’s rating vs. a CDS rating that is calculated based on credit market derivatives. A table highlights the differences. Some of the differences are enormous.For those interested in various Bond ETFs, there's much more information in the three page article. Here is the table from page two. In Steer Clear Of Bond Ratings Paul Amery for Index Universe writes ... Ratings agencies are too slow to react to deteriorating creditworthiness, and when they do react, cuts tend to come in one fell swoop. In Greece’s case, the ratings cut to junk by Moody’s in June was one of four “notches” in one go, for example (from A3 to Ba1).

Iceland Is No Ireland as State Kept Free of Bank Debt - Iceland’s President Olafur R. Grimsson said his country is better off than Ireland thanks to the government’s decision to allow the banks to fail two years ago and because the krona could be devalued. “The difference is that in Iceland we allowed the banks to fail,” Grimsson said in an interview with Bloomberg Television’s Mark Barton today. “These were private banks and we didn’t pump money into them in order to keep them going; the state did not shoulder the responsibility of the failed private banks.” “How far can we ask ordinary people -- farmers and fishermen and teachers and doctors and nurses -- to shoulder the responsibility of failed private banks,” said Grimsson. “That question, which has been at the core of the Icesave issue, will now be the burning issue in many European countries.”

In a Disappointing Europe, Sweden Stands Out - Sweden’s economy contracted 5.3% last year but has rebounded smartly this year.  Q3 GDP was reportedly earlier today and at 2.1% quarter-over-quarter was nearly twice as strong as the consensus forecast and Q2 figures were revised up a touch.  From a year ago, the Swedish economy is 6.9% larger.  Adding to the positive news stream was the Oct retail sales report.  The 0.8% rise was twice the consensus.   The point is that not only is Sweden reporting robust data, it is surprising the market to the upside. This is serving to shift expectations decidedly in favor of a rate hike by the Riksbank at the next meeting (Dec 15) and likely followed by another rate hike in the middle of Q1.  The Riksbank expects the repo rate to average 1.3% in Q1 11.  Currently it is at 1%.  It expects the repo rate to average 2% in Q4 11.   At this juncture, the main risk to a Riksbank hike next month is if there is a complete meltdown in the euro and the international variables might steady the Riksbank’s hand.

Why is Greenland so rich these days? It said goodbye to the EU - If you think that leaving the EU would be catastrophic, take a look at Greenland. By rights its people ought to be poor. Their island is isolated, suffers from freezing weather, has a workforce of only 28,000 and relies on fish for 82 per cent of its exports. But it turns out that since leaving the EU, Greenland has been so freed of EU red tape and of the destruction of the Common Fisheries Policy, that the average income of the islanders today is higher than those living in Britain, Germany and France. Greenland’s politicians realised that the fisheries policy was ruining their fishing industry. They had the guts to stand up against the all the prophets of doom and let their people vote in a referendum on leaving the European Community, as the EU was then called. On January 1, 1985, it became independent of Brussels – the only country ever to do so.

Debt Crisis Woes: Merkel’s Reputation on the Decline in Europe – SPIEGEL - It wasn't all that long ago that Germany's chancellor was the star of Europe -- a consensus builder who had positioned herself at the vanguard of the effort to save the world from global warming. Indeed, it looked for a time as if Merkel was on the way to becoming a European politician as widely respected as Helmut Kohl was in his time.  Now, though, Merkel's eventual legacy seems to be more unclear than ever. Ever since the sovereign debt crisis began shaking the euro zone, Germany has been the target of criticism more frequently than it has in a long time. And the image of the chancellor has been badly blemished. European papers these days are full Merkel, looking tight-lipped and severe. Her plan to create a bankruptcy mechanism for euro-zone countries, they say, has worsened the debt crisis in Ireland and elsewhere. Merkel's name, once widely respected, is now mud.

European Markets in Limbo as Irish Bailout Takes Shape - European finance ministers will gather here Sunday to complete a multibillion-euro bailout for Ireland as financial markets waited to see if a restructuring of Irish banks would mean losses for bondholders.  The hastily arranged meeting, after another week of turmoil for countries using the euro currency, prompted speculation that Europe would seek to bolster confidence beyond Ireland by promising support, if needed, for other vulnerable economies like Portugal and Spain.  Policy makers hope that swift action can quell the fear of contagion ahead of the opening of the markets Monday.  In a move that underlined the importance attached by the European Union to Sunday's meeting, telephone consultations took place before it began among the French president, Nicolas Sarkozy; the German chancellor, Angela Merkel; the president of the European Central Bank, Jean-Claude Trichet; the president of the European Council, Herman Van Rompuy; and the president of the European Commission, Jose Manuel Barroso, according to a statement from E.U. officials.

EU Outlines Bond Restructuring Plan - Creditors of euro-zone countries that face insolvency after 2013 will see their bond holdings restructured—and may be forced to take losses—under a proposal agreed by the leaders of France and Germany, and top European Union officials, according to people familiar with the matter. Finance ministers, meeting Sunday in Brussels to approve an international rescue package for Ireland valued at about €85 billion ($110 billion), will also discuss the proposal. The proposal to make private-sector creditors bear part of the burden of future troubles was agreed earlier Sunday by German Chancellor Angela Merkel, French President Nicolas Sarkozy, EU President Herman Van Rompuy and European Central Bank chief Jean-Claude Trichet, people familiar with the matter said.

EU Ministers Race to Complete Aid Package for Ireland - Ireland’s negotiations over an 85 billion-euro ($113 billion) aid package came down to setting the interest rate it will pay on emergency loans as European finance ministers battled to contain the fiscal crisis.  A “staff-level” accord on Ireland’s aid will be endorsed today, European Union Economic and Monetary Commissioner Olli Rehn said today in Brussels. French Finance Minister Christine Lagarde said Ireland’s interest rate is the only “little detail” to be nailed down.  With 10-year bond yields averaging over 7.5 percent in Greece, Ireland, Portugal, Spain and Italy on Nov. 26, European leaders are fighting to prevent the spread of Ireland’s fiscal woes from threatening the survival of the 12-year-old euro.

Europe Goes "Completely Mad" At Suggestion Of Irish Default Demanded By 57% Of Irish Population - Today the myth of a popular, democratic government in Ireland collapsed for good. After an impromptu poll of 500 people nationwide found that a "substantial majority" of the people, or 57%, wants the State to default on debts to bondholder, what it ended up getting was precisely the opposite. Why? "Last night that the Irish delegation negotiating with the EU-IMF last week raised the issue of default. "The Europeans went completely mad," a senior government source said." Of course, this is a reason for the Europeans not to want an Irish default, not for the Irish. And last time we checked, the Irish government represented its people, not the interests of Brussels. As America showed all too well, we expect every banker in the world to threaten perpetual damnation for Ireland should they decide on doing what is right for its people (and so very wrong for another year of record banker bonuses). Then again, with elections in Ireland imminent, it is almost certain that there will be a massive popular overhaul of the government, and all bets at that point will be off whether the ECB can dictate terms to a brand new, and far more loyal, government.

EU finance ministers agree deal on Irish rescue package - The European Union has approved an €85 billion rescue package for Ireland which, if drawn down in its entirety today, would attract an average interest rate of 5.83 per cent. Of this €10 billion will be used to immediately to recapitalise the banks to bring them up to a core tier 1 capital ratio of 12 per cent, with a €25 billion contingency. Further injections of capital for the banks will take place in the first half of 2011, as needed. The remaining €50 billion will be used to meet the budgetary requirements of the State. Ireland has also secured an extra year – until 2015 – to meet its target of reducing its budgetary deficit to 3 per cent.

Indecent Financial Proposal: IMF Lending to Ireland - No, I'm not talking about further dalliances by IMF Managing-Director Dominique Strauss Kahn with his underlings which have spawned a bestseller in France on his alleged penchant for indecent proposals. However, I am still talking about Europeans abusing power at the international lender of last resort. (Even with a rather timid redistribution of voting shares away from European countries to fast-growing Asian ones, the impression remains that the Fund is dominated by Western voices--especially since it's still customary that the Europeans get to choose its head and the Americans its first managing director.) A few days ago, I read former IMF Chief Economist Simon Johnson repeat an entirely legitimate criticism of the IMF being asked to bail out Ireland in an FT article by Alan Beattie: The Irish case shows how far the fund has drifted from its original purpose. Some officials say it needs to hold a debate about its role. Originally set up to administer the post-war system of fixed exchange rates, the IMF was constructed to tide over countries suffering balance of payments problems while the governments returned to solvency by cutting spending or raising taxes.

The plank in Schäuble’s eye - From the look of it, the Irish bailout is taking another chunk of another one of FT Alphaville stalwart Neil Hume’s weekends. From Peston European finance ministers are struggling to reach agreement on the interest rate to be paid by Ireland for the €85bn of rescue finance it is set to receive from the EU and IMF – although they appear to have reached a settled position there should not be losses imposed on providers of senior debt to Irish banks. The rate Ireland pays for its bailout is to be announced very soon, apparently after some wrangling between the UK government, which wanted 5%, fearing 7%+ was unaffordable, and can see a total bank exposure UK to Ireland of around EUR200Bn, plus trade, and the German government, which, according to their finance minister Wolfgang Schäuble feels that any rescue loans should not look like cheap money, but should be charged at an interest rate that contains an element of punishment for the reckless borrowing spree of Ireland’s banks, which took the Irish economy to the brink of bankruptcy. Umm, who gets punished, exactly? And who gets off?? And whose banks??? Is Schäuble perhaps confused about the nationality of the well-known not-particularly-Irish bank, DEPFA,

Germany Drops Bond Threat - European governments sought to quell the market turmoil menacing the euro, handing debt-strapped Ireland an 85 billion-euro ($113 billion) aid package and diluting proposals to force bondholders to cover a share of future bailouts. European finance chiefs ended crisis talks in Brussels yesterday by endorsing a Franco-German compromise on post-2013 rescues that means investors won’t automatically take losses to share the cost with taxpayers as German Chancellor Angela Merkel initially proposed to the consternation of bond traders.  In a third move, Greece was told it could have an extra four-and-a-half years to repay emergency loans totaling 110 billion euros to match the seven-year term under Ireland’s deal. The German push ran into criticism from policy makers elsewhere, who called it mistimed, and from European Central Bank President Jean-Claude Trichet, who warned it would unsettle bondholders. Germany yesterday backed away from the pitch for an automatic penalty, agreeing to give the International Monetary Fund a role in determining losses on a case-by-case basis.

Olli Rehn: No Haircuts For Senior Bondholders - So here is the Irish bailout in a nutshell: senior bondholders impairment: zero; Irish pensioners impairment: about 100%. Olli Rehn just confirmed during the press conference that senior bondholders will not be impaired. Irish taxpayers and pensioners to be overjoyed. Additionally, the maturity of the Irish IMF loan will be 7.5 years. This also means that the maturity of the Greek loans will likely be extended. Club Med will now exist indefinitely on life support, or until the euro is dissolved, whichever comes first. Lastly the pathologically lying sociopath just said that Europe will rerun its stress tests again next year... And as many times as needed until faith in Europe is restored, and 300 million austere Europeans finally believe their corrupt, thieving, fat ass politicians.

Markets give thumbs-down to Irish agreement, as Germany caves in on bail-ins. - EU and Ireland agree package; overall size is €85bn, with €50bn for Irish budget,€10bn for bank recapitalisation, and €25bn for a contingency fund; interest rates 6%; no haircut for investors; Merkel, Sarkozy and van Rompuy agree bail-in mechanism, as Germany caves in on demand for automatic, or semi-automatic bail-in; agreements forsees CACs, similar to those in emerging market sovereign bonds; Breakingviews says Ireland deal is unlike to appease the markets, as Portugal remains very likely to need assistance under the fund;  It is simply extraordinary how much credibility the EU has lost in such a short period of time. Lex says banks in Holland, UK, Belgium and Spain are also too big to save; we say that this morning’s market reaction suggests that the investors remain as concerned about contagion as they were last week; bond yields this morning are higher across the board, with bond spreads unchanged from Friday; the euro continues to weaken; Wolfgang Munchau, meanwhile, makes a proposal to refocus the EFSF on banking, and to pool the sovereign debt. [more]

Bankers Gone Wild in Ireland AND Germany - Much ink has been spilled in the press over the Irish problem and the laxity of the country’s southern Mediterranean counterparts in contrast to the highly “disciplined” Germans. But perhaps we have to revisit that caricature. Not only has the Irish crisis blown apart the myth of the virtues of fiscal austerity during rapidly declining economic activity, but it has also illustrated that Germany’s bankers were every bit as culpable as their Irish counterparts in helping to stoke the credit bubble. One of the traditional rationales for the creation of the euro was that a single currency and strict Maastricht criteria would keep the profligate Mediterraneans and their Celtic equivalents in line. Instead, critics, particularly in Germany, increasingly see the European Monetary Union as a means for freeloading nations to offload their liabilities onto fitter neighbors. Not surprisingly, this has engendered much discussion that perhaps it would serve Germany’s interests to leave the euro, rather than booting one of the Mediterranean “scroungers” out. But as Simon Johnson has pointed out, this comforting narrative of German prudence matched up against Irish profligacy doesn’t really stack upIreland bailout: full Irish government statement

Ireland’s Banks Get $46 Billion as Senior Bondholders Escape Bailout Costs –- Irish banks soared in Dublin trading as the government said it will make junior bondholders pay some of the cost of the 35 billion-euro ($46 billion) rescue package.  “The risk of immediate shareholder-dilutive wipe-out has been averted,” Ciaran Callaghan, an analyst at Dublin-based NCB Stockbrokers, wrote in a note to clients today.  Bank of Ireland Plc, the country’s largest lender, soared 16 percent to 30.7 euro cents at the 5:10 p.m. close of trading, while Allied Irish Banks Plc, the second-largest, gained 3.8 percent to 35.5 cents and Irish Life & Permanent Plc surged 59 percent to 81.9 cents. The five-member ISEQ Financial Index is still down about 98 percent from its peak in February 2007.  Finance Minister Brian Lenihan told state broadcaster RTE the government needs to impose “big haircuts” on banks’ junior bondholders after the rescue. Ireland met its two-year-old pledge that senior bondholders, typically the last investors to lose out when a bank or company founders, wouldn’t lose money.

The Irish Non-bailout – Krugman - So, a credit line at 5.8 percent interest. Considering that Ireland was able to borrow at that rate as recently as mid-September, and was falling off a cliff then, why is this supposed to solve the problem? What’s the Gaelic for “You’ve gotta be kidding”?

Terms of Enslavement; Irish Citizens Say "Default"; Agreement Violates EU and Irish Laws; 50 Ways to Leave the Euro - ANY Ireland bailout terms are onerous given that it is not Ireland that is bailed out but rather banks in the UK, Germany, US, and France (in that order). Moreover and unfortunately, the exact deal foolishly agreed to by Irish Prime Minister Brian Cowen is not only amazingly bad for Ireland, but one of the provisions violates EU and Irish law. Please consider these terms as outlined in EU agrees on $89 billion bailout loan for Ireland

  • Ireland gets Euro 67.5 billion ($89.4 billion) in bailout loans
  • The 16-nation eurozone, the full 27-nation EU, and the global donors of the International Monetary Fund each commit euro 22.5 billion ($29.8 billion).
  • Interest rates on the loans would be 6.05 percent from the eurozone fund, 5.7 percent from the EU fund and 5.7 percent from the IMF.
  • Ireland will have 10 years to pay off its IMF loans.
  • The first repayment won't be required until 4 1/2 years after a drawdown.
  • Prime Minister Brian Cowen said Ireland will take euro 10 billion immediately to boost the capital reserves of its state-backed banks

Cost of borrowing hits a eurozone record of 9.21pc – Ireland's cost of borrowing hit 9.21pc yesterday, the highest since the creation of the euro. It came after news that investors holding Irish bonds face punitive costs to do business through key market player LCH Clearnet.  Yields on the cost of Spanish and Portuguese bonds also widened.  Clearing house LCH Clearnet demanded a 48pc cash deposit for deals involving Irish bonds. These houses act as middle-men when investors trade bonds between them. LCH Clearnet holds a cash deposit while bond deals are in place to protect it from losses if deals go wrong. The standard deposit for deals involving government bonds is 3pc. LCH Clearnet is the second biggest clearing house in the world. The increase in the deposit requirement means holders of Irish bonds are essentially being frozen out of the clearing system.

EU to Ireland: Do you want your pensions or your banks? -  In assessing the effectiveness of the EU/IMF emergency lending package to Ireland, it’s important to distinguish the financial market impact from the political impact.  In terms of market impact, the package is surely a success.  All talk of restructuring, for sovereign debt let alone senior debt in banks, is off the table.  Through IMF and bilateral involvement, the call on EU lending has been kept in the low range: note the heavy use of the EU-budget backed stability mechanism relative to the use of the financial stability fund — the EFSF’s powder has been kept dry in case it’s needed elsewhere.  Furthermore, the lender of last resort checklist is looking good: if not quite lending freely at high rates against good collateral, all the EU money comes in at a large headline amount, with a fairly high rate (above IMF and Greece program), and the collateral coming from conditions to which the Irish government had already agreed.  This money will get paid back. In terms of domestic politics — and therefore with broader implications for the EU as political project — the package is much more problematic.

All The Latest On The Irish Bailout - Up To €17.5 Billion Of Rescue To Be Funded By Irish Pension Fund Contribution Redirection - Follow along as we track the news avalanche: Official release from ECOFIN as paraphrased by the CEU: Euroarea financial support will be provided to Ireland.Three pillars: 1) an immediate strengthening of the banking system, 2) an ambitious fiscal adjustment to restore to fiscal sustainability, 3) growth enhancing reforms in the labor market, to allow return to sustainable growth. Financial package will cover needs up to €85 billion: €10 billion for immediate recap measures, €25 billion on a contingency basis for banking system support, and €50 billion for budget needs. €17.5 billion will be financed by an Irish contribution from banking system and its pension fund (the NPRF). The remainder €17.5 will ceme from EFSF, UK, Scandinavian countries, and the IMF.  Interest rate at about 5.8% Precise interest rate to be in line with standard IMF pricing practices, and will be come next week. Olli Rehn: "Senior debt of bank bondholders will not be involved"

Ireland must find €17.5bn from its pension fund and reserves for bailout - EU ministers tonight spelt out the terms of Ireland's €85bn international financial rescue package, and revealed the Dublin government will have to raid its national pension fund and other cash reserves for €17.5bn as a condition of the deal to bail out its banks and debt-laden economy. The unexpected contribution from Ireland was demanded at a hastily arranged meeting of the eurozone's finance ministers, who were desperate to secure a deal before the markets open tomorrow. The package from the EU and International Monetary Fund includes €67.5bn of external loans. €10bn will go straight to the crippled banks, and €25bn is earmarked for bank support in the future. The remaining €50bn will be used to shore up the public finances and allow the government to keep making welfare payments and cover other expenses such as health and education.

Ireland crisis loan conditions become clearer - Ireland’s department of finance has released the draft loan program agreement with the European Union and IMF.  It is still preliminary and subject to various approvals, but the government was under pressure to show the basics of what had been agreed prior to the budget vote on 7 December.  A quick perusal of the document reveals the following:The EFSF apparently asked the government to post collateral for the EFSF loan.  This rumour had circulated during the negotiations but a reference in the letter confirms it.  But the government found “legal and economic constraints” to do it … those acquired-helpnessness Irish lawyers strike again.   Anyway, the apparent disagreement over collateral provides indications both of the risk EFSF may see in the package, and so the interest rate that has drawn so much attention. “The Irish owned banks were much larger than the size of the economy.”  The government may be groping towards an understanding of the difference between “Irish banking system” and “Irish banks.”

Irish bailout ’stuns’ experts - The €35bn (£29.8bn) going into Ireland's banks shocked experts, who feared bailout might or might not help Ireland, but in any case might not contain contagion elsewhere in the eurozone. Brian Lucey, associate professor of finance at Trinity College Dublin was "stunned" at the cash poured in: "We've already put at least €32bn into them, so that's going to be €67bn, which is 50% of GNP, that's a world record". He also warned that a new government next year could rip up the deal. "Sovereign governments have a right to effectively do whatever they want," he said. The EU authorities hope the Irish bailout would draw a line in the sand and halt the threat of Spain and Portugal needing international assistance. But tonight, investors and analysts were far from certain this could be achieved.

If Ireland Doesn’t Take The Bailout . . . So a week ago as I write this, the Irish formally asked for a bailout from the European Union, acting in concert with the International Monetary Fund and the British government. And now, a week after that request, the EU finance ministers just approved the bailout of the Republic of Ireland——however . . . However, in those seven days in between, a serious shitstorm broke out in Ireland—it has been one hell of a week, over there in the Emerald Isle. And though the bailout has been approved by the EU finance drones, we still do not have an approval from the most important player of them all: The Irish people. Let’s recap:

Irish Cutbacks Pile It on for 'New Poor' —A church-run soup kitchen here symbolizes the human cost of Ireland's crisis: Middle-class homeowners, squeezed by rising debt and falling incomes, line up for food parcels alongside foreign asylum-seekers and the long-term unemployed. As Ireland plans its economic bailout with austerity measures, the number of people living on the streets in Dublin rises. Video courtesy of Reuters. These are Ireland's "new poor"—ordinary people with houses and jobs laid low by years of austerity, and now facing even tougher times as the government slashes public-sector jobs, raises taxes and cuts social welfare. This week, the Irish government unveiled a new four-year belt-tightening plan to repair public finances broken by recession and the cost of propping up the country's beleaguered banks. It is a key precondition of the estimated €85 billion bailout Ireland is currently negotiating with the European Union and the International Monetary Fund.

The Irish Banking Crisis: A Parable - Once upon a time, there was a country where bankers disappeared. The bankers, fed up with regulation, dissatisfaction, and downright hostility, decided to unleash the planet-destroying superweapon in their arsenal: they went on strike, not once, but three times. This is no fairy tale, so we don't have to imagine what happened next. And what did come next was something really, really interesting — and just a little bit awesome. Instead of Ragnarok ripping prosperity to shreds, the economy continued to grow. Though the money supply did contract sharply, neither trade, commerce, nor industry came to a grinding halt. How? People created their own currencies, to substitute for the collapsing money supply. They kept using checks to pay one another, but then, people's checks began trading within communities. Here's how Antoin Murphy, one of the few scholars to have studied these strikes, which took place in the 1970s, describes it: "a highly personalized credit system without any definite time horizon for the eventual clearance of debits and credits substituted for the existing institutionalized banking system." The country in question was Ireland — today, in deep crisis because of profligate banks.

State guarantee to banks second highest in EU at €723bn - IRISH banks have been state-guaranteed to the tune of €723bn since the start of the crisis, the second-highest figure in the 27-member bloc. The European Commission's state aid scoreboard, which ranks countries in order of their reliance on government support, places Ireland second only to Britain, which has gained EU approval for over €850bn worth of guarantees, capital injections and other support schemes. The Irish figure includes the €400bn blanket guarantee issued in September 2008, which is no longer in place.  The Department of Finance says that at the end of September 2010 the state was on the hook for €146.7bn in guarantees.  The state has received over €1.33bn in fees under the guarantee schemes.

Will it work? No. What can Ireland do? Remove the bank guarantee and default – THE DEAL is done, but there is no joy. The agreement that was supposed to end the financial crisis gave rise to its next wave. We are now in the unique situation that financial markets are taking a longer term view than national governments. The governments are saying: There is no liquidity crisis. Greece and Ireland are safe for the next few years. The markets are saying: There is a solvency crisis; there is no way that Greece and Ireland will be able to prevent an explosion of their national debt. The markets, for once, are correct. At an interest rate of 5.8 per cent, the loan from the European Financial Stability Facility will at best plug a temporary funding gap. It will not improve – and quite possibly worsen – Ireland’s underlying solvency position. The interest rate is very likely to be higher than Ireland’s nominal annual growth during the period of the loan. And that means that the real value of the debt will increase.  Revoke the guarantee for the banking system and then convert senior and subordinate bondholders into equity holders.

The people must act or we will remain irrelevant - Before an election, a civic movement has to create a critical mass around the idea of radical political reform HAVING AN election after agreeing a four-year deal that will shape all key decisions is like debating which brand of condom to buy after you’ve become pregnant. It is a parody of democratic choice. Popular sovereignty has almost no meaning in Ireland right now. Its restoration is the precondition for a meaningful election. We need a non-party technical administration to hold the fort while the people have their say on the four-year plan and on radical reform of our political system. Within that space, we need to make a collective decision on the International Monetary Fund-European Union deal. The primary goal of the IMF-EU package to which any new government will be committed is not to stop Ireland spiralling downwards into economic depression. It is to ensure that Irish citizens cough up yet more money for the banks.

Barry Eichengreen on the Irish bailout - The Irish “rescue package” finalized over the weekend is a disaster. You can say one thing for the European Commission, the ECB and the German government: they never miss an opportunity to make things worse. I’m probably the most pro-euro economist on my side of the Atlantic. Not because I think the euro area is the perfect monetary union, but because I have always thought that a Europe of scores of national currencies would be even less stable. I’m also a believer in the larger European project. But given this abject failure of European and German leadership, I am going to have to rethink my position. The Irish “program” solves exactly nothing – it simply kicks the can down the road. A public debt that will now top out at around 130 per cent of GDP has not been reduced by a single cent. The interest payments that the Irish sovereign will have to make have not been reduced by a single cent, given the rate of 5.8% on the international loan. Ireland will be transferring nearly 10 per cent of its national income as reparations to the bondholders, year after painful year. This is not politically sustainable, as anyone who remembers Germany’s own experience with World War I reparations should know. A populist backlash is inevitable. The Commission, the ECB and the German Government have set the stage for a situation where Ireland’s new government, once formed early next year, rejects the budget negotiated by its predecessor. Do Mr. Trichet and Mrs. Merkel have a contingency plan for this?

Ireland is Bankrupt...a letter from an Irish citizen - Ireland is not only insolvent because it has no liquidity, no way of meeting its debts. The government decided to link the economic future of the country to a failed banking system and now the two are inextricably intertwined. No amount of raised taxes can bail out the banks and still pay the day-to-day running expenses of our welfare state. The famed 'Celtic Tiger' boom economy was always a high-risk, dangerous fiction. Someone dubbed Ireland the 'Wild West of Economics'. Our illusory wealth was tied to a property bubble that was as unsustainable as it vacuous, and all the money was borrowed, primarily from German savers. We were hooked on credit like it was crack cocaine. We binged but never purged and we stayed high to postpone the inevitable hangover. Everybody was in cahoots, from corrupt local governments, driving through emergency rezoning laws, to rogue bankers financing the criminal inflation of developments and shoveling billions to builders, to newspapers cashing in on their property advertising to regulators asleep at the wheel. Our mafia don cum Taoiseach, Bertie 'Gombeen-Man' Ahern, invited critics of the system to commit suicide. Nobody left the orgy. Nobody wanted to leave. Planet Hollywood had finally come to Planet Ireland!

Kevin O’Rourke on the Irish crisis -- Live at Eurointelligence. An extract. The reaction to the news that Irish taxpayers are to be squeezed while foreign bondholders escape scot-free has been one of outraged disbelief and anger. At the start of last week, it was possible to make the argument that ‘burning the bondholders’ was irresponsible, since it would inevitably lead to contagion, and the spread of the crisis to Iberia. That argument has at this stage lost all validity, since contagion has happened anyway. Besides, the correct response to the possibility of contagion was never to engage in make-believe, but to extend taxpayer protection to other Eurozone members as required. Swapping debt for equity in a coordinated fashion across Europe would show ordinary people that Europe is on their side; but like the PLO of old, the European Union never misses an opportunity to miss an opportunity.

The Euro at Mid-Crisis, by Kenneth Rogoff - Now that the European Union and the International Monetary Fund have committed €67.5 billion to rescue Ireland’s troubled banks, is the eurozone’s debt crisis finally nearing a conclusion? Unfortunately, no. In fact, we are probably only at the mid-point of the crisis. To be sure, a huge, sustained burst of growth could still cure all of Europe’s debt problems – as it would anyone’s. But that halcyon scenario looks increasingly improbable. The endgame is far more likely to entail a wave of debt write-downs, similar to the one that finally wound up the Latin American debt crisis of the 1980’s. For starters, there are more bailouts to come, with Portugal at the top of the list. With an average growth rate of less than 1% over the past decade, and arguably the most sclerotic labor market in Europe, it is hard to see how Portugal can grow out of its massive debt burden. This burden includes both public debt (owed by the government) and external dent (owed by the country as a whole to foreigners). The Portuguese rightly argue that their situation is not as dire as that of Greece, which is already in the economic equivalent of intensive care. But Portugal’s debt levels are still highly problematic by historical benchmarks (based on my research with Carmen Reinhart).

PIMCO | Mohamed A. El-Erian – Ireland Rescue Is Not a Game Changer - Europe tried to strike a delicate balance this weekend. It granted emergency loans to boost liquidity, an approach that has visibly lost traction in containing the dislocations in the continent’s periphery. But it also moved toward a more durable approach to tackling solvency problems, although one that involves greater risk of collateral damage. The new liquidity package does little to deal with Ireland’s debt overhang, or to reduce the embedded cost of its debt. Instead it aims to introduce stability into market conditions, which in turn should allow the Irish government to implement its recently announced austerity package.  Ireland will get €67.5 billion to recapitalize its banks, and fund the state’s balance sheet. The financing carries an average interest charge of 5.8% – not cheap but considerably better than market terms.  The package, therefore, is not a “game changer.” It will reduce the risk of contagion to other peripheral countries, until a regional resolution framework is put in place. But it will not significantly improve Ireland’s medium-term growth and employment prospects. / Europe - IMF admits failings in predicting Irish crisis - The International Monetary Fund has conceded it could have done better in predicting Ireland’s property and banking crash that led to in Sunday’s announcement of a €85bn bail-out by the fund and Ireland’s European partners. Ajai Chopra, deputy director of the IMF’s European department, who leads the mission to Ireland, said in an interview with the Financial Times: “There is no question that we – and other observers – could have done better. But it's very much a balancing act. We have to be careful that we don’t end up predicting nine of the next two crises, or that we precipitate what we’re trying to avoid.” The fund has been thrust centre stage by the eurozone sovereign debt crisis, and in the process rediscovered its role as the world’s economic troubleshooter.

Irish Haircuts: Too Metastasized to Fail - A question everyone asks after the Irish bailout is "Why were there no haircuts to Irish bank bondholders?" Why, in other words, are the people who financed Ireland's debt forays not on the hook for aiding and abetting this misadventure? Michael Cembalest of JP Morgan weighs in on this in his latest: Greece, Ireland, Spain and Portugal (GISP) are small in GDP terms relative to Germany and France. But their banking systems grew to be very large (e.g., a 20% haircut on French bank exposure to GISP countries would wipe out French bank equity). Irish Finance Minister Lehinan intimated that Ireland asked to be able to apply haircuts to senior bank debt, and was told by the EU that it would make no money available if there were any haircuts, due to fears of contagion. What does that tell you about the risk of small countries, or the European banking system? Welcome to yet another example of banks being too metastasized to fail.

Europe Update - The European markets are off about 1% this morning. The yield on the Ireland 10-year bond is up to 9.25%. The yield on the Portugal 10-year bond is up to 7.02%. The yield on the Spain 10-year bond is up to 5.36%. Roubini suggests Portugal should seek a bailout: "Go now to the IMF to borrow money now" (in Portugese) And from Reuters: Greece Gets Loan Repayment Extension to 2021  Greece will have until 2021 to repay its 110 billion euro ($145.7 billion) EU/IMF bailout loan, the country's finance minister said on Monday. In return, Greece will have to pay a higher fixed interest rate of about 5.8 percent from 5.5 percent...

Euro Falls Against Dollar as Irish Deal Fails to Stem Concern-- The euro fell to the lowest level in more than two months against the dollar as Ireland’s agreement to receive 85 billion euros ($112 billion) in aid failed to stem concern that Europe’s sovereign-debt crisis will deepen. The shared European currency slipped versus the yen and erased an early advance versus the greenback. Finance chiefs ended crisis talks in Brussels yesterday, agreeing that a future crisis-management system won’t automatically cut the value of bond holdings as the Irish package was secured. Irish opposition parties criticized the terms of the agreement, and the cost of insuring debt from Spain and Portugal soared to record highs. “We saw an attempt for the euro to trade higher earlier in the session, but even if the Irish problem is solved, and that’s still debatable with the need to get the austerity budget passed, investors are very wary of seeing the reaction of the other peripheral members,”

Why the Irish crisis is such a huge test for the eurozone - The fault lines in the currency union stand revealed. The promise was that the eurozone would deliver its members from currency crises. But, as I, and others, warned, be careful what you wish for: credit crises would replace currency crises – and these are likely to be even worse.Why would a currency union lead to credit crises? One answer is that divergences in relative costs lead to structural trade imbalances – large external deficits when the less competitive economies are close to potential output. The private or public sectors must then spend more than their incomes to sustain full employment. Such excess spending must, in turn, be financed from abroad. In the end, such lending will vanish. If the lending goes via the banking sector, as in Ireland or Spain, there will first be a financial crisis. If the lending goes via the public sector, as in Greece, the crisis will first be in state finances. A deeper answer is that the common interest rate will appear very low in some member countries. In the eurozone, the fact that global interest rates were low and demand in core economies weak, exacerbated this effect. These ultra-low interest rates triggered asset price bubbles and credit booms in peripheral economies. These, in turn, encouraged construction booms. In these circumstances, what the late John Kenneth Galbraith called the “bezzle” – the stock of financial crime – rises, to emerge in the crash. As the financial system implodes, the economy collapses and the public finances, seemingly strong in the boom, turn sharply for the worse.

Germany is Old Too - So, the butcher’s bill on Ireland is in and stands at 85 billion Euro, jointly financed by the EU (the European Financial Stability Fund (EFSF)and the European Financial Stability Mechanism), the IMF and bilateral loans from a number of countries including Sweden, Denmark and the UK. Of course, it only worked for a couple of hours before markets were reeling again today in the face of a Eurozone crisis which seems to have no end. Worryingly, markets seem to be going for all together larger game this time around with Spanish bonds bearing the brunt of the attention. In principle and fact, I agree with RBS’ Harvinder Singh (via FT Alphaville’s Neil Hume) that the only possible end game at this point is that things get so bad that we see some form of fiscal unity and/or a joint Eurozone pooling of risk through the issuance of an EMU bond. Illuminati’s Jim O’Neill is a little more sanguine – although ultimately he also invokes the point that the core, and especially Germany, must go all in, in its effort and commitment to keep the Eurozone in one piece.I know that all this may come off as scaremongering; but the farther we move forward into this mess, the more it is beginning to look like calm and calculated analysis rather than prophecies of doom.

Greece Is Almost Certainly “On Track” – But Towards Which Destination Is It Headed? - According to the latest IMF-EU report Greece’s reform programme remians “broadly on track” even if the international lenders do acknowledge that this years fiscal deficit target will now not be met and that a fresh round of structural measures is needed if the country is to generate a sustained recovery. My difficulty here must be with my understanding of the English lexemes “remains” and “sustainable”, since for something to remain on track it should have been running along it previously (rather than never having gotten on it), and for something – in this case a recovery – to be sustained, it first needs to get started, and with an economy looking set to contract by nearly 4% this year, and the IMF forecasting a further shrinkage of 2.6% next year, many Greeks could be forgiven for thinking that talk of recovery at this point is, at the very least, premature. A more useful question might be “what kind of medicine is this that we are being given”, and “what are the realistic chances that it actually works”. Unfortunately, in the weird and wonderful world of Macro Economics, witch doctors are not in short supply.

Not Waving But Drowning - Krugman - The markets are evidently not reassured. But why should they be? It’s hard to escape the sense that European policy makers are just completely out of their depth. They know how to deal with liquidity problems, but they cannot come to grips with the reality that this requires more than buying a bit more time. It’s as if we’re having the following dialogue: “Ireland really can’t afford to pay these debts.” “Here’s a credit line!” “No, really, we just can’t afford to pay.” “Here’s a credit line!” It really is like watching a car wreck.

Europe's debt crisis: Should bondholders suffer, too? - There is something very unfair, even unseemly, about the bailouts currently being implemented in the Eurozone. The citizens of Greece and Ireland, the two countries rescued by the European Union so far, will be forced to suffer higher taxes, reduced government services and meager growth and job prospects under severe austerity plans imposed in return for the bailout money. But their bondholders are being protected. On one level, we could say that's only proper. The Greeks and Irish are responsible for making their own messes, and now have to pay for them. But at the same time, it takes two to create a financial crisis. Those investors who bought Greek or Irish bonds took on risk as well when they loaned these governments money, and therefore bear their own share of the responsibility for Europe's current debt woes. Shouldn't the creditors pay for their mistakes, too? The EU has decided the answer is yes. On Sunday, European ministers signed off on a framework for a permanent mechanism to resolve sovereign debt crises in Europe. You can find the details of the plan in a statement here. The envisioned process potentially shifts some of the burden of resolving these crises from taxpayers to bondholders, who would have to swallow losses on their investments. The idea brings an element of fairness into the efforts to quell Europe's debt crisis.

Portugal Remains Under Pressure As Contagion Intensifies - With reports of Ireland trying to finalize an IMF/EU deal over the weekend, all eyes are on Portugal.  Press report that Portugal is being pushed to request an aid program have been denied by officials, but the way things are going, it seems like it’s only a matter of time before Portugal succumbs to the contagion.  As seen in EM crises of the past, we simply cannot ignore the fact that contagion remains a very strong force and so we see little chance that Portugal can avoid it.  Parliament gave final approval to the 2011 budget, which contains harsh austerity measures.  However, harsh budget measures have not taken any pressure off of Greece or Ireland.

EU denies pushing Portugal towards bailout (Reuters) - Ireland hammered out the final details of an EU/IMF rescue on Friday as financial market pressure mounted on Portugal and Spain despite vehement denials from euro zone governments that they too might require bailouts. The euro currency dipped as low as $1.32 for the first time in over two months and shares on both sides of the Atlantic fell amid fears the currency bloc's debt crisis could deepen further and the 85 billion euro ($113 billion) package for Ireland might not be the last. The bloc's woes and the seeming inability of its leaders to unite behind a plan to stem the contagion has prompted some experts to speculate the 16-nation currency area could splinter apart, but the costs of a breakup would be catastrophic and the chances are still seen as extremely slim. European officials were forced to deny a German newspaper report on Friday that Portugal was under pressure from some of its euro zone partners to follow Ireland and seek a rescue in order to prevent contagion to its much larger neighbor Spain.

Roubini tells Portugal to seek bailout as markets slide - Nouriel Roubini, the US economist, said Portugal should consider asking for a bailout before its financial plight worsens as the euro fell after the €85bn Ireland bailout failed to ease eurozone debt fears.  Mr Roubini, the economist who predicted the financial crisis, told daily paper Diario Economico it is "increasingly likely" Portugal will require international assistance. He said the country is approaching "a critical point" due to it high debt load and weak growth and there were ample funds to shore up Portugal, one of the eurozone's smaller countries which contributes less than 2pc to the 16-nation bloc's gross domestic product.  However, he said neighboring Spain, Europe's fourth-largest economy, is "too big to bail out."

Spain, Portugal CDS spreads widen to record levels-- The cost of insuring Spanish and Portuguese government debt rose Monday as spreads on peripheral euro-zone sovereign credit default swaps, or CDS, widened to record levels in the wake of a lackluster Italian bond auction, analysts said. The five-year Spanish CDS spread widened by 25 basis points to 350 basis points, according to data provider Markit. That means it would now cost $350,000 a year to insure $10 million of Spanish debt against default, up from $325,000 on Friday. The Portuguese spread widened to 545 basis points from 502, Markit said, while the Italian spread widened to 231 basis points from 215. "Spain and Portugal are now at record wides, suggesting that contagion fears haven't been assuaged by Ireland's bailout," said Gavan Nolan, vice president for credit research at Markit.

'Insolvent' Portugal Needs Loans Soon, Buiter Says - Portugal is “insolvent” and will probably need soon to join the emergency-loan program from the European Union and the International Monetary Fund that’s available to Greece and Ireland, according to Willem Buiter, Citigroup Inc.’s chief economist. “The market’s attention is likely to turn to Portugal’s sovereign, which at current levels of interest rates and growth rates is less dramatically but quietly insolvent,” Buiter wrote in a report dated yesterday. “We consider it likely that it will need to access the European Financial Stability Facility soon.”

Portuguese Central Bank Warns of 'Intolerable Risk' (Audio) - The Bank of Portugal claims its own banking industry faces what it calls an "intolerable risk" if the country fails to get a grip on its spending and borrowing.  The warning is contained in the Bank's Financial Stability report which is published this morning. The Portugese budget deficit has continued to worsen despite government spending cuts. Economist Paulo Casaca, a former MEP for the Portuguese Socialist Party, analyses the latest warning.

Portugal's Banks Pile Up Sovereign Debt - Portuguese banks are buying their government's debt at a fast pace, a move that could pose a risk to institutions that so far have weathered the financial crisis better than many. According to the Portuguese Central Bank, the country's financial institutions, including banks, have together invested €17.91 billion ($23.5 billion) in the country's public debt as of September, up 87% from €9.58 billion a year ago. Since the beginning of the year, the exposure has risen 77%. The move also highlights contradictions European authorities are facing to save the region's economies. The officials are providing cheap funding to banks through the European Central Bank, and economists say the banks seem to be using that money to buy government bonds, thereby leaving the country's banking system vulnerable to risks associated with sovereign debt.

S&P threatens Portugal Downgrade - Standard & Poor's tossed a bit of fuel on the euro zone financial blaze Tuesday by threatening to downgrade Portugal. S&P put its A-minus long-term debt rating on Portugal on CreditWatch with negative implications, saying a downgrade is possible in the next three months. The move comes as the weaker European economies, known collectively as the PIIGS for Portugal, Italy, Ireland, Greece and Spain, are under attack in the bond markets.

U.S. Treasury Envoy to Visit Spain as Portugal Faces Downgrade - The U.S. Treasury Department said its top international official will visit Madrid, as Spanish and Italian bond spreads rose to euro-era records and Standard & Poor’s said it may cut Portugal’s debt ratings.  Lael Brainard, the undersecretary for international affairs, will meet this week with senior government officials in Madrid, Berlin and Paris to “discuss economic developments in Europe as well as our longer-term work to advance our shared agenda on strong and sustainable global growth,” the Treasury said in a statement yesterday.  Her visit comes amid renewed concern that Europe’s crisis could spread beyond Greece and Ireland, two countries that already have accepted bailout packages. Italian and Spanish government bonds fell yesterday, driving up the extra yield investors demand to hold the securities instead of German bunds.

Spanish Banks Face Funding Hurdle Amid Bailout Threat - Spain’s banks may struggle to refinance about 85 billion euros ($111 billion) in debt next year as costs surge on concern continental Europe’s fourth- biggest economy may need an Irish-style bailout.  “There’s a universal dumping of Spain going on,”  “The fear is that Portugal, Spain and Italy are now in line after what happened in Ireland.”  Anxiety over Spain’s ability to bring down the euro- region’s third-highest budget deficit after Europe handed Ireland an 85 billion-euro aid package has driven up financing costs for the country’s lenders already battered by rising bad loans and falling revenue. The average yield investors demand to hold euro-denominated Spanish bank bonds, relative to government debt, rose 141 basis points to 385 basis points in November -- the biggest monthly jump on record, according to data compiled by Bank of America Corp.

Can the eurozone afford its banks? - BBC inteview  Jim O'Neill, probably the most influential thinker at Goldman Sachs (as current head of its asset management division and erstwhile chief economist), has this morning written that "European Monetary Union (EMU) will probably survive, but it is likely to remain very messy". Which is hardly a ringing endorsement by the world's most powerful investment bank of the most ambitious economic and financial project in Europe of our age.And, let us not forget, Goldman Sachs is not famous for issuing public statements that rile the world's most powerful governments - which tend to be its customers.

The Spanish Prisoner, by Paul Krugman - Ireland can’t do all that much damage to Europe’s prospects. The same can be said of Greece and of Portugal, which is widely regarded as the next potential domino. But then there’s Spain. The others are tapas; Spain is the main course.  What’s striking about Spain, from an American perspective, is how much its economic story resembles our own. Like America, Spain experienced a huge property bubble, accompanied by a huge rise in private-sector debt. Like America, Spain fell into recession when that bubble burst, and has experienced a surge in unemployment. And like America, Spain has seen its budget deficit balloon thanks to plunging revenues and recession-related costs.  But unlike America, Spain is on the edge of a debt crisis. The U.S. government is having no trouble financing its deficit, with interest rates on long-term federal debt under 3 percent. Spain, by contrast, has seen its borrowing cost shoot up in recent weeks, reflecting growing fears of a possible future default.  Why is Spain in so much trouble? In a word, it’s the euro.

Spanish debt rate hits eight-year high - Investors fled Spanish debt Monday, pushing 10-year bond rates to an eight-year high, as Ireland's 85-billion-euro rescue failed to stop fears the crisis may spread. Markets are turning their focus to Portugal and Spain on concerns they could be the next dominoes to topple. If Spain was to require an international rescue, it would dwarf those seen to date in Greece and Ireland. Spain's gross domestic product is twice that of Ireland, Portugal and Greece combined. Investors demanded higher yields before taking a bet on Spanish debt, despite the authorities' argument that the country's economy is in no danger of needing a rescue. Spanish 10-year bond yields rose in early afternoon trade to 5.330 percent, the highest since 2002. The Spanish yield was 2.58 percentage points above the rate demanded for safe-bet German bonds.

ECB Support `Critical' for Spain as Crisis Worsens, Buiter Says - The European Central Bank may have to step up purchases of Spanish government bonds and backstop its banking system if the country runs into financing difficulties, Citigroup Inc. Chief Economist Willem Buiter said. “Once Spain needs assistance, the support of the ECB will be critical,” Buiter said in a note to investors yesterday. A Spanish crisis would “stretch the resources” of the bailout fund set up in May by European governments “perhaps beyond its current limits.”

FT Alphaville » Insolvent – Greece, Ireland, Portugal and probably Spain - Former FT blogger Willem, ‘Maverecon’, Buiter has lost none of his power to shock. He may be the chief economist of Citigroup but that doesn’t mean he can’t speak his mind as his latest essay for the bank’s clients proves. In it, Buiter claims Ireland is insolvent, Portugal is quietly insolvent, Greece is de facto insolvent and Spain will be insolvent once the problems in its banking sector are recognised. At which point things get really interesting. Buiter predicts the ECB could be forced to buy Spanish government paper and fund its banking system by purchasing the debt from the European Financial Stability Facility if things get really bad.

Spain and Ireland turn to privatisation -Spain and Ireland are set to launch large-scale privatisation programmes as they fight to preserve market faith in their turnaround plans. The Spanish government is looking at auctioning stakes in its national lottery operator and airports, while Ireland will look at privatisations in its electricity and gas sectors as part of a joint European Union and IMF bail-out package agreed on Sunday.  News of the privatisation plans came as it emerged that the eurozone bail-out fund will next month begin issuing debt on behalf of embattled member states. Any bonds sold would be the first issued in the name of all currency pact members.  Speculation had grown over the last week that the European Central Bank (ECB) was considering taking drastic steps to shore up market confidence in the single currency, with rumours spreading on Wednesday that the ECB had already begun buying Irish bonds to stabilise what had looked to be weakening faith in their value.

Some European GDP Statistics - The above data is from Eurostat, and shows real GDP normalized to have 2007 Q4 at 100.  The countries selected are the PIIGS, along with France and Germany for comparison.  All of these use the euro as currency, so there are no exchange rate movements involved in the above curves. As you can see, France and Germany went through the recession similarly, hit the trough in Q1 of 2009, and are now in an ongoing recovery, with real GDP now above pre-recession values. Ireland is uniquely badly off, with GDP down to only just above 80% of pre-recession values, and still not much sign of an actual recovery. As of the last data, the Greek economy was contracting, but is nowhere near as badly off as Ireland.  Portugal and Spain were recovering, but very weakly. Ireland is experiencing an event that is on the scale of the Great Depression in terms of the impact on economic output.

Some European Unemployment Rates - For the same group of countries as yesterday, here is the unemployment rate since 2000. You can see that the PIIGS countries all range from bad to terrible.  Both Spain and Ireland look dreadful with unemployment very high and still no clear sign of even stabilizing, let alone recovering.  Greek unemployment is increasing rapidly, and both Italy and Portugal, although not as high, look like they could still go higher.By contrast, French unemployment clearly appears to have stabilized, and German unemployment is low and falling. I imagine there will be major political shifts in countries with unemployment this high.

Unemployment Rises in Europe, Weighing on Euro - Unemployment in the euro zone rose in October to its highest level in more than 12 years, an official report showed Tuesday, underlining the pressure on governments as they try to reduce spending and bring deficits under control.  The seasonally adjusted unemployment rate was 10.1 percent in October, up from 10 percent in September, Eurostat, the statistics agency of the European Union, reported. For the full Union, unemployment was unchanged in October at 9.6 percent, it said, equivalent to about 23.1 million men and women.  Julia Urhausen, a Eurostat spokeswoman, said joblessness in the 16 nations that make up the euro zone was at its highest since July 1998, when the rate also stood at 10.1 percent.

Are We Entering Another Phase of Financial Crisis? - As Spain starts looking rocky, Tyler Cowen writes: In a nutshell, we're watching the most pitched, highest-stakes, most determined battle between politics and finance which has been staged. I am expecting finance to win. Arnold Kling follows up with four questions:

    • 1. What is the true state of the large European banks? In particular, if, they had to write down the principal on the debt of the PIGS by, say, 15 percent, which banks would still be solvent
    • 2. What does the option for inflating away European debt look like? How would the cost of that inflation be distributed? Can the inflation take place within the context of the euro, or does it require that some countries leave the euro?
    • 3. Does a crisis create an opportunity for governments to make radical changes to the welfare state, or is that still not possible?
    • 4. Suppose that governments have to choose between preserving their banks and preserving high levels of spending on public employees and retirees. Which choice is better for the economy? For political survival?

I don't know the answer to any of them, but of the four, I think the last is the most interesting; Europe cannot let its banks fail, but it also can't divert public pensions to line the pockets of bankers.  Yet it may well have to do one or the other.  I am also expecting finance to win.

Where the Black Swan Dwells - Elsewhere, Ireland and the rest of Europe wore themselves out with soul-searching all week over how to handle national bankruptcy within a currency system that bears only a schematic relation to reality. Does the bankruptee go broke all at once, or is she recruited into permanent debt slavery so that the bond-holders of various banks can keep their loved ones in marzipan and Fauchon's wonderful marrons glacés for one more holiday season? As of Monday morning, Ireland has been commanded to, er, bend over and pick up the soap, shall we say, for about a hundred billion euros in loans that will not be paid back until a mile-high ice-sheet covers Dublin (something that might happen sooner rather than later if the climate mavens are right).      We'll see how this bail-out goes down with the French and German voters, too, who have to pay for it, after all, especially as Portugal, Spain, and Italy line up at the cash cage for their cheques (and bars of soap). Of course, a few more basis points in the interest rate spreads could prang the whole Euro soap opera - does anybody really believe this game of kick-the-can will go on after New Years? I'm not even sure it goes on past this Friday, but I am a notoriously nervous fellow.

Endgame - Peripheral eurozone bond yields spiked yesterday, as investors fear default of Greece, Ireland and Portugal; the euro continued its decline against the dollar; European Commission reduces growth forecast for eurozone, and says Spain will not hit deficit target, and must do more deficit cutting; Igantio Torreblanca blames German politics for this mess; the Greek loan will be extended to seven and a half years, as EU recognises that Greece can’t pay, won’t pay; Paul Krugman says that Ireland is insolvent at an interest rate of 5.8%; Peter Boone and Simon Johnson paint four eurozone endgame scenarios; Marshall Auerback takes a look at the role of German banks in the Irish crisis; Eurointelligence, meanwhile, has updated its table of 10-year bond yields to include a much larger number of troubled eurozone countries: This is no longer a Greek and Irish crisis. [more]

Euro zone periphery hammered as default fears rise (Reuters) - The euro zone's debt crisis deepened on Tuesday, with investors pushing the single currency lower and the spreads on peripheral bonds up to new highs amid concern weak member states may ultimately be forced to default. European policymakers came out in force to try to calm markets, with European Central Bank President Jean-Claude Trichet warning that pundits were underestimating the determination of governments to keep the euro zone stable. But markets paid little attention, pressuring Portugal, Spain and Italy only days after the EU agreed to an 85 billion euro ($110.7 billion) bailout for Ireland. The borrowing costs of countries like Belgium and France also rose as investors looked beyond the euro zone periphery and targeted core founding members of the bloc. A Reuters survey of 55 leading fund management houses showed U.S. and UK investors had significantly cut back their exposure to euro zone bonds this month, piling into equities instead despite a weakening in global shares.

Another Lesson In How Not To Go About Things From The EU Commission - The present generation of European leaders will doubtless be remembered for many things, but somewhere high up there on the list will be the appalling sense of bad-timing they seem to have when making critical announcements. The confusion caused by certain ill-considered remarks from Angela Merkel about how private sectors bondholders would need to participate in future EU bailout processes is evidently one good example. Another, without doubt is going to be the decision by EU Commissioner Olli Rehn to appear before the world’s press today (yes, today of all days, one day after the sensitive announcement of the Irish Bank Bail-out plan and the decision to create the European Financial Mechanism), and inform the assembled throngs that, as far as the EU Commission could see, Spain will not be sticking to its 6% of GDP fiscal deficit commitment next year, simply because according to EU calculations the deficit is going to be 6.4% – unless, of course – there is another round of fiscal reduction measures. I think Spanish has a suitable word for this kind of persistent bad timing: "gafé". But the thing is, if Europe’s leaders insist on continually showing the markets just how "gafé" they all are, then we are never going to find our way out of this hole we have all dug for ourselves. - Spain braces itself for a crisis made in Germany - FT video - On May 9, when European Union leaders approved the rescue package embodied in the European financial stability facility, Spain saw the light at the end of the tunnel. Six months later, it is looking like it belongs to an incoming train. Seeing how the story unfolded in Greece and Ireland and watching the crisis heading for Portugal, it is no wonder that the dominant sentiment in Spain is concern. But more than that, the prevailing feeling is one of frustration with Germany. With the May agreement in its pocket, the Spanish government went home and put together a reform package that had everything required to get Spain out of its collision course: government expenditure reductions, labour market reforms, public sector pay cuts, pension freezes, an extension of the retirement age and a rise in value added tax. Subsequently, the government, with the aid of the central bank, decided to rein in regional and local government deficits, forced regional saving banks to merge and made public its bank stress tests. Most of the measures are now in place. Spain’s current problems start not at home but rather abroad – in Germany, to be precise.

The Merkel crash - So what’s really behind the spike in Spanish government bond yields on Monday? How about this: because of Angela Merkel’s European Stability Mechanism the market is finally being being forced to price in default risk for eurozone countries. Simple eh? Harvinder Singh of RBS thinks so. Introducing the Merkel crash: The market is correct. This is the Merkel crash we have been outlining. If you think a country will get a high coupon for new issuance in H2-13 then it is right to see the sovereign weaker right now. Then the self-fulfilling nature of the crisis starts. For example, SPGB 10y is at 5.4% now from 4% in October. That makes the legwork much harder for Spain. We see 10y spreads at 300bp this week and then the market will test 450bp where the repo haircuts kick-in. Italy is expected to get dragged out with Spain and there should be new highs in spreads in core EMU too. We expect some flight to quality to Bunds but the fact that even German debt trades poorly reflects the fact that one way or another Germany will end up paying more.

Germany watches with concern as euro falls despite Ireland bailout - Germans braced for even more turmoil in the Eurozone after a multibillion-dollar rescue package for Ireland failed Monday to satisfy financial markets alarmed at the cost of having to bail out heavily indebted partners that share the common currency.  With indications that not just tiny Portugal but the large economies of Spain and even Italy may also need rescue deals, some German commentators debated whether the time had come to rethink membership in Europe's single currency.  Germany was a reluctant participant in the bailout of Greece's economy in May, when taxpayers here vented their frustration in regional elections at having to throw their weight behind a country perceived to have lived beyond its means for years. When Ireland's crisis loomed, Germans again balked at the prospect of having to help a country whose per-capita annual income is more than $5,000 higher than Germany's $40,000.

The knives are out: Spain accuses Germany and France for destabilising the situation - Salgado says political comments have caused the rise in Spanish spreads – which reach a new record yesterday; the Irish justice minister accused the ECB of forcing Ireland into a premature decision; Germany’s Bild accuses the Irish of being deficit sinners; market bloodbath continued yesterday, with euro down below $1.30 at one point, and Belgian and Spanish spreads reaching new records; there are also signs of contagion into the corporate bond market; Trichet does not rule out an extension of the ECB’s bond purchase programme; Bart Haeck argues that Belgium should not rush into an emergency government; Martin Wolf says Ireland should drop the bank guarantee, make bondholders pay, and default on its debt; Wolfgang Munchau wonders whether the crisis could threaten the cohesion of the EU as a whole; Willem Buiter, meanwhile, says that large parts of the European periphery, including Spain, is effectively insolvent. [more]

Spanish Skies Shut Down After 90% Of Air Traffic Controllers "Call In Sick" In Protest Over Austerity - From Sky News. If you are reading this from an airplane, we can only hope your final destination is not Spain. Sky News has just broken that virtually all Spanish air traffic is shut down after 90% of air traffic controllers have decided not to work due to 'illness' but mostly in protest of austerity. Those with a memory that stretches beyond the last Dancing with the Stars episode will recall that this is what happened in Greece just days before the people died in riots and Waddell and Reed experimented with the whole sell concept. "Update from the AP: Spain orders its air traffic controllers to resume work or military will take over control of airspace. That's some serious flu going around.

Why European debt defaults are necessary - Jim O’Neill of Goldman Sachs is now going around saying that the eurozone needs “solidarity,” and that Germany in particular needs to get with the all-for-one-and-one-for-all program, after getting itself into this mess by encouraging far too many countries to join the euro in the first place. At the same time, the survival of the euro, he says, “requires Germany to be not so noisy and aggressive about how other countries should run their economies.” You can see the problem here: if enacted, it would mean that the European periphery can run up massive debts, safe in the knowledge that Germany will pay them off. Willem Buiter calls this by its proper name—permanent fiscal transfer—and says that it’s “most unlikely” even in Ireland, let alone in (say) Greece. Even Buiter—who now works for Citigroup, remember, which has a long and painful institutional memory when it comes to sovereign lending—is talking about the fact that some kind of default (he calls it “restructuring”) will be necessary, certainly in Greece and Ireland, before markets have any confidence that the problems in those countries are resolved.

Belgium: Will it Be The Next Euro Domino to Fall Down? – Belgium’s positions are not only massive but probably toxic, he said, albeit in more colorful language. Belgium’s publicly admitted gross debt to GDP ratio already stands at 100%. In 2008, before Greece had to ‘fess up to the true size of its public debt, it had a ratio of 99%. This year, Greece’s ratio will be above 130%, on its way — probably — to 150% over the coming couple of years. OK, so on many of the other metrics, Belgium doesn’t do (quite) as badly as the peripheral Europeans currently in crisis. But the numbers are nothing to cheer about. Belgium’s government deficit is expected to come in at 4.8% this year, according to the IMF, and is seen rising for the coming few years.True, the structural deficit, at 3.5%, is about half of Greece’s level. But given Belgium has been without a government since April and is riven by deep tensions between its French- and Dutch-speaking communities, the prospects of strong, clear-sighted economic policy any time soon seems far fetched.

Hungary, Belgium T-Bill Sales Costly, Demand Subdued - Fears that Ireland's financial problems will spread further afield led to more expensive short term debt auctions for Hungary and Belgium Tuesday. For Hungary, which sold less than it had planned in Treasury bills, domestic factors also played a part. The unexpected Hungarian interest rate hike on Monday and mounting concerns over Hungarian government policy weighed on sentiment, adding to wider concerns over the possibility of more sovereign bailouts in the euro zone. In a separate auction, Belgium also paid higher yields amid subdued demand for its three- and six-month Treasury certificates, again reflecting fears of contagion within the euro zone. Belgium's sale of Treasury certificates, or short-term debt, mirrored its government bond sale Monday when demand was subdued and the yield surged 14% on the 10-year bond on offer, compared to a month ago.

Hungarian Bonds Extend Record Selloff on Interest-Rate Dispute -- Hungary’s bonds fell for a seventh day, extending their biggest monthly rout since February 2009, on speculation the central bank’s row with the government will prompt further interest-rate increases and drive away investors. The yield, which moves inversely to the bond’s price, on notes in forint due February 2015 jumped 17 basis points to 8.35 percent, its highest since September 2009, as of 1:30 p.m. in Budapest. The cost of insuring Hungary’s debt against non- payment climbed to the highest since June. The forint, the world’s worst-performing currency in November, gained 0.1 percent to 284.17 per euro after tumbling 3.2 percent in the previous three days

Contagion crisis intensifies; Spain yield soars — The euro zone’s sovereign-debt crisis intensified Tuesday, with yields on Spanish, Italian and other peripheral government bonds soaring in the wake of a weekend meeting of European Union finance ministers that failed to soothe fears of the potential for future defaults. The yield on 10-year Spanish government bonds jumped to around 5.63%, strategists said, a day after surging to 5.43%. The move sent the yield premium demanded by investors to hold 10-year Spanish debt over comparable German bunds to more than three full percentage points. “Ireland’s bailout did nothing to ease the euro-zone debt crisis: it might have even made it worse,” . “For now the market sees a pattern emerging and the next piece of the bailout puzzle seems to be Portugal, with Spain to follow after that.” The yield on 10-year Italian bonds also rose for a second day to hit 4.77% from around 4.64% on Monday. Portuguese, Greek and Irish bond yields also rose. And outside the periphery, the Belgian 10-year bond yield continued to climb, hitting 3.97% versus around 3.86% on Monday.

Spain, Italy Now Face Bonds Pressure - Financial pressure on the euro zone intensified today, with the euro falling and Italy facing rising borrowing rates as EU measures to control its debt crisis left investors uncertain and anxious. The euro fell under $1.30 for the first time since mid-September, dropping at one point to $1.2969, though it later recovered to stand at $1.3030 this evening. There was also more pressure on 10-year borrowing rates for countries seen at risk of needing a rescue after Greece and Ireland, with particular attention focused on Spain as the size of its economy puts it in a far bigger problem category. The borrowing rate for Spain rose to 5.57%, while Portugal's equivalent remained high at almost 7.2%. The gap between Spanish and benchmark German borrowing rates widened to three percentage points, an all-time high.

Spain, Portugal and Italy bond yields rise on fears more bailouts needed to quell debt crisis  - Investors sold off government bonds from Spain, Portugal and Italy on Tuesday amid worries that Europe's debt crisis has not been contained by Ireland's bailout but is putting pressure on other fiscally weak countries. The yields on Spain's 10-year bonds jumped as high as 5.7 percent by midmorning, making for a euro-era record difference of 305 basis points against the benchmark Germany 10-year bond, which had a yield of 2.7 percent. The spread on Italy's 10-year bond reached 210 points, also the highest since the launch of the euro, before easing back somewhat. Portugal, whose yields soared last week, saw its spread edge higher as well.

Italy Debt Costs Rise at Auction After Irish Rescue (Bloomberg) -- Italy’s borrowing costs rose at a sale of 6.8 billion euros ($9 billion) of bonds on investor concern that the 85-billion-euro aid package for Ireland won’t be enough to stop the spread of the region’s debt crisis. The Treasury sold 3 billion euros of securities due March 2021 to yield 4.43 percent, up from 3.89 percent at a sale on Oct. 28, data from the Bank of Italy showed today. The Treasury also sold 2.5 billion euros of securities due in November 2013 to yield 2.86 percent, more than the 2.32 percent at the previous auction. Another 1.34 billion euros of floating-rate notes due 2017 were sold with a yield of 2.3 percent

Contagion Strikes Italy as Ireland Bail-out Fails to Calm Markets - The EU-IMF rescue for Ireland has failed to restore to confidence in the eurozone debt markets, leading instead to a dramatic surge in bond yields across half the currency bloc.  Spreads on Italian and Belgian bonds jumped to a post-EMU high as the sell-off moved beyond the battered trio of Ireland, Portugal, and Spain, raising concerns that the crisis could start to turn systemic. It was the worst single day in Mediterranean markets since the launch of monetary union.  The euro fell sharply to a two-month low of €1.3064 against the dollar, while bourses slid across the world. "The crisis is intensifying and worsening," . "Bond purchases by the European Central Bank are the only anti-contagion weapon left. It needs to act much more aggressively."

The Italian Job - Krugman - OK, folks, this is getting really serious. Spain is bad enough, but Italy … Italy has puzzled me a bit. On one side, it has a lot of debt (net 99 percent of GDP), and if you look at prices and wages it looks almost as overvalued as Spain. On the other side, Italy’s deficit isn’t nearly as bad (5.1 percent in 2010, sez the IMF), and the economy doesn’t seem to be suffering as much as you’d expect. But now Italy’s under pressure too. I still don’t see a wide euro breakup. But I guess it’s worth posting, for future reference, one thought I have here: namely, that a rump eurozone, without the southern Europeans, doesn’t look workable to me. It’s not about economics per se; it’s about political economy.

Europe Debt Fears Hit More Secure Countries - Fears among European bondholders spread Tuesday from the weakest members of the euro zone to other countries, including Italy and Belgium, spurring a stepped-up search for a solution to a crisis that is increasingly putting political as well as financial strain on Europe’s decade-old monetary union. Despite the commitment of 200 billion euros, or $260 billion, in bailout funds to Europe’s two most stricken nations — Greece and Ireland — institutional investors were unimpressed with the rescue effort this weekend of Ireland and continued to sell bond holdings in the weaker euro-zone economies. But what is worse for the European Union and an increasingly stretched International Monetary Fund is that investors have begun to disgorge some of their positions in Belgium, Italy and even Germany.

Concern on debt crisis deepens –Global concern about the debt crisis rocking the euro zone mounted today, with Washington sending a top US Treasury envoy to Europe and G20 officials discussing the turmoil in a conference call. A day after investors pushed the risk premiums on Spanish and Italian government debt to new highs, the bond spreads of countries on Europe's southern periphery narrowed and the euro steadied on speculation that the European Central Bank could unveil new anti-crisis steps at a meeting tomorrow. But calmer markets failed to remove deep worries about contagion in the 16-country euro region that has pushed European policymakers onto the defensive and forced them to search for new ways to stabilise their 12-year-old currency project.

German bond issue undersubscribed: Bundesbank  — A German five-year bond issue on Wednesday was undersubscribed, figures released by the central bank showed, the second time in two weeks that a German debt issue has gone uncovered. Last week, an issue of 10-year German bonds, the eurozone benchmark, also met with offers for less than was available, amid heightened market tensions stemming from the Irish debt crisis. This time, the agency which manages Germany's sovereign debt received offers for just 4.55 billion euros (5.96 billion dollars) after tendering bonds worth a total five billion euros, the central bank data showed

IMF Expects to Double Its Lending Capacity - The International Monetary Fund expects to double its lending capacity to $450 billion over the next few months, giving it additional firepower to deal with the sovereign-debt crisis engulfing Europe, according to IMF officials and documents. Whether that will be sufficient depends on how deeply the problem spreads. The IMF currently has $202 billion in basic resources and an additional $41 billion it can tap in times of acute international financial distress, for a total of $243 billion, according to IMF financial documents. But that is less than the amount that the euro zone is now counting on the IMF to provide for troubled European countries.

Following Hungary And Ireland, France Is Next To Seize Pension Funds - If the recent Hungarian "appropriation" of pension funds, and today's laughable Irish bailout courtesy of domestic pension funds sourcing 20% of the "new" money was not enough to convince the world just how bankrupt the entire European experiment has become, enter France. Financial News explains how France has "seized" €36 billion worth of pension assets: "Asset managers will have the chance to get billions of euros in mandates in the next few months for the €36bn Fonds de Réserve pour les Retraites (FRR), the French reserve pension fund, after the French parliament last week passed a law to use its assets to pay off the debts of France’s welfare system. The assets have been transferred into the state’s social debt sinking fund Cades. The FRR will continue to control the assets, but as a third-party manager on behalf of Cades." FN condemns the action as follows: "The move reflects a willingness by governments to use long-term assets to fill short-term deficits, including Ireland’s announcement last week that it would use the country’s €24bn National Pensions  Reserve Fund “to support the exchequer’s funding programme” and Hungary’s bid to claw $15bn of private pension funds back to the state system."

Financial News: France Seizes EUR36 Billion Of Pension Assets - Asset managers will have the chance to get billions of euros in mandates in the next few months for the EUR36 billion Fonds de R??serve pour les Retraites (FRR), the French reserve pension fund, after the French parliament last week passed a law to use its assets to pay off the debts of France's welfare system.  The assets have been transferred into the state's social debt sinking fund Cades. The FRR will continue to control the assets, but as a third-party manager on behalf of Cades.  The move reflects a willingness by governments to use long-term assets to fill short-term deficits, including Ireland's announcement last week that it would use the country's EUR24 billion National Pensions Reserve Fund "to support the exchequer's funding programme" and Hungary's bid to claw $15 billion of private pension funds to the state system.

Europe Update and more - From the WSJ: Fresh Round of 'Stress Tests' Planned for European Banks - The [first stress] tests were largely discredited by revelations that they lacked rigor, including a Wall Street Journal report in September that the tests understated some banks' holdings of potentially risky sovereign bonds. ... "There was some variety in terms of rigor and application of [the initial] tests," European Economic and Monetary Affairs Commissioner Olli Rehn said in Brussels. Oh yeah. Ireland's banks passed the initial stress tests in July! And we know how that worked out.  From the Financial Times: Trichet hints at more bond purchases. The Financial Times quotes European Central Bank president Jean-Claude Trichet as saying “pundits are under-estimating the determination of governments” and “I don’t think that financial stability in the eurozone, given what I know, could really be called into question.”From Bloomberg: Italy-Germany 10-Year Yield Spread Reaches 200 Points, Widest Since 1997.

You Can't Make This Up: Europe Plans Fresh Round Of "Secret" Stress Tests To "Restore Confidence" - You really can't make this up: the WSJ reports: "As market sentiment toward the euro zone sharply deteriorates, European officials are planning a new round of bank "stress tests" that they say will be more rigorous than the widely discredited exams conducted earlier this year." Thank you for confirming the prior stress test, the one which found that not one Irish bank was impaired, was a bunch of bullshit. Of course, this being Europe, it will require another forceful intervention by the uber-propaganda czar Geithner to get European countries in line: "But the tests are already subject to bickering between countries. While some European leaders are pushing for next year's tests to be broader and more transparent than last summer's exercise, the agency that will oversee the tests says it might opt not to publicly disclose the results at all." And all will be proclaimed to be fine. No further comment needed.

Euro Bank Stress Tests Hoist on PR Petard - Yves Smith - We’ve been critics of bank “stress tests” from the get-go, because they were a shameless misuse of regulatory credibility as a tool to prop up bank stock and bond prices. It was in some was the inevitable result of how badly financial authorities (save some lonely but prominent figures in the UK, like Mervyn King and Adair Turner) have been coopted. They honestly seem incapable of imagining a banking industry very different from the one we have now, much the less moving towards one. The marketing efforts were intense; the Wall Street Journal, for instance, had front page stories virtually every day with various leaks of how the process was going.  The scathing comments of well informed critics, like former bank regulator Bill Black, never got aired in the MSM, even though journalists could not have been ignorant of his views. The European version of the stress tests was a cynical, lame copy of the US version. The Treasury effort at least had the appearance of rigor and enough media hooplah and bank grumbling to fool a lot of people. The Eurotests were done far too quickly, and perhaps more important, it was patently obvious the results were pre-ordained.

Nigel Farage: Europe Is Becoming An Orwelian Police State, Ruled By Unelectable Madmen, Which May Soon Be Overrun With Violence - Nigel Farage made waves recently when he told the Europarliament the truth about the sad fate of the euro experiment. Obviously, it was not taken too lightly by the career politicians who, just like our own, have made it their life mission to lead a failed economic experiment to its sad end, no matter the social cost and public suffering. Today, Farage made a repeat appearance on King World News continuing with his warning that the one most likely outcome of Europe continuing on its autopilot course will be one the culminates with "violence and extremism." To wit: “Nobody dares to admit that they got this whole thing wrong...Once people realize that who they vote for in general elections has become no more than a charade, then if they want to change things, all they are left with is civil disobedience and violence, and we’re beginning to see this already.  In Greece we are seeing small terrorist style attacks that are taking place on EU buildings that are taking place against EU officials

When Giants Fall: Alarms Being Raised - Some things go together: weak economies and a dissatisfaction with the existing political order; high levels of unemployment and increasing social unrest; hopelessness and despair and a yearning for dramatic change. Under the circumstances, it's no surprise to see, as Agence France-Presse reports in "EU Warns of Extremist 'Upsurge' across Europe," that alarms are being raised about troubles to come: European Commission president Jose Manuel Barroso warned Sunday that the continent was facing an upsurge of populism, chauvinism and extremist ideas. "It worries me that today in Europe there is an uspsurge of populism, of extremes," he told Europe 1 radio station in an interview in which he warned of growing nationalism and xenophobia. Barroso called on Europe's political leaders to fight against the "manipulation of fears and irrational arguments" that he said were fuelling populism in many countries.

How to resign from the club - Economist - MEMBERSHIP of the euro is meant to be for keeps. Europe’s currency union is supposed to be immune from the sort of speculative attack that cracked the exchange-rate mechanism, the system of currency pegs that preceded it, in 1992-93. A lesson from that time is that when the foreign-exchange markets are far keener on one currency than another, even the stoutest official defence of a peg between the two can be broken. Inside the euro zone, no one can be forced to devalue because no one has a currency to mark down.  The strains in euro-zone bond markets this year show that there are other ways for markets to drive a wedge between the strong and the weak. Concerted selling of their government bonds has forced Greece and now Ireland to seek emergency loans from other European Union countries and the IMF. Portugal may soon join them in intensive care. Spain is in the markets’ sights and the trouble is spreading to Italy, home of the world’s third-largest market for public debt. The idea of breaking up the currency zone raises at least three questions. First, why would a country choose to leave? Second, how would a country manage the switch to a new currency? Third—and perhaps most important—would leavers be better off outside the euro than inside it?

Europe Examines Ways to Quell Its Debt Crisis - Fears over the European financial crisis began to spread Tuesday from the weaker countries to healthier ones, including Italy and Belgium, and even much stronger Germany, spurring a stepped up search for a solution to the economic problems putting a strain on Europe’s decade-old monetary union.  Despite the commitment of close to 200 billion euros ($260 billion) in bailout funds to two economically stricken nations — Greece and Ireland — borrowing costs across the continent rose as investors worried about the growing risks.  In recent days, investors have been selling the debt of Germany, whose economy remains relatively robust, because of worries it will bear much of the burden of the ever-higher costs of bailing out weaker countries.

Trichet Says EU’s Resolve on Euro Shouldn’t Be Underestimated -- European Central Bank President Jean-Claude Trichet signaled investors are underestimating policy makers’ determination to shore up the euro region’s stability as contagion spreads through the bloc’s bond markets. “I don’t believe that financial stability in the euro zone could really be called into question,” Trichet told lawmakers in Brussels today. Observers “are tending to underestimate the determination of governments.” European leaders are struggling to contain a worsening sovereign debt crisis that forced Ireland last week to follow Greece and ask for an international bailout. While European Union governments on Nov. 28 agreed to give Ireland an 85 billion-euro ($110 billion) rescue package, Spanish and Italian bonds have dropped on concern they may also need to need help as they try to get budgets under control. The selloff is reminiscent of the declines that preceded the EU’s decision in May to set up a 750 billion-euro bailout fund to rescue the euro. On the same day, the ECB took the unprecedented step of agreeing to buy government bonds.

Eurobonds are a potential facet of European sovereign debt monetisation - Marc Chandler has come around to Evans-Pritchard’s view. I certainly see some legitimacy in the ECB acting as a lender of last resort here.  But QE is no more legitimate for the Europeans than it is for the Americans. Nevertheless, I agree with Evans-Pritchard that debt levels in the euro zone are so high that default and/or monetisation are the only ways out. And given the interconnectedness in Europe via its undercapitalised banking system, a failure in Portugal would impact Spain, and a default in Spain would impact Germany and so on. Because politicians are constrained by this knowledge, we have only seen bailouts in Europe to date – no defaults and no wide-scale monetisation. This will change. That’s why I presented three options for the euro zone yesterday. I didn’t mention so-called Euro bonds, however. Legitimately, this feature belongs in the monetisation scenario because it would facilitate ECB ‘monetisation’.  Euro bonds would be a supranational debt instrument backed by the collective taxing authority of euro zone sovereign governments. As such, it would represent a blended debt structure on the same ‘level’ as the ECB more akin to what we see in other sovereign countries like the UK, the US or Canada.

Bond Markets Raise Stakes for ECB Meeting - European bond investors are raising expectations that the European Central Bank will use its monthly meeting Thursday to forcefully prop up government bond markets of its beleaguered periphery by, among other things, ramping up purchases of government debt. Those hopes appear to be based on seemingly innocuous comments by ECB President Jean-Claude Trichet to the European Parliament Tuesday. He told parliamentarians that the ECB’s six-month-old program to buy government bonds of peripheral countries is “ongoing” in order to ensure a smooth transmission of monetary policy. Mr. Trichet’s comments reflect the obvious, but analysts at Barclays Capital and elsewhere took Mr. Trichet’s comments — he also warned, as he often does, against underestimating the resolve of euro zone governments in dealing with Europe’s fiscal woes — to suggest that the ECB is poised to step up its bond buys. Yield spreads between government bonds of Spain, Italy and other peripheral countries fell Wednesday on those hopes.

Mounting calls for ‘nuclear response’ to save monetary union – As Europe's debt crisis spreads ever wider, the EU authorities are coming under intense pressure to move beyond piecemeal rescues and resort to radical action on a nuclear scale. Spain's former leader Felipe Gonzalez warned that unless the European Central Bank steps into the market with mass bond purchases, the EMU system will lurch from one emergency to the next until it blows up.  Alluding to Portugal and Spain, he said a third country will need a rescue as soon as "January or February", and fourth soon after, at which point it will "contaminate the whole of Europe and get out of hand".  "If the ECB bought just a third as much public debt as the US Federal Reserve is doing, we could stop the speculation," he said.

The man with the magic words - …turns out to be Trichet, this week, anyway; the bond markets are soothed. Two key comments: We have got a monetary federation. We need quasi-budget federation as well. a statement which ought to have all the Eurosceptics, and many others, chorussing “told ya”; then  Mr Trichet also hinted that the ECB could extend its purchase of government bonds, a controversial move within the ECB governing council, saying he could not discuss the issue “at this stage” but that further decisions on the programme would be taken by the board. The bond markets, which had brushed aside the Irish bailout, and were clobbering not only Greek, Irish and Portuguese debt, but also Spanish, Belgian and even Italian, took a hint that at last there would be a bid somewhere for the less exalted Eurodebt, and backed off. Whether Trichet’s bond purchase programme turns into the EUR2Trillion monster now envisaged by market participants, or not (the ECB has only purchased EUR70Billion of bonds so far, which doesn’t imply great willingness to go down this path), we have at least a pause in what, on Monday and Tuesday, looked ominously like a slide towards panic.

Only Trichet can save us now – ECB about to monetise peripheral debt -  Markets are euphoric after Trichet’s hint that the bond purchasing programme might be upgraded; analysts are talking about €1000 to €2000bn; Barroso and Rehn call on the ECB to do whatever it can to stabilise the situation; bond spreads eased on the news, and the euro’s bilateral exchange with the dollar stabilised; Irish banks are the most exposed to the eurozone periphery, according to the BIS; Jose Socrates, in reply to a Commission proposal, said that Portugal does not need suggestions on labour market reforms from anyone; The FT foresees five crisis scenarios: monetisation, more money for the EFSF, a single bond, a fiscal union, or a breakup; Otmar Issing says Germany is right to insist on bond holder bail-ins, but the present proposal is not going to work; Barry Eichengreen, meanwhile writes a very angry comment, in which he compares the Irish rescue package to Versailles.  [more]

Here Is What ECB Intervention Looks Like - Behold Jean Claude Trichet's fat finger. ECB now lifting every bid. Note that the PGB was at 84 before yesterday's two rumors that drove the market (both sovereign bonds and stocks) higher are now refuted. We have a suggestion: perhaps Trichet and Brian Sack can just take it out back and beat each other. The winner's currency goes to zero and the respective stock market goes to 36,000.

ECB steps up push to calm markets The European Central Bank launched its most aggressive intervention in government bond markets for seven months after Jean-Claude Trichet, president, unveiled a determined – but carefully calibrated – response to the eurozone crisis. Traders said the ECB was on Thursday buying Portuguese and Irish bonds in €100m tranches – four times bigger than previously. The moves sharply brought down the cost of borrowing for Lisbon and Dublin and sparked a euro rally. Addressing a press conference in Frankfurt, Mr Trichet stopped short of an explicit announcement that the euro’s monetary guardian was escalating its actions to restore investor confidence in the eurozone. Instead, he stressed the responsibility of eurozone governments to win back confidence in their public finances – indicating that they should be prepared if necessary to increase the size of the European Union’s rescue funds.  But the ECB president acknowledged market tensions were “acute” and confirmed there would be no limit to the size of the bond-buying programme. Hinting at a strategy that would rely more on the element of surprise, Mr Trichet said that the ECB’s intervention in bond markets would be “commensurate” with the malfunctioning of markets.

ECB Offers "Unlimited Cash" for 3 Months at 1%, Buys Government Bonds to Fight Acute Tensions; Ireland, Take the Money and Buy Gold In a move ECB President Jean-Claude Trichet says is NOT Quantitative Easing, ECB Delays Exit of Emergency Measures, Buys Bonds to Fight ‘Acute’ Tensions - The European Central Bank delayed its withdrawal of emergency liquidity measures and bought more government bonds as President Jean-Claude Trichet pledged to fight “acute” financial market tensions. Trichet said the ECB will keep offering banks as much cash as they want through the first quarter over periods of up to three months at a fixed interest rate. As he spoke, ECB staff embarked upon a new wave of purchases, triggering a surge in Irish and Portuguese bonds. “Uncertainty is elevated,” Trichet told reporters after the ECB’s Governing Council left its benchmark interest rate at 1 percent today. “We have tensions and we have to take them into account.” Bond purchases will continue to be offset to keep the money supply unchanged, in contrast to the Federal Reserve and the Bank of England, he said. “It’s not quantitative easing, we’re withdrawing all the liquidity,” he said. President Axel Weber, a leading contender to replace Trichet at the bank’s helm next year, opposed the decision to start buying bonds in May and has since called for the program to be cancelled. He says it poses “stability risks” and that there is no evidence it works.

Q&A: Trichet on ECB Bond Buying - European Central Bank president Jean-Claude Trichet spoke with Dow Jones Newswires reporter Nina Koeppen in a television interview Thursday. The conversation took place on the 28th floor of the ECB tower in Frankfurt, after the ECB’s rate-setting meeting.

S&P puts Greece on downgrade watch – says ESM will damage bondholders - Overnight, S&P issued a downgrade watch for Greece on the grounds that the new bailout mechanism will discriminate against private bond holders; the news is a bombshell because it provides evidence that the new EMS will lead to a generalised credit downgrade for the European periphery; Jean Claude Trichet did not announce a monetisation strategy, but the ECB upped its bond purchase operations; the market reacted euphorically, spreads down, euro up; FT Deutschland says Axel Weber really does not care whether he gets the job; Portugal agreed new budget process rules; Wolfgang Munchau writes in the Irish Times that Ireland should renege on the EFSF agreement; Simon Johnson and Peter Boone, meanwhile, argue that the ESM will be ultra-tough. [more]

Merk Commentary: Pragmatic ECB Squares the Circle - Whatever it Takes - The one thing worse than a fire in a building is a fire in a building when emergency exits are bolted shut: a panic in the market is exacerbated when liquidity dries up. It appears the European Central Bank (ECB) embraces this view: in today's press conference by ECB head Trichet, he re-iterated a number of times that non-standard measures are there to permit appropriate transmission of standard measures. In plain English, this means that whatever emergency support is given to the market is a) temporary in nature and b) designed to allow monetary policy and thus economies to function. Some observers are disappointed that the ECB "only" announced an extension of its full allotment refinancing facilities until Q1/2011. However, that's incorrect: Trichet went out of his way to state that the ECB will do "whatever it takes" without using those words: the measures taken will be "commensurate to what we observe any time to what we see as disruption." Policy will be "back to functioning normally when we are back to normal functioning." When asked specifically whether the ECB would do whatever it takes, he indicated there is no limit on the the bond purchase program (Securities Market Program, SMP), although he emphasized that any bond purchases are always sterilized.

More Thoughts on ECB Decision - European officials must have known they were going to disappoint the market with the decision to simply postpone draining liquidity.  The firewall around Greece failed.  The firewall around Ireland has failed.  The politicians have dropped the ball and the left Trichet holding the bag.  Many from the periphery appeared to lobby the ECB to help out.  Trichet in essence says there is little it can do and that it is really up to the governments.  That said, little is really resolved.  The amount of refinancing needed next year by peripheral countries and their banks is staggering.  There is some thought that the Fed’s purchases of Treasuries will free up funds and that just like the earlier Fed programs had helped foreign institutions, so do will its asset purchases.  But this is insufficient really given the magnitude of the problems. If the problem is in part that some banks, like in Portugal, have become dependent on ECB liquidity as they have been locked out of the wholesale funding market, it is not clear how extending ECB liquidity provisions address this.  Kicking the can until end of Q1 2011 is hardly a sustainable solution.  We do note that Spanish, Italian and Belgian sovereign refinancing needs next year are front loaded in Q1 11.

QE2 in the EMU – Not Likely - The market expects the ECB to announce additional liquidity provisions to attempt to quell the fears emanating from Europe’s liquidity/solvency crisis, though we suspect that the ECB is unlikely to announce a massive extension of bond purchases.  We feel, however, the ECB will continue to provide liquidity through its MFI operation, which may leave the market disappointed and stoke a rise in volatility in the sovereign market, unraveling some of the euro’s recent gains.  Yet the euro continues to maintain yesterday’s trading range and will need to get above the August 62% retracement level of $1.3235 to garner further support. Meanwhile, sterling rallied on the back of the positive European news and continued to rally, moving into $1.566 highs, following the strong construction PMI numbers yesterday.  And the combination of strong global PMI’s and the rise in risk appetite eased demand for safe haven currencies, thus weakening the yen. 

European Central Bank ‘doctrine’ has turned markets into reality shows - The ECB's refusal to tackle the ostracism of struggling countries by bond investors leaves us all watching a battle for survival. Like Big Brother, millions of people are watching how a group of people – in this case, countries – fight each other, with the only aim of self-survival. Never mind that these nations are part of a wider European Union: let Greece, Ireland, Portugal, even the much bigger Spain go bust, as long as those in control – read Germany and the European Central Bank (ECB) – don't lose the comfort of their driving seats. The ECB's stubborn refusal on Thursday to roll up its sleeves and start buying the bonds of troubled countries felt like a foot in the shoulder of Italy, Spain, Portugal and Ireland, sinking them just a little bit more. Investors have massively sold the sovereign bonds issued by those countries, thinking that their ailing economies and high debts will make it very difficult for them to pay back. They are right: who would lend money to a friend making £20,000 a year, who wants to buy a £1m home? Ireland and Spain have lived well above their means over the past decade – but its citizens and politicians, well aware of it, preferred to continue with the bonanza, as long as it lasted.

The European crisis = the Euro crisis? - "The Euro is to blame for the current crisis in Europe". I am sure this sentence sounds familiar to many. The argument is simple: as Euro members cannot devalue their currencies anymore, they do not have an option to improve their economic conditions (by favoring exports), growth suffers and their high levels of debt become unmanageable. The Euro area is not an optimum currency area (it lacks labor mobility, fiscal transfers, etc.) so this was a crisis waiting to happen. Paul Krugman says it here, Simon Johnson says it here and you can find many more articles in the business press repeating these arguments. Let me (partially) disagree with that statement and just bring an alternative view to this issue. It is not a view that denies the importance of exchange rates or the fact that the constraints of the Euro area (one monetary policy might not fit all) might be hurting Euro economies but I think that it is healthy to question our priors on the importance of the exchange rate in explaining some of the empirical phenomena we observe these days in Europe. A couple of disclaimers before I present my arguments:

Still a crisis of confidence - LOTS of people around the internet have lots of things to say about the latest twists and turns in Europe. I've been letting events percolate over the last few days and trying to take a broader view. You should all know, by the way, that the print edition's coverage of the ongoing crisis has been excellent and very thorough (see especially this, and this). Buttonwood and Charlemagne have done a good job tracking the blow-by-blow. In terms of the latest twists and turns, there are a few key questions. One issue is the solvency of various governments. Things became messy when Germany pressed for talks about debt restructuring in troubled economies, which spooked markets, especially with regard to Ireland, which had only recently announced a big jump in the cost of supporting its banks. Ireland didn't want a rescue and didn't think it actually needed one; it thought it could accept the austerity necessary to handle its debts, daunting as the prospect seemed. Maybe it could have at lower yields, but markets became nervous as yields rose a bit, which pushed yields up further. Worse, banks began leaking deposits (read Buttonwood on this dynamic) which worried Europe a great deal.

Was private or public debt at fault in Europe? - The full (short) paper is here, recommended.  Excerpt: [apart from Greece]...the root cause of the debt problems is to be found in the unsustainable debt accumulation of the private sectors. From 1999 until 2008, when the financial crises erupted, private households in the eurozone increased their debt levels from about 50% of GDP to 70%. The explosion of bank debt in the eurozone was even more spectacular and reached more than 250% of GDP in 2008. Surprisingly, the only sector that did not experience an increase in its debt level during that period was the government sector, which saw its debt decline from 72 to 68% of GDP. Ireland and Spain, two of the countries with the severest government debt problems today, experienced the strongest declines of their government debt ratios prior to the crisis. These are also the countries where the private debt accumulation was the strongest.

Euro Zone Members as U.S. States - Ireland is a small economy. How small? Its total output is roughly that of the state of Connecticut. But its troubles threaten to spread to other European economies, some small (like Portugal) and some sizeable (like Spain.) To get a sense of scale, Real Time Economics compared the 2009 output of goods and services for members of the euro zone to the output of U.S. states. The economy of Spain, for instance, is about the same size as the combined economies of Texas, Oklahoma, New Mexico and Arkansas. Italy is nearly as big as Illinois, Indiana, Michigan, Ohio, Wisconsin and Kentucky combined. Meanwhile, hopes for rescue rest on the shoulders of France, whose economy is bigger than that of the entire West Coast including Alaska, Hawaii and the U.S.’s largest state California, and on Germany, which is about the size of New York, New Jersey, Pennsylvania, Maryland, Virginia and North Carolina — plus the District of Columbia.

Some Thoughts On The IMF And Europe - Newswire story reporting increased US support for Europe does not have a lot of substance behind it, in our view.  If we are reading the comments correctly, the US official was simply saying that the US would back an extra commitment of funds from the IMF for Europe, not that the US would give more money to the IMF for use in supporting Europe.  As we have pointed out in the past, the IMF total contribution to the European rescue fund is not a solid one.  That is, the IMF responds to country-by-country requests for aid, not to regions.  Thus, the IMF really does not have EUR250 bln set aside just for Europe.  And the thinking goes that whatever the true number is, the IMF has enough funds to help Greece, Portugal, and Ireland but not enough to fund either of the bigger peripheral countries of Spain and Italy.  As a point of reference, Greece (GDP of $330 bln) received $39 bln from the IMF.  Ireland (GDP of $227 bln) and Portugal (GDP of $228 bln) are similarly sized, so perhaps total IMF aid could end up being around $115-120 bln for these three.  Spain (GDP of $1.46 trln) is almost twice the size of these three combined and so back of the envelope calculations suggest the need for a potential IMF package of over $225 bln for Spain alone.

The rough politics of European adjustment - If Europe is going to “resolve” the current crisis in an orderly way, it is going to have to move very quickly – not just for the obvious financial reasons, but for much narrower political reasons.  I am pretty sure that the evolution of European politics over the next few years will make an orderly solution progressively more difficult. For ten years I have used mainly an economic argument to explain why I believed the euro would have great difficulty surviving more than a decade or two.  It seemed to me that the lack or fiscal centrality and full labor mobility (and even some frictional limits on capital mobility) would create distortions among countries that could not be resolved except by unacceptably high levels of debt and unemployment or by abandoning the euro.  My skepticism was strengthened by the historical argument – no fiscally fragmented currency union had ever survived a real global liquidity contraction. I am now going to veer off into a very different realm, that of politics.

Eurozone Adjustment Asymmetry - Adjustment to resolve asymmetries should be symmetric. Both sides should adjust. But sometimes it isn't symmetric. One side may choose to adjust; but the other side is forced to adjust. Like under the Gold Standard. So if the Eurozone does break apart to resolve the asymmetry: I think it will not be through Germany choosing to leave; I think it will be through Ireland, Greece, wherever, being forced to leave. Suppose people are different, so some people borrow from other people. And suppose this continues, and debt eventually gets too high, and needs to stop rising, or even come down. The creditors should spend more, and the debtors should spend less, so that total spending should stay the same. The adjustment should be symmetric.  In a barter economy, it might even happen like that. The creditors would decide that additional loans to the debtors would be unsafe, so decide to stop lending. If they don't lend, they have to spend their income themselves. But in a monetary economy, it doesn't happen like that.

Cross-border deleveraging and Europe’s bargaining game -While high-ranking eurozone bureaucrats are ruminating on the appropriate burden-sharing mechanisms of a future Europe, something potentially more momentous has been going at the background: European banks have been cutting back their intra-European exposures… fast! The numbers are pretty stunning: Between December 2009 and June 2010 (the latest data available from the BIS), German banks cut their eurozone claims by $180bn (more than 5% of German GDP). French banks cut their own exposure by near $280bn (10%of French GDP), of which $130bn were claims on Italy and Spain. And Dutch banks cut their eurozone claims by $170bn (about 20% of Dutch GDP), with cuts across the board, from Spain, Ireland and Greece to Italy, Germany and Belgium. One can only assume that the cutbacks have continued in full force post-June. This “deleveraging” has important implications for the core-periphery bargaining game and the future of the euro.

Can Europe's economic system survive its debt crisis? - As contagion spreads in Europe, political and economic leaders continue to struggle to find a real solution. There is hope that the European Central Bank will announce Thursday that it will expand its purchases of government debt to appease jittery markets. And Spain's government announced a wide-ranging privatization plan to raise fresh funds. Perhaps such steps may calm investors for a while, but the underlying problems remain firmly in place. Portugal simply may not be able to avoid a European Union-led bailout; the next dominoes to fall could be much bigger Spain and Italy. The bailout mechanism in place has done nothing to resolve investor concerns about the future solvency of weak Eurozone economies, and the leaders of Europe are still muddling through, their indecision, sloth and poorly timed initiatives have only further fueled the contagion. In my opinion, the mess is threatening the sustainability of Europe's entire economic system. Here's my list of the four fundamental questions facing Europe right now:

Three options for the euro zone: monetisation, default, or break-up - Judging from rising sovereign borrowing costs and euro weakness, market participants are not impressed by the Irish bailout. Marc Chandler’s group at Brown Brothers Harriman is right when they write the market is clearly disappointed with the rescue package of Ireland. This period in Europe reminds me very much of the period after the Indy Mac failure in the U.S.  Before Indy Mac, after each credit crisis trigger event, there was a restoration of calm. The TED spread was consistently the best bellwether for crisis sentiment. We saw spreads spike when BNP Paribas froze funds and Northern Rock failed in August and September of 2007 only to drop again. There was another spike in December 2007 over difficulties at bank structured investment vehicles and bond insurers. Again, massive liquidity and lower interest rates helped to bring things under control.

The Eurozone Endgame: Four Scenarios - Boone and Johnson - In the aftermath of the Irish bailout, the German proposal for a future sovereign and/or senior bank debt restructuring mechanism within the eurozone makes complete political sense to the electorate in stronger European countries.  They do not want to write “blank checks” to weaker countries and to out-of-control financial institutions going forward; creditors to countries that run into trouble will face likely losses. While the details of this “burden sharing” approach remain to be hammered out (after Sunday’s announcements), there is no way for German or other politicians to backtrack on the broad strategic principles.  But once this arrangement is in place, say in 2013 or thereabouts, all eurozone countries will (a) be able to sustain less debt than has recently been regarded as the norm, and (b) become vulnerable to the kinds of speculative attacks in debt markets that we have seen in recent weeks – to reduce funding rollover dangers, they will all need to lengthen the maturity of their outstanding debt.  Ultimately, there will be a eurozone will greater shared fiscal authority, a common cross-border resolution authority for failed banks, and likely greater economic integration.  But there are four scenarios regarding who ends up in that eurozone – and how we get there.

Pettis on Eurozone Pathways and Endgames - Yves Smith - Michael Pettis, like Simon Johnson a few days ago, has tried mapping out what he thinks future scenarios for the eurozone might be, and what that means in terms of possible winners and losers.One of Pettis’ strengths is that he takes the time to be explicit about his reasoning, which gives readers the opportunity to see where they might beg to differ. And as much as I like his post, I think he makes one fatal assumption at the top, that the eurozone has more time than it really does.  I’m curious to get reader input (and do read the entire Pettis piece, it’s wonderfully thoughtful), but I see the conundrum in plain view. The eurozone does not have two to three years to come to resolution. The markets are pounding on weak countries now, and the inter-related credibility of nation-states and their banks are in serious doubt. And he is right, that the difficulty of apportioning costs, particularly among so many players, means that this situation cannot be resolved quickly. Political processes and market responses operate on hopelessly different time scales.

Imminent Eurozone Default: How Likely? - By Simon Johnson - The big question of the week in Europe is deceptively simple – will any countries that share the euro as their currency default on their government or bank debts in the foreseeable future?  The answer to this question determines how you regard bonds from countries such as Portugal, Spain, Italy, and Belgium. Answering this question is not as simple as it seems, however, because it involves taking a view on three intricate issues: What exactly is the eurozone policy now on bailouts, can big eurozone countries really be bailed out if needed, and what happens to the politics of these countries and of the eurozone has a whole as pressure from the financial markets mounts? The prevailing consensus – and definite official spin – is that over the weekend European leaders backed away from the German proposal to impose losses on creditors as a condition of future bailouts, i.e., from 2013.  But a close reading of the Eurogroup ministers’ statement from Sunday suggests quite a different interpretation.  It’s a straightforward text, just 2 ½ pages long, but it has potentially momentous consequences – as it envisages dividing future eurozone crises into two kinds.

The European rescue plan that dare not speak its name - Should Germany leave the euro? Looking at the eurozone debt crisis unfold, many economists are warming to the idea, though I am told that the German chancellor emerged from this weekend's bail-out talks more determined than ever that the single currency remain intact. Her plan, I'm told, is to honour the promise to proect senior creditors "in the breach". The current rules and protections will stand until 2013, but if there are individual bank failures before that time, she is going to try very hard to force private senior creditors to take a hit. As one person put it: "the more this is about banks, the cheaper it is for Germany." It will be interesting to see whether this German offensive on debt is any more successful than the last one. In the meantime, what about the rest of the eurozone? Could it benefit from getting rid of Germany, and maybe some of its neighbours?

The Disastrous Consequences of a Return to the Deutsche Mark - Daniela Schwarzer, an analyst of EU economic policies at the Berlin-based German Institute for International and Security Affairs (SWP), sees two possible scenarios. According to the first scenario, Germany and the other more stable euro-zone countries -- such as Austria and the Netherlands -- would jointly introduce a "hard-currency euro." A similar idea was recently floated by Hans-Olaf Henkel, the former president of the Federation of Germany Industry (BDI) on German public television. Henkel called for the establishment of two distinct euro blocs: a northern one "that doesn't want any inflation and is used to budget discipline" and a southern one that can go ahead and devalue its currency whenever it feels so inclined.  According to the second scenario, Germany actually would return to the deutsche mark. There would no longer be a shared-currency zone in Europe, and each former euro-zone country would decide its own monetary policy again.  But is that something anyone would really want? After all, Germany has reaped all sorts of benefits from the euro. A collapse of the common currency would have dramatic effects. Here is a list of possible consequences:

Angela Merkel Warned that Germany could Abandon the Euro - The German chancellor, Angela Merkel, has warned for the first time that her country could abandon the euro if she fails in her contested campaign to establish a new regime for the single currency, the Guardian has learned. At an EU summit in Brussels at the end of October that was dominated by the euro crisis and wrangling over whether to bail out Ireland, Merkel became embroiled in a row with the Greek prime minister, George Papandreou, according to participants at the event's Thursday dinner. Merkel's central aim, which she achieved, was to win agreement on re-opening the Lisbon treaty so a permanent system of bailout funding and investor losses could be established to deal with debt crises that have laid Greece and Ireland low and are threatening Portugal and Spain. The Germans also called for bailed-out countries to lose voting rights in EU councils.

If Germany left the eurozone - It may be unthinkable, but I'm not the only one thinking about it. Since my last post, both Capital Economics and Graham Turner of GFC Economics have independently put some numbers together to see what we'd be talking about if Germany took the high road out of the euro. The results are suggestive, to say the least. As I discussed before, there would be a big upfront financial and an economic cost of Germany leaving the single currency - not to mention an enormous political price for walking away from a project in which so much has been invested. The major economic cost would be the hit to competitiveness, because the new German currency would surely go up. Listening to Germany's politicians and industrialists, you would expect it to have very little impact: in the world market, they tend to argue, German companies compete on quality, not price. But there is no debate about what a revaluation against the rest of the world would do to Germany's national balance sheet. It would hurt. Capital Economics has come up with a back-of-the-envelope calculation - with a fairly sophisticated envelope.

It's Not Just the "Peripheral" European Countries ... Financial Contagion Could Spread to "Core" Eurozone Countries and the U.S. - It's not just the "peripheral" European countries which are in trouble. As Ambrose Evans-Pritchard reported yesterday:The escalating debt crisis on the eurozone periphery is starting to contaminate the creditworthiness of Germany and the core states of monetary union. Credit default swaps (CDS) measuring risk on German, French and Dutch bonds have surged over recent days, rising significantly above the levels of non-EMU states in Scandinavia. "Germany cannot keep paying for bail-outs without going bankrupt itself," said Professor Wilhelm Hankel, of Frankfurt University. "This is frightening people. You cannot find a bank safe deposit box in Germany because every single one has already been taken and stuffed with gold and silver. It is like an underground Switzerland within our borders. People have terrible memories of 1948 and 1923 when they lost their savings."

Sovereign debt: In a monstrous grasp - Bond “vigilantes” might just have turned into something scarier. In a week when markets gave an unequivocal thumbs down to Europe’s attempt to contain its debt crisis through a bail-out of Ireland, the investment strategist who coined the vigilante description in the 1980s came up with a new metaphor for the investors who haunt debt-laden countries. “The governments have created their own Frankenstein’s monster,” says the New York-based Ed Yardeni. “If you run a big deficit, then you create your own monster in the form of the bond markets.” Europe’s debt crisis entered a dangerous new phase this week and one that could prove decisive. No longer is the focus on small countries. The premiums that Spain and Italy, two of Europe’s largest economies, have to pay over Germany to borrow rose to record highs for the euro era on Tuesday. The very future of the single currency could be at stake should the full force of the crisis spread to them. That raises the pressure on European authorities to find a solution to satisfy the very bond markets that many of them like to blame for the turmoil. Christine Lagarde, France’s finance minister, became only the latest politician to decry the “irrational” markets as she bemoaned investors pricing Spanish debt the same as that of Romania or Pakistan. “Europe is difficult to understand for the markets,” she told RTL radio, somewhat plaintively. But to outside experts and investors, that criticism misses both the point and the way markets function.

The World in 2036: Nassim Taleb looks at what will break, and what won't | The Economist - A system that is over-reliant on prediction (through leverage, like the banking system before the recent crisis), hence fragile to unforeseen “black swan” events, will eventually break into pieces. Although fragile bridges can take a long time to collapse, 25 years in the 21st century should be sufficient to make hidden risks salient: connectivity and operational leverage are making cultural and economic events cascade faster and deeper. Anything fragile today will be broken by then. The great top-down nation-state will be only cosmetically alive, weakened by deficits, politicians’ misalignment of interests and the magnification of errors by centralised systems. The pre-modernist robust model of city-states and statelings will prevail, with obsessive fiscal prudence. Currencies might still exist, but, after the disastrous experience of America’s Federal Reserve, they will peg to some currency without a government, such as gold. Companies that are currently large, debt-laden, listed on an exchange (hence “efficient”) and paying bonuses will be gone. Those that will survive will be the more black swan-resistant—smaller, family-owned, unlisted on exchanges and free of debt. There will be large companies then, but these will be new—and short-lived.

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