Fed's balance sheet falls in latest week (Reuters) - The U.S. Federal Reserve's balance sheet fell in the latest week, following eight consecutive weeks of growth, as agency mortgage-backed securities holdings fell more than Treasury holdings increased, Fed data released on Thursday showed. The balance sheet declined to $2.403 trillion in the week ended December 29 from $2.410 trillion the prior week. The balance sheet has been expanding since the U.S. central bank last month began a second bout of quantitative easing, known as QE2. The balance sheet had topped the previous record of $2.333 trillion set in May as the Fed was about to end its initial round of bond purchases that involved $300 billion of Treasuries and $1.425 billion in mortgage-related securities. The second round of quantitative easing follows the Fed's use of proceeds from maturing mortgage securities in its portfolio to buy Treasuries -- a move that started in August. Since that time, it has purchased about a combined $236 billion in Treasuries.
Fed's Balance Sheet Broadly Unchanged In Latest Week - The U.S. Federal Reserve's balance sheet remained broadly unchanged at a high level in the latest week as the central bank went ahead with a controversial plan to buy government bonds. The Fed's asset holdings in the week ended Dec. 29 edged just a tad lower to $ 2.423 trillion, from $2.431 trillion a week earlier, it said in a weekly report released Thursday. The central bank's holdings of U.S. Treasury securities rose to $1.016 trillion Wednesday from $1.007 trillion the previous week. But that was offset by a decline in mortgage-backed securities to $992.14 billion from $1.008 trillion. Meanwhile, Thursday's report showed total borrowing from the Fed's discount lending window edged down to $45.08 billion Wednesday from $45.10 billion a week earlier. Borrowing by commercial banks moved up slightly to $58 million from $54 million a week earlier. The report also showed U.S. government securities held in custody on behalf of foreign official accounts fell to $3.351 trillion, from $3.358 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts fell to $2.618 trillion from $2.625 trillion in the previous week.
Fed Treasury Holdings Hit $1.02 Trillion; Total Assets Fall - The Federal Reserve’s total assets fell to $2.42 trillion in the latest week from a record $2.43 trillion the previous week as the central bank’s holdings of mortgage-backed securities fell more than the increase in its Treasury portfolio. Mortgage-backed securities held by the Fed fell by $16.3 billion to $992.1 billion in the week ended Dec. 29. Treasuries held by the Fed increased by $8.9 billion to $1.02 trillion, according to a weekly release by the central bank today. Fed holdings of federal agency debt were unchanged at $147.5 billion. The Fed has bought $167.9 billion in Treasuries on its way to purchasing $600 billion of government debt through June 2011. The Fed is also reinvesting the proceeds of its maturing mortgage holdings. M2 money supply rose by $4.9 billion in the week ended Dec. 20, the Fed said. That left M2 growing at an annual rate of 3.2 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.
John Coochrane on Quantative Easing - All of the arguments fall apart on one hard fact: Now that short-term interest rates are basically zero, money and short-term bonds are the same thing. A bank can hold reserves at the Fed, which pay 0.25% interest – this is the “money” we’re talking about. Or, it can hold one to three-month treasury bills. These are very easy to buy and sell and also pay about 0.25 % interest. Obviously, the bank really doesn’t care a bit which one it holds. This fact is why the Fed is buying long-term debt in the first place. The Fed knows that its usual open-market operations – buying short-term debt from banks, and giving the banks more reserves in exchange – have no effect whatsoever. This is like taking your red M&Ms, giving you back green M&Ms. It has no effect on your diet. But if exchanging money for short-term debt has no effect, it follows inescapably that giving banks more money is exactly the same as giving them short-term debt. All that QE does is to restructure the maturity of US government debt in private hands. Now, of all the stories you’ve heard why unemployment is stubbornly high, how plausible is this: “The main problem is the maturity structure of debt. If only Treasury had issued $600 billion more bills and not all these 5 year notes, unemployment wouldn’t be so high. It’s a good thing the Fed can undo this mistake.” Of course that’s preposterous.
Reinhart Says Fed Treasury Purchases May Exceed $600 Billion -- The Federal Reserve may expand its purchases of U.S. Treasuries, or quantitative easing, beyond its $600 billion target, said Vincent Reinhart, who was the Fed’s chief monetary-policy strategist from 2001 until September 2007. “They do all of QE2 because they don’t want to be seen as succumbing to outside pressure,” Reinhart, now a scholar at the American Enterprise Institute in Washington, said in an interview on Bloomberg. “I think there is a chance there will be QE3 and it is going to be because the unemployment rate is above 9 percent,” he said, referring to a third round of purchases."
What's Happening with QE2? - The QE2 asset purchases by the Fed began in early November. The plan was to increase the Fed's holdings of long-term Treasury securities by about $75 billion per month until the end of the second quarter of 2011. In the chart, the blue line is securities held outright by the Fed, which has been increasing at a steady rate, as planned. Of course, the Fed has to issue liabilities - outside money - to finance these purchases. However, reserves (the green line), and currency (the red line) show little increase since the beginning of the program. What's going on? The big question here is why the Fed does not offset, on a daily basis, net withdrawals or deposits from the Treasury's account with the Fed. Fed officials seem to think that QE2 works through action on both sides of the Fed balance sheet. If QE2 has any consequences, it seems the Fed should want to minimize financial market disruption by smoothing the path of outside money. Why isn't that happening?
Flaws in the belief in effectiveness of Fed monetary easing - QE2 is hailed by some economists as the tool needed to jumpstart the laggard US economy. The mechanism here is - The build-up of the monetary base eventually leads to rising inflation expectations. This is supposed to then encourage people to start buying things now, in anticipation of rising future prices, which then leads to a positive multiplier effect for the economy. There are several flaws in this belief. Here are reasons that I could think off the top of my head: Debt among economic agents is ignored/inflation expectations is over-estimated. Debt does make a difference. Inflationary measures can be hindered in a recession economy with a lot of debt, because the indebted that are undergoing deflation, i.e. balance sheet recession, will not be induced to make more purchases if paying off the debt is already eating up much of their income. They will hope that the non-indebted ones will come to the rescue, and be induced to consume more via increased inflation expectations. Transmission to the larger economy will be via even more debt. QE2 puts more reserves on the banks, but no money goes directly to people who will spend it on consumption. For this to get to the end-consumers, those remaining non-indebted will have to take one for the team, get into debt, and spend it in the local economy.
When is QE not QE? - The most recent Fed balance sheet data are summarized here. Note where the Fed was yesterday (12/29/10) relative to a year ago (12/30/09). On the asset side, "securities held outright" has increased by about $300 billion, with an increase of about $230 billion in long-maturity Treasuries, and a net increase of about $70 billion in agency securities and mortgage-backed securities. However, on the liability side, the increase in outside money has been quite small, at about $15 billion ($54 billion increase in currency, $39 billion decrease in reserves). As I remarked here, what is going on with Treasury reserve accounts at the Fed is important. During the year, the balance in the Treasury's general account dropped by $31 billion, but the Treasury also accumulated $188 billion in its "supplementary financing account." This supplementary account was created in September of 2008, and is described here. Basically, the Treasury sells T-bills, in exchange for reserves, and deposits the proceeds in this supplementary account. The balance in this account peaked at about $560 billion in November 2008, went to zero for a period late in 2009, and rose to about $200 billion in April 2010, staying constant at that level since. The Fed thinks of this as a reserve-draining operation.
Perry Mehrling: Should Anyone Be Surprised that the Fed Was Lending to Foreign Banks in the Crisis? - The Financial Times devoted an entire article this week to the fact that foreign banks borrowed more than half the funds deployed under the Federal Reserve’s first emergency program, the Term Auction Facility. Why is this a surprise? We know that, after the collapse of Lehman and AIG in September 2008, the Fed’s liquidity swap facility with other central banks swelled quickly to about $600 billion. The whole point of that facility was to provide dollar funding to non-US banks. The foreign central banks simply served to channel the funds. In Fall 2007, the Fed was not lending much, but it was encouraging the lending by backstopping the Fed Funds market, driving the target Fed Funds rate down from 5% to 2%, using daily intervention in the Treasury repo market to keep the Fed Funds rate from being bid up along with the Eurodollar rate. Now comes the news that the Term Auction Facility, created in December 2007 as a kind of anonymous discount window, lent on a fully collateralized basis directly to non-US banks. Personally, I did not know this until the disclosure, but I am not surprised.
Why Does Brian Sack Interact With Goldman's "FX Committee"? - Following the release of Bill Dudley's daily schedules from the beginning of 2009, through September 30, 2010, there have been some amusing, if not very surprising, disclosures. Among them: Dudley's penchant to meet with Jamie Dimon, Vik Pandit and, of course, former boss Lloyd Blankfein. Other meetings include Sullivan and Cromwell chairman, and the banking cartel's personal chief attorney H. Rodgin Cohen. Those are to be expected: after all Dudley has to conduct the New York Fed policy exactly in accordance with Wall Street's expectations, and per Wall Street's recommendations. What is a little more surprising is that on February 9, 2009, Bill Dudley hosted a lunch roundtable with hedge fund SAC Capital... Where it gets a little confusing is why Dudley had to have two informal meetings with the man who singlehandedly determines US fiscal and monetary policy: Goldman's Jan Hatzius, first on March 11, and then, less than a month later, on April 6, both times as the Pound and Pence. And where it gets downright bizarre, is trying to explain why Bill Dudley on June 11, 2009, had to bring over one still unknown Brian Sack, now pervasively known as the head of the Fed's Open Market Operations Committee, to not only walk over to Goldman Sachs for a meet and greet (as opposed to Goldman coming over to the NY Fed), but specifically "introducing Brian Sack to the Goldman FX Committee" between 4:00 and 4:30 PM on that day. Just which of Brian's myriad functions is the one that requires the participation of Goldman's FX team? Last time we checked, purchasing bonds and MBS in POMO operations had little if any impact on Goldman's FX trading flow...
Fed Officials to Assume Voting Roles in New Year - As the Federal Reserve debates whether to scale back, continue or expand its $600 billion effort to nurse the economic recovery, four men will have a newly prominent role in influencing the central bank’s path. One is an economist who fears that the Fed’s easy-money policies could lead to manias like the housing bubble that burst in 2007. Another is a Texas Democrat who served in the Clinton White House, but is wary of the Fed’s aggressive efforts to combat unemployment. A third is a precocious economist who graduated from Princeton at 19. And the fourth is the only one who agreed wholeheartedly with the Fed’s chairman, Ben S. Bernanke, that the economy was at risk of falling into a dangerous cycle of deflation last summer and that an additional monetary boost was needed
Gramley Says Plosser, Fisher May Dissent From Fed Ease Plan - Federal Reserve Bank of Philadelphia President Charles Plosser and Dallas Fed President Richard Fisher may dissent from Fed Chairman Ben S. Bernanke’s plan to purchase $600 billion in Treasuries, former Fed governor Lyle Gramley said. “I think Charles Plosser of Philadelphia and Richard Fisher of Dallas probably will dissent from time to time,” Gramley said today in an interview on Bloomberg Television. “It probably isn’t going to affect the outcome of monetary policy decisions. Ben Bernanke still has control of the committee.”. Plosser said in an interview last week it was a “close call” on whether he would have dissented from the Fed’s Dec. 14 reaffirmation of plans to buy $600 billion in Treasuries through June, expanding record stimulus to try to reduce 9.8 percent unemployment and keep inflation from dropping. Fisher said in November that the move may be “the wrong medicine” for the U.S. economy.As part of an annual rotation in voting on Fed policy, Plosser, Fisher and the heads of the Chicago and Minneapolis Fed banks will cast votes in 2011.
Impacts of Proposed Changes in the Fed’s Mandate - John B. Taylor - A few weeks ago Paul Ryan and I wrote an article proposing changes in the Federal Reserve Act. One change would require the Fed to focus on "the single goal of long-run price stability within a clear framework of overall economic stability.” Since then some have argued that changing the dual mandate in this way would not have prevented the recent highly discretionary monetary policy, which, in my view, has on balance been counterproductive. For example, Greg Mankiw writes on his blog that “If the Fed's mandate were different, monetary policy today might well be the same. That is, with inflation now below its target, the Fed could be pursuing QE2 even if it were operating under the proposed mono mandate.” Similarly, in today’s Wall Street Journal Marc Sumerlin writes that such a change would “actually be supportive of the Fed’s current program.”
The Fed and its discontents - IN THE wake of Ben Bernanke’s media blitz, Republican lawmakers have renewed their attack on the Federal Reserve’s dual mandate for both “maximum employment” and “stable prices”. Emboldened by the tea-party movement’s auriferous fetish, Republicans Mike Pence and Bob Corker, a representative and a senator respectively, have led the charge to eliminate the Fed’s “employment” responsibility. In Mr Pence’s words, “It’s time that the Fed focus solely on price stability and the dollar.” Now, I have some sympathy with the idea that central bankers shouldn’t be treated as divine experts unfettered by rules and inoculated from democratic accountability. They make far-reaching decisions that, in part, reflect political judgments about which people can disagree. The Republicans’ line of attack, however, makes little sense. The political logic of attacking the Fed, however, is clear. Unelected elitists in Washington make for a nice villain. This is doubly true for moderate Republicans like Mr Corker who need to polish their tea-party bona fides ahead of a potential primary challenge in 2012.
Is raising inflation expectations a good idea? - When you are at the zero rate bound, the monetary policy tools to use (QE, etc) have the objective of increasing inflation expectations. If people expect heightened inflation, monetary authorities intend them to do several rational acts: buy stuff now that they would have postponed ‘til the future, and make investments in businesses, stocks, and others that rise in tandem with inflation. Examples were made of buying a canoe now, buying a farm, buying oil and gas shares, as well as buying a restaurant meal now. The point was also made that rising inflation will spur people to borrow money, since the rising inflation will increase the value of physical assets, while inflating away the real cost of borrowing. But rising inflation expectations cuts both ways. If a lender is going to lend to a borrower to buy his canoes now, it's now going to lend him at the rate that incorporates the higher inflation expectations for next year. So the higher borrowing rate effectively offsets the value of buying canoes now rather than buying it at a higher price next year and just borrowing less (or not at all). There's no way to get ahead if the other side also knows what one side knows.
Commodity Prices and Inflation - Krugman - The reactions to today’s rather wonkish piece are kind of funny: I’m getting a lot of “you’re an idiot who doesn’t understand economics, it’s all about the debased dollar”. Anyway, it’s worth pointing out that commodity prices do have a habit of fluctuating, a lot — and that historically, such fluctuations have generally presaged neither major inflation nor major deflation. Update: Oh, I forgot to mention that the best analysis I’ve seen of the 2007-2008 commodity price spike is this Jim Hamilton paper (pdf).
Commodities and Money - The recent behavior of commodity prices seems to have provoked a politically-infused controversy over how this behavior relates to monetary policy. Let's see if we can find the light amid the heat. The chart shows the year-over-year percentage change in a commodity price index for the period January/92 to November/10. The first thing to note is that the 12-month growth rates in this index show volatility on the order of what we see in stock price indexes, and for good reason. Physical commodities are storable, and therefore they are assets. We should expect then, that the prices of commodities should behave more like other asset prices, than like the prices of final goods and services. Indeed, over the pre-crisis period in the chart, the rate of change in the commodity price index goes from -20% to well over 40%, back to the neighborhood of -20%, up again to the 30% range, down to 0, and up to more than 60% per annum, during a period where consumer price inflation, by any measure, was quite stable.
Partying Like It's 1923: Or, The Weimar Temptation - Krugman - There’s an observation I’ve tried to make in a number of columns and blog posts, but maybe haven’t gotten across as clearly as I should: namely, the extent to which current economic discourse is being warped by what we might call the Weimar Temptation, the desire to see everything in terms of the evils of deficits and the money printed to cover them. The hyperinflation story is, after all, satisfying both intellectually and morally. A weak, spendthrift government can’t limit its spending to match its revenues; it loses the confidence of investors, so it has to print money to make up the difference; and too much money chasing too few goods leads to ever-higher inflation. But there’s always the temptation to apply the story too widely. Partly this is the drunk-and-the-streetlight effect: you look for dropped keys where the light is brightest, even though that’s not actually where you dropped them. Partly it’s ideology: the hyperinflation story is a comfortable one for people who want to make government always the problem, never the solution.
Nobody Believes in Supply and Demand -Krugman - The issue of commodity prices is a curious one; I’m getting a lot of correspondence along the lines of, “Well, which is it? Is it too much money printing, or is it greed?” But why does it have to be either of these? Why can’t it just be supply and demand? What we’re seeing, after all, is a rise in the relative price of raw materials compared with other goods and services. This is what normally happens during a cyclical recovery, and there’s no obvious reason to see it as a sign of ominous inflation (unless you’re determined to see such signs). Basically, this looks like rapid demand growth in emerging markets (though not here) colliding with limited supply. And it’s curious to see people on the right as well as the left seeing something dark and evil in supply and demand it work
Changes in the yield curve - The bond market sees an improving economy. The yield curve has shifted up and steepened over the last 4 months, which I read as a perception that things are not quite as dreary as they appeared a short while ago. On the other hand, that still leaves the overall level of interest rates a little below where they stood a year ago. Essentially what happened this fall was a reversal of much of the pessimistic sentiment that had been developing in the first 8 months of 2010. Much of the flattening and lowering of the yield curve in the first 8 months of 2010 was due to a decrease in inflationary expectations. These too have come back up, as the graph below of the spread between nominal yields and those on Treasury inflation protected securities reveals. One goal of the Fed's second round of quantitative easing begun at the start of November was to flatten the yield curve. That obviously didn't happen, and I discussed some of the reasons why a few weeks ago. A second goal was to increase inflationary expectations, which was achieved.
The Great Liquidity Demand Shock - I have been arguing here for some time that the Great Recession of 2007-2009 was nothing more than a pronounced money demand shock that the Federal Reserve failed to fully offset. As a consequence, nominal spending collapsed and given sticky prices the real economy crashed too. This seems self evident to me and other so called quasi-monetarists (a term coined by Paul Krugman) like Scott Sumner, Bill Woolsey, Nick Rowe, and Josh Hendrickson. Some folks, however, do not buy it. They disagree that the fundamental problem was a money demand shock and by implication they disagree that the Fed could have done anything to offset it. This thinking can be vividly seen in the responses to my National Review article where I make the case for QE2 with a money demand shock story. A more thoughtful response to my argument comes from Brad DeLong who says rather than a narrow money demand shock being the underlying cause of the Great Recession, it was a broader liquidity demand shock. Thus, the demand for all highly liquid assets increased and derailed nominal spending.
The Coming Economic Propaganda Blitz -Let this post serve as your first warning. The Bureau of Economic Analysis (BEA) within the Commerce Department is going release the advance estimate for 2010 4th quarter Gross Domestic Product (GDP) on January 28, 2011. This estimate is likely to show the economy growing at a 4% (or better) annual rate. But that won't be the end of it—not by a long shot. Due to the Fed's bond buying (QE2) and the massive tax cuts just enacted by Congress, growth in subsequent quarters is also going to be considerably higher than it would have been. Well, you might say, isn't that a good thing? Doesn't that indicate that "The Economy" is finally kicking into gear? That's certainly what the Powers That Be want you to believe. The problem is that there are two economies, not one. See my post "The Economy" — America's Great Lie. There's the economy where the well-off and the rich folks dwell, and there's the other one where ordinary Americans live. If the former is thriving, and it is, and the official statistics lump the two together, it will appear that everybody is better off.
GDP Boosted by Personal Transfer Payments - Personal transfer payments are essentially a wealth transfer process from those that are well compensated to those that are less well compensated. There are some requirements that recipients work (Earned Income Tax Credit for poverty level wage earners, for example), and that recipients have worked in the past (Social Security Retirement Benefits and unemployment benefits, for examples). Other transfers have no work requirement at all, food stamps for example. Whether personal transfer payments are desirable or not has been widely debated. It is a subject for an Op Ed and will not be addressed here. Instead we will analyze how personal transfer payments (more specifically increases in the payments) have influenced the course of The Great Recession and the recovery. We will use GDP as the measure of how personal transfer payments have influenced the economy. Some knowledgeable readers are going to say: “Hold on! It is well known that personal transfer payments are not included in GDP.” That is correct, but when those payments are spent by recipients for goods and services GDP is increased. And most personal transfer payment receipts are immediately spent on goods and services.
The Recovery That Was - and Then Wasn't - We’ve talked before here about whether a fleeting economic recovery began early this year. Two pieces of data mentioned in my column this week offer more evidence that a recovery did in fact start, only to falter in the spring. The first is stock prices, which appear in this graphic reviewing the 2010 economy. The second is the data from the New York Times/CBS News polls. It shows a stronger pattern than I expected. Altogether, the data offers a consistent picture: employment, stocks and public opinion, among other indicators, each improved in 2009 and early 2010, only to deteriorate again in mid-2010.
Yes, Virginia, this is a Recovery - On the one hand, I fully appreciate those who say, essentially, "we're not in a recovery because things are still awful," but on the other hand want to take no prisoners of those who disrespect that the term has an academic meaning that is well known and that requires respect. Well, the Doomorons are at it again, this time citing as authority a piece written at New Deal 2.0 by a "Junior Fellow" at the Franklin and Eleanor Roosevelt Institute, who claims that it is "idiocy" to say that we are in a recovery because, allegedly, the middle class is doing worse than it was in 2009. He provides no evidence, and in fact, almost all the evidence is that the middle class is still doing poorly, but better than it was doing in 2009. Real income is still bad, but up. Foreclosures are bad, but down. Household net wealth isn't good, but has gone up. Hourly earnings are still bad, but up. Jobs are bad, but up. Unemployment is bad, but down.
How Fast Will the Economy Recover?- I have been pretty pessimistic about the speed of the recovery. The worry is not about a double dip -- I think the probability of that happening is pretty low. But I have been worried about an "agonizingly slow recovery," particularly for employment, one that is measured in years rather than months. However, recent news such as the rise in long-term interest rates, which appears to be due to the expectation of a better economy ahead, along with better than expected Christmas sales, changes in the yield curve, falling jobless claims, increased consumer spending, and other signs of an improving economy had me thinking that I may need to reassess my pessimism. Perhaps the recovery will still be drawn out, but not quite as slow as expected. That would be good news. But two pieces of data released today have me moving back toward the more pessimistic outlook. Consumer confidence is down, and house prices are still falling. The fact that the fall in consumer confidence seems to be related to a fall in job market prospects adds to the worries. Overall, recent data has been mixed with some encouraging signs coupled with signs that we still face significant hurdles.
How Not to Fix Economic Models - Add more money. The Wall Street Journal notes the Institute for New Economic Thinking was launched last year with $50 million from financier and theorist George Soros. The institute so far has approved funding for more than 27 projects, including efforts by aimed at developing new ways to model the economy. What are their ideas? Remember that Soros’ Alchemy of Finance presented the big idea that prices are irrational, which he defined as biased ‘in one direction or another’ (his other idea, that markets can influence what they predict, playing off his role in the 1992 EMU crisis). He’s sympathetic to researchers who would confirm he’s not just rich, but a profound, original thinker. Here’s the WSJ: The problem, says Doyne Farmer, is that the models bear too little relation to reality. People aren’t quite as rational as models assume, he says. Advocates of traditional economics acknowledge that not all decisions are driven by pure reason.
Princeton’s Kenen: No Plausible Alternative to Dollar Now - There’s no credible alternative to the U.S. dollar as the world’s dominant currency, according to a paper to be presented next week at a meeting of top economists. Princeton University economist Peter B. Kenen argues that neither Europe’s nor China’s currency presents a valid substitute–nor an International Monetary Fund alternative to the dollar that was created some 40 years ago. “There is, I submit, no plausible candidate,” Kenen says in a paper that will be discussed Jan. 7 at the annual meeting of the American Economic Association in Denver. The U.S. was attacked by several countries after the Federal Reserve announced in November it would buy more government bonds to lift the economy. Countries with export-led economies including Germany and China accused the Fed of deliberately trying to weaken the dollar. The dollar’s widespread use in world trade gives the U.S. currency a powerful role in the global economy, making countries around the world more sensitive to U.S. economic policy
Dollar Share of Global Reserves Fell in Third Quarter, IMF Says - The dollar’s share of global foreign-exchange reserves fell to the lowest in at least 11 years in the third quarter as central banks increased holdings of non-traditional currencies, International Monetary Fund data showed. The U.S. currency’s portion dropped to 61.3 percent in the period ended Sept. 30, the lowest since 1999, according to IMF quarterly data, from 62.2 percent in the prior quarter. The share of “other currencies,” which excludes reserve holdings of U.S. dollars, euros, British pounds, Japanese yen and Swiss francs, rose to 4 percent from 3.7 percent in the previous quarter. “The major reason why they need to diversify their portfolios is the majors like the dollar make up too much of the portfolios with the increased volatility we have now,”
Faber Says Long-Term US Treasuries Are `Suicidal' Investment - Government bonds are likely to decline, said Faber, who publishes the Gloom, Boom and Doom report. After bottoming in December 2008, the 10-year Treasury yield rose as high as 3.9859 percent in April on government measures to stimulate the economy. Concern about a second recession in three years sent yields lower through October. “This is a suicidal investment,” Faber said in a telephone interview from St. Moritz, Switzerland. “Over time, interest rates on U.S. Treasuries will go up. Investors will gradually understand that the Federal Reserve wants to have negative real interest rates. The worst investment is in U.S. long-term bonds.”
The West and the Tyranny of Public Debt -The history of public debt is the very history of national power: how it has been won and how it has been lost. Dreams and impatience have always driven men in power to draw on the resources of others—be it slaves, the inhabitants of occupied lands, or their own children yet to be born—in order to carry out their schemes, to consolidate power, to grow their own fortunes. But never, outside periods of total war, has the debt of the world’s most powerful states grown so immense. Never has it so heavily threatened their political systems and standards of living. Public debt cannot keep growing without unleashing terrible catastrophes. Anyone saying this today is accused of pessimism. The first signs of economic recovery, harbingers of a supposedly falling debt, are held up to contradict him. Yet we wouldn’t be the first to think ourselves uniquely able to escape the fate of other states felled by their debt, such as the Republic of Venice, Renaissance Genoa, or the Empire of Spain.
Triple The National Debt - Hugh Jidette For President. Let's Borrow Like There's No Tomorrow. Hugh Jidette is running for President on a platform of lowering taxes while increasing spending. How? One word. Debt. Sure, we’re saddling future generations with it, but what have future generations ever done for us? Hugh Jidette is running ads across the country, at least until the networks realize he can't afford to pay for them. In case they pull the ads, you can watch them here, and share them with friends.
A Fed-Induced Speculative Blowoff - Hussman - Why are Treasury yields rising despite hundreds of billions of Treasury purchases by the Federal Reserve? There are two possibilities in the current debate. One is that the Fed's policy of purchasing Treasuries has scared the willies out of the bond market on fears of higher inflation, and that the policy is a failure. The other is that the policy has been such a success at boosting the prospects for economic growth that interest rates are rising on anticipation of a better economy. From our standpoint, neither of these explanations hold much water. On the inflation front, the recent bond selloff has hit TIPS prices as well as straight Treasuries, which isn't something you'd expect to see if inflation expectations were being destabilized. And although precious metals and other commodity prices have been pressed higher, the commodity run can be more accurately traced to negative real interest rates at the short-end of the maturity curve, coupled with a downward trend in long-term yields that has now reversed dramatically (more on that below). I've long argued that unproductive government spending and profligate fiscal policy are ultimately inflationary (regardless of how the spending is financed, and particularly if it is monetized), but I continue to view persistent inflation as a long-term, not near-term concern. A rise in T-bill yields of more than 15-25 basis points would change that assessment. Until then, velocity can be expected to collapse in direct proportion to changes in the monetary base, with little impact on prices.
Lesson’s from Japan’s fiscal disaster - When it comes to overindebted countries which can’t stop spending, it’s pretty hard to compete with Japan. The fact that everybody picks up on when reporting on the 2011 budget is that debt issuance is going to exceed tax revenues for the second year running — or, to put it another way, that more than half the budget is being paid for by borrowing rather than taxes. For me, however, the scarier fact is that more than half of government tax revenue is going to go straight back out the door in debt-service payments. If you’re at all interested in Japan’s budget, the Yomiuri Shimbun editorial on the subject is excellent; for a shorter version, James Simms has a good overview in the WSJ. The problem is a familiar one: politicians are happy spending money and incapable of implementing budget cuts, and the result is a slow-moving fiscal trainwreck. The situation in Japan is particularly depressing because the country has no major ethnic or political rifts. I can’t imagine Greece-style riots in Japan either. But still the technocrats can’t make any headway.
A Time to Spend - DeLong - A normal gap between supply and demand for some subset of currently produced commodities is not a serious problem, because it is balanced by excess demand for other currently produced commodities. As industries suffering from insufficient demand shed workers, industries benefiting from surplus demand hire them. The economy rapidly rebalances itself and thus returns to full employment – and does so with a configuration of employment and production that is better adapted to current consumer preferences. By contrast, a gap between supply and demand when the corresponding excess demand is for financial assets is a recipe for economic meltdown. There is, after all, no easy way that unemployed workers can start producing the assets – money and bonds that not only are rated investment-grade, but really are – that financial markets are not adequately supplying. The flow of workers out of employment exceeds the flow back into employment. And, as employment and incomes drop, spending on currently produced commodities drops further, and the economy spirals down into depression. Thus, the first principle of macroeconomic policy is that because only the government can create the investment-grade financial assets that are in short supply in a depression, it is the government’s task to do so. The government must ensure that the money supply matches the full-employment level of money demand, and that the supply of safe savings vehicles in which investors can park their wealth also meets demand.
Models Used for Policy Should Reflect Recent Experience, But Do They? - Data from the Department of Commerce show that short-term stimulus funds did not go to increase federal purchases, or state and local purchases, or even consumption purchases by much over the past few years. Thus the packages did not materially stimulate GDP or employment. In a recent Commentary piece “Where Did the Stimulus Go?" John Cogan and I review and explain our empirical research using these data. Unfortunately, most Keynesian models have been not adjusted to incorporate these facts, so they keep making the same predictions. To cite one example, the multipliers in Mark Zandi’s model as of July 2008 are found here (page 52 of the full document, 5 of the paper) while the multipliers as of December 2010 are found here. They are virtually the same. The model assumes a multiplier from a temporary tax rebate or refund which is greater than one, even though the actual data show it was much less than one in the case of the 2008 and 2009 stimulus packages. Note that the model also assumes a multiplier from a permanent tax cut which is only about 1/3. The relative sizes of permanent and temporary effects are exactly the opposite of what basic economics implies.
Gary Burtless on the stimulus - So far, the overwhelming share of that stimulus has been devoted to three items: Tax cuts for households; direct benefits to people adversely affected by the severe recession, mostly the unemployed or poor; and fiscal relief to state and local governments. Vermont did not need any "Czar" to receive or administer funds under these programs. The money for them quickly left the U.S. Treasury without any effort on the part of the Czar who penned this highly misleading op-ed piece. People in Vermont *directly* received benefits from the stimulus as: (1) lower federal tax withholding from their paychecks; (2) extended unemployment benefits; (3) premium subsidies so they could maintain their health insurance after they were laid off from a job in which they received health protection; (4) miscellaneous benefits (e.g., for college costs) under one provision or another; and (5) aid from the Treasury that permitted Vermont and its localities to finance their Medicaid and K-12 education programs without hiking taxes or lowering other public spending. The kinds of infrastructure spending for which the WSJ's "Czar" had some responsibility constituted a small percentage of the stimulus the Congress authorized for 2009 and 2010.
Stimulus, Without More Debt, by Robert Shiller - The $858 billion tax package signed into law this month provides some stimulus for our ailing economy. With the unemployment rate at 9.8 percent, more will certainly be needed, yet further deficit spending may not be a politically viable option.Instead, we are likely to see a big fight over raising the national debt ceiling, and a push to reverse the stimulus we already have. We don’t need to go deeper into debt to stimulate the economy more; a concept known as the “balanced-budget multiplier theorem” states that national income is raised, dollar for dollar, with any increase in government expenditure on goods and services that is matched by a tax increase. The reasoning is very simple: On average, people’s pretax incomes rise because of the business directly generated by the new government expenditures. If the income increase is equal to the tax increase, people have the same disposable income before and after. So there is no reason for people, taken as a group, to change their economic behavior. But the national income has increased by the amount of government expenditure, and job opportunities have increased in proportion.
Irrational exuberance over the balanced budget multiplier - And here is a Christmas gift--from Professor Robert J. Shiller--to those of us who have been primed since youth to be receptive to this sort of message: Stimulus, Without More Debt. The argument for why a tax-financed increase in government spending will work is summarized as follows: The reasoning is very simple: On average, people’s pretax incomes rise because of the business directly generated by the new government expenditures. If the income increase is equal to the tax increase, people have the same disposable income before and after. So there is no reason for people, taken as a group, to change their economic behavior. But the national income has increased by the amount of government expenditure, and job opportunities have increased in proportion.In other words, the Keynesian cross (formal exposition available here). Econ 101 in action, kids! So what, pray tell, is your beef with this, Mr. Grinch?
The military failure machine -Nicholas Kristof has a column in the NYT putting forward the heretical idea that the US should spend less on the military and more on diplomacy and education. The argument is obviously right as far as it goes, but it leaves one big question unasked. An obvious reason for the focus on military spending is that Americans have massive confidence in their military and much less in their education system, particularly the public school systems.Yet judged by results, the opposite should surely be the case. Why is this so? The US military has fought five large-scale wars in the past fifty years, resulting in a draw in Korea, a defeat in Vietnam, and three inconclusive outcomes in Iraq (twice) and Afghanistan. That’s a record that makes the worst inner-city public school look pretty good. At least the majority of students, even at the worst schools, end up more or less literate.
Sending 243 troops back can pay all Higher Education budget for the whole year all over Afghanistan - This week, Greg Mortenson, who has been building schools for girls and boys in Afghanistan, offered a brilliant alternative to war in Afghanistan via Nicolas Kristof’s piece in the NY Times: Mr. Mortenson says that $243 million is needed to fund all higher education in Afghanistan this year. He suggests that America hold a press conference here in Kabul and put just 243 of our 100,000 soldiers (each costing $1 million per year) on planes home. Then the U.S. could take the savings and hand over a check to pay for Afghanistan’s universities. Is this talk of schools and development naïve? Military power is essential, but it’s limited in what it can achieve. There’s abundant evidence that while bombs harden hearts, schooling, over time, can transform them. That’s just being pragmatic. The war in Afghanistan isn't making us safer, and it's not worth the cost. The fact that bringing home 243 troops could pay for all higher education in Afghanistan this year shows that there are much, much better ways of stabilizing Afghanistan and improving the lives of Afghans if we're willing to let go of military force as the answer
Sacred Cows - Paul Krugman - I was looking at Republican plans to cut spending without touching Social Security, Medicare, defense, etc., and ran across this: Cutting non-security discretionary funds by $100 billion means a 21% annual reduction in the part of the budget that includes funding for education, health and human services and housing and urban development, among other things, according to the Center on Budget and Policy Priorities, a liberal think tank. In other words, the sacred cows of domestic Democratic policy. Ahem. Let’s look at the budget for the biggest of these agencies (pdf), HHS. About half of that budget goes for the Centers for Disease Control and the National Institutes of Health. I didn’t think that preventing epidemics was a “Democratic” sacred cow; and despite the anti-science tendencies of the right, I don’t think they’re against medical research in general.
GOP on the Deficit: Do as I Say, Don't Watch What I Do - There is now no doubt that all of the GOP talk during the campaign about reducing the deficit was nothing more than a ploy to get elected and that Republicans have no plans to do anything but make the federal government's red ink larger than it already is and would otherwise be. The proof? Take a look at this outstanding report by Bob Greenstein and Jim Horney of The Center on Budget and Policy Priorities -- two of the most respected federal budget analysts anywhere -- published just before Christmas about how House Republicans are about to put in place new budget procedures that make it likely the deficit will be increased rather than decreased. The first is a change in the pay-as-you-go rules that will no longer require proposed tax cuts to include offsets so that there's no increase in the deficit. Under the new GOP rules, that would only apply to proposed increased in mandatory spending. In addition, proposed mandatory spending increases could only be offset with reductions in other mandatory spending. The previous PAYGO rule that allowed the offset to be either spending cuts or revenue increases would be eliminated.
Mike Pence and the Charm of Having it Both Ways - I see the Wall Street Journal is now marketing Indiana Republican Represantive Mike Pence as a "military and fiscal hawk." One's first thought is that it's an oxymoron, on the order of "chaste debauchery." There's nothing more tiresome than the public figure--there are swarms of them, who ladle out the goodies to the hogs at the military trough while trumpeting their own budgetary rectitude. Indeed critics like to climb on Pence the selectivity of his hawkery, as he beats his breast for budget restraint, with a compassionate exception for pork in his own state. On the narrow issue of inconsistency, I'm almost willing to give him a bye: I can't think of any politician of either party who has ever survived while attacking a dominant economic interest on his home turf. My notion is that Pence is one of those who have figured out how to talk the talk on defense cuts, knowing they will never have to walk the walk
The New Voodoo, by Paul Krugman - Hypocrisy never goes out of style, but, even so, 2010 was something special. For it was the year of budget doubletalk — the year of arsonists posing as firemen, of people railing against deficits while doing everything they could to make those deficits bigger. And I don’t just mean politicians. Did you notice the U-turn many political commentators and other Serious People made when the Obama-McConnell tax-cut deal was announced? One day deficits were the great evil and we needed fiscal austerity now now now, never mind the state of the economy. The next day $800 billion in debt-financed tax cuts, with the prospect of more to come, was the greatest thing since sliced bread, a triumph of bipartisanship. Still, it was the politicians who took the lead on the hypocrisy front. My nomination for headline of the year: “McConnell Blasts Deficit Spending, Urges Extension of Tax Cuts.”
The Tax and Spending Compromise - The largest component of this Tax Relief Act is the extension of the Bush-era tax cuts on incomes, dividends, capital gains, and estates. This extension will have some relatively short-term benefits to the economy by stimulating investments and the formation and expansion of small businesses, but the main case for extending these tax cuts is their effects on longer-term economic growth. The growth rate in per capita incomes is determined mainly by the rates of investments in human and physical capital, and by technological progress. Both these drivers of economic growth are in good part in turn determined by tax rates on personal and business incomes. I view the maintenance of the Bush tax cuts as only the first important move of the American tax code toward a more effective income tax structure. That structure would have a broad-based low rate flat tax on personal incomes, with little, if any, taxation of corporate incomes, and with dividends and capital gains taxed as ordinary income. As the majority report of the recent National Commission on Fiscal Responsibility and Reform proposed, the income base should be greatly broadened by eliminating the deductibility of interest on mortgages, and a variety of other special deductions that result from the political influence of various special interests.
The Tax Deal: A Second Stimulus?—The economy is expected to grow by only about 3 to 4 percent in 2011; if the new Act added 2 percent to the higher figure, which I don’t think anyone expects, so that the Gross Domestic Product grew by about $800 billion (6 percent of our $14 trillion GDP), this would, it is true, reduce the rate of growth of the deficit. Suppose the additional $800 billion in GDP yielded $160 billion in additional federal tax revenues (20 percent). Then the 2011 deficit, instead of being roughly $800 billion, would be “only” $640 billion—we would still be on the road to bankruptcy. It is nevertheless possible to defend the new Act on two grounds. The first, and I think less important, is that it indicates the possibility of compromise between the Obama Administration and the resurgent, and increasingly conservative and assertive, Republican Party, though compromise will be more difficult come January when the Republicans take control of the House. Second, and more important, estimates that GDP would grow by at least 3 percent in 2011 were premised on the expectation that the bulk, at least, of the Bush tax cuts would be continued. Given the weakness of the economy, a sudden tax increase in 2011, which would have been the effect of allowing those cuts to expire, could easily have knocked one or two percentage points off the GDP growth rate.
What’s So Good about America’s Tax Package? - The official budget arithmetic will treat the agreement on personal-income tax rates as a $450 billion increase in the deficit, making it seem like a big fiscal stimulus. But the agreement only maintains the existing tax rates, so taxpayers do not see it as a tax cut. It would be a fiscal stimulus only if taxpayers had previously expected that Congress and the administration would allow the tax rates to rise – an unlikely prospect, given the highly adverse effects that doing so would have had on the currently weak economy.Even for those taxpayers who had feared a tax increase in 2011 and 2012, it is not clear how much the lower tax payments will actually boost consumer spending. The previous temporary tax cuts in 2008 and 2009 appear to have gone largely into saving and debt reduction rather than increased spending. It is surprising, therefore, that forecasters raised their GDP growth forecasts for 2011 significantly on the basis of the tax agreement. A typical reaction was to raise the forecast for 2011 from 2.5% to 3.5%. While an increase of this magnitude would be plausible if a forecaster had previously expected tax rates to increase in 2011, it would not have been reasonable to forecast 2.5% growth in the first place with that assumption in mind. So, either the initial 2.5% forecast was too high or the increase of one percentage point is too large. What is true of the agreement is also true of the decision, as part of that agreement, to maintain unemployment insurance benefits for the long-term unemployed. This, too, is essentially just a continuation of the status quo. No new benefit has been created.
Stimulus And Tax Cuts Not a Long-Term Solution - Yves Smith - (interview & transcript) Stagnant and low wages must be addressed for real economic growth
Tax Cutters Set Up Tomorrow's Fiscal Crisis: Simon Johnson - Both sides think they got something: Democrats feel this will nudge unemployment below 8.5 percent in 2012, helping the president get reelected; Republicans achieved longstanding goals on measures such as the estate tax and think they will get most of the credit for an economic recovery that’s already under way. The truth is, the deal moved us closer to a fiscal crisis, just as the euro zone now is experiencing. The central conceit behind official thinking about fiscal policy on both sides of the aisle is that investors will buy almost all U.S. government debt without blinking an eye or increasing Treasury yields. This is an endearing and heart- warming notion, rather like a seasonal showing of Jimmy Stewart in “It’s a Wonderful Life.” What it should do is force us to think about how much the world has changed and how antiquated such ideas are today.
Yes, They're Frauds – Krugman - From CBPP, House Republican Rule Changes Pave the Way For Major Deficit-Increasing Tax Cuts, Despite Anti-Deficit Rhetoric: House Republican leaders yesterday unveiled major changes to House procedural rules that are clearly designed to pave the way for more deficit-increasing tax cuts in the next two years. These rules stand in sharp contrast to the strong anti-deficit rhetoric that many Republicans used on the campaign trail this fall. While changes in congressional rules rarely get much public attention, these new rules — which are expected to be adopted by party-line vote when the 112th Congress convenes on January 5 — could have a substantial impact and risk making the nation’s fiscal problems significantly worse. I hear that a lot of journalistic insiders were annoyed when I began calling out self-styled deficit hawks like Paul Ryan as flim-flammers. But they are; nobody, and I mean nobody, in a position of influence within the GOP cares about deficits when tax cuts for the affluent are on the line. Deficit hawkery is just a stick with which to beat down social programs.
The top marginal income tax rate should be about 65%...To maximize real economic growth in the United States, the top marginal income tax rate should be about 65%, give or take about ten percent. Preposterous, right? Well, it turns out that’s what the data tells us, or would, if we had the ears to listen. This post will be a bit more complicated than my usual “let’s graph some data” approach, but not by much, and I think the added complexity will be worth it. So here’s what I’m going to do – I’m going to use a statistical tool called “regression analysis” to find the relationship between the growth in real GDP and the top marginal tax rate. If you’re familiar with regression analysis you can skip ahead a few paragraphs.
Lower Marginal Tax Rates Don’t Correlate With Increased Economic Growth - I was looking for some data on tax rates vs economic growth for a longer piece I’m working on when I came across this interesting gem by Mike Kimel, in which he runs the numbers and finds no correlation between lower top marginal tax rates and real GDP growth (at least, in the United States). He does this in the form of a classic economics style bet. It’s fascinating and well worth the read. Here’s the bottom line, though:The way to read this graph…. consider the cell with t to t+3 on the horizontal and 50 years on the vertical. That cell has 62.1% in it. That indicates that of the 29 fifty year windows in which you can measure the growth in real GDP from a given year to three years later, 18 of them (or 62.1% of them) show a positive correlation between the top marginal tax rate. Notice… most of the squares have numbers above 50% in them. That means, in most situations we considered, more often than not, the correlations between marginal tax rates and growth rates are positive, not negative. When the negative correlations do occur, they tend to occur over the very short term. Put another way – they have negative repercussions that hit later. (And yes, that is what the table indicates.) Over longer periods of time, the percentage of time positive correlations are observed approaches 100%.
Marginal Income Tax Rates and Economic Growth, Ctd. - Building on yesterday’s post about Mike Kimel’s data crunching of top marginal rates vs. economic growth, today Kimel has created a handy bar chart of t+1 real GDP growth vs. top marginal income tax rate. Personally, I’d like to see some numbers run on effective tax rates vs. GDP growth (not to mention some inclusion of state and local tax data), but Kimel’s use of the data shows pretty effectively that cutting the top marginal income tax rate does not, in fact, lead to improved economic growth–if there was a cause and effect relationship between low taxes and improved economic growth, there would definitely be a stronger correlation between the two–but there simply isn’t. This is contra the opinions of pretty much all mainstream economists, and defiitely contradicts one of the fundamental talking points of conservative politicians. It also, I might add, goes against what my intuitive expectations would lead me to believe. But the numbers are what they are
Top Marginal Income Tax Rates & Real Economic Growth, a Bar Chart - The chart below shows tax rates on one axis and the growth rates in real GDP that accompanied those tax rates on the other: I broke the tax ranges into 5 percentage point increments centered around intuitive numbers (30%, 35%, etc.). Growth rates are the median observed for each range. For ranges which did not occur in the real world, growth rates are left blank. Top marginal tax rates come from the IRS' Statistics of Income Historical Table 23, and are available going back to 1913. Real GDP can be obtained from the BEA's National Income and Product Accounts Table 1.1.6, and dates back to 1929. Thus, the graph uses data starting in 1929.
Conservatives Can Be Persuaded to Embrace Taxes—But Only If Poor People Pay Them - Via Harold Pollack, we learn that George Will and incoming House Ways & Means Committee Chairman Dave Camp are eager to tackle the problem of poor people having too much money: As usual, this is based on the clever magic trick of pretending that poor people don’t pay state and local taxes. But whatever the merits of the position, it’s tactical important to keep in mind that this is the position. Lurking behind conservative rhetoric about the evils of government spending, is the reality of conservative hostility to taxes. And lurking behind conservative rhetoric about the evils of taxes is the reality of conservative hostility to taxing rich people. Which means that Republicans are likely to insist that any revenue-enhancing deficit-control package rely heavily on regressive measures.
Tax Reform Won’t Happen in 2011 (or 2012) - The bipartisan tax deal reached by President Obama and Congress earlier this month, along with a few kind words about closing tax loopholes from a handful of GOP lawmakers, has some reformers uncharacteristically optimistic about a quick agreement to revise the revenue code. But, sadly, they are wrong. Here’s why there won’t be a serious effort to rewrite the tax code until after the next elections. Obama isn’t on board. The President could have used the tax reform plans offered by his own fiscal commission or the Bipartisan Policy Center as an opportunity to jumpstart the debate. But he was decidedly cool, calling only for a national conversation on taxes.Hill Republicans are not on board. Incoming Ways & Means Committee Chairman Dave Camp (R-MI) says tax reform will be one of his priorities, and that’s a good thing. But speaker-to-be John Boehner (R-OH) has little interest in supporting real reform. Hill Democrats are not on board either. Dems are just as enamored of targeted tax subsidies as Republicans.
Why the Rich Are Getting Richer - The U.S. economy appears to be coming apart at the seams. Unemployment remains at nearly ten percent, the highest level in almost 30 years; foreclosures have forced millions of Americans out of their homes; and real incomes have fallen faster and further than at any time since the Great Depression. Many of those laid off fear that the jobs they have lost -- the secure, often unionized, industrial jobs that provided wealth, security, and opportunity -- will never return. They are probably right. And yet a curious thing has happened in the midst of all this misery. The wealthiest Americans, among them presumably the very titans of global finance whose misadventures brought about the financial meltdown, got richer. And not just a little bit richer; a lot richer. In 2009, the average income of the top five percent of earners went up, while on average everyone else's income went down. This was not an anomaly but rather a continuation of a 40-year trend of ballooning incomes at the very top and stagnant incomes in the middle and at the bottom. The share of total income going to the top one percent has increased from roughly eight percent in the 1960s to more than 20 percent today.
Pinning down 'Obamanomics' -We're two years into the Obama administration, and "change we can believe in" has become "continuity we can believe in." So far, five senior members of the president's team have resigned their posts - and not one has been replaced with a candidate from outside the administration.That isn't to understate the differences between members of the administration: Christina Romer, its first chair of the Council of Economic Advisers was a macroeconomist. Austen Goolsbee, her replacement, is a microeconomist. Rahm Emanuel loves cursing. His replacement, Pete Rouse, loves cats. .But two years into the Obama administration, the president seems confident in the people around him and the approach they've persuaded him to take. "When I reflect back on the last two years," Obama told the New York Times, "we probably spent much more time trying to get the policy right than trying to get the politics right." That self-assessment is a long way from, "It's time for some new ideas." And it raises the question: What is the overarching policy they spent so much time getting right? What is Obamanomics?
America’s Political Class Struggle - America is on a collision course with itself. This month’s deal between President Barack Obama and the Republicans in Congress to extend the tax cuts initiated a decade ago by President George W. Bush is being hailed as the start of a new bipartisan consensus. The US is running an annual budget deficit of around $1 trillion, which may widen further as a result of the new tax agreement. This level of annual borrowing is far too high for comfort. It must be cut, but how? The problem is America’s corrupted politics and loss of civic morality. One political party, the Republicans, stands for little except tax cuts, which they place above any other goal. The Democrats have a bit wider set of interests, including support for health care, education, training, and infrastructure. But, like the Republicans, the Democrats, too, are keen to shower tax cuts on their major campaign contributors, predominantly rich Americans. The result is a dangerous paradox. The US budget deficit is enormous and unsustainable. The poor are squeezed by cuts in social programs and a weak job market. One in eight Americans depends on Food Stamps to eat. Yet, despite these circumstances, one political party wants to gut tax revenues altogether, and the other is easily dragged along, against its better instincts, out of concern for keeping its rich contributors happy.
Two Views of Class Struggle -- Jeff Sachs writes, Since Ronald Reagan became President in 1981, America's budget system has been geared to supporting the accumulation of vast wealth at the top of the income distribution. Amazingly, the richest 1% of American households now has a higher net worth than the bottom 90%. The annual income of the richest 12,000 households is greater than that of the poorest 24 million households. Investors Business Daily editorializes, Add the cost of benefits and pensions, and the average compensation gap between federal and private-sector workers jumps to nearly $62,000 per year -- $123,049 vs. $61,051.
Dodd-Frank, the real threat to the Constitution - The Dodd-Frank legislation passed in the summer is supposed to remedy weaknesses in the U.S. financial system - ensuring transparency and accountability, and removing risks that banks are "too big to fail." Yet the bill created a structure of almost unlimited, unreviewable and sometimes secret bureaucratic discretion, with no constraints on concentration - a breakdown of the separation of powers, which were created to guard against the exercise of arbitrary authority. Take, for example, the resolution/seizure authority of Title II, ostensibly designed to end bailouts and "too big to fail" risks. The Treasury can petition federal district courts to seize not only banks that enjoy government support but any non-bank financial institution that the government thinks is in danger of default and could, in turn, pose a risk to U.S. financial stability. If the entity resists seizure, the petition proceedings go secret, with a federal district judge given 24 hours to decide "on a strictly confidential basis" whether to allow receivership.
Dodd-Frank Regulatory Reform Rules - FRB St. Louis -Track the progress of more than 200 proposals and rules that will be written by various federal agencies as part of the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. How to Use This Site:
- Latest Updates: This homepage feature shows the most recent rule activity regardless of status, and is generated by the site's RSS feed. Older rule activity can be found by status via the navigation tabs.
- Open for Comment: In this section, view all the proposed rules that are open for comment and published in the Federal Register, and also find out how and when to submit comments to the respective agency(ies).
- Proposed: This section lists all rules that are proposed and are waiting for final approval.
- Final: This section lists all final rules, and includes critical effective or mandatory compliance dates.
- Resources: Links to all 11 agencies involved in the Dodd-Frank Act rulemaking process, as well as a quick tutorial on how a rule is made.
Floored (homophonically) Section 171(b)(2) of the of the Dodd-Frank Wall Street Reform and Consumer Protection Act states that the agencies shall establish minimum risk-based capital requirements applicable to insured depository institutions, depository institution holding companies, and nonbank financial companies supervised by the Federal Reserve. In particular [the] sections specify that the minimum leverage and risk-based capital requirements shall not be less than “generally applicable” capital requirements, which shall serve as a floor for any capital requirements the agencies may require. This is the Collins amendment to Dodd-Frank, inserted by Susan Collins into the act at, it is generally believed, the suggestion of Sheila Bair. What does it mean? Again, a slight paraphrase:
Will Warren or a DINO Head the FCPB? - The Wall Street Journal is reporting that Elizabeth Warren is quietly searching [Murdoch delinked] for a permanent head for the Consumer Financial Protection Bureau. The hunt suggests that Ms. Warren, a lightning rod for some bankers, might not be selected to lead the bureau, a centerpiece of the Dodd-Frank financial overhaul bill that passed this summer. Still, many liberal groups will push to get her in the post. President Barack Obama’s choice could signal how he intends to deal with resurgent Republicans in Congress. The feelers to business groups serve as a reminder that any nominee would likely need support from at least seven Republicans in the Senate to win confirmation. Among the names being discussed are Iowa’s attorney general, Tom Miller; New York state bank regulator Richard Neiman; and former Office of Thrift Supervision director Ellen Seidman….
New Consumer Agency Is Frightfully Necessary -- And Late - Elizabeth Warren - No one has missed the headlines: Haphazard and possibly illegal practices at mortgage-servicing companies have called into question home foreclosures across the nation. The latest disclosures are deeply troubling, but they should not come as a big surprise. For years, both individual homeowners and consumer advocates sounded alarms that foreclosure processes were riddled with problems. While federal and state investigators are still examining exactly what has gone wrong and why, two things are clear. First, several financial services companies have already admitted that they used "robo-signers," false declarations, and other workarounds to cut corners, creating a legal nightmare that will waste time and money that could have been better spent to help this economy recover. Mortgage lenders will spend millions of dollars retracing their steps, often with the same result that families who cannot pay will lose their homes.Second, this mess might well have been avoided if the Consumer Financial Protection Bureau had been in place just a few years ago.
Ron Paul Does Not Like Elizabeth Warren Or The New Consumer Protection Agency (VIDEO) Video: Ron Paul Texas Straight Talk - The banks still win in Washington This is a difficult issue, and I understand why Congressman Paul and others from the Austrian School do not support the CFPB. He has no confidence the agency won't eventually be captured by the industry it regulates - the banks.
In Defense of the Dodd-Frank Resolution Authority, Part 1 - This post started out as a defense of Dodd-Frank’s resolution authority, and a description of what the liquidation of one of the major US banks would likely look like under the new law. But I quickly realized that in order to understand how a resolution of one of the major banks would work in practice, you really have to have an understanding of how the major banks/investment banks are structured, legally, and why that structure causes so many problems in bankruptcy. I don’t think this is something that’s ever been explained in the blogosphere (I’d be extremely surprised), but it’s crucial to understanding the real issues surrounding financial reform and the major banks, so I think this post can be useful. Anyway, this is part one of a two-part post; part two will describe what an orderly liquidation of a major US bank under the Dodd-Frank resolution authority would actually look like. That post will come sometime tomorrow.
In Defense of the Dodd-Frank Resolution Authority, Part 2: The Actual Defense - Title II of Dodd-Frank creates a new resolution authority, called the Orderly Liquidation Authority (OLA), for systemically important financial institutions — which, crucially, includes financial holding companies (all the major US banks are organized as FHCs now). The OLA is patterned on the Federal Deposit Insurance Act, which lays out the FDIC resolution authority for commercial banks. The OLA, like the FDIC resolution authority, gives the FDIC a range of tools to liquidate a large nonbank financial institution while also mitigating systemic risk. No one is arguing that commercial banks that are seized and resolved by the FDIC are being “bailed out,” because they’re not — that’s why we call them “failed banks.” The FDIC resolution authority is just an alternative insolvency regime; but, obviously, it’s still an insolvency regime. So presumably, the people who say that “Dodd-Frank did nothing to end TBTF!” are arguing that a large FHC would not be resolved through the OLA. As I noted in my previous post, one of the main reasons that Lehman’s failure was such a catastrophic event for the markets was Lehman’s complete and total lack of preparation for a bankruptcy filing. Any serious analysis of Dodd-Frank’s resolution authority therefore has to recognize that Dodd-Frank also requires any financial institution subject to the new resolution authority to regularly submit a “resolution plan” (a.k.a. “living will,” or “funeral plan”) to regulators.
Shoring Up Banks So None Fail - The “too big to fail” problem among banks will be partly fixed in 2011. Global regulators are expected to reach an agreement that would make a select group of megabanks hold higher levels of capital. That requirement will make them safer, while removing some of the benefit they get from being big. But eliminating the taxpayer guarantee enjoyed by large lenders will require more fundamental measures, which will take years to achieve. Regulators seem to agree that banks deemed too big to fail are dangerous. Large lenders enjoy implicit government support because of their importance, and as a result, they tend to have higher credit ratings and pay less for deposits and wholesale financing. That, in turn, encourages them to become even bigger and more interconnected.
Gaming The Bank Regulation System: A Primer - It’s eye opening to reflect that the Basel III requirements are the joint production of more than 500 representatives from 27 nations, including top regulators and central bankers. They met dozens of times this past year. They produced 440 pages of new rules. But those rules are just as open to regulatory arbitrgage—a fancy phrase for gaming the system—as ever. Imagine that Bank of America l ends $1 million to a BBB rated company. That loan comes with a 100 percent risk weighting, which—under the 7 percent Basel III capital requirement—means that Bank of America would have to set aside $70,000 in capital. Bank of America would rather not set aside $70,000, so it buys a credit default swap from JPMorgan. Because JPMorgan is a bank, the CDS has just a 20 percent capital weighting. This means that Bank of America must now set aside just $14,000 in capital for the loan. JPMorgan, however, doesn’t want to set aside the necessary capital for the loan, either...
Derivatives Clearing Group Decides Against Registration - The world’s largest clearinghouse for credit-default swaps, ICE Trust, has had second thoughts about registering with regulators, citing concerns over new rules devised to bring transparency to the $600 trillion derivatives market. ICE Trust, a division of the Intercontinental Exchange, the big derivatives exchange, applied to be a derivatives clearing organization with the Commodity Futures Trading Commission in November. Last week, the company quietly withdrew its application. In a Thursday letter to the commission, which was released on Tuesday, a lawyer for ICE Trust said the company changed its mind because of “significant changes proposed to” regulations for clearing organizations. Over the last several weeks, the agency has outlined several proposals for clearinghouses, including a plan to limit conflicts of interest and to open the market to more competition. ICE, the dominant player in derivatives clearing, has been criticized in the past for pushing aside smaller players.
How to Derail Financial Reform - Ever since the Dodd-Frank financial reform law was signed in July, the question has been whether it would actually lead to a stable financial system. If the Republicans who will control the House next year get their way, the answer will surely be “no.” The legislation requires regulators to write hundreds of rules to put the law into effect. To their credit, regulatory agencies have begun that process with a sense of mission and depth of expertise that was missing in the years before the financial crisis. In particular, the Securities and Exchange Commission and the Commodity Futures Trading Commission — which share the all-important regulation of the multitrillion-dollar derivatives market — have proposed rules that are tough and sophisticated. The new Consumer Financial Protection Bureau is ramping up. The Financial Stability Oversight Council, led by the Treasury secretary, will report in January on how to implement the “Volcker rule” to restrict proprietary trading by banks.
What Could Possibly Go Wrong? -Thus, in an effort to make banks “safe”, the Basel rules incentivized banks to invest in government debt, mortgages and better yet, AAA mortgage CDOs, and agency debt, and to engage in massive interbank lending. And what happened? These supposedly categorically safe instruments were the sources of the ongoing systemic turmoil. Now, the Gnomes of Basel are telling the world that cleared derivatives are categorically, inherently safer than bilateral derivatives. As a result, they are trying to structure the incentive system to drive derivatives onto CCPs. Based on their track record: be afraid. Be very afraid. The problem with Basel generally is that its architects don’t seem to take into account the incentives their rules create. Historically governments, agencies, mortgages, etc., have been relatively safe. So give them a favorable treatment. But this gives financial institutions subject to the rules and who also are driven by perverse incentives to add risk arising from government guarantees (implicit and explicit) the motivation to construct portfolios and design instruments and make lending decisions that are “safe” according to Basel, but which are in fact far riskier than the capital charges reflect.
Resisting Bankers' Rules - As I pointed out in last week’s post, echoing a widely shared view, regulators are subject to capture by those they regulate. But this shouldn’t lead to the conclusion that regulation is futile. Rather, what we need is better monitoring and support, resistance and recapture. The recent history of financial regulation offers both stark contrasts and some hope. It’s not hard to find examples of collaborators who didn’t try very hard, accomplished little and moved into lucrative private-sector jobs, easily weathering the storms of a financial crisis they helped create. A detailed history of regulatory complicity in financial services has yet to be written. When it is, virtually every major federal agency operating in this area, including the Securities and Exchange Commission, is likely to be implicated. Indeed, the complex and sometimes overlapping jurisdictions of such agencies as the Federal Reserve Bank, the Office of Thrift Supervision, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency contributed to the problem. However, higher-ups within the Office of the Comptroller of the Currency stand out.
2011 Will Bring More De facto Decriminalization of Elite Financial Fraud - The role of the criminal justice system with regard to financial fraud by elite bankers in 2011 is likely to reprise its role last decade — de facto decriminalization. The Galleon investigation of insider trading at hedge funds will take much of the FBI’s and the Department of Justice’s (DOJ) focus. The state attorneys general investigations of foreclosure fraud do focus on the major players such as the Bank of America (BoA), but they are unlikely to lead to criminal liability for any senior bank officials. It is most likely that they will lead to financial settlements that include new funding for loan modifications. The FBI and the DOJ remain unlikely to prosecute the elite bank officers that ran the enormous “accounting control frauds” that drove the financial crisis. While over 1000 elites were convicted of felonies arising from the savings and loan (S&L) debacle, there are no convictions of controlling officers of the large nonprime lenders. The only indictment of controlling officers of a far smaller nonprime lender arose not from an investigation of the nonprime loans but rather from the lender’s alleged efforts to defraud the federal government’s TARP bailout program. What has gone so catastrophically wrong with DOJ, and why has it continued so long? The fundamental flaw is that DOJ’s senior leadership cannot conceive of elite bankers as criminals.
The ‘Subsidy’: How a Handful of Merrill Lynch Bankers Helped Blow Up Their Own Firm - Within Merrill Lynch, some traders called it a "million for a billion" -- meaning a million dollars in bonus money for every billion taken on in Merrill mortgage securities. Others referred to it as "the subsidy." One former executive called it bribery. The group was being compensated for how much it took, not whether it made money. The group, created in 2006, accepted tens of billions of dollars of Merrill's Triple A-rated mortgage-backed assets, with disastrous results. The value of the securities fell to pennies on the dollar and helped to sink the iconic firm. Merrill was sold to Bank of America, which was in turn bailed out by taxpayers. What became of the bankers who created this arrangement and the traders who took the now-toxic assets? They walked away with millions. Some still hold senior positions at prominent financial firms.
How 'Citizens United' Ruling Screws the Free Market - In 2007 David Cay Johnston, a Pulitzer-prize winning New York Times reporter, devoted his book Free Lunch to exploring, in the subtitle's words, "How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You With the Bill)." He details how certain laws transfer wealth to the politically powerful by, among other methods, capping corporate liability, shifting tax burdens, and generously subsidizing billionaires at the average citizen's expense. Taking this one step further, researchers have attempted to quantify the return-on-investment (ROI) of this corruption. A widely cited study by professors at the Universtiy of Kansas shows a 22,000 percent return on $283 million spent lobbying for tax holidays. Another study demonstrates that large companies got a 600-2000 percent return lobbying for tax breaks. Both of these estimates far eclipse the average ROI for Fortune 500 companies, which is less than 10 percent. As Johnston puts it, corporations can more easily "mine gold from the government treasury than the side of a mountain."
The Limits to Racketeering - According to Joseph Tainter’s theory of imperial collapse, as societies become more complex, they must expend an ever greater portion of the energy they have available simply on maintaining their complexity. Although social and technological advances may achieve profitable returns for awhile, once a certain level of complexity is reached, diminishing returns set in. Eventually, at the late imperial stage, the complexity of the power structure, the military infrastructure, the bureaucracies, all the rents involved in maintaining an ever more bloated parasite class, their luxuries, the police state required to extract these rents and keep the productive people down, and the growing losses due to the response of the oppressed producers, everything from poor quality work to strikes to emigration or secession to rebellion, reaches a point where the system can only cannibalize itself and eventually collapse. One dynamic of the system which makes citizen action so difficult is its distributed responsibility for repressing the people. But perhaps the same dynamic also generates an inner weakness.
Wall Street Execs Whine To Politico About Their Hurt Feelings - This morning's Politico features another piece ("Obama and Wall St.: Still Venus and Mars") in a continuing series that present Wall Street people whining about all those times White House higher-ups have ever-so-mildly allowed certain language to slip from their larynxes that makes the financial industry out to be some kind of villain for that time its over-leveraged, incompetent speculation led to the near-collapse of the entire economy and required taxpayers to shovel untold billions of dollars at too-big-to-fail banks so that they could survive. They are sad, you see, and the record-setting profits they have made are no comfort to them, because hey, maybe The Huffington Post will say something really mean! That is literally a thing that appeared in a newspaper, today!
Academic Economists To Consider Ethics Code - When the Stanford business professor Darrell Duffie co-wrote a book on how to overhaul Wall Street regulations, he did not mention that he sits on the board of Moody’s, the credit rating agency. As a commentator on the economy, Laura D’Andrea Tyson, a former adviser to President Bill Clinton who teaches in the business school at the University of California, Berkeley, does not usually say that she is a director of Morgan Stanley. And the faculty Web page of Richard H. Clarida, a Columbia professor who was a Treasury official under President George W. Bush, omits that he is an executive vice president at Pimco, the giant bond fund manager. During the American Economic Association’s annual meeting, in Denver next week, its executive committee will take up a proposal to “consider the association’s role regarding ethical standards for economists,” according to an internal committee agenda obtained by The New York Times.
Rule by the Ridiculous - Krugman - There must be a way to construct a word for this out of Greek roots; something like kleptocracy, but meaning rule by ridiculous people instead. But it’s all Greek to me. Anyway, a couple of stories today. 1. Wall Street executives in a complete snit about Obama: he bailed them out with no strings, he’s leaving their bonuses intact, but he doesn’t always invite them to White House events. Who thought that “Ma, he’s looking at me funny!” would become a crucial campaign slogan? 2. Paul Ryan requires that his staffers read Atlas Shrugged. I mean, I was inspired by Isaac Asimov, but I don’t think I’m Hari Seldon — whereas Ryan, it seems, really does think he’s John Galt. Future historians will giggle at our expense.
Which of These Banks Was 2010’s Most Shameless Corporate Outlaw? - Bankers. The red carpet's still being rolled out for them in Washington, but if there's a stain on it they'll pout for days. Jason Linkins documents the latest set of cheap white whines from very wealthy white men. (Discrimination lawsuits are a routine part of their legal troubles, too.) This time they're upset because nobody from the six largest banks in America was invited to the president's CEO Roundtable. They're offended because they didn't meet with the president? From the looks of things they're lucky not to be meeting with the warden. Their collective rap sheet includes fraud, sex discrimination, collusion to bribe public officials... even laundering drug money for Mexican drug cartels. One of them is accused of ripping off some nuns! None of this criminal behavior has stopped them from sulking over a presidential slight. Let's review the record for these corporate malefactors, and then decide: Which of these six banks was "America's Most Shameless Corporate Outlaw" in 2010? (I mean, really: Nuns?)
Banks and WikiLeaks - The whistle-blowing Web site WikiLeaks has not been convicted of a crime. The Justice Department has not even pressed charges over its disclosure of confidential State Department communications. Nonetheless, the financial industry is trying to shut it down. Visa, MasterCard and PayPal announced in the past few weeks that they would not process any transaction intended for WikiLeaks. Earlier this month, Bank of America decided to join the group, arguing that WikiLeaks may be doing things that are “inconsistent with our internal policies for processing payments.” The Federal Reserve, the banking regulator, allows this. Refusing to open an account for some undesirable entity is seen as reasonable risk management. The government even requires banks to keep an eye out for some shady businesses — like drug dealing and money laundering — and refuse to do business with those who engage in them. But a bank’s ability to block payments to a legal entity raises a troubling prospect. A handful of big banks could potentially bar any organization they disliked from the payments system, essentially cutting them off from the world economy.
Zombie banks - FT - Are zombies now stalking the west’s banking systems? To be sure, western governments, wary of the Japanese experience, made sure their banks were recapitalised far more quickly after the Japanese crisis. But the life support may not have been sufficient. The underlying assets that brought down the financial system three years ago have not increased in value. Of course, the derivatives based on residential and commercial properties have been largely written down. But 32 per cent of the $13,400bn in bank assets outstanding in the US, for example, are still loans secured on real estate. Mortgage-backed securities account for $1,252bn of the total. Many banks that are not dead today, then, could die very quickly if the housing market turns down again. European banks are also holding billions of dollars in sovereign loans of questionable quality. And, as in Japan, western banks are also being propped up by near-zero interest rates. Of course, banks earn a margin no matter what the lending and borrowing rates. But a sharp rise in rates might inflict mortal wounds on bank revenues and profits, especially if it triggered a recession. Scared of zombies? Better hope that inflation stays low and asset prices keep going upwards.
Bailed-Out Banks Slip Toward Failure - Nearly 100 U.S. banks that got bailout funds from the federal government show signs they are in jeopardy of failing.
The troubled banks identified by the Journal all have either a Tier 1 capital ratio under the "well-capitalized" 6% level; both a total risk-based capital ratio of under the "well-capitalized" 10% threshold and nonperforming loans of over 10% of their portfolio; or a regulatory order requiring the bank to monitor or boost its capital.
A Federal Deposit Insurance Corp. spokesman declined to comment on the Journal's analysis, which also calculated that 814 of the nation's 7,760 banks and savings institutions are troubled according to these standards, up from 729 at the end of the second quarter. The FDIC's official list of problem banks, which uses different criteria from the Journal's analysis, includes 860 financial institutions. The banks aren't publicly identified.
Citigroup Too Interwoven to Fail - Citigroup remains too "interwoven" to fail even after the government has plowed billions into rescuing the banking titan and Congress has passed laws taking aim at financial behemoths, Citi Chairman Richard Parsons told CNBC. "It's not a question of too big to fail," Parsons said in a live interview. "It's a question of too interwoven in the fabric of the global financial life to fail." Parsons said allowing Citi to fail previously or in the future would be akin to having "the heart, the pump of the economic system fail because then everybody else dies." "It's probably the most important private financial institution for maintaining our economic strength and presence around the world. You can't let an institution like that go down," he said.
Floyd Norris Repeats “Big Banks Are Necessary/Desirable” Canard - Yves Smith - Aargh, can someone please acquaint economists with the economics of banking? Consider the embarrassing premise of a piece by Floyd Norris of the New York Times: The message is that big international banks are desirable, and that little banks should properly grow up to be bigger banks. Hogwash. Big banks are LESS efficient on a cost basis than small banks. Every study of banking ever done in the US has found that once a certain, not all that large size threshold has been achieved, banks exhibit an increasing cost curve, which means they are more expensive to operate per dollar of assets. So why do banks strive to get bigger? It’s VERY simple. Bank CEO pay is strongly correlated with the size of the bank. So bank leaders find gobbling up other banks to be a very attractive activity. And the selling bank’s cooperation is assured because the sale triggers payouts to the top brass.
Hard Call for FDIC: When to Shut Bank - More than 300 U.S. banks and savings institutions failed in the past four years. But there are huge differences in how sick they were when regulators seized them. About a dozen of the dead financial institutions had a tangible common equity ratio, a widely used measurement of a bank's cushion to absorb losses, of more than 8% when they failed. That isn't much worse than the median ratio of 9% among the 50 companies in the investment bank's regional-bank stock index. In contrast, a total of 50 failed banks had negative capital by the time regulators swooped in, meaning their capital was depleted by losses. And those shutdowns came as long as two years after government officials issued their first warning about financial inadequacies, analysts at the KBW Inc. unit found. "There's just not enough manpower and coordination to catch all these failing institutions at once." Killing a bank too soon could mean getting rid of a financial institution that might recover to make solid, profitable loans. Waiting until all of a bank's capital is gone deepens the losses suffered by the FDIC's deposit-insurance fund, putting additional strain on surviving banks that pay into the fund.
Unofficial Problem Bank list at 919 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for Dec 24, 2010. Changes and comments from surferdude808: The FDIC did not release its enforcement actions for November 2010 nor did they close any institutions this week, which contributed to a quiet week for the Unofficial Problem Bank List. There were three removals and two additions this week leaving the list at 919 institutions with assets of $407.9 billion.
Unofficial Problem Bank list increases to 935 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for Dec 31, 2010. Changes and comments from surferdude808: The FDIC finally released its enforcement actions for November 2010. After 18 additions and two removals, the Unofficial Problem Bank List finishes 2010 at 935 institutions and assets of $412.4 billion
Problem Banks: Stress by State - With the banking crisis ending its third year, it may prove useful to identify which states have experienced the most stress. At year-end 2007, there were 8,536 insured institutions headquartered in the 50 states, D.C., and Puerto Rico. Since that time, 1,340 or 15.7 percent have either failed or made an appearance on the Unofficial Problem Bank List (see table below). When ranking markets with a minimum of 15 institutions at year-end 2007, Arizona has experienced the most stress with 45.6 percent of its institutions having failed or being identified as a problem. Washington is a close second at 45.4 percent. The other stressed banking states that rank in the top ten include Nevada (43 percent), Oregon (40 percent), Florida (37 percent), Georgia (34 percent), California (34 percent), Utah (32 percent), Idaho (26 percent), and Colorado (25 percent). The common theme among these is overexposure to commercial real estate lending, particularly residential construction & development loans, and the collapse of real estate markets.
NYSE November Margin Debt Rises To Fresh Post-Lehman High - After we recently disclosed that surging NYSE margin debt is the latest indication of record euphoria (which presumably was sufficiently interesting that it made Alan Abelson's latest column), after it hit a post-Lehman high of $269 billion, we are happy to announce that as we expected, November margin credit grew by another $5 billion to $274 billion, which implies that investors continue to purchase stocks increasingly on margin, i.e., on credit, which is fantastic when stocks levitate, but leads to a circular sell off when sell offs generate collateral calls, forcing more sell offs, etc. And looking at net cash, it was flat M/M at ($34) billion meaning that there was no incremental real cash going into cash accounts, and the entire November outperformance was achieved as net cash remained flat, and every incremental point in gains was financed by net crediting
Looking For Love In All The Wrong Places? - You are all very much aware of the change in market tone and sentiment over the last four months. Strategists and investors fretting over rapidly deteriorating macro leading economic indicators (remember the ECRI reaching levels always consistent with recession?) and contemplating the possibility of a double dip has given way to these same folks now trying to one up each other in putting forth ever higher domestic GDP growth estimates for the new year. Goldman (Jan Hatzius) has been a poster child example of this about face, but they have plenty of company. The transition is not hard to understand. With the heavy POMO started in September, followed up by QE2, and now the tax cut extension legislation that should add about $400 billion of "new" fiscal stimulus in 2011, we better have an improved outlook. Certainly THE issue as we move into 2011 is the potential for organic economic growth, or otherwise. Personally, we just can't put a big "multiple" on marginal stimulus (read borrowed money) additions to macro near term economic expansion. But this issue will not become relevant until 2011 is well underway.
Algorithms Take Control of Wall Street - Last spring, Dow Jones launched a new service called Lexicon, which sends real-time financial news to professional investors. This in itself is not surprising. The company behind The Wall Street Journal and Dow Jones Newswires made its name by publishing the kind of news that moves the stock market. But many of the professional investors subscribing to Lexicon aren’t human—they’re algorithms, the lines of code that govern an increasing amount of global trading activity—and they don’t read news the way humans do. They don’t need their information delivered in the form of a story or even in sentences. They just want data—the hard, actionable information that those words represent. Lexicon packages the news in a way that its robo-clients can understand. It scans every Dow Jones story in real time, looking for textual clues that might indicate how investors should feel about a stock. It then sends that information in machine-readable form to its algorithmic subscribers, which can parse it further, using the resulting data to inform their own investing decisions. Lexicon has helped automate the process of reading the news, drawing insight from it, and using that information to buy or sell a stock. The machines aren’t there just to crunch numbers anymore; they’re now making the decisions.
Investors Attempting to Dump Bonds Push Bid Index Near Record: Muni Credit - Municipal bond investors are trying to unload holdings at the fastest pace in at least 14 years amid increasing mutual fund redemptions and rising U.S. Treasury rates. Bondholders looked for buyers for about $896 million in municipal securities daily this month through Dec. 22, the most on record, according to a Bloomberg bids-wanted index that dates to Aug. 8, 1996. Sellers sought bids for $783 million on average in March 2008, the second-highest monthly tally, the index shows. Investors pulled the biggest weekly amount of money from fixed-income funds in two years after selling picked up after Meredith Whitney, the banking analyst, on Dec. 19 forecast “hundreds of billions of dollars” in municipal defaults. . Investors have pulled $9.12 billion from municipal funds since the week ended Nov. 11. Mutual fund redemptions lead to bond sales because managers must sell the securities to repay investors. Individual investors make up about 37 percent of the $2.86 trillion muni market, according to Federal Reserve data.
Credit Suisse Sells Soured Loans to Appllo at Huge Discount - Credit Suisse Group is selling a $2.8 billion portfolio of soured commercial-property loans to Apollo Management LP for $1.2 billion, marking one of the largest bank sales of distressed real-estate loans since the downturn, according to people familiar with the matter. The properties backed by the loans include apartment buildings in Germany and hotels in Denmark, Sweden and France, many of them of lower quality and in hard-hit locales, the people say. Real-estate investors are watching loan sales closely. Ever since the 2008 financial crisis, expectations of a world-wide wave of defaults by landlords and fire sales by banks have tantalized private-equity firms. In the early 1990s, some of these same firms generated handsome profits after buying big loan portfolios from the government as it took over failing U.S. savings-and-loans. This time around, fire sales by banks have been few and far between. Banks have been wary of taking big losses on their boom-time loans while regulators have encouraged banks to restructure many of their commercial mortgages rather than simply foreclose.
Commercial property loans pose new threat - What will happen to the financial system if US interest rates keep rising? That is a question many investors are pondering, given the recent sharp upward swing in US Treasury yields. There is plenty to fret about: higher rates could hurt US homeowners, for example, as well as delivering more pain for struggling municipalities. However, there is another sector that investors should watch: commercial real estate. During the past three years, the CRE sector has not generally grabbed much attention, because events there have not been as dramatic as in subprime (in 2007-08) or sovereign debt markets (in 2010). For one dirty secret in the financial world is that the lack of drama in the CRE sector has partly arisen because banks on both sides of the Atlantic have been “evergreening” loans – or in essence extending the maturities – and practising forbearance to avoid recognising losses. Banks and borrowers have been able to conduct such evergreening because interest rates have been at rock bottom. But if rates rise, this evergreening will be harder to maintain. What makes this doubly pernicious is that any rise in rates might hit just as the sector is heading for a wave of refinancing.
Fannie, Freddie, and the Pain Caucus - The members of the Pain Caucus see things differently when they will be the ones blamed for the pain (which tells us something about how all those calls for deficit reduction from the GOP are likely to turn out). House Republicans, who now have responsibility for the oversight of Fannie and Freddie, have decided that dismantling Fannie Mae and Freddie Mac isn't so urgent after all: Suddenly, some members of the GOP realize they actually will be part of the government. Earlier this year, leading House Republicans proposed to privatize mortgage giants Fannie Mae and Freddie Mac or place them in receivership starting in two years. Now, as Republicans prepare to assume control of the House next week, they aren't in as big a rush, cautioning that withdrawing government support in the housing market should be gradual.
Margin Debt Soars to Highest Levels Since September 2008 - Margin debt is one measure of the amount of optimism or pessimism in the stock market. Rising margin debt generally correlates to a rising stock market. Margin use has soared to the highest level since September 2008. Margin Debt vs. S&P 500 - click on chart for sharper image Margin Debt Data is from NYSE Factbook Securities Credit. ZeroHedge discussed margin debt in NYSE October Margin Debt Jumps To Highest Since Lehman Failure As Investor Net Worth Is At Lowest Since April Highs. Moreover, mutual fund cash levels have been near record lows since September, and topping it off, a respected friend tells me NYSE cash levels are negative $35 billion. Collectively, this sounds like "all in" to me, and then some.
How Allstate Used Sampling To Confirm BofA/Countrywide Lied About Virtually Everything When Selling Mortgages - A few days ago, news broke that MBIA was allowed to use statistical sampling in its ongoing Bank of America fraud lawsuit. This happened despite the Countrywide acquiror's loud protests. And now, courtesy of today's brand new lawsuit against BofA (and Agent Orange himself) filed by Allstate, in which the insurer "seeks unspecified damages, alleges fraud, negligent misrepresentation and violation of U.S. securities laws" we know just why Bank of America was so very against allowing sampling to be used by plaintiffs. According to the full report (pdf attached below), Allstate has determined that Bank of America misrepresented virtually everything in its prospectuses: from the percentage of owner-occupied properties reped in prospectuses (about a 10% differential), to the LTV thresholds on represented loans (both at the 90% and 100% threshold), while inbetween finding willful and malicious intent to defraud and deceive.
Vindictive servicer of the day: ING Direct - I’m a longstanding fan of American Homeowner Preservation, which has found a clever way of keeping underwater homeowners in their homes while minimizing the loss to their lenders. Even the red-in-tooth-and-claw capitalists at Goldman Sachs can understand that. But not, it seems, the idiots at ING Direct: ING Direct, the Dutch bank and internet-based mortgage lender, has objected to American Homeowner Preservation’s program to keep families in their homes, and ING will no longer consider AHP short sales. “ING DIRECT will also be adding your company to our exclusionary list as your company strictly finds investors to keep sellers in their home, while the bank takes a significant loss. This is against ING DIRECT’s short sale policies and guidelines, and as such you will no longer be able to work on this short sale file or any future ING DIRECT accounts,” If you cut out the excess verbiage, this basically boils down to “you try to keep homeowners in their homes, so we’re not going to deal with you”.
Stop Servicer Scams, 1: Why You Should Care - Regulating the servicers now is continuing to grow as a political issue. This Zach Carter story, House Democrats Push For New Foreclosure Regulations, explains how a new letter from Representative Miller is being signed by House Democrats. This letter joins and references a letter from 52 economists, financial experts and activists. Cheyenne Hopkins of American Banker has an excellent article explaining the different positions taken by regulators and lobbyists. There are a lot of things in the world you can worry about. I want to make the case you should worry about this topic beyond the large amount of abuse stories you are hearing each and every day. Lewis Raneri, the creator of the mortgage-backed security, tried to warn the crowd of financial types that his invention, which had taken over the residential mortgage market, wasn’t capable of doing mass modifications, the kind of thing lenders needed to do to in the aftermath of a nationwide housing bubble.
Stop Servicer Scams, 2: Dissecting the Letter and Its Requests - This Zach Carter story,House Democrats Push For New Foreclosure Regulations, explains how a new letter fromRepresentative Miller is being signed by House Democrats. This letter joins and references a letter from 52 economists, financial experts and activists. So what specifically does this letter from economists, financial experts and activists call for? This list was organized by Chris Walen and Josh Rosner. Josh Rosner wrote and presented the securitization section of the Roosevelt Institute’s “Will It Work and How Will We Know? The Future of Financial Reform” panel and report. These are two major experts in this field. The nice part of trying to fix a system that is so broken is that there are a lot of low-hanging fruit out there to pick. The letter itself is an excellent read to understanding the problem. I want to go through their list of demands, and see how common sense they are.
At housing court, final pleas to head off evictions - In the midst of the holiday season, no one wanted to be here. Yet hundreds of people — homeowners, tenants, landlords — mobbed the fifth floor of Boston Housing Court on a recent Thursday, shuffling into courtrooms on what is unofficially known as eviction day. If foreclosure is the final chapter of homeownership, a court eviction hearing is the weary epilogue. Just two years ago, hearings involving foreclosed homeowners were relatively rare, occurring once a month or less. But soaring foreclosures, which have continued to rise in recent months, have flooded the court with such eviction requests. Some manage to postpone eviction, while others are not so lucky.
Can The Bank Just Change The Locks On My Home? - Today, all over this formerly great country of ours, there are gangs of thugs roaming through neighborhoods deciding what homes they want to break into. I had two clients in my office today who were victims of the banks breaking into their home and it MAKES ME SO ANGRY I COULD SCREAM! They don’t have any Order from a judge or law enforcement that would give them the legal basis to forcibly break into any person’s home, but that doesn’t stop them. They claim not to have any idea that breaking into private property is not permitted by law and say that they are relying upon instructions from the banks who have taken over this country. What angers me most is if law enforcement responds to the call about these break ins, law enforcement will leave and frequently not even take a report….they determine that it is a civil matter and they leave…sometimes leaving a terrified homeowner fearful and unprotected because the thugs hired by the banks have convinced law enforcement that they are permitted to break into homes. Often law enforcement believes this…I mean, after all, they’re the bank right?
Mortgage-Assistance Efforts Declined in Third Quarter - The number of troubled U.S. homeowners receiving assistance with their mortgages fell in the third quarter as the government’s foreclosure-prevention effort tapered off. Federal bank regulators reported Wednesday that about 470,000 homeowners received loan assistance in the July-to-September quarter, down 17% from the second quarter and down 32% from the same quarter a year earlier. Banks have largely sifted through a big pool of eligible borrowers who weren’t getting any assistance before the Obama administration launched its effort to combat foreclosures in early 2009, officials said. The government’s mortgage-assistance program, known as the Home Affordable Modification Program, has fallen far short of expectations. It is now likely to aid between 700,000 and 800,000 borrowers, compared with the 3 million to 4 million it had aimed to assist, according to an oversight panel’s report published earlier this month.
U.S. house prices tumble in October - Home prices tumbled in October, according to data released Tuesday, with six cities setting new lows as the housing market remains divorced from the upturn seen in other parts of the U.S. economy. The non-seasonally-adjusted S&P/Case-Shiller 20-city composite home-price index fell 1.3% on a monthly basis and 0.8% on an annual basis in October. Economists polled by Dow Jones Newswires had expected a 0.6% decline in the annual figure. Prices hadn’t dropped on an annual basis since January and are 29.6% below their peak. “The double dip is almost here, as six cities set new lows for the period since the 2006 peaks,” said David M. Blitzer, chairman of the index committee at Standard & Poor’s. “There is no good news in October’s report. Home prices across the country continue to fall.” Atlanta, Charlotte, Miami, Portland, Seattle and Tampa hit their lowest levels since home prices started to fall in 2006 and 2007.
Case-Shiller: Home Prices Weaken Further in October - S&P/Case-Shiller released the monthly Home Price Indices for October (actually a 3 month average of August, September and October). This includes prices for 20 individual cities and and two composite indices (for 10 cities and 20 cities).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 30.7% from the peak, and down 0.9% in October(SA). The Composite 20 index is off 30.5% from the peak, and down 1.0% in October (SA). The second graph shows the Year over year change in both indices. The Composite 10 SA is up 0.2% compared to October 2009. The Composite 20 SA is down 0.8% compared to October 2009. This is the first year-over-year decline since 2009. The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.
Home Prices in U.S. Decrease More Than Forecast - Home prices dropped more than forecast in October, a sign housing will remain a weak link as the U.S. recovery accelerates into the new year. The S&P/Case-Shiller index of property values fell 0.8 percent from October 2009, the biggest year-over-year decline since December 2009, the group said today in New York. The decrease exceeded the 0.2 percent drop projected by the median forecast of economists surveyed by Bloomberg News. A wave of foreclosures waiting to reach the market means home prices will remain under pressure in 2011, representing a risk to household finances. Federal Reserve policy makers this month said “depressed” housing and high unemployment remained constraints on consumer spending, reasons why they reiterated a plan to expand record monetary stimulus.
Case Shiller Misses Consensus As Home Price Decline Continues For 4th Month - If Bernanke is hoping to eventually have restore HELOCs as a piggybank for the greater US population, he better come up with something quick. The Case Shiller for October, as always nearly three months delayed, shows that the double dip in home prices which started in June, is persisting. And since both new and mortgage refi apps have plunged in recent weeks following the spike in the 30 Year cash mortgage rate, do not expect to see any rise in Top 20 Composite MSA home prices. From the October print: the October SA Composite 20 came at 143.52%, a decline of 0.99% from September, and just down from a year earlier. There was a sequential decline in 18 of the 20 MSAs, with just Denver and DC posting an increase. The biggest drops were in Atlanta (-2.13%), Chicago (-1.80%), and Minneapolis (-1.76%). The decline was even worse on a non-seasonally adjusted basis, where the sequential decline in the Composite 20 was -1.32%. As the attached chart demonstrates, the double dip is accelerating, as the sequential drops are increasing in magnitude.
A Look at Case-Shiller, by Metro Area (December Update) - The S&P/Case-Shiller Composite 20-city home price index, a broad gauge of U.S. home prices, posted a 1.3% drop in October from a month earlier and fell 0.8% from a year earlier, as the housing market faced a new round of trouble six months after the expiration of a federal tax credit for buyers. All 20 cities in the index posted month-to-month declines in October. Only four areas of the U.S. — Los Angeles, San Diego, San Francisco and Washington, D.C. — posted year-over-year gains. Six markets — Atlanta, Charlotte, Miami, Portland, Seattle and Tampa — hit their lowest points since home values started dropping four years ago, pushing prices in those areas below the lows seen in most regions in spring 2009.
Case Shiller House Prices: Which cities will hit post bubble lows next? - In the S&P/Case-Shiller report for October, S&P noted: [S]ix markets – Atlanta, Charlotte, Miami, Portland (OR), Seattle and Tampa – hit their lowest levels since home prices started to fall in 2006 and 2007 S&P reports the data Not Seasonally Adjusted (NSA) because of concerns about foreclosures impacting the seasonal factor. Using the Seasonally Adjusted (SA) series, eleven cities were at post bubble lows; the six cities listed above plus Phoenix, Chicago, Detroit, New York and Las Vegas. The following graph shows the percent above the post bubble lows for the 20 Case-Shiller cities and the two composite indexes using both SA and NSA data. We can probably guess the cities that will set new post bubble lows in November. Using the NSA data, Las Vegas, New York and Detroit will all probably join the list above setting new lows. Using the SA data, Dallas, Cleveland, Denver, and maybe the Composite 20 index will be at new lows.
House Prices and Months-of-Supply, and Real House Prices - This graph shows existing home months-of-supply (left axis), and the annualized change in the Case-Shiller composite 20 house price index (right axis, inverted). House prices are through October using the composite 20 index. Months-of-supply is through November. We need to watch inventory and months-of-supply closely for hints about house prices. The recent surge in existing home inventory - and increase in the months-of-supply - is one of the reasons I expected house prices to fall another 5% to 10%. S&P is also forecasting additional price declines. The following graph shows 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, both indexes are back to early 2001 prices. Also both indexes are at post-bubble lows.
The Housing Market's Double Dip - The LA Times greets my return to blogging with some grim news this morning: Prices of previously owned single-family homes fell 0.8% in October from the same time last year, according to the Standard & Poor's/Case-Shiller index of 20 metropolitan areas. The closely watched index fell 1.3% from September to October as six metro areas hit fresh lows. "It is grim, baby. We don't see any basis for sustained price increases in 2011," "Prices are going to be in the doldrums all year, and usually you look for housing to lead the overall recovery, but that seems doubtful." We're now starting to see housing data that fully reflects the end of the end of the housing tax credit earlier this year, and sure enough, prices have started to fall again. Ezra Klein points us to Gary Shilling for more, and I find Shilling partly persuasive and partly not. However, the bulk of his argument is sound, especially his observation that housing inventory is still abnormally high:
Nation on edge of double-dip in home prices (CNNMoney.com) -- Home prices took a shockingly steep plunge on a monthly basis, an indication that the housing market could be on the verge of -- if it's not already in -- a double-dip slump. Prices in 20 key cities fell 1.3% in October from a month earlier, an annualized decline of 15%, according to the S&P/Case-Shiller index released Tuesday. Prices were down 0.8% from 12 months earlier. Month-over-month prices dropped in all 20 metro areas covered by the index. Six markets reached their lowest levels since the housing bust first began in 2006 and 2007. They were Atlanta, Charlotte, N.C., Miami, Portland, Ore., Seattle and Tampa, Fla. "The double-dip is almost here," said David Blitzer, chairman of the Index Committee at Standard & Poor's. "There is no good news in October's report. Home prices across the country continue to fall."
Home Prices Teeter on a Double Dip - A 20-city composite of home prices through October as measured by the S&P/Case-Shiller Indices is teetering on the brink of falling below recent lows in 2009 to create a price new low and achieve the “double dip” in prices long feared by the real estate industry. Data released today by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, show a deceleration in the annual growth rates in 18 of the 20 MSAs and the 10- and 20-City Composites in October compared to what was reported for September 2010. The 10-City Composite was up only 0.2 percent and the 20-City Composite fell 0.8 percent from their levels in October 2009. Home prices decreased in all 20 MSAs and both Composites in October from their September levels. October was the fifth consecutive month where the annual growth rates moderated from their prior month’s pace, confirming a clear deceleration in home price returns.
Roubini: "It's Pretty Clear The Housing Market Has Already Double Dipped" - Hopefully today's 4th consecutive decline in home prices, as per the earlier noted Case Shiller October data (and with both mortgage rates and foreclosure inventory surging, we are willing to bet that following the reported November and December CS data, the decline will be for half a year straight), makes it sufficiently clear that housing has double dipped, and that the primary goal of Bernanke, which is not to pad banker bonuses, but to reflate home prices and recreate that mythical HELOC "fake wealth effect" piggybank, has been a complete failure (he sure is succeeding in getting WTI about to soon hit $100/barrel). Just in case there are any doubters left, Nouriel Roubini sat down with CNBC's netnet to confirm what virtually everyone else already knows: "It's pretty clear the housing market has already double dipped," per Nouriel, who recently took advantage of the NYC housing downturn and bought a $5.5MM pad. "And the rate of decline is stronger than in previous months" - precisely what we pointed out a few hours back. In other words, the double dip is accelerating. Today's jump in 10 and 30 Y rates will not help.
ROBERT SHILLER: If House Prices Keep Falling This Fast, The Economy Is Screwed - Housing guru Robert Shiller says the decline in October's Case-Shiller house-price index was much worse than expected (over 10% annualized). He also says that if house prices keep falling this fast, the economy will face "serious reasons to worry" (which, for Professor Shiller, is an apocalyptic statement). 6 of the 20 cities in the index have now hit new lows, below the lows reached in 2009 before the "recovery" in house prices. In several cities, prices are back to where they were 10 years ago. If prices continue to fall at this rate, Shiller expects the panicked Congress will issue another home-buyer tax credit or other emergency measure to stop the fall, despite the fact that it's an unfair gift of taxpayer money from renters to home-buyers and homeowners. When the ship is sinking this fast, Shiller says, you do what you have to do.
Will Home Prices Rebound in 2011? - A very successful hedge fund manager is making the case that housing prices may rebound sharply in 2011. He may be right.The guy's name is Bill Ackman and his hedge fund is Pershing Square Capital, which had $3.5 billion under management in mid-2010. He has spent most of his career investing in consumer and retail businesses. But he made a killing in the late 2000s by spotting early problems in the credit markets and betting against bond insurer MBIA. Basically, he was early to recognize that Wall Street's system of credit default swaps was just a shell game--shift risk around, not eliminating it. Now Ackman says he is believes residential housing could be the next great investment. Nonetheless, Ackman's call that housing will rise has been met with a lot of skepticism. Market strategist Gary Shilling says housing prices will fall another 20%. Ezra Klein, the Washington Post's popular blogger, says Shilling is clear and comprehensive. Felix Salmon says Ackman's thesis is based on two points, both of which have major problems. Daryl Jones of Hedgeye on sister publication Fortune.com says Ackman and other housing bulls are wrong. In today's Journal, Peter Schiff, the strategist and failed Senate candidate, says housing prices are still too high. Lastly, Dr. Doom, and NYU professor, Nouriel Roubini says housing is already double dipping and will continue. So Ackman clearly has the contrarian point of view here.
New House Price Decline Is Starting To Look Exactly Like 2006 - 2009… The market has still not completed the price discovery necessary to determine the final value of housing – after all, easy money policy is still producing affordability that has masked the failure of prices to completely readjust to normalized levels. But we reiterate our call of January 2010, that the 20-City Index is likely to settle between 8% and 10% below the April 2009 lows – to a 20-City Index value in the high 120’s. The value for October was 145.32. The Index for October set values back to mid-2003 levels. Note that the steepness of the bubble prices rises was such that our call above would only set prices back to mid-2002 levels.The most striking thing about today’s report is that we are seeing a repeat of the price decline patterns that appeared during the 2006-2009 downturn (albeit in an accelerated fashion): the declines starting in the “sand state” markets and gradually (already) spreading to the balance of the 20 markets. This time around, however, lenders do not have the benefit of a homeowner equity buffer to shield them from the full brunt of declines in collateral value. Based in this latest data, mortgage holders will be well advised to reconsider the levels of loss provisioning and their plans for effective remediation.
Home Prices Are Still Too High - Most economists concede that a lasting general recovery is unlikely without a recovery in the housing market. Earlier this year market observers breathed easier when national prices stabilized. But the "robo-signing"-induced slowdown in the foreclosure market, the recent upward spike in home mortgage rates, and third quarter 2010 declines in the Standard & Poor's Case–Shiller home-price index—including very bad October numbers reported this week—have sparked concerns that a "double dip" in home prices is probable. A longer-term view of home price trends should sharply magnify this fear. Even those economists worried about renewed price dips would be unlikely to believe that the vicious contractions of 2007 and 2008 (where prices fell about 30% nationally in just two years) could return. But they underestimate how distorted the market had become and how little it has since normalized. The 173% gain in the Case-Shiller 10-City Index (the only monthly data metric that predates the year 2000) in those nine years averaged an eye-popping 19.2% per year.
Crash points - In the wake of some bad figures on home prices from the S&P/Case-Shiller index, several writers are pointing to an analysis from Gary Schilling arguing that prices will decline another 20%. I'm not exactly bullish about the American housing market. I don't think big price increases are likely anytime in the near future, and I wouldn't be surprised to see the drops in prices continue for another few months. Housing isn't going to lead the economy out of its languid recovery. But, I find the arguments for another big drop in national prices to be rather implausible. Let me begin by reminding people about exactly what is being measured by the Case-Shiller index. The latest figures report prices for the month of October. But the index is actually a three-month moving average, which means that the October figure averages numbers for August, September, and October. What's more, the sales data are gathered after they're officially reported by the local deed recording offices, which means that these are closed sales, the contracts for which were probably agreed a month or two beforehand. So the latest data gives a view of sales with contracts that were agreed between June and September.
Freddie Mac: 90+ Day Delinquency Rate increases in November - Freddie Mac reported that the serious delinquency rate increased to 3.85% in November from 3.82% in October. The following graph shows the Freddie Mac serious delinquency rate (loans that are "three monthly payments or more past due or in foreclosure"): Some of the rapid increase last year was probably because of foreclosure moratoriums, and from modification programs because loans in trial mods were considered delinquent until the modifications were made permanent. As modifications have become permanent, they are no longer counted as delinquent. The increases in October and November are probably related to the new foreclosure moratoriums. The rate will probably start to decrease again in 2011.
Home foreclosures jump in 3rd quarter: regulators - (Reuters) – U.S. home foreclosures jumped in the third quarter and banks' efforts to keep borrowers in their homes dropped as the housing market continues to struggle, U.S. bank regulators said on Wednesday. The regulators said one reason for the increase in foreclosures is that banks have "exhausted" options for keeping many delinquent borrowers in their homes through programs such as loan modifications. Newly-initiated foreclosures increased to 382,000 in the third quarter, a 31.2 percent jump over the previous quarter and a 3.7 percent rise from the same quarter a year ago, the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) said in a quarterly mortgage report. The number of foreclosures in process increased to 1.2 million, a 4.5 percent increase from the second quarter and a 10.1 percent increase from a year ago, according to the regulators.
LPS Mortgage Monitor: Foreclosure Inventory Rising for 5th Straight Month, Nearly 2.2 Million Loans are 90 days+ Delinquent Not Yet in Foreclosure - A press release from LPS' Mortgage Monitor Report shows Foreclosure Inventory Rising for 5th Straight Month The November Mortgage Monitor report released by Lender Processing Services, Inc. (LPS) shows that the volume of loans moving to REO continued to drop as moratoria further delayed foreclosure sales. While the 90+ delinquency category has steadily declined, the number of loans moving to seriously delinquent status beyond 90 days far outpaced the number of foreclosure starts. Nearly 2.2 million loans are 90 days or more delinquent but not yet in foreclosure.Foreclosure inventories also continued to rise for the fifth straight month as delinquent accounts are referred for foreclosure, but the sale of foreclosure properties continued to decline. When compared to January 2008 levels, the foreclosure inventory of Jumbo Prime loans is nearly seven times higher; the inventory of Agency Prime loans is nearly six times higher; and the foreclosure inventory of Option ARM loans is approaching five times the inventory in January 2008. The report also shows that one-third of loans that are 90 days or more delinquent have not made a payment in a year
LPS: Over 4.3 million loans 90+ days or in foreclosure - LPS Applied Analytics released their November Mortgage Performance data. According to LPS:
• The average number of days delinquent for loans in foreclosure is a record 499 days
• Over 4.3 million loans are 90 days or more delinquent or in foreclosure
• Delinquency rates are down across all products as more loans entered foreclosure and new delinquencies declined.
• Foreclosure inventory increases are being driven both by elevated levels of foreclosure starts as well as a very limited amount of foreclosure sale activity.
This graph provided by LPS Applied Analytics shows the percent delinquent, percent in foreclosure, and total non-current mortgages. The percent in the foreclosure process is trending up because of the foreclosure moratoriums. According to LPS, 9.02% of mortgages are delinquent (down from 9.29% in October), and another 4.08% are in the foreclosure process (up from 3.92% in October) for a total of 13.10%. It breaks down as:
• 2.61 million loans less than 90 days delinquent.
• 2.16 million loans 90+ days delinquent.
• 2.16 million loans in foreclosure process.
Noncompliance with HAMP Guidelines as an Affirmative Foreclosure Defense? - To date, homeowners have not met with any real success in bringing suits alleging private rights of action under HAMP or, for that matter, alleging that denial of HAMP modifications is an a violation of their 5th Amendment due process rights. But it's one thing to bring an a suit offensively; it's another to raise an argument as a defense. (This is old hat to our lawyer readers, but I recognize that it isn't intuitive to non-lawyers that there are different standards regarding whether an argument can be raised offensively or defensively, with generally more lenient standards regarding defenses). Which brings me to the Indiana Court of Appeals' ruling in Lacy-McKinney v. Taylor, Bean & Whitaker Mortg. Corp., 937 N.E.2d 853, which was graciously brought to my attention by a Credit Slips reader. The Indiana Court of Appeals held (citing a number of precedent rulings) that a compliance with servicing guidelines is a condition precedent to a foreclosure that can be raised as an affirmative defense. This raises an interesting question: can a servicer's failure to comply with HAMP guidelines provide an affirmative defense to foreclosure?
At 4.86%, The Fannie 30 Year Fixed Mortgage Is Back To 7 Month Highs - To all who have been following the recent rout in both the 10 year and the mortgage market, today's most recent jump in the 30 Year Freddie Fixed-rate mortgage, which at 4.86%just hit a 7 month high, will not come as a surprise. To Ben Bernanke, however, this is a flashing red sign, that QE2 is only working for Wall Street: its primary function of creating imaginary wealth in the form of additional home equity is not only failing, but the recent jump in mortgage rates by 1%, has had the indirect impact of forcing home prices to drop by another 10%. Look for this to hit Case Shiller data in March-April when today's near-5% mortgage rates diffuse through the marketplace. Robert Shiller describes it best: "Optimism is fading from the housing market." QE3 should promptly abort any last traces of anything even remotely resembling a housing recovery.
Home Builders’ Pain Will Persist Into New Year - With no relief to their turmoil in sight, home builders will ring in the new year with poor sales, anemic traffic and weak financial results. That’s bad news for investors who might have been excited earlier this year when optimistic builders spent wildly on land in preparation for a market upturn they felt was imminent. This confidence was fed by the federal tax credit for home buyers, which offered up to $8,000. However, buyer traffic and sales have tumbled in the months following the credit’s April 30 expiration, a trend that has continued during the cold weather and holidays. As a result, builders are cancelling land contracts, exiting and consolidating softer markets and laying off employees. Companies continue trimming prices and consolidating markets as new-home sales remain weak.
Bring back the RTC to fix housing - According to CoreLogic, about 10.8 million homes were underwater as of Sept. 30. This represents 22.5% of all mortgages. As homeowners find themselves deeper underwater, they eventually can no longer justify paying a mortgage based on a principal balance that does not reflect the value of the home, and they consider a strategic default. I am not sure if the traditional supply-and-demand formula works in housing. True, we could continue to allow supply to work off until the equilibrium is reached. However, as this supply works off, and my neighbors allow their homes to fall into foreclosure, the value of my own home is diminished. And as more homes in my neighborhood default, the value of my home falls even lower. This cumulative effect only occurs in real estate. If my neighbor allows his car to be repossessed, the value of my car is not directly affected. If I have a neighbor who defaults on their Visa, the balance on my Visa is not affected. Yet if my neighbor allows his house to go into foreclosure, the value of my home is directly affected. According to a Morgan Stanley report last week, home prices may drop as much as 11% through the first quarter of 2011. That is the danger of this contagious downward spiral. As prices continue to decline, more people are forced to walk away, causing home values to decline further.
The Fallacy of a Pain-Free Path to a Healthy Housing Market - Dallas Fed - In the mid-1990s, the public policy goal of increasing the U.S. homeownership rate collided with a huge leap in financial innovation. Lenders shifted from originating and holding mortgages to originating and packaging them for sale to investors. These new financial products enabled millions of Americans who hadn’t previously qualified to buy a home to become owners. Housing construction boomed, reaching a postwar high—9.1 million homes were built between 2002 and 2006, a period when 5.6 million U.S. households were formed. The resulting oversupply of homes presents policymakers with a formidable challenge as they struggle to craft a sustainable economic recovery. Usually a driver of economic recoveries, the housing market is foundering as an engine of growth. A fresh push to increase ownership drove the rate up 5 percentage points to its peak in the mid-2000s. Home price gains followed the rate upward. As gauged by an aggregate of housing indexes dating to 1890, real home prices rose 85 percent to their highest level in August 2006. They have since declined 33 percent, falling short of most predictions for a cumulative correction of at least 40 percent. In fact, home prices still must fall 23 percent if they are to revert to their long-term mean (Chart 1).
Housing Pain Pits Neighbor Against Neighbor in Florida - Few things agitate Sid Schulman, But it galls him when neighbors stop paying their mortgages and maintenance fees, and leave the cost of community upkeep to others. The scene of these frictions is a 28-acre community in southeastern Florida's Broward County that spreads out on a peninsula, surrounded by a canal, a lake and an eight-foot stone wall. In a particularly stark example of housing tensions found in many places to varying degrees, the International Village homeowners association responded to the banks' slowdown in foreclosures with an aggressive step: It began its own foreclosure process. Florida law permits that under certain circumstances. A nonprofit homeowners association can take temporary title of residential units from people who aren't paying monthly fees they agreed to pay.
How immigrant amnesty would affect housing markets - I’ve long suspected that immigration amnesty would be a boon to housing markets. The idea is that illegal immigrants could be deported and so will be less willing to make the fixed investment of homeownership, and illegal status holds down wages which should also decrease the demand for housing. However I haven’t seen any persuasive studies on this issue. Today I discovered a new paper by Catalina Amuedo-Dorantes and Kusum Mundra that provides some evidence: We address this gap in the literature and find that legalization raises immigrant homeownership by 20 percentage-points even after accounting for a wide range of individual and family characteristics known to impact housing ownership. Note that this does not address the question of whether legalization increases the demand for housing or just the type of housing. For instance, legalization may simply lead illegal renters to buy houses that are identical to the ones they were renting, which aside from potential externalities to homeownership shouldn’t affect prices.
Pending Home Sales index increases 3.5% in November - From the NAR: Pending Home Sales Continue Recovery The Pending Home Sales Index,* a forward-looking indicator, rose 3.5 percent to 92.2 based on contracts signed in November from a downwardly revised 89.1 in October [revised down from 89.3]. The index is 5.0 percent below a reading of 97.0 in November 2009. The data reflects contracts and not closings, which normally occur with a lag time of one or two months. This suggests existing home sales in December and January will be somewhat higher than in November.
‘Doubling Up’ in Recession-Strained Quarters - Census Bureau data released in September showed that the number of multifamily households jumped 11.7 percent from 2008 to 2010, reaching 15.5 million, or 13.2 percent of all households. It is the highest proportion since at least 1968, accounting for 54 million people. Even that figure, however, is undoubtedly an undercount of the phenomenon social service providers call “doubling up,” which has ballooned in the recession and anemic recovery. The census’ multifamily household figures, for example, do not include such situations as when a single brother and a single sister move in together, or when a childless adult goes to live with his or her parents.
Recession Creates Spike in Multifamily Households -Of the myriad ways the Great Recession has altered the country’s social fabric, the surge in households like the Maggis’, where relatives and friends have moved in together as a last resort, is one of the most concrete, yet underexplored, demographic shifts. Census Bureau data released in September showed that the number of multifamily households jumped 11.7 percent from 2008 to 2010, reaching 15.5 million, or 13.2 percent of all households. It is the highest proportion since at least 1968, accounting for 54 million people. Even that figure, however, is undoubtedly an undercount of the phenomenon social service providers call “doubling up,” which has ballooned in the recession and anemic recovery. The census’ multifamily household figures, for example, do not include such situations as when a single brother and a single sister move in together, or when a childless adult goes to live with his or her parents.
Sob story of the day, Cat Rock edition - Today’s WSJ features the sad, sad story of retired churchman Fred Osborn, who might have to sell his family home. It only has single-pane windows, making it expensive to heat in the winter. And even after renting it out in the summer, Osborn ends up losing money on the old place. On top of that, his son has moved in, along with his four kids. If it got sold, three generations of Osborns would be kicked out at once. “I want to enjoy retirement now, but I really can’t afford to do that,” Osborn tells the WSJ’s Anne Miller. “It’s a very conflicting, emotional thing.” But here’s the rub: the story is in the WSJ’s real estate section. It’s basically about a home for sale. The price is $200,000, plus $1,000 a year in taxes. Will you help poor Mr Osborn out? Hang on, I might have missed out a zero. Actually, the price is $2,000,000, plus $10,000 a year in taxes. A little bit less sympathetic now, I guess. Wait, I’ve just found another order of magnitude down the back of the sofa. Osborn, it turns out, “will entertain offers above $20 million”, while taxes are “about $100,000 a year”.
Defying the Pessimists, Holiday Sales Rebound - After a 6 percent free fall in 2008 and a 4 percent uptick last year, retail spending rose 5.5 percent in the 50 days before Christmas, exceeding even the more optimistic forecasts, according to MasterCard Advisors SpendingPulse, which tracks retail spending. The rise was seen in just about every retail category. Apparel led the way, with an increase of 11.2 percent. Jewelry was up 8.4 percent, and luxury goods like handbags and expensive department-store clothes increased 6.7 percent. There was even a slight increase in purchases of home furniture, which had four consecutive years of declining sales. The figures include in-store and online sales, and exclude autos.
Credit Cards’ Cash Rewards Prompt Higher Spending, More Debt - Credit cards that give cash back prompt consumers to spend more and accrue more debt, according to researchers at the Federal Reserve Bank of Chicago. The initiation of a 1% cash rewards program yielded, on average, a $25 reward each month — and an increase in spending by $68 a month and in credit-card debt of $115 a month, the economists say in a paper to be presented at the American Economic Association meetings next week. The three economists looked at 12,000 credit card accounts at a financial institution whose identity they don’t disclose over a two-year period ended June 2002. Some of the customers were offered cash-back rewards; others weren’t. That debts grew faster than spending among those offered cash rewards likely means people reduced their monthly payments more than they increased spending.
Borrow Like There's No Tomorrow - The silence lately about America's public debt problem has been deafening. When nobody wants to talk about a problem, avoidance is always a solid indication that we've gone into deep denial about that problem. The public debt is the well known "elephant in the room" that nobody wants to see. Thus I am and am not surprised at the tepid response to the Huge Jidette (a word play on "huge debt") for president campaign. So-called liberals like Paul Krugman or Dean Baker rationalize debt problems away, saying interest on the debt doesn't matter in the long run. This is a very deep form of denial. So-called conservatives pretend to care about debt and the size of goverment, but then they run up the debt as fast as they can whenever they get the chance, or they create brand new agencies we don't actually need—see Homeland Security. Again, this is another deep form of denial. My aphorism is politics makes you stupid.
The United States of Debt animation
Consumer confidence unexpectedly falls in Dec. (Reuters) - Consumer confidence unexpectedly deteriorated in December, hurt by increasing worries about the jobs market, according to a private report released on Tuesday. The Conference Board, an industry group, said its index of consumer attitudes slipped to 52.5 in December from an upwardly revised 54.3 in November. The median of forecasts from analysts polled by Reuters was for a reading of 56.0. The expectations index declined to 71.9 in December from 73.6 in November. The present situation index fell to 23.5 from 25.4. Consumers' labor market assessment worsened. The "jobs hard to get" index rose to 46.8 percent in December from 46.3 percent last month, while the "jobs plentiful" index dropped to 3.9 percent from 4.3 percent.
Fed Watch: Curiously Weak Consumer Confidence - There was a bit of angst regarding yesterday's Conference Board consumer confidence report. See, for example, Mark Thoma and Brad DeLong. The report appears to contradict the generally positive Univ. of Michigan report - still weak compared to pre-recession, but at least moving in the right direction. More interestingly, it is at odds with recent consumer spending reports, not just early reports of the best Christmas season (in terms of year-over-year gains) since 2005, but also the most recent trends in personal consumption expenditures. Something is off-kilter, and has been since mid-year. Consumer confidence appears too low relative to actual consumption. Either confidence should be moving higher, as the Univ. of Michigan survey suggests, or consumption needs to slow dramatically. Place your bets. Consider the recent trends in real consumer spending (percentage change are log difference approximations):
The Holiday Stimulus Package, Continued - There will be almost three million fewer jobs next month than in December, and this outcome reveals a lot about how the labor market works. As I noted last week, employment normally falls sharply after Christmas, for the obvious reason that consumer demand is significantly less in January than in the preceding December. Next month should be no exception. Three million is a lot of jobs – that happens to be the total number of jobs that the Obama administration contended that it had “created or saved” over the entire life of the stimulus law passed in 2009. Yet next month’s multimillion loss of employment will be largely ignored by news organizations, because it will not be much different than it has been any other January.
Hazards in Interpreting Seasonals - Professor Casey Mulligan has an interesting post, in which he observes that while retail sales are about 15-20% higher in December than in the previous three months, retail employment is only about 4% higher in December than October, thus proving that fiscal stimulus cannot be very effective at raising employment. From the low sales to employment ratio, Professor Mulligan concludes: Although the holiday spending surge is clearly associated with a high level of employment, it also shows how spending is a rather indirect way of creating jobs. That holiday spending of roughly $90 billion more in December is associated with about 500,000 additional jobs for a month -- that amounts to $180,000 per job per month!Professor Mulligan's calculation is essentially a one observation regression of the change nominal retail sales on change in retail employment. ... But I think this ... is irrelevant. First, the employment that is relevant is the total employment associated with Christmas-goods production and distribution (in addition to retail employment). Second, the activity variable that is relevant is not sales, but US related value-added.
Retailers Swipe at Credit-Card Plan - The Credit Card Act signed into law last year was supposed to stop financial institutions from sleazy antics. But instead, some retailers say, it may restrict stay-at-home moms. Dress Barn Inc., Home Depot Inc., Citigroup Inc. and other companies are urging the Federal Reserve to drop a proposed rule that would require credit-card issuers to consider only a borrower's "independent" income rather than household income. The new standard, which would apply to new credit-card accounts and requests to increase limits on existing accounts, could make it difficult for some customers to get credit on the spot, especially stay-at-home moms. The proposed rule "would unfairly restrict the ability of many consumers, particularly women not working outside the home, to qualify for credit," wrote David Jaffe, president and chief executive of Dress Barn in a letter to the Fed this month. The company operates 2,477 stores for women and young girls.
Woman Deceased in 1995 Continued to Robo Sign Till at Least 2010 - Yves Smith - How, may you ask, can a woman who has been dead since 1995 continue to sign documents in 2010? Normally, one would hazard to guess that stamps with her signature on them were still in use (this is more common than you would think in foreclosure land). That would be plenty troubling. But this little account comes from the debt collection realm, a cesspool of bad practices. Here, the credit card company Providian (acquired by WaMu in 2005) had employees signing affidavits in the name of Martha Kunkle for over a decade. Debt collection agencies continued to use these bogus affidavits. From the Wall Street Journal:
Dead Soul Is a Debt Collector - WSJ - Martha Kunkle has come back to life. She died in 1995. Yet her signature later appeared on thousands of affidavits submitted by one of the nation's largest debt collectors, Portfolio Recovery Associates Inc., in lawsuits filed against borrowers. Some regulators complain that the use of Ms. Kunkle's name reflects an epidemic of mass-produced, sloppy and inaccurate documentation in the debt-collection industry. Large debt collectors such as Portfolio Recovery Associates and publicly traded rivals Encore Capital Group Inc. and Asset Acceptance Capital Corp. frequently buy delinquent accounts in bulk. Information about each debt sometimes is little more than a line in a spreadsheet with the borrower's name and amount owed, according to lawyers who represent borrowers. As of Sept. 30, Portfolio Recovery Associates had $91.5 million in revenue from lawsuits it won, or 34% of its overall revenue. In 2008, Judy Montoya, an employee at Portfolio Recovery Associates, testified in a debt-collection suit filed by the company that its "legal specialists" sign as many as 200 affidavits a day. The company's spokeswoman said such employees sign an average of 100 affidavits a day and are guided by "a very rigorous set of policies and procedures." Ms. Montoya couldn't be reached to comment.
Simulative Conspicuous Consumption? - Digby points us to the following NYT piece: At $106.5 Million, a Picasso Sets an Auction Record with what is in one sense an understandable bitter comment "Hey, dead artists need work too." Per the story the last time this work changed hands it was for $19,800. Which should mean that someone is exposed to capital gains on pretty much the full amount of the sales price. Even at 15% that is a reasonable chunk of change. Plus the seller has to put the net dollars SOMEWHERE, even if that is just buying more fine art. Now nothing guarantees that the proceeds will get spent/invested in the U.S., but unless the seller spends it all on tons of Bolivian blow it all gets injected somewhere in the world economy. Meanwhile the buyer had to free up capital from somewhere in order to pay for the painting, and while it is possible this was done by selling assets for a loss, or in the course of a tax-free exchange, chances are good that this ended up with another taxable event and/or unlocked previously unproductive capital. Plus the buyer had to come up with a substantial commission, another taxable event (to the dealer) and one likely to inject some spending of its own. Plus someone is going to receive a good sized insurance premium payment, and who knows the proximate result might be some blue collar jobs going to armed guards.
Chicago PMI Surges To 68.6 On Expectations Of 62.5, Highest Since July 1988 - Even as economists were expecting a contraction in December from the November print of 62.5 to 61.0, the Chicago PMI climbed to 68.6 in December, an unprecedented 15th consecutive month surge and the highest reading since 1988! In terms of specific indices: Production reached its highest levels since October 2004; New Orders improved to 2005 levels; Employment reached its highest level in more than 5 years; Priced Paid accelerated to its highest point since July 2008. And while inventories and "prices paid" demonstrate that the prevailing weakness across inventory accumulation and margin pressures as seen in other diffusion indices persist, there was strength in most verticals. Then again, as the PMI is a B-tier indicator at best, it is unlikely that the Fed will actually look at it in determining whether or not to end its monetary stimulus.
Dallas Fed's Texas Manufacturing Index Misses Expectations Of 17, Comes At 12.8, Inventories Surge | Another diffusion index miss, another snooze in stocks, another surge in inventories, another plunge in new orders, and another harbinger of margin collapse: that's how one can describe today's only relevant economic datapoint. The Dallas Fed's December Texas Manufacturing Index came at 12.8, a big miss from expectations of 17, and a drop from the November print of 13.1. And as always, the really nasty news was behind the headlines: finished goods inventories surged by 11.1 to -1.1 (and a whopping 19.5% in the six month forward index), while materials inventories rose by 3.9%. On the margin collapse side prices paid for raw materials jumped by 9%, wages and benefits increased by 4.4%, while new order volume and growth rate bit plunged by 7.5% and 6.8% respectively. We expect the futures to go green imminently on this piece of economic data which no computer gives a rat's ass about.
Charting 2010, Part 1: The Key Jobs Chart(s) Of 2010 - After a year of endless propaganda surrounding the imaginary jobs boom, which as we have been pointing out for months, is nothing more than the permanent transfer of full time jobs to part time, perhaps the one chart that captures the full effect of said "recovery" is the comparison of number of employees added by China's sweatshop behemoth FoxConn, which at 300,000 in 2010 was just under one third of all non-farm payrolls added by the entire United States in the same year! In other words, this year one company added nearly one third the total number of jobs as the entire world's greatest economy. And even with this meager job creation, the US unemployment rate is only 9.8%? But perhaps what should really concern pundits, is that the number of Americans employed in manufacturing is even lower: 9.3%.
Weekly Initial Unemployment Claims below 400,000, Lowest since July 2008 - The DOL reports on weekly unemployment insurance claims: In the week ending Dec. 25, the advance figure for seasonally adjusted initial claims was 388,000, a decrease of 34,000 from the previous week's revised figure of 422,000. The 4-week moving average was 414,000, a decrease of 12,500 from the previous week's revised average of 426,500. This graph shows the 4-week moving average of weekly claims since January 2000. The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased this week by 12,500 to 414,000. Even though weekly claims are seasonally adjusted, sometimes data for holiday weeks can be a little off.
Initial Claims Print At 388K, Far Lower Than Expectations Of 418K, Non-Seasonally Adjusted Claims Jump To 521K - And the year end seasonal divergence starts: while seasonally adjusted claims came at 388,000, a 34,000 drop from the prior week, and 30k below consensus, it is the Non-Seasonally adjusted number which probably provides a far better indication of what is happening: and at 521,834 it was a 24,879 increase from last week's 497k. Additionally, the 99 week cliff continues impacting more and more claims recipients: a total of 150k people dropped from EUCs and Extended claims. Lastly continuing claims increased on a Seasonally Adjusted basis by 57K to 4.128MM even as the actual NSA number declined. Lastly, last week's slightly better than expected print of 420k has been revised to what would have halved the number to the expectation of 424k. We will soon chart how in 2010, the BLS revised upward (i.e. adversely) almost 100% of its initial claims data in the subsequent week.
Unemployment Situation in Pictures; Manufacturing, State and Local, Temporary-Help - Inquiring minds are looking at charts of state and local employment, manufacturing, temporary help, and other items in the BLS Current Statistics report. Note how local governments were still expanding mid-recession, all the way up till July of 2008. A year later, starting June of 2009, local governments finally got religion and started cutting jobs. Look for this trend to continue into 2011. In spite of all the whining by states, they have not yet made any significant cuts in employment. For all the brouhaha about the manufacturing recovery, employment in the manufacturing sector has dropped four consecutive months. Total nonfarm employment shows the nature of the jobless recovery. Jobs are expanding barely enough to hold the unemployment rate constant, and it has taken a declining participation rate to do that.
What happens to people when their unemployment insurance runs out and they still can't find a job? - The average length of a spell of unemployment now sits at 30 weeks, after hitting a high of 35 weeks in July. About 6.3 million people, 42 percent of all unemployed Americans, have been out of work for more than six months. And more than 1 million have exhausted their unemployment benefits. They're called 99ers. (The term, coined this year, refers to the maximum weeks of benefits in the states with the highest unemployment rates.) There are about 1.6 million of them, according to the Department of Labor. And they raise the question: What happens when unemployment insurance ends? There is no reliable way to measure what happens to 99ers, whether they find work, return to school, remain unemployed, or move on to programs such as disability and welfare. (The Department of Labor does not follow the same individuals longitudinally.) But economists know with a reasonable amount of certainty that their unemployment does not end when their unemployment insurance does.
Career Shift Often Means Drop in Living Standards - A new study of American workers displaced by the recession sheds light on the sacrifices a large number have made to find work. Many, it turns out, had to switch careers and significantly reduce their living standards. “In many cases, these people are not very happy,” “They’re the winners who got new jobs, but they’re not really what they want, and not where they want to be.” . As of November 2010, only about one-third had found replacement jobs, either as full-time workers (26 percent) or as part-time workers not wanting a full-time job (8 percent). And of those who successfully found work, 41 percent had switched into a new career or field. Some of these may have been workers who retrained for new fields they wished to enter, but many seem to have taken their new jobs out of desperation. Only a minority of those displaced workers changing careers — 22 percent — said they had taken a class or a training course before finding their new job.
To 'Low-Ball' or Not To 'Low-Ball' or Not … It seems a growing number of employers are offering lower-than-expected salaries to job candidates who are re-entering the workforce as the recession ebbs. Why? Because they can. "Companies will pay you less because they know you have no choice but to take it," Holly Erickson, 38, a resident of St. Clair, Mo., tells the St. Louis Post-Dispatch. According to the story, many unemployed job seekers are sacrificing about $10,000 in pay for every year they are out of work, although researchers have yet to pinpoint just how many workers have taken hits to their careers and wages because of the recession. A survey in September by job-search site CareerBuilder found 54 percent of 925 unemployed respondents reported fielding compensation offers that were more than 25 percent lower than the paycheck they received at their last job.
What will happen with real wages? - Put aside the rise of China, and think back to when the three major economies were the United States, Japan, and Germany. Japan has seen a continuing decline in real wages. The German data are harder to assess, but we have seen periods of wage declines, a lot of wage stagnation, and arguably real wages have declined relative to education levels in the work force. If we look at U.S. real wages over the next ten years, what is the chance that they rise?
Labor Dept Changes the Employment Report - The Labor Department is ringing in the New Year with an assortment of changes to the employment report. The adjustments, both to improve accuracy and to better gauge the effects of the recession, will be rolled out over the next couple months. Here’s a guide to the changes coming up:Unemployment Duration: Jobless Americans will be able to report unemployment durations of up to five years; until now, the government has recorded only whether a person has been out of work for two years or more. The switch will show up in January’s employment data, released in February. It won’t change the total number of unemployed people.Birth/Death Model: Business births and deaths will be estimated on a quarterly basis instead of annually with the aim that it will lead to smaller revisions in employment data. The adjustment will begin with the January jobs report released in February. Separate measures for unincorporated self-employed workers and incorporated self-employed workers will be added to Table A-9, which currently looks like this.The tables that currently identify self-employed workers, Table A-8 for example, will now list them as self-employed workers, unincorporated. That changes their title but still measures the same set of people.
BLS Change on Unemployment Duration - To make this clear (since I mentioned this change earlier): This change will have no impact on the number of unemployed or the unemployment rate. This will only impact the average duration of unemployment. From the BLS: Changes to data collected on unemployment duration Currently if someone says they have been unemployed longer than 2 years, they are listed at 2 years (the current maximum). This new change will allow for responses up to 5 years and will probably have a small impact on the average (mean) duration of unemployment, but will have no impact on the median duration - or on the number unemployed or the unemployment rate.
Who Benefits from Long-Term Unemployment? - The share of the labor force that has been out of work for at least six months remains near an all-time high. Long-term unemployment is clearly terrible for the millions of people who find themselves in that situation. But it does have a flip side for the rest of the labor force: unemployment in this downturn has been concentrated among a surprisingly small number of people. The most recent data, shown above, goes through only 2009, but other data suggests the pattern has continued in 2010: A significantly smaller share of workers experienced any spell of unemployment in the last few years than in the other deep recessions of the past 50 years. That’s why the peaks above are higher for the mid-1970s recession and the early-1980s recession than for our recent recession. In essence, a relatively small number of people have borne a disproportionate share of the brunt of the Great Recession.
Startups Key to Job Growth - New businesses are the most important source of new jobs, researchers say. And that’s just counting people who are on the payrolls of firms that get counted in official job statistics. According to a paper by Small Business Administration economist Ying Lowrey, the actual role of startup businesses in employment may be far greater than official employment statistics suggest. Many startup companies have yet to be incorporated, she says, and the entrepreneurs who toil at them are unpaid or self-employed workers aren’t counted in official tallies. “These unpaid and self-employed jobs make contributions to the economy, involving millions of individuals, but are not incorporated in the job counts that are the basis of much scholarly research,” How many jobs are we talking about? Using data from a University of Michigan panel study of entrepreneurs, a Kauffman Foundation survey of new businesses and a Census Bureau survey of small business owners, she estimates that between 1997 and 2008 new entrepreneurial businesses created 3.5 million new jobs a year.
Dude, Where’s My Job? - The storyline being sold to the American public by the White House and the corporate mainstream media is that the economy is growing, jobs are being created, corporations are generating record profits, consumers are spending and all will be well in 2011. The 2% payroll tax cut, stolen from future generations to be spent in 2011, will jumpstart a sound economic recovery. Joseph Goebbels would be proud. According to BEA data, financial industry profits and “rest of world” profits — that is, the money U.S.-based corporations make overseas — are relatively much higher now than they were in the 1950s or 1960s. And the taxes paid by corporations are much lower now than they were then, as a share of national income. The reason that corporate profits are near their all-time highs is that Wall Street corporations and mega multinational corporations are making gobs of loot and paying less of it out in taxes. Isn’t that delightful for the CEOs and top executives of these companies?
Three Changes Making It Difficult To Find a Low Skill Job - In the comments of an earlier post we discussed the difficulty entry-level applicants are having in obtaining jobs. In this post I discuss 3 changes from the last 12 months making it difficult for workers with low- to no-skills find employment.When an employer has a low-skill task that needs to be done - whether it be low level data entry or manual labour, she has a number of alternatives (or substitutes) to hiring a low-skilled worker. She could:
- Find a technological solution. Rather than hiring another worker, is there a piece of equipment or machinery that will do the job, or make existing workers more productive so another person is not needed?
- Outsource/offshore/subcontract. Instead of doing the work in-house, can we pay someone else to do it?
- Do without. Instead of having 8 cash-registers open, can we get away with having only 7?
Can Washington get America's economy moving again with cash rewards?… In the flurry of activity at the end of the 111th Congress, the reauthorization of the "America COMPETES Act" went mostly unnoticed. But it is a little bill that Washington hopes will prove transformative. The law—its cringeworthy official name is the America Creating Opportunities To Meaningfully Promote Excellence in Technology, Education, and Science Act—overhauls the way the federal government supports private-sector R & D, and one of the main ways the government hopes to support R & D is with prizes. Lots of prizes. So-called "inducement prizes" (as opposed to "recognition prizes," like the Nobel or the MacArthur or the Pulitzer) make up a major part of the Obama administration's grand Strategy for American Innovation. Last year, outlining its vision for a more competitive America, the White House said the government "should take advantage of the expertise and insight of people both inside and outside" Washington by using "high-risk, high-reward policy tools such as prizes and challenges to solve tough problems." This fall, Challenge.gov, a portal featuring agencies' cash rewards for new ideas, debuted. And the COMPETES Act, which first passed in 2007, included a provision clarifying some legal issues around such contests.
Job Postings Surge as Economy Warms - As the economy gradually recovers, some big U.S. companies are cranking up their recruiting and advertising thousands of job openings, ranging from retail clerks and nurses to bank tellers and experts in cloud computing.Many of the new jobs are in retailing, accounting, consulting, health care, telecommunications and defense-related industries, according to data collected for The Wall Street Journal by Indeed Inc., which runs one the largest employment websites. It said the number of U.S. job postings on the Internet rose to 4.7 million on Dec. 1, up from 2.7 million a year earlier. The company daily collects listings from corporate and job-posting websites, removing duplicates. Its figures may undercount available jobs because some companies don't post all listings online, an Indeed spokesman said. Farming, manufacturing and construction jobs tend to be under-represented in online postings, while skilled computer and mathematical jobs are overrepresented
Facts or Fallacies? Part I: BLS Data v. the Zombie Lump-of-Labor Fallacy-Fallacy In the third quarter of 2010 real GDP in the U.S. was 21 percent higher than it had been in the fourth quarter of 1999. Labor force participation grew during the same period by 9 percent, an increase of nearly 14 million people. However, between December 1999 and September 2010, total non-farm employment fell by just over 200,000.Here is what Bill McBride at Calculated Risk ("Older Workers and the Lump of Labor Fallacy") thinks is supposed to happen:The number of jobs in the economy is not fixed, and people staying in the work force just means the economy will be larger.McBride suspects we will see more of this age-related fallacy. Indeed, we are already seeing more of this kind of fallacy rhetoric just in the last few months from the minions of right-wing Thinktankia urging that the Social Security retirement age be raised. (Pay attention, Bruce Webb and Coberly!)
Facts or Fallacies? Part II: In which Paul Krugman takes his lumps and eats them too while Jamie Galbraith runs afoul of the notorious lump-of-labor fallacy-fallacy - In comments at Angry Bear in response Part I, it was suggested that Paul Krugman has also made the lump-of-labor fallacy claim and that perhaps I should be talking about his arguments (or those of Paul Samuelson) instead of those of conservative think-tankers. Both of those liberal Keynesian economists have indeed advanced the fallacy claim. I would love to discuss the matter with Professor Krugman and sent him an invitation. Meanwhile, indulge me while I rehearse my debating points on some archival material. I'd also like to bring in a few big names on my side: James K. Galbraith, Dean Baker and… Paul Krugman! Just to even things out, the pre-recession Krugman gets Bruce Bartlett and Larry Summers on his tag team.
The Long Road Ahead - Krugman -The figure above illustrates Okun’s Law — the relationship between growth and unemployment. The horizontal axis shows annual growth rates of real GDP; the vertical axis shows the year-to-year change in the unemployment rate. Two things are clear. First, the economy has to grow around 2 1/2 percent per year just to keep unemployment from rising. Second, growth above that level leads to a less than one-for-one fall in unemployment (because hours per worker rise, more people enter the work force, etc.). Roughly, it takes two point-years of extra growth to reduce the unemployment rate by one point. Put it this way: suppose that from here on out we average 4.5 percent growth, which is way above any forecast I’ve seen. Even at that rate, unemployment would be close to 8 percent at the end of 2012, and wouldn’t get below 6 percent until midway through Sarah Palin’s first term.
Behind the Population Shift - The rise of the Sunbelt has two common explanations: one climatic and the other commercial. The climatic, obvious explanation is that it’s the weather, stupid. The commercial explanation, which has a proselytizing undertone, is that places like Texas and Nevada attract companies and people with their lower business taxes and fewer regulations. The first view emphasizes the outdoors; the second right-to-work laws. If all that we knew was that Sunbelt populations were increasing, it would be impossible to distinguish among these and other theories, but we have evidence on wages, productivity and the price of housing that can help us make sense of the Census. If economic productivity – created by low regulations or anything else – was causing the growth of Texas and Arizona and Georgia, then these places should have high per capita productivity and wages. Yet per capita state product in Arizona in 2009 was $35,300, 16 percent less than the national average. Per capita state products were $36,700 and $42,500 in Georgia and Texas, respectively.
America’s revival begins in its cities - Reinvention requires a new wave of innovation and entrepreneurship, which can emerge from our dense metropolitan areas and their skilled residents. America must stop treating its cities as ugly stepchildren, and should instead cherish them as the engines that power our economy. America’s 12 largest metropolitan areas collectively produced 37 percent of the country’s output in 2008, the last year with available data. Per capita productivity was particularly high in large, skilled areas such as Boston, where output per person was 39 percent higher than the nation’s metropolitan average. New York and San Francisco enjoy similar per capita productivity advantages. Boston also seems to be moving past the current recession, with an unemployment rate well below the national average of 9.8 percent. For decades, the American dream has meant white picket fences and endless suburbs. But the ideas created in dense metropolitan areas power American productivity. We should reduce the pro-homeownership bias of housing policies, such as the home mortgage interest deduction, which subsidize suburban sprawl and penalize cities. We should rethink infrastructure policies that encourage Americans to move to lower-density environments. Most importantly, we should invest and innovate more in education, because human capital is the ultimate source of both urban and national strength.
Middle-class gap grows - The gap between the rich and the middle class is larger than it has ever been due to the bursting of the housing bubble. The richest 1% of U.S. households had a net worth 225 times greater than that of the average American household in 2009, according to analysis conducted by the Economic Policy Institute, a liberal think tank. That's up from the previous record of 190 times greater, which was set in 2004. The widening gap came even as wealthy households' average net worth tumbled 27% -- to about $14 million -- between 2007 to 2009. That's the first time that they suffered a decline since the three-year period of 1992 to 1995. Meanwhile, the average family's net worth plunged 41% -- to just $62,200 -- from 2007 to 2009, according to EPI's calculations. "The typical person lost more because a bigger percentage of their wealth in 2007 had been the value of their home,"
Robert Reich and old people 'clogging up the pipes' - Video of Robert Reich is here discussing unemployment: Transcript: >>and when we're at a time when there's so many people in their 50s who are unemployed and may not be able to get back into the job -- the job market, I mean, it's unlikely to happen, but wouldn't it be a good idea to actually lower the eligibility for social security retirement? >>It might be, Sam. In fact, a lot of people right now are saying that the eligibility age for social security retirement given the depth of our continuing jobs recession -- and this jobs recession does continue -- maybe should be lowered so that you create openings for younger people coming into the job market who right now don't have a chance because there are so many older people clogging up the pipes, as it were.
"Threshold earners" and economic inequality - Reihan Salam discusses a theory of Tyler Cowen regarding "threshold earners," a sort of upscale version of a slacker. Here's Cowen: A threshold earner is someone who seeks to earn a certain amount of money and no more. If wages go up, that person will respond by seeking less work or by working less hard or less often. That person simply wants to "get by" in terms of absolute earning power in order to experience other gains in the form of leisure. Salam continues:This clearly reflects the pattern of wage dispersion among my friends, particularly those who attended elite secondary schools and colleges and universities. I [Salam] know many "threshold earners," including both high and low earners who could earn much more if they chose to make the necessary sacrifices. But they are satisficers. OK, fine so far. But then the claim is made that "threshold earning" behavior increases income inequality.
The Working Poor - As the middle class in America continues to be slowly wiped out, the number of working poor continues to increase. Today, nearly one out of every three families in the United States is considered to be "low income". Millions of American families are finding that they can barely make it from month to month even with both parents working as hard as they possibly can. Blue collar American workers from coast to coast are having their wages decreased at a time when it seems like the cost of virtually every monthly bill is going up. Unfortunately, there is every indication that things are only going to get worse and that average American families are going to be financially squeezed even more in the months and years to come. The Working Poor Families Project has just released their policy brief for the winter of 2010-11. What they have discovered is that the number of working poor in the United States is higher than they have ever seen it before and it continues to increase at a staggering pace. The following are some of the key findings for 2009 that were pulled right out of their report....
Obama's War on Inequality - How he's losing it.- Wasn't reversing the decades-long trend toward income inequality supposed to be the big theme of the Obama administration? The new president sounded it strongly in his inaugural address, stating that "a nation cannot prosper long when it favors only the prosperous." He followed up with a 2010 budget proposal that sought, in the words of the New York Times' David Leonhardt, "to reverse the rapid increase in economic inequality over the last 30 years." Obama has raised the issue at major occasions since, including his first State of the Union address in 2010, when he noted, "We cannot afford another so-called economic 'expansion' like the one from last decade … where the income of the average American household declined." But if Obama has declared war on inequality, inequality seems to be winning. In the deal he just cut with congressional Republicans, the president not only agreed to extend the Bush tax cuts for the highest earners but also to eliminate the estate tax for all but the microscopic percentage of people passing down more than $5 million—causing inheritance tax proponent Ray Madoff to declare the battle lost for good.
Recession hitting assholes especially hard - I understand that being unemployed and having to move back in with relatives can cause a lot of stress, and I really do have a lot of sympathy for anyone going through this, and especially for those who don’t have the safety net of family and friends to fall back on. But this recent article in the New York Times, while clearly designed to highlight the stresses of moving back in with your parents, really illustrated the stresses of moving back in with your parents when you’re all assholes. I know that’s harsh, but let me provide some evidence. The story opens with a litany of impatience, short-tempers, and passive aggresiveness: A nudge from Kathy Maggi for her 26-year-old daughter, Holly, to clean her room sparks a blow-up; an offhand comment by Jim Maggi about the way bills come in “month after month” to his daughter’s fiancé, James Wilson, causes days of smoldering; a bite of a chocolate bar from Grandma to 21-month-old Madison leads to frustrated chatter behind closed doors about “Nana” and “Pawpaw” spoiling her...
The Moment of Convulsion - Seeing this residue of history put me in mind of a riddle that one of my college professors presented to us one day years ago: why did Achilles drag Hector around the city of Troy three times? We came up with dozens of reasons ranging from conjectures out of the text of The Iliad to lame bits of Hippie numerology, but nobody could furnish the answer that the prof was looking for, which was eventually revealed: Because he [Achilles] was just that pissed off. This was the idea that dogged me in the winter twilight of Paris late on Christmas Day as I pondered the fate of my own country back across the cold cold sea. A lot of Americans are beaten down and discouraged these days. They've lost not only jobs, incomes, and houses, but also a sense of purpose, and perhaps faith in the essential fairness of the American venture - as the propane runs out, and families try to subsist on Froot Loops, and the re-po squad turns up to haul away the Ford F-150 Raptor. Meanwhile, in their last remaining refuge from harsh reality, TV, they glimpse the likes of Jamie Dimon, Chloe Kardashian, and Jay-Z emerging from limousines looking hopelessly bored with wealth beyond imagination. When will the folks out there move from shame and despondency to being really pissed off about the disposition of things?
State and Local Tax Revenues Grow - The U.S. Census Bureau reported this morning that state and local tax revenues for the third quarter were up 5.2% over the third quarter a year ago, marking the fourth consecutive quarter of positive growth. For the twelve months ending September 2010, total state and local tax revenue was $1.278 trillion, still under the September 2008 peak of $1.307 trillion. (See Table 1.) Property tax collections grew 7.8% from 2009 to 2010; individual income tax, 4.8%; sales tax, 4.0%; gasoline tax, 8.2%; cigarette tax, 8.3%; and alcohol tax, 1.9%. Corporate income tax collections fell by 3.3% over 2009.
States’ Revenues Continue Upward Trend — State tax revenues rose for a third consecutive quarter, continuing the reversal of a downward trend that has devastated state budgets, according to preliminary data in a new report from the Rockefeller Institute of Government. Despite the improved collections in July-September 2010, however, revenues remain significantly below peak levels and are still weak in a number of states, the report shows. Tax collections increased by 3.9 percent in the third quarter of 2010, compared to the same period a year earlier, based on data from 48 states. Of states reporting, 42 showed gains in overall tax revenues. Collections improved for the two largest revenue sources — personal income and sales taxes — while corporate income tax revenues declined slightly.
Tax Revenues Gain, but Still Below Peak - State and local tax revenues continue to recover as the economy improves, but remain below pre-recession peaks and are likely to face continued pressure in 2011. Combined state and local tax revenues rose 5.2% to $284.3 billion in the third quarter of 2010 from the same period a year ago, the Census Bureau reported Wednesday. That was a big reversal from the third quarter of 2009, when tax revenues fell by 5.4% from the year-earlier period. This gain in third-quarter revenues was driven in part by increases in income- and sales-tax receipts, which have rebounded along with Americans' salaries and spending. Many cities and states have also passed income- and sales-tax increases to battle falling receipts during the recession. Personal income tax receipts rose 4.8% in the third quarter while sales taxes rose 4%, according to the Census. Corporate income tax collections, which are volatile, fell 3.3% in the quarter.
State Budget Cuts: The Undeclared War on the Middle Class - The next round of the Great Recession — the feared “double dip” in employment — is coming. The Federal Reserve Board is so worried about it that it is encouraging inflation. What policy makers are not saying is that the next round will be the direct result of government policy and that this round will disproportionately target women, families and the most vulnerable. The explanation is simple. In a recession, tax revenues fall, increasing deficits. State governments are required by law to balance their budgets, so they must either raise taxes or cut spending. Doing either in the middle of a recession makes it worse by increasing unemployment and reducing the money people have to spend, setting off another round of economic decline. Since the Great Depression, economists have emphasized the importance of efforts to counter this vicious cycle. Republicans, starting with Nixon, have argued that revenue sharing that sends federal money to the states is the most effective way to save jobs and avoid waste.
Minimum wage earners in 7 states getting raises - It will be a happier New Year for nearly 650,000 workers earning minimum wage. They're getting small raises in seven states that tie their salaries to the cost of living. The minimum wages in those states will go up between 9 cents and 12 cents an hour Saturday because their consumer price indexes rose in 2010. Poverty advocates say the rising minimum wages shouldn't be seen as raises, just adjustments to keep the working poor at the same level as prices of goods rise. The National Employment Law Project, a New York-based advocate for workers, estimates that about 647,000 people will see their paychecks go up in Arizona, Colorado, Montana, Ohio, Oregon, Vermont and Washington. "It just ensures minimum wage keeps pace with the rising costs of necessities like milk and bread and gas," said Paul Sonn, legal co-director for NELP.
Ebb of stimulus funding could hit Texas workers hard - The federal stimulus payments that helped thousands of Texas workers ride out the recession will ebb next year, just as state legislators are likely to enact cuts that could hurt government workers and others who rely on public spending. The Recovery Act has sent about $16.5 billion to Texas state agencies since 2009. The biggest impact has been on public education, where more than 27,000 jobs were supported by stimulus funds between July and September 2010, according to the Texas Education Agency. Some employers are warning that a new burst of layoffs is coming because states can't, or won't, make up for the stimulus. Texas highway contractors are already cutting workers as new contract bids decline. And the state would cut 550 child-protective workers if the Legislature doesn't replace $23 million in stimulus funds that has paid their wages and other expenses
Massachusetts Gov. Deval Patrick prepares $1.5 billion in cuts to balance budget – As he considers ways to close a deficit in next year’s budget, Gov. Deval L. Patrick says that “everything is on the table,” including possible further cuts in state aid to cities and towns. Patrick said he wouldn’t comment on whether he will propose a reduction in local aid. He said he recognizes that the financial assistance is important for maintaining municipal services and that any possible cuts would be balanced with measures to save money for cities and towns. “At a time where total spending in the budget will be lower next year than it is in the current fiscal year, of necessity, everything is on the table,” Patrick said. Patrick is facing a shortfall of up to $2 billion in the state budget for the fiscal year that starts July 1, largely because federal stimulus money is no longer available and huge costs such as pensions, health care for state employees and Medicaid continue to rise. Patrick said he would reduce spending in the next fiscal year by $1.5 billion to help balance the budget.
Quinn floats plan to borrow $15 billion - As the state's stack of unpaid bills grows, Gov. Pat Quinn is floating the idea of borrowing roughly $15 billion to alleviate the pressure, though taxpayers would be saddled with loan payments for years. The governor has approached several lawmakers with a plan he's dubbed a "debt bond." While the name is somewhat redundant, the thinking is the state can pay back what it owes and plug its big budget hole — if only for a year. Supporters say the outsize loan would provide instant cash to schools, doctors and social welfare agencies that have laid off workers and cut services as they await long-overdue payments.
Illinois Default Insurance Cost at Five-Month High: Muni Credit - The cost of insuring Illinois's bonds against default rose to the highest level in five months as the state headed for the new year without a plan to finance a $3.7 billion pension-fund contribution. The cost of credit-default swap insurance on the lowest- rated state after California has risen 16 percent to $330,000 to protect $10 million of debt, from $285,000 on Dec. 3, according to data compiled by Bloomberg. That's the most expensive since July 12, when it reached $335,000. Bill Gross, who runs the world's biggest bond fund at Pacific Investment Management Co., said Illinois's budget may be only 55 percent-funded."That means the other 45 percent they can't pay or have to borrow," Gross said today in an interview on CNBC. "How a state like that can get in that type of position, I'm not quite sure."He said he would avoid buying any Illinois debt.
Illinois Default Insurance Cost Rises as Weak States Punished - The cost of insuring Illinois’s bonds against default rose to the highest level in five months as the state headed for the new year without a plan to finance a $3.7 billion pension-fund contribution. The cost of credit-default swap insurance on the lowest- rated state after California has risen 16 percent to $330,000 to protect $10 million of debt, from $285,000 on Dec. 3, according to data compiled by Bloomberg. “They’re punishing all the states but they’re punishing the worst states more,”“Illinois has been worse for a while.” Insuring Illinois against default now costs more than that for California, the lowest-rated U.S. state according to Standard & Poor’s. Covering the most-populous state’s general- obligation debt averaged $291,000 in December, Bloomberg data show. S&P ranks California at A-, its fourth-lowest investment grade, and Illinois at A+, two levels higher. The cost of insuring Illinois debt is more than three times that of Texas at $102,000. Texas, which S&P said felt the effects of the recession later and began to pull out earlier, may face a deficit of as much as $25 billion in the next two years, according to an Oct. 25 report in the Dallas Morning News.
Credit Default Swaps PIIGS vs CINN Group (California, Illinois, New York, New Jersey) - In response to European Sovereign Debt Crisis in Pictures; PIIGS Spreads to Germany at or Near Record Levels I received this chart from Chris Puplava at Financial Sense. click on chart for sharper image
Chris writes "In addition to foreign credit risk (Greece, PIIGS), I’m seeing my CINN STATE (CA, IL, NY, NJ) Credit Default Swap (CDS) composite moving higher again."
Municipalities issued record $429 billion in 2010 (Reuters) - U.S. municipal bond issuance reached a record-high $429 billion in 2010, while taxable Build America Bonds made up 27.4 percent of new deals, according to Thomson Reuters data on Wednesday. States, cities and other munis issuers sold $117.4 billion of BABs this year, eager to grab a 35 percent federal rebate on interest costs provided by the program, which was created in last year's federal stimulus act. With the BABs program expiring at the end of 2010 and no extension coming from Congress, BABs issuance reached nearly $15.6 billion in December, accounting for 38.7 percent of the $40.3 billion of bonds sold this month, according to Thomson Reuters. November 2010 remained the biggest month for BABs since the program began in April 2009, with $16 billion of bonds
Despite gargantuan deficit, Texas officials to launch ambitious building plans - Got a hole in your budget? Cut spending. Shake the couch for spare change. Raid your savings. Ask for a raise, if you think you can get away with it. And when all else fails, sell your assets, right? But not in Texas. In fact, the folks who handle the state’s real estate are focused not on the current budget mess, but on ambitious building plans they say will make long-term financial sense: getting state agencies and employees out of expensive building leases and into new buildings owned by taxpayers. They’re also looking at plans for private development on state land along a seven-block canyon of parking garages and smaller buildings near the Capitol.
Minnesota Tax Hikes Looming - The Minnesota legislature is facing a six-billion dollar deficit. It could mean higher taxes. The budget's of most small Minnesota cities rely heavily on Local Government Aid payments from the state. If the Legislature cuts those payments, local leaders say it could mean a cut in services and more taxes. For instance: A complete loss of L.G.A. payments to the City of Crookston would require a 300-percent increase in property taxes to make up the difference. Dave Genereux, Crookston Mayor: "We really don't have a lot of choices. We'd raise taxes a little… some. But, we'll have to cut services, raise fees on things to try to make up for it."
Pleas For Food Jump As Poverty Increases - Arizona’s sharply rising poverty rate has spurred a run on food banks statewide, including Rim Country where food banks continue to push a food drive through the holiday season. Arizona now suffers the second highest poverty rate in the nation and food banks this year reported a 27 percent jump in demand, according to a just-released survey by Arizona State University’s Morrison Institute for Public Policy. The long lines at many food banks mirror a 33 percent increase in applications for Supplemental Nutritional Assistance Program — formerly called food stamps. Nearly 1 million Arizonans now need extra food, including one out of four children, according to the survey.
Ariz. Cities Aim To Protect State-Shared Revenue- A top priority of cities and towns during the upcoming session of the Arizona Legislature is protecting the tax revenue distributed back to them from the state. The state faces a budget deficit of $2.25 billion. Cities fear state-shared revenue that comes from income, sales and vehicle-license taxes could be an inviting target for the Legislature in the session that begins Jan. 10. Incoming Senate President Russell Pearce said the Legislature should consider reducing the municipalities' portion of state revenue and let them raise their own revenue.
Whopping $69.5 billion debt hangs over city as short- and long-term spending gets cut - A report from Controller John Liu shows New York is carrying $69.5 billion in debt - the highest level ever. That breaks down to $8,281 for every man, woman and child in the city, 7% higher than a year ago. New York, like most governments, runs up those huge sums on long-term projects like parks and bridges and schools - as well as big tech projects like CityTime - then pays them back over time with interest. "The credit card bills are coming due," Liu said. Many of those projects are worthy, but Mayor Bloomberg has plowed the taxpayers' money into them like never before - even as he plans to lay off workers and close fire companies at night. "There always has to be a balance. We're trying to strike that," said Bloomberg spokesman Marc La Vorgna. "We do have to deal with the growing cost of debt service."
Mangano Lowers Taxes but Leaves Nassau County in a Fiscal Crisis… Facing a huge budget deficit when he took office in January, Nassau County Executive Edward P. Mangano did not impose a hiring freeze. He did not stop borrowing to subsidize some of the richest school districts in the country. He did not eliminate the Police Department’s beloved mounted unit. Instead, Mr. Mangano, a Republican who won one of the first upsets of the Tea Party era, did what he had promised: He cut taxes, adding $40 million to the county’s deficit, which has since reached nearly $350 million. Now, with its bonds suddenly downgraded and a state oversight agency preparing to seize its checkbook and credit cards, Nassau is on the verge of a full-fledged fiscal crisis. That things could get so dire in this wealthy county, where property taxes are the second highest in the nation, offers a lesson in what happens when anti-tax fervor meets the realities of disappearing revenues and a punch-drunk economy.
New York May Seize Nassau County Finances as Deficit Reaches $343 Million - A state authority may decide today whether to assert control over Nassau County’s finances, moving beyond an oversight role because elected officials haven’t closed next year’s $343 million budget gap. The Nassau County Interim Finance Authority, created in 2000 to sell bonds and oversee operations while the county worked out earlier deficits, meets today at 10 a.m. in Uniondale. Nassau, which abuts New York City’s eastern edge on Long Island, has the highest median household income of any county in the state at $92,221, according to census data. The county’s budget doesn’t meet “the standards of prudence necessary for us to project budget balance,” according to a Sept. 28 authority report. It said the county relied on $61 million of concessions by labor unions that may not happen and on bond sales to pay property-tax refunds, an operating expense.
In Los Angeles, When It Rains, It Pours – Red Ink - The recent deluge widened and deepened many previously neglected potholes, necessitating numerous lane and street closures throughout the City. Unfortunately for our cash starved City that has neglected our streets for years, it costs exponentially more to repair these larger car devouring potholes, blowing an even wider hole in the City’s ever increasing budget deficit. But the City’s finances and very solvency are not a top priority for Mayor Villaraigosa despite the looming budget deficit of $350 million, the $16.7 billion unfunded pension liability, and our Third World infrastructure which requires an investment of $10 billion just to reach “economic sustainability.”
Jersey City Sends Layoff Notices to 89 in the Police Department - Jersey City distributed layoff notices today to the 82 Jersey City Police Department (JCPD) officers and seven civilian employees scheduled to be laid off on February 15 of next year. The 45-day notice is required by the state’s Civil Service Commission, which last week approved the Healy administration’s layoff plan (see below for the full plan), which also includes demotions for two captains, four lieutenants and six sergeants. The layoffs come as the city struggles to bridge an $80 million budget shortfall. The administration has asked many departments to reduce their budgets; the JCPD layoffs are part of an attempt to close a $900,000 gap in that department’s budget.
Strapped Cities Hit Nonprofits With Fees - Facing budget gaps and an aversion to new debt and taxes, states and local governments are slapping residents with an array of new fees—and some are applying them to nonprofits. That marks a sharp departure from long-standing tax exemptions mandated by state law or adopted on the theory that churches, schools and charitable organizations work alongside governments to provide services to the community. The issue is on display in Houston, where some flood-prone roads are in such disrepair that signs warn drivers, "Turn around, don't drown." Houston's taxpayers in November narrowly voted to adopt a "drainage fee" to raise at least $125 million a year toward the cost of improving roads and storm-water systems. The city will charge fees to property owners, and it won't grant exceptions to churches, schools and charities.
Bill would allow Indiana cities to declare bankruptcy - A plan backed by Gov. Mitch Daniels would allow local governments in Indiana to ask for a state takeover and declare bankruptcy if necessary. Daniels says he hopes there won't be many local governments that seek bankruptcy, but says the state needs to have the law clarified and on standby in case it happens. Republican state Sen. Ed Charbonneau of Valparaiso is sponsoring a bill to outline the procedure. His bill would allow a local government in financial trouble to ask the Indiana Distressed Unit Appeals Board to appoint an “emergency manager” to run the government. The emergency manager would have the power to cut the budget, renegotiate labor contracts, and approve or veto contracts, expenses, loans and hiring. The bill states that if the emergency manager can't turn around the local government's finances, the unit would be allowed to seek federal bankruptcy protection.
Michigan Town Is Left Pleading for Bankruptcy — Leaders of this city met for more than seven hours on a Saturday not long ago, searching for something to cut from a budget that has already been cut, over and over. This time they slashed money for boarding up abandoned houses — aside from circumstances like vagrants or obvious rats, said William J. Cooper, the city manager. They shrank money for trimming trees and cutting grass on hundreds of lots that have been left to the city. And Mr. Cooper is hoping that predictions of a ferocious snow season prove false; once state road money runs out, the city has set nothing aside to plow streets. “We can make it until March 1 — maybe,” Mr. Cooper said of Hamtramck’s ability to pay its bills. Beyond that? The political leaders of this old working-class city almost surrounded by Detroit are pleading with the state to let them declare bankruptcy, a desperate move the state is not even willing to admit as an option under the current circumstances. “The state is concerned that if they say yes to one, if that door is opened, they’ll have 30 more cities right behind us,”
Conservative chorus calling for states’ right to declare bankruptcy - A chorus of conservative pundits are calling for bankruptcy laws to be changed so that all 50 US state governments might have the chance to restructure their debts, an ability currently limited to corporations, municipal entities, and private citizens. "Many states, including those with the country’s largest population centers, are now on a path to insolvency," Grover Norquist. anti-tax activist, wrote in a recent Politico editorial. He continued, "This is primarily due to fiscally promiscuous lawmakers, skyrocketing Medicaid costs and unsustainable gold-plated government employee pension plans that most Americans could never dream of." David Skeel in the Weekly Standard marked the state of California at the top of the hit list due to its possible $25.4 billion deficit next year. "Although bankruptcy would be an imperfect solution to out-of-control state deficits, it’s the best option we have, at least if we want to have any chance of avoiding massive federal bailouts of state governments," .
Why we needn't worry too much about municipal bankruptcy. - In every downturn, tax revenues decline and spending on social programs—food stamps, unemployment insurance, etc.—increases. Both of those elements push budgets, local or federal, into the red. For Washington, that is not much of a problem: The government just runs deficits. But every state save for Vermont and virtually every town and city, including Harrisburg, is required to keep funds going out equal to funds coming in, recession or no. So during downturns, local and state governments cut their budgets and find new sources of income to remain afloat. They use up their rainy-day funds, amassed during surplus years. They cut spending on nonessentials, like streetlamps. They hike taxes and fees. They fire employees, slash salaries, reduce pension contributions, trim school budgets, abandon building projects, cut back on firefighting and policing services. Sometimes they even issue bonds just to stay afloat. For the most part, municipal bonds make safe, low-risk, low-reward investments. They are not quite the equivalent of Treasury debt, which is considered basically risk-free. But historically, their rates of default come in around one-third of 1 percent, far lower than the rates for, say, corporate bonds.
Legislative fight expected on class-size limit — Among proposed solutions to the state's massive budget deficit is changing a Texas law that holds most elementary school classes to no more than 22 students. Legislative leaders and Comptroller Susan Combs say easing the requirement would save hundreds of millions of dollars and give school districts more flexibility in educating students. But teachers groups, backed by Democrats in the House and Senate, say any change will reverse academic gains in elementary schools and force the elimination of as many as 12,000 teaching jobs. The class-size requirement has been law since 1984. The change would mean an extra three students per class on average in those five grades. The comptroller's office says that the current average with the 22-pupil limit is 19.3 students per class. Combs said the change would save an estimated $558 million a year, mostly through elimination of thousands of teaching jobs.
Number Of Homeless Students In State Climbs To 21,000 - They sleep in cars. In parks. In shelters. On the sofas of generous relatives or friends. They are the more than 1.3 million homeless children nationwide. Of that total, more than 21,000 live in Washington state, according to numbers submitted to the federal government this past week. According to the Office of Superintendent of Public Instruction, the numbers show that during the 2009-10, the state reported 21,826 homeless students, up 5.0 percent from the previous year and up 56.5 percent from 2005-06. “There are a lot of factors that could explain the increase,” said Melinda Dyer, program supervisor for the education of homeless children and youth at OSPI. “The biggest is probably more awareness. Five years ago, many districts didn’t know that this was a requirement. We’re seeing better reporting now than we did then.
State colleges and universities bracing for budget storm - Officials at Connecticut's public colleges and universities are bracing for another tough budget year as the legislature and new governor grapple with next year's $3.67 billion deficit. "Public universities are definitely on the firing line," "The next several years are going to be the toughest budget years higher education has faced in the last 50 or 60 years." While combined spending by the state's three higher education systems-the University of Connecticut, Connecticut State University and the Connecticut Community Colleges-grew by nearly 230 percent over two decades, to $1.94 billion in fiscal 2009, the General Fund contribution increased by less than 83 percent, to $556 million, Meanwhile, in-state tuition and fees increased by 239 percent at the community colleges, 284 percent at UConn and nearly 353 percent at CSU
Highest-paid UC execs demand millions in benefits - Three dozen of the University of California's highest-paid executives are threatening to sue unless UC agrees to spend tens of millions of dollars to dramatically increase retirement benefits for employees earning more than $245,000. "We believe it is the University's legal, moral and ethical obligation" to increase the benefits, the executives wrote the Board of Regents in a Dec. 9 letter and position paper obtained by The Chronicle. Their demand comes as UC is trying to eliminate a vast, $21.6 billion unfunded pension obligation by reducing benefits for future employees, raising the retirement age, requiring employees to pay more into UC's pension fund and boosting tuition.
16 Shocking Facts About Student Debt And The Great College Education Scam#### As you read this, there are over 18 million students enrolled at the nearly 5,000 colleges and universities currently in operation across the United States. Many of these institutions of higher learning are now charging $20,000, $30,000 or even $40,000 a year for tuition and fees. That does not even count living expenses. Today it is 400% more expensive to go to college in the United States than it was just 30 years ago. Click here to see the facts > Most of these 18 million students have been told over and over that a "higher education" is the key to getting a good job and living the American Dream. They have been told not to worry about how much it costs and that there is plenty of financial aid (mostly made up of loans) available. Now our economy is facing the biggest student loan debt bubble in the history of the world, and when our new college graduates enter the "real world" they are finding out that the good jobs they were promised are very few and far between. As millions of Americans wake up and start realizing that the tens of thousands of dollars that they have poured into their college educations was mostly a waste, will the great college education scam finally be exposed?
For-Profit College Share Slump Converges With Surging Student Life-Debtors - Students seeking to move up in life by getting a degree from a for-profit college are being trapped in a growing underclass of education debtors. Under U.S. law, their loan obligations can rarely be discharged in bankruptcy, making them more onerous than credit-card debt or subprime mortgages taken out before the housing bubble burst. Along with blocking students from further education and access to housing, defaults can subject them to government confiscation of tax refunds and Social Security payments, as well as paychecks. Students at for-profit colleges, which rely on federal financial-aid programs for as much as 90 percent of revenue, carry the biggest loans in U.S. higher education. Bachelor’s degree recipients at for-profits have median debt of $31,190 compared with $17,040 at private, nonprofit institutions and $7,960 at public colleges, according to Education Trust, a Washington-based nonprofit research and student-advocacy organization.
Many Employees Don’t Understand Retirement Packages - Employees often misunderstand their retirement packages and plan their golden years using inaccurate assumptions, a new study shows. Employees near retirement age incorrectly gauged when their retirement plans would kick in — and used those misconceptions to choose a retirement age. Many didn’t know how much post-retirement income they would earn either, “Survey responses indicate that the retirement-eligible employees in these companies had a rather low level of knowledge, a lack of confidence in their ability to make optimal retirement choices, and a strong desire for their employers to provide more formal pre-retirement planning programs,” according to the study conducted from 2008 to 2009. While nearly all of the workers surveyed were covered by defined benefit pension plans, 56% said they didn’t know what their pension would be as a percentage of their salary once they retired. In surveys that asked employees about details of company and national retirement programs, workers got 50% of the answers correct on average. Just 36% of respondents knew the earliest age they were eligible to receive their company pensions. Another 37% overestimated the age, while 9% underestimated it.
Pensions Issue Overshadows USPS Outlook For 2011 - Next year looks set to be a more favourable year for the US Postal Service, according to federal regulators – with the exception of its retiree health benefits problem. In its end-of-year report to the US Congress, issued yesterday, the Postal Regulatory Commission suggested that cost-cutting by the USPS over the past two years was having a positive impact. The regulatory body added that the glaring exception to the outlook for the USPS was the issue of the organization’s overpayments to its healthcare fund for retired postal workers. Ruth Goldway, the Commission’s chairman, said that the improving economy was now strengthening the mail market, but that the Postal Service faced “potential financial insolvency” in 2011 because of its rising debt and the legally-imposed cap on its borrowing. In particular, she highlighted the pension obligations issue as a key problem area, noting that her Commission had found that pay requirements for the USPS, compared to other federal organizations, may have been overstated by as much as $55 billion.
Pensions eat up growing portion of city of Decatur's property tax revenue - As the Decatur City Council prepares to convene Monday to discuss setting its portion of the local property tax levy, the largest burden on those revenues - funding the pensions of police, firefighters and city employees - remains a persistent and growing challenge. In 2001, about 30 percent of the city's property tax levy went into paying down the pensions of its retired police and firefighters. In 2011, 70 percent of it will go toward pensions, even as recent years have seen cuts to other services that draw their funds from the same source, including the Decatur Public Library. The state legislature sets all of the rules for pension contributions, and over the years it has mandated that municipalities make ever increasing payments. The result, McCrady said, has been a higher and higher cost for the city.
New York's Exploding Pension Costs - Public pension costs in New York are mushrooming—just when taxpayers can least afford it. Over the next five years, tax-funded annual contributions to the New York State Teachers’ Retirement System (NYSTRS) will more than quadruple, while contributions to the New York State and Local Retirement System (NYSLRS) will more than double, according to estimates presented in this report. New York City’s budgeted pension costs, which already have increased tenfold in the past decade, will rise by at least 20 percent more in the next three years, according to the city’s financial plan projections. NYSTRS and NYSLRS are “fully funded” by government actuarial standards, but we estimate they have combined funding shortfalls of $120 billion when their liabilities are measured using private-sector accounting rules. Based on a similar alternative standard, New York City’s pension funds had unfunded liabilities of $76 billion as of mid-2008—before their net asset values plunged in the wake of the financial crisis.
Houston mayor wants benefits cut, takes fight to Legislature - Instability in its three pension systems is the greatest threat to Houston's financial solvency, city officials and financial analysts say. Within three years, according to an actuarial study commissioned by the city, the pension for firefighters will require the city to contribute 45 percent of its payroll costs for that retirement plan, a burden Mayor Annise Parker says is unsustainable. The other two plans are in even worse shape. The police and municipal employee pensions are underfunded by $2.1 billion, roughly the equivalent of what the city spends annually for public safety and general operations. "The bottom line is the whole system is completely unsustainable with current benefit levels and the city's financial position,"
Chicago's Daley Says Pension-Overhaul Law Will Bring Record Tax Increase - Chicago Mayor Richard M. Daley accused his fellow Democrat, Illinois Governor Pat Quinn, of imposing “the largest property-tax increase in the history” of the city by signing a pension-overhaul bill into law. Quinn’s action places “a tremendous burden on Chicago taxpayers” to bolster the pension funds of public-safety employees, Daley said yesterday in a statement. “The governor took away the opportunity to fix the legislation before he signed it,” Daley said. “The direct result of the governor’s actions will be a massive property-tax hike for Chicago residents of at least $550 million, or about a 60 percent increase in our current property-tax levy.”
Pittsburgh City Council, Mayor Clash on Pension ‘Armageddon’ - Pittsburgh’s City Council ordered Mayor Luke Ravenstahl to attend a meeting today to hash out a plan to avoid a state takeover of the underfunded municipal pension, which may more than double its cost to taxpayers. A vote to compel Ravenstahl to come before the council’s finance committee followed about six hours of debate on shoring up the pension system using parking fees. The retirement plan has about $325 million in assets to cover $1 billion in promised benefits, according to a consultant’s report. The city has until Dec. 31 to show the state how it will bolster the plan. “It’s merely an accounting gimmick to get past Dec. 31,” Pittsburgh, whose pension problem was called a “financial Armageddon” by two city councilors yesterday, joins cities such as San Diego and states such as Illinois and New Jersey that may cut services or raise taxes to meet ballooning retirement costs. Those states and 18 others skipped payments or underfunded their retirement systems from 2007 to 2009,
Pension impasse continues; council summons mayor - Pittsburgh City Council tonight passed a motion compelling Mayor Luke Ravenstahl to appear at a meeting tomorrow to discuss the city's pension crisis. The motion followed hours of heated discussion over a bailout plan that council proposed and Mr. Ravenstahl summarily rejected today. Five council members and City Controller Michael Lamb gathered behind a podium this morning to say they'd fashioned the best possible resolution to the pension issue. They said they needed Mr. Ravenstahl's support, but he called the plan unworkable and declined to support it. The plan revolved around the idea of shoring up the pension fund not with cash but with a different asset -- 30 years of dedicated revenue from parking-rate increases. Council members introduced enabling legislation today but postponed a vote until the meeting with Mr. Ravenstahl. They decided to compel Mr. Ravenstahl's attendance because they said they were frustrated with dealing with his subordinates.
Baby boomers near 65 with retirements in jeopardy - Through a combination of procrastination and bad timing, many baby boomers are facing a personal finance disaster just as they're hoping to retire. Starting in January, more than 10,000 baby boomers a day will turn 65, a pattern that will continue for the next 19 years. The boomers, who in their youth revolutionized everything from music to race relations, are set to redefine retirement. But a generation that made its mark in the tumultuous 1960s now faces a crisis as it hits its own mid-60s."The situation is extremely serious because baby boomers have not saved very effectively for retirement and are still retiring too early,"
Robert Samuelson's Social Security Demagoguery - Robert Samuelson is once again calling for cuts to Social Security and Medicare, ostensibly in the name of generational fairness. Samuelson makes the now common argument that a hugely disproportionate share of government spending goes to these programs that primarily serve the elderly. Of course, using Samuelson logic we should also complain that a hugely disproportionate share of government expenditures go the very wealthy. The reason that the wealthy get a disproportionate share of government expenditures is that they bought government bonds which pay interest. The reason that the elderly get a disproportionate share of government benefits is that they paid Social Security taxes and Medicare taxes that were intended to support these programs. What is remarkable about Samuelson's piece is that there is absolutely zero effort to consider any real issues of generational equity in a piece that is ostensibly devoted to the topic. For example, there is no discussion of the fact that the current generation of near retirees experienced an unprecedented period of wage stagnation over their working lifetime. The median hourly wage in 2010 is less than 10 percent higher than it was in 1973. By contrast, the Social Security trustees project that average hourly wages will rise by more than 40 percent over the next three decades.
The Myth-ing Logic of Phony IOUs in the Soc Sec Trust Funds - There has been a recent mini-surge of op-eds claiming that the 'assets' of the Trust Funds, all $2.6 trillion, are simply mythical. The most recent Scrooge to argue this line may have been Thomas McClanahan of the KC Star in this piece from Christmas: More mythbusting on Social Security ‘money’" in which he informs us how mistaken we are: Many people believe the trust fund contains securities that have real economic value. To turn trust fund bonds into real money, the government must do what it would have to do if the trust fund did not exist: borrow, cut spending somewhere else, or raise taxes. The trust fund bonds may be assets from the point of view of Social Security, but they’re a liability for the government as a whole, and for us as taxpayers. Well the argument is at base nonsense on historical, political, legal and economic grounds, but it also suffers a logical hole big enough to run a Prison Bus through. Because if it is true in 2010 it was equally true in 1993 when the Trust Funds first got back to actuarial balance (per McClanahan another myth presumedly) and more to the point in 1983 when Reagan agreed to the tax increase via the Greenspan Commission. Which would logically make Dutch and the Maestro Greenspan pre-meditated thieves and liars.
Ron Paul Advocates Demolition of Social Security - Let’s get this straight; Ron Paul is nothing more than a kinder/gentler face for the Chicago School neoliberalization program supported by the neocons on one side and the Clitonista/Obama New Dems on the other. He is yet another flavor of the oligarchical corporatist tools, who fully expected his son to be handed a seat in the senate, by birthright, and therefore a government paycheck for the rest of his life. Now Ron is helping to bolster the neoliberal calls for the pending doom of Social Security while he himself knows full well just how nice his government pension entitlement check is going to be for him and his corporatist kid.
The Consequence of a Shattered Safety Net: Return to the Poorhouse? - Ryan Grim and Arthur Delaney do the nation another excellent service today by examining what the world would be like without Social Security. It isn’t too hard to imagine – you just have to dive back into the pre-1930s history books. And you will see the world of the poorhouse, the last refuge for the elderly and the infirm, the farms run by private charities which provided a dour and often cruel existence for those on the edges of society. Grim and Delaney begin with a fitting example of someone bound for the poorhouse back in 1896
Ambulance Fees Increasing Across USA - Ambulance providers nationwide are coping with rising costs, decreased support from local government, low Medicare reimbursement rates and a jump in the number of uninsured Americans, says Stephen Williamson, president of the American Ambulance Association. A 2007 report by the Government Accountability Office showed providers were paid a Medicare reimbursement rate 6% below cost, and the gap widened to 17% in remote areas. Williamson says the disparity has grown since then. In the past, providers could rely on subsidies from local government, but those resources have dwindled during the economic downturn, Williamson says.
Medicare will soon bulge with baby boomers - Richard Carlson turns 65 in January but already carries a symbol of that milestone - a Medicare card. Carlson is among the 77 million baby boomers born between 1946 and 1964 who will become Medicare-eligible at the rate of one every eight seconds beginning in January. The implications of the population bulge are enormous - for government spending as well as for the care seniors will get. Medicare is already sagging under the weight of cost increases above inflation that are driving it toward insolvency. The Centers for Medicare and Medicaid Services expects 2.8 million 65-year-olds will enter the system next year. Their average costs will exceed $7,700 per person
'Boomers' set to swamp US seniors' health program - The struggling US Medicare program is about to be swamped as the post-World War II generation becomes eligible for the government-administered health insurance for seniors. Thousands of the oldest of the so-called baby boomers -- people born between 1946 and 1964 -- will Saturday turn 65, the age at which they become eligible for the Medicare program for older Americans that has been run by the US government since 1965.A baby boomer will turn 65 every eight seconds in 2011, meaning Medicare will gain some 7,000 potential new beneficiaries a day next year, according to the AARP, a non-profit organization that aims to improve the quality of life for older Americans. That would mean more than 2.5 million potential new Medicare recipients next year alone.
Survey: Most Baby Boomers Not Counting On Medicare -- Many baby boomers are worried Medicare will not last through their retirement, according to a new survey by the Associated Press. The survey found only 20 percent of baby boomers think their Medicare is secure. The program currently provides medical benefits to 46 million Americans at an annual cost of about $500 billion. The first baby boomers become eligible for the program in January.
U.S. Health Premiums Outstrip Income Gains: Chart of the Day - U.S. health-insurance costs are rising more quickly than the ability of U.S. families to pay and the gap is widening, according to the Commonwealth Fund. The CHART OF THE DAY shows that private-insurance premiums for families rose three times faster than median household income over six years, the New York-based non-profit fund said in a report. Deductibles, the amount that policy holders have to pay before insurance coverage kicks in, rose almost five times faster, the fund said. “Families are being priced out of the market,” “The consequences are less adequate insurance coverage, costlier insurance coverage, higher rates of no coverage and growing stress on the family.” In 15 states, health-insurance premiums are the equivalent of at least 20 percent of median household income for people under 65, according to the report.
Number Of Uninsured Americans Soars To Over 50 Million - As the Great Recession has sown unemployment and downgraded work even for those people who have held on to their jobs, the number of Americans lacking healthcare has swelled beyond 50 million, according to a sobering new report from the Kaiser Foundation. Among the report's most troubling findings: The number of Americans without any health care coverage grew by more than four million in 2009. That left almost one-fifth of non-elderly people uninsured. Among those between 19 and 29 years old, nearly one-third lacked coverage. The study underscores the degree to which the recession has accelerated the loss of basic elements once viewed as inextricable pieces of a middle class life. The number of Americans lacking medical coverage now exceeds the population of Spain.
Three-Quarters Of U.S. Uninsured Employed - Seventy-five percent of the some 50 million of the U.S. population with no health insurance come from working families, researchers say. The report by the Kaiser Family Foundation says 57 percent of people in the U.S. under age 65 receive health insurance coverage as an employer benefit. Medicare covers virtually all those who are age 65 years and older, but the non-elderly who do not have access to or cannot afford private insurance now go without health coverage unless they qualify for insurance through the Medicaid program, Children's Health Insurance Program or a state-subsidized program. The report says the recession has resulted in many losing their health insurance because they have become unemployed, but it has become increasingly difficult for many of the employed to afford coverage.
More than 25% of Kids and Teens in the U.S. Take Prescriptions on a Regular Basis - Gage Martindale, who is 8 years old, has been taking a blood-pressure drug since he was a toddler. "I want to be healthy, and I don't want things in my heart to go wrong," he says. And, of course, his mom is always there to check Gage's blood pressure regularly with a home monitor, and to make sure the second-grader doesn't skip a dose of his once-a-day enalapril. These days, the medicine cabinet is truly a family affair. More than a quarter of U.S. kids and teens are taking a medication on a chronic basis, according to Medco Health Solutions Inc., the biggest U.S. pharmacy-benefit manager with around 65 million members. Nearly 7% are on two or more such drugs, based on the company's database figures for 2009.
Does Unemployment Lead to Less Healthy Diets? - A new National Bureau of Economic Research paper suggests that increases in unemployment lead to a decrease in fruit and vegetable consumption, with potentially long-lived effects on workers’ health. “Among those who are predicted to be at the highest risk of unemployment, a one percentage point increase in the resident’s state unemployment rate is associated with a 2% to 4% reduction in the frequency of fruits and vegetable consumption, and an 8% reduction in the consumption of salad,” The research relies on the Behavioral Risk Factor Surveillance System, a telephone survey in which 350,000 Americans are interviewed each year, and compares communities with different unemployment rates between 1990 and 2007, before the last recession began. “Since December of 2007,” they note, “the national unemployment rate doubled from 5% to 10% over the following two years.” The economists say this implies that the frequency of fruit and vegetable consumption would decline by between 10% and 20%, all else equal, among “the most vulnerable populations such as low-educated individuals.”
Is the Economy Making You Fat? - Can lean times lead to wider waistlines? It appears so. If you are finding it harder to keep off the weight recently, it's not just you or holiday parties that are to blame. The recession and its aftermath are making you fatter. A new research paper published by the National Bureau of Economic Research finds that people tend to eat fewer fruits and vegetables when they either lose their jobs, or are at a higher risk of losing their jobs. And for the past few years, that's been all of us. Worse, not only do we eat fewer veggies, but our consumption of Cheetos and McDonald's tends to go up as well. Here's why:
Fixing the economy the scientific way - Here are two facts that might seem unrelated: 1) Most Americans cannot name a living scientist. 2) Over the last two years, by far the most pressing problems in the country have been the economy and the cost of healthcare (a chief concern of President Obama's deficit commission). What if we told you solving the first will help us fix the second? Without ramping up our investments in science and research — a matter barely on the public's radar in a country where 65% of the citizens can't name a living scientist and another 18% try but get it wrong — we'll be hobbled in trying to fix our long-term economic problems. That's because science creates jobs, and it can also reduce healthcare costs related to the aging of the population.
Comprehensive Science Legislation to Become Law - The lame-duck House of Representatives accepted a stripped-down Senate version of the America COMPETES Act, a bill to strengthen research, education, and innovation at several federal agencies. But looming fights over the discretionary budget may make the legislative success a Pyrrhic victory. The sharply partisan nature of the debate on the House floor this afternoon—only 16 of 146 Republicans supported its passage, along with all 212 Democrats who voted—signaled that the new Republican House leadership won't take kindly to bills that promise large increases in federal spending, no matter how worthy the cause. That attitude bodes ill for the likely impact of COMPETES, which puts Congress on record in support of steady increases in the budgets of the National Science Foundation (NSF), the basic science programs at the Department of Energy (DOE), and the National Institute of Standards and Technology.
Soybeans, Corn Advance to 28-Month Highs on Argentina's Weather Concerns - Soybeans and corn rose to 28-month highs as hot, dry weather threaten crops in Argentina, the world’s biggest shipper of animal feed and cooking oil made from the oilseed. Hot, dry weather in the next 10 days will increase stress on developing soybean and corn crops in southern Argentina, especially plants already reproducing, World Weather Inc. said today in a report. A lack of rain in southern Brazil may threaten some crops, while too much precipitation may increase disease in northern fields, the private forecaster said. “The threat of lower production in Argentina has increased buying in soybeans and tempered selling in the corn market,” . “The concern is that dryness may expand into Brazil.”
Corn, Soybeans Climb, Capping Best Second-Half Performance in Five Decades - Corn and soybeans rose, capping their best second-half performances in at least five decades, as stockpiles tumbled and adverse weather threatened crops in South America. U.S. corn inventories before next year’s harvest will decline to the lowest since 1996 and global consumption will outpace supplies for a second year in the season ending Aug. 31, U.S. Department of Agriculture data show. Warm, dry weather has threatened crops in Brazil and Argentina, the biggest shippers after the U.S. “Damage is occurring daily and it is irreversible,” Prices surged 68 percent since June 30, the biggest gain in the second half since at least 1959, when Bloomberg data begins.
Cotton Caps Biggest Annual Rally Since 1973; Orange Juice Drops - Cotton rose, capping the biggest annual gain since 1973, as inventories plunged, adverse weather damaged global crops and demand surged in China, the world’s biggest user. Orange juice declined. Stockpiles monitored by ICE Futures U.S. tumbled 72 percent in 2010, the biggest annual decline since at least 2003, when the data begins. Flooding in Australia and Pakistan and hail in Texas, the biggest U.S. producing state, damaged crops. China’s imports will jump 56 percent this year, according to U.S. Department of Agriculture data. “Mother Nature has not been very kind,”“Prices will remain strong as the supply situation is not going to improve in the immediate future.”
Sugar Gains for Third Straight Year; Coffee Jumps 77% in 2010 - Sugar futures jumped 5.7 percent today, capping the third straight annual gain, on renewed speculation that global supplies will fall short of consumption. Coffee had the biggest yearly rally since 1994. Worldwide demand will reach 165.3 million metric tons in the year ending Sept. 30, topping supplies by almost 3 million tons, ABN Amro Bank NV and VM Group have said. In the second half of 2010, sugar prices doubled, leading gains in the period among 19 raw materials in the Thomson Reuters/Jefferies CRB Index. “There is going to be a production response that will help temper the rally, assuming there are no production disruptions,” “If there are any disruptions, there would be a significant reaction. There just isn’t enough sugar around.” Raw sugar for March delivery climbed 1.74 cents to settle at 32.12 cents a pound at 2 p.m. on ICE Futures U.S. in New York. The percentage gain was the biggest since Nov. 18. Yesterday, the price plunged 10 percent, the largest drop since Nov. 12.
US Commodities: Raw Materials Post Record Second-Half Gain - Commodities posted a record second- half gain as adverse weather slashed global crops, debt woes in Europe boosted demand for precious metals as investment havens and China consumed more of everything from cotton to copper. The Thomson Reuters/Jefferies CRB Index of 19 raw materials jumped 29 percent in the past six months, the most since the gauge debuted in late 1956. Today, gold and copper closed at record settlement prices. This month, cotton extended a rally to an all-time high, silver rose to a 30-year peak and coffee jumped to the highest since 1997. In 2010, commodity prices beat gains in stocks, bonds and the dollar as China led the recovery from the first global recession since World War II. Crops were ruined by Russia’s worst drought in at least a half century, flooding in Canada and parched fields in Kazakhstan, Europe and South America. Corn and soybeans recorded the biggest second-half increases in five decades.
Jeff Rubin: Will car sales rebound to salvage U.S. ethanol targets? - Despite a last-ditch attempt by Senator Dianne Feinstein and others to end the subsidies, the Senate decided to fork out more pork barrel funds to corn farmers and, by extension, to firms like Monsanto and Archer Daniels Midland for another year. But don’t count on U.S. ethanol production ever coming even close to reaching that lofty target of 36 billion gallons per year. If the return of fiscal sanity to Washington doesn’t undercut its life-sustaining subsidies, an aborted recovery in motor vehicle sales will soon put the kibosh on future production growth.
Paul Krugman on "Peak Oil" and Smooth Adjustment to Anticipated Rising Commodity Prices - In this column, Paul Krugman says some wise stuff. As an applied micro economist, he starts with some facts: "Oil is back above $90 a barrel. Copper and cotton have hit record highs. Wheat and corn prices are way up. Over all, world commodity prices have risen by a quarter in the past six months." He offers some speculations about the causes of these price dynamics. But, the interesting part of the article is his predictions about the consequences of these events: He writes: "So what are the implications of the recent rise in commodity prices? It is, as I said, a sign that we’re living in a finite world, one in which resource constraints are becoming increasingly binding. This won’t bring an end to economic growth, let alone a descent into Mad Max-style collapse. It will require that we gradually change the way we live, adapting our economy and our lifestyles to the reality of more expensive resources."
Small Beetles Massacre The Rockies' Whitebark Pines The Whitebark pine trees in the high-elevation areas of America's Northern Rockies have stood for centuries. But these formerly lush evergreen forests are disappearing at an alarmingly fast rate; what remains are eerie stands of red and gray snags. Warmer climates have sparked an outbreak of a voracious mountain pine beetle that is having devastating consequences for whitebarks and the wildlife that depend on them. As entomologist Jesse Logan looks up at snow-covered slopes speckled with skeletons of dead trees, he says the massacre is happening faster than even he expected. More than a decade ago, Logan predicted that with global warming, these tiny, ravenous beetles would start to thrive here. At the time, other insect experts were skeptical. But in recent years, winter cold snaps haven't been nearly as brutal as usual.
Water Pricing and Coping with Drought in the Southwest - Given the growth of population and jobs in the Southwest and the basic need for water, if the supply of water is threatened by drought --- how can this region continue to flourish? An economist would say that allowing water prices to reflect scarcity would take care of this problem. Consider Peter Gleick's quote; "Part of the challenge we face in the Southwest is old-style thinking," said Peter Gleick, president of the Pacific Institute and an author of another analysis. "We brought to the Southwest very European ideas about water, developed in water-rich areas. ... That worked OK for a while, although not really. But now it's clear that green lawns and unlimited swimming pools and inefficient irrigated agriculture can't be sustained." Gleick says the solution lies in a combination of encouraging the development of untraditional water sources, such as reclaimed wastewater, policies to encourage more efficient water use, efforts to coordinate water policy at local, state and federal levels, and planning to help water utilities adapt to climate change.
Most Buildings Don’t Work Properly, Who Cares? - At 10,600 feet in the Colorado Rockies, the weather can be extreme. On that night, things got brutal. It was minus 8 degrees Fahrenheit outside, and the wind was howling. Unfortunately, heating equipment failed, so it wasn’t much warmer inside the restaurant (27 degrees), and as a result, two pipes froze solid and burst. Sam’s is not unique. Almost no building mechanical systems operate as they’re supposed to. But nobody knows. Nobody checks. And life goes on. The result is that the planet has a huge fleet of buildings that are badly built and running crappily. Fans run backwards. Vents remain open when they should be closed. Heaters run all summer. And this remains true for the life of the building—some 50-100 years. Most people accept this situation like they would a balky TV thirty years ago—smack it a few times and the channel comes in. That’s how these things work. But the inconvenience masks a broader issue. Buildings use tons of energy: 948 quadrillion BTUs in the U.S annually, to be precise, or the equivalent energy of 16 million Hiroshima sized bombs. This comes at staggering dollar cost and climate impact: in the U.S. at least, these structures are responsible for about a third of total greenhouse gas emissions every year. Can’t we do better?
Australia floodwaters cover area bigger than Texas — Military aircraft dropped supplies to towns cut off by floods in northeastern Australia as the prime minister promised new assistance Friday to the 200,000 people affected by waters covering an area larger than France and Germany combined. Residents were stocking up on food or evacuating their homes as rising rivers inundated or isolated 22 towns in the state of Queensland. Prime Minister Julia Gillard toured an evacuation center in the flood-stricken town of Bundaberg on Friday and announced that families whose homes had been flooded or damaged would be eligible for disaster relief payments of $1,000 per adult and $400 per child.
Counting The Cost: The Bill Could Run Into Billions, Warns Bligh - QUEENSLAND could face a flood damage bill "like never before" -- with Premier Anna Bligh predicting it will run into the billions. So far the torrent has crippled parts of the state's resources sector, which pumps millions into government coffers daily, wiped out huge swaths of crops, stranded tonnes of produce in transit to southern markets, swamped at least 700 homes, damaged state assets worth in excess of $1.5 billion and left a $500 million bill for councils from damage to local roads, bridges and water supplies.Queenslanders are going to need every bit of help they can get and the support for the disaster appeal has been overwhelming." A spokeswoman for the Premier said the repair costs for state assets alone would be in excess of $1.5bn. Meanwhile, the Local Government Association of Queensland has predicted the damage bill will go well above the $1.5bn estimated. "That bill will be on top of the estimated $600m to $1bn worth of damage to state-controlled public assets and in addition to the repair bill following the devastation wrought by floods in north Queensland earlier this month,"
Fire and Ice - It may seem a strange time to say so, but 2010 remains on pace to be the hottest or second-hottest year ever recorded, according to NASA: By email, Reto Ruedy of NASA elaborates: … the 2010 mean will most likely be 0.65 C [above the 1951-80 mean], statistically indistinguishable from 2005 (0.63 C), and barely distinguishable from 2007 (0.58 C), 2009 (0.57 C), 1998 and 2002 (0.56 C), 2003 and 2006 (0.55 C), but definitely warmer than 2004 and 2001 (0.47 C) and 2008 (0.43 C). All other years are below 0.4 C and all years before 1981 are below 0.2 C above the 1951-1980 mean. Here’s hoping Congress takes some action in 2011.
Bundle Up, It’s Global Warming - THE earth continues to get warmer, yet it’s feeling a lot colder outside. Over the past few weeks, subzero temperatures in Poland claimed 66 lives; snow arrived in Seattle well before the winter solstice, and fell heavily enough in Minneapolis to make the roof of the Metrodome collapse; and last week blizzards closed Europe’s busiest airports in London and Frankfurt for days, stranding holiday travelers. The snow and record cold have invaded the Eastern United States, with more bad weather predicted. All of this cold was met with perfect comic timing by the release of a World Meteorological Organization report showing that 2010 will probably be among the three warmest years on record, and 2001 through 2010 the warmest decade on record. How can we reconcile this? The not-so-obvious short answer is that the overall warming of the atmosphere is actually creating cold-weather extremes. Last winter, too, was exceptionally snowy and cold across the Eastern United States and Eurasia, as were seven of the previous nine winters.
Cold winter in a world of warming? - Last June, during the International Polar Year conference, James Overland suggested that there are more cold and snowy winters to come. He argued that the exceptionally cold snowy 2009-2010 winter in Europe had a connection with the loss of sea-ice in the Arctic. The cold winters were associated with a persistent ‘blocking event’, bringing in cold air over Europe from the north and the east. Last year’s cold winter over northern Europe was also associated with an extreme situation associated with the North Atlantic Oscillation (NAO), with the second lowest value for the NAO-index on record (see figure below). I admit, last winter felt quite cold, but still it wasn’t so cold when put into longer historical perspective. This is because I remember the most recent winters more vividly than those of my childhood – which would be considered to be really frosty by today’s standards. But such recollections can be very subjective, and more objective measurements show that the winters in Europe have in general become warmer in the long run, as explained in the German blog called ‘Wissenlogs’. If there were no trend, then such a low NAO-index as last year’s would normally be associated with even colder conditions over Europe than those observed during the previous winter.
Expect more extreme winters thanks to global warming, say scientists - Some climate scientists believe that the dramatic retreat of the Arctic sea ice over the past 30 years has begun to change the wind patterns over much of the northern hemisphere, causing cold, Arctic air to be funnelled over Britain during winter, replacing the mild westerly airstream that normally dominates the UK's weather. The study was carried out in 2009, before last year's harsh winter started to bite, and is all the more prescient because of its prediction that cold, snowy winters will be about three times more frequent in the coming years compared to previous decades. The researchers used computer models to assess the impact of the disappearing Arctic sea ice, particularly in the area of the Barents and Kara seas north of Scandinavia and Russia, which have experienced unprecedented losses of sea ice during summer. Their models found that, as the ice cap over the ocean disappeared, this allowed the heat of the relatively warm seawater to escape into the much colder atmosphere above, creating an area of high pressure surrounded by clockwise-moving winds that sweep down from the polar region over Europe and the British Isles. Vladimir Petoukhov, who carried out the study at the Potsdam Institute for Climate Impact Research in Germany, said the computer simulations showed that the disappearing sea ice is likely to have widespread and unpredictable impacts on the climate of the northern hemisphere.
NOAA reports 2010 hottest year on record so far, while Arctic sea ice extent hits a stunning December low - Head of NOAA’s National Climatic Data Center: Climate change to intensify winter weather - Following fast on the heels of NASA reporting the hottest January to November on record — despite the deepest solar minimum in a century — NOAA’s National Climatic Data Center has released its State of the Climate: Global Analysis for November. It finds this was the second warmest November on record (after 2004) and
- For the 2010 year-to-date (January–November), the combined global land and ocean surface temperature was 0.64°C (1.15°F) above the 20th century average—the warmest such period since records began in 1880.
- The November 2010 Northern Hemisphere land and ocean surface temperature was the warmest November on record….
- The November 2010 global land surface temperature was the warmest on record, at 1.52°C (2.74°F) above the 20th century average…
A stunning year in climate science reveals that human civilization is on the precipice - The last year or so has seen more scientific papers and presentations that raise the genuine prospect of catastrophe (if we stay on our current emissions path) that I can recall seeing in any other year. Perhaps the media would have ignored that science anyway, but Climategate appears to be a key reason “less than 10 percent of the news articles written about last year’s climate summit in Copenhagen dealt primarily with the science of climate change, a study showed on Monday.” But for those interested in the real climate science story of the past year, let’s review a couple dozen studies of the most important findings. Any one of these would be cause for action — and combined they vindicate the final sentence of Elizabeth Kolbert’s Field Notes from a Catastrophe: “It may seem impossible to imagine that a technologically advanced society could choose, in essence, to destroy itself, but that is what we are now in the process of doing.”
Forecasters keep eye on looming 'Solar Max' The coming year will be an important one for space weather as the Sun pulls out of a trough of low activity and heads into a long-awaited and possibly destructive period of turbulence. . "The latest prediction looks at around midway 2013 as being the maximum phase of the solar cycle," said Joe Kunches of the Space Weather Prediction Center at the US National Oceanic and Atmospheric Administration (NOAA). But there is a prolonged period of high activity, "more like a season, lasting about two and a half years," either side of the peak, he cautioned. At its angriest, the Sun can vomit forth tides of electromagnetic radiation and charged matter known as coronal mass ejections, or CMEs. They can unleash static discharges and geomagnetic storms that can disrupt or even knock out the electronics on which our urbanised, Internet-obsessed, data-saturated society depends.
Can Social Science Combat Climate Change? - By studying past instances of social transformation, scientists at Lawrence Berkeley National Laboratory (LBNL) hope to predict future change in response to global warming as part of California’s Carbon Challenge—a study commissioned by the California Energy Commission to help the state cut greenhouse gas emissions by 80 percent below 1990 levels. LBNL energy technology scientist Jeffery Greenblatt and his colleagues are analyzing technology options as well as data records from 10 historical behavior changes—smoking cessation, seat belt use, vegetarianism, drunk driving, recycling and yoga, among others.For starters, Greenblatt is examining the full mix of technical advances in both the supply and demand of energy that could possibly help meet the target, including more efficient electric motors, better insulation, intelligent controls for energy, as well as fluorescent and LED lighting. But even all of these technological advances may not get California to its mid-century mandate alone.
Rebound Redux - The Jevons Paradox is a special case of Jean-Baptiste Say’s Law of Markets, a cherished version of which has it that “Every labor-saving device creates in general as many, oftentimes more, jobs than it destroys…” You can’t “reject” Jevons without also repudiating Say. They’re joined at the hip. So will that reduced carbon footprint also be “jobless”? There is a way out of the dilemma, but it involves investigating the relationship between the Jevons Paradox and Say’s Law, not cherry-picking the parts you like and the parts you don’t. I discuss this relationship in Chapter 1 of Jobs, Liberty and the Bottom Line. See also What “lump of energy” fallacy? at Crooked Timber
A new type of wind-turbine platform can be placed much farther from shore. - Deepwater Wind, a company based in Providence, Rhode Island, has drawn up plans for what could be the largest wind farm in U.S. waters, the company announced last week. The proposed farm would generate a huge 1,000 megawatts of power and would be located 18 to 27 miles off the coast of Rhode Island and Massachusetts at a depth of 52 meters—considerably deeper than any other large scale wind project to date. By moving into deeper waters, turbines can harness stronger, more sustained winds. And the massive turbines the company plans to use—each capable of generating more than 5 megawatts of power, with blades rising 150 meters above the water’s surface—will be nearly invisible from shore, thereby avoiding potential legal battles with coastal communities that perceive the turbines as eyesores.
We haven't posted a good green vs. green spat in a while - Today, American Bird Conservancy announced that three iconic American bird species face especially severe threats from wind energy development. "Golden Eagles, Whooping Cranes, and Greater Sage-Grouse are likely to be among the birds most affected by poorly planned and sited wind projects,” said Kelly Fuller, Wind Program Coordinator for American Bird Conservancy, the nation’s leading bird conservation organization. “Unless the government acts now to require that the wind industry respect basic wildlife safeguards, these three species will be at ever greater risk.” The U.S. Fish and Wildlife Service (FWS) currently estimates that more than 400,000 birds are already being killed each year after being struck by the fast-moving blades of wind turbines. This figure is expected to rise significantly, and will likely eventually pass the million mark as wind power becomes increasingly ubiquitous under a Department of Energy plan to supply 20% of America's power through wind by 2030. Golden Eagles have already been one of the major victims of the largest wind farm in the United States at Altamont Pass in California. The Altamont wind farm was sited in an area that eagles and other raptors use to hunt ground squirrels and other small mammals. Using the now-outdated towers as perches, thousands of raptors have been killed as they launch out through the spinning turbines towards their prey.
Small Islands in the Pacific: Duel Between Freshwater and Sea Water - It is said that the first refugees of climate change will come from the Pacific. In the midst of this ocean's tropical regions are scattered 50,000 small islands, 8,000 of them inhabited. They are particularly vulnerable to the impacts of global warming. These effects include rising sea-water levels, drought and diminishing stocks of freshwater. Such water is essential for the life of the fauna and flora and for the human populations' food supplies. On the coral reef islands, freshwater occurs as underground reservoirs, as lenses in balance with the underlying sea water. IRD scientists and their research partners have investigated the processes behind such lenses, the way they change and develops, their capacity and vulnerability. The team's geological, hydrogeological and geophysical surveys showed that the lens structure and internal processes depend strongly on the island's vegetation cover and topography. This work opens up ways towards assessing what will happen to this resource as a consequence of expected changes in the climate and sea level.
Indonesia, Java, Volcano Ijen: sulfur mines - These Indonesian miners,in primitive conditions not seen in most places for more than a century, often wear no protection,carrying up to 100 kilos of sulfur on their shoulders, climbing steep rocky paths and descending the volcano for 3 kilometers, bare foot, twice daily, choking from stinking, toxic fumes. For this shortened, blinding, gagging life in hell, they are paid 6 Euros a day. These conditions destroy their lungs, eyes and other tissues. “We work in hell,” said the miners, “our eyes and lungs burn the whole day, but there’s nothing we can do. Otherwise, we’re scared we’ll have nothing to eat.” Here is a very good photo
Nuclear Power: Running on fumes? - I went to a debate on nuclear energy on Monday evening sponsored by the Center for Climate Change Law at Columbia. The Center is headed by Mike Gerrard, a force of nature in environmental law for over thirty years. “Should nuclear power be an important component of U.S. strategy to combat climate change?” The pros, as ’twere, for nuclear were Susan Eisenhower, an old hand in power and proliferation circles, and Barton Cowan, a lawyer who’s been representing the industry for decades. The skeptics — it’s not an inherently bad word, it’s just been tarred by those who would make you believe the earth is flat — were represented by Peter Bradford, a long-time utility industry regulator and a member of the Board of the Union of Concerned Scientists, and Robert Alvarez, a senior scholar focused on nuclear disarmament, environmental, and energy policies at the Institute for Policy Studies. The proponents, I’m sorry, but not surprised, to tell you, had nothing in the least convincing to say.
A Battle Over Uranium Bodes Ill for U.S. Debate - The future of nuclear power in America is back on the table, with all its vast implications, as global warming revives the search for energy sources that produce less greenhouse gas. But in this depressed corner of western Colorado — one of the first places in the world that uranium, nuclear energy’s primary fuel, was ever dug from the ground in industrial scale — the debate is both simpler and more complicated. A proposal for a new mill to process uranium ore, which would lead to the opening of long-shuttered mines in Colorado and Utah, has brought global and local concerns into collision — jobs, health, class-consciousness and historical memory among them — in ways that suggest, if the pattern here holds, a bitter national debate to come. Opponents say that the nostalgia many residents here cherish about the boom years is the product of willful forgetfulness about the well-documented cancer deaths and environmental destruction the uranium mines produced. They also say that the mill company is cynically exploiting the idea of a return to simpler times.
New House Science Committee chair Ralph Hall (R-TX) threatens to subpoena climate scientists - Rep. Ralph Hall (R-TX) plans to pursue an aggressive pro-oil agenda as the incoming chair of the House Science and Technology Committee. In an interview with the Dallas Morning News this month, the “unconditional champion of fossil fuels” described his zeal for the “holy grail” of the oil industry — the Arctic National Wildlife Refuge — discussed issuing subpoenas to interrogate climate scientists, and explained why the BP disaster “didn’t dampen his enthusiasm for offshore drilling.” Hall described the BP explosion that killed eleven men, injured dozens, and led to the despoilment of the Gulf of Mexico as a “tremendous,” “blossoming” flower of energy: “As we saw that thing bubbling out, blossoming out – all that energy, every minute of every hour of every day of every week – that was tremendous to me. That we could deliver that kind of energy out there – even on an explosion.”
China vows to $30B investment in water saving projects -China plans to invest 30 billion dollars on water conservation projects in 2011 to reduce the impact of natural disasters on grain production, state media said Saturday. The report comes after severe flooding and droughts across the country this year destroyed crops and drove up food prices, pushing inflation to its highest level in more than two years in November. The investment -- up 10 percent on year -- would go towards improving irrigation and projects to combat weather-related disasters, the China Daily said, citing water resources minister Chen Lei. China has invested a little over 100 billion dollars in water projects in the past five years, the report said. "We have to accelerate the construction of water conservation facilities as one of the key infrastructures the country needs to secure increasing grain production,"
The Lithium Revolution - Another very interesting and important section of the Deutsche Bank report we discussed yesterday is the section on lithium battery prices. Deutsche Bank analysts are projecting a 7.5%/year rate drop in prices per kWhr (other analysts have similar expectations). However, as the graph above shows, in the last 13 months they've been obliged to drop their price estimates by 30%. Also, the historical price curve for laptop batteries has averaged 14%/year. So there's some reason to think the 7.5%/year cost curve might be on the conservative side. Prices might fall faster.In any case, given Deutsche Bank's estimates, here's how the payback time of a pure EV evolves compared to an equivalent conventional car, assuming $3.25 gasoline, 10c/kWhr electricity and 15k miles/year:
Paris To Test Banning Gas-Guzzlers (Yes, SUVs!) In City Core - Why are many European carmakers now planning to build electric vehicles? Because many European cities are widely expected to ban high-emissions vehicles from their city cores over the next decade–perhaps even vehicles with any emissions at all. Now, Paris may be the first city to experiment with such a policy. Next year, it will begin to test restrictions on vehicles that emit more than a certain amount of carbon dioxide (CO2) per kilometer–the measure of a car’s contribution to greenhouse gases. An official within the Parisian mayor’s office, Denis Baupin, identified older diesel-engined cars and sport-utility vehicles as specific targets of the emissions limit. “I’m sorry,” Baupin said on RTL Radio, “but having a sport utility vehicle in a city makes no sense.” He suggested that Parisian SUV owners replace their sport utilities with vehicles that are “compatible with city life.”
Global Rivers Emit Three Times IPCC Estimates of Greenhouse Gas Nitrous Oxide — What goes in must come out, a truism that now may be applied to global river networks. Human-caused nitrogen loading to river networks is a potentially important source of nitrous oxide emission to the atmosphere. Nitrous oxide is a potent greenhouse gas that contributes to climate change and stratospheric ozone destruction. It happens via a microbial process called denitrification, which converts nitrogen to nitrous oxide and an inert gas called dinitrogen. When summed across the globe, scientists report this week in the journal Proceedings of the National Academy of Sciences (PNAS), river and stream networks are the source of at least 10 percent of human-caused nitrous oxide emissions to the atmosphere. Rates of nitrous oxide production via denitrification in small streams increase with nitrate concentrations.
Science & the Public: Heavier crudes, heavier footprints - Relying on heavy oils and tar sands as the feedstock for liquid fuels will exaggerate the greenhouse-gas emissions associated with fossil-fuel use, a new study finds. Light crudes are the easiest to work with. But as their biggest and most accessible reservoirs have been tapped — and often tapped out — the oil industry has increasingly been turning to what has been termed “unconventional” stocks. These are viscous, if not tarry, forms of petroleum. And as the upper graph below shows, the average “gravity” — viscosity of crude — has fallen into the heavy range (below an average of about 31 degrees on the American Petroleum Institute scale) beginning in 2000. At least for oil processed by U.S. refineries. Not surprisingly, it takes extra work to convert viscous gunk into the gasoline, diesel and other high-value fuels that power engines the world over. And the extra fuel that powers those upgrades releases bonus greenhouse-gas emissions, thereby upping the carbon footprint of each gallon of refined product created.
Floods bring Queensland coal sector to a halt - AUSTRALIA'S $50 billion coal industry may miss large export contracts as a result of flooding in central Queensland. Wesfarmers yesterday added its name to the list of coal producers that have suspended operations as the floods created the worst conditions in 50 years. Wesfarmers said it had been forced to suspend work at its Curragh North mine.'Following heavy rain from the aftermath of Cyclone Tasha, major flooding is occurring in central Queensland,'' Wesfarmers told the stock exchange. The company said some access roads to Blackwater had been closed, preventing many employees from returning to work following the Christmas public holidays.
Arch, Peabody seek coal exporting deals to Asia - China will triple its electricity use by 2035, with coal remaining the dominant fuel, according to a forecast last month by the Paris-based International Energy Agency. The fastest growth will happen during the next five years, as millions of Chinese migrate from the countryside to cities and electricity use per capita continues to rise. For Peabody Energy Corp. and Arch — the nation's two largest coal producers, both headquartered in the St. Louis region — the rising tide of Asian coal demand couldn't be better timed. China and India are shopping the globe for new fuel supplies just as legal challenges and fears about climate change are jeopardizing demand at home. For environmentalists, scientists and policymakers worried about the environmental and social cost of coal emissions, the timing couldn't be worse. To them, sending coal to Asia just means exporting American pollution and climate destruction. Global warming being global, burning coal overseas would have the same impact on rising temperatures and sea levels in the U.S. as burning it here.
EIA Forecasts More Shale Gas Resources And Greater Use - The U.S. Energy Information Administration (EIA) released its Annual Energy Outlook 2011 (AEO2011) Early Release Overview last week that dramatically increased its estimate of technically recoverable unproved shale gas resources and raised its forecast of the amount of natural gas to be consumed in the future. Neither of these changes to their annual forecast is a great surprise given ongoing industry trends, but what may be somewhat of a surprise is the smaller increase in gas shale resources compared to the 2009 forecast from the Potential Gas Committee at the Colorado School of Mines.
The Gulf of Mexico is Dying - The Gulf of Mexico (GOM) does not exist in isolation and is, in fact, connected to the Seven Seas. Hence, we publish these findings in order that the world community will come together to further contemplate this dire and demanding predicament. We also do so with the hope that an appropriate global response will be formulated, and acted upon, for the sake of future generations. It is the most basic responsibility for every civilization to leave their world in a better condition than that which they inherited from their forbears. After conducting the Gulf Oil Spill Remediation Conference for over seven months, we can now disseminate the following information with the authority and confidence of those who have thoroughly investigated a crime scene. There are many research articles, investigative reports and penetrating exposes archived at the following website. Particularly those posted from August through November provide a unique body of evidence, many with compelling photo-documentaries, which portray the true state of affairs at the Macondo Prospect in the GOM.
Ken Feinberg Paying Stephen Gillers, NYU Professor, With Money From BP Oil Spill Claims Fund For Legal Ethics Advice — A law professor being paid $950 an hour with BP's money has declared that the czar of the $20 billion claims fund for Gulf oil spill victims is independent of the oil giant. Fund administrator Ken Feinberg said Thursday he has agreed to pay New York University professor Stephen Gillers for his advice. Since being hired, Gillers has written a letter stating that Feinberg is neutral and not subject to BP's direction or control. Some victims, lawyers and state officials unhappy with the claims process have questioned Feinberg's independence and suggested he is a pawn in a BP effort to limit its liability.
Oil Industry's Spending to Rise in Hunt for Energy - The global oil industry—far from chastened by the catastrophic U.S. Gulf of Mexico spill—is planning record spending next year, including a large amount for deep-water development. From giants Saudi Aramco and Exxon Mobil Corp. to five-person wildcat outfits, the industry plans to spend nearly a half-trillion dollars next year to find and extract oil and natural gas, according to a new survey by investment bank Barclays Capital. For the first time in several years, large Western oil companies are leading the industry's charge, increasing their budgets faster than the state-run national oil companies that have dominated spending in recent years. "This is being driven by the appetite to find more oil, comfort that today's oil prices will be sustained and companies getting out of a hunker-down, recession mode,"
Global oil wealth to rise by 2trn barrels - New technology in the future could boost the world's proven oil resources by nearly two trillion barrels but more than five times of these quantities could remain inaccessible, according to Saudi Aramco. Although the current global oil reserves in place are estimated at 14 trillion barrels, only about 1.2 trillion can be recovered, said Khaled Al Buraik, executive director of the government-controlled Saudi Aramco Speaking at a seminar in Riyadh, Buraik said the quantity of oil extracted so far worldwide does not exceed one trillion barrels.
US excess liquidity pushes oil to record high - RIYADH: As the year comes to a close, another round of crude price spiral seems just round the corner. Markets are already at their highest level in 25 months, despite the fact that the world is barely out of the Great Recession. The jobless rate today is hovering at around 10 per cent twice the levels in 2007-08; the housing sector in the US continues to languish in the intensive care with existing home sales down 27.9 per cent year-on-year in November and a lacklustre global macroeconomic performance. And this leads us to the question-given ample supplies, considerable spare capacity how could crude be at this level,? Indeed, severe winter and snowstorms have hit parts of Europe buoying the expectations, at least temporarily, that fuel demand will increase. Chinese consumption continues to grow at least in the short term. Yet the biggest mover for energy markets appeared to be financial investors,” “The additional liquidity pumped into the markets by the Fed’s Treasury purchases should also reach commodity markets and is thus leading to increasing oil prices,” analysts at the Frankfurt-based Commerzbank AG said. “What is more, the higher price level reflects the weaker dollar, which is a direct consequence of the ultra-expansive US monetary policy.”
Oil is near its highest level in two years with the support of the cold and appetite for risk - Oil prices on Friday near their highest levels in more than two years as a blast of cold in parts of the world, urging them to risky assets and the absence of indications that OPEC is ready to intervene to stop the rise. And Brent crude recorded for February delivery to close at $ 93.46 a barrel, 48 cents lower on Friday after being touched 74.94 dollars the highest level since October in October 2008. And stopped trading on Friday, U.S. light crude standard and with the highest level in 26 months at 91.63 a dollar on Thursday due to closure of New York Mercantile Exchange (NYMEX) for the Christmas holiday. The sharp rise was due to Brent to the severity of the cold in the European continent and Britain. It is expected to continue to snow in parts of Europe over the weekend, which threatens to prolong a state of chaos on transport networks, railways, aircraft and may increase the demand for more fuel
Gasoline prices reach all-time high for Christmas - Gasoline prices continued rising over the weekend, bringing the first Christmas in which the national average for a gallon of unleaded gasoline was more than $3, according to the AAA. While the auto club reported a national average of $3.042 a gallon on Monday, the average price in the Pittsburgh metropolitan area was $3.129 a gallon. Driving forces behind the unusual increase in gas prices since Labor Day range from French refinery workers to Wall Street investors. The most obvious cause is a decrease in the supply of gasoline, especially on the East Coast. The U.S. Department of Energy reported that in late August gasoline inventories on the East Coast were 11 million barrels higher than their five-year average. By the end of November, inventories had fallen to nearly 3 million barrels below the five-year average.
Brazil to replace oil rigs with 'underwater cities' - Petrobras plans to turn science fiction into reality to extract oil from the vast pre-salt oil fields discovered off the south east coast of Brazil. The plan is to construct 'cities’ more than 2,000 metres under water, containing machines, giant pieces of equipment and robots that could inspect the systems being used to extract millions of barrels of oil. Many operations would be fully automated while others would be controlled by humans at a distance. “Our target is that we won’t need platforms in ten years from now,” said Carlos Tadeu Fraga, executive manager of the Petrobras Research Centre. Petrobras already owns virtual reality laboratories where engineers can inspect 3D images of oil fields. But now they want to take a further technological leap by installing floating rig equipment on the sea bed.
The Finite World, by Paul Krugman - Oil is back above $90 a barrel. Copper and cotton have hit record highs. Wheat and corn prices are way up. Over all, world commodity prices have risen by a quarter in the past six months. So what’s the meaning of this surge? Is it speculation run amok? Is it the result of excessive money creation, a harbinger of runaway inflation just around the corner? No and no. What the commodity markets are telling us is that we’re living in a finite world, in which the rapid growth of emerging economies is placing pressure on limited supplies of raw materials, pushing up their prices. And America is, for the most part, just a bystander in this story. What about commodity prices as a harbinger of inflation? Many commentators on the right have been predicting for years that the Federal Reserve, by printing lots of money — it’s not actually doing that, but that’s the accusation — is setting us up for severe inflation. Stagflation is coming, declared Representative Paul Ryan in February 2009; Glenn Beck has been warning about imminent hyperinflation since 2008. Yet inflation has remained low. What’s an inflation worrier to do?
Petroleum Prices and the International Dimension -- Paul Krugman observes that there are many real side factors that should drive oil prices higher (in an article that cites Jim’s 2009 paper). I certainly don't have much to add in terms of thinking about oil prices and domestic macro implications, but Krugman's note did impel me to examine more closely the international aspects of the underlying demand factors. Figure 1 depicts the changes (not percent changes) in oil consumption in millions of barrels per day, by economy. Clearly, in 2008 and 2009, due to the slowdown and then deep recession (which even in September 2008, Don Luskin was still disputing), oil consumption declined. As Figure 1 illustrates, 2010 is a year of rebound in petroleum consumption growth, with Chinese consumption resuming its growth. One interesting highlight is that the pattern that held before the Great Recession, of Chinese consumption growth exceeding US growth, has re-asserted itself. Given the resumption in world consumption, it's no surprise that prices have re-established themselves since mid-2009, as shown in Figure 2. (For an earlier discussion of China’s role, see this CBO report from 2006).
Krugman: Peak Oil has Arrived -- His exact words are: the primary driving force behind rising commodity prices isn’t demand from the United States. It’s demand from China and other emerging economies. As more and more people in formerly poor nations are entering the global middle class, they’re beginning to drive cars and eat meat, placing growing pressure on world oil and food supplies.And those supplies aren’t keeping pace. Conventional oil production has been flat for four years; in that sense, at least, peak oil has arrived. Emphasis mine. I would have worded it a bit differently: with a nuance here and a caveat there, but I think the broad thrust of what he's saying is helpful. It's good to see such a widely followed voice acknowledging these issues. I think the degree of political strain is going to be somewhat greater than he's yet acknowledging though.
The World's Real Oil Problem - Paul Krugman writes about the rising global price of commodities: Oil is back above $90 a barrel. Copper and cotton have hit record highs. Wheat and corn prices are way up. Over all, world commodity prices have risen by a quarter in the past six months. Oil plays a role in the world economy that's far more important than any other commodity, so when I'm in a mood to worry I worry about oil prices. I don't know if we've hit peak oil, but we have reached the point at which the growth of supply has reached the point where it can barely keep up with growing demand in a normal economy. (More here about that.) This means that whenever the economy is growing at a decent pace (and driving up demand for oil with it), the price of oil will inevitably rise sharply and slow down the global economy (at best) or throw us into another recession (at worst). In other words, oil has become a permanent limit to world economic growth.
Energy: Can We Run Out of Oil and Other Natural Resource? - The reality is that we are in uncharted waters. The world has never, ever seen anything like the rise of major developing countries like China and India—over a billion people growing into the middle class, demanding meat, cars, planes, electricity. Just because we proved smart enough to innovate our way out of periods of past growth doesn't mean we'll be able to handle a world with 9 billion plus people by 2050, most of them richer than now. We may already see that impact on the U.S., which will likely have to dig its way out of recession with the added burden of high energy prices thanks to healthy demand from the developing world.
Oil Juggernaut Unleashed - The prevalence of crude is undeniable. You might dabble in green-think cultism or you might drive an obnoxious monolith of a Hummer (what I like to call an “overcompensation-mobile”), but neither philosophy of consumption dares to contradict that this world runs on oil. Petroleum is used in the manufacture or shipping of almost every industrial product on the planet, and even many agricultural goods. Therefore, it behooves the public to seriously consider the ramifications of oil price and its underlying effect on the entirety of our economy. Even minor increases holding over an extended period of time cause economic reverberations that can be felt for years afterwards. Financial and social adjustments to commodity inflation can sometimes take decades if the event is historically unprecedented. Petroleum is a foundation ingredient, it is energy itself; the higher its cost, the greater the cost of every other product we use, and the worse off our financial structure is. Period. There is no scenario yet experienced by any nation in which oil inflation actually benefited the masses or the overall economy, even in countries that sell oil!
$90 Oil In a Weak Economy Is Telling Us Something – Deustche Bank Sees Oil Spikes by 2012 – I’m sure you noticed that oil crossed $90 this week. I’m sure you have also noticed that the economy in the United States and Europe is not exactly booming. I wish I could time travel back to the year 2000 so that I could tell people that 10 years later oil would be $90 per barrel in a weak economy. I would have sounded about as sensible as someone predicting the Dow Jones at 500 or 50,000. The funny thing is that there were people warning that the world oil market was about to change. One gentleman in particular named Colin Campbell was especially prescient. Here is a link to a presentation that he gave in 2000 with oil in the $20’s and no obvious signs for the mainstream media of the shift that was about to occur: http://www.mnforsustain.org/oil_campbell_c_peak_oil_presentation.htm
Crude oil price hits two-year high amid concerns over demand - The price of crude oil struck a two-year high yesterday on the back of supply concerns as blizzards hammered north-eastern parts of the US – but the price receded in later trading after uncertainty about Chinese fuel demand. At the same time, Kuwait’s oil minister, Sheikh Ahmad Al-Abdullah Al-Sabah, said the global economy can withstand an oil price of $100 a barrel.Other Arab members of the Organisation of the Petroleum Exporting Countries (Opec) said they would probably decide against boosting output in 2011 because the market was well supplied. Earlier in the day oil futures slipped below $91 a barrel as analysis began to emerge on the move of China’s central bank to raise key interest rates over the weekend. However, US crude for February settled 51 cents lower at $91 a barrel, after hitting an intraday peak of $91.88 – the highest since October 2008. ICE Brent crude rose 12 cents to $93.89 a barrel
Gas and oil prices are rising. Do you really know why? - What happens when oil wells start producing less oil? And they will. This is a question being asked at the highest levels of government all over the world every day. The oil disaster in the Gulf of Mexico propelled global concern for the topic. It may not be headline news anymore, but gas prices surely are, and if you live in the Northeast and heat with oil, your oil bill is probably looking quite a bit different than it did this time last year. Some people who previously had little interest or knowledge about the state of oil are now clamoring for details, not only regarding the economic and environmental impact, but the future of oil drilling, how much oil we have, what comes next and what can be done.
In defense of doom and gloom in an oil-price bet - In peak-oil debates, Cornucopians cite improving technology that will extract fossil fuels more economically. New deposits will be found; new methods will retrieve more from existing reserves; new ways will emerge to affordably process less-than-sweet crude, such as Canada's tar sands. But how far can we take such optimism? We all have faith that technology gets better, based on past experience. But does that belief justify policy decisions that affect lives years and decades from now? If the world today lived as if fossil fuels were abundant and affordable, would we bother conserving energy or investing in solar and other renewable sources? And if we chose the partying route, and our abiding faith in technology turns out to be wrong, what then? Will we have burned through our supplies and painted ourselves into an energy corner? The odds that we have hit peak oil may be low, but the consequences are huge if we don't pay attention to that risk.
Crude Oil Price Hits 2-Year High, Now $94 -Oil rose to a two-year high in New York on speculation that China's monetary tightening will sustain economic growth in the world's largest energy user, Bloomberg News reported yesterday. In Abuja, leading global auditors, KPMG, has submitted the interim report on forensic audit of the Nigerian National Petroleum Corporation (NNPC) to the Federal Government with the final report due for submission in the first or second week of January 2011. Oil futures increased for a sixth day, the longest rally in seven weeks, after the People's Bank of China boosted benchmark one-year lending and deposit rates by 25 basis points on December 25, the second increase since mid-October. Brent (the equivalent of Nigeria’s Bonny Light) price has now hit $94.52 per barrel, the highest since October 2008. Nigeria’s budget benchmark for 2011 is $65, raising hopes that the country may now begin to rebuild its excess crude account (ECA) as well as foreign reserves.
Crude Oil Trades Near Two-Year High on Speculation U.S. Inventories Shrank - Crude traded near a two-year high in New York on speculation that cold weather in the U.S. and Europe will boost demand in industrialized nations. New York, the biggest city in the world’s largest oil consumer, suffered the heaviest December snows in six decades as storms spread across the eastern U.S. Oil fell yesterday after China raised benchmark lending and deposit rates. “Oil is more or less balanced between positive data from cold weather in Europe and the U.S., and negative data from China’s latest interest rate hike,” “I don’t expect a big move in one or the other direction this week as volumes are very low. When traders return in the New Year, we’ll get a better picture of the price direction.”
Oil Surges to Highest Year-End Price Since 2007 on Dollar - Oil surged to its highest year-end price since 2007 as the dollar weakened and gasoline and heating oil futures climbed. Crude capped its second consecutive year of gains as the dollar dropped against the euro, boosting commodities’ appeal as an alternative investment. Oil settled above $91 a barrel after testing technical support near $89. Gasoline and heating oil advanced before the January contracts expired today. “A weaker dollar and stronger product prices are all bolstering crude,” said Jason Schenker, president of Prestige Economics LLC, an Austin, Texas-based energy consultant. Oil for February delivery climbed $1.54, or 1.7 percent, to settle at $91.38 a barrel on the New York Mercantile Exchange. Prices fell 13 cents this week and rose 8.6 percent in December.
Cost Of Crude Oil Records 26-Month High To End 2010 - Oil prices registered a 26-month high $92/per barrel Friday, ending 2010 with a 15 percent increase on hopes that the improving economy would fuel higher demands next year and send prices into the $100/barrel mark. Stable growths from the Asian market, particularly in China, as well as the increase in demand from developing countries contributed to the four-month rally that catapulted the price of crude oil more than the $70-$80 mark it recorded for most of the year. According to a survey conducted by Reuters, the global demand for oil increased to 2.2 million barrels per day (bpd), its highest growth since 2004 with another 1.5 million projected for 2011. Although oil prices are expected to hit $100/barrel in 2011, experts are not seeing the price level to hit $150 as it did in 2008, the first time crude oil barged into triple digits.
U-Turn In Demand: Is $100 A Barrel Oil Around Corner? - As OPEC sets its sights on $100 a barrel oil ahead of this weekend’s next round of meetings, analysts are warning of growing signs that such a scenario could be in the cards early next year. Just a few weeks ago, forecasts for U.S. oil demand pointed to a dip from last December. But consumption patterns in the four-week period ended last week showed a jump of nearly 1 million barrels a day from December 2009, reported David Bird for Dow Jones Newswires. If demand is gaining steam, “the push to what is widely seen as an inevitable run on the $100-a-barrel mark” could be around the corner, he wrote Thursday. In another note on the same day, Barclays Capital analyst Paul Horsnell said that with a week left in the month it’s likely demand will surpass an average of 20 million barrels a day. That would be the first time that’s happened in any month since February 2008, he added.
Gas Prices Heading Up From 3 Dollars - For the first time since October 2008 the average gas price has crossed the three dollar per gallon mark. According to AAA, gas prices have climbed four weeks in a row. The average gas price is now $3.03 per gallon in Massachusetts. That is about 44 cents more than you were paying at this time last year. Area drivers told 22News that they are new having a harder time finding gas stations selling gas below the three dollar price mark. One Springfield driver said that he prefers to stick with his favorite station. Don't expect prices to go down anytime soon, either. Predictions for 2011 run as high as four and five dollars per gallon.
Heating oil prices hit record levels; residents struggling - The story is old. Except this time prices for heating fuels are at a level not seen by owners and operators of providers in a very long time. Prices, which are averaging around $3 per gallon, have been on a steady incline throughout December. A decline, or even dip, is presently not promised. "There's people who are getting 5 to 10 gallons to put in their tanks," A household will typically burn 7 to 10 gallons of fuel per day during the winter. "This economy is the absolute worst I've ever seen it. This area in particular is struggling," Bridgeton statistics state unemployment at around 23 percent and median household income $17,536, less than the county-wide average of $50,000. She said 20 gallon deliveries are becoming normal and "65 to 70 percent of deliveries are for 50 gallons."
$5 for a gallon of gasoline in 2012 - -- The former president of Shell Oil, John Hofmeister, says Americans could be paying $5 for a gallon of gasoline by 2012. In an interview with Platt's Energy Week television, Hofmeister predicted gasoline prices will spike as the global demand for oil increases. "I'm predicting actually the worst outcome over the next two years which takes us to 2012 with higher gasoline prices," he said. Tom Kloza, chief oil analyst with Oil Price Information Service says Americans will see gasoline prices hit the $5 a gallon mark in the next decade, but not by 2012. "That wolf is out there and it's going to be at the door...I agree with him that we'll see those numbers at some point this decade but not yet." Kloza said.
Energy: Can We Run Out of Oil and Other Natural Resources? - The reality is that we are in uncharted waters. The world has never, ever seen anything like the rise of major developing countries like China and India—over a billion people growing into the middle class, demanding meat, cars, planes, electricity. Just because we proved smart enough to innovate our way out of periods of past growth doesn't mean we'll be able to handle a world with 9 billion plus people by 2050, most of them richer than now. We may already see that impact on the U.S., which will likely have to dig its way out of recession with the added burden of high energy prices thanks to healthy demand from the developing world.
Oil shortages could turn outer suburbs into slums - AUSTRALIA will be forced to rely on huge quantities of imported oil unless it radically overhauls its transport and urban policies, according to a study by the Planning Institute of Australia. It warns that without urgent national action the trade deficit will spiral and many outer suburbs will become slums. The study comprises a series of papers in the latest edition of the journal Australian Planner. One of the authors, Professor Peter Newman of Curtin University, who is also an adviser to the federal government, said the most compelling finding was that ''urban sprawl is finished''. ''If we continue to roll out new land [releases] and suburbs that are car dependent, they will become the slums of the future,'' he said.
Russia Starts Oil Pipeline to China as Putin Attempts to Diversify Exports - Russia will start its first oil pipeline to China at midnight, increasing crude exports to the world’s largest energy consumer. OAO Rosneft, Russia’s largest oil producer, and state-run pipeline operator OAO Transneft will sell China 15 million metric tons (110 million barrels) a year for 20 years through the East Siberia Pacific Ocean pipeline, known as ESPO, after China provided the companies $25 billion in oil-backed loans to finance construction and development of deposits. Russia currently supplies crude to China by rail and shipped 1.06 million tons in November, making it the Asian country’s seventh-largest supplier, according to Chinese customs statistics on Bloomberg.
Trader Holds $3 Billion of LME Copper - As commodity prices soar to new records, the ability of a few traders to hold huge swaths of the world's stockpiles is coming under scrutiny. The latest example is in the copper market, where a single trader has reported it owns 80%-90% of the copper sitting in London Metal Exchange warehouses, equal to about half of the world's exchange-registered copper stockpile and worth about $3 billion. Single traders also own large holdings of other metals. One trader holds as much as 90% of the exchange's aluminum stocks. In the nickel, zinc and aluminum alloy markets, single traders own between 50% and 80% of those metals, and one firm has 40%-50% of the LME's tin stockpiles. While commodities exchanges scrutinize all holdings to ensure a single player isn't trying to corner the market, and many of the positions are owned by big firms on behalf of clients, the large holdings do result in a concentration of ownership that could skew prices.
As Commodity Prices Rise, Concentration Of Ownership Questioned - The Wall Street Journal is reporting that a single holder has bought 80% to 90% of copper in the London Metal Exchange’s warehouses. As we told you earlier, J.P. Morgan (JPM) was thought to hold 50% to 80% of the exchange’s copper. But prices of copper hit record levels yesterday. The iShares Silver ETF (SLV) closed at $28.64 a share and has gained more than 73% so far this year. As commodity prices soar, concern is spreading about concentrations in other metals, as well. One trader holds as much as 90% of the LME’s aluminum, according to the WSJ. In the nickel, zinc and aluminum alloy markets, single traders own between 50% to 80% of those metals, according to filings with the exchange. Up to half of all tin held at the LME is also reported to be controlled by a single trader.
Why the Surge in Commodity Prices? - Paul Krugman explains the main reason for the rising commodity prices: the primary driving force behind rising commodity prices isn’t demand from the United States. It’s demand from China and other emerging economies. As more and more people in formerly poor nations are entering the global middle class, they’re beginning to drive cars and eat meat, placing growing pressure on world oil and food supplies. There are many observers who disagree with this interpretation. They argue it is loose U.S. monetary policy and speculation that is driving the surge in commodity prices. Krugman notes there is a way to test this alternative theory: two and a half years ago, many commentators dismissed the price spike as an aberration driven by speculators. And they claimed vindication when commodity prices plunged in the second half of 2008. But that price collapse coincided with a severe global recession, which led to a sharp fall in demand for raw materials. The big test would come when the world economy recovered. Would raw materials once again become expensive? If so, then Krugman's theory is more plausible. So what does the data show? I'd say Krugman has a solid case.
Copper Approaches Record as Swiss Franc Weakens on Global Recovery Signs - Copper rose to almost a record high amid speculation the global recovery will continue into 2011. The Swiss franc declined and U.K. shares advanced for a fifth day before the holiday weekend. Copper gained 0.7 percent, extending this year’s rally to 27 percent. The franc depreciated 0.4 percent against the euro. U.S. markets were closed for the Christmas holiday. Confidence among American consumers probably improved this month, economists said before the Conference Board’s report due to be released on Dec. 28. U.S. stocks completed a fourth straight weekly gain yesterday after data showed the nation’s economy grew more in the third quarter than initially reported and Americans increased spending in November for a fifth month. “The continuing advance of base metals continues to prove the strength of economic growth and the tortuous business of turning on additional supplies of metals,”
Copper May be in 550,000 Ton Deficit in 2011 on Low Stocks, Macquarie Says - The global copper market is estimated to have a 550,000-metric ton deficit next year as falling stockpiles push prices to $5 a pound, Macquarie Bank Ltd. said in a research report today. The forecast was based on an assumption of 4 percent mine supply disruption, or 720,000 tons, with global stocks falling to below three weeks of world consumption, according to the report. It also excluded material that may be held by exchange- traded products launched by BlackRock Inc. and JPMorgan Chase & Co., it said.
Copper Jumps to Record as China Stockpiles Drop, Demand Outpaces Supplies - Copper futures rose to a record as inventories declined in China, the world’s largest user, bolstering speculation that demand will outpace supply. Stockpiles monitored by the Shanghai Futures Exchange fell 5.8 percent last week, the biggest drop in almost three months. As of Sept. 30, global consumption exceeded output by 436,000 metric tons this year, the International Copper Study Group said last week. That compares with a deficit of 56,000 tons in the same period last year, the group said. “Demand is pushing new highs while supply remains reasonably tight,” said Tim Parker, who manages $7.5 billion at T. Rowe Price Group Inc.’s New Era Fund in Baltimore. “There are only days of supply in inventories, and there’s so little new copper coming into the market.”
Copper Advances to Record on Speculation Supply Shortage Poised to Worsen - Copper futures rose to a record for the fourth time this week as speculation heightened that a supply deficit will widen as China, the world’s biggest consumer, leads a rebound in demand for industrial metals. The price reached an all-time high of $4.452 a pound as the global economy recovered from its deepest recession since World War II. Supplies of copper, used in wiring and pipes, will lag behind demand by 825,000 metric tons next year, almost double this year’s deficit of 449,000 tons, Barclays Capital says. The metal “continued to climb as the economy got better and better,” On the Comex in New York, copper futures for March delivery gained 8.45 cents, or 1.9 percent, to close at $4.447 at 1:16 p.m. In 2010, the price climbed 33 percent, posting an annual gain for the eighth time in nine years.
China cuts rare earth export quotas - China announced Tuesday that it will cut its export quotas for rare earth minerals by more than 11% in the first half of 2011, further shrinking supplies of metals needed to make a range of high-tech products after Beijing slashed quotas for 2010. China produces about 97% of rare earth elements, used worldwide in high technology, clean energy and other products that exploit their special properties for magnetism, luminescence and strength. The rare earth issue may further strain relations between China and the United States, which have been battered this year by arguments over everything from Tibet and Taiwan to the value of the Chinese currency. Chinese President Hu Jintao is due to visit the United States next month.
Andes Villagers Resist China's Claim on $50 Billion Mine -(video)- Before Aluminum Corp. of China, known as Chinalco, can mine the more than $50 billion of copper ore buried in the Toromocho mountain in Peru, the company must get the residents of the nearby town of Morococha to leave their land. Some residents are resisting the move, despite the offer of a free house in a newly built town. They want a greater share of the spoils. The problem illustrates the challenges global mining companies face as copper resources decline, consumer demand increases and exploration is pushed to the frontiers of the earth.
Copper Advances to Record on Speculation Supply Shortage Poised to Worsen - Copper futures rose to a record for the fourth time this week as speculation heightened that a supply deficit will widen as China, the world’s biggest consumer, leads a rebound in demand for industrial metals. The price reached an all-time high of $4.432 a pound as the global economy recovered from its deepest recession since World War II. Supplies of copper, used in wiring and pipes, will lag behind demand by 825,000 metric tons next year, almost double this year’s deficit of 449,000 tons, Barclays Capital says.
China Cuts First-Round Rare Earth Export Quotas by 11% - China cut its rare earths export quotas by 11 percent in the first round of permits for 2011, threatening to worsen a global shortage of the minerals needed for smartphones, hybrid cars and guided missiles. The government allotted 14,446 metric tons of rare earth exports split among 31 companies, the Ministry of Commerce said in a statement. That compares with the first round this year of 16,304 tons and the second round of 7,976 tons, according to previous ministry statements. The government usually issues two rounds of export quotas every year. China, which accounts for more than 90 percent of world supplies, slashed export quotas by 72 percent in the second half of this year, sparking a surge in prices. Japan, the biggest user, has sought alternate supplies with companies including Hitachi Metals Ltd. and Toyota Motor Corp. seeking cooperative ventures at home and abroad to secure the minerals.
China's rare earths export cut spurs trade concerns - China's move to slash export quotas on rare earth minerals -- vital in a slew of high-tech products -- has raised fresh international trade concerns, and Japan's Sony Corp vowed on Wednesday to reduce its reliance on the minerals. China, which produces about 97 percent of the global supply of rare earth minerals, cut its export quotas by 35 percent for the first half of 2011 versus a year ago, saying it wanted to preserve ample reserves. It also cautioned that it has not decided on the quotas for the second half of the year. The little-known class of 17 related elements is used in numerous electronic devices and clean energy technology. Sony, maker of Bravia brand flat TVs, Vaio PCs and the PlayStation 3 videogame console, will look for ways to cut its use of rare earth elements, including developing alternative materials, Iguchi said.
US `Very Concerned' About China Rare-Earth Quotas -USTR Spokeswoman - The U.S. sharply criticized China's decision Tuesday to cut its rare-earth export quotas, raising the stakes for potential retaliation over the sensitive trade issue. "We are very concerned about China's export restraints on rare-earth materials," said a spokeswoman from the U.S. Trade Representative's office. "We have raised our concerns with China and we are continuing to work closely on the issue with stakeholders," the spokeswoman said. China's decision to cut first-half 2011 export quotas by about 35% from the year-earlier period is stoking tense bilateral trade tensions less than a month before President Hu Jintao arrives for a visit with President Barack Obama.
China To Establish Rare Earth Group - China, which supplies more than 90 percent of the world’s rare earth minerals, is close to establishing an association that will, under government oversight, work to “guide” the domestic industry. The China Association for Rare Earth will be organized under the authority of the Chinese Ministry of Industry and Information Technology and include the 93 largest domestic producers, Wang Caifeng (王彩鳳), a member of the committee overseeing the group’s formation, told reporters at a press conference in Beijing yesterday.....The US said last week it may file a WTO complaint against China over restraints on supplies of rare earths....(Page 2)-China will also raise export taxes for some rare earth elements to 25 percent next year, the Ministry of Finance said this month. The move is an increase from the 15 percent temporary export tax on neodymium, used in batteries for hybrid cars, including Toyota Motor Corp’s Prius.
Illegal Rare Earth Mines Face Crackdown - China’s national and provincial governments [have started] to crack down on the illegal mines, to which local authorities have long turned a blind eye. The efforts coincide with a decision by Beijing to reduce legal exports as well, including an announcement by China’s commerce ministry on Tuesday that export quotas for all rare earth metals will be 35 percent lower in the early months of next year than in the first half of this year.Rogue operations in southern China produce an estimated half of the world’s supply of heavy rare earths, which are the most valuable kinds of rare earth metals. Heavy rare earths are increasingly vital to the global manufacture of a range of high-technology products — including iPhones, BlackBerrys, flat-panel televisions, lasers, hybrid cars and wind-power turbines, as well as a lot of military hardware. The gangs have terrorized villagers who dare to complain about the many tons of sulfuric acid and other chemicals being dumped into streambeds during the processing of ore. Illegal rare earth mining and chemical runoff have poisoned thousands of acres of prime farmland, according to the government of Guangdong Province, and have been blamed for many illnesses.
Pricing Fracas Leads to Coal Shortage - Chinese power plants have been staging brown outs, with some functioning only days of coal inventory – why the shortages aren't from the price of transportation. Already down to mere days of thermal coal inventory, a manager at a power plant in Anhui Province has been left completely empty-handed without a single thermal coal contract for 2011. "We want to sign the contracts, but the coal producers don't," The shortage of coal supply at thermal power plants has become yearly occurrence in winter months. But this year, the government's strong policies to keep coal prices stable have made the signing and execution of power coal contracts even more difficult.
Chinese missile shifts power in Pacific - A new Chinese anti-ship missile that will significantly alter the balance of military power in the Pacific is now operational, according to a senior US commander. Admiral Robert Willard, the top US commander in the Pacific, said the Chinese ballistic missile, which was designed to threaten US aircraft carriers in the region, had reached “initial operational capability”. His remarks signal that China is challenging the US ability to project military power in Asia much sooner than many had expected. The US and other countries in the Pacific region are increasingly concerned at the speed with which China is developing its naval power. Japan, for example, recently decided to refocus its military on the potential threat from China.
China Matches U.S. Space Launches for First Time | Danger Room | Wired.com Outwardly, it looked like just another big space launch — and those happen about once a week, from spaceports all around the world. But Friday’s blast-off of a rocket, carrying a Chinese GPS-style navigation satellite, from the Xi Chang Satellite Launch Center was different. It set a record for successful Chinese launches in one year: 15. The launch represented another important milestone. For the first time since the chilliest days of the Cold War, another country has matched the United States in sheer number of rocket launches.To some observers, the rapid acceleration of the Chinese space program is perfectly reasonable, even expected. With nearly 20 percent of the world’s population and the planet’s second-biggest economy by some measures, it stands to reason that China would join other advanced, spacefaring nations — and on a grander scale. But more cautious (or alarmist, depending on your point of view) China-watchers question Beijing’s motives, and warn of potentially dire consequences if China comes to dominate the heavens.%3
Car sales: China takes pole | The Economist - More vehicles will be sold in China than anywhere else in 2011 - THE world’s auto industry is expected to suffer a fourth year of poor sales in 2011. Demand in America will rise only slightly: with the housing market still in the doldrums and cash-for-clunker subsidies at an end, consumers will be wary about buying big-ticket items. In Europe, without subsidies and with government spending cuts due to come into force, demand will fall further. Sales in Japan will dip again. And although sales will rise in China, the pace will slow. Demand for cars will grow in other developing countries such as India, but their volumes will not be enough to make up the shortfall.
China: Moving from or Clinging to Export Reliance? - The changes identified below seemingly indicate contrasting pressures on the PRC leadership. First, the central government is demanding a greater share of dividend payouts from state-owned enterprises. Given the astounding rates of investment in China, I certainly believe this is a welcome development. Aside from reducing the potential for overinvestment, the hope here is that more state funds emanating from these SOEs will be allocated to spending on social safety nets which can encourage the emergence of a Chinese consumer culture: Currently, 99 central government-backed firms are required to pay 5% of their profits as dividends, and 18 companies pay 10%. Another 34 centrally owned companies pay nothing. Under the new rules, 15 companies, including China's major energy and telecommunications companies, will have to pay 15% of profits in dividends. Another 78 companies in sectors including transportation and metals, will pay 10%, and 33 companies will pay 5%.
China Squeezes Foreigners for Share of Global Riches - Foreign companies have been teaming up with Chinese ones for years to gain access to the giant Chinese market. Now some of the world's biggest companies are taking a risky but potentially rewarding second step—folding pieces of their world-wide operations into partnerships with Chinese companies to do business around the globe. General Electric Co. is finalizing plans for a 50-50 joint venture with a Chinese military-jet maker to produce avionics, the electronic brains of aircraft. The deal with Aviation Industry Corp. of China would give GE access to a Chinese government project aimed at challenging Boeing Co. and Airbus in the civilian-aircraft market. General Motors Co. established a joint venture this year with SAIC Motor Corp., its longtime partner in China, to produce and sell their no-frills Wuling-brand microvans in India, and eventually in Southeast Asia and other emerging markets as well. To make the GE deal happen, GE Chief Executive Jeffrey Immelt made an extraordinary concession, agreeing to fold into the venture all of GE's existing world-wide business in nonmilitary avionics. GM, in its deal, contributed technology, its manufacturing facilities in India and use of its Chevrolet brand name in that market.
China Increases Rates to Counter Highest Inflation in Two Years - China raised interest rates for the second time since mid-October to counter the fastest inflation in more than two years and more moves may follow. The benchmark one-year lending rate will rise by 25 basis points to 5.81 percent and the one-year deposit rate will climb by the same amount to 2.75 percent, effective today, the People’s Bank of China said in a one-sentence statement on its website late yesterday. Premier Wen Jiabao is seeking to slow gains in property values and consumer prices that are making it harder for families to buy homes and pay for food. Bank lending and a wider-than-forecast November trade surplus have pumped more cash into an economy already awash with money. China is tightening after a record expansion of credit to counter the effects of the world financial crisis. The broadest measure of money supply, M2, has surged by 55 percent over the past two years and outstanding yuan-denominated loans have climbed 60 percent to 47.4 trillion.
China's Surprise Rate Hike May Roil Commodity Markets - The surprise timing of the People's Bank of China (PBOC) increase in benchmark lending and deposit interest rates is likely to weigh on commodity markets when trading starts on Monday. On Christmas Day, the PBOC raised rates by 25 basis points, the second rate rise in just over two months, part of a series of measures designed to combat inflation which hit a 28-month high of 5.1 percent in November. The opportunity to cash in on prices at or near their highest in years before the year end could mean the correction this time may be greater than the losses following the last interest rate hike in October. While the market expected China to raise rates, some investors had thought it was too late to move in 2010. "This certainly doesn't spell the end of the commodities boom or the strong China story. It's a smart move that may have caught the market off guard,"
China Raises Interest Rates Again to Cool Inflation - China's central bank raised interest rates on Saturday for the second time in just over two months as it stepped up its battle to rein in stubbornly high inflation. The People's Bank of China said it will raise the benchmark lending rate by 25 basis points to 5.81 percent and lift the benchmark deposit rate by 25 basis points to 2.75 percent. The central bank said in a statement on its website (www.pbc.gov.cn) that the latest rate rise would take effect on Sunday. The move came after Beijing said earlier in December it was switching to a "prudent" monetary policy, from its earlier "moderately loose" stance.
China's Wen seeks to assure public about inflation - Chinese Premier Wen Jiabao is trying to reassure the public about the government's ability to control inflation amid worries that rising prices could hurt social stability. Wen said Sunday on China National Radio that the government has already taken 16 measures to fight inflation and is fully able to control the general level of prices. The remarks came a day after China raised interest rates for the second time in a little more than two months to curb inflation, which has risen to a 28-month high.
Yuan Advances Beyond 6.6 Per Dollar for First Time Since 1993 on Inflation - The yuan strengthened beyond 6.6 per dollar for the first time in 17 years, bringing gains for 2010 to 3.6 percent, on speculation China will allow the currency to advance in an effort to tame inflation. The benchmark money-market rate reached a three-year high after the central bank drained cash from the banking system to cool economic growth. The renminbi climbed 0.57 percent in the past five days, a fifth weekly gain, and reached the strongest level since China unified official and market exchange rates at the end of 1993. The yuan will continue to appreciate, advancing 6 percent next year, said David Cohen, an economist at Action Economics Ltd. in Singapore. Policy makers “recognize the usefulness of a stronger currency in curbing inflation,” said Cohen. “The yuan, like other Asian currencies, has very strong fundamentals and the country has a very large current-account surplus.”
Why don't Chinese spend more money? - If anyone on the planet can afford to head down to the neighborhood mall and indulge in a shopping spree, you'd think it would be the Chinese. After all, they live in an economy that routinely posts growth rates of 9% or higher, resulting in surging incomes and boundless job opportunities. While much of the world experienced GDP contractions and dramatic spikes in unemployment during the Great Recession, China, supported by massive stimulus programs, barely missed a beat. In theory, as income increases, and the prospects for future earnings become brighter, families should be more willing to postpone savings and spend now. But in China, just the opposite is happening. It's still proving difficult to convince the average Chinese to part with his or her money, even though his or her stash of cash is bigger than ever. Sure, Chinese consumers are spending more and more each year on items like cars and appliances. But simultaneously, the urban Chinese household saves twice as much of its income today as 20 years ago – from 15% in the early 1990s to over 30% in recent years. Oddly, as Chinese incomes have grown, so has their propensity to save.
China ratings agency rattles cages of Western rivals - China's homegrown credit ratings agency Dagong has made a name for itself this year by hitting out at its Western rivals, but analysts say it will be hard-pressed to win the trust of foreign investors. Since July, Dagong has given the United States and 17 other nations lower marks than they received from Moody's, Fitch and Standard & Poor's, and said the big three caused the financial crisis by failing to properly disclose risk. Chairman Guan Jianzhong, a paid adviser to China's government, insists his agency is fully independent -- and stands by his tough talk about his rivals, whose ratings affect interest rates at which states and companies can borrow. Dagong Global Credit Rating Co.'s Western competitors "neglect two fundamental principles -- knowing whether the country in question has money, and if that money can generate value", Guan told AFP in an interview.
China Slows As Tightening Start To Bite - China's industrial growth has begun to slow as a string of measures to choke excess credit and control inflation feed through the economy, threatening to curb the country's voracious appetite for commodities. HSBC's manufacturing index fell from 55.3 to 54.4 in December, the first drop in five months. The slowdown suggests that the authorities are at last gaining traction in their ever-more zealous efforts to stop over-heating, though many analysts say the credit bubble has already gone too far to avoid trouble next year. The spectre of Chinese monetary tightening has now become the most neuralgic issue in the world economy. There are fears that Beijing may knock away the central prop of global recovery if it misjudges the delicate task.
Credit-deposit growth gap behind liquidity crunch - The faster growth in bank credit than deposits is behind the present cash crunch, the Reserve Bank of India (RBI) has said. Year-on-year credit growth was 23 per cent till December 3, while deposit growth was only 15 per cent, as compared to RBI's projection of 20 per cent and 18 per cent, respectively, for 2010-11. The liquidity deficit, indicated by banks' borrowing from the repo tender of RBI, has been over Rs 1 lakh crore on an average since November. Low government spending, coupled with slack deposit growth and advance tax outflows, has resulted in the crunch. On Wednesday, banks borrowed a record Rs 1.7 lakh crore from RBI.
Iran's economic 'surgery' - INSIDE STORY - Al Jazeera - Iran's government has slashed subsidies on food, water, electricity and fuel. They say the subsidies have been an expensive affair costing them around $100bn annually. Petrol prices will rise from 40 cents per litre to 70 cents. Electricity prices will jump from around $5 per month to $20. It is a dramatic increase, also for the cost of natural gas, from around $30 per month to $150. The cutbacks have been descirbed as the "biggest surgery" to the nation's economy in 50 years. They come as the Iranian economy is straining under international sanctions. Earlier this year, the UN, the US and the EU all imposed tough new sanctions on Iran over its nuclear programme. But is Mahmoud Ahmadinejad, Iran's president, breaking his electoral promise to help the poor, his main source of support? And are sanctions the only reason behind Iran's economic woes?
Iran Gasoline Consumption Down 20% Year-On-Year After Subsidy Cut - Iran's gasoline consumption has fallen by 20% on a year-on-year basis since a four-fold increase in prices came into force, a top Iranian oil official said Wednesday, as a broad overhaul of subsidies hit oil-products use. The gasoline subsidy cut comes after after a U.S. ban this summer on the country's gasoline imports. Feared riots against the rise have not materialized so far amid cash payments to compensate the less well-off and heavy police presence.
Iran refuses India oil sales on RBI's terms – sources - An oil trading dispute between India and Iran escalated as Tehran refused to sell oil to India under New Delhi's prohibitive new rules, sources on both sides said on Wednesday. The Indian sources said officials from the central banks of the two countries will meet on Friday as Iran seeks to rescue trade worth around $12 billion a year, which could be jeopardised by rising U.S. pressure on countries trading with Iran to abandon all dealings. Last week, the Reserve Bank of India said deals with Iran must be settled outside the Asian Clearing Union (ACU) system, used by central banks of member nations to settle bilateral trades. Two Indian industry sources said on Wednesday that National Iranian Oil Co (NIOC) turned down Indian oil firms' request for payments outside the ACU. The ACU includes the central banks of India, Bangladesh, Maldives, Myanmar, Iran, Pakistan, Bhutan, Nepal and Sri Lanka.
Oil crisis looms as RBI stifles Iran oil imports - India may face fuel supply shortage next month after Reserve Bank of India (RBI) stopped facilitating payments for Iranian crude imports, which make up for 12% of the nation’s oil needs. RBI’s sudden move, which came without either the oil industry or the government being consulted, would mean that the nation cannot import 10 million barrels of crude oil contracted from Iran for January, a replacement of which cannot be found easily. “There is a huge crisis staring us. The RBI has, without putting in place an alternative payment mechanism, suddenly withdrawn from a system that was running fine since 1976,” an oil industry official said. “You simply cannot find replacement of such a huge quantity so easily. Plus, once the market comes to know of such a huge requirement, the already firm crude prices will shoot through the roof,”
Food, fuel prices drive inflation worries - Rising prices in India of fuel and food are reviving worries about inflation and sent swap rates to 26-month highs as expectations grew for more rate increases in Asia's third-largest economy. India's embattled government is expected to decide next week whether to increase state-set fuel prices as international crude oil hovered near two-year highs, a move that would have a broader inflationary impact than a decision earlier this month by state-run fuel retailers to lift the price of petrol. In the year to Dec. 11, India's food price index rose 12.13 percent, with the price of onions -- the country's most widely-eaten vegetable -- of especial concern, while the fuel price index climbed 10.74 percent. This compared with 9.46 percent and 10.67 percent respectively in the previous week."Inflation is becoming a problem now. We expect the RBI (Reserve Bank of India) to hike rates sooner rather than later. Now we expect 50-75 basis points of rate hike in the next year, most of which should happen in the first half," said Manish Wadhawan, director and head of rates trading at HSBC in Mumbai.
Getting Corruption Right - –Transparency International and occasionally the World Bank like to rank countries by their degree of corruption, with the media then ceaselessly citing where each country stands. But cultural differences between countries undermine the legitimacy of such rankings – which are, after all, based on surveys of the public. What Obama was doing was a common enough practice in the United States; it was not so in India, where such a technique is, indeed, regarded as reprehensible. A similar bias arises from the occasional tendency to view political patronage elsewhere as being more corrupt than the same practices at home. For example, when the East Asian financial crisis broke out, there followed a systematic attempt to pin the blame on the affected countries: “crony capitalism” allegedly had somehow crippled their economies! In other words, the acquaintances and benefactors of the East Asian leaders were “cronies,” whereas those of US leaders were “friends”? In fact, it was clear that the culprits were the International Monetary Fund and the US Treasury, which had encouraged a shift to capital-account convertibility without understanding that the case for free capital flows was not symmetrical with the case for free trade.
2010: The Year of IMF Reform - The IMF Blog - The year 2010 was—finally—the year of IMF reform. Dominique Strauss-Kahn, the IMF’s Managing Director, did not exaggerate when he asserted that the agreements of 2010 were “the most important reform in the governance of the institution since its creation.” What will happen now, and why is it so important? Three major changes have been agreed to. Each one is a major reform and the culmination of years of work. Each one will be difficult to make effective. Each one should prove to be a blessing, but only if it is well implemented. First, the fast-growing emerging market countries will have a bigger say in how the institution is run and how it interacts with its membership. For the first time, the combined voting power of the United States and the current European Union members will fall below 50 percent.
Blanchard Sees Continued Two-Speed Recovery in 2011 - IMFdirect - Interesting interview with the IMF’s Chief Economist Olivier Blanchard in the Fund’s IMF Survey magazine. He says the two-speed global economic recovery is likely to dominate 2011, with weak growth in advanced economies barely enough to bring down unemployment and emerging markets facing the challenges of success, including how to avoid overheating and handle strong capital inflows. In an assessment of the global economy at the end of 2010, and the prospects for 2011, Blanchard said that countries should continue to focus on rebalancing their economies in the coming year, including structural measures and exchange rate adjustments. “Without this economic rebalancing, there will be no healthy recovery,” he says. Read the full interview here.
FX Intervention Trifecta: Korea, Malaysia, Thailand - Oh, will the combatants ever cease from "international currency war" so we can celebrate the holidays in relative peace? With the US dollar doing another of its habitual swoons due to much-lamented American free money policies, Asian economies not particularly keen on shooting themselves in the foot are having to wade into the open market and buy the godforsaken and hapless greenback to stem the appreciation of their currencies. From the Wall Street Journal comes this snippet: Central banks in South Korea, Malaysia and Thailand are believed to have intervened in foreign-exchange markets Thursday as Asian currencies surged against the dollar on optimism about the region's economic outlook, underscored by strong economic data from China and signals that the yuan will continue to strengthen. Taiwan, meanwhile, unveiled measures to buttress its banking system against rapid movements in foreign capital, the latest Asian economy to introduce stricter regulations to control the risks posed by such capital flows... In Kuala Lumpur, traders said Malaysia's central bank was suspected of buying dollars to curb a rise in the ringgit, which hit a three-month high Thursday
Japan's Budget May Fail to Spur Growth While Debt Stays High - Japan's budget plan for next year may fail to achieve the government's goal of spurring private demand, while making little progress on reducing the country's debt, Shinkin Asset Management Co. said. Prime Minister Naoto Kan will keep new debt sales at 44.3 trillion yen ($534 billion) in 2011 to finance a record budget of 92.4 trillion yen in the year starting April 1, according to a proposal approved on Dec. 24 by the Cabinet in Tokyo. The Kan administration is trying to reduce a public debt burden about twice the size of gross domestic product, stimulate an economy hit by deflation and a strong yen hurting exporters, and bolster social security spending for an aging society. His latest budget plan may not do much to revive demand, said economist Hiroshi Miyazaki.
Japan's Perpetual Motion Debt Machine - Perpetual motion is impossible, but Japan has managed the illusion of perpetual debt for 20 years. Perpetual motion--a machine which produces more than it consumes indefinitely, without any visible energy source--is impossible. So too is an economy which consumes more than it produces and fills the gap with debt. Yet Japan has maintained the illusion of a perpetual motion debt machine for 20 years. Back in 2001 I wrote an article describing Japan's Runaway Debt Train: 40% of its annual budget was borrowed, and much of its tax revenues were gobbled up by interest payments on its mind-boggling public debt. Nine years later, nothing has changed: welcome to perpetual motion. Japan's government approved a record 92.4 trillion yen ($1.1 trillion) budget for the 2011 fiscal year, of which 44 trillion is borrowed, 7 trillion is lifted from various trust funds and a mere 41 trillion is tax revenues.
EU wants power to block China’s technology purchasing power - The European Union's industry commissioner wants the power to block China from buying up European tech companies. Commissioner Antonio Tajani made the comments in an interview with German daily paper Handelsblatt. Europe should establish a new authority with powers to block foreign takeovers of strategic European businesses, he said. "Chinese companies have the means to buy more and more European enterprises with key technologies in important sectors," The commissioner envisions an authority along the same lines as the United States' Committee on Foreign Investment. The proposed E.U. authority would determine "if the acquisition (of a company) with European know-how by a private or public foreign company represented a danger or not".
Is there a roadmap for the Eurozone debt crisis? - Latin America’s sovereign debt crisis in the 1980s suggests there is one. A defining decade for the region, it saw many countries shut out of international capital markets and default after they took on unsustainable amounts of debt. The crisis, which almost brought the US financial system to its knees, was resolved only via debt write-offs. Although the two continents are very different, the similarities between their situations then and now are striking. In both cases debts were issued in a currency over which borrowing countries had no control. In Latin America it was the US dollar. For large European borrowers, such as Greece, Ireland, Portugal, Spain and Italy, it is the euro. Second, the debt crises followed a sustained period of easy credit. Third, both debt crises coincided with a global recession deemed to be the worst since the Great Depression
Portugal needs to raise up to 20b euros -Portugal needs to raise up to 20 billion euros ($A26.02 billion) on international markets in 2011, the national debt agency says, in what will be a key test of the country's ability to calm jittery investors. Portugal is one of the frailest members of the 16-nation eurozone. Its high debt burden and low growth in recent years have fuelled speculation it may join Greece and Ireland in needing a financial bailout. The Institute for Treasury and Public Credit Management said on Wednesday it intends to issue bonds worth 18-20 billion euros to meet Portugal's financing requirements next year. It provided no dates for the auctions.
Deutsche Bank: Portugal likely to seek bailout -The chief economist of Germany's biggest bank says he expects Portugal to seek a bailout from other eurozone countries soon as the sovereign debt crisis continues to erode market trust. German Sunday newspaper Frankfurter Allgemeine Sonntagszeitung quoted Deutsche Bank AG's Thomas Mayer as saying he "wouldn't be surprised if Portugal would in the near future seek help in addition to Greece and Ireland." The newspaper further quoted Mayer as saying the government in Lisbon would be "well-advised to move swiftly" under the protection of Europe's euro750 billion ($980 billion) rescue fund.
Why are Irish Political Leaders so Keen to Collude with the Bank Regulator in Covering Up Blatant Regulatory Breaches at Unicredit Ireland? - -Dublin, by way of the proudly-named International Financial Services Centre, a sparkling new development in the old docks, is “home to more than half of the world’s top 50 financial institutions”. But as the Irish financial crisis wears on, this glitter invites unpleasing comparisons: it simply looks meretricious. What Dublin and, let’s say, Bangkok, a favoured destination for paedophilic sex tourists, have in common, is a service offering based on activities forbidden overseas. Where they differ is in the amount of money involved, but each capital makes some money out of predatory or adventurous incomers, and needs slack local laws, slack local law enforcement, and pimps and procurers (or their analogues). That’s not so very different from the business plan for the City of London after Big Bang, to be honest, or a dozen offshore financial centres, but in Ireland this variant of mercantilism been pursued with a great deal of energy and rigour, to disastrous effect, as this latest story attests, once again. Back in September 2007 Unicredit Bank Ireland’s risk manager resigned. Firing or losing risk managers can be a very bad sign, indeed: here is another sighting at Merrill Lynch ($50Bn of CDO losses, taken over by Bank of America) and another at HBOS (losses 2008-9: £17.1Bn, part nationalised). Those two firms were train wrecks, urged to destruction by utterly reckless top management. At Unicredit, the resignation matter was a bit more technical : massive breaches of liquidity requirements (banks are required to ensure that cash inflows equal at least 90 per cent of cash outflows forecast over the relevant period). Over to Ireland’s Village magazine for the details:
The Lender of Last Resort - Nick Rowe - What Paul Krugman is saying about Ireland and the Eurozone is not wrong. But he keeps missing the most important point. And it's bugging me. Sure, the scale of Ireland's bank guarantees is much bigger than the US's TARP, as a percentage of GDP, and that matters. And sure, the Eurozone is less of an Optimal Currency Area than the US, and that matters too. But the lender of last resort matters more. The US has an effective lender of last resort. The Fed has the political authority to print as many US dollars as are needed. The only effective limits are the risks of inflation and moral hazard. The Eurozone does not have an effective lender of last resort. The individual Eurozone countries do not have their own central banks. The ECB lacks the political authority to print as many Euros as are needed. Suppose you abolished the US Federal government. So you needed all 50 State governments to agree before the Fed could act as lender of last resort to one of those State governments. And suppose some of those US State governments had as much debt as Greece, or were bailing out their banks like Ireland. Think all 50 State governments would agree on anything?
Italy launches 12-billion-euro bond issue at higher rates - Italy on Wednesday raised 12 billion euros (15.7 billion dollars) in a treasury bond auction that drew strong demand but at interest rates sharply higher than at a previous operation. Italy, with a public debt approaching 120 percent of gross domestic product, has lately prompted investor unease amid a wider eurozone finance crisis affecting Spain, Portugal, Ireland and Greece. The Bank of Italy said the treasury had placed six-month bonds worth 8.5 billion euros and two-year bonds worth 3.5 billion euros. The rate on the six-month bond went to 1.698 percent from 1.483 percent while that on the two-year bond rose to 2.937 percent from 2.307 percent.
Italy falls short on bond sale, yields rise (Reuters) - Italy failed to sell part of its planned offer of bonds on Thursday, paying sharply higher yields to place 8.1 billion euros ($10.71 billion) of medium- and long-term debt with investors. The sale adds to the 12 billion euros of short-term debt Italy sold on Wednesday, comforting the market on the Treasury's ability to fund a huge state debt burden and avoid the problems seen by other highly-indebted euro zone economies. But the Treasury sold only 1.3 billion euros of 7-year paper and 836 million of 5-year paper compared to planned sales of up to 1.5 billion and 1.0 billion respectively. "The periphery euro zone countries are under pressure to raise a lot of cash ... as the sovereign confidence crisis is not over, so all these auctions are going to be work,"
Italy sells 8 bln euros in bonds but rates jump — Italy raised more than eight billion euros (10.6 billion dollars) on Thursday in its final bond auction of 2010, but was forced to pay investors sharply higher interest rates amid eurozone debt crisis fears. Rome placed several maturities of bonds, with the yield on those due in 2021 jumping to 4.8 percent versus 4.43 percent in the previous auction. The yield, or the rate of return it must pay investors, on Italy's 10-year bonds rose to 4.833 percent on the secondary market on Wednesday evening
French debt reaches 81.5 pct of GDP in Q3 end - France's gross debt reached 1,574.6 billion euros (2,082.3 billion U.S. dollars) at the end of the third quarter of 2010, amounting to 81.5 percent of whole national output, the state statistics bureau Insee said on Tuesday. The figure by the end of September decreased to 17 billion euros (22.5 billion dollars) compared to the second three months of the year, and lowered the percentage from 82.9 percent in that period, the national agency added. Among the public debt, general government net debt played a negative role in need of strict control despite of efforts aiming to slash the public expenditure.
ECB fails to fully offset government bond buys - The European Central Bank failed to attract the 73.5 billion euros from banks on Tuesday needed to offset its seven-month run of euro zone government bond purchases, instead managing to draw just over 60 billion. The pace of the ECB's government bond purchases picked up last week as the bank spent 1.121 billion euros reflecting the bank's ongoing attempt to calm euro zone debt markets. The central bank takes seven-day deposits from commercial banks on a weekly basis to offset its spending, but the failure to fully sterilize the purchases is likely to reflect the fact banks are keeping hold of their funding around the traditionally tense year-end period.
Next European Leg Down? First Failed ECB Monetization Sterilization, As Central Bank Has E13 Billion Shortfall In Bond Bids - The ECB managed to obtain just E60.8 billion in tender interest for its most recent 7 Day SMP "peripheral bond monetization" operation, whereby it needed at least E73.5 billion to be able to offload all of its cumulative acquired sovereign bonds to other financial institutions: a de facto sterilization, which is why the ECB has so far been claiming it is not monetizing debt (as it constantly rolls the held balance on other bank balance sheets). That is no more: following today, the ECB is left with just under E13 billion in sovereign holdings and thus are not sterilized. This development follows Monday's announcement, which was reported first on Zero Hedge, that the ECB acquired 100% more in peripheral bonds in the prior week compared to two weeks ago. Another notable development: the number of bidding banks participating in the tender operation dropped to just 41- the lowest since the inception of the program in May when Greece went tits up and all of Europe was supposed to bail each other out in perpetuity. And what is most disturbing is that this complete lack of interest (or telegraphed lack of bank liquidity) happened even as the marginal rate jumped by over 50%, from 0.6% to 1%- the same as the maximum rate allowed on an auction. Should banks not come back with tender takedown interest next week, this could very well be the catalyst for the next leg down in the European crisis.
Collective Action Clauses: Das Opium des Volkes - In the absence of a sovereign bankruptcy regime, Collective Action Clauses (CACs) help solve coordination problems in sovereign bonds by binding all bondholders to the terms of a debt restructuring approved by the majority. Some variants go farther to help map a path for debt renegotiation. A promise to adopt CACs in all sovereign debt issued by EU member states figured prominently in statements by European leaders in November, and again by the European Council just a couple of weeks ago. Beginning in 2013, CACs would be adopted, and could be used “case by case” to facilitate restructuring of unsustainable government debts, and thereby share the burden of crisis response with the private sector, eliminating the need for bailouts. CACs are part of the plan for a new European Stability Mechanism, which would replace the temporary European Financial Stability Facility and the European Financial Stabilization Mechanism, established earlier this year for three years.
Euro debt crisis likely to spill into 2011, say Danish experts (Xinhua) -- The eurozone has been plagued by a sovereign debt crisis throughout 2010, and several financial experts in Denmark warned that the mired situation may extend well into 2011. Interviewed by Xinhua on the cause and impacts of the crisis as well as viable solutions, the experts agreed that the eurozone was getting nowhere in ending the crisis. "The stimulus packages did prevent a complete breakdown, but the eurozone has not yet decided how to handle the government debt crisis in a way that would prevent a repeat of the crisis,"
Expect some answers from the eurozone - The eurozone survived 2010. My prediction is that it will survive in 2011. The question is, in what condition? Quite probably we will see more funding crises, as some eurozone governments and banks seek to refinance their debts. We must also be prepared for a public backlash against what in several countries are the most extreme austerity programmes since the 1930s. The euro, even if it survives the year, will remain a source of political, economic and financial instability for the eurozone itself and the world as a whole. What we saw last year was not a speculative attack on the euro, as continental European politicians would have us believe, but a perfectly normal response to a change in risk perception. Smart investors understand that the combination of high indebtedness, high interest rates and low growth raises dramatically the risk of default at some point in the future. Normally, a higher interest rate would compensate for such risk, but this does not work when the rate become so high that it triggers the default you want to insure against. This is why the rational response has simply been to get out – especially given the abundance of far less risky high-yield alternatives. Ten-year Turkish government bonds were yielding just under 9 per cent last week. Ten-year Polish bonds were at 6 per cent. Neither country is going to default or adopt an inflationary monetary policy.
The euro: where we are at - Wolfgang Munchau writes: The EFSF will expire in 2013, at which point a new, tougher crisis regime will kick in. The EU has chosen this particular two-step construction for mainly political reasons, but from a funding perspective it is a nightmare. All existing bondholders will be protected until 2013. All government bonds issued from 2013 onwards will have collective action clauses. This means that if a government cannot service the debt, it can agree a haircut with a majority of investors – with legal force for all investors, including those who disagree with the majority vote. Looking at it from a risk-management perspective, this means that the entire default risk of the eurozone periphery will be concentrated on post-2013 bond issues. No one in their right mind would buy such junk bonds.
Estonia's Entry Expands Euro Into Former Soviet Union - Estonia entered the euro area with “no glitches” in banking and retail, shrugging off the sovereign debt crisis rippling through Europe to extend the currency block into the former Soviet Union. Wedged between Russia and Latvia on the Baltic Sea, Estonia is the 17th country to switch to the currency. Gross domestic product of 14 billion euros ($19 billion) makes it the second- smallest euro economy after Malta. “The New Year came exactly like the Estonian central bank and its partners had planned,” deputy central bank Governor Rein Minka told a news conference in Tallinn, the capital, today. “There were no glitches with adopting the euro or with technical systems. The new money reached all the places it was supposed to.”
Estonia joins crisis-hit euro club, others wary (Reuters) - Estonia joined the euro zone as its newest member Saturday, but the currency club's deepening crisis is likely to put off bigger eastern European entrants from joining for up to a decade. The small Baltic state of 1.3 million became the 17th euro zone country at midnight, beginning a switch from the kroon, and was the first former Soviet state to adopt the euro. Prime Minister Andrus Ansip was the first to take euros out of a specially installed cash machine outside a theater where a ball had been held to celebrate the switchover and the new year. "It is a small step for the euro zone and a big step for Estonia," he said, holding the notes.
Congratulations to Estonia - or Maybe Condolences? – Krugman - If I’ve got this right, Estonia will join the euro in about 40 minutes. It is an impressive achievement, a symbol of the country’s transformation from Soviet province to good European citizen.But the cost of the adventure so far has included a Depression-level slump: GDP is growing again, but only after falling 18 percent. The IMF projections only go out to 2015 — and even then, the Fund expects GDP still to be below its 2007 level. Unemployment, having risen to almost 18 percent, is expected to remain above 10 percent into 2014. So, congratulations to Estonia — but condolences too. This wasn’t the glittering euro entrance you were promised.
Euro-Zone Bonds to Start New Year With Old Problems - —With Portugal hitting the debt markets for fresh cash next week, the euro zone looks set to start the new year much as it began 2010: under threat from countries with weak economies and shaky public finances. But this time around, the first auctions of the year could be decisive. Despite the Greek and Irish bailouts, 2010 ended with debt-laden euro-zone countries facing escalating borrowing costs. "If the first 2011 issues are completed without too many difficulties, this will bode well for the rest of the year in as much as it would suggest investors have taken on board the risk presented by [countries on the bloc's periphery]." Although these so-called peripheral countries have improved their situation through budget cuts and tax increases, their funding needs remain heavy, because most have a higher amount of debt to pay off in 2011. Portugal is the biggest question mark right now, and its borrowing costs have been soaring. Yields on its 10-year bonds jumped to 6.682% at the end of 2010, from 4.065% at the end of 2009.
Fresh Crises Loom in Europe and the U.S. - Simon Johnson - Most experienced watchers of the euro zone are expecting another serious crisis in early 2011, tied to the rollover funding needs of its weaker governments. With debts coming due from March through May, the crisis seems much more predictable than what happened to Greece or Ireland in 2010. And the investment bankers who fell over themselves to lend to these countries on the way up now lead the way in talking up the prospects for a serious crisis. This situation is not more preventable for being predictable, because its resolution will involve politically costly steps – which, given how Europe works, can be taken only under duress. Don’t smile at the thought and think, “It can’t happen here,” because this same logic points directly to a deep and morally disturbing crisis in the United States.
U.K. Think Tank Sees 20% Chance Of Euro’s Survival - Europe’s common currency, battered for more than a year by a sovereign debt crisis, is unlikely to survive the next decade in its current form, the Center for Economics and Business Research warned Friday. In a list of top 10 predictions for 2011, the CEBR, a U.K.-based think-tank, gave the euro a slim one-in-five chance of being preserved in its present incarnation as the legal tender for the 16 nation currency bloc. That number will increase to 17 on Monday, when Estonia accedes to the euro zone. The organization sees brewing debt problems in Spain and Italy as the catalyst for a new downturn. While economists have long warned that Spain and Portugal are two of the most vulnerable economies in the euro zone, Italy’s heavy debt load — approximately 115% of GDP — and sluggish growth have made some analysts wary about the country’s long-term prospects.
Euro has 1-in-5 chance of lasting decade: UK think-tank (Reuters) - The euro currency area has only a one-in-five chance of surviving in its current form over the next 10 years because of competitive imbalances between its members, a leading British think tank said on Friday.The Center for Economics and Business Research said Spain and Italy would have to refinance over 400 billion euros ($530 billion) of bonds in the spring, potentially sparking a fresh crisis within the 16-nation euro area."The euro might break up at this point, though European politicians are normally able to respond to a crisis," said CEBR Chief Executive Douglas McWilliams in a list of 10 forecasts for 2011.
The Pound's Not Sinking, The Yen's Not Keeping Up... Spent the past few minutes reading Alea. jck notes that, over the past five years, the Pound has grown in importance at the expense of the yen and that the Euro has done the same against the dollar.If this goes against your memory, you're not part of the IMF. Even better is when jck gets his funny on. For those screaming about PIIGS, he presents the evidence: Note: Banks and government debt rollovers amount to €210 bln for 2011, €15 bln lower than in 2010, you would never guess that reading the funny (pink) papers.Somewhere, an FT editor is reading that and cheering that they're on holiday until the 4th.
UK Bubble: Waiting for the great default - What is the true meaning of this chart? As the red line illustrates, the yield on a UK twenty-year government bond is around four percent. This means that private investors are prepared to accept a promise that the government will repay a loan in 20 years time in exchange for a four percent return a year. At the same time, the government promised to pay generous pensions to the public sector. It will also maintain a comprehensive pension system for the rest of us. It has agreed to sustain a social safety net for the unemployed and those suffering from long-term illnesses. It insists that it will keep a fully comprehensive and free National Health Service. It has also committed to honouring a mountain of PFI agreements under which the private sector built public sector infrastructure in return for long-term service contracts. I could go on, but the key point is that previous governments have promised away decades of tax revenues. It's impossible to see how all these commitments can be honoured at the same time.
Families £3,000 worse off - Middle-class families will be more than £3,000 a year worse off this year, with the rising cost of living pushing many to the brink of bankruptcy, research has found. A combination of higher prices, lower benefits and pay freezes will leave many struggling to cope in a tough economic climate, experts have warned. Telegraph figures show that a family of four, living in Ashford, Kent, with a single earner on £50,000 will be £3,252 worse off this year than they were in 2010. Major costs include a £488 rise in rail fares, an increase in energy bills of £161 over the year, and food bills rising by £230. Predicted rises in interest rates add a further £562 to the family's average £150,000 variable rate mortgage. "The worst is yet to come. We are still approaching the peak in personal insolvencies. People have been putting off reducing their debts just to get through the last year. "As soon as interest rates go up, more people will struggle and personal insolvencies will rise."
Pensioner Insolvency Rises Fastest As Baby Boomers Struggle To Pay Off Debts - Pensioners are now the fastest growing group filing for insolvency as Britain's baby boomers struggle to repay debts carried into retirement. A record 15 people entered insolvency every hour in 2010, as the total number of people filing for bankruptcies, IVAs and Debt Relief Orders reached around 135,000 – up from 2009’s high of 134,132 – RSM Tenon said in a report on Friday. Pensioners, although they made up less than 4pc of the total, now form the age group that is seeing the highest growth rate for insolvency, with a 14pc rise that RSM said could point to a worrying trend. "This is the first generation of people who have been used to carrying debt,"
Charity is never a substitute for public welfare - The personal wealth of Francis Maude, the Cabinet Office minister who has just issued a green paper on "giving" in the hope of "building culture change" in our attitudes to charity, is estimated at £3m. No doubt it was to maintain his own levels of "giving" that, having rented out a central London house he already owned, he bought a flat nearby and put £35,000 in mortgage interest on expenses. No doubt, too, he stopped to ladle out soup to the homeless on his way to board meetings of Prestbury Holdings, a financial services company that benefited handsomely from sub-prime mortgages and paid Maude more than £3,000 each time he put in an appearance. Perhaps he and the 22 millionaires among fellow ministers who attend cabinet meetings regard constructing the "big society" as a sufficiently charitable contribution in itself. That's the trouble with charity: it doesn't all go to what might be regarded as good causes. As a proportion of GDP, the US gives most: 1.7% against Britain's 0.7%. But donations to religious organisations account for 60% of the difference and, though some money reaches the poor, large sums fund preachers and church premises. Other "charitable" beneficiaries include the universities Americans attended in their youth, which are thus prompted to look with a kindly eye on children of alumni when they apply for places. But we, too, have our weaknesses, such as Eton, which notoriously counts as a charity.
The UK Inflation Genie Is Out Of The Bottle - It would be wrong – reckless, in fact, given the slew of recent bad data – to fail to point to the worrying mix of economic issues the UK now faces. During 2011, the British economy will suffer from rising inflation and sluggish (in some quarters, possibly negative) growth. This grim combination will be set against a budgetary situation that can only be described as ghastly. George Osborne was recently in New York, soaking up plaudits for boldly leading Britain into fiscal austerity at a time when, apparently in contrast, America's feckless political elite has allowed the national debt to balloon. The problem is that UK austerity, so far at least, is a myth. November's national accounts, released last week, were shocking. Government spending last month was sharply up on the same month in 2009 – yes, up! British state borrowing is still escalating, with the national debt rising very quickly.
Sovereign Debt Levels 'Unsustainable', Double Dip A Possibility - Too many countries have levels of debt they will not be able to finance, which could cause further economic turmoil in 2011, Gulf economic expert Eckart Woertz has said. Speaking to Arabian Business, Woertz, who is a visiting Fellow at Princeton university in America, said GCC economies would not be insulated from another downturn on international markets. He said: “Debt levels are still at historic and unsustainable peaks compared to GDPs. There was only a certain shift from private to public sector debt issuance and the latter has faced increasing problems in 2010, be it in California or Greece. “People who uncritically hail the growth potential of China and other emerging markets may think twice: their growth model has relied on exports and deficit spending in the US and other OECD countries - if the latter crumbles, they will face problems as well.”
Future shock? Welcome to the new Middle Ages - Imagine a world with a strong China reshaping Asia; India confidently extending its reach from Africa to Indonesia; Islam spreading its influence; a Europe replete with crises of legitimacy; sovereign city-states holding wealth and driving innovation; and private mercenary armies, religious radicals and humanitarian bodies playing by their own rules as they compete for hearts, minds and wallets. It sounds familiar today. But it was just as true slightly less than a millennium ago at the height of the Middle Ages. In recent years it has become conventional wisdom that the post-cold-war world will see rising powers such as China and Brazil create what international relations experts call a “multi-polar” order. Yet for the next 10 or 20 years, it is not at all clear that the future many imagine will come to pass – namely that the relative US decline will continue, Europe will muddle along, China and India will grow ever stronger, and other straight-line projections. In fact, the world we are moving into in 2011 is one not just with many more prominent nations, but one with numerous centres of power in other ways. It is, in short, a neo-medieval world. The 21st century will resemble nothing more than the 12th century