Fed's Balance Sheet Contracts After AIG Exit - The U.S. Federal Reserve's balance sheet contracted in the latest week after the U.S. government exited insurer American International Group Inc. (AIG). The Fed's asset holdings in the week ended Jan. 19 fell to $2.428 trillion, from $2.471 trillion a week earlier, it said in a weekly report released Thursday. AIG repaid all its obligations to the Federal Reserve Bank of New York on Friday, ending the central bank's involvement in the affairs of the giant insurer. As part of the closing of AIG's "recapitalization" agreement, the New York Fed received $47 billion from AIG and terminated the credit line it first provided the company in its September 2008 bailout. The Fed's holdings of U.S. Treasury securities rose to $1.080 trillion on Wednesday from $1.062 trillion. Meanwhile, Thursday's report showed total borrowing from the Fed's discount lending window slipped to $23.69 billion Wednesday from $43.96 billion a week earlier. Borrowing by commercial banks fell to $24 million Wednesday from $87 million a week earlier. Thursday's report showed U.S. government securities held in custody on behalf of foreign official accounts fell to $3.348 trillion, from $3.346 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts fell to $2.602 trillion from $2.611 trillion in the previous week.
Fed Assets Fall by $42.9 Billion as AIG Repays Emergency Aid - The Federal Reserve’s total assets fell to $2.43 trillion as American International Group Inc. repaid its emergency aid from the Fed, according to a weekly release today by the central bank. AIG repaid the last $21 billion it owed on a Fed credit line last week. AIG also repurchased the Fed’s preferred interests in two overseas life insurance divisions, AIA Group Ltd. and American Life Insurance Co., that AIG sold last year. The Fed still has loans outstanding to two special-purpose companies that were created to buy portfolios of AIG’s assets. The facilities, known as Maiden Lane II and Maiden Lane III after a street bordering the New York Fed building in Manhattan, had outstanding loans of $12.8 billion and $12.7 billion respectively. Treasuries held by the Fed rose by $17.5 billion to $1.08 trillion as of yesterday. Mortgage-backed securities held by the Fed declined by $12 billion to $980.2 billion, while holdings of federal agency debt declined by $446 million to $145.9 billion in the week ended Jan. 19. M2 money supply rose by $6.9 billion in the week ended Jan. 10, the Fed said. That left M2 growing at an annual rate of 3.4 percent for the past 52 weeks, below the target of 5 percent the Fed once set for maximum growth.
Checking the Fed's Balance Sheet - Here is the latest update to information on what is on the Fed's balance sheet. There are some words at the beginning of the release about the unwinding of the relationship between AIG and the New York Fed, and that shows up in several places on the balance sheet. On the asset side, the QE2 asset purchases continue, with an increase in long-maturity Treasuries of about $27 billion during the past week. Mortgage-backed securities (MBS) are now running off at a slower rate than previously, presumably because of the increases in mortgage interest rates. The reduction in MBS was about $3 billion, so the net increase in securities held outright is $23 billion from the previous week - a rate higher than the monthly target of $75 billion in net purchases. In spite of that, with all the AIG action, total assets actually went down in the week by $16 billion. Then, on the liabilities side, the balance in the Treasury's general account (which I have discussed here and in other posts) fell by $30 billion, which would increase the stock of outside money in private hands. However, on net, particularly given the transactions with AIG, the result is that the net increase in outside money is small: $280 million in currency and $5 billion in reserves.
HOT: Fed Hides Major Accounting Change - Reuters has a very hot story out tonight on an accounting change the Fed snuck into a regular weekly report. It will move off its balance sheet any bad debt the Fed may have purchased from Goldman Sachs, or anybody else for that matter. Here's Reuters via CNBC (My emphasis):Concerns that the Federal Reserve could suffer losses on its massive bond holdings may have driven the central bank to adopt a little-noticed accounting change with huge implications: it makes insolvency much less likely. The significant shift was tucked quietly into the Fed's weekly report on its balance sheet and phrased in such technical terms that it was not even reported by financial media when originally announced on Jan. 6. But the new rules have slowly begun to catch the attention of market analysts. Many are at once surprised that the Fed can set its own guidelines, and also relieved that the remote but dangerous possibility that the world's most powerful central bank might need to ask the U.S. Treasury or its member banks for money is now more likely to be averted.
Fed changes accounting rules - The US Federal Reserve has changed its accounting rules in a way that means it will never have to report negative capital on its weekly balance sheets unless it suffers catastrophic losses. The Fed’s accounting is in the spotlight because of the possibility that it could suffer losses when unwinding its programme of quantitative easing that overwhelms its capital base of $53bn. But most economists feel that the concept of negative capital is meaningless for a central bank. Although the latest move is only a technical change that brings the Fed’s weekly balance sheet in line with its annual accounts it caused a stir after Bank of America Merrill Lynch published a research note. “The timing of the change is not coincidental, as politicians and market participants alike have expressed concerns since the announcement of QE2 about the possibility of Fed ‘insolvency’ in a scenario where interest rates rise significantly,” wrote analysts.
The Fed can't go bankrupt. Anymore. - There’s been much debate about the possibility of the US central bank going broke. Forget it. But not because of the Federal Reserve’s fiscal position, per se.Earlier this month the central bank made a subtle change to its accounting methods. One that might make it impossible for the Fed to show capital losses. The timing of the move was probably not coincidental, either. The central bank announced the change just as the debate about its solvency, ability and credibility was really heating up. Especially the idea that the Fed might be unable to tighten policy as much as required when the economy recovers, since doing so could lead it to go bankrupt and then the US Treasury would have to step-in and recapitalise, thus potentially undermining the central bank’s independence. Anyway, here’s the accounting change:
The Original Mandate of the Federal Reserve - Writing on his recently launched blog, my colleague Perry Mehrling traces the evolving mandate of the Federal Reserve from its founding to the present day: From a longer historical perspective, populist targeting of the Fed, both from the right and from the left, is nothing new. Big Finance and Big Government are perennial bogeymen in American political discourse. Coupling the two in the institution of a central bank is at the heart of current debate about the role of the Fed during the crisis. In 1913, at the founding of the Fed, legislators directly confronted both bogeymen. The whole idea of the Federal Reserve System, so the language of the Act made clear, was to channel credit preferentially to productive uses. Section 13(2) makes clear who was supposed to get the credit: “Discount of Commercial, Agricultural and Industrial Paper”, not speculative financial paper and not Treasury paper. The new Fed was about reversing the upper hand enjoyed by Big Finance, and without replacing it with the hand of Big Government. Exigencies of war finance soon shifted the focus of the newborn Fed, and the Act was accordingly amended.
The Fed Adds a Third Mandate - In his famous helicopter speech in late 2002, he assured us that deflation could not happen “here,” even if the short-term rate was zero, because the Fed would move out the yield curve by buying large amounts of medium-term bonds. This would have the effect of lowering yields all along the upper edge of the curve. This became known as quantitative easing. In Jackson Hole last summer,, in later speeches in the fall, and in op-ed pieces he said that such a program would lower rates. Then a funny thing happened on the way to QE2: long-term rates began to rise all over the developed world. As Yogi Berra noted, “In theory, there is no difference between theory and practice. In practice, there is.” It’s got to be driving Fed types nuts to see the theory of QE, so lovingly advanced and believed in by so many economists, be relegated to the trash heap, along with so many other economic theories (like that of efficient markets). The market has a way of doing that. So, Liesman asked Bernanke about one minute into the clip (link below) about the little snafu that, following QE2, both interest rates and commodity prices have risen. How can that be a success? Ben’s answer (paraphrased):“We have seen the stock market go up and the small-cap stock indexes go up even more.” Really? Is it the third mandate of the Fed now to foster a rising stock market? I wonder what the Fed’s target for the S&P is for the end of the year?
Federal Reserve Labors to Get Its Message Out - Federal Reserve officials, who meet next week to ponder monetary policy, have signaled they aim to stick with Chairman Ben Bernanke's plan to buy $600 billion in long-term U.S. Treasury bonds. But they are struggling to find a coherent way to explain that—and other touchy issues they face in coming months—to the public. Mr. Bernanke has promoted more open discussion of policy issues, both inside the Fed and outside, in contrast to predecessors Alan Greenspan and Paul Volcker. Most Fed officials welcome that. But following stiff criticism, both domestically and internationally, to the new round of bond-buying—some of it fueled by public misgivings by some Fed officials, including Fed governor Kevin Warsh and some regional Fed bank presidents—the central bank is reviewing its communications practices. Now, individual members of the Federal Open Market Committee sometimes air their personal views about monetary policy without regard to whether the Fed chairman has spoken publicly on a decision.
1. Conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates
2. Supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers
3. Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets
4. Providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system
Why We Don’t Need the Fed - Daniel Indiviglio recently wrote a piece called Why We Need the Fed. I am here this evening to take the opposite side of the argument. We need to divide the argument, because there are two things being argued about:
- What do we use as a currency? Should currency have intrinsic value (privately determined), or is it just a social convention, a forcible notional unit of account (legal tender)? If it is notional, should we let a bunch of largely unaccountable bureaucrats manipulate its value, ostensibly for our good, but more often for the ends that the bureaucrats prize?
- How do we regulate banks? Credit policy is more important than monetary policy. How does a free society rein in the ability of financial companies from making financial promises that average people don’t realize that they can’t keep.
The second question is more important, because that is what drives our credit booms and busts. If banks did not engage in maturity transformation, borrowing short and lending long, we would have almost no banking crises. Crises happen because there is a run on liquidity. Banks rupture when they don’t have liquidity to pay depositors or repo lines. Banks that are matched have the short-term assets to liquidate to repay exiting lenders/depositors.
The Fed Has No Clothes - Philadelphia Fed President Charles Plosser gave a major speech on Monday at the Central Bank of Chile. In the polite language of central bankers, the speech constitutes a systematic criticism of not only current Fed policy but of the Fed’s entire response to the financial crisis. Plosser’s speech updates Milton Friedman’s 1967 presidential speech to the AEA and quotes from it. “…We are in danger of assigning to monetary policy a larger role than it can perform, in danger of asking it to accomplish tasks that it cannot achieve, and, as a result, in danger of preventing it from making the contribution that it is capable of making.” In Friedman and Plosser’s analysis, the sole contribution monetary policy can make is price stability. What, in the current context, can monetary policy not achieve? Plosser enumerates impossible goals of monetary policy.
Fed Touts Market Gains to Sell QE 2 - In recent weeks, the Federal Reserve has been turning to an unusual metric to prove the potency of its bond-buying program: the stock market. Comments from Fed Chairman Ben Bernanke and other officials, as well as research by the central bank, cite rising stock prices as a sign that the central bank’s $600 billion bond-buying program is working to bolster the economy. The focus on stocks puts the Fed in an unusual position, given that equity moves haven’t usually been a focus of the monetary-policy process. The shift could be benign, or a sign of trouble. On the positive side, central-bank policy may indeed be lifting stocks, which should in turn make many households more wealthy and willing to spend, thus boosting growth. On the downside, the gains could be the only thing policy makers can hang their hat on while they pursue a controversial policy. For most of the modern era of monetary policy-making, equity prices have been nearly an afterthought. But since the current round of Treasury purchases started late last year, it’s been a different story. Yields are up, making borrowing more expensive, not less.
A Law Might Speed Up the Taylor Cycle - John Taylor -The phrase in the headline above concludes Amity Shlaes's "amazingly thorough" article (quoting AEA President Orley Ashenfelter here) on the long cyclical swings between rules and discretion which I documented in a speech at the annual AEA-AFA luncheon in Denver on January 7. Given that the previous period of discretion (in the 1960s and 1970s) lasted nearly two decades, a continuation of the normal cycle means that it might take another dozen years to get back to more stable rules-based monetary and fiscal policies, which is the length of time Amity Shlaes suggests. She also suggests that a law could move the balance back toward rules much sooner. I think that’s why we are beginning to see renewed interest in legislation to modify the Federal Reserve’s mandate and add reporting requirements and accountability for its monetary strategy.
Having My Cake and Eating it Too - Tim Duy and Andy Harless call me out for being critical of the the Fed's low interest rates in the early-to-mid 2000s and for being critical of the Fed for failing to stabilize total current dollar spending. They say I cannot have it both ways. They argue that in order to keep nominal spending stable in the early-to-mid 2000s, the Fed had to push the federal funds rate below its neutral rate level for an extended period. Therefore, it is unfair for me to assign blame to the Fed for the credit and housing boom. Scott Sumner and Bill Woolsey have also raised this question to me in the past. So what do we make of it? I am being inconsistent? Though it may not convince everyone, there is a way to reconcile my two criticisms of the Fed. The key to doing so is appropriately specifying the trend growth of nominal spending. I will define it here as the trend growth rate over the 1987-1998 period for several reasons. First, its the part of the Greenspan period where there were no wide, unsustainable swings in economic activity. Second, 1998 is when the Greenspan Fed for the first time significantly deviated from past practice by lowering the federal funds rates even though the economy was experiencing robust economic growth.
Matt Stoller: The Real China Problem Runs Through JPM and Goldman -The Federal Open Market Committee releases its transcripts on a five year time lag. Last week, we learned what they were saying in 2005. Dylan Ratigan blogged an interesting catch: Dallas Fed President Richard Fisher expressed his frustration about Chinese imports. Not, of course, that there were too many imports, but that our ports weren’t big enough to allow all the outsourcing American CEOs wanted.Fisher is just the latest Fed official to applaud this trend. Here’s the backstory. In the 1970s, there was a lot of inflation. The oligarchs of the time didn’t like this, because it made their portfolios worth less money. So they decided they would clamp down on inflation by no longer allowing wage increases. To get the goods they needed without a high wage work force, they would ship in everything they needed from East Asia and Mexico. The strategy worked. Inflation collapsed. Wages stopped going up. There were no more strikes. Unemployment jumped. There were all sorts of excuses for why this was a good idea – we would do the ‘high value add’ work in America, like research and development, while the ‘low quality work’ like manufacturing went abroad. And everyone would benefit – sure you wouldn’t get a raise, but you’d get low prices at Walmart (Walmart shows up all the time in FOMC meeting transcripts). But basically this was a way of ensuring that banks and creditors could make a lot of money that would instead go to workers. It was known as ‘the great moderation’, a term coined by Bernanke, and was considered a great success.
Missing the Big Picture - Economists Risk Everything - In a different time we could happily go about our lives, ignoring economists as largely irrelevant to our daily lives. That is no longer the case. In helping to shape central bank policies, economists are performing one of the largest social and monetary experiments in all of history, and its outcome, good or bad, will shape all of our lives enormously over the coming years. In fact, this experiment is already well underway and yielding results. Perhaps not the desired results, but results nonetheless. The biggest problem with most, but not all, economists is that their theories are founded on incorrect assumptions. This biggest of them all is assuming that the economy has some sort of an 'equilibrium point,' a magic place where just the right number of monetary actions and policies will create high jobs, price stability, and economic growth.
No hunger at the Fed - Food and energy prices are raging upwards once again, forcing governments in China, India, Brazil, Russia, and others to ring the alarm bells. The United Nations Food and Agricultural Organization (FAO) has announced that in December 2010 food price inflation broke records, with the world food price index exceeding its peak level of 2008. With gold prices racing beyond $1,400/ounce, oil prices about to cross the $100/barrel, rising by 25% in 2010, and the US dollar crumbling, it is hardly surprising to see food prices also explode at alarming rates. In contrast to their counterparts in many leading countries, US policymakers do not appear alarmed by energy and food price inflation; in fact, it has hardly made it onto their agenda. Even though prices of sugar, wheat, corn, coffee, soybeans, and many other basic food, such as onions and cooking oil, rose at rates ranging between 60%-80% in 2010, this inflation seems to have been of little concern to the Federal Reserve. In his testimony on January 7 before the Committee on the Budget of the US Senate, Fed chairman Ben Bernanke remained committed to fighting low inflation: Bernanke was concerned about impact of low inflation on borrowers: "With short-term nominal interest rates already close to zero, declines in actual and expected inflation increase, respectively, both the real cost of servicing existing debt and the expected real cost of new borrowing."
Early Warning: Misflation - I was thinking the word "deflation" seems to have slipped in status in the economic blogosphere lately. From being in every other blog post, suddenly it seems to have slipped back into the trees with the recent influx of slightly better economics news. Intrigued, I went and updated the graph above, which shows the monthly changes in the CPI ex food and energy. As you can see, the last two data points (Nov and Dec 2010) show a bit of an uptick. Possibly one could attribute this to the Fed's QE2 program. So this presumably explains why people stopped talking about it. However, although actual deflation has not occurred yet, it certainly seems premature to declare the end of the trend based on that uptick - it's well within the existing range of the noise around the overall deflationary trend since the onset of the great recession in December 2007.
The Big Inflation Warning Hidden In This Morning's Philly Fed Release - Today's Philly Fed survey data missed expectations and was a steep drop from last month's eventually revised down heights. But what is most worrying in this release is the sharp increase in survey responders expecting to pay more for inputs in the future. From the Philly Fed (emphasis ours): Price increases for inputs as well as firms’ own manufactured goods are more wide‐ spread this month. Fifty‐four percent of the firms reported higher prices for inputs, compared with 52 percent in the previous month. The prices paid index, which increased 6 points in January, has increased 42 points over the past four months. On balance, firms also reported a rise in prices for manufactured goods: More firms reported increases in prices (26 percent) than reported decreases (9 percent), and the prices received index increased 8 points, its second consecutive positive reading. That increase over the last four months means that, yes, if Bernanke and the Fed are trying to create inflation it is working. But if businesses can't pass on those increasing prices to consumers, they may have a problem.
Inflation Risk Is Real: Why Should You Care? - On Friday January 14, the Bureau of Labor Statistics (BLS) released the monthly Consumer Price Index (CPI), which showed a 0.5% increase in the overall price level during the month of December 2010. This equates to an elevated 6.2% annualized inflation rate, which is the highest reading since June 2009. The CPI series is extremely noisy. It is difficult to discern from a single month’s data whether inflation really is accelerating or whether December’s price rise was a one-off event. However, the new CPI number does not come in a vacuum. It is just the latest piece of evidence that inflation risk is much greater than many appreciate and is likely to complicate decision-making at the Federal Open Market Committee (FOMC) in the very near future. Over the twelve months ending in December, inflation was up 1.5%. This is a relatively low inflation rate, but presumably right in the middle of the Fed’s preferred range of just under two percent.
What's Moving Interest Rates? - Paul Krugman I get a lot of questions about what I think is causing fluctuations in long-term US interest rates. The short answer is, it’s the economy, stupid. Think of an investor choosing whether to buy a 10-year bond or to keep her money parked in short-term Treasuries. Abstracting from risk, she would choose whichever strategy is expected to yield a higher return over the next decade. But short-term interest rates are set by Fed policy; right now they’re more or less zero, but they will rise eventually — and hopefully sometime within the next 10 years — when the economy recovers sufficiently. So expectations about future short-term rates largely reflect beliefs about the pace of recovery. Hence the correlation visible in the figure above. The red line is the 10-year rate, the blue line the level of new claims for unemployment insurance, a leading indicator for changes in the labor market. UI claims are a pretty crude indicator of expected economic performance; even so, you can see that 10-year rates plunged in the worst of the slump, when people thought we might actually be seeing a second great depression; they rose as people started to think, well, maybe not; they fell through much of 2010, as the recovery lost steam; and they’ve picked up somewhat recently, as the data flow has looked somewhat better.
Comments on the Philly Fed Survey - From the Philly Fed: January 2011 Business Outlook SurveyThe survey's broadest measure of manufacturing conditions, the diffusion index of current activity, edged down slightly from a revised reading of 20.8 in December to 19.3 in January. [anything above 0 shows expansion]Here is a graph comparing the regional Fed surveys and the ISM manufacturing index. The dashed green line is an average of the NY Fed (Empire State) and Philly Fed surveys through January. The ISM and total Fed surveys are through December.This early reading suggests the ISM index will be in the high 50s again this month. Overall the Philly Fed survey was positive.
Household debt and the weak U.S. recovery (FRBSF) The U.S. economic recovery has been weak, especially in employment growth. A microeconomic analysis of U.S. counties shows that this weakness is closely related to elevated levels of household debt accumulated during the housing boom. Counties where household debt grew moderately from 2002 to 2006 have seen a moderation of employment losses and a robust recovery in durable consumption and residential investment. By contrast, counties that experienced large increases in household debt during the boom have been mired in a severe recessionary environment even after the official end of the recession.
Consumers and the Economy, Part II: Household Debt and the Weak U.S. Recovery - FRBSF Economic Letter: The U.S. economic recovery has been weak, especially in employment growth. A microeconomic analysis of U.S. counties shows that this weakness is closely related to elevated levels of household debt accumulated during the housing boom. Counties where household debt grew moderately from 2002 to 2006 have seen a moderation of employment losses and a robust recovery in durable consumption and residential investment. By contrast, counties that experienced large increases in household debt during the boom have been mired in a severe recessionary environment even after the official end of the recession. One of the striking features of the U.S. economic downturn that started in 2007 is that it was preceded by the largest increase in household debt in recent history. The thin blue line in Figure 1 plots the ratio of household debt to income for the U.S. economy over time, where income is measured as compensation and wages. After a steady increase from 1950 to 2001, the household debt-to-income ratio skyrocketed from 2001 to 2007 by more than it had in the prior 45 years.
FedViews: Current Economy and Outlook - FRBSF - Looking back, our 2010 economic forecast issued a year ago of moderate growth and low inflation proved relatively accurate. We predicted that real GDP would grow 3.4% last year. Based on data available today, growth appears to have been a bit below 3%. The slightly slower-than-expected growth reflects the soft patch the economy went through during the middle part of the year following the outbreak of the European fiscal crisis. Despite slight overoptimism on growth, our forecast of a 9.5% unemployment rate in the fourth quarter of 2010 missed by only 0.1 percentage point. Both core and overall inflation rates appear to have been about ¼ percentage point below our forecasts from a year ago.
Sugar High or Growth from Sustainable Economic Policy? - I wanted to continue where I left off yesterday with a post from just a few days ago. I believe this upturn has more legs than many believed (and still believe) possible. However, that doesn’t mean the recovery to growth is sustainable.To quote from the last part of yesterday’s post: If the developed economies use this cyclical upturn wisely to reduce household debt levels, to increase private sector savings, to clean up the balance sheets of weak banks, and to cautiously normalize fiscal and monetary policy, we will be in a much better position to counteract economic weakness when the next downturn hits. Will policy makers do so? I have my doubts. Now, last week, I caught some very good commentary by a number of well-known financial industry experts. I wanted to share my own thoughts with you on their commentary, especially in light of my posts at Credit Writedowns on Eisenhower’s Farewell Address and The New Monetary Consensus. I had featured two of the commentaries at CW, from Roach and Faber. I will add a bit from Gross and Grantham and try to unify them into a single theme regarding corporatism and the sustainability of this upturn.
BBC: China's Hu Jintao: Currency system is 'product of past' - Chinese President Hu Jintao has said the international currency system dominated by the US dollar is a "product of the past". Mr Hu also said China was taking steps to replace it with the yuan, its own currency, but acknowledged that would be a "fairly long process". The remarks to the Washington Post and Wall Street Journal came in the form of written responses to questions.They reflect continuing tensions over currency issues between the two powers. Mr Hu also reiterated criticism of a decision by the US Federal Reserve to inject $600bn into the economy, which some argue will weaken the dollar at the expense of other countries' exports. "The monetary policy of the United States has a major impact on global liquidity and capital flows and therefore, the liquidity of the US dollar should be kept at a reasonable and stable level," President Hu said. Meanwhile, he disagreed with suggestions that letting the yuan appreciate in value would help China to combat inflation. He said inflation, which reached 5.1% in November - its highest level in 28 months - was "on the whole moderate and controllable".
Hu questions future role of US dollar - China’s president Hu Jintao has raised questions on the role of the US dollar in the global monetary system on the eve of a state visit to Washington, saying “the current international currency system is the product of the past”. Mr Hu also delivered a thinly veiled critique of US monetary policy, underlining China’s concern about the impact on its own economy of recent stimulus measures taken by the US Federal Reserve. “The monetary policy of the United States has a major impact on global liquidity and capital flows and therefore, the liquidity of the US dollar should be kept at a reasonable and stable level,” said Mr Hu. Mr Hu made his comments in response to written questions from two US newspapers, the Washington Post and the Wall Street Journal. His unusually blunt comments on the US-led monetary system as a “product of the past” is confirmation that China will continue to take measures to internationalise its own currency, the renminbi.
The Role of the Dollar: Who Cares? - Krugman - Well, Hu cares: China’s president Hu Jintao has raised questions on the role of the US dollar in the global monetary system saying “the current international currency system is the product of the past”. “The monetary policy of the United States has a major impact on global liquidity and capital flows and therefore, the liquidity of the US dollar should be kept at a reasonable and stable level,” said Mr Hu. All this is very reminiscent of the Japanese around 20 years ago. So, let’s ask the question again: what advantages does America derive from the dollar’s international role? One clear advantage is that around $500 billion in currency — pieces of green paper bearing portraits of dead presidents — is being held outside the country. That’s in effect a zero-interest loan, which in normal, non-liquidity trap conditions is worth something like $25 billion a year in savings. That’s good, but it’s a fraction of a percent of GDP. Beyond that: well, it’s often asserted that only the dollar’s role allows the United States to borrow so much money on foreign markets and have so much debt. But there are countries that have run up a lot of external debt without owning an international currency. Here’s Australia:
China's US Assets Fall With the Dollar - I laughed when I read a Bloomberg story that reported, “China said it would ‘welcome’ a positive statement from the US on the stability of Chinese-held dollar assets during next week’s summit in Washington between President Hu Jintao and President Barack Obama.” I was chortling away as I thought to myself, “Okay, Chinese dude! We are positive! We are positive about the stability of your dollar assets! Hahaha! We are positive that the purchasing power of your US assets will fall along with the fall in the purchasing power of the dollar, you moron, as the Federal Reserve keeps creating more and more money, so that the government can borrow and spend more and more money, to support more and more people by, unbelievably, bailing out the greedy and the banks, as redundant as that is, with the growth in the national debt (the REAL spending deficit!) now amounting to an astounding 13% of GDP, with all of it adding to the money supply, which means much higher inflation in prices, a cruel misery inflicted on the people by the Federal Reserve because of the increase in tax revenues that, they are sure, will accrue to local, state and federal governments! Hahaha!”
The Recent History of the Dollar - Krugman - Some commenters seem to believe that there has been a massive depreciation of the dollar since Ben Bernanke began QE2, or more broadly since he began rapidly increasing the monetary base. But nooooo! [/end Belushi] The dollar briefly surged during the oh-God-we’re-all-gonna-die period of the financial crisis, then fell more or less back to where it was at the start of the recession. And all of these movements were small compared with the long dollar slide during the Bush years — a slide, by the way, which was never part of my critique of that era.
A Trillion Here, a Trillion There...With the kinds of numbers we are seeing nowadays, I reckon the good ole Republican Senator from Illinois might have been known for a slightly different quip if he had lived for another 40 years or so:
- Consumer credit outstanding: $2.4 trillion
- Mortgage debt outstanding: $10.6 trillion
- Federal debt outstanding: $14 trillion
- Commercial/multifamily mortgage debt outstanding: $3.2 trillion
- Municipal bonds outstanding: $2.8 trillion
- Corporate debt (non-financial companies) outstanding: $7.4 trillion
- Public pension underfunding: $2.5 trillion
- Infrastructure investment needed: $2.2 trillion
- U.S. fiscal gap: $202 trillion
U.S. in Debt Crisis Without Spending Cuts, Pimco's Kashkari Says - The U.S. may face a debt crisis without action to limit federal spending, according to Neel Kashkari, a former Treasury official who headed the taxpayer- funded $700 billion Troubled Asset Relief Program. “Our debt is now starting to get away from us,” Kashkari, a managing director at Pacific Investment Management Co., said in an interview on Bloomberg Television’s “InBusiness” with Margaret Brennan. “Indicators in the Treasury market are flashing caution.” The difference in yields between 2- and 30-year Treasuries widened to a record and the yield on 10-year notes rose by as much as eight basis points to 3.41 percent. Kashkari said confidence in Treasuries may plunge as the central bank continues to print money to buy bonds and as the U.S. government fails to tackle a more than $1.2 trillion budget deficit. “To the extent that we continue to issue record levels of Treasuries year after year, after year, it’s inevitable that foreign buyers will begin to look elsewhere,”
China: The new landlord of the US -- If you owed somebody a lot of money, let's say for the sake of argument nearly $900 billion, you probably wouldn't want to make this creditor angry, right? Tell that to President Obama, Treasury Secretary Tim Geithner and several members of Congress. China is the largest foreign holder of U.S. debt. The Treasury Department reported Tuesday that China owned $895.6 billion in U.S. bonds as of November. That's down from $906.8 billion a month earlier and is the first decline in China's holdings since June. Despite this fact, many politicians are talking tough (perhaps tougher than they should be) about China's artificially low currency and how that affects trade relations between the two world powers. With China President Hu Jintao now visiting the United States and set to meet Obama at the White House Wednesday, it seems likely that the topic of the undervalued yuan will come up. Hopefully though, Obama will be more diplomatic than those who are calling for the U.S. to crack down even more on China for its currency manipulation. Let's face it. China is kind of like our landlord. Or, if you prefer a more menacing term, our loan shark. We should tread carefully.
China holds the trump cards in any showdown with the US - The timing of Chinese President HuJintao's arrival at the White House yesterday was rather neat. Just as the television cameras began beaming pictures of Mr Hu glad-handing well-wishers in the White House gardens round the world, the Treasury published data that makes one wonder about the long-term relationship between the US and China – and what might happen in the financial markets should it ever deteriorate. China is by some margin the biggest buyer of American debt. It owns $900bn of US Treasuries – $1 trillion if you count Hong Kong's holdings – which makes it the key investor. Were the US's biggest foreign creditor to start selling meaningful numbers of its Treasury bonds – for financial or political reasons – it would do real damage.
China as the Bad Guy? - In anticipation of the state visit by Chinese Leader Hu Jintao, I spoke about the pressure on US politicians to do something about the Chinese currency problem with RT America’s Alyona Minkovski on the Alyona Show last night. The video is below. My take here is that the pressure on Obama to do something, anything about China has diminished do to the upswing in the economy and the Republican house leaders unwillingness to go protectionist. Meanwhile Hu is looking to make America look like the bad guy and deflect criticism onto the US because of quantitative easing. As a juxtaposition to my comments, you might find the following analysis from Paul Tudor Jones on the structural problems in the US-China relationship interesting. I have posited that this unbalanced relationship could eventually end in Murder-Suicide, something that I still believe could happen and that Tudor Jones took head on in a recent newsletter. But for now, tensions are waning somewhat.
Analysis: What is Plan B if China dumps its US debt? (Reuters) - When borrowing money it's always good to have a Plan B in case a big creditor pulls the plug. That should be true whether the sum is a few thousand dollars or about a trillion, the size of the United States government's debt to China. With Chinese President Hu Jintao due to arrive in Washington on Tuesday, it is worth asking about U.S. officials' Plan B just in case one day relations take a surprise turn for the worse and Beijing dumps its holdings of U.S. treasuries. China is officially the United States' biggest foreign creditor, with roughly $900 billion in Treasury holdings -- or over $1 trillion with Hong Kong's holdings included. That means it could do severe damage to U.S. debt markets if it suddenly started selling large amounts. Most experts say if there were signs of this happening, the U.S. government would go for a combination of persuading Americans to buy more U.S. debt, the same way they did in World War II, and finding friendly foreign governments to make additional purchases. Banks could be called on to increase their holdings of treasuries, and as a last resort, the Federal Reserve could also be called on to fill the gap, though this could risk turning any dollar weakness into a slump.
China’s bond purchasing games - Beyond the spotlight glaring on China’s leader Hu Jintao as he kicks off his US visit are some intriguing movements in Beijing’s foreign reserves management. First, we had China’s pledge to buy eurozone bonds amid its recent charm offensive in Europe. Then we had reports last week that China sold off a net Y81.3bn of Japanese government bonds in November. That was barely two months after Beijing provoked alarm in Tokyo with its record buy of JGBs in July. Now, it emerges that China was among the top sellers of US Treasuries in November. As the FT reports: China and Russia were the major sellers of US Treasuries in November as bond yields surged sharply higher that month, according to the latest government data. The US Treasury reported on Tuesday that private investors sought more dollar-denominated stocks and bonds in November than October, offsetting record sales by foreign governments.
According to the Setser Test, it's unlikely that China reduced its Treasury holdings in November – Rebecca Wilder - According to the Treasury International Capital System (TIC) release, foreigners were net buyers of US securities in November, +$39 billion over the month. Of the $61.7 billion in long-term Treasuries net purchased (notes and bonds), private investors claimed $50.6, while official investors (central banks, sovereign wealth funds, etc.) accrued a smaller $11.1 billion. Over the last twelve months, foreign investors amassed $571 billion of the high-quality US securities: Treasury notes and bonds, agencies, and stocks, which includes the -$12 billion net sale of corporate bonds. Overall, it was a reasonably positive report, indicating that long-term asset sales are roughly in line with the current account deficit (chart to the upper left). But the pundits follow the table on major foreign holders of US Treasuries. They note that the number 1 holder, China, reduced its holdings of Treasuries in November from just over $900 billion to just under. For some reason, investors and critics of the deficit alike are worried that when China is no longer named the US' biggest stockpiler of Treasury securities, Treasury rates will skyrocket. Oh, the bond vigilantes.
China May Be Masking Its Purchase of U.S. Securities - For eight years after the United States resumed running large budget deficits in 2002, China was the largest lender, buying a fifth of the new Treasury securities sold during that span — an expenditure of more than $900 billion. During 2006, China financed more than half the American deficit. When the financial crisis struck hardest, China spent more than $100 billion on Treasuries over the two-month period of September and October 2008. But over the last year, China has been a net seller of Treasury securities, according to figures released this week by the American government. If that is true, it would be extraordinary, considering the size of the bilateral trade deficit, and there has been speculation that China has been purchasing Treasuries through accounts in other countries. It is not easy to see how the Chinese government managed to keep its currency from rising more rapidly against the dollar if it did not continue buying Treasuries in 2010, and there has been speculation that it shifted purchases to accounts managed by British money managers.
Treasury Spreads, Yield Curve Steepest on Record - Curve Watchers Anonymous is watching the spread between 2-year treasuries and 30-year treasuries. Bloomberg reports "The spread between yields on the 30-year bond and the 2-year note marked the steepest slope in the yield curve since at least 1977, when regular offerings of long bonds began and Bloomberg started compiling the data." Here are a few charts. Click on any chart below for a sharper image.Bloomberg notes "Treasury Inflation Protected Securities showed traders’ expectations for price increases were near an eight-month high on speculation the Fed’s plan to buy bonds in a strategy called quantitative easing will facilitate faster growth."The curve is artificially steep because Bernanke has the short end of the curve pegged near zero percent. Bernanke's announced intent for QEII was to lower interest rates. QEII started at the beginning of November. Since that did not work (yields started spiking the day after the program started), Bernanke has proclaimed a rising stock market is proof of success of QEII.
Deficit Hawkoprite Watch - Sometime this spring, Congress is going to have to raise the debt ceiling or the federal government will face default. Republicans are going to demand many, many pounds of flesh in exchange, ranging from cuts in discretionary spending to rethinking of entitlement programs, which together could undermine the weak stimulative effect of the December tax cuts. Democrats are probably going to give in to at least some Republican demands for two reasons: politically, they fear that they would be held accountable for a default because the public still associates spending with Democrats, and they hold the White House; pragmatically, they are just not as crazy as the Republican right, and in most negotiations the crazy party gets a better deal. Of course, this is insane. The deficit problem was created by Congress, through its many votes to increase spending and decrease revenues (otherwise known as taxes).
President Has the Upper Hand in a Shutdown - Many people forget that about two-thirds of federal spending is on interest on the debt and on mandatory programs that are funded with permanent appropriations that don’t expire. As a result, some of the largest federal programs will not be shut down if Congress and the White House can’t, won’t or don’t agree on a new continuing resolution, an omnibus appropriation or individual appropriations when the current CR expires at midnight March 4. Because of that, it will be up to the Obama administration to determine what activities will and won’t be affected if a shutdown occurs. Members of Congress may complain and criticize the White House for its decisions, but unless the leadership in the House and Senate can muster the two-thirds vote needed to override an almost certain veto, even passing legislation specifying which programs must and must not continue to operate won’t have any practical effect.
Cantor Says House Won't Raise Debt Limit 'Without Serious Cuts"…The majority leader, Eric Cantor of Virginia, put the Obama administration and the capital markets on notice Tuesday that the Republican-led House would use its leverage to avoid a vote to raise the federal debt ceiling if spending cuts were not made first. “We are simply not going to accept the increase in the debt limit without serious cuts,” Mr. Cantor said in a briefing with reporters on Capitol Hill, adding, “if our votes are needed, which I assume the president thinks they are,” then such a vote would be linked to budget cuts. Earlier this month, the Obama administration told members of Congress that the government would reach its legal borrowing limit as early as the end of March and no later than May 16, and urged members to raise the debt ceiling to avoid potential default.
Geithner Won’t Default on the Public Debt - In a guest column at CNN Money, I argue that Treasury Secretary Timothy Geithner won’t allow us to default on the public debt even if Congress fails to increase the debt ceiling: America reached two dubious milestones in recent weeks. Our national debt, including Social Security obligations, has run up to nearly $14 trillion. That’s a lot of money, even in Washington. And our Treasury Secretary started using the d-word. Writing to congressional leaders, Timothy Geithner warned that failing to increase America’s debt ceiling, currently $14.3 trillion, “would precipitate a default by the United States.” “Default” is not a word that Treasury secretaries use lightly. For more than two centuries, the United States has paid its debts on time. That’s why U.S. Treasuries have historically been considered the safest investment in the world. When Geithner was sworn into office, he took responsibility for defending the full faith and credit of the United States.
Romer: What Obama Should Say About the Deficit - This year, instead of being on the floor of Congress with the rest of the cabinet, I will be watching his State of the Union address on television with the rest of the country. My hope is that the centerpiece of the speech will be a comprehensive plan for dealing with the long-run budget deficit. . The need for such a bold plan is urgent — both politically and economically. I am looking for pages and pages of concrete proposals that the administration is ready to fight for. The recommendations of the bipartisan National Commission on Fiscal Responsibility and Reform that the president created are a very good place to start. The need for such a bold plan is urgent — both politically and economically. Voters made it clear last November that they were fed up with red ink. President Obama should embrace the reality that his re-election may depend on facing up to the budget problem.
Listen to Your Former CEA Chair, Mr. President -Some reporters have already started to ask me what I hope to hear in the State of the Union address President Obama will deliver next week. I can’t really express my wishes any better than Christina Romer, the President’s former Council of Economic Advisers Chair, did in her New York Times column last weekend. In particular (emphasis added): My hope is that the centerpiece of the speech will be a comprehensive plan for dealing with the long-run budget deficit. I am not talking about two paragraphs lamenting the problem and vowing to fix it. I am looking for pages and pages of concrete proposals that the administration is ready to fight for. The recommendations of the bipartisan National Commission on Fiscal Responsibility and Reform that the president created are a very good place to start.
The Deficit We Want - We have come to believe a story about the deficit that is largely not true.It’s a comforting story, to be sure. It holds the promise of a painless solution, because it suggests that the country’s huge looming deficits are not really our fault. Instead, they seem to stem from weak-willed politicians, wasteful government programs that do not benefit us and tax avoidance by people we have never met. In truth, the coming deficits are a result, above all, of the fact that most Americans are scheduled to receive far more in Medicare benefits than they have paid in Medicare taxes. Conservative and liberal economists agree on this point. After Medicare on the list of big, growing budget items come Social Security and the military.The three programs are roughly as popular as tax increases are unpopular – which is precisely why solving the deficit problem will be so difficult. The new Times/CBS News poll highlights the problem, by asking more specific questions about taxes and spending than many previous polls have. (See questions 33 through 45 here.)
Poll Finds Wariness About Cutting Entitlements - As President Obama and Congress brace to battle over how to reduce chronic annual budget deficits, Americans overwhelmingly say that in general they prefer cutting government spending to paying higher taxes, according to the latest New York Times/CBS News poll. Yet their preference for spending cuts, even in programs that benefit them, dissolves when they are presented with specific options related to Medicare and Social Security, the programs that directly touch the most people and also are the biggest drivers of the government’s projected long-term debt. Nearly two-thirds of Americans choose higher payroll taxes for Medicare and Social Security over reduced benefits in either program. And asked to choose among cuts to Medicare, Social Security or the nation’s third-largest spending program — the military — a majority by a large margin said cut the Pentagon.
Leonhardt: The Deficit We Want - David Leonhardt reviews some choices on reducing the deficit at Economix: The Deficit We Want Here is the story on the polls Leonhardt discusses: Poll Finds Wariness About Cutting Entitlements In some ways, this is a common story. When people are asked to choose between cutting spending or raising taxes, they want to cut spending. Not surprisingly, when given a straight-up choice between broad spending cuts and tax increases, Americans say they would prefer to reduce the deficit mostly through less spending. It’s not even close: 62 percent for spending cuts, 29 percent for tax increases. But there is overwhelming support for individual programs: Herein lies the political problem. We want to cut spending. We just don’t want to cut the benefits that the spending pays for. This is a huge disconnect.
More Evidence The Federal Deficit Definitely Is Not A Rational Issue - The latest New York Times/CBS News poll once again shows that feelings about reducing the federal deficit are anything but rational. As Bruce and I have discussed here at CG&G many times over the years, Americans resoundingly don't want taxes raised but, with rare exceptions that typically won't have much of a positive impact on the problem, also don't want spending cut. Over at Economix, David Leonhardt has a good story explaining the budget ins and outs of the poll. The poll once again confirms that, although "federal spending" is very unpopular in theory, the services the federal government provides with that spending are at least or more popular in reality. That's why the notion that eliminating "waste, fraud, and abuse" will reduce the deficit works so well: It offers the hope that spending can be reduced without the government doing anything less than it is currently doing.
The Pay-for-Hardly-Anything-As-You-Go Rule - In this week’s Washington Budget Report, which the Concord Coalition puts out weekly (sign up for it here!), Concord’s Cliff Isenberg explains how the bottom line on the official PAYGO scorecard for fiscal year 2010 bears little relationship to what actually happened to the federal deficit and debt (emphasis added):An OMB report concludes that exemptions in the PAYGO law have been used for legislation adding hundreds of billions of dollars to the deficit. PAYGO generally requires legislation affecting direct spending or revenues to be offset, though last year’s law included costly exceptions for several revenue and spending priorities.OMB’s official scorecard shows that legislation subject to PAYGO and enacted since last February would save $55.2 billion over 2010-2015 and $63.7 billion over 2010-2020. However, when adjustments for loopholes such as emergency designations and exemptions are taken into account, the same laws would increase the deficit by $899.4 billion over 2010-2015 and by $820.1 billion over 2010-2020.
House Republicans Propose $2.5 Trillion In Spending Cuts Over Ten Years - I suppose we should consider this the first first shot across the bow in the budget wars: A group of conservative House Republicans laid out a plan to drastically cut federal spending over the next ten years, targeting everything from Amtrak to Fannie Mae and Freddie Mac to subsidies for mohair producers. All told, it adds up to $2.5 trillion in cuts, whacking 55 different agencies and programs, including public housing, benefits for federal employees, funding for the arts and humanities and international aid. Many of the proposed cuts represent longtime conservative targets, like the National Endowment for the Arts and the Corporation for Public Broadcasting. They also would gut a wide range of energy and environmental programs — like weatherization and beach erosion funds — and have proposed clamping down on federal employee unions.But the long list of spending cuts is notably silent on the two biggest federal budget drivers — entitlements and defense spending. The plan also cuts funds for the District of Columbia, including subsidies for the Washington Metropolitan Area Transit Authority.
House GOP group proposes deep spending cuts over next decade… Congressional conservatives on Thursday demanded far more dramatic reductions in government spending than House GOP leaders have recently proposed, in the first sign of a fissure between old-guard Republicans and tea-party-backed newcomers. Members of the conservative Republican Study Committee said the GOP must keep its campaign pledge to immediately slice at least $100 billion from non-defense programs, an effort that would require lawmakers to reduce funding for most federal agencies by a third over the next seven months. And the group called for even deeper cuts over the next decade to return non-defense spending to 2006 levels. "One hundred billion dollars is the number the American people heard last fall. And, frankly, when you look at it in the context that there's a $14 trillion debt, it seems to me we should be able to find $100 billion," said Rep. Jim Jordan (Ohio), chairman of the study committee, a group of economic and social conservatives whose ranks have swelled since the GOP won back control of the House in the November midterm elections.
Here's How Conservatives Want to Save $2.5 Trillion…Folks have been asking, so here is a breakdown of the spending cuts the RSC thinks it can achieve over 10 years for $2.5 trillion in savings. I've listed them in ascending order by dollars. Unless I say otherwise, the estimate is for annual savings.
Will the GOP's Budget Cuts Gut the Middle Class? - It’s the biggest task facing the new House Republican majority now settling into life in Washington: Making good on its promise to slash the federal budget and shrink the size of government. Top Republicans like House Speaker John Boehner of Ohio, Majority Leader Eric Cantor of Virginia, and Majority Whip Kevin McCarthy of California have pledged to slim government down to 2008 budget levels, a strategy that's been called "back-to-Bush." In early January, Boehner told reporters, "On September 24, we made clear in the [Pledge to America] that we want to go back to 2008 spending levels...There's no ifs, ands, or buts about it." Problem is, no one knows where exactly House Republicans plan to apply the scalpel. It's not clear they themselves know where they’ll cut. The "Pledge to America" only calls for reductions to non-security discretionary programs; that means agencies like the Department of Veterans Affairs, Department of Homeland Security, and Defense Department would be exempt. The GOP's plan would cut non-security discretionary funding—the roughly one-third of government spending controlled by Congress, which excludes programs like Social Security and Medicare—by nearly 22 percent, shaving $105 billion off of President Obama’s $483 billion 2011 budget proposal.
The GOP's war against the poor and sick - The Republican Study Committee, aka "the caucus of House conservatives," has released a list of proposed spending cuts that it says will add up to $2.5 trillion over the next 10 years. Dave Weigel has a tidy summary here. Although for the most part the line items add up to a list of cherished liberal priorities (no defense spending or homeland security cuts here, no indeed!), I'm guessing that the average person will glance at it and see some things that they don't think the government should be funding. Mohair subsidies? But it's worth drilling down on the third biggest item on the list -- weighing in at $16.1 billion -- the "Repealing Medicaid FMAP increase," because I can't think of anything that better demonstrates the priorities of the current Republican Party. Medicaid is the government's primary social insurance program targeted at poor and disabled Americans. Medicaid is responsible, for example, for such things as nursing home care for the indigent. It is jointly funded by the states and the federal government --it is, in fact, one of the biggest items in most state budgets.
Republicans Press Boehner Not To Get Squeamish On Spending Cuts - Rank and file Republicans aren't happy with House Speaker John Boehner (R-OH) and Budget Committee Chairman Paul Ryan (R-WI). They think the GOP should take a hatchet to the federal budget now, to make good on their pledge to slash spending by $100 billion "this year." And their displeasure is spilling out into the open."Despite the added challenge of being four months into the current fiscal year, we still must keep our $100 billion pledge to the American people," reads a draft of a letter to Boehner, obtained by TPM, being circulated by the Republican Study Committee. "These $100 billion in cuts to non-security discretionary spending not only ensure that we keep our word to the American people; they represent a credible down payment on the fiscally responsible measures that will be needed to get the nation's finances back on track."
Trashing the CBO, and any chance at fiscal responsibility - It's the age of civility in American politics, but there's one institution that's been civil all along: the Congressional Budget Office (sorry, but sometimes civility is boring). The nonpartisan agency, which calculates the official cost of legislation for Congress, speaks in the polite language of actuarial tables, refuses to reliably please or disappoint either party and is the closest thing American politics has to an umpire. And the Republicans are getting sick and tired of it. The reason is the health-reform law. Democrats, despite knowing that the taxes and Medicare cuts would cause them great political pain, were so intent on getting the Good Housekeeping seal of approval from the CBO that they made their bill far more fiscally responsible. This left the Republicans in a bind. If the Democrats' legislation fulfilled its goal of covering almost every American and also managed to pay for itself, it was suddenly much harder to oppose. So last week, as the Republicans sought to make their case that the health-care bill should be repealed, a lot of their arguments were aimed at undercutting the numbers coming out of the CBO.
Five myths about defense spending - Defense spending is a massive part of our federal budget - and a cause of equally massive debate, whether in wartime or in peace. With fiscal pressures rising, Defense Secretary Robert Gates has detailed a reprioritization of Pentagon resources and a $78 billion reduction in planned defense spending over the next five years. But he has also argued that "when it comes to the deficit, the Department of Defense is not the problem." Still, the $720 billion defense budget is a very large share of federal discretionary spending - more than half in 2010. We can no longer separate national security from fiscal imperatives. Unfortunately, several myths keep us from a more disciplined defense budget.
1. Defense spending is dictated by the threats we face.
2. The larger the Pentagon's budget, the safer we are.
3. Republicans like defense spending; Democrats don't.
4. Today's levels of military pay and benefits are necessary.
5. Gates's cuts are enough.
Obama Ignores Eisenhower at Country's, World's Peril - On January 17, 1961, President Dwight D. Eisenhower issued his prophetic warning about the military-industrial complex, anticipating the increased political, economic, military and even cultural influence of the Pentagon and its allies. Several weeks earlier, he had privately told his senior advisers in the Oval Office, "God help this country when someone sits in this chair who doesn't know the military as well as I do." Several months after his inauguration in 1953, he warned against warfare that had "humanity hanging from a cross of iron." In the spring of 1961, I was part of a small group of undergraduates who met with the president's brother, Milton Eisenhower, who was then president of Johns Hopkins University. Milton Eisenhower and a Johns Hopkins professor of political science, Malcolm Moos, played major roles in the drafting and editing of the farewell speech of January 1961. Milton Eisenhower explained that one of the drafts of the speech referred to the "military-industrial-Congressional complex" and said that the president himself inserted the reference to the role of the Congress, an element that did not appear in the delivery of the farewell address. When the president's brother asked about the dropped reference to Congress, the president replied: "It was more than enough to take on the military and private industry. I couldn't take on the Congress as well."
50 years later, we're still ignoring Ike's warning, by Susan Eisenhower - I've always found it rather haunting to watch old footage of my grandfather, Dwight Eisenhower, giving his televised farewell address to the nation on Jan. 17, 1961. Of course, the speech will forever be remembered for Eisenhower's concerns about a rising "military-industrial complex," Looking back, it is easy to see the parallels to our era, especially how the complex has expanded since Sept. 11, 2001. In less than 10 years, our military and security expenditures have increased by 119 percent. Even after subtracting the costs of the wars in Iraq and Afghanistan, the budget has grown by 68 percent since 2001. In 2010, the United States is projected to spend at least $700 billion on its defense and security, the most, in real terms, that we've spent in any year since World War II. However, at this time of increased concerns over our fiscal deficit and the national debt, Eisenhower's farewell words and legacy take on added significance.
Ike was right all along: The danger of the military-industrial complex - If you doubt, half a century on, that Dwight Eisenhower had it right, then consider the advertisements on WTOP, the Washington region's all-news radio station. Every big metro area in the US has one, where car dealerships tout their bargains, and fast food chains promote a new special offer. WTOP has all that. But it boasts other advertisers too, with names such as Boeing, Lockheed Martin and General Dynamics. Of course, the average listener can't remotely afford a brand new military aircraft, or a state-of-the-art battlefield management system. But that's not the point. These almost otherworldly ads, with patriotic music playing softly in the background, are aimed at a very restricted audience: the government that is their only customer for such wares. For the rest of us, they are proof that in the capital of the world's richest democracy, the defence industry is a very big player indeed.
The Speech Ike Didn't Give - In an op-ed at the Washington Post, Susan Eisenhower laments "50 years later, we're still ignoring Ike's warning". She mentions a "bookend" speech Eisenhower made at the beginning of his presidency in 1953, but I prefer an earlier one he didn't make during the campaign because it was pre-empted by Nixon's Checkers speech. Here is The Speech Ike Didn't Give: (The transcript is also available behind a pay wall at the Washington Post: Text of Eisenhower's Speech to GOP Rally in Cleveland on his Program Against Inflation.)
Analysis of Federal Civilian and Military Compensation - Director's Blog - In response to a request from the House Democratic Whip, CBO prepared an analysis comparing federal civilian and military compensation. Total compensation can be divided into three components: cash compensation (including pay, cash allowances, and bonuses); noncash benefits (such as subsidized health insurance and child care); and deferred benefits (such as pensions and veterans’ benefits.) Because of the difficulties of estimating the relative size of noncash and deferred compensation, for this analysis CBO focused on cash compensation, addressing how salaries earned by federal civilian workers compare with cash compensation for military personnel. According to CBO’s analysis, median cash compensation for military personnel—including the tax-free cash allowances for food and housing—exceeds the salaries of most federal civilians with comparable education and work experience. In addition, according to prior studies, noncash and deferred benefits are also higher for military personnel than for federal civilian workers.
The War on Logic, by Paul Krugman - We are, I believe, witnessing something new in American politics. Last year, looking at claims that we can cut taxes, avoid cuts to any popular program and still balance the budget, I observed that Republicans seemed to have lost interest in the war on terror and shifted focus to the war on arithmetic. But now the G.O.P. has moved on to an even bigger project: the war on logic. So, about that nonsense: this week the House is expected to pass H.R. 2, the Repealing the Job-Killing Health Care Law Act — its actual name. But Republicans have a small problem: they claim to care about budget deficits, yet the Congressional Budget Office says that repealing last year’s health reform would increase the deficit. So what, other than dismissing the nonpartisan budget office’s verdict as “their opinion” — as Mr. Boehner has — can the G.O.P. do? The answer is contained in an analysis — or maybe that should be “analysis” — released by the speaker’s office, which purports to show that health care reform actually increases the deficit. Why? That’s where the war on logic comes in.
How Tax Cuts Can Grow, Not Shrink, Government - Here is one of my favorite presentations from the Tax Policy Center/Loyola Law School conference I participated in last Friday: the Tax Policy Center’s Donald Marron and Eric Toder explaining how tax expenditures can reduce revenue but grow government at the same time. They show how adding “spending-substitute tax expenditures” to the definition of government spending more than doubles the measured size of government (see charts #18 and 19). If only Tea Partiers could grasp this, then they might realize the logical inconsistency between their desire for more tax cuts, a lower deficit, and smaller government. And if conservatives who want smaller government begin to realize that raising more revenue by reducing tax expenditures (broadening the tax base) would actually shrink government, and at the same time liberals who want the rich to pay higher taxes begin to realize that reducing tax expenditures would actually raise revenues in a progressive manner, then I think we would have a recipe for bipartisan consensus on one of the smartest ways to reduce the deficit.
The OECD says imputed rent should be taxed - When homeowners own their property with equity, they get a tax benefit as important as the mortgage interest deduction: the imputed rent they pay to themselves goes untaxed. To think about how this works, consider two nieghbors who own their houses free and clear. Suppose the houses are identical, and that the nieghbors swap houses, paying rent to each other. They now have a tax liability that they would not have had they remained in their houses. Avoiding this liability is tantamount to a tax expenditure--a benefit to those who own their houses without debt. The OECD is correct that countries rarely tax imputed rent, and argues that this lack of taxation has tilted investment toward housing to the detriment of more productive uses. It also argues that the benefits to homeownership are overstated. I am not sure that this is true (see here and here), but I will leave that for another time.
Sin of Omission By Geithner in Chest-Thumping Over Tax Cut Deal - Tim Geithner led an Administration effort yesterday to publicize in glowing terms the tax cut deal passed by Congress and signed by the President during the lame duck session in December. Concurrently, they sent out a fact sheet with some similar statistics that Geithner described in a press briefing. He claims that 159 million workers will benefit from the payroll tax cut, and there’s no reason to doubt him on that point. But the analysis suffers from a major sin of omission. Geithner said that the payroll tax cut, totaling about $110 billion according to new estimates, will lead to an increase in take-home pay for the average worker by about $700 a year, and for the average working family about $1,000 a year. It’s important for him to use those numbers, because they are greater than the $400 per individual, $800 per family Making Work Pay tax cut which this payroll tax cut essentially replaces for 2011. The difference comes in how those taxes get calculated and where they phase out. Making Work Pay was a flat $400 for every worker, but the benefit phased out for workers making over roughly $95,000 a year. That meant it was targeted directly to people who would spend it and offered a pretty nice benefit. By contrast, the payroll tax cut applies to every worker in America, as Geithner says. Bill Gates will get a payroll tax cut. Alex Rodriguez will get a payroll tax cut. Paris Hilton will get a payroll tax cut. Because the payroll tax itself caps out currently at $106,800, that’s $2,136 more than they got under Making Work Pay.
Endogenize ideology - Paul Krugman has a nice column on how moral issues now constrain and complicate economic policymaking. Krugman is treating morality as a problem of comparative statics. In the 1990s and before, there was one ideological environment, an environment under which decent economic ideas (from Krugman’s perspective and from my own) had a reasonable shot of being enacted into policy. In 2010, we have a different environment. An ideology that treats all taxation as theft — as illegitimate, coercive, perhaps even morally equivalent to violence — is now sufficiently prominent that it effectively renders policy ideas that involve use of resources by government and potentially even redistribution impractical. In both cases, we treat the ideological environment as exogenous and try to characterize the space of feasible policy options. We then choose the best available. That’s the wrong approach, I think.
Toward a 21st-Century Regulatory System, by Barak Obama: But throughout our history, one of the reasons the free market has worked is that we have sought the proper balance. We have preserved freedom of commerce while applying those rules and regulations necessary to protect the public against threats to our health and safety and to safeguard people and businesses from abuse. From child labor laws to the Clean Air Act to our most recent strictures against hidden fees and penalties by credit card companies, we have, from time to time, embraced common sense rules of the road that strengthen our country without unduly interfering with the pursuit of progress and the growth of our economy. Sometimes, those rules have gotten out of balance, placing unreasonable burdens on business. At other times, we have failed to meet our basic responsibility to protect the public interest, leading to disastrous consequences. Such was the case in the run-up to the financial crisis. There, a lack of proper oversight and transparency nearly led to the collapse of the financial markets and a full-scale Depression.
Obama's Bogus Explanation For Troubles: Too Much Regulation - Two years after inheriting the worst economic disaster since the Great Depression, President Barack Obama has settled on an unhelpful new explanation for his failure to restore jobs: A surplus of suffocating regulations. In an op-ed published in Tuesday's Wall Street Journal, the president decries how regulations have sometimes "gotten out of balance, placing unreasonable burdens on business -- burdens that have stifled innovation and have had a chilling effect on growth and jobs." In the crudest sense, this is probably wise politics. Pandering to businesses in possession of campaign cash reinforces the advantages of Obama's incumbency in the run-up to next year's presidential election. By brazenly stealing a long-established Republican talking point Obama is speaking to the core distrust of government that prevails in many homes. He is also following through on his pledge to get along better with big business, following his recent summit with prominent chief executives at the White House. But as a message fed into the policy process, one that helps shape the tone of public discourse, Obama's words are nothing short of a public disservice.
Regulators Falling Behind on Implementing Obama Policies - President Obama pulled off a neat trick with his announcement on regulatory streamlining yesterday. Initially, it earned praise from the right (they claimed it was their idea) and enmity on the left, even though it looked to be more of an announcement of general principles rather than any specific prescription. Then, when asked if the streamlining would incorporate the two major legislative goals of the Administration so far, health care and financial reform, both of which have a major regulatory component, they said no, the announcement had nothing to do with that. And that earned the enmity of the right and muted praise from the left. So as a result, nobody’s happy with this clear kabuki announcement.
Obama’s unforced regulatory fumble - If viewed in total isolation from the context of current events, President Obama's Wall Street Journal Op-Ed explaining his decision to issue an executive order mandating that government agencies "strike the right balance" on regulatory policy would be utterly unexceptional. But on the day before House Republicans are expected to vote to repeal the Affordable Care Act, primarily on the specious grounds that it is a "job-killing" regulatory Frankenstein, the White House's decision to suddenly be concerned about the right balance between public safety and commerce is strange and discomfiting. The big battles of the next two years are going to be all about defending the regulatory achievements of the Obama administration -- healthcare reform and bank reform -- in addition to ensuring that the Environmental Protection Agency isn't hamstrung by Republican opposition as it carries out its Supreme Court mandate to treat greenhouse gases as pollutants under the Clean Air Act.
Evidence of an American Plutocracy: The Larry Summers Story - “So here is the evidence for an American plutocracy of a narrow and discrete but hardly harmless sort. Wall Street seduced the economics profession not through overt corruption, but by aligning the incentives of economists with its own. It was very easy for academic economists to move from universities to central banks to hedge funds — a tightly knit world in which everyone shared the same views about the self-regulating and beneficial effects of open capital markets. The alliance was enormously profitable for everyone: The academics got big consulting fees, and Wall Street got legitimacy. And it has kept the system going despite the enormous policy failures it has generated, not to exclude the recent crisis.”
How Summers hobbled Obama’s economic policy - I love myself a brutal takedown, and Jason Linkins’s evisceration of Peter Baker’s big NYT Magazine story on Obama’s economic policy is a classic of the genre. Except, I have to admit to being Team Baker on this one. We’ve all read a lot of stories about the economy, and what bad shape it’s in, and how we got to this sorry place. This one’s different. It’s written by the NYT’s White House correspondent, and it raises an uncomfortable question: what if part of the problem is that Obama’s economic team just wasn’t a good team? What if, in fact, it turns out to have been a very bad team? Baker points out that most of the original members of Obama’s economic team have left, and that the new guys are generally Clinton-era veterans. And given the reputation of the two presidents, you’d expect the Clinton bunch to be more fractious and chaotic than the No Drama Obama crew. But that turns out not to be the case:
‘An Economic Philosophy That Has Completely Failed’ - Bill Black - I get President Obama's "regulatory review" plan, I really do. His game plan is a straight steal from President Clinton's strategy after the Republican's 1994 congressional triumph. Clinton's strategy was to steal the Republican Party's play book. I know that Clinton's strategy was considered brilliant politics (particularly by the Clintonites), but the Republican financial playbook produces recurrent, intensifying fraud epidemics and financial crises. Rubin and Summers were Clinton's offensive coordinators. They planned and implemented the Republican game plan on finance. Rubin and Summers were good choices for this role because they were, and remain, reflexively anti-regulatory. They led the deregulation and attack on supervision that began to create the criminogenic environment that produced the financial crisis. Just one problem -- they were wrong and Levitt and Born were right. Rubin and Summers weren't slightly wrong; they put us on the path to the Great Recession. Obama knows that Clinton's brilliant political strategy, stealing the Republican play book, was a disaster for the nation, but he has picked politics over substance. I explained in a prior column how the anti-regulators made the crisis possible and caused the loss of over 10 million jobs.
Obama Taps GE's Immelt to Head Economic Advisor Panel - President Barack Obama will name Jeffrey Immelt, General Electric Co.’s chief executive officer, to head his outside panel of economic advisers, replacing former Federal Reserve Chairman Paul Volcker. Immelt wrote in an op-ed today in the Washington Post that Obama asked him to take the helm of the newly renamed President’s Council on Jobs and Competitiveness. The group will reach out to labor and business leaders to serve “as a catalyst for action,” he wrote. Immelt, 54, is an original member of the panel, which was formed as the President’s Economic Recovery Advisory Board in February 2009. GE’s CEO since 2001, he heads the world’s biggest maker of jet engines, medical-imaging equipment and power-plant turbines and gives the White House a corporate heavyweight to help burnish Obama’s pro-business credentials.
GE’s Jeff Immelt To Replace Paul Volcker - Jesse - In case there was any question remaining in your mind as to what is really happening. It should be noted that GE was the number one corporation in lobbying, spending $40 million on the purchase of political influence last year. Obama is looking more like Herbert Hoover every day, but without the Great Engineer's accomplishments. As someone said, it could have been worse, Obama could have chosen Lloyd Blankfein as his advisor. But that would have been a demotion for Lloyd, and a probable lessening of his existing impact on public policy.
Obama Picks Jeffrey Immelt, GE CEO, To Run New Jobs-Focused Panel As GE Sends Jobs Overseas, Pays Little In Taxes - Jeffrey R. Immelt, the chairman and chief executive of General Electric Co. tapped by President Barack Obama as his next top outside economic adviser, will be asked to guide the White House as it attempts to jump-start lackluster job creation and spur a muddled recovery. Immelt's firm stands as Exhibit A of a successful and profitable corporate America standing at the forefront of the recovery. It also represents the archetypal company that's hoarding cash, sending jobs overseas, relying on taxpayer bailouts and paying less taxes than envisioned.The move is the latest salvo in the White House's continued aggressive and very public outreach to corporate America. Earlier this month, Obama appointed a top executive at JPMorgan Chase as his chief of staff, and this week he granted a longtime wish of business interests by promising to review federal regulations perceived as onerous. Firms like GE say good jobs will come from lower taxes and less regulation. Immelt told analysts Friday that he'll focus on tax policy and regulation, among other topics.
Obama’s Kabuki Jobs Council, Brought to You By “Nut on China” Jeff Immelt - I noted the other day that GE had signed a big deal with China that will involve us sharing our jet technology with China, which will ultimately help China compete with both GE and — China has said explicitly — Boeing. Then there’s the fact that, even as Immelt has been calling for manufacturing in the U.S., his company has been shutting U.S. plants to move the work to China …GE managed, alone of “manufacturing companies” in the U.S., to turn itself into a Too Big To Fail overleveraged finance company in need of a $16 billion bailout from the government (as has happened with all the TBTF finance companies, bailouts have made GE’s financing business profitable again).In short, no matter how many times Immelt gets up on a podium or in an op-ed and feigns an interest in American jobs, his actions make him the poster child for everything wrong with the U.S. economy right now.
Immelt, GE Capital, and the Financialization of Manufacturing - But the idea that GE can, as Joe Klein puts it, point a way forward from a financialized economy is also wrong. As Raj Date cleverly put it, to understand the bailouts, you need to understand “the Killer G’s”: Goldman Sachs, GMAC, and GE Capital.GE Capital, the major subsidiary of GE, is a major shadow bank. It used GE’s high-quality credit rating to become a major player in the capital markets, much in the same way AIG FP used the boring insurance high credit rating. GE Capital was the single largest issuer of commercial paper going into the financial crisis. GE Capital received major bailouts during the crisis, including having the FDIC guarantee more than $50 billion dollars of unsecured debt that was issued. To put that in perspective, only about $24 billion of GE Capital’s funding comes through deposits, allowing a shadow bank with massive unsecured debt obligations and only a small depository base to be carried through the financial panic. Both graphs from Date
The President's New Relationship with American Business - Robert Reich - Whenever you hear a business executive or politician use the term “American competitiveness,” watch your wallet. Few terms in public discourse have gone so directly from obscurity to meaninglessness without any intervening period of coherence. President Obama just appointed Jeffry Immelt, GE’s CEO, to head his outside panel of economic advisors, replacing Paul Volcker. According to White House spokesman Robert Gibbs, Immelt has “agreed to work thorugh what makes our country more competitive.” In an opinion piece in the Washington Post announcing his acceptance, Immelt wrote “there is nothing inevitable about America’s declining manufacturing competitiveness if we work together to reverse it.” But what’s American “competitiveness” and how do you measure it? Here are some different definitions:
"Competitiveness" - Krugman - Sigh. So it appears that President Obama is going to make “competitiveness” his main economic theme. To be fair, he could (and may well) do worse. But this is hackneyed stuff, and involves a fundamental misconception about the nature of our economic problems. It’s OK to talk about competitiveness when you’re specifically asking whether a country’s exports and import-competing industries have low enough costs to sell stuff in competition with rivals in other countries; measures of relative costs and prices are, in fact, commonly — and unobjectionably — referred to as competitiveness indicators. But the idea that broader economic performance is about being better than other countries at something or other — that a
companycountry is like a corporation –is just wrong. I wrote about this at length a long time ago, and everything I said then still holds true.*
The Bankers Have Won Completely - Today's title is a quote from Simon Johnson, founder of The Baseline Scenario, former chief economist of the IMF and now professor of economics at MIT. I quit reading Simon's website about a year ago. Here's why— What I object to is this: who exactly is Simon Johnson trying to persuade to do something about these problems [in the banking sector]? Is it the Congress? Only they can pass a law changing the current regime. Here's Illinois Senator Dick Durbin talking about the banks' influence in Congress— Sen. Dick Durbin (D-Ill.) has been battling the banks the last few weeks in an effort to get 60 votes lined up for bankruptcy reform. He's losing.On Monday night in an interview with a radio host back home, he came to a stark conclusion: the banks own the Senate. My accusation against Simon Johnson? Inexcusable naiveté. My verdict? Guilty as charged. My view then, and my view now, is that if you want to solve our Too-Big-To-Fail banks problem, you must first solve our the political corruption problem. But the latter is clearly unsolvable. The political system is irrevocably, completely broken, and has been for many years now. And it's getting worse. Wall Street's size and influence is greater than ever before. Johnson sums up our precarious situation in The Bill Daley Problem—
Niall Ferguson On Whether The Financial Crisis Will Lead To America's Decline And A Glimpse Of The "Post-Pax Americana" Dark Ages - "Two weeks after we presented Niall Ferguson's video lecture - 'Empires On The Verge Of Chaos' to tremendous reader response and almost 30,000 views, we follow up with another must watch video presentation, this time highlighting the intellectual rigor of Ferguson, David Gergen and Mort Zuckerman. The topic once again is the Financial Crisis, and specifically how, why and whether it will lead to America's decline. Of particular note is Ferguson's spot on characterization of the primary deficiency in the so-called brains of economists, namely that they see patterns, equilibria and stable systems where there are absolutely none: i.e., in the complex (as in Lorenzian) world of economics: 'Complex systems look like they are in equilibrium, but they are not: they are constantly adapting, highly decentralized, interdependent systems and this process of adaptation can continue for quite a long time. And you think to yourself when you look at it, that's in a wonderful equilibrium. That's how we think about the economy. That is how economists teach economics. They talk about it in terms of equilibrium. The bad news is that in fact we inhabit a complex system that has virtually nothing to do with the neoclassical model that you are taught in Econ 101.
Chamber President Tells Congress To ‘Starve To Death Financially’ New Consumer Protection Bureau - Last week, during his “State of American Business” address, Chamber of Commerce President Tom Donohue decried the Dodd-Frank financial reform law as a “regulatory tsunami.” Donohue said that the Chamber is “particularly concerned” with the new Consumer Financial Protection Bureau — which the Chamber dishonestly fought against during the Dodd-Frank debate — and added that the Chamber would be “deeply involved in the regulatory rulemaking” moving forward.The Chamber, of course, was at the forefront of the fight against Dodd-Frank, coordinating a campaign with the nation’s biggest banks to blunt the much-needed regulatory overhaul. And it seems that Donohue is preparing the Chamber to do much more than simply weigh in on the Dodd-Frank rule-writing process. In an address before 200 business executives in Minneapolis yesterday, Donohue pledged to “starve to death financially” new regulatory agencies:
Obama Consumer Agency May Not Be Able To Oversee Payday Lenders, Mortgage Firms - The nascent consumer agency dedicated to protecting borrowers from abusive lenders, a cornerstone of the Obama administration's efforts to reform the financial industry, will not be able to regulate the kinds of lenders that helped cause the crisis if the White House doesn't meet a key deadline, federal auditors say. Firms like New Century Financial, Ameriquest, Fremont General and Countrywide Financial -- lenders that aren't banks and fall outside the bounds of regular federal supervision -- made the kinds of shoddy mortgage loans that ultimately led to the housing crisis. The Bureau of Consumer Financial Protection, currently led by Elizabeth Warren on an interim basis, is supposed to change that by putting them under the umbrella of a robust federal regulator. But if the White House can't get a nominee through the Senate by July, the bureau will lack the authority to supervise nonbank lenders, according to a Jan. 10 report by the inspectors general of the Treasury Department and Federal Reserve obtained by The Huffington Post. In six months, the agency officially assumes the power formally held by bank regulators. Bloomberg News first reported on the existence of the report Wednesday afternoon.
U.S. Lawmaker Renews Push for Credit Card Rate Cap - Concerned that credit cards are trapping consumers “in a spiral of debt,” a Democratic U.S. lawmaker from New York Thursday introduced a bill that would cap credit card interest rates and all other loans at 15%. “Many hardworking Americans are using credit cards to make ends meet in this recovering economy, but credit card companies are finding new ways to squeeze the middle class despite significant reforms in the last Congress,” Rep. Maurice Hinchey said in a statement.”We need to put an end to this legalized loan sharking.” Consumers are facing greater fees and higher interest rates as banks seek to recoup revenues lost due to increased regulation. However, previous attempts to cap credit card rates have failed, and it could be even harder for such a plan to advance this year. With the House run by Republicans and the Senate run by Democrats, many analysts expect greater gridlock on Capitol Hill this year. Also, Congress passed a sweeping financial regulatory overhaul last year that could leave lawmakers less willing to sign off on another major financial regulation.
Here Comes $4 Gas, $5 Cups of Coffee -The final dam to stopping $150-a-barrel oil and $4-a-gallon gas is being breached, as financial regulation continues its daily erosion into worthlessness. Watching the CFTC attempt to back up Dodd-Frank legislation since it was passed in July has been like watching salmon flop upstream as the water drains out -- it's slow, arduous and likely to lead nowhere.It is clear now that we will instead be witness to the highest prices for commodities ever, fueled by the biggest influx of profit-driven trading and investment ever, unstanched even in the slightest by the hopes of financial regulation legislation.
Panel Begins to Set Rules to Govern Financial System - The new regulatory board charged with overseeing the stability of the financial system took its first big steps on Tuesday to set out tentative guidelines to limit trading by banks for their own accounts and to restrict the growth of the biggest financial companies. The Financial Stability Oversight Council, the grand council of financial regulators created by the Dodd-Frank Act, also proposed rules as to which large financial companies that were not banks would be regulated by the Federal Reserve because they constituted a potential threat to the nation’s financial system’s stability based on their size. It is likely to take several days for Wall Street to wade through and decipher many of the implications of the recommendations, which were embedded in reams of studies, reports and regulatory filings released simultaneously Tuesday afternoon. Among the four documents was a 79-page report on the Volcker rule, and 46 pages of proposed rules on regulating nonbank financial companies.
Tim Geithner: Never Again, Until The Next Time - Simon Johnson - In a column now running on Bloomberg, I review the new Inspector General report on what exactly happened during the “Citi Bailout Weekend” of late November 2008. The big question lurking in the background is how acutely we face a problem of Too Big To Fail (TBTF) today, i.e., the perception in the credit markets that very big banks will be supported in a crisis, therefore enabling these banks to borrow more cheaply during a boom - and thus enabling them to become larger and increasing their debt relative to equity (leverage). According to the report, Treasury Secretary Tim Geithner now completely backs away from claims that the Dodd-Frank reform legislation ended TBTF.
Tunnel Vision, or Worse, From Banking Regulators - As required by the Dodd-Frank financial regulation legislation (in section 123), Treasury Secretary Timothy Geithner, as chairman of the Financial Stability Oversight Council, has released an assessment on the costs and benefits of potentially limiting the size of banks and other financial institutions. This report, four and a half pages (pages 9 to 13) within a longer “Study of the Effects of Size and Complexity of Financial Institutions on Capital Market Efficiency and Economic Growth,” is represented as a survey of the relevant evidence that should guide policy thinking on this issue. Mr. Geithner’s team concludes rather vaguely, “This study will not make recommendations regarding limits on the maximum size of banks, bank holding companies and other large financial institutions.” . Given that the paper was prepared by some of the country’s top experts, who are well aware of the facts, the only reasonable inference is that our leading relevant officials prefer not to take the Dodd-Frank Act seriously with regard to reducing systemic risk. Instead, on all major points, the Financial Stability Oversight Council is allowing the big banks to prevail – and to pursue global expansion as they see fit.
Volcker Rule May Work, Even if Rules Are Vague -The Volcker Rule was part of the Dodd-Frank Act that Congress passed last year, barring banks from engaging in “proprietary trading.” When Mr. Volcker proposed it, the big banks at first wanted to kill it. But it became clear that the combination of his prestige and the bank’s own bad reputations meant that something was going to pass. So the banks settled for trying to hobble the rule with exceptions and qualifications. Now it is up to regulators to adopt rules. This week the Financial Stability Oversight Council, which was also created by Dodd-Frank and is led by the Treasury secretary and includes other financial regulators, put out a study and recommendations on the issue, providing at least a road map toward the rules that will come out within a few months.
The Volcker Rule Study: Don't Get Too Excited - You shouldn’t expect too much from the Volcker Rule study that the Financial Stability Oversight Council (FSOC) is releasing today. It almost certainly won’t get into the weeds of the definitions, which is where all the action in the Volcker Rule fight will be. It may make recommendations on how specific/broad different definitions should be, but that still won’t tell us much. It all depends on the specific language of the definitions. Instead, the study will likely focus on how regulators should enforce the Volcker Rule. Regulators have already floated the idea of using a three-tiered system, in which certain trades or combinations of trades would set off “tripwires” that automatically alert regulators. This could conceivably work, but again, it all depends on the specific language of the tripwires — if the tripwires are too narrowly defined, for example, they might not catch some proprietary trades.
The Volcker Rule Study: Key Takeaways - As I expected, the FSOC’s Volcker Rule study (pdf) doesn’t provide a ton of guidance on the key issues, which are the definitions. It does provide some clues though. I don’t have a ton of time, but here’s what I think are some of the key takeaways:
1. Market-making troubles: Regulators are clearly having trouble figuring out how to define “market-making” for less liquid markets such as swaps. Just look at how vague the “indicia of market-making” they identify for less liquid markets are (on page 29). For instance, they identify “Holding oneself out as willing and available to provide liquidity on both sides of the market” as indicative of market-making. Um, ya think?
2. Inventory accumulation will be a problem: The fact that the statute explicitly permits the accumulation of inventory in anticipation of “reasonably expected near term demands of clients” is going to be a serious problem. The study doesn’t include any ideas for how to place meaningful limits on that exemption.
3. Risk-mitigating hedging activity: The FSOC did actually offer some specifics on how they think regulators should define “risk-mitigating hedging activities.”
Did the Poor Cause the Crisis?, by Simon Johnson - The United States continues to be riven by heated debate about the causes of the 2007-2009 financial crisis. Is government to blame for what went wrong, and, if so, in what sense? In December, the Republican minority on the Financial Crisis Inquiry Commission (FCIC), weighed in with a preemptive dissenting narrative. According to this group, misguided government policies, aimed at increasing homeownership among relatively poor people, pushed too many into taking out subprime mortgages that they could not afford. This narrative has the potential to gain a great deal of support, particularly in the Republican-controlled House of Representatives and in the run-up to the 2012 presidential election. But, while the FCIC Republicans write eloquently, do they have any evidence to back up their assertions? Are poor people in the US responsible for causing the most severe global crisis in more than a generation?
“Fannie Mae Made Me Do It” - Simon Johnson - In December, the Republican minority on the Financial Crisis Inquiry Commission (FCIC), weighed in with a preemptive dissenting narrative. According to this group, misguided government policies, aimed at increasing homeownership among relatively poor people, pushed too many people into taking out subprime mortgages that they could not afford. This narrative has the potential to gain a great deal of support, particularly in the Republican-controlled House of Representatives and in the run-up to the 2012 presidential election. But, while the FCIC Republicans write eloquently, do they have any evidence to back up their assertions? Are poor people in the US responsible for causing the most severe global crisis in more than a generation? Not according to Daron Acemoglu of MIT (and a co-author of mine on other topics), who presented his findings at the American Finance Association’s annual meeting in early January. (The slides are on his MIT website.)
Cumulative Output Loss...lest we forget how much the mindless deregulation and irresponsible fiscal policy induced-crisis    and great recession has cost us in terms of lost output, and how difficult the road to recovery remains. (Very important as certain forces seek to gut financial regulation by way of "defunding". ) Jeffry Frieden and I tried to tabulate the likely costs of lost output associated with the Great Recession that followed the financial crisis driven by financial deregulation, lax fiscal and monetary policy, and ample capital supplies abroad. Using the January 2010 CBO projections, we calculated the cumulative GDP loss (relative to potential GDP) from 2007Q4-2014Q1 at 3.53 trillion Ch.2005$, 11349 per person (Ch.2005$), or about $12604 in current dollars). Macroeconomic conditions, as well as the projections of potential output, have changed somewhat since I undertook that calculation earlier this year, so I decided to update the calculation. I present the estimated cumulative loss from 2008Q1-2010Q3, as well as the cumulative loss from 2010Q4-2011Q4.
The Dangers of the Investment Bank Franchise Model - Yves Smith - Tony Jackson of the Financial Times has an article tonight on a topic near and dear to my heart, namely the fact that higher capital ratios will not lead investment banks, um, banks, to change their highly profitable “wreck the economy” behavior. He focuses on the role of how the change from the partnership model has turned investment bankers into mercenaries (and one might add, mercenaries willing and able to foment precisely the sort of trouble in which they can then intervene):In the 1980s, those firms were absorbed into larger quoted conglomerates, whose obligations to shareholders made such swings in profit impossible. So the burden fell on employees, who were axed wholesale in bear markets and re-employed – usually by other firms – in the upturn. This has turned investment bankers into a tribe of mercenaries, ready to switch allegiance instantly for a better offer. That might seem unattractive but it is a rational response to industry conditions.The resulting individualism, though, can run to extremes. One American investment banker I know, who works freelance on projects for different employers, tells me he regards taking a salary as “demeaning”. He eats what he kills, and is beholden to no one. At this point, the dysfunction of the system becomes jarringly apparent.
A.I.G. Repays Fed Debt and Looks Toward Big Stock Sale - With the repayment of its obligations to the Federal Reserve Bank of New York on Friday, the American International Group took a big step toward paying down its $130 billion taxpayer-financed bailout. But perhaps the hardest part remains: selling off what has become a 92.1 percent stake held by the Treasury Department. Friday signaled the closing of the A.I.G. recapitalization plan, in which the insurer drew on proceeds from recent asset sales and Treasury funds to pay off its debts to the New York Fed. At the same time, the Treasury converted its preferred shares in A.I.G. into common stock, which it planned to sell off beginning in either March or May, according to people briefed on the matter.
The Goldman Uncertainty Principle of Securities Regulation - - Yves Smith - I wish I had bandwidth to cover the Goldman-Facebook egg-on-its-face fiasco long form, but since other able writers are all over this story, I suspect NC readers will not find coverage wanting. However, I could not let this remark pass without comment. From the Wall Street Journal: Goldman Sachs Group Inc. slammed the door on U.S. clients hoping to invest in a private offering of shares in Facebook Inc., because it said the intense media spotlight left the deal in danger of violating U.S. securities laws. On the surface, this looks like doublespeak of a very high order. The US is a rule based legal system, which means a violation of securities laws is a violation of securities laws, or more precisely, a violation of law can be determined by mapping a fact set against statutes, regulation, and case law. So the idea that legality has anything to do with media coverage is spurious. But perversely, Goldman’s truthiness is an accurate account of the real state of affairs. Goldman sees that securities regs operate in the world of Schrodinger’s cat, where legality is in an indeterminate state until someone takes the trouble to look.
SEC Recommends Common Standard for Brokers, Advisers = The U.S. Securities and Exchange Commission is recommending a common fiduciary standard for brokers and registered investment advisers who provide personalized investment advice. The SEC said there’s a need for a uniform fiduciary standard “no less stringent than currently applied to investment advisers,” according to the staff report delivered to Congress yesterday. The agency was asked by Congress to study the effectiveness of current rules with the option of creating a universal standard as part of the Dodd-Frank financial services overhaul law enacted on July 21. Broker-dealers currently are held to a suitability standard that calls for advice that meets their clients’ needs when the product is sold, instead of the fiduciary duty imposed on registered investment advisers to put their clients’ best interests first.
“The Vast Majority Of This Contraction Of Credit Availability To American Industry Has Been By The Larger Banks” - Dennis Santiago – CEO and Managing Director of Institutional Risk Analytics – notes: The really shocking numbers are in the unused line of credit commitments of banks to U.S. business. This is the canary number I like to look at because it is a direct expression of banking and finance confidence in Main Street industry. It’s gone from $92 billion in Dec -2007 to just $24 billion as of Sep-2010. More importantly, the vast majority of this contraction of credit availability to American industry has been by the larger banks, C&I LOC from $87B down to $18.8B by the institutions with assets over $10B. Poof! This once again confirms what I have been saying for years: the giant banks are causing most of the credit contraction. As I wrote in 2009: Fortune pointed out in February that smaller banks are stepping in to fill the lending void left by the giant banks’ current hesitancy to make loans. Indeed, the article points out that the only reason that smaller banks haven’t been able to expand and thrive is that the too-big-to-fails have decreased competition:
More Evidence of Undercapitalization/Insolvency of Major Banks - Yves Smith - Even as we and other commentators have noted the underlying weakness of major bank balance sheets, which have been propped up by asset-price-flattering super low interest rates and regulatory forbearance, we still witness the unseemly spectacle of major banks keen to leverage up again. The current ruse is raising dividends to shareholders, a move the Fed seems likely to approve. Anat Admati reminded us in the Financial Times on Wednesday that we are about to repeat the mistakes of the crisis: The Basel III reforms agreed last year set minimum bank equity between 4.5 per cent and 7 per cent of “risk-weighted assets”, which are significantly smaller than total assets for most banks. Triple A-rated assets require little or no equity capital. The system of risk weights established by Basel II, which distorts banks’ investments towards favourably treated assets, was mostly maintained. Under Basel III, the ratio of equity to total assets can be as low as 3 per cent. These equity requirements are dangerously low. Significantly increasing banks’ equity funding would provide many benefits to the economy, at little social cost. Our Richard Smith has provided a series of posts analyzing the many shortcomings of Basel III (see here, here, here and here); below is his drive-by shooting:
Study Points to Windfall for Goldman Partners -- Goldman Sachs executives have long been among the most richly paid on Wall Street in the best of times. They are now poised to reap a windfall that was sown in the dark days of the financial crisis in 2008. Nearly 36 million stock options were granted to employees in December 2008 — 10 times the amount issued the previous year — when the stock was trading at $78.78. Since those uncertain days, Goldman’s business has roared back and its share price has more than doubled, closing on Tuesday at nearly $175. The options grant is among the many details that emerge from a study of regulatory filings and internal partnership documents by The New York Times and Footnoted.com, a division of Morningstar that scrutinizes corporate disclosures. These filings provide a much fuller picture of both Goldman’s compensation and its elite partnership of 475 people who run the firm.
Is Incoming New York Attorney General Schneiderman Going to Be Too Soft on Bank Abuses? - Yves Smith - An article in the Wall Street Journal says that the incoming New York state attorney general, Eric Schneiderman, is going to be nicer to Wall Street than his predecessors Eliot Spitzer and Andrew Cuomo. Given that Cuomo decided to take financial firm chicanery seriously only fairly late in his term of office, the Wall Street Journal assessment does not bode well for the prospect of tough enforcement. The reason this matters is that the New York state AG has a particularly effective weapon, the Martin Act. One of the continuing frustrations I have as a writer and a citizen is the use of the word “fraud”. Activities that by any common-sense standard are fraudulent probably don’t meet the legal standard for fraud. In very crude terms, one of the hurdles that needs to be overcome is intent. If a perp can argue that he thought what he did was not improper (his attorneys or accountant blessed it, it never occurred to him it was an abuse, etc.) or he can claim it was a mistake, he can get off scot free. The very fact that Joe Cassano, the head of AIG’s Financial Products Group, has not been prosecuted serves as an illustration of difficulties involved.
CoStar: Commercial Real Estate Prices declined in November - From: CoStar Commercial Repeat-Sale Indices • CoStar’s three national commercial real estate repeat sales indices were down for the month of November despite notable price increases for high profile core transactions in Washington D.C. and New York City • The Investment Grade index was down 4.1% for the month giving back some, but not all of the 8.1% net gains observed over August, September and October. Notwithstanding November’s decline, the Investment Grade index is still up 7.6% since its cyclical low earlier this year. Collectively they show a market that is not just bifurcated but possibly trifurcated, with trophy assets commanding bidding wars, smaller assets languishing, particularly in secondary and tertiary markets; and distressed properties trickling onto the market as banks recycle assets at a relatively measured pace.This graph from CoStar shows the indexes for investment grade, general commercial and a composite index. All three indexes declined in November.
Downtown Hartford Office Buildings Nearly One-Third Empty - Greater Hartford's office market — a barometer for the health of the area's economy — grew even more fragile in 2010, with vacancy in downtown Hartford rising to levels not seen since the devastating recession of the early 1990s. Nearly one-third of all the office space in the city's central business district — 2.4 million square feet — is empty. And it could get worse this year, experts say. A new report from commercial real estate services firm CB Richard Ellis shows the troubling rise in vacancy in Hartford's central business district to 30.2 percent at the end of 2010, up from 18.3 percent a year earlier. In the broader region, office vacancies in Hartford and the surrounding suburbs jumped to 21.5 percent at the end of 2010, compared with 17.4 percent a year earlier. Longtime commercial real estate observers in Hartford say the increased vacancies in the city are the highest in recent memory.
NMHC: Is the recovery real for apartments? - I am attending the NMHC Apartment Strategies Conference in Palm Springs today. The overwhelming sense from participants is "YES" the apartment recovery is real. One data point - There are a record number of attendees this year. The expectations are for a record low supply completed this year. Some pickup in completions next year (2012), and then plenty of completions in 2013. The starts will probably pickup later this year, although I'll know more at a later session. The pickup in starts will help both GDP and employment growth this year. The expectations are for strong rent growth over the next two years (around 5% per year) for large upper tier apartments. This will keep the vacancy rate from falling too much as owners trade off rent increases for occupancy. Apartment market has bifurcated. Upper half of apartments are improving, regardless of geography. Lower half are struggling. In 2010 most new households selected renting as opposed to owning. The feeling is this will continue for at least a couple more years.
Lawmakers Urge Federal Reserve to Abandon TILA Rule Change - Consumer advocacy groups have been joined by federal lawmakers in their campaign against a mortgage lending rule change proposed by the Federal Reserve. The Fed has recommended revising a stipulation that allows homeowners to stop a foreclosure on the grounds that the lender violated the disclosure requirements outlined in the Truth-in-Lending Act (TILA) for certain home-secured transactions, including closed-end mortgages and home equity lines of credit. Currently, a borrower has up to three years to convince the courts to cancel, or rescind, a mortgage loan if they can prove the lender did not properly disclose the terms of the loan at the time it was signed. It’s a regulation that has been in place since TILA was enacted 42 years ago.The proposed rule would reverse the traditional understanding of TILA’s right of rescission by requiring a homeowner to pay off the entire mortgage amount before a creditor is required to cancel its security interest in the home. Sen. Sherrod Brown (D-Ohio) was joined by five other senators, including the outgoing and incoming chairmen of the Senate Banking Committee, in sending a letter to the Federal Reserve. In it, they said “In this time of record foreclosures and reports of systemic problems with the operations of the largest mortgage servicers, the proposed revisions are unfortunate and unnecessary.”
Banks Want Pieces of Fannie and Freddie’s Business - As the Obama administration prepares a report on the future of Fannie Mae and Freddie Mac, some of the nation’s largest banks are offering a few suggestions. Wells Fargo and some other large banks would like private companies, perhaps even themselves, to become the new housing finance giants helping to bundle individual mortgages into securities — that would be stamped with a government guarantee. The banks have presented their ideas publicly through trade groups. Housing industry consultants and people familiar with recent meetings at the Treasury Department say these banks view the government’s overhaul of the mortgage market as a potential profit opportunity. Treasury officials have met with executives from several institutions, including Wells Fargo, Morgan Stanley, Goldman Sachs and Credit Suisse, according to a public listing of the meetings.
Wells Fargo Won’t ‘Pay Up’ to Settle Mortgage Buybacks - Wells Fargo & Co. won’t seek a settlement with Fannie Mae or Freddie Mac on disputed mortgages, and terms offered to rival banks may not have been as generous as some portrayed, Chief Financial Officer Howard Atkins said. “The quality of our securitizations was of a much higher caliber than all of the other large bank peers,” Atkins said today in an interview. “It doesn’t make sense for us to pay up to get rid of the remaining small amount of problems we have.” Prodded by lawmakers, Fannie Mae and Freddie Mac have pressed banks including Wells Fargo to buy back mortgages that were based on faulty data about the homes and borrowers. Wells Fargo said today in its fourth-quarter report that demands from the government-owned mortgage companies declined for a second straight quarter and now stand at $1.5 billion. Wells Fargo set aside $464 million of provisions in the fourth quarter to cover repurchases and spent $506 million for buybacks.
JPMorgan’s EMC Mortgage Sued Over Home Loan Documents - JPMorgan Chase & Co.’s EMC Mortgage, facing homeowner lawsuits over foreclosures, was sued by the trustee of a mortgage portfolio for refusing to turn over documents detailing the quality of loans bought by the trust. Wells Fargo & Co., the trustee, is seeking access to files for more than 2,000 underlying mortgages in the Bear Stearns Mortgage Funding Trust 2007-AR2, according to the complaint filed today in Delaware Chancery Court in Wilmington. “The trustee has repeatedly requested that EMC provide access to the subject documents,” Wells Fargo said in the complaint. “EMC has played proverbial ‘rope a dope’ and otherwise continued to drag its feet, and has produced nothing.” Claims of wrongdoing by banks and loan servicers triggered a 50-state investigation last year into whether hundreds of thousands of foreclosures were properly documented as the housing market collapsed. Lending practices have also pitted mortgage-bond investors against banks over misrepresentations such as overstatements of borrowers’ income and inflated appraisals.
Unofficial Problem Bank list increases to 937 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for Jan 21, 2011. Changes and comments from surferdude808: The OCC finally released its actions through the middle of December 2010 as we have been waiting for the past two weeks. By and large, the OCC actions were the conversion of Formal Agreements to Consent Orders for six national banks with only one new entrant. The major changes this week result from the publication of nine actions issued by the Illinois Department of Financial & Professional Regulation. We applaud the transparency of the Illinois Department as they are the only state banking authority that publishes its safety & soundness enforcement actions against banks. This week there are 11 additions and seven removals. The changes result in the Unofficial Problem Bank List having 937 institutions with assets of $409.4 billion, compared with 933 institutions and assets of $410.4 billion last week.
Bank Of America Posts Billion-Dollar Loss Tied To Mortgages - Bank of America, the largest U.S. bank by assets, reported a fourth quarter net loss of $1.2 billion Friday, which was well behind analysts expectations. The loss was driven by a previously announced writedown of $2 billion related to mortgage business. Excluding the charge, the bank earned 4 cents per diluted share or $756 million. Analysts expected the bank to earn 14 cents per share and bring in $25 billion in revenue. In the fourth quarter of 2009, the bank lost $5.2 billion, or 60 cents per share.Overall, Bank of America's revenue was down 11% in the quarter to $22.7 billion, about $2 billion short of analysts’ estimates. For the full year 2010, BofA reported a net loss of $2.2 billion or 37 cents per share including a goodwill charge of $12.4 billion.
BofA Says $10 Billion Is Top of Buybacks Forecast - Bank of America Corp., which set aside $4.1 billion in the fourth quarter to resolve disputes over faulty mortgages, said it could cost as much as $7 billion to $10 billion more to resolve outstanding claims. The forecast represents the “upper range” of future losses tied to bond insurers and private investors, the Charlotte, North Carolina-based bank said today in a slide presentation. The actual cost may depend on “legal and procedural hurdles” facing firms who want the bank to repurchase home loans it originated, Chief Financial Officer Charles Noski told analysts in a conference call. Bank of America, the biggest U.S. bank by assets, has been battling accusations that mortgage investors were duped into buying loans issued with overstated property values and inflated borrowers’ incomes. Noski said the size of the provision was appropriate after Betsy Graseck, an analyst at Morgan Stanley, asked why the company didn’t set aside more for reserves, given the forecast range. “This is a possible range, not a probable range,” Noski said
To Bailout or Not to Bailout: Mortgage Mess Endgames Emerging - Yves Smith - In the last week, several ideas for fixing the housing market have surfaced. One is the Third Way proposal, which appears to be an Administration trial balloon. Predictably, it is yet anther bailout, with plenty of smoke and mirrors to disguise that fact. A second proposal, from Sheila Bair yesterday, is to establish a “foreclosure claims commission“. This is in keeping with the direction that Iowa’s Tom Miller has been pushing for with the 50 state attorneys general investigation. This scheme sounds more promising that the Third Way proposal, but is very likely to wind up in bailout territory. Third is a not-widely-covered plan by Senator Jeff Merkley which has two provisions that would force banks to address the fact that mortgages are deeply under water. That makes it firmly anti-bailout (or more accurately, any resulting bailouts would be explicit as opposed to buried in various mortgage market gimmies to banks). It would thus speed recognition of housing market losses, force debt writedowns, and accelerate repricing and clearing of the housing market. The Merkley proposal is pro consumer and pro investor; the other two are pro bank. Sadly, it isn’t hard to see which is likely to prevail in the absence of public pressure.
The Stakes Are Huge: There's Another Bank Crash Looming, and We Must Prevent Another Bailout - Everything I am reading these days on financial issues points to some serious reckoning soon to come, especially because of -- as the folks at Third Way are calling it -- foreclosure-gate. The Massachusetts Supreme Court ruling in the Ibanez case, along with a growing body of cases where the banks and/or their servicers have been ruled against in foreclosure cases, and even the banks' lawyers are being castigated in court by judges for bringing in made-up paperwork, is causing a growing sense of panic among the biggest banks that hold the most mortgages. Spokespeople for the banks are talking bravely, trying to dismiss the situation as some minor paperwork errors, but everyone who has been paying attention to the situation fears that there are really big consequences afoot. If you have the stomach for it and want to learn more about the gory details about the policy side of all this, there are a bunch of good writers you can turn to, including Yves Smith, David Dayen, and Marcy Wheeler, all of whom have put up great pieces worth looking at in the last couple of days. Numerian has a great post I have already linked to a couple times in past pieces this week on the truly scary implications of what is going down.
Bank Walk Aways - The phenomenon of jungle mail or "strategic default" has become well known enough over the past few years. There's a lesser known phenomenon, though, known as bank walk aways. With a bank walk away, the lender will fail to pursue a foreclosure on a defaulted loan in order to avoid assuming the liabilities associated with the property. This practice takes various forms, including:
- homeowner defaults, but lender never pursues foreclosure (typically very low value property in Detroit or Cleveland, and the costs of the foreclosure exceed the property value)
- homeowner defaults, lender commences foreclosure, gets judgement, but doesn't record the deed. Homeowner has moved out, but is still on the hook for the tax bill and possibly any torts associated with the property.
- Homeowner discharges the debt in a bankruptcy. The lien is still valid, however and enforceable based on the default. The homeowner has moved out, but the lender doesn't foreclose and insists that the homeowner is on the hook for taxes and (force-placed) insurance.
JP Morgan Chase admits to ripping off military families - Maybe this will get the attention of Treasury and the White House, and get some real action on bank abuses in the mortgage mess. One of the nation's biggest banks — JP Morgan Chase — admits it has overcharged several thousand military families for their mortgages, including families of troops fighting in Afghanistan. The bank also tells NBC News that it improperly foreclosed on more than a dozen military families. The admissions are an outgrowth of a lawsuit filed by Marine Capt. Jonathan Rowles. He and his wife, Julia, say they’ve been battling Chase for five years. The dispute apparently caused the bank to review its handling of all mortgages involving active-duty military personnel. Under a law known as the Servicemembers Civil Relief Act (SCRA), active-duty troops generally get their mortgage interest rates lowered to 6 percent and are protected from foreclosure. Chase now appears to have repeatedly violated that law, which is designed to protect troops and their families from financial stress while they’re in harm's way.
Union Members Disrupt Mortgage Banksters Meeting in DC (VIDEO) Awesome activism from members of the Sheetmetal Workers union (SMWIA), 200 of whom burst into a private meeting of mortgage bankers to protest layoffs by a homebuilding company that got a $900 million in federal funds intended for job creation. The banksters fled the scene, though one said he would have engaged the workers if they had “worn a suit.” (Watch CNBC’s coverage of the protest at the top of this post.) The protest — aimed at the Pulte Group, one of the nation’s largest homebuilders — quickly turned into a scrum as workers wearing hardhats and shouting through bullhorns overwhelmed the security staff at the JW Marriott, bursting into a crowded conference room before a stunned crowd of bankers. Shouting “Where are the jobs?” and “Where is the money?” the protesters from the Sheet Metal Workers’ International Association and the International Union of Painters and Allied Trades, many in overalls and helmets, said taxpayers have provided $900 million in tax breaks to Pulte with the aim of creating jobs. “Those tax breaks were supposed to create jobs,” “That was President Obama’s and Congress’s intent.” “Instead, Pulte laid off workers,” .
Lender Processing Services Has Yet Another Bad Day in Court - Yves Smith - In October, Lender Processing Servicer was targeted in two lawsuits, one filed in Federal bankruptcy court, both alleging illegal sharing of legal fees. The Federal suit sought class action status and was joined shortly thereafter by the Chapter 13 bankruptcy trustee for Northern Mississippi on behalf of herself and all other US Chapter 13 bankruptcy trustees as a class. Lender Processing Services dismissed the suit as a “fishing expedition“. Funny, it appears the judge does not agree. I hope to get a transcript of the hearing on Friday, since he authorized the case against both firms moving into discovery and from what I understand, not on a very narrow basis as both defendants had sought. If successful, this litigation would do tremendous damage to LPS.
Big Lenders May Lose With Simpler Mortgage Disclosure - The Consumer Financial Protection Bureau said it will soon begin writing and testing a simplified mortgage-disclosure form aimed at making it easier for borrowers to compare deals from different lenders. The bureau expects by the end of the month to award a contract to develop the form, making it one of the first projects of the new agency, according to a bidding document given to vendors in November and reviewed by Bloomberg News. More concise disclosure is one of the main stated goals of Elizabeth Warren, the special White House and Treasury adviser charged with setting up the agency established by the Dodd-Frank regulatory overhaul. Simpler forms that can be directly compared may make the market less lucrative for lenders such as Bank of America Corporation, Wells Fargo & Company, JP Morgan Chase & Co. and Citigroup Inc.
10,000 GMAC Foreclosures Stopped in Maryland - In a major ruling Friday, a coalition of nonprofit defense lawyers and consumer protection advocates in Maryland successfully got over 10,000 foreclosure cases managed by GMAC Mortgage tossed out, because affidavits in the cases were signed by Jeffrey Stephan, the infamous GMAC “robo-signer” who attested to the authenticity of foreclosure documents without any knowledge about them, as well as signing other false statements. The University of Maryland Consumer Protection Clinic and Civil Justice, Inc., a nonprofit, filed the class action lawsuit, arguing that any case using Jeffrey Stephan as a signer was illegitimate and must be dismissed. In court Friday, GMAC agreed to dismiss every case in Maryland relying on a Stephan affidavit. They can refile foreclosure actions on the close to 10,000 homes, but only at their own expense, and subject to new Maryland regulations which require mandatory mediation between borrower and lender before moving to foreclosure. Now GMAC has to go back and basically file the entire case all over again, meaning they have to give notice of foreclosure to the borrower, engage the borrower in modification options, and basically run through the whole process from the beginning. They cannot use the shortcut solution, thanks to the class action suit filed. GMAC’s dismissal of every foreclosure in Maryland shows their doubts they would have won the class action
Pending Legislation in VA Would End Use of MERS, Give Borrowers More Foreclosure Defenses - Yves Smith - The securitization industry may be about to reap the whirlwind of its failure to take the need for reform seriously. As we’ve indicated, industry incumbents have adopted a denialist approach to widespread evidence of serious documentation problems and procedural abuses, and have fought reasonable, pro investor proposals tooth and nail. The Washington Post reports on several pending legislative proposals in the state of Virginia, all of which seek to level the power imbalance between the financial services industry and mortgage borrowers. The interesting thing about this pushback is that Virginia is not at all left leaning state. These measures instead appears to result from the fact that it has one of the fastest foreclosure processes in the US. Homeowners…would be given more time to defend themselves under one proposal. Another bill would require lenders to get the approval of a judge before seizing a home. A third would give homeowners a last-minute chance to avert foreclosure by catching up on overdue payments. Note that the proposal to require judicial approval before a foreclosure sale is forward-looking and would not affect current foreclosures. But it also would represent a meaningful impairment of lender’s rights in that state. Virginia is a “deed in trust” state, which means the lenders holds title to the house until the mortgage loan is satisfied. The second proposal, to give borrowers the right to cure a default up to the time of the sale of the home, sounds nice but probably does not add up to much.
Bank Board Member Proposes Legislation in Virginia to Change UCC to Help Banks Escape Foreclosure Woes - Yves Smith - Earlier this week, we discussed how several measures proposed in Virginia would have the effect of redressing the power imbalance between banks and borrowers in the foreclosure process. One would give borrowers more time to mount defensed (Virginia has one of the fastest track processes in the US); another would require judicial approval for a foreclosure to become final. But the farthest-reaching proposal would force banks to maintain accurate property records in local government offices, which would end the use of MERS in that state. Not surprisingly, the industry is not about to let this go down without a fight. Rep. Donald Merricks, who is also a bank board member (apparently of Virginia Bank & Trust) proposed House Bill 1718. It was due to come up for “check vote” today, which is a preliminary tally of support, but it was “pulled” meaning the bill is still pending but the check vote has been deferred. This is a serious undertaking. The bill proposed to change Virginia’s Uniform Commercial Code, which is a set of provisions not to be tampered with lightly. The irony here is that this is an outcome we have warned about in our earlier discussion of the Statute of Frauds of 1677, that basic practices to prevent abuses in contracts and in courts might be gutted to give the banks a free pass on their mortgage mess.
Banks Halting Foreclosures in Parts of Florida - Yves Smith - This is starting to get interesting. Having achieved the creation of special courts to whittle down a backlog of foreclosures, called the “rocket docket” due to the propensity of many of its judges to operate on an accelerated timetable that too often led to a refusal to hear borrower objections and evidence, servicers are now withdrawing foreclosure cases in Southwest Florida en masse. It is not yet clear whether these cases are being abandoned or whether the banks will refile once they find a way to argue their action is valid. However, reading between the lines, one has to question whether they will succeed. From the Fort Myers News-Press: Banks in recent weeks have been dropping hundreds of their Southwest Florida foreclosure lawsuits instead of facing defendants at trial, according to local attorneys and court records….Some foreclosures at large law firms were never actually read by the attorneys who filed them here and elsewhere, and some of the mortgages that ended up in mortgage-backed securities sold to investors were never legally transferred by the banks, defense attorneys have alleged. “We think they’re going to come back and refile,”
Mass Supreme Court to Consider Whether Buyers Out of Faulty Foreclosures Actually Own Property - Oh boy, if you think the Massachusetts Supreme Judicial Court decision on Ibanez, which raised serious questions about the validity of transfers in mortgage securitizations, turned heads in the banking industry, you ain’t seen nothin’ yet.The SJC is considering what has the potential to be another widely-watched case, Bevilacqua v. Rodriguez. Note this case was heard at the lower court level by the same land court judge, Keith Long, that ruled on Ibanez, and the SJC in large measure affirmed Long’s take in that case. The issue is key: whether a buyer can own a piece of real estate acquired from a party that lacked the right to foreclose upon the previous owner. The background via Bloomberg: Bevilacqua III went to Long’s court to force the original owner to say whether he had a claim on the property in Haverhill, about 36 miles (58 kilometers) north of Boston. A city assessment website lists four condominiums at the location with a total value of $600,300. Bevilacqua asked Long whether he could try to find the original owner through newspaper notices, said his lawyer Jeffrey B. Loeb, of Rich May PC in Boston, in a phone interview.In August, Long ruled that Bevilacqua wasn’t the property’s owner and didn’t have standing to inquire about claims. U.S. Bancorp, which sold Bevilacqua the property in 2006, conducted an invalid foreclosure because it didn’t properly own the mortgage at the time, Long said.
Home Buyers Are at Risk in Bad-Foreclosure Case at Massachusetts Top Court - Massachusetts’ highest court will consider whether a home buyer can rightfully own a property if the bank that sold it to him didn’t have the right to foreclose on the original owner. The state’s Supreme Judicial Court, which agreed last month to take the appeal, already ruled Jan. 7 that banks can’t foreclose on a house if they don’t own the mortgage. The lower- court decision now under review said the buyer of residential property in Haverhill, Massachusetts, never really owned it because U.S. Bancorp foreclosed before it got the mortgage. “It appears to be the next step in the conversation,” Paul R. Collier III, who represented the borrower in the earlier case, U.S. Bank v. Ibanez, said in a phone interview. Like the Ibanez case, the court’s decision may resonate with other states as they grapple with the rights of new homebuyers who may be hesitant to complete a purchase for fear of uncertain title, and with how such a trend may hobble the broader housing market.
How accurate are property records? A Utah court case in which the owner of a Draper townhouse got clear title to the property, even though he still owed $132,000 on it, raises new legal and financial questions about a property-records database created by mortgage bankers. The award of a title free of liens means that whoever owns the promissory note on the Draper property — likely a group of faraway investors — no longer has the right to foreclose to collect on a delinquent loan. Indeed, the townhouse owner has sold the property and kept the money. Those who own the promissory note probably don’t even know what occurred. The lawsuit over the title to the townhouse named Garbett Mortgage and Citibank FSB as the holders of promissory notes as recorded on trust deeds filed with the recorder’s office. Integrated Title Services was listed as trustee of the Garbett Mortgage trust deed, while First American Title was the trustee of the CitiBank trust deed. But there also was another entity listed on the trust deeds called the Mortgage Electronic Registration Systems (MERS). Under the state’s quiet title laws, Keane said he did not have to name MERS or serve it legal papers in the lawsuit because it was not the legal owner of title to the property. MERS cannot be the “beneficiary” or holder of the promissory note because it readily has admitted it has no financial interest in any notes or mortgages.
Blame the Victims and Enrich the Perpetrators - It’s outrageous the way subprime borrowers swarmed and solicited unsuspecting lenders and camped out in the offices of investment banks to push them to find ways to finance their insatiable need for capital to purchase homes. It’s a scandal the way they got in bed with appraisers to get the home values stated at three to five times market value. It’s criminal the way they falsified income to push through the mortgage loans. Oh wait… they didn’t. [Hat tip to Nomi Prins, author of It Takes a Pillage.]While there were instances of fraud by borrowers, the key drivers of our housing crisis were fraud perpetrated by mortgage lenders and securities fraud — by some of our most revered financial institutions — that provided money to fuel fraudulent mortgage lending. After the largest bank bailout in world history, we have a national epidemic of foreclosure fraud. In cases where foreclosures are being delayed, banks are walking away from abandoned homes and sticking local taxpayers with the bill to clean up the mess they left behind.
Fix Foreclosure Fraud With a Borrowers’ Bill of Rights - People are debating the need for a "systemic fix"to address the foreclosure crisis. What we really need is a systemic redesign, from the ground up. Fortunately, the design was laid down centuries ago -- by 800 years of law, and by the idea that free people are entitled to limit the unwarranted power of others over their persons and property. These principles are a good foundation for structuring future negotiation, legislation, or regulation. The president wooed corporate executives this week with a Wall Street Journal editorial called "Toward a 21st Century Regulatory System." What we really need is a 21st century banking system, built on ancient principles and not fly-by-night profiteering. You could encode those principles in a document and call it the Borrower's Bill of Rights. You could even call it the Mortgage Magna Carta, since some of the basic principles involved date back that far.
Housing Starts Miss As Permits Jump Ahead Of Building Code Changes - More weak economic data today, as Housing starts were reported at 529K on expectations of 550K, another sequential decline from the prior revised 553K. The silver lining was in the housing permit number which was 635K on expectations of 554K (compared to a prior revised 544K). Yet as the note from GS below explains the only reason for the surge in permits is due to a jump in applications ahead of the implementation of new building codes in 2011. As Hatzius notes: "If building code changes are the main explanation for the rise in permits, we should see a substantial drop back in multifamily permits next month."
Housing Starts Decline in December - Total housing starts were at 529 thousand (SAAR) in December, down 4.3% from the revised November rate of 553 thousand, and up 11% from the all time record low in April 2009 of 477 thousand (the lowest level since the Census Bureau began tracking housing starts in 1959). Single-family starts decreased 9.0% to 417 thousand in December - the lowest level since early 2009. The second graph shows total and single unit starts since 1968. This shows the huge collapse following the housing bubble, and that housing starts have mostly been moving sideways for two years - with a slight ups and downs due to the home buyer tax credit. There was an increase in permits, especially for multi-family units. Here is the Census Bureau report on housing Permits, Starts and Completions.
Housing Starts in U.S. Decreased in December to One-Year Low - Builders began work on fewer homes than projected in December, a sign the industry that triggered the recession continued to struggle more than a year into the U.S. economic recovery. Housing starts fell 4.3 percent to a 529,000 annual rate, the lowest level since October 2009, Commerce Department figures showed today in Washington. The median forecast in a Bloomberg News survey called for a 550,000 rate. A jump in building permits, a proxy for future construction, may reflect attempts to get approval before changes in building codes took effect at the beginning of this year. Companies like KB Homes and Lennar Corp. project demand will be slow to rebound as elevated unemployment and mounting foreclosures discourage buyers. While low borrowing costs and falling prices are helping revive sales from last year’s post tax-credit slump, Federal Reserve policy makers are concerned housing may undermine the economic expansion.
MBA: Mortgage Purchase Application decline in latest survey - The MBA reports: Applications Increase in Latest MBA Weekly Survey The Refinance Index increased 7.7 percent from the previous week. This is the third consecutive weekly increase in refinance applications and is the highest Refinance Index observed since the beginning of December. The seasonally adjusted Purchase Index decreased 1.9 percent from one week earlier.This graph shows the MBA Purchase Index and four week moving average since 1990. The four-week moving average of the purchase index suggests weak existing home sales through the first couple months of 2011. As the MBA's Fratantoni noted: "[P]urchase applications remain quite low, indicating that home sales are unlikely to pick up any time soon."
December Existing Home Sales: 5.28 million SAAR, 8.1 months of supply - The NAR reports: December Existing-Home Sales Existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, rose 12.3 percent to a seasonally adjusted annual rate of 5.28 million in December from an upwardly revised 4.70 million in November, but remain 2.9 percent below the 5.44 million pace in December 2009.This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993. Sales in December 2010 (5.28 million SAAR) were 12.3% higher than last month, and were 2.9% lower than December 2009. The second graph shows nationwide inventory for existing homes. According to the NAR, inventory decreased to 3.56 million in December from 3.72 million in November. The all time record high was 4.58 million homes for sale in July 2008. The last graph shows the 'months of supply' metric.Months of supply decreased to 8.1 months in December from 9.5 months in November. The months of supply will probably increase over the next few months as sales slow a little, and inventory increases. This is still higher than normal.
Existing Home Inventory increases 8.4% Year-over-Year in December - Earlier the NAR released the existing home sales data for December; here are a couple more graphs ... The first graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Inventory is not seasonally adjusted, so it really helps to look at the YoY change. Although inventory decreased from November to December, inventory increased 8.4% YoY in December. This was one of the key metrics I used in 2005 to call the top of the housing bubble in activity. This is the largest year-over-year increase in inventory since January 2008 and this is something to watch closely over the next few months. By request - the second graph shows existing home sales Not Seasonally Adjusted (NSA).The red columns are for 2010. Sales NSA were above the level in 2007 and 2008, but below the level in 2009.
Low Interest Rates and Optimism About the Economy Did Not Lure Homebuyers in December - The Post reported on the better than expected numbers on existing home sales reported for December. It told readers that:"Low interest rates, relatively affordable prices and tentative optimism about the economy helped lure buyers in December." Actually, the data on existing home sales reports on closed sales in December. It generally takes 6-8 weeks between when a house contract is signed and when the sales are closed. This means that the December data reflect attitudes in October and early November, not December.
Housing Remains Embattled Sector - December saw housing starts slip a greater-than-expected 4.3% to an annual rate of 529,000. Over the past two years, starts have been averaging below a 600,000 pace–well below the mark of nearly 2 million hit regularly during the housing boom. The collapse in housing–along with the attendant mortgage crisis–was the main trigger for the U.S. recession. Residential construction has subtracted from gross domestic product growth for 12 of the last 14 quarters. The federal government tried to help by instituting two homebuyer tax-credit programs. Those lifted sales temporarily. In addition, the Federal Reserve has been buying up mortgages in an effort to keep interest rates ultra-cheap. That worked for a while but the 30-year mortgage rate is about half a percentage point higher than it was in October. With no new federal help expected, housing now must sink or swim on its own.
Record Low Housing Completions in 2010 - This is a key story: there were a record low number of housing completions in 2010, breaking the record set in 2009. The total for single family, multi-family and manufactured homes (estimated) was 703 thousand units in 2010. That is about 17% below the 844 units completed in 2009 (including manufactured homes). The previous record low was 1.244 million in 1982. As Tom Lawler noted, there will be record low number of multi-family units completed in 2011 - since it takes over a year on average to complete - and probably a record low number of total units. This graph shows annual completions for 1 to 4 units, 5+ units and manufactured homes. In 2010, 1 to 4 unit completions were at a record low 506 thousand. This was just below the 534 thousand units completed in 2009. This is far below the previous record low of 712 thousand units in 1982. For 5+ units, completions were at 147 thousand units. This was just above the record low of 127 thousand in 1993 - and that record will be broken in 2011.
2010 weakest year for home sales since 1997 - The number of people who bought previously owned homes last year fell to the lowest level in 13 years. The National Association of Realtors says sales dropped 4.8 percent to 4.91 million units in 2010. That was slightly lower than 2008, which had been the weakest level since 1997.Home prices have been depressed by a record number of foreclosures and high unemployment. Many potential buyers held off on purchases last year, fearful that prices hadn't bottomed out yet. The poor year for sales ended strong in December. Buyers snapped up homes at a seasonally adjusted annual rate of 5.28 million units, an increase of 12.8 percent from November and the strongest sales pace since last May. Still, many economists believe it will take years for sales to rise to a normal level of around 6 million units a year. And some say 2011 will be even weaker than last year because more foreclosures are expected and home prices are likely to keep falling through the first six months of the year.
Data To Show Housing As Economy’s Achilles Heel -Eric Rosengren, the president of the Boston Federal Reserve Bank, called the housing market “moribund” in a speech Friday. “I expect housing will not provide as much support to this recovery has it has in previous ones,” Rosengren said. CIBC World Markets chief economist Avery Shenfeld was even more pessimistic, saying he believes the weak housing sector will be a drag on consumer spending in the second half of the year. Shenfeld said he is forecasting economic growth to average 2.6% in 2011, as consumers will be forced to be cautious as home prices are declining. Joel Naroff, president of Naroff Economic Advisers, said 2011 would be a “transition year” for housing with the market “not going anywhere.” Experts say housing construction has leveled off but show no signs of recovery. In December, starts are expected to fall 2.2% to a seasonally adjusted annualized rate of 543,000 after rising 3.9% to a 555,000 rate in November. Building permits are at their lowest levels since April 2009.
Fed President Charles Plosser Says Fed Is Helpless To Reverse Sharp Decline in House Prices - Philly Fed's Plosser once again releases a slam dunk speech which is the most vocal critique of Ben Bernanke's interpretation of the freedoms afforded to him by monetary policy to date. 'How do you use monetary policy to burst a bubble in Las Vegas real estate, where house prices were appreciating at a 45 percent annual rate by the end of 2004, without damaging the Detroit market, where prices were increasing at less than a 3 percent annual rate? Because monetary policy is such a blunt instrument, asking monetary policy to do what it cannot do, such as seeking to deliberately influence the evolution of asset prices, risks creating more instability, not less. Moreover, the moral hazard created by the belief that the central bank would intervene if prices of a certain class of assets became “misaligned” might, in fact, cause more inefficient pricing and more instability, not less...monetary policy cannot reverse the sharp decline in house prices when the economy has significantly over-invested in housing' And more: 'I have advocated the elimination of Section 13(3) of the Federal Reserve Act, which allowed the Fed to lend directly to “corporations, partnerships and individuals” under “unusual and exigent circumstances.”'
Confidence Among U.S. Homebuilders Stagnates on Lack of Credit for Buyers - Confidence among U.S. homebuilders stagnated in January, reflecting a lack of credit that threatens to hold back construction this year. The National Association of Home Builders/Wells Fargo sentiment index registered a reading of 16, the same as the past two months and less than the median forecast of economists surveyed by Bloomberg News, data from the Washington-based group showed today. Readings below 50 mean more respondents said conditions were poor. Developers Lennar Corp. and KB Home are cutting costs as elevated unemployment limits demand and mounting foreclosures add to the supply of unsold properties. At the same time, sales are projected to recover from last year’s post tax-credit slump, helped by falling prices and low borrowing costs.
Americans Still See Buyer's Market in Housing - A new Gallup poll shows that 67% of Americans feel now is a "good time" to buy a house -- similar to the 72% of April 2010 and the 71% of April 2009. The findings, from a Gallup poll conducted Jan. 7-9, 2011, suggest Americans are holding on to perceptions of a buyer's market despite the challenges of securing financing and observers' concerns about the potential for a housing "double-dip." Overall, there is good reason for most Americans to think now is a good time to buy a house. Interest rates remain near historic lows. Home prices are down sharply, providing many incredible buys. There is a huge supply of unsold homes and more to come as home foreclosures hit record highs -- suggesting that the bargains could get even better as the year unfolds.
The effect of demolishing high concentration public housing on crime - Despite popular accounts that link public housing demolitions to spatial redistribution of crime, and possible increases in crime, little systematic research has analyzed the neighborhood or city-wide impact of demolitions on crime. In Chicago, which has conducted the largest public housing demolition program in the United States, I fi nd that public housing demolitions are associated with a 10 percent to 20 percent reduction in murder, assault, and robbery in neighborhoods where the demolitions occurred. Furthermore, violent crime rates fell by about the same amount in neighborhoods that received the most displaced public housing households relative to neighborhoods that received fewer displaced public housing households, during the period when these developments were being demolished. This suggests violent crime was not simply displaced from the neighborhoods where demolitions occurred to neighborhoods that received the former public housing residents.
Household debt decreased in 2010 due in part to default - Outstanding mortgage debt continued to contract over 2010 reflecting a decreased appetite for homeownership, according to economic researchers at the Federal Reserve Bank of Cleveland. Mortgage debt outstanding in the fourth quarter was down 2.5% from the same period a year ago. Other forms of household debt also decreased due in part to people defaulting on their monetary obligations. Revolving debt, such as credit card debts, dropped 9.8% year-over-year, while nonrevovling debt, including student and auto loans, decreased 0.9%.Analysts at Bank or America Merrill Lynch previously attested that the most likely way households greatly deleverage debt is through default on an underwater mortgage. According to their estimates, Americans deleverage roughly $1 trillion in outstanding debt this way.
A Note on Aggregate Demand and Aggregate Supply - Krugman - Just a brief note: one thing that keeps appearing in comments is the notion that because we had a bubble, in which some people were borrowing too much, the economic growth of 2000-2007 wasn’t “real” — that it was all a figment of our imagination. This is confusing demand with supply. We really did produce all the goods and services counted in GDP; we were able to do that because we had willing workers, a sufficient capital stock, the right technology, and so on. What is true is that some of the spending that created demand for those goods and services was debt-financed, and those debtors can’t continue to spend the way they did. But that doesn’t say that the capacity has somehow ceased to exist; it only says that if we want to keep the capacity in use, someone else has to spend instead. In other words, past growth wasn’t an illusion, or a fraud; but we need policies to sustain aggregate demand. And yes, I have a model.
Hotels: RevPAR up 7.6% compared to same week in 2010 - The last four weeks have been tough for hotel occupancy with only a small increase over the very low levels for the same period a year ago (includes the holidays). Here is the weekly update on hotels from HotelNewsNow.com: STR: US results for week ending 15 Jan. In year-over-year comparisons, occupancy increased 4.5 percent to 49.9 percent, average daily rate was up 3.0 percent to US$97.59, and revenue per available room finished the week up 7.6 percent to US$48.70. The following graph shows the four week moving average of the occupancy rate as a percent of the median occupancy rate from 2000 through 2007. The down spike in 2001 was due to 9/11. The up spike in late 2005 was hurricane related (Katrina and Rita). The dashed line is the current level. This shows how deep the slump was in 2009 compared to the period following the 2001 recession.
As Food Prices Soar, Eateries Scramble - Soaring global food prices, particularly for meat, sugar and coffee, are putting pressure on the restaurant, travel and hotel sectors as they pursue a fragile recovery. In a bid to offset added costs without passing them on to price-sensitive consumers, many companies are scrambling to renegotiate contracts, find cheaper suppliers and reconfigure menus. Marriott International Inc. has been coping with higher prices for beef, fish and chicken over the past six months, says Brad Nelson, a vice president and the global corporate chef for the hotel chain. The company is also paying higher prices for sugar and arabica coffee beans, which have both soared over the last year. "It's a global challenge," says Mr. Nelson. So far, it has ruled out raising food prices at its restaurants, instead re-engineering its menus to offer alternatives to popular and pricey cuts of beef such as filet mignon and New York strip.
How much are gasoline prices weighing on consumers? - On Friday Reuters reported:Rising gasoline prices beat down U.S. consumer sentiment in early January, overshadowing an improved job outlook and passage of temporary federal tax breaks, a survey released on Friday showed. A year-end surge in gasoline prices ratcheted up consumer inflation expectations to their highest in more than two years, according to the latest data from Thomson Reuters and the University of Michigan. The surveys' preliminary January reading on the overall consumer sentiment slipped to 72.7, below 74.5 in December. It fell short of a 75.4 reading predicted by economists polled recently by Reuters. The correlation between consumer sentiment and gasoline prices is reasonably strong. In the graph below, sentiment is plotted in black and the blue line corresponds to the negative of the inflation-adjusted gasoline price, plotted as a negative number in order to emphasize the feature that increases in gasoline prices are usually accompanied by a drop in consumer sentiment.
Rising gas prices bring spending trade-offs - Americans are starting to watch their spending more carefully as gasoline prices reach levels not seen since October 2008. Thursday's government report on retail sales indicates that consumers are skipping a restaurant meal or a movie because they have to spend more to drive. Swonk estimates gasoline prices are affecting the spending habits of more than half of U.S. drivers. The national average for a gallon of regular hit $3.10 on Monday, according to the Energy Department's Energy Information Administration. That's about 37 cents more than a year ago. Average pump prices in major cities range from $2.91 in Denver to $3.38 in San Francisco. Drivers in New York City pay about $3.19 a gallon, while gas stations charge $3.24 a gallon in Chicago and $3.37 in Los Angeles. In Boston gas goes for $3.11 a gallon. It's $2.92 in Houston and $3.20 a gallon in Miami. For every penny the price at the pump increases, it costs consumers overall an additional $4 million. If the price goes up a dime, it means consumers pay $40 million more each day that 10-cent hike is in place.
Number of the Week: Americans Dipping Into Savings - $311 billion: The net amount US consumers have withdrawn from savings and investment accounts over the past two years. In the course of the recession and recovery, Americans have dipped deeper into their savings than at any point in the past six decades. That’s helping the economy now, but could leave it less prepared to withstand shocks in the future. Over the two years ending September 2010, Americans withdrew a net $311 billion — or about 1.4% of their disposable income — from their savings and investment accounts, according to the Federal Reserve. That’s a sharp divergence from the previous 57 years, during which they never made a net quarterly withdrawal. Rather, they added an average of 12% of disposable income to their holdings of financial assets — including bank accounts, money-market funds, stocks, bonds and other investments — each year
U.S. Manufacturing Picks Up -U.S. manufacturing, viewed as a lost cause by many Americans, has begun creating more jobs than it eliminates for the first time in more than a decade. As the economy recovered and big companies began upgrading old factories or building new ones, the number of manufacturing jobs in the U.S. last year grew 1.2%, or 136,000, the first increase since 1997, government data show. That total will grow again this year, according to economists at IHS Global Insight and Moody's Analytics. James Hagerty has encouraging news from the U.S. manufacturing sector, which is adding more jobs than it's losing for the first time in more than a decade.
Despite efforts to improve, U.S. patent approvals move slower - A year and a half after President Barack Obama appointed an IBM Corp. executive to fix the U.S. Patent and Trademark Office, its problems by several key measures have only worsened, as damage inflicted by years of congressional raids on its funding continues to make it all but impossible for the agency to keep up with its workload. The result: More than 1.2 million patent applications, filed by inventors and entrepreneurs ranging from major corporations to garage tinkerers, are still awaiting final decisions, a number nearly unchanged from the levels of the past three years. Also unchanged is a bureaucracy that publishes entire patent applications online 18 months after they are filed, whether or not they have been acted upon - and most often they have not, because the agency is so far behind. That puts American ingenuity up for grabs, free to anyone with an Internet connection. "In China, there are thousands of engineers who don't work in laboratories inventing new technologies," "They sit in computer rooms reading U.S. patent applications on the Internet. And they can use the technology anywhere in the world, including in America, for free. "American economic security is threatened in a way Congress has failed to recognize,"
The phantom 15 million - Long before the housing bubble burst and Wall Street melted down, something in our national job-creation machine went horribly wrong. The years between the brief 2001 recession and the 2008 financial collapse gave us solid growth in our gross national product, soaring corporate profits, and a low unemployment rate—but job creation lagged stubbornly behind, more so than in any economic expansion since World War II. The Great Recession wiped out what amounts to every U.S. job created in the 21st century. But even if the recession had never happened, if the economy had simply treaded water, the United States would have entered 2010 with 15 million fewer jobs than economists say it should have. Somehow, rapid advancements in technology and the opening of new international markets paid dividends for American companies but not for American workers. An economy that long thrived on its dynamism, shedding jobs in outdated and less competitive industries and adding them in innovative new fields, fell stagnant in the swirls of the most globalized decade of commerce in human history. Even now, no one really knows why.
What Really Happened to 15 Million Jobs? - Perhaps, some economists theorize, the United States isn't creating innovative jobs because its workforce isn't up to the challenge. For probably the first time in history, our young adults are no better educated than their parents. Nearly all our international rivals, in developed and developing economies alike, continue to make generational leaps in college graduation. Brainpower is still our comparative advantage with the rest of the world, but the advantage is shrinking. "It is the best educated and those with the highest skills that derive the most benefits from a globalizing economy,"As the U.S. workforce becomes relatively less skill-intensive vis-à-vis the entire world, the broader benefits of the global economy, both in terms of job creation (and national well-being), are going to decline."Mounting evidence suggests that educational stagnation has already socked American workers, particularly men. David Autor makes the case in a series of recent papers that globalization has effectively "hollowed out" much of the country's middle-skill jobs--assembly-line, call-center, and bookkeeping occupations, for example--and replaced them with a computer or a lower-paid foreign worker.
The Robots Are Taking Our Jobs - Free traders like to point out that technology likely destroys far more American jobs than globalization, and yet globalization skeptics do not complain when this happens. Furthermore, we like to add, why should individuals whose jobs are offshored be entitled to a better safety net than individuals whose jobs are made redundant by technology? Aside from being absolutely true, free traders like myself engage in these arguments because they bolster the case for free trade by pointing out the logical inconsistency between people’s intuitively positive feelings about technological progress and their intuitively negative feelings about free trade. But what happens in the future if artificial intelligence means that human-like robots start replacing jobs? When the machine that replaces you has a voice and a name, like Watson, it will feel different than when the machine is a big metal contraption that attaches widget A to widget B.
The myth of ‘American exceptionalism’ implodes - One aspect of "American exceptionalism" was always economic. US workers, so the story went, enjoyed a rising level of real wages that afforded their families a rising standard of living. Ever harder work paid off in rising consumption. The rich got richer faster than the middle and poor, but almost no one got poorer. Nearly all citizens felt "middle class". A profitable US capitalism kept running ahead of labour supply. So, it kept raising wages to attract waves of immigration and to retain employees, across the 19th century until the 1970s. Then everything changed. Real wages stopped rising, as US capitalists redirected their investments to produce and employ abroad, while replacing millions of workers in the US with computers. The US women's liberation moved millions of US adult women to seek paid employment. US capitalism no longer faced a shortage of labour. US employers took advantage of the changed situation: they stopped raising wages. When basic labour scarcity became labour excess, not only real wages, but eventually benefits, too, would stop rising. Over the last 30 years, the vast majority of US workers have, in fact, gotten poorer, when you sum up flat real wages, reduced benefits (pensions, medical insurance, etc), reduced public services and raised tax burdens. In economic terms, American "exceptionalism" began to die in the 1970s.
The Real Economic Lesson China Could Teach Us - Robert Reich - Highlighting today’s summit between Chinese President Hu Jintao and President Obama is China’s agreement to buy $45 billion of American exports. The President says this will create more American jobs. That’s not exactly right. It will create more profits for American companies but relatively few new jobs. Nearly half of the deal is for two hundred Boeing aircraft whose parts come from all over the world. The rest involves agricultural commodities that don’t require much U.S. labor because American agribusiness is highly automated. Here’s the real story. China has a national economic strategy designed to make it, and its people, the economic powerhouse of the future. They’re intent on learning as much as they can from us and then going beyond us (as they already are in solar and electric-battery technologies). They’re pouring money into basic research and education at all levels. In the last 12 years they’ve built twenty universities, each designed to be the equivalent of MIT.Their goal is to make China Number one in power and prestige, and in high-wage jobs. The United States doesn’t have a national economic strategy. Instead, we have global corporations that happen to be headquartered here. Their goal is to maximize profits, wherever they can make the most money.
Temp agencies seeing more demand — and competition - Agencies that provide temporary staffing are benefiting from the fact that companies are feeling more optimistic about their short-term prospects but not confident enough to add permanent workers."The new reality is people have been much more resistant to bringing on permanent employees than they have been in the past because of the uncertainty of where the economy is going," The number of temporary workers jumped 25%, to an average of 2.6 million a day, in the third quarter of 2010 compared with the same period a year earlier, according to the American Staffing Assn. Neidle estimated that temporary workers would make up 4% of the workforce within three years, from a low of 1.65% before the recession.
The ‘new normal’ of unemployment - Dean Baker - The fact that the overwhelming majority of economists in policy positions failed to see the signs of this disaster coming, and supported the policies that brought it on, did not seem to be a major concern for most of the economists at the convention. Instead, they seemed more intent on finding ways in which they could get ordinary workers to accept lower pay and reduced public benefits in the years ahead. This would lead to better outcomes in their models. The conventional wisdom among economists is that the economy will be forced to go through a long adjustment process before it can get back to more normal rates of unemployment. The optimists put the return to normal at 2015, while the pessimists would put the year as 2018, and possibly, even later. Furthermore, many economists believe that the new normal will be worse than the old normal. The unemployment rate bottomed out at 4.5% before the housing bubble began to burst. If we go back to 2000, the United States had a year-round average unemployment rate of just 4.0%. The optimists now envision that normal would be 5.0% unemployment, while the pessimists put the new normal at 6.0% unemployment and perhaps higher. As a point of reference, every percentage point rise in the unemployment corresponds to more than 2 million additional people without jobs.
Borderless Economy, Jobless Prosperity - Why has the economic recovery left workers behind? The question keeps coming up, in slightly different versions. As the headline of a recent New York Times article by Michael Powell put it, “Profits Are Booming. Why Aren’t Jobs?” The term “jobless prosperity” – which surfaced in 1993 and again 2002 – now bobs high. Many journalists argue that globalization is partly to blame for historically low rates of job creation over the last year. Companies in the United States are simply less reliant on American workers – and American consumers – than they once were. Maybe they just don’t need us any more. Few economists like this argument, but even some mainstream savants like Alan Blinder of Princeton University express concern about the effects of offshoring. And the effects of globalization extend well beyond job loss. Writing in The Atlantic on “The Rise of the New Global Elite,” Chrystia Freeland provided a vivid anecdotal account of the same phenomenon, letting the chief executive of a green-technology company explain that most of his sales come from outside the United States, and, if he were starting from scratch, most of his workers would, too..
Unemployment datapoints of the day - The Gallup global employment data are out, and there’s a huge amount of meat here, including this unemployment map: US unemployment, on this measure, is in the double-digit range — significantly above the global average of 7%. Meanwhile, Germany, with a much stronger social safety net, has unemployment of less than 5%. (Remember, these aren’t official national statistics, they’re Gallup’s attempt to apply the same yardstick to all countries.) Zoom in on Europe, and the you can see where all the current tensions are coming from, especially in the stark contrast between Germany and Spain, and in general the difference between a relatively prosperous north and a struggling south which is also much closer to the hardships of north Africa.
Gallup Finds Unemployment at 9.3% in Mid-December - Unemployment, as measured by Gallup without seasonal adjustment, increased to 9.3% in mid-December -- up from 8.8% at the end of November and roughly matching the 9.2% of mid-November. The percentage of part-time workers who want full-time work increased to 9.2% of the workforce in mid-December -- up from 8.4% at the end of November, and the highest since mid-September. This suggests that the situation facing those working part time but looking for full-time work has deteriorated sharply during recent weeks. The increase in Gallup's U.S. unemployment rate and the substantial worsening in the percentage of part-time workers wanting full-time work combined to send underemployment surging to 18.5% in mid-December from 17.2% at the end of November. Underemployment now matches the levels seen in September and mid-October.
Jobless Rate Points to Lost Power in Work Force - Alone among the world’s economic powers, the United States is suffering through a deep jobs slump that can’t be explained by the rest of the economy’s performance. The gross domestic product here — the total value of all goods and services — has recovered from the recession better than in Britain, Germany, Japan or Russia. Yet a greatly shrunken group of American workers, working harder and more efficiently, is producing these goods and services. The unemployment rate is higher in this country than in Britain or Russia and much higher than in Germany or Japan, according to a study of worldwide job markets that Gallup will release on Wednesday. The American jobless rate is also higher than China’s, Gallup found. The European countries with worse unemployment than the United States tend to be those still mired in crisis, like Greece, Ireland and Spain. Economists are now engaged in a spirited debate, much of it conducted on popular blogs like Marginal Revolution, about the causes of the American jobs slump. Lawrence Katz, a Harvard labor economist, calls the full picture “genuinely puzzling.”
A hint of good employment news? - Twice a month Gallup polls approximately 30,000 adults on unemployment. This survey is Not Seasonally Adjusted (NSA). Before I get to the data, this is a reminder that the employment series really needs a seasonal adjustment. Every year, even in good employment years, the U.S. economy loses 2.5 to 3.0 million payroll jobs (net) in January. This is because of various seasonal factors, like seasonal retail layoffs, and the headline BLS report is seasonally adjusted (SA). The same pattern is evident in the unemployment rate; the NSA rate is always sharply higher than the SA rate in January. So keep that in mind when looking at the following from Gallup: U.S. Unemployment Steady at 9.6% in Mid-January Unemployment, as measured by Gallup without seasonal adjustment, remained at 9.6% in mid-January, the same as at the end of December. This marks a one-percentage-point improvement from 10.6% in mid-January 2010. This suggests a sharp drop in the seasonally adjusted unemployment rate in January (although the timing and methods are different between the two surveys).
Are Earnings Rising or Stagnant? - The average hourly earnings data is for people who earn an hourly wage or punch a time clock as oppose to those earning a salary. As a general rule this is the lower earning segment of the population as college educated professionals and managers are much more likely to be salaried. It reflects what is happening to about 80% of the labor force. Surprisingly, this percent has not changed significantly over the years. But the average hourly earnings data has clearly been changed by the changing composition of employment as more highly paid manufacturing employment has both declined in importance and relative pay. I always though of the ECI as a measure of what it cost a firm to keep an employee in the same job. It is deliberately designed this way to try to avoid the problem of changing composition of the labor force from distorting the data. There are positive and negatives to this. The compensation data is the most comprehensive measure of labor payments. The one question I have never resolved to my own satisfaction is how it treats the payment to CEOs and other senior management with stock options. It is a difficult accounting issue at the level of the individual firm, let alone for the aggregate economy
Is job outsourcing already a piled trade? - Job outsourcing has been a great source of increased competitiveness and cost effectiveness for a lot of companies. Jobs seen as prime candidates for outsourcing were those that could be done with minimal face to face contact with customers and other colleagues, and resulted in perceived minimal intrusion to regular company workflows and processes if they were moved offsite. Outsourcing staff jobs to offshore locations that promise decreased labour costs has led to increased profits, very important especially in the aftermath of the recent economic downturn. But as early outsourcers saw increased cost competitiveness, other companies have also joined in to keep from falling behind in terms of competitiveness. This could be the commercial version of what is known in hedge fund circles as a piled trade, a trade that is profitable only if one fund does it, but when everybody else does it, the trade loses its profitability, and eventually becomes a dangerous one, as getting out of it becomes impossible without breaking down the house of cards that is now the trade. If everyone is already in the trade, then everybody is a seller, and there are no longer any buyers.
Productivity, labour demand, and employment - This topic has come up a couple of times in comments on previous posts. Suppose there's an increase in labour productivity. Maybe because of improved technology. How will that affect labour demand, and employment? I'm just going to work through the absolutely standard long-run classical textbook analysis of this question, with the help of a couple of diagrams. There is nothing new here for advanced macroeconomists. This post is aimed at people who have a basic understanding of introductory economics. The answer is that labour demand can either increase or decrease, though "normally" it will increase. And employment can either increase or decrease, though "normally" it will decrease. (I will try to explain what I mean by "normally", but it roughly corresponds to "what has normally happened historically".)
Partial vs General equilibrium lumps of labour - Nick Rowe - Does an increase in productivity cause labour demand to increase or decrease? The answer to that question, and how we go about answering it, depends on whether we are talking about one small sector of the economy (partial equilibrium), or the economy as a whole (general equilibrium). (I was doing general equilibrium in my previous post). If you start with the answer for one small sector, and just add it up across all sectors, you get into a total mess. That's the Fallacy of Composition. What's true for each of the parts isn't necessarily true for the whole. Let's simplify massively. Ignore land and capital. Labour is the only factor of production. And let's assume all labour is identical. And let's assume constant returns to scale, so if you double labour employed you double output produced. That lets us focus all our attention on the difference between partial and general equilibrium, and ignore everything else that might complicate the story.
Partial vs General equilibrium lumps of labour - At Worthwhile Canadian Initiative, Nick Rowe asks the question "Does an increase in productivity cause labour demand to increase or decrease?" and presents a simplified sketch of how that question might be answered in a general equilibrium analysis. Nick's sketch has some correspondences with as well as theoretical differences from Luigi Pasinetti's analysis of the same question. Here is how Pasinetti addresses that question in Chapter V of Structural Change and Economic Growth: Most of the chapter (all but 8 pages, and particularly pages 87-90, with which I am concerned here) can be viewed online at Google books, so I won't try to summarize his exposition, which is already schematic (as he points out). The first part I want to call attention to starts on page 87, Section 5, "Impossibility of automatically maintaining full employment through time":
Does unemployment actually lag output? - Everyone seems to think it does, so naturally I’ll argue the other side. What surprised me is how easy it is to make the argument. As you look at the following data, ask yourself what you’d expect to happen to unemployment if there were no lags. Keep in mind that the trend rate of RGDP growth is around 3%: 2008:1 and 2008:2 — RGDP falls at about 0.1% / 2008:3 through 2009:2 — RGDP plunges 4.1% / 2009:3 — RGDP rises at a rate of only 1.6% / 2009:4 and 2010:1 — RGDP rises at a 4.35% rate / 2010:2 and 2010:3 — RGDP rises at only a 2.15% rate. I’d expect unemployment to rise modestly in early 2008, soar in late 2008 and early 2009, rise a bit more in the 3rd quarter of 09, fall in late 2009 and early 2010, and then rise a bit in the summer of 2010. Here are the actual unemployment rates:
Wages and Employment, Again (Wonkish) - Krugman - I occasionally mention here that recognizing the reality of wage stickiness is a key part of demand-side economics, but I’ve also argued a number of times that cutting wages now would probably make the slump worse, not better. Is there a contradiction here? No, there isn’t — but it’s a slightly tricky subject. The way this channel works in standard models, however, is that a rise in the real money supply reduces interest rates, leading to a rise in demand; and a fall in nominal wages for a given money supply would have the same effect. What happens when you’re in a liquidity trap, with short-term interest rates up against the zero lower bound? Well, the answer in a simple model is that falling wages and prices can still be expansionary, but only because they reduce current prices relative to expected future prices, and thereby generate expected inflation. And once you add in debt-constrained players, it’s likely that the effect actually goes the other way: a fall in wages worsens debt problems, and so ends up contractionary.
Zeroing in on Unemployment- : Zero is so in these days. At least in the macro-economics blogosphere. So we now have a renewed discussion of “Zero Marginal Product” (ZMP) of labor as an explanation for the persistently high unemployment rate.... I think there is a little bit of “zero envy” going on here — wanting to promote ZMP as an alternative to the “zero lower bound” on interest rates as an explanation of our economic malaise. More importantly, I think the ZMP argument (as it has been made) is fraught with numerous logical difficulties. First, it has been suggested by Tyler Cowen that we can understand ZMP as labor hoarding — in a world where firms don’t actually hoard labor. I think this argument really gets it wrong. Fundamentally, it confuses firm-level and market-level notions of marginal product. Labor hoarding occurs when a firm chooses to pay a wage above marginal productivity for a period of time because there are adjustment costs in hiring. So a worker’s marginal product at a particular firm may be lower than the wage, and yes, in some cases may be zero, though that’s an extreme case. But the operative phrase is at a particular firm. It doesn’t mean that the person’s maximal marginal product (across all possible jobs) is suddenly really small.
Sumner and Krugman on zero MP workers - Scott's post is here, Krugman's is here. (My first post on the topic is here, my last post here). Let's start with Scott, excerpt: This post by Stephen Gordon shows US employment in 2010:3 falling about 5% below its 2008:1 peak, while output seems to have declined only about 0.7%. This is what Cowen finds puzzling. But I don’t see any puzzle at all. If employment didn’t change, I’d expect US output to grow at about 2% a year, which is the trend rate of productivity growth. Because we are looking at a two and a half year period, you’d expect output to grow roughly 5% with stable employment. Now assume that employment actually fell 5%. If the workers who lost jobs were similar to those who remained employed, I’d expect output to be flat over that 2.5 year period. Because output fell slightly, it seems like the workers who lost jobs were slightly more productive than those who remain employed.
ZMP v. Sticky Wages - I find myself in the unusual position of being closer to Paul Krugman (and Scott Sumner, less surprising) than Tyler on the question of Zero Marginal Product workers. The ZMP hypothesis is too close to a rejection of comparative advantage for my tastes. The term ZMP also suggests that the problem is the productivity of the unemployed when the actual problem is with the economy more generally (a version of the fundamental attribution error). To see the latter point note that even within the categories of workers with the highest unemployment rates (say males without a high school degree) usually a large majority of these workers are employed. Within the same category are the unemployed so different from the employed? I don't think so. One reason employed workers are still fearful is that they see the unemployed and think, "there but for the grace of God, go I." The employed are right to be fearful, being unemployed today has less to do with personal characteristics than a bad economy and bad luck (including the luck of being in a declining sector, I do not reject structural unemployment).
AS vs. PSST, again - The debate is hotting up, as our friends across the pond would say. Some random comments.1. The Washington Post reports that some on the left want to see older workers encouraged to retire, to make room for young workers. If you believe in AS-AD, I suppose that makes sense. If you believe in PSST (or anything like elementary economics), it's nuts. From a PSST point of view, taking away market activity from some people will reduce, not increase, the market economic activity of others. I should point out that this applies to sending home illegal immigrants--from a PSST point of view I would expect this to reduce employment of the native population, not increase it. 2. Nick Rowe talks about the effect of technological improvement on labor demand. However, he uses a single production function. That either means he will tell a partial equilibrium story or that he will tell a GDP factory story. 3. Scott Sumner responds to my response. 4. Tyler Cowen has much more. One point he makes is that "trend productivity growth" is not some deux ex machina operating outside the business cycle.
Give me green, and jobs, but not green jobs - LAST week, I had an extended Twitter debate, which is not easy to do, with environmental writer David Roberts of the green site Grist (full disclosure: I have contributed to Grist in the past). The trigger for the debate was this piece, by Richard Schmalensee and Robert Stavins, on the relative merits of a cap-and-trade policy versus a renewable energy standard (RES). With the former, a cap is set on carbon emissions, the right to emit a certain amount of carbon under the cap is auctioned off or otherwise allocated, and those rights can then be traded on the open market. With the latter, power companies are simply required to generate a certain percentage of their energy output from renewable sources. There may also be a market component to the RES policy; firms can trade green energy credits, much as they'd trade carbon credits under a cap-and-trade plan. The systems may sound similar, but as Mssrs Schmalensee and Stavins point out they have different impacts:
Why Green Energy Can't Power a Job Engine -Evergreen Solar announced last week that it was closing its plant in Devens, Mass., laying off 800 workers, and moving production to China. Evergreen’s factory had received more than $40 million in subsidies, which led many to see the plant closing as lesson in the futility of green energy and industrial policy. But what does Evergreen’s story really teach us about solar energy, public subsidies and the future of American manufacturing? Evergreen proved adept at finding financing and global partners. The company went public in 2000, which provided funds to expand operations and repay the venture capitalists, like the Utech Fund, which placed an early bet on “string ribbons.” An early infusion of $5 million also came from Kawasaki in 1999. Evergreen Solar’s move to China was supported by a $33 million loan from the Chinese government, and it has suggested that the Chinese production was cheaper because “solar manufacturers in China have received considerable government and financial support.” But surely China’s skilled, low-wage labor force is a far more important source of its low costs.
Why is the U.S. so awful at job creation? - More than any other advanced industrial rich nation, we have really, really sucked at creating jobs since the recovery from the Great Recession began. Worthwhile Canadian Initiative has the charts. In comparison with other members of the G-7 -- Canada, France, Germany, Italy, Japan, the United Kingdom and the U.S. -- the United States has demonstrated remarkably good GDP growth since the beginning of 2009, second only to Canada's. But we're last, by a mile, in terms of new job creation over the same period. These are critically important charts, because when we try to answer the question of why job growth has been so slow in the aftermath of the Great Recession, the disproportionately large gap between GDP growth and job creation demonstrated by the U.S. warns us not to be content with the usual list of bullet points that attempt to explain "jobless prosperity": globalization, technological progress, the relatively devastating effect of recessions caused by financial crises, et cetera. Instead, we must answer the question of why the U.S.'s experience is so different from that of its closest analogues on the global economic scene.
Average Labor Productivity - Here is an issue that is currently floating around the blogosphere. If we look at post-World War II aggregate data, a standard business cycle regularity is that deviations of average labor productivity from trend are procyclical. For example, suppose we focus only on the period from late 1950s to the late 1980s, and use the ratio of real GDP to employment (household survey) as a crude measure of aggregate labor productivity. In the first chart, we see that average labor productivity is typically lower at the end of NBER recessions than at the beginning Now, in terms of the macro models that people were working with in 1990, this regularity might be seen as being consistent with the predictions of real business cycle (RBC) models, and inconsistent with Keynesian models. Indeed, unless total factor productivity (TFP) is falling in a recession, average labor productivity has to increase. One response to this is (was?) that labor hoarding is an important phenomenon.
Why is labor hoarding diminishing? - Paul Krugman offers three good explanations of why today's recessions are involving larger labor losses than in the past. Bubble-based recessions are tougher to get out of, unions are weaker, and many leading firms face more volatility. All taken together, these mean the incentive for labor hoarding is weaker than before (yet Krugman cannot bring himself to mention that labor hoarding models are based on...a zero MP condition. And that a lot of the real work in the account of the cycle is suddenly being done by structural explanations.) We can all agree with: 1. Some workers are temporarily zero MP because demand is low. Are there additional factors behind ZMP-like conditions?
Three ZMPs and two Co-ordination failures - "ZMP" stands for "Zero Marginal Product". It should really stand for "Zero Value Marginal Product". Can an additional worker produce no additional goods of any value? Is that why they are unemployed? Yes, but. There are three types of ZMP. Two of them are based on two different types of coordination failure. The disagreement between macroeconomists is on what type of coordination failure is causing the ZMP of unemployed workers. ZMP1. No coordination failure. It is possible that some potential workers, perhaps because of severe disabilities, simply cannot produce anything useful, even in a perfectly functioning economy. ZMP2. Coordination failure 1.The unemployed plumber wants his house re-wired. The unemployed electrician wants his pipes replaced. But the plumber doesn't know that there's an electrician in town; and the electrician doesn't know that there's a plumber in town. Given the current state of knowledge, both workers have Zero Value Marginal Product. ZMP3. Coordination failure 2. (Monetary Disequilibrium). The unemployed hairdresser wants her nails done. The unemployed manicurist wants a massage. The unemployed masseuse wants a haircut. The hairdresser knows where the manicurist can be found. The manicurist knows where the masseuse can be found. The masseuse knows where the hairdresser can be found. But all three women are short of money, and won't spend any until after she earns some. Given the unwillingness of each to spend money, each of the three has a Zero Value Marginal Product. Nobody is willing to pay for their labour.
Capital, Labor, and Modernization Many years ago, I had a Cultural Anthropology professor who discussed the glories of the mechanical cherry-picker. The only catch was that (1) it had upfront and maintenance costs and (2) it performs less well than experienced cherry-pickers. Roy Mayall at The London Review of Books blog notes that the same type of conceit is being used by the Royal Mail: Walk-sequencing machines sort the letters into the order that they are going to be delivered in. The old walk-sorting machines only organised the post into rounds: postal workers had to do the final sorting. Under the old system, all the post was in the delivery office by 7.15 and we were usually out on our rounds by 9.00. Under the new system, the last lorry arrives at 9.15 and sometimes we don’t get out until after 11.00. It’s quite normal for a postal worker to finish work at 3.30 these days, and for posties doing rural rounds still to be delivering letters as late as four in the afternoon. The machines also have a tendency to break down, as we've just discovered, so on some days no post is delivered at all. But they are central to the Royal Mail’s 'modernisation' programme.
If They Had Asked Me - The New York Times asks various folks for their view of why jobs have not come back during this recovery. I recommend taking a longer view of the process. I think that a major reconfiguration of the U.S. economy has been going on for at least ten years and might well go on for another ten. The employment-population ratio sagged the first three years of this decade, came back a little bit the following three years, then edged down for two years, then plummeted, and for the past year has been about flat. The cumulative decline is very large. That suggests something more than a mere cyclical downturn (or two). Some hypotheses (all of which I have offered prevsiously):
Structural problems in the U.S. labor market - I don't agree with everything in this piece, by Jim Tankersley, but it is a good overview of why currently high unemployment isn't just about demand (though it is about that too). Excerpt: Blinded by low unemployment, lawmakers and economists overlooked two crucial warning signs of the nation’s deteriorating economic health. One was the percentage of working-aged men—the traditional backbone of the U.S. labor force—who held a job. The other was the number of jobs being created each month. Throughout the 2000s, both numbers nose-dived.
Partial vs General equilibrium labor supply models - In the standard labor supply model, the individual's choice between income and leisure is mediated by the wage level. But in the analysis of labor demand, the presence of quasi-fixed, per-worker costs constrain the substitution of hours for workers. To an ignorant non-economist, the presence of these quasi-fixed costs raises questions about what economists mean when they refer to 'the wage' with regard to their labor supply model. I'm sure my confusion could be easily cleared up with a few letters of the Greek alphabet, an indifference curve or two and a smattering of strategically-placed assumptions. But I want to try to do it the hard way, with examples drawn from real data that have a semblance of familiarity to the unlearned, such as myself.
Utopian Thinking on Jobs and Unemployment at the Washington Post - Fox on 15th went Utopian on its readers today, ridiculing the suggestion by James Galbraith to temporarily lower the age at which workers can receive full Social Security benefits to 62. The plan, which also was put forward in a bill by Representative Dennis Kucinich, would pull some number of older workers out of the labor force and thereby create more jobs for unemployed younger workers. The Post disses the plan. In addition to telling readers that it baffled financial journlalists (are financial journalists really so thick that they had problems understanding this one?) it goes on: "The proposals echo a familiar, and questionable, notion on the left: that we should find ways to better parcel out existing jobs. It's the same logic that leads some countries to consider cutting the number of hours or days someone can work each week, so that more people can share the work pool. In reality, the true challenge is to figure out how to create new jobs." This one really is too delicious to believe that it actually appeared in print. Let's go in order.
Local Food Pantries Seeing Record Number Of People Seeking Help - Nationwide, the Salvation Army reported demand for food pantry services was up 94 percent last year compared with the previous year, according to the Salvation Army National Commander Commissioner William Roberts. And, as demand for the services provided by the Salvation Army has increased, donations to the non-profit has remained flat or decreased in some cities. Experts expect the demand for food services to continue through 2011, and in Illinois, the food stamp program has experienced a record-breaking increase. Numbers from the Illinois Department of Human Services show about 857,000 households enrolled in the Supplemental Nutrition Assistance Program in December. That's 12.7 percent more people using food stamps this year compared with December 2009 and a record number of people depending on the help.
Houston permit rule stops couple's effort to feed homeless - Bobby and Amanda Herring spent more than a year providing food to homeless people in downtown Houston every day. They fed them, left behind no trash and doled out warm meals peacefully without a single crime being committed, That ended two weeks ago when the city shut down their "Feed a Friend" effort for lack of a permit. And city officials say the couple most likely will not be able to obtain one. "We don't really know what they want, we just think that they don't want us down there feeding people," Anyone serving food for public consumption, whether for the homeless or for sale, must have a permit, said Kathy Barton, a spokeswoman for the Health and Human Services Department. To get that permit, the food must be prepared in a certified kitchen with a certified food manager. The regulations are all the more essential in the case of the homeless, Barton said, because "poor people are the most vulnerable to foodborne illness and also are the least likely to have access to health care." Bobby Herring said those rules would preclude them from continuing to feed the 60 to 120 people they assisted nightly for more than a year. The food had been donated from area businesses and prepared in various kitchens by volunteers or by his wife.
The More Americans That Go On Food Stamps The More Money JP Morgan Makes - JP Morgan is the largest processor of food stamp benefits in the United States. JP Morgan has contracted to provide food stamp debit cards in 26 U.S. states and the District of Columbia. JP Morgan is paid for each case that it handles, so that means that the more Americans that go on food stamps, the more profits JP Morgan makes. Yes, you read that correctly. When the number of Americans on food stamps goes up, JP Morgan makes more money. In the video posted below, JP Morgan executive Christopher Paton admits that this is "a very important business to JP Morgan" and that it is doing very well. . But doesn't this give JP Morgan an incentive to keep the number of Americans enrolled in the food stamp program as high as possible? So what happens if you have a problem with your food stamp debit card? Well, you call up a JP Morgan service center. When you do this, there is a very good chance that you are going to be helped by a JP Morgan call center employee in India. That's right - it turns out that JP Morgan is saving money by "outsourcing" food stamp customer service calls to India.
Reinforcing America’s Social Safety Net - When someone loses a job through no fault of their own, we provide relief through unemployment compensation. If someone is born with a condition that limits their ability to compete in a market system, society is willing to help. Similarly, when old age takes its toll and people can no longer compete effectively for jobs, jobs that are needed to pay medical and other bills, we do not turn our backs, instead we give help in the form of Social Security and Medicare. Some people worry that social insurance programs such as Unemployment Compensation, Social Security, and Medicare take away the incentive to get ahead, the incentive that helps to make capitalism tick. Won’t those being taxed to pay for the programs work less, and won’t those receiving, say, unemployment compensation be less motivated to find work? It is a common misconception that these programs necessarily reduce economic efficiency. In fact, to the extent that social insurance provides a service that people are willing to pay for but cannot get due to market failures, social insurance improves economic efficiency.
Putting Poverty on the Agenda | The Nation - “When you have 1 in 7 Americans living in poverty. 1 in 5 children living in poverty—including 1 in 3 African-American children and Latino children—and it's not on America's radar, something’s very wrong.” Indeed it is the shame of our nation that a record 47 million people now live below the poverty line—$22,400 for a family of four—and a stunning 1 in 3 Americans are living at less than twice that threshold. And yet we hear so little about this crisis in the mainstream media and Congress, where it seems off the radar not only for the GOP, but even for some of our progressive allies. But the grim truth is that many of the same structural problems that are making life a struggle for the middle-class—and resulted in the first “economic recovery” in 2003-2007 where productivity rose, but median income declined and poverty worsened—are also leading to record numbers of poor people. From 1980 to 2005, more than 80 percent of the total increase in American incomes went to the richest 1 percent. Our economy is super-sizing the wealthy, while producing large quantities of low-wage jobs, unemployment and underemployment, and services are eroding.
Reducing inequality requires addressing power gaps, so education won’t cut it - Larry Mishel has a new briefing paper with the Economic Policy Institute. In it, he argues that more education will not cure our employment deficits or our inequality. The succinct claim is made early on: The huge increase in wage and income inequality experienced over the last 30 years is not a reflection of a shortfall in the skills and education of the workforce. Rather, workers face a wage deficit, not a skills deficit. Mishels brings a lot of time series and cross-tab data to refute the structural unemployment argument:This argument implies that unemployment difficulties reside in the workers who are unemployed: they either are located in the wrong place or do not have the required skills for the currently available jobs. But surprisingly, perhaps amazingly, there is no systematic empirical evidence for such assertions.He specifically takes on the claim that we need more higher education:The point for our current purposes is that the pay of college graduates is as disconnected from productivity growth as is the pay of high school graduates. Vastly expanding college enrollment and completion will do nothing to address this problem…
21st Century Segregation: Inverting King’s Dream - In "Final Words of Advice" from 1967, King asserted directly: "I am now convinced that the simplest approach will prove to be the most effective—the solution to poverty is to abolish it directly by a now widely discussed measure: the guaranteed income. . . . We are likely to find that the problems of housing and education, instead of preceding the elimination of poverty, will themselves be affected if poverty is first abolished." I also recommend that we place King's messages in the context of today's public claims coming from the new reformers, including Secretary of Education Arne Duncan:"Education is still the key to eliminating gender inequities, to reducing poverty, to creating a sustainable planet, and to fostering peace. And in a knowledge economy, education is the new currency by which nations maintain economic competitiveness and global prosperity." How would King respond to this Utopian expectation coming from the same educational leader who regularly characterizes our public schools and their teachers as failures?
Martin Luther King’s Last Speech one minute video
Union Membership in U.S. Fell to 70-Year Low Last Year - The number of American workers in unions declined sharply last year, the Bureau of Labor Statistics reported on Friday, with the percentage slipping to 11.9 percent, the lowest rate in more than 70 years. The report found that the number of workers in unions fell by 612,000 last year to 14.7 million, an even larger decrease than the overall 417,000 decline in the total number of Americans working. “It was a very tough year for unionized workers,” said John Schmitt, a senior economist with the Center for Economic and Policy Research in Washington. “We’re seeing declines in the private sector, and we’re seeing declines in the public sector.” The number of private sector workers in unions fell by 339,000, to 7.1 million, while the number of public sector union members fell by 273,000, to 7.6 million.
Public-Worker Unions Battle US Governors Over Benefits in Change of Role - To Scott Walker, Wisconsin’s newly elected Republican governor, public employees are the haves and taxpayers the have-nots. Halfway across the U.S., Jerry Brown, California’s Democratic governor, wants unpaid days off for some state workers to cut labor costs. Facing attacks from deficit-slashing officials on both ends of the political spectrum, government employees are fighting back. In Ohio, hundreds held a candlelight vigil in Cincinnati Jan. 14 to protest Republican Governor John Kasich’s plan to bar state health and child-care workers from joining labor groups. Nationally, the American Federation of State, County and Municipal Employees plans rallies, phone banks and lobbying at about a dozen legislatures to counter what unions call an assault on recession-weary working people. States closed $130 billion of budget gaps this fiscal year, according to the Center on Budget and Policy Priorities, a Washington research group. The belt-tightening has made a target of unions, pushing them from their traditional role of defending against reductions to one that tries to shape how they’re made.
California Unemployment Rate Ticks Up To 12.5% - California's unemployment rate climbed in December as fallout from real estate downturn and the state's budget woes continued to weigh on the labor market. The jobless rate rose to 12.5% from 12.4% in November. That stood in contrast to the nation's unemployment rate, which fell to 9.4% in December, from 9.8% the previous month. California employers added just 4,900 jobs to payrolls in December, the Employment Development Department said Friday, after adding 30,500 the month before. The beleagured construction sector lost 3,200 jobs. But the month's biggest loser was the government sector, which shed 15,400 jobs. (The jobless rate rose despite the net increase in jobs because an even greater number of people joined the labor market; the reverse can also be true.)
California And Janet Yellen Will Drive the Next Round of QE - Janet Yellen is the Vice-Chairman of the Federal Reserve. Ms. Yellen is from California. In California no economic recovery is taking place. This Spring, the Federal Reserve will need to decide on a continuation of QE. To guide the FED on further QE, I believe Ms. Yellen is already looking at charts–such as the kind displayed below. Updated with fresh data today for December 2010 it shows that California’s total employment has, from a crash bottom, increased by 79 thousand. The very small recovery in jobs seen in the first half of 2010 has now been turned back. | see: California Employment in Millions 2000-2010.
State Budgets: Year Ahead Looms As Toughest Yet - If 2011 is hinting at a national recovery, there is little sign of it in statehouses across the country. States that already have raided their reserve funds, relied on borrowing or accounting gimmicks, and imposed deep cuts on schools, parks and public transit systems no longer can protect key services in the face of another round of multibillion dollar deficits. As governors roll out their budget proposals and legislatures convene this month, they do so amid a sputtering economic recovery and predictions of slow growth for years to come. State and local governments face lackluster revenue projections, worries from Wall Street over looming debt and the end of federal stimulus spending. In the first weeks of 2011, Republican and Democratic governors alike have begun detailing across-the-board pain for education, health care, transportation, public safety and other programs. Some say the year of reckoning for state and local governments is at hand, with calls for structural changes that could radically shift expectations of what services government provides. Many believe the months ahead will be the most challenging in memory, with consequences for millions who depend on government funding.
U.S. Bills States $1.3 Billion in Interest Amid Tight Budgets… As if states did not have enough on their plates getting their shaky finances in order, a new bill is coming due — from the federal government, which will charge them $1.3 billion in interest this fall on the billions they have borrowed from Washington to pay unemployment benefits during the downturn. The interest cost, which has been looming in plain sight without attracting much attention, represents only a sliver of the huge deficits most states will have to grapple with this year But it comes as states are already cutting services, laying off employees and raising taxes. And it heralds a larger reckoning that many states will have to face before long: what to do about the $41 billion they have borrowed from the federal government to help them pay benefits to millions of unemployed people, a debt that federal officials say could rise to $80 billion. The states, when they borrowed the money, hoped that the economy would have turned around by the time the first interest payments came due, or that future Congresses might loosen the terms. The problem is not only the staggering number of people who have lost their jobs, but the fact that many states entered the downturn with too little money salted away in the trust funds they use to pay unemployment benefits, which they are supposed to build up in good times by taxing employers.
Florida Businesses Hammered by Jobless Loan - Florida's politicians are staying mum, but interest on the state's $2 billion unemployment-insurance loans continues to mount. The interest on the federal advances, which the state is using to fund jobless benefits, starts coming due in September. By then, the state will have racked up $61 million in interest charges. While officials from Gov. Rick Scott on down remain noncommittal or silent on the subject of repayment, Florida's businesses are paying through the nose. Unemployment taxes nearly tripled this year and the minimum unemployment tax will more than double again in 2012. That's an increase from $25 per employee to nearly $200. Business groups, including the Florida Chamber of Commerce, hope that Tallahassee can ease that financial blow. But with the state facing a $3.6 billion budget deficit, there are no discretionary public dollars laying around. And with Florida continuing to borrow $115 million a month to pay jobless claims, the state's tab is mounting daily.
Ohio faces $8 billion deficit and owes Uncle Sam $3 billion - Even as state legislators debate how to cope with an estimated $8 billion deficit, Uncle Sam wants Ohio to start repaying the federal government billions it has spent in weekly benefits to jobless people. "It's about $3 billion we owe the U.S. government for money they lent us for the unemployment compensation fund, and we suspect we're going to borrow again within three weeks," said state Sen. Tim Grendell, R-Chester Township. "The interest owed on the increased loans could be in the $200 million range. The Feds aren't giving the money away. The state has an obligation to pay it back." Neither the state nor the federal government have made any announcements about when Ohio will start paying the money to the federal government. Grendell said no unemployment compensation bills have been introduced in the Ohio General Assembly and no formal proposals have been made.
NC fiscal woes include $2.5 billion debt for unemployment benefits - North Carolina must begin to deal this year with interest payments on a $2.5 billion debt to the federal government — money borrowed over time since February 2009 to provide for increased unemployment benefits as a result of the economic downturn, according to a report today in the News & Observer of Raleigh.One of 30 states in the same borrowing predicament, according to the N&O, N.C.‘s unemployment insurance fund is otherwise solely dependent on a tax on employers for 5.7 percent of taxable payroll. The report indicates that state officials have been reluctant to raise that percentage, which could increase financial pressure on the businesses involved. The incoming legislature must now factor in plans to start paying off the debt to the feds as well as idealing with an announced $3.7-billion budget shortfall
GOP wants to cut 5000 state jobs - Minnesota Republicans are pushing for a 15 percent cut in the size and cost of the state's bureaucracy, a move that could lead to 5,000 fewer jobs in the state. Rep. Keith Downey, R-Edina, said Wednesday that the state could no longer afford more than 30,000 employees and wants to see the number shrink by 2015, possibly through early retirement incentives or even layoffs. Looking to balance a projected $6.2 billion deficit, House Republicans have rolled out a series of cost-cutting measures, including adopting temporary cuts made by Gov. Tim Pawlenty and establishing a commission to examine every 10 years whether to abolish or retool state agencies.
Cuts could mean justice denied - Counties are short of judges. Public defenders are overbooked. About 250 court positions around the state are vacant. Paperwork is stacking up. It's taking longer to file orders for protection, get divorced, collect debts, even contest traffic tickets.And with Minnesota now facing a $6.2 billion deficit, the prospect of any more state cuts is chilling to court officers. "I cannot overestimate the importance of this issue," said Supreme Court Chief Justice Lorie Gildea. "The success of our democracy depends on a vibrant, fully functioning justice system ... We can't put the people in prison that we're afraid of if we don't have an adequately funded justice system."
State and Local Budget Update - State and local budgets are a key issue this year. Here are a few states: New York Gov. Andrew Cuomo proposed eliminating 20 percent of state agencies by combining duties, such as merging the Insurance Department, Banking Department and the Consumer Protection Board into the Department of Financial Regulation. It's part of "radical reform" to pull his state out of its fiscal crisis. And Gov. Chris Christie in New Jersey skipped a $3.1 billion payment to the state's pension system in a push to cut benefits for public workers, while proposing higher employee contributions and a boost in the retirement age from 62 to 65. In Illinois, lawmakers voted for a ... hike in personal income tax, from 3 percent to 5 percent, in a bid to resolve a $15 billion deficit ... In oil-rich Texas ... hard times are looming. The shortfall is projected to be between $15 billion and $27 billion over the coming two-year budget cycle. In South Carolina, outgoing Gov. Mark Sanford has proposed a spending plan that would end funding for museum and arts programs, slash college funding and give many state employees a 5 percent pay cut. And on and on.
Budget Worries Push Governors to Same Mind-Set - The dismal fiscal situation in many states is forcing governors, despite their party affiliation, toward a consensus on what medicine is needed going forward. The prescription? Slash spending. Avoid tax increases. Tear up regulations that might drive away business and jobs. Shrink government, even if that means tackling the thorny issues of public employees and their pensions. In years past, new governors have introduced themselves in inaugural remarks filled with cheery, soaring hopes; plans for expansions to education, health care and social services; and the outlines of new, ambitious local projects. But an examination of more than two dozen opening addresses of incoming governors in recent days shows that such upbeat visions were often eclipsed by worries about jobs, money and budget gaps. While state revenues — shrunken as a result of the recession — are finally starting to improve somewhat, federal stimulus money that had propped up state budgets is vanishing and costs are rising, all of which has left state leaders bracing for what is next. For now, states have budget gaps of $26 billion, by some estimates, and foresee shortfalls of at least $82 billion as they look to next year’s budgets.
The Data Shows that State "Beggar Thy Neighbor" Policies Don't Work. - Many states seem to believe a “beggar thy neighbor” approach to taxes works best. That is, the state with the lowest taxes will “steal” business from other states and produce the fastest economic growth. A lot of people seem to believe it works. The data stands in opposition to them. States raise revenues through a variety of means – state income taxes, property taxes, fines on overdue books, etc. The Tax Foundation , which bills itself as “a nonpartisan tax research group based in Washington, D.C” and which I believe can be fairly described as generally advocating lower taxes in general, provides a file showing the the overall state tax burden and per capita income for every state for each year from 1977 to 2008. I took the per capita income, adjusted by the CPI-U, and got the real per capita income, which I then used to compute the percentage growth (or shrinkage) in real per capita from one year to the next for every state and every year from 1977 to 2007. I did the same thing for the US, getting the US average growth in real per capita income from t to t+1 for every year from 1977 to 2007, and subtracted that amount from the state growth rates. This provided the amount by which each state grew (or shrunk) faster (or not) than average, each and every year from 1977 to 2007.
State Budget Deficits Force Painful Choices - There is more pain to come. Much more. California may have the biggest overall debts in the nation but many other states are also struggling to close enormous budget deficits, either by cutting spending or increasing taxes, neither of which are very popular with voters. According to a CBS poll, 77 percent of respondents prefer cutting spending to raising taxes. Almost three quarters of people asked think it is OK to keep running a deficit in an emergency situation. In Illinois the governor wants to raise income taxes by an almost unthinkable 66 percent to help close his state's $13 billion deficit. "This is a temporary income tax to deal with the immediate fiscal emergency our state faces, to pay the bills so we don't have severe cutbacks," said Ill. Gov. Pat Quinn. In New Jersey, which already has some of the highest tax rates in the country, Gov. Chris Christie took the opposite route. Facing an $11 billion gap, Christie imposed stringent cuts on education and public employees. He even nixed a badly needed new tunnel between New Jersey and New York city. '
No department spared: Texas budget to cut billions as state faces huge deficit — Texas' proposed $73.2 billion state spending plan that makes large cuts to education is just a starting point, but the final version will be no less painful if lawmakers keep rejecting tax increases and tapping the Rainy Day Fund, the lead House budget writer said Wednesday. Lawmakers got their first glimpse of what the next state budget might look like late Tuesday, as the state faces a revenue shortfall of at least $15 billion for the next two years. Adhering to promises of no tax increases and no money from the Rainy Day Fund, the revenue was mainly made up with about $14 billion in cuts to state programs. The Texas Constitution requires a balanced budget. Proposed cuts so far include almost $5 billion to public education and the closure of four community colleges. The base budget does not pay for an estimated 160,000 new students who are expected to enroll in public schools over the next two years.
Texas House eyes $156.4 billion budget, down 16.6 percent Texas's next two-year budget would shrink 16.6 percent to $156.4 billion under a House proposal unveiled on Wednesday by the Legislative Budget Board. Under the proposal, the two-year budget that starts on September 1 would be reduced by $31.1 billion from the current two-year plan. The deficit in Texas's new budget has been estimated as high as $27 billion in local media reports, and elected officials, including Republican Governor Rick Perry, have vowed not to raise taxes to fill the shortfall. Like most states, Texas spends most of its money on education and health care.Health-care spending would total $35.2 billion, and does not reflect any extra dollars to cover medical inflation or any increase in enrollment for Medicaid, the state-federal health plan for the poor. Also excluded was any money to replace federal stimulus funds that totaled $4.3 billion.
CNN: Even budget deficits are bigger in Texas -- Texas lawmakers unveiled a Spartan budget late Tuesday night that slashes $31 billion in spending to close the state's massive budget deficit. Education, Medicaid and corrections would be hit particularly hard. House legislators were forced to rely on spending cuts to close the shortfall -- estimated at between $15 billion and $27 billion -- because Republican leaders pledged not to raise taxes. They also did not touch the state's projected $9.4 billion rainy day fund, one of the most flush in the nation. The spending plan calls for a 13% hit to public education and a 7.6% drop in higher education support. Among the cuts, funding for pre-K Early Start programs would be slashed, and four community colleges would be closed. Such a drastic decline in public education support could be problematic because it would drop the education budget below a level mandated by the state, and force the legislature to change the law.
Republicans Make $9 Billion Reserve Off Limits - The two-year budget plan that the Texas House of Representatives will release today may eliminate more than 8,000 jobs and cut spending on schools, universities and social services by 11 percent. It will not tap $9.4 billion set aside for deep economic stress, Republicans say. The Rainy Day fund will grow 14 percent by Aug. 31, 2013, bolstered by revenue from levies on oil and gas production, State Comptroller Susan Combs estimated this month. The fund has risen sixfold since 2007 as other states drained reserves to balance total deficits likely to top $190 billion during the next two years, according to the National Conference of State Legislatures. While Texas is spending $87 billion of general-fund revenue in its current two-year budget, it won’t expend more than $77.3 billion in fiscal 2012 and 2013, Governor Rick Perry said in a Jan. 13 speech. Using the reserve would delay efforts to set the state’s fiscal house in order, he said. Texas voters in November supported Republicans who pledged to cut spending and not raise taxes in one of seven U.S. states without a levy on personal income, he said.
Texas Budget Woes: Success or Failure? - Columnist Paul Krugman noted earlier this month that Texas is facing a budget shortfall. Evidently not heeding our warning about relying on state budget numbers from the Center on Budget and Policy Priorities, Krugman cited the left-leaning CBPP as the basis for his argument that Texas-style fiscal restraint couldn't protect the Lone Star State from the recession: Right now, triumphant conservatives in Washington are declaring that they can cut taxes and still balance the budget by slashing spending. Yet they haven't been able to do that even in Texas, which is willing both to impose great pain (by its stinginess on health care) and to shortchange the future (by neglecting education). Kevin Williamson from National Review has a response that perhaps understates the size of the problem but puts it in a greater context:
Everything's Big in Texas, Including Austerity - Texans famously have a strong independent streak, hence the bumper sticker "Don't Mess With Texas." A few months ago, Texas Governor Rick Perry famously suggested that, given Washington's continuing profligacy, the state may consider seceding from the union to avoid saddling its future generations with such a horrendous debtload: An animated Perry told the crowd at Austin City Hall -- one of three tea parties he was attending across the state -- that officials in Washington have abandoned the country's founding principles of limited government. He said the federal government is strangling Americans with taxation, spending and debt. Perry repeated his running theme that Texas' economy is in relatively good shape compared with other states and with the "federal budget mess." Many in the crowd held signs deriding President Barack Obama and the $786 billion federal economic stimulus package. Later, answering news reporters' questions, Perry suggested Texans might at some point get so fed up they would want to secede from the union, though he said he sees no reason why Texas should do that.
Higher Taxes Wouldn't End Some Deficits - Governor after governor has publicly forsworn the prospect of raising income taxes, preferring to talk layoffs and cuts in programs and public union benefits. To cite prominent examples, Democrat Andrew M. Cuomo of New York and Republican Chris Christie of New Jersey have ruled out income tax increases. Still, cracks have appeared in the no-tax-increase facade. In Illinois, Gov. Pat Quinn signed a law that temporarily raises the income tax rate to 5 percent, from 3 percent. New governors Mark Dayton of Minnesota and Jerry Brown of California have talked of enacting or extending tax increases. Set aside for a moment the ever-charged argument about whether income tax increases spook the wealthy and consider this question: What would an increase in the personal income tax of a size similar to that of Illinois do for other fiscally troubled states? The New York Times examined this question in three embattled places, New York, California and New Jersey.
State Bankruptcy: An Idea That's Ready for Primetime? - Changing federal bankruptcy law to allow individual states to file is an idea that appears to be gathering momentum—and opposition. Under current US bankruptcy laws, the states are prevented from filing for bankruptcy—as municipalities now are permitted to do in about half the states. But the rhetoric is heating up, according to an article in the LA Times, in the weeks since my colleague Nicole Lapin reported on the topic. On the one hand, many of those who support changing the law say they are just being realistic about the precarious finances of the states. Those who support the idea say that deficit-ridden states simply cannot afford to support the unfunded pension and health-care liabilities with the state public employees' unions. And, moreover, unions have very little incentive to enter into serious negotiation with the states in order to solve problems together. Of course, there are those who see more nefarious motives. For one, some believe state bankruptcy is merely a stalking horse to break the back of the public employees unions.
Governor Gregoire Dismantling the Washington She Helped Build - Christine Gregoire began her career in 1969 as a prison-system typist. Last month, as Washington’s governor, she proposed closing one of the state’s 13 penitentiaries to save $17.6 million. “I’m a long-term public servant,” “The budget I put out today is nothing like anything I would have expected ever to be put out in the state of Washington. And I am the last person I would ever have expected to put it out.” Voters in November rejected an income tax and restrained the state’s ability to increase other levies. Gregoire, a lifelong state employee who was attorney general before becoming a two-term governor, says she now must slash health care, education and other programs to confront a projected $4.6 billion deficit. “I created the Department of Early Learning,” Gregoire said. “I put more money in K-12 than I think has been put in there in years, if not decades. I was really investing in higher education because I think education is the future for us. And I’m dismantling all of it.”
SD Governor Expected To Seek Deep Budget Cuts - South Dakota Gov. Dennis Daugaard is expected to seek deep cuts across state government when he presents the Legislature with a new budget proposal on Wednesday. Before leaving office, former Gov. Mike Rounds suggested a budget that would make 5% cuts in state aid to school districts and reimbursements to doctors and others who provide services to patients in the Medicaid program. Daugaard is expected to propose even deeper cuts than those presented by Rounds. Daugaard last week said he wants to cut each state department by at least 10%. Asked if that kind of cut would apply to schools and Medicaid providers, Daugaard said every part of state government should share in the sacrifice to balance the budget.
Branstad Says Hundreds Of State Layoffs Necessary — Iowa Gov. Terry Branstad on Tuesday said spending cuts needed to balance the state's budget will force the layoffs of hundreds of state workers hired during former Gov. Chet Culver's single term in office. Branstad told reporters he would move quickly to craft a new state budget that will include deep cuts. He wouldn't specify the number who will lose their jobs, but spokesman Tim Albrecht said hundreds of positions will be cut. Branstad said hundreds of workers were hired during the closing days of Culver's administration and that the state can't afford to keep them on the payroll. It is easier to fire workers during their first six months in office, Branstad said, because seniority makes dismissing the workers more complex.
GOP Leadership Outlines 'Familiar' Plan To Trim $1 Billion From State's Projected Deficit - Former Gov. Tim Pawlenty’s budget-balancing strategy is carrying over into this session as the Republican legislative leadership today outlined plans to continue his spending cuts from last session as part of its plan to tackle the state’s projected $6.2 billion deficit. Continuing those unallotments would reduce the deficit for the 2012-2013 biennium by about $840 million, leaders said.Included in the bill is a provision asking Minnesota Management and Budget staff to identify $200 million in cuts to state agencies for the current budget cycle, effectively lowering the state’s projected budget deficit to $5.2 billion. Even after the spending reductions, the state would face a $5.2 billion deficit. Holberg said it’s hard to “guesstimate” when the shortfall might be fully solved.
Cuomo Threatening Government Shutdown Over Budget - Gov. Cuomo is threaten ing to shut down state government in early April if the Legislature refuses to pass a new budget that slashes spending by an unprecedented $10 billion, The Post has learned. Insiders said Cuomo is determined to avoid the long budget delays that have plagued and crippled the state for nearly three decades as budget fights between governors and the Legislature went as late as mid-August. The first-ever shutdown would bring nearly all services except prisons, health-care institutions and the State Police to a grinding halt and leave more than 100,000 state workers idle and without paychecks, insiders said. Cuomo relayed his readiness for such a high-stakes confrontation in conversations with key aides and state lawmakers during the past two weeks as he outlined general plans to cut the state payroll and impose billions of dollars in reductions on school districts and the Medicaid program in the fiscal year beginning April 1.
State's budget deficit bigger than expected, DiNapoli says -- More bleak news for New York. State Comptroller Thomas DiNapoli said the budget deficit for the next fiscal year, which starts April 1, could reach $11 billion. DiNapoli said the projected budget deficit for the current fiscal year, which ends March 31, will be higher than the state Division of Budget's $315 million estimate. It will likely be in excess of $1 billion and could be as high as $1.5 billion, he said. Looking at spending commitments versus new revenue for the next fiscal year, which begins April 1, "we see a gap that's about $9.5 billion," If this year's deficit is rolled into next year's budget, it could total $11 billion,
Cuomo Considers Cutting Up to 15,000 State Jobs - Gov. Andrew M. Cuomo is considering reducing the state workforce by up to 15,000 workers in his budget, the largest cut to the government payroll in recent years, two people briefed on the plan said Wednesday night. The prospective cuts are likely to accompany large reductions in Medicaid and state education spending, those people said, as Mr. Cuomo and his administration seek to close a projected budget gap of more than $9 billion. But the cuts would represent a substantial downsizing of the state’s workforce, including clerical workers, state troopers and park rangers. And that belt-tightening would almost certainly be accompanied by noticeable reductions in government services, though it is hard to predict where and how much until Mr. Cuomo releases his proposed budget in early February.
Illinois is No Peter Pan - “Top Illinois Democrats have agreed to push a plan that would temporarily boost income taxes by 75 percent and double cigarette taxes,” harked CBS Chicago on January 6, 2011. The proposed plan would increase Illinois’ personal income tax rate from 3 percent to 5.75 percent for the next three years. After that, it would drop back to 3.25%. So they say. Illinois is a state in which the legislators have so betrayed the taxpayers that a lifetime on Devil’s Island would be too good for them. For instance, the liability of the four state pension plans is calculated at $151 billion or $280 billion, depending on the assumptions used. The $280 billion figure is analytically controversial but deductively compelling given the efforts to deny and confuse bondholders and the public alike respecting the coming collapse of the municipal bond market.
More on Illinois' income tax increase --thinking about globalization - As states continue to face difficult times and vulnerable residents unemployed by the Great Recession come to the end of their ropes with the last of their unemployment support checks (those unemployed for 99 weeks don't get any more help under the latest extension), the rhetoric continues to escalate. As I noted in my last post on Illinois' decision to increase its personal and corporate income tax rates (See Illinois Senate Bill 2505, signed into law by Gov. Quinn on Jan. 13), tax increases--especially those that require people and companies of wealth and power to kick in a fairer share of the tax burden--may well make sense even as the country deals with the continuing fallout of the banksters's binge of casino speculation. Governor Quinn noted when signing the Illinois legislation that the tax increase was need to stave off fiscal insolvency. The right wing's preferred solution-- to see the states fire public employees or at the least reneg on their earlier commitments to fund pensions (which generally permitted them to hire highly skilled employees at lower wages than would otherwise have been possible)-- would only make grave matters much worse.
Old overdue bills still an issue for Illinois - The state’s stack of unpaid bills will soon double despite an income tax increase, according to state Comptroller Judy Baar Topinka. The four year, temporary personal income tax hike of 67 percent was approved on the final day of the previous Legislature and recently signed by Gov. Pat Quinn. In part, the income tax hike is designed to help Illinois catch up on past-due bills and stop being delinquent on its payments. “Our current backlog of bills stands at $6 billion, and the increased revenues will help address this backlog,” said Kelly Kraft, spokeswoman for the governor’s Office of Management and Budget. Not quite, according to Topinka, who is in charge of Illinois’ checkbook. “By the time we get through four years from now and all of this and what they’re able to spend, we will probably have a debt of $12 billion of unpaid bills that have yet to be dealt with,” the Riverside Republican said. Topinka said her office is now working on getting last August’s bills paid.
State Bankruptcy Option Is Sought, Quietly - Policy makers are working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers. Unlike cities, the states are barred from seeking protection in federal bankruptcy court. Any effort to change that status would have to clear high constitutional hurdles because the states are considered sovereign. But proponents say some states are so burdened that the only feasible way out may be bankruptcy, giving Illinois, for example, the opportunity to do what General Motors did with the federal government’s aid. . Bankruptcy could permit a state to alter its contractual promises to retirees, which are often protected by state constitutions, and it could provide an alternative to a no-strings bailout. Along with retirees, however, investors in a state’s bonds could suffer, possibly ending up at the back of the line as unsecured creditors.
NYT Reports States Looking For Ways To File Bankruptcy - A few days ago we reported that Newt Gingrich was pushing for legislation to allow states to file for bankruptcy, "allowing Them To Renege On Pension And Benefit Obligations." As we speculated back then "obviously what this means for equity investors in assorted muni investments is that a complete wipe out is becoming a possibility, as Meredith Whitney's prediction, which everyone was quick to mock and ridicule, is about to come back with a vengeance." Sure enough, this most recent development in the states' path to insolvency was quickly ignored as it was not a dipping mushroom cloud that could be bought. Until tonight: the NYT has just rehashed the post in an article that would not only validate the Whitney thesis if true, but make a Cramer-Bove out of everyone who has been caught on tape in the past two weeks kicking and screaming that there is no chance in hell the carnage predicted by the scourge of Citigroup (and yes, back in 2007 everyone said that Citi could never fail either).
California's fiscal emergency re-declared - California remains in a fiscal emergency, says Gov. Jerry Brown, issuing an official proclamation to that effect, echoing one issued last year by his predecessor, Arnold Schwarzenegger. This proclamation underscores the need for immediate legislative action to address California’s massive budget deficit, the governor’s office says. “Without corrective action the combined operating deficit for fiscal year 2010-11 and fiscal year 2011-12 is $25.4 billion and … revenues are $3.1 billion lower than were projected at the time of the 2010 Budget Act,” Mr. Brown says in his declaration. He says the state’s General Fund revenues for Fiscal Year 2010-11 will “decline substantially” below the revenue estimates upon which the budget was based while General Fund expenditures will “increase substantially” creating a carry-over deficit affecting the cash reserves and the budget for Fiscal Year 2011-12.
California cities race to shield funds from state - A revolt by city officials against Gov. Jerry Brown's proposal to abolish municipal redevelopment agencies is rapidly spreading across the state. Over the last several days, officials in Long Beach, Pasadena, Palm Springs and numerous other cities have hastily called special meetings to discuss transferring billions of dollars from their redevelopment agencies to city control to keep the money out of the state's reach. The move is an attempted end-run around Brown's proposal to scrap redevelopment and allow school districts, counties and the state to take the billions in property tax dollars the agencies now collect to improve blighted areas. Brown predicted that the move would save the state $1.7 billion in the next fiscal year and send much more money back to school districts and counties in years to come. The redevelopment agencies take in about $5 billion each year.
Villaraigosa on Los Angeles's budget, potential layoffs - The Los Angeles City Council, heading into the Martin Luther King holiday weekend, voted to cut $18 million. That's a dent in the $63 million deficit for this year, but there's still a ways to go, as well as a projected $360 million deficit for the coming fiscal year. Los Angeles Mayor Antonio Villaraigosa spoke with KPCC's Larry Mantle Tuesday about the budget, layoffs and more, providing a state of the city for 2011. "They did the right thing in making the cuts," says Villaraigosa. The City Council voted to lease city-owned parking garages to private operators, which Villaraigosa says will generate $53 million. He defended leasing the parking garages, saying that it was not a "core business" for the city. "We still have a lot of tough decisions to make in the days ahead." What's going to be cut? "Well, virtually everything we do," says Villaraigosa
LA agencies may shut down 2 days a week --- The budget crisis in Los Angeles prompted Mayor Antonio Villaraigosa to call Tuesday for city agencies to shut down for two days each week starting next week. City Controller Wendy Greuel cautioned Monday Los Angeles could run out of funds to pay employees and vendors within four weeks. At a news conference Tuesday, Villaraigosa said all city agencies -- with the exception of public safety and revenue-generating departments -- should close for two days a week beginning April 12, the Los Angeles Times reported. Villaraigosa said he would direct city officials to get to work right away on a plan to implement the shutdown. "We have to act, and we have to act quickly," the mayor said.
LA Mayor Says "No Question You’ll See Some Cities Default"; Mayor Daley Says "I wouldn’t doubt it"; NY Mayor Goes After Public Pensions - In a long overdue move, New York Mayor Michael Bloomberg is calling for increased retirement ages of public union workers, changes in union seniority rules, and the ability to negotiate directly with unions instead of the state setting pensions.Chicago Mayor Daley and Los Angeles Mayor Antonio Villaraigosa both warn of defaults even though the LA Mayor downplays LA's default risk. In Washington state, Governor Christine Gregoire, a life-long bureaucrat and part of Washington's problem, at long last has her hands tied by voters refusing to accept more tax hikes. The New York Post reports Bloomberg warns of deep budget cuts Mayor Bloomberg warned in his “State of the City” address Wednesday that New York still faces deep budget problems and promised he would seek to cut pensions for government workers that he said were more generous than those found in the private sector.
Bernanke on Municipal Bond Bailout: No Way - On Friday, Federal Reserve Chairman Ben Bernanke dismissed the possibility that the central bank would intervene in the municipal credit markets. In testimony before the Senate Budget Committee Bernanke said: "We have no expectation or intention to get involved in state and local finance." He later said that states "should not expect loans from the Fed." The comes according to a story in Friday's Wall Street Journal. According to the Journal, the rationale for the policy of nonintervention is the following: "The Fed only has legal authority to buy muni debt with maturities of six months or less that is directly backed by tax or other assured revenue, which makes up less than 2% of the overall market. The Dodd-Frank financial-regulation law enacted last year further tied the Fed's hands, Mr. Bernanke noted, by barring the central bank from lending to insolvent borrowers or pursuing bailouts of individual borrowers."
Denver's projected $99.4 million deficit in 2012 will be "challenging" for budget planners - Denver finance officials issued an early warning Wednesday, saying the city is facing a nearly $100 million budget deficit in 2012 that will require serious, systemic fixes. "Our feeling is the 2012 budget will be one of the most challenging the city has ever felt," said Claude Pumilia, Denver's chief financial officer. "Now you are really going to face tough choices." Over the past three years, the city has faced $346 million in budget shortfalls — gaps filled through temporary fixes such as furloughs, delaying the replacement of equipment and vehicles and not holding recruit classes for new police officers. "Those are all temporary fixes. All that does is push the problem out another year," said Ed Scholz, Denver's budget officer. "We are running out of options. Each year there are less and less triggers to pull."
Deep layoffs begin in Camden, N.J. - Some firefighters turned in their helmets and police officers their badges Tuesday as part of deep municipal layoffs destined to further erode the quality of life in Camden, already one of the nation's most impoverished and crime-ridden cities. About 335 workers, representing one-sixth of the local government work force, lost their jobs, according to Mayor Dana Redd. It was worst in the public safety departments, where nearly half the police force and close to one-third of the city's firefighters were laid off. The mayor of Camden, N.J., says 168 police officers, 67 firefighters and about 100 non-uniformed city employees were laid off Tuesday. Mayor Dana Redd says about 100 of the police officers and most of the firefighters could be brought back if their unions agree to concessions. She says the biggest police union is scheduled to vote on a plan Wednesday. The layoffs come as Camden, a crime-ridden city across the Delaware River from Philadelphia, faces a huge budget deficit and declining state aid.
Camden, NJ, to lose nearly half its cops - There will be fewer cops patrolling the streets of Camden, N.J., come Tuesday. Struggling to close a $26.5 million budget gap, the city with the second highest crime rate in the nation is laying off 163 police officers. That's nearly 44% of the force. And Camden will also lose 60 of its 215 firefighters. Some people with desk jobs will be demoted and reassigned to the streets. The mayor's office says that the cuts will not affect public safety. "We're still going to protect our residents," Public safety "will remain our top concern. We'll shift our resources to be more efficient with what we have."
Life In America's Most Dangerous City About To Become "Living Hell" As Layoffs Of One Quarter Of Government Labor Force Begin - Life in Camden, NJ has never been fun. Frequently ranked as America's most dangerous city, whose only claim to fame are the corporate offices of Campbell's Soup, Camden is about to get even more dangerous as it is among the first to experience wholesale cuts to its government labor pool. Bloomberg reports that 'as many as 383 workers, representing one-fourth of the local government's work force, are expected to lose their jobs, including about half the police force and one-third of the city's firefighters.' It seems cuts have already commenced: 'police officers are turning in their badges as part of deep municipal layoffs that began Tuesday.' It's a good thing then that unlike the rest of the world, New Jersey does not (yet) have surging food inflation as otherwise one may be tempted to argue this could be a rather interesting hot spot in the future, especially with the local police force deciding to find better pastures even as it starts collecting 99 weeks of unemployment benefits.
City Bond Defaults Likely Amid Strain - The mayors of Los Angeles and Chicago said the financial strains still weighing on local governments in the wake of the recession may cause cities to default on their bonds. Los Angeles Mayor Antonio Villaraigosa, a Democrat, said municipalities are being squeezed as states move to balance their own budgets, a step that can involve taking more funds that would otherwise be sent to towns and cities. “There’s no question you’ll see some cities in default,”. “The difference between us and the federal government is they can print money. The states balance their budget oftentimes on the backs of cities, counties and school districts. We actually have to balance a budget.” Villaraigosa said in an interview that he didn’t think the number of defaults are going to be as large as some have speculated, saying they may be confined largely to small cities. Chicago Mayor Richard Daley, a Democrat, said some cities are struggling to meet expenses, including costs for their employees’ pensions. "These are serious financial problems for many cities, especially the smaller cities that can’t deal with the day-to- day cost of government,” Daley said today at the press conference in Washington. Asked whether he expected to see a lot of cities default, he said: “I wouldn’t doubt it.”
Vallejo Plan Would Give Unsecured Creditors 5 to 20 Cents on the Dollar - Unsecured creditors will receive 5 cents to 20 cents on the dollar for their claims under a reorganization plan Vallejo, Calif., filed Tuesday in federal court. The plan to exit bankruptcy outlines the reorganization of debt the city owes its largest creditors, Union Bank and National Public Finance Guarantee. It also sets aside a pool of $6 million to pay unsecured creditors about 5% to 20% of their claims over two years, according to court documents filed in U.S. Bankruptcy Court for the Eastern District in Sacramento.“The city regrets that it cannot pay a higher percentage,” . “The city lacks the revenues to do so while maintaining an adequate level of municipal services, such as the provision of fire and police protection and the repairing of the city’s streets.”
Vallejo Bankruptcy Plan Would Pay Creditors as Little as 5% - The city of Vallejo, California, proposed paying some creditors as little as 5 percent of what they are owed, making it the first general municipality that would fail to fully repay its debts in bankruptcy. General unsecured creditors would collect 5 percent to 20 percent of their claims under the plan of adjustment filed late yesterday in U.S. Bankruptcy Court in Sacramento, the state capital. No city or county has used federal bankruptcy laws to force creditors to take less than they are owed, according to Bruce Bennett, the lead lawyer for Orange County, California, when it filed the biggest municipal bankruptcy in the U.S. in 1994. Vallejo’s plan assumes the city can’t provide essential services, like police and fire protection, while also paying its debts, he said. Should the city succeed, the case “may become an important precedent,” Bennett said in an interview. The creditors, who include retirees and former employees, would be paid $6 million over two years.
NM Governor Fights Tax Hikes As Lawmakers Return - The New Mexico Legislature convenes Tuesday with Republican Gov. Susana Martinez already battling with educational groups over budget cuts and tax increases. "Instead of digging deeper into the pockets of New Mexico families and small businesses, what we have to do is change how the state spends money. I am determined to make sure we make the proper cuts,". "We are not undertaxed. The state government overspends." Financial issues are expected to dominate this year's legislative session because the state faces a budget shortfall of up to $400 million in the coming year. On Monday, educators, parents and children rallied at the Capitol against spending cuts for public education and in support of tax increases to balance the budget.
City, schools can't count on help to close budget gaps - Rochester faces a $48.5 million budget gap. The City School District is short about twice that amount — representing 14 percent of its budget. And the state, which has bailed out local governments in the past, is in a $10 billion hole that could grow to $11 billion if lawmakers don’t start making cutbacks. Coming off a decade in which state aid to the city increased about 50 percent, or more than $30 million in inflation-adjusted dollars, the city is now in the midst of midyear budget cuts. Those reductions are meant to offset the loss of $2.6 million in state and other funding, and possibly begin tackling the looming shortfall that lies ahead. “We’ve hitched our wagon to the state,” “Given the state’s fiscal situation, we’re that much more at risk.”
York City School District could seek tax exceptions - The York City School Board on Wednesday discussed the possibility of raising property taxes beyond its state-mandated limit for next year. The city school district is facing a $15 million deficit for the 2011-12 school year. The board voted 7-2 Wednesday to move forward with advertising a preliminary budget in order to seek state exceptions to raise taxes by more than 2.2 percent, the limit set for the district. Districts can ask for special exceptions for a variety of reasons in order to raise taxes higher than their state-set limit. The city could use one or more exceptions, said Kenn Medina, business manager. Raising taxes by 3.3 percent, instead of 2.2 percent, could generate an extra $660,000, he said.
New Britain Schools Could Lose More Than 100 Teachers To Budget Cuts — After losing about 50 teachers to budget cuts last year, the city's financially battered school system faces the prospect of laying off another 100 or more this summer, the board of education said Wednesday night. The system faces a projected $11 million gap in the coming budget, the result of a staggering reduction in federal grants and the likelihood of bare-bones funding from city government, board members said. To close about $6 million of that deficit, the board unanimously agreed Wednesday night to cut 105 jobs in the 2011-12 budget – including dozens of teachers along with administrators, school secretaries, vocational counselors, maintenance workers, a computer technician and others. The reductions take effect after the new fiscal year starts July 1.
School officials say cuts could be 'devastating' - School officials say programs and people would be two unavoidable casualties of the 10 percent across-the-board cut to education funding proposed Wednesday by Gov. Dennis Dauggard.Sticking to a campaign promise to slash the state's budget deficit, Daugaard proposed $127 million in cuts to the 2012 budget, including $55.2 million in education funding. Meade School District superintendent Jim Heinert said the cut would be severe and force the district to eliminate programs, staff and services. "For us, it amounts to a $1.4 million loss. If we would try to accomplish that in one year, it would have a devastating effect. He says he has real numbers. What he doesn't see is that real numbers affect real people."For Rapid City, 10 percent means $7 million."There's no way we can salvage $7 million in the general fund
Without aid, DPS may close half of its schools - Detroit Public Schools would close nearly half of its schools in the next two years, and increase high school class sizes to 62 by the following year, under a deficit-reduction plan filed with the state. The plan, part of a monthly update Emergency Financial Manager Robert Bobb gives the Department of Education, was filed late Monday to provide insight into Bobb's progress in his attempt to slash a $327 million deficit in the district to zero over the next several years. Under it, the district would slim down from 142 schools now to 72 during 2012-13. Bobb has said school closures, bigger classes and other measures would be needed if he cannot get help from lawmakers to restructure finances in the state's largest school district. DPS considered but declined to file for bankruptcy in 2009. In the past year, debt in the district has increased by more than $100 million, brought on by a mix of revenue declines in property taxes, reduced state aid, declining enrollment and an unplanned staffing surge this past fall
Bad Budget May Halt School Construction In Wash. State Gov. Chris Gregoire's austere budget proposal could mean that school construction projects approved by local voters might not get built, state lawmakers were told Monday. As part of her next two-year budget Gregoire would allocate $505 million for capital projects at public schools. That compares with $757 million budgeted for the current spending plan and the nearly $950 million requested by the office of the superintendent of public instruction... Gregoire's 2011-13 budget leaves the school construction fund $180 million short of what's necessary, Dorn said, "and that means some projects won't get finished. And others won't even get started." Facing a $4.6 billion deficit in a $36 billion operating budget and pressures to other spending plans, Gregoire has said she's left with no other options but to make deep cuts to education and health care.
SC House Budget Subcommittees Beginning Hearings - South Carolina's public schools and college systems will make pitches to House budget writers as legislators deal with a projected $829 million budget shortfall for the upcoming fiscal year. On Tuesday, the state Education Department, Commission on Higher Education and the Board for Technical and Comprehensive Education are scheduled to go before House Ways and Means subcommittees. A handful of colleges also will make their budget pitches this week including Clemson University, the Medical University of South Carolina and The Citadel. Federal bailout cash during the past two years has helped schools and colleges avoid the deep spending cuts other agencies have seen. But that money is no longer available, and legislators say schools and colleges have to deal with reductions.
UC President Warns Of Possible Layoffs, Program Cuts— University of California campuses may have to layoff hundreds of faculty members and enroll more out-of-state students to deal with Gov. Jerry Brown's budget cuts. The UC Board of Regents met yesterday in San Diego to talk about their next steps. Brown has hit the UC system with potentially $500 million in state-budget cuts. Regents say the UC is grappling with an additional $500 million in costs associated with UC pensions and rising utility bills. Altogether, the UC-budget gap stands at $1 billion. Regents say access, affordability and the quality of the UC system will be severely affected
The Case for Tuition Increases at Public Universities-Becker - The fiscal crisis in many states of the United States has led these states to cut their funding of public colleges and universities. The newly elected governor of California, Jerry Brown, has proposed to significantly cut state funding to California public colleges and universities, the most extensive and prestigious public system of higher education in the United States. To compensate at least in part for the cuts in public funding, tuition at American public institutions of higher learning is increasing significantly. Something similar is going on in countries where cash-strapped central governments finance most university expenses.. Students at different British universities opposed the proposal to raise tuition by occupying university buildings, picketing the British Parliament building, and engaging in various acts of violence, but the bill passed anyway (by a close vote). Tuition and other fees at public colleges and universities generally are much less than the cost of providing the education. To be sure, tuition and fees at private nonprofit institutions are also generally considerably less than education costs. The crucial difference, however, between public and private institutions is that the gap between costs and tuition revenue of private schools is mainly covered through voluntary contributions from alumni, private foundations, and others, whereas a sizable fraction of the gap at state-run schools is paid out of taxes imposed on state residents
Raising Public-College Tuition—Posner - A number of states are in quite desperate financial straits. They have huge debt, and like members of the eurozone, cannot lighten their debt load by inflating their currency or by improving their trade balance by devaluation. It is natural that they should be raising fees, such as college tuition. Whether this is the best way to reduce debt is a separate question, but probably an academic one; the pattern of revenue enhancement and cost reduction that a state embraces depends on the political balance in the state, rather than on what is efficient or otherwise in the public interest. As Becker points out, there are external benefits to higher education. In the narrowest terms, college-educated persons (especially college graduates) have significantly higher incomes than the non-college-educated population, and those higher incomes generate higher tax revenues, which finance government expenditures that are used to finance government programs that largely benefit other people. The amount of the external benefits cannot actually be measured, however, because the decision to attend college is not random; generally, it is the intellectually abler who attend college, and their higher incomes are the combined result of their personal characteristics and the increased skills that college imparts to them. Nevertheless there is little doubt that college does generate external benefits, which creates a case for subsidy.
Education Still Pays - The Bureau of Labor Statistics is out with a new report today showing that pay trends in 2010 were not as good as they had been in 2009. In 2009, real weekly pay had risen for every educational group — high-school dropouts, high-school graduates, people with some college and four-year college graduates. In 2010, pay fell for every group. The slump also became more white-collar last year. The gap in pay between college graduates and people with some college (but no four-year degree) shrunk a bit. The pay gap between people who attended college and people who didn’t continued to grow — and is now wider than it has ever been. The typical college graduates makes about 75 percent more every week than the typical non-graduate. So the overall story lines remain the same. College provides a far better economic return than in past decades despite the skepticism you sometimes hear.
Report: First two years of college show small gains - Nearly half of the nation's undergraduates show almost no gains in learning in their first two years of college, in large part because colleges don't make academics a priority, a new report shows. Instructors tend to be more focused on their own faculty research than teaching younger students, who in turn are more tuned in to their social lives, according to the report, based on a book titled Academically Adrift: Limited Learning on College Campuses. Findings are based on transcripts and surveys of more than 3,000 full-time traditional-age students on 29 campuses nationwide, along with their results on the Collegiate Learning Assessment, a standardized test that gauges students' critical thinking, analytic reasoning and writing skills. After two years in college, 45% of students showed no significant gains in learning; after four years, 36% showed little change. Students also spent 50% less time studying compared with students a few decades ago, the research shows.
The value of college - IN RECENT decades, researchers have documented a rising wage premium for college educated workers, and economists have theorised that recent increases in income inequality may be due to rising demand for skills combined with lagging supply of skilled workers. But some critics contend that the better earning performance of those with college degrees primarily reflects the higher skill level of those who attend and complete a college degree, and others indicate that the main benefit of university is its signalling power to employers. So, do colleges actually teach students anything? A new book tracking 2,300 students at four-year universities includes some striking findings:
- 45 percent of students "did not demonstrate any significant improvement in learning" during the first two years of college.
- 36 percent of students "did not demonstrate any significant improvement in learning" over four years of college.
- Those students who do show improvements tend to show only modest improvements. Students improved on average only 0.18 standard deviations over the first two years of college and 0.47 over four years.
Student tracking finds limited learning in college - You are told that to make it in life, you must go to college. You work hard to get there. You or your parents drain savings or take out huge loans to pay for it all.And you end up learning ... not much. A study of more than 2,300 undergraduates found 45 percent of students show no significant improvement in the key measures of critical thinking, complex reasoning and writing by the end of their sophomore years. Not much is asked of students, either. Half did not take a single course requiring 20 pages of writing during their prior semester, and one-third did not take a single course requiring even 40 pages of reading per week.
The Student Loan Debt Bubble- It was announced last summer that total student loan debt, at $830 billion, now exceeds total US credit card debt, itself bloated to the bubble level of $827 billion. And student loan debt is growing at the rate of $90 billion a year. There are far fewer students than there are credit card holders. Could there be a student debt bubble at a time when college graduates' jobs and earnings prospects are as gloomy as they have been at any time since the Great Depression? The data indicate that today's students are saddled with a burden similar to the one currently borne by their parents. Most of these parents have experienced decades of stagnating wages, and have only one asset, home equity. The housing meltdown has caused that resource either to disappear or to turn into a punishing debt load. The younger generation too appears to have mortgaged its future earnings in the form of student loan debt.
Bloomberg Seeks NYC Pension Changes, No Tax Boost - New York Mayor Michael Bloomberg called for avoiding tax increases and raising some workers’ retirement age as he laid out steps to plug a deficit that may be about 7 percent of a projected $67.5 billion budget.The mayor, 68, enters the second year of his third term facing a $2.4 billion deficit, not counting at least $2 billion in state aid, which the city expects to lose, for education and health care.“A new defining challenge confronts us: forcing government to live within its means,” Bloomberg said in his speech, which lasted about 45 minutes. “The city’s economic future is hanging in the balance.” Pat Lynch, president of the Patrolmen’s Benevolent Association, said police officers paid for the benefit with more than $1 billion in past surplus pension earnings and $75 million upfront. “Having realized billions in benefits, the city now wants to renege,” he said in a statement. “We intend to hold them to it.”
States Warned of $2 Trillion Pensions Shortfall - US public pensions face a shortfall of $2,500 billion that will force state and local governments to sell assets and make deep cuts to services, according to the former chairman of New Jersey’s pension fund. The severe US economic recession has cast a spotlight on years of fiscal mismanagement, including chronic underfunding of retirement promises. “States face cost pressure, most prominently from retirement benefits and Medicaid [the health programme for the poor],” Orin Kramer told the Financial Times. “One consequence is that asset sales and privatisation will pick up. The very unfortunate consequence is that various safety nets for the most vulnerable citizens will be cut back.”
Should the retirement age be lower, not higher? - In December, President Obama's deficit commission recommended a series of tough measures to reduce spending, including raising the retirement age and thus delaying the moment when people start collecting Social Security. According to economist James K. Galbraith, though, this is exactly backward. In an article in the latest Foreign Policy magazine titled "Actually, the retirement age is too high," Galbraith, a professor at the University of Texas at Austin, contends that older workers should be encouraged to retire earlier, not later. With the economy creating few jobs, he writes, "common sense suggests we should make some decisions about who should have the first crack: older people, who have already worked three or four decades at hard jobs? Or younger people, many just out of school, with fresh skills and ambitions?" The answer he says, is obvious - send the old folks home. He calls for a three-year window in which the age to begin receiving full Social Security benefits drops to 62. "With a secure pension and medical care, [the new retirees] will be happier," he writes. "Young people who need work will be happier. And there will also be more jobs." . The proposals echo a familiar, and questionable, notion on the left: that we should find ways to better parcel out existing jobs. It's the same logic that leads some countries to consider cutting the number of hours or days someone can work each week, so that more people can share the work pool. In reality, the true challenge is to figure out how to create new jobs.
Does disability insurance discourage employment? - Jagadeesh Gokhale writes: Jobs lost during the recent recession caused a deluge of applications to the Social Security Disability Insurance program — more than 6 million each year in 2009 and 2010 — and threw into relief the fact that the SSDI program is structurally unsound. The current applications surge will accelerate the exhaustion of SSDI's trust fund and will force Congress to have to choose among two unpalatable options — increase SSDI payroll taxes or reduce benefit allowance rates. But that is not enough. If the particularly vulnerable population the SSDI is designed to serve is to be protected, while preserving incentives to work, the program has to be radically restructured.Even in normal economic times, those with marginally physical or mental impairments apply in the hope of acquiring disabled status under SSDI. Among those already receiving SSDI benefits, the incentive to return to the work force is very poor.
The 'demographic timebomb' defused - The basic story is that we are seeing a declining ratio of workers to retirees. This is supposed to mean that our children and our grandchildren will have an unbearable burden supporting us in our old age. In the United States, the story is that we now have about three workers for each retiree. In 20 years' time, this ratio is supposed to drop to 2:1. In countries like Germany and Japan, the decline is somewhat greater, since they have lower birth rates, and in the case of Japan, less immigration. They also have somewhat more rapid gains in longevity.This basic story has managed to make otherwise sane people seriously fearful about their country's and the world's future. A quick statistic that should alleviate the fears is that the ratio of workers to retirees in the United States was 5:1 back in the 1960s, far higher than the current 3:1 ratio.
The immigration way to age with dignity - MANY Americans probably do not realise how dependent they are, or will be, on illegal immigrants. It is a familiar story when it’s revealed that a wealthy politician or political appointee once employed an illegal immigrant to do housework or work as a nanny. But even for those of us without an army of servants, the services low-skill immigrants provide looking after our children or caring for an aging parent play an important role in our economy. According to the Migration Policy Institute, 18% of low-skill home health care workers are immigrants. The actual figure is probably much higher because the 18% does not include illegal migrants who often work in this field. Giovanni Peri has found that low-skill immigrants enhance productivity rather than detract from the welfare of American workers. More low-skill immigration leads to a more efficient allocation of labour because natives sort into higher-skilled and paid jobs (which are generally better matches for them), while immigrants take the low-paid jobs. But there’s also a second-order effect. Access to affordable child and elder care allows natives to work more at higher-paid jobs or pursue other productive activities.
How To Fix Social Security: A 4-Point Plan That Faces the Brutal Realities - Social Security is imploding before our very eyes. As I laid out in The Fraud at the Heart of Social Security (January 17, 2011) and To Fix Social Security, First Ask Why It Is Deep in the Red (January 18, 2011), the system is already running massive deficits in 2010 that weren't supposed to occur until 2018, and the deficit in 2011 is transpiring 15 years earlier than the seers at the Social Security Administration (SSA) anticipated. There is no mystery why the system's revenues are collapsing: 9 million jobs have vanished, and millions more have slipped from full-time to part-time or temporary. The Social Security payroll tax (including the Medicare sliver) is 15.3% of payroll. So as total payroll plummets, so does Social Security's revenue. Roughly 8% of all private-sector jobs have vanished for good, despite what various cheerleaders project. Another 8% have slipped to "part-time for economic reasons," and another 15% are self-employed/free-lance/contract workers who have seen their incomes decline by 5%.
Social Security Is in Far Worse Shape Than You Think - But federal spending and income data from the Treasury Department reveal that the Social Security program is already deep in the red, with outlays exceeding payroll tax revenues by $76 billion in 2010 alone. This stunning shortfall calls into question the rosy fiscal forecasts made by the Social Security Administration (SSA) about the program's future solvency. The annual report of the Social Security Trustees, published in August 2010, forecast that the primary Social Security program, the Old Age and Survivors Insurance Trust Fund (OASI), would not exceed its tax receipts until 2018. Unfortunately, it happened in fiscal 2010, which ended in October. That year's outlays for the OASI fund were about $580 billion, while receipts came to only $540 billion -- a whopping $40 billion shortfall. Add in the deficit from the second Social Security fund, Disability Insurance (DI), and the gap between total SSA outlays ($707 billion in 2010, according to the Treasury) and tax receipts ($631 billion) grows to $76 billion -- more than 10% of the program's expenses.
Early Social Security Projections - Paul Krugman - This post by Bruce Webb sent me looking briefly at some early Social Security Trustees’ reports, to firm up my answer to something that has been bugging me for years. You see, in discussions of Social Security it’s often argued that in the program’s early years, nobody could have imagined the increases in life expectancy that have actually occurred, so nobody could have imagined that we’d have as many beneficiaries relative to the number of people of working age. And I thought I knew that this was wrong — that people in the 30s and 40s did know about rising life expectancy, and expected it to continue. Well, it turns out that Table 9 in the 1945 report (pdf) shows high and low estimates of the population distribution looking forward as far as 2000, which we can compare with the actual population distribution in 2000. What you can see right away is that the SSA expected a much smaller population than we actually ended up with — the baby boom and immigration weren’t anticipated. But they also expected a somewhat older population than we actually got: their “low” estimate put the ratio of seniors to adults under 65 at 20.8%, almost the same as the actual 21.1%, while the “high” estimate put the ratio at 29.1%.
Social Security replacing smaller portions of workers’ income - At a time when many policymakers are debating different ways to reduce Social Security benefits, it is worth pointing out that these benefits are already modest and the portion of workers’ income that Social Security replaces is falling. In 2010, the average Social Security benefit was $14,052, less than the minimum wage for a full-time worker. The chart shows Social Security income replacement rates in 2002, compared with projected replacement rates in the year 2030. The income replacement rate, which was 41% in 2002, is projected to fall to 36% by 2030.
The Fraud at the Heart of Social Security - There are two frauds at the very heart of the Social Security system, and I am going to describe and source them in detail. After spending a number of hours poring over public data from the Social Security Administration (SSA), The U.S. Treasury and the Congressional Budget Office (CBO), and additional hours searching the Web for other published analyses, I can state with some authority that there are no published analyses or accounts of Social Security which incorporate the actual outlays and receipts from fiscal year 2010 in a context which includes the Social Security Trust Fund. In other words, all published analyses are based either on SSA or CBO estimates, not the actual numbers from the Treasury, and all media reports I could find are simply cut-and-paste repetitions of these estimates. I cannot find a single source which provided any evidence of digging through the data and assembling a coherent picture of the Social Security system. The media simply repeats "conclusions" published by "official sources" based on estimates, not facts. The laziness this implies is staggering.
Growing Medicaid cases putting pressure on local hospitals - As more and more area residents lost their jobs in the economic downturn, local Medicaid rolls have increased — and it’s causing problems for local hospitals. Medicaid’s payments already don’t cover the cost of their services, and if newly-elected Gov. Andrew Cuomo further reduces those payments, it could ultimately affect the services hospitals offer, officials say. “We are writing off a greater and greater percentage of our revenue,” “As our volume of Medicaid encounters grows, it’s a cascading effect.” Meanwhile, at St. Elizabeth, Medicaid reimburses the hospital only 80 percent of the cost of care the patients get, Ketcham said. On the sidelines are the state’s already beleaguered taxpayers, who don’t want to shoulder any more increases.
Medicaid Faces $1 Billion Hole - Loss of stimulus dollars has created a gaping hole in the state's budget. The agency that administers Medicaid is facing a billion dollar shortfall. The program will be supported by cuts to other state agencies, but some Medicaid services may be lost. The Department of Community Health administers Medicaid. Its chief David Cook says relief doesn’t seem to be coming any time soon especially with federal health care legislation. "In 2014 there will be approximately 600,000 or more low income adult individuals in Georgia that will qualify and come into the Medicaid system," says Cook. To prepare for the increase and make up for the hole, the agency is cutting a couple of hundred staff positions. It has also proposed reimbursing doctors and hospitals one percent less, increasing co-payments, and cutting vision and dental services for adults.
Doctors dropping Medicaid as potential cuts loom - What would you do if your paycheck was cut by 10 percent? That's how much state lawmakers want to reduce Medicaid reimbursement for Texas doctors. Ten years ago, two-thirds accepted Medicaid to help those who can't afford health insurance. Today, the Texas Medical Association says fewer than half do. Now, if more cuts come, even more doctors may be out. Democrats and low-income advocates harshly criticize the proposed cuts. But, the Republican super majority in the House says voters clearly want cuts, not more taxes.
Supreme Court takes on states' plans to cut Medicaid payments - The Supreme Court agreed Tuesday to review California's controversial proposals to cut Medicaid reimbursements to physicians, dentists, pharmacies, health clinics and other medical providers. The court's decision to hear three combined California legal challenges is good news for Democratic Gov. Jerry Brown, who wants to enact budget cuts similar to those that courts have previously struck down. Potentially, hundreds of millions of dollars in proposed savings are at stake. "The fact that the court agreed to hear these cases is a big and important step for California," Elizabeth Ashford, a spokeswoman for Brown, said Tuesday night. The court's decision also could please 22 states that have sided with California, including Florida, Idaho and South Carolina. California and the other states want to restrict the kinds of private lawsuits that can be filed over public benefits.
Medicare and Health Reform - Krugman - Many attacks on health reform involve assertions that the law’s proposed Medicare savings can’t possibly materialize, that the Democrats just made stuff up. So it’s worth looking at where those savings are supposed to come from. The Center on Budget and Policy Priorities has a nice summary of the law’s financing; here’s the Medicare table: The 10-year total is $441 billion. Which parts of this are at all flaky? Not the cuts in Medicare Advantage — that’s a straightforward reversal of the giveaway embedded in the 2003 Bush drug benefit law. Not the reduction in drug costs, which amounts simply to making better use of bargaining power that we already know the government has — in fact, this item could have been much larger.Not the reduction in subsidies for hospitals that treat the uninsured — those hospitals will see a real reduction in their costs. Not higher premiums on the affluent — that’s real money, up front. So all we’re talking about is the $196 billion reduction in payments to providers.
Health Care Basics - Krugman - I thought it might be useful to remind readers about how Obamacare/Romneycare is supposed to work. Start with the basic point: modern medicine requires that people have health insurance. Why? Because in any given year, most people have modest medical expenses – but a minority will have expenses that ordinary families couldn’t possibly pay for out of their current income. The only way to protect against the risk of such expenses is with insurance. But the health insurance market for individuals has never worked. If the market is left loosely regulated, as it is in California, insurance companies devote large resources to determining who really needs health care, so as not to provide it; this both leads to huge administrative costs and leaves anyone with a chronic condition, or in fact anything that hints at possible trouble, out in the cold. If the state instead imposes community rating, as in New York – that is, if insurers are required to offer the same terms to anyone, regardless of medical history – you get caught in an “adverse selection death spiral”, in which healthy people don’t buy insurance, meaning that rates reflect the expenses of the unhealthy, which drives out even more healthy people, etc.. So what do we do? One answer is government-provided insurance. It’s a little-known fact that Medicare, Medicaid, and other government programs like veterans’ care already pay significantly more American medical bills than private insurance:
ObamaCare Answers the Wrong Question on Health Costs - With the House of Representatives set to vote to fully repeal ObamaCare this week, one of the strongest arguments for repeal relates to the law's effect on health care costs. Despite the rapid growth of medical costs in recent years, the new law does little to restrain that growth or to bend the curve towards decreasing costs. In fact, there is strong evidence, supported by the Congressional Budget Office, that many will see their health insurance premiums increased because of changes in the law. Yet progressive health policy analysts consistently claim that ObamaCare includes every known proposal to lower health costs. David Leondardt reiterated this point for The New York Times on Friday. A recent post at The Economist analyzed all of the ways in which ObamaCare's structure of mandates, regulations and taxes will not lead to any improvement in medical care.
A New 'Definition' For Health Care Reform - The principal divide in American health care policy is over what to do about rapidly rising costs. On one side are those who believe the solution is to enhance the government's power to direct the system's resources and enforce budgetary controls. This point of view animated the drafting of the recently passed health care law. On the other side are those who believe the answer is a functioning marketplace for insurance and care, not coercion and heavy-handed regulation. The key to such a competitive market is cost-conscious consumers, something sorely lacking today. Pro-competition, pro-consumer-choice advocates should press for reforms that would begin to convert existing, federally subsidized arrangements from open-ended benefit guarantees into "defined contribution" programs. The comprehensive and strategic approach we propose would apply defined contribution financing by taxpayers to all three major insurance coverage platforms -- Medicare, Medicaid and private health insurance.
More Government in Health Care? Yes. You Got a Problem With That? - As the House begins its debate on whether to repeal the Affordable Care Act, you’re going to hear a lot about how it’s a “government takeover” of health care and how it means Kathleen Sebelius, Secretary of Health and Human Services, will be dictating the terms of everybody’s insurance policies.I’m not really sure how potent this claim is. My suspicion is that it plays well with conservative inclined to oppose reform but resonates a lot less with everybody else. But since it’s such a staple of conservative rhetoric these days, I think it’s worth debunking again--although only in part, because more government in health care happens to be precisely what we need these days. Let’s start with the basics. In a true “government takeover” of health care, the government would seize control of the entire sector, turning doctors into government employees and hospitals into government institutions. A few countries have systems with some of those characteristics, but the United States is not about to join them--not even close. Doctors will continue to remain in private practice. Hospitals will continue to operate as private enterprises. And so on.
Mandates don't stay modest, a continuing series - This remains an underreported story: Should health insurers have to cover treatment of Lyme disease? What about speech therapy for autistic children? Or infertility treatments? Can they limit the number of chemotherapy rounds allowed cancer patients? Or restrict the type of dialysis offered to people with kidney disease? This week an independent advisory group convened by the Obama administration launched what is likely to be a long and emotional process to answer such questions... Under the health-care overhaul law, beginning in 2014 all new insurance plans for individuals and small businesses will have to include a package of minimum "essential benefits" falling into 10 general categories - ranging from hospitalization, to prescription drugs, to rehabilitative and habilitative services. But Congress largely left it to Secretary of Health and Human Services Kathleen Sebelius to decide how detailed to make the essential benefits package and what exactly to put in it. Defenders of ACA do not in general like to confront the "at what margin?" question. The rhetoric used to argue for the bill usually suggests that the mandate must indeed be extended. I will keep my eye on this issue. Here are previous installments in the series.
The doc fix - Jon Chait has a column on the doc fix and he complains about some of the other policy analysts. I understand that the doc fix is not a net cost of ACA, since we have been doing it anyway, and I understand that the Republicans are being hypocrites on the issue. But I have a broader question. Should we be doing the doc fix at current levels? If I were a supporter of single payer, I would wish to cut the doc fix. That is, after all, how single payer systems save so much money, compared to the U.S. system. They use monopsony to lower reimbursement rates and the quality of outcomes does not always suffer much, if at all. So are the single payer advocates in fact advocating an end or limit to the doc fix? That is a literal and naive question -- I am not pretending I have caught anyone in a contradiction. Is Krugman here endorsing the doc fix? I am not sure, but he does call it "necessary."
Free Market Health Care - I think it’s a little bit strange that this week House Republicans will voluntarily cast a vote that can be characterized, 100 percent accurately, as authorizing insurance companies to refuse coverage to people on the grounds that they’re in less-than-perfect health. Tough votes happen in congress all the time, but you don’t normally ask people to walk the plank over something that has no chance of passing. After all, as Amy Goldstein notes the pre-existing condition problem is quite widespread: As many as 129 million Americans under age 65 have medical problems that are red flags for health insurers, according to an analysis that marks the government’s first attempt to quantify the number of people at risk of being rejected by insurance companies or paying more for coverage. The secretary of health and human services released the study on Tuesday, hours before the House plans to begin considering a Republican bill that would repeal the new law to overhaul the health-care system. Something this helps highlight is the odd two-step that conservative opponents of the Affordable Care Act tend to do on the subject of what it is they want from the health care system.
Upton Sinclair and the Wonk Gap - Paul Krugman - Jonathan Chait bemoans the wonk gap: One of the unusual and frustrating aspects of the health care debate is the sheer imbalance of people who understand the issue at all from a technical standpoint. Even the elite policy wonks of the right make wildly incorrect claims about the issue. First of all, I don’t think this is unique to health care, or especially unusual. Monetary policy, fiscal policy, you name it, there’s a gap, although not quite as large as on health. Second, I’m surprised that Chait doesn’t refer to Upton Sinclair’s principle: it’s difficult to get a man to understand something when his salary depends on his not understanding it. In fact, in general right-wing think tanks prefer people who genuinely can’t understand the issues — it makes them more reliable. There was a time when conservative think tanks employed genuine policy wonks, and when asked to devise a Republican health care plan, they came up with — Obamacare! Wouldn’t the right be better served by better wonks? No. For one thing, they’d be unreliable — they might start making sense at an inappropriate moment. And, crucially, the media generally can’t tell the difference. I’ve had long exchanges with reporters over the doc fix; let me tell you, it’s very, very hard to get the point across. Or maybe the simplest way to say this is, Ignorance is Strength. And why tamper with a winning formula?
Can the GOP De-fund ObamaCare? - Today’s House vote to repeal President Obama’s health care reform legislation (the “Patient Protection and Affordable Care Act”, or PPACA) is the opening act of a two year struggle to either enshrine the law permanently or disrupt it long enough for the next election to determine its ultimate fate. Repeal legislation will of course fail in the Senate, which may not even schedule a vote. The House promises to consider a series of bills to repeal or modify several key provisions of the PPACA, but their prospects in the Senate are likewise dim. As a result, attention will inevitably shift to “must-pass” appropriations bills as vehicles to challenge the new law. This tactic could leave the Act more vulnerable to political and legal challenge but will not produce any significant change or delay in the implementation of the PPACA. We believe that in the near term, efforts to roll back Obamacare through the budget process are impractical and will ultimately fail.
Why the Insurance "Mandate" Is a Bogus Issue - Former Republican Majority Leader and FreedomWorks uberlobbyist, Dick Armey, who helped organize the original "Tea Party" opposition to health insurance reform, recently sent a memo to his followers detailing their plan to "repeal" the Affordable Care Act. Armey understands that most of the specific provisions of the law -- like banning insurance company discrimination based on pre-existing conditions, eliminating the ability of insurance companies to cut you off when you get sick, or assuring access to insurance to most Americans -- are pretty popular. He argues that the point of vulnerability is the so-called "insurance mandate" -- the requirement that every American has to either have private insurance, coverage at work, Medicare or Medicaid. The "mandate" is also the principal focus of the many lawsuits that right wing state attorneys general have filed against the law. Ironically, Armey and his ilk, use the unpopularity of the insurance companies (whose interests they actually represent) to gin up unhappiness at being forced to buy insurance from those very companies.
A pre-existing health-conditions study says half the country is uninsurable. - Now, with House Republicans pushing to repeal the 2010 health reform bill, the Health and Human Services department has done Roosevelt one better by releasing a short paper that states up to half of all Americans have pre-existing conditions that make it either impossible or very expensive for them to obtain health insurance in the private non-group market. That statistic could help President Obama consolidate support for health reform (and maybe his own re-election; this time out a 30-year Democratic realignment of presidential politics probably isn't in the cards). The health-insurance industry says the statistic is an unfair exaggeration, and Rep. Louie Gohmert, R.-Tex., says the claim is not only wrong but "offensive." But the lobbyists and the hard-right GOP hacks are wrong.
Health Care’s Dueling Economists — Again During the initial health-care debate, the White House and Congressional Republicans issued dueling letters from economists supporting and decrying the overhaul.Now, as the House gets ready to vote on a largely symbolic bill to repeal the legislation, both sides are again lining up economists. Earlier this month, the White House blog offered a post titled: “Repealing the Affordable Care Act Will Hurt the Economy.” Meanwhile, Speaker John Boehner’s office today released a letter signed by 200 economists and experts calling for repeal and replace. Separately, former Congressional Budget Office Director Douglas Holtz-Eakin, along with Joseph Antos and James C. Capretta, argues on the Wall Street Journal’s editorial pages against a preliminary CBO estimate showing that repealing the health-care legislation will add to the deficit.
Where are All the Sick People Who Can't Get Insurance? - Approximately 300 million Americans face a serious risk of being killed in an auto accident. Which is to say, there are auto accidents, and the entire population of the country is at risk of being one of the thousands of people every year who are killed on our nation's highways. That statement is about as useful as a new report from HHS, presumably timed to undercut the GOP as they debate their fruitless attempt to repeal the health care bill. HHS says that millions of people--about half the country, in fact--either has, or has a loved one with, a condition that could cause them to have difficulty securing insurance. As with the catchy opening sentence on auto deaths, this turns out to be much less interesting when you examine it. I don't really want to know who could be conceivably affected by a problem--after all, even someone with no medical conditions now could presumably develop one. What I want to know is, how many people this problem affects.
Health Care Repeal Won't Add to the Deficit - The Congressional Budget Office says repealing the Affordable Care Act would increase the deficit by $230 billion over the coming decade and by a modest amount in the decade after that. The CBO estimate has become the central defense by ACA advocates fighting the upcoming repeal vote in the House. They might want to re-think their strategy. A close examination of CBO's work and other evidence undercuts this budget-busting argument about repeal and leads to the exact opposite conclusion, which is that repeal is the logical first step toward restoring fiscal sanity. If CBO is right, 32 million people will be added to the health entitlement rolls, at a cost of $938 billion through 2019, and growing faster than the economy or revenues thereafter. How, then, does the ACA magically convert $1 trillion in new spending into painless deficit reduction? It's all about budget gimmicks, deceptive accounting, and implausible assumptions used to create the false impression of fiscal discipline.
Give me $1 billion to cut the budget deficit - Mankiw - I have a plan to reduce the budget deficit. The essence of the plan is the federal government writing me a check for $1 billion. The plan will be financed by $3 billion of tax increases. According to my back-of-the envelope calculations, giving me that $1 billion will reduce the budget deficit by $2 billion. Now, you may be tempted to say that giving me that $1 billion will not really reduce the budget deficit. Rather, you might say, it is the tax increases, which have nothing to do with my handout, that are reducing the budget deficit. But if you are tempted by that kind of sloppy thinking, you have not been following the debate over healthcare reform. Healthcare reform, its advocates tell us, is fiscal reform. The healthcare reform bill passed last year increased government spending to cover the uninsured, but it also reduced the budget deficit by increasing various taxes as well. Because of this bill, the advocates say, the federal government is on a sounder fiscal footing. Repealing it, they say, would make the budget deficit worse. So, by that logic, giving me $1 billion is fiscal reform as well.
The GOP's Health Care Plan: Blame the Lawyers - Do Republicans really have a plan for fixing the health care system? They've insisted, even as they've pushed to repeal last year's health care reform law, that they have some new ideas for reducing health care costs and expanding access to the uninsured. So far, though, the Republicans' new ideas look a lot like their old ones. On Thursday, Rep. Lamar Smith (R-Texas), the new GOP chairman of the House judiciary committee, will hold a hearing. Judging from Smith's comments, and the subject of the hearing, one of the Republicans' big ideas for fixing the health care system is simply to keep people from suing the doctors who injured them. Better known as "tort reform," such proposals are Republicans' one and only health care policy. They have been offering this same proposal now for about two decades, often as their sole contribution to the national debate over what should be done to help rein in medical spending.
Ezra Klein - Repeal, but no replace -As expected, House Republicans have voted to repeal the Patient Protection and Affordable Care Act. Three Democrats voted with them, which is substantially less than the 13 currently serving Democrats who voted against the bill in the first place, and many less than prominent Republicans had been predicting. On health-care reform, the two parties are moving further apart rather than closer together. What's not as expected, however, is that the GOP gave up on "repeal and replace" so early. Throughout the election, that was their message. If you look at their press language, it's still their message. Being on the side of the status quo is, according to the pollsters, a bad place to be. But that's where they are. They voted for repeal despite offering nothing in the way of replacement, save for the vague intention to have some committees come up with some ideas at some future date. Barry Goldwater might have wanted the GOP to offer a choice, not an echo, but Speaker Boehner saw more upside in a shout than a choice.
Health Care: The House's Vote to Repeal - The health reform passed last year was far from perfect--partly because it was based on a Republican-generated model for health reform that relied too much on private sector self-policing, rather than setting up a single payer system or at least a public medicare-like option to compete with the private system we have now. Our medical system without reform combines the worst of all possible worlds--very high cost (much more costly than those of our peers like Canada) and mediocre service (for all but the wealthiest oligarchic members of our society, who are empowered by their wealth and able to get just about anything they want). So the Republicans have taken a less-than-perfect bill that at least provided medical care for 30 million uninsured Americans with a mandate for coverage that made that insurance affordable and at least addressed some of the painful examples of insurance company power to put their profits above reasonable medical coverage of their customers by eliminating the pre-existing condition provision and they have proposed simply saying no and putting us back at square one.
Uncertainty Surrounding ObamaCare Causing European Businesses to Hoard Cash!! - Steven Shafer blogsA recent research note from Standard & Poor’s Valuation and Risk Strategies team lays out the 50 largest corporate cash holdings (excluding financials) and finds that of the $1.1 trillion (nearly equal to the amount held by the S&P 500), 58% is held outside the U.S. Among those concerned about the uncertainty coming out of the Obama Administration is Electrcitie de France, which is holding$ 22 Billion in cash.There has never been a US administration that struck fear into the hearts of corporations worldwide like this one. Its almost as eerie as the way the combined forces of Fannie Mae, Freddie Mac and the Community Reinvestment Act managed to gin up a housing boom in Ireland, Spain, Greece and even Latvia. The powers of US big government know no bounds!
Repealing Health Care Reform: How It Could Happen And What it Would Mean… He’s a named plaintiff in a lawsuit challenging the constitutionality of the Patient Protection and Affordable Care Act. The focus of Hyder’s suit, which was organized and written by a conservative legal organization, is the “individual mandate”—the requirement that everybody obtain health insurance or pay a fee to the government. The case is one of several moving through the federal judiciary. Sometime in the next few years, at least one of them is likely to end up before the Supreme Court. A few weeks ago, I spoke with Hyder at his office, in order to learn more about why he had brought this case. He said his motive was straightforward. He’s opted not to carry health insurance because he doesn’t think the benefits justify the price, and he doesn’t want the government forcing him to do otherwise. Okay, I asked, but what if he gets sick and needs hospitalization? How will he afford those bills? It was a distinct possibility, he agreed. But those potential bills would be problems for him and his hospital, he suggested, not society as a whole.
First, kill healthcare reform. Then, the New Deal? - Anyone who is concerned about whether opponents of healthcare reform will succeed in their multi-pronged legislative and judicial assault against the Affordable Care Act should head over to the New Republic and devour Jonathan Cohn's superb cover story, "The Worst Case: How Health Care Reform Really Could Get Repealed -- and Why the Repercussions Would Go Well Beyond Health Care." For years Cohn has been one of the most lucid and well-informed journalists covering the healthcare reform saga, and he proves it all over again with this amazing piece.Cohn's focus is on the judicial effort to smack down ACA's individual mandate as unconstitutional, and he brings a lot of clarity to the legal issues involved, even if, ultimately, he can't predict what the Supreme Court will do when the whole ball of wax ultimately lands there. But the more important contribution of his article is the context: The fight against healthcare isn't just about an attack on supposedly socialist medicine, it's part and parcel of a decades-in-the-making conservative legal assault on the role that government has been playing in the United States since at least the New Deal.
Lawsuit Loans Add New Risk for the Injured - The business of lending to plaintiffs arose over the last decade, part of a trend in which banks, hedge funds and private investors are putting money into other people’s lawsuits. But the industry, which now lends plaintiffs more than $100 million a year, remains unregulated in most states, free to ignore laws that protect people who borrow from most other kinds of lenders. Unrestrained by laws that cap interest rates, the rates charged by lawsuit lenders often exceed 100 percent a year, according to a review by The New York Times and the Center for Public Integrity. Furthermore, companies are not required to provide clear and complete pricing information — and the details they do give are often misleading. A growing number of lawyers, judges and regulators say that the regulatory vacuum is allowing lawsuit lenders to siphon away too much of the money won by plaintiffs. “It takes advantage of the meek, the weak and the ignorant,” . “It is legal loan-sharking.”
Toxins found in pregnant U.S. women in UCSF study - Multiple chemicals, including some banned since the 1970s and others used in items such as nonstick cookware, furniture, processed foods and beauty products, were found in the blood and urine of pregnant U.S. women, according to a UCSF study being released today. The study, published in the journal Environmental Health Perspectives, marks the first time that the number of chemicals to which pregnant women are exposed has been counted, the authors said. Of the 163 chemicals studied, 43 of them were found in virtually all 268 pregnant women in the study. They included polychlorinated biphenyls or PCBs, a prohibited chemical linked to cancer and other health problems; organochlorine pesticides; polybrominated diphenyl ethers, banned compounds used as flame retardants; and phthalates, which are shown to cause hormone disruption. Some of these chemicals were banned before many of the women were even born. The presence of the chemicals in the women, who ranged in age from 15 to 44, shows the ability of these substances to endure in the environment and in human bodies as well, said lead author Tracey Woodruff, director of the UCSF Program on Reproductive Health and the Environment.
Why Bedbugs Won't Die - The first comprehensive genetic study of bedbugs, the irritating pests that have enjoyed a world-wide resurgence in recent years, indicates they are quickly evolving to withstand the pesticides used to combat them. The new findings from entomologists at Ohio State University, reported Wednesday online in PLoS One, show that bedbugs may have boosted their natural defenses by generating higher levels of enzymes that can cleanse them of poisons. In New York City, bedbugs now are 250 times more resistant to the standard pesticide than bedbugs in Florida, due to changes in a gene controlling the resilience of the nerve cells targeted by the insecticide, researchers at the University of Massachusetts in Amherst recently reported.
Beware the water cowboys - As communities struggle to balance their ever-shrinking budgets, investment firms and large, predominantly foreign companies are seizing the moment. Across the country, communities are being aggressively courted to sell or lease their drinking water and wastewater utilities to private companies. Since 1991, water utilities interested in profit have seduced at least 144 cities and towns into privatizing their domestic water systems. Most were in the nation's Rust Belt. But this year, a record number of communities are considering it, including some in the West: Tulsa, Okla., Fresno County and Rialto, Calif., and Comal County, Texas, are all considering privatization.But before they answer the siren call of private water companies, Western cities should heed the experiences of other communities. Because after the jolt of cash that comes when a city leases or sells its water utility, benefits drop off -- sometimes precipitously. In the 10 largest cities around the country that have sold or leased their water systems, companies have raised consumers' water rates by an average of 15 percent a year.
Global effort to calm food prices - Faced with rising international food prices, governments around the world are cooking up measures to protect domestic supplies and keep a lid on prices at home. Russia has banned grain exports until the end of the 2011 harvest. South Korea and the Philippines have suspended some of their import duties on foodstuffs such as fish and powdered milk. In December, Sri Lanka released rice stocks and re-imposed a price ceiling that had been removed in October. And across the Mideast and North Africa, governments have kept food prices low by using big subsidies. The Food and Agriculture Organization of the United Nations recently warned that in December its food price index surpassed its previous peak of early summer 2008, fed by particularly sharp increases in sugar, cooking oils and fats. Corn and soy prices were also moving up quickly, with corn hitting a 29-month high Friday. In Bangladesh, rice prices jumped 8 percent in December. In India, the price of onions soared 80 percent in just one week. "Now everyone is having fears of going back to the levels of 2007-08,"
Corn Advances to 30-Month High, Wheat Gains on Falling Stocks - Corn rose for a fifth day to a 30- month high in Chicago and wheat climbed amid shrinking global stockpiles. Soybeans advanced on speculation that a strengthening yuan may spur imports into China. World corn supplies will fall 14 percent this year and wheat inventories will drop 9.8 percent, the U.S. Department of Agriculture said last week. Prices also gained as the dollar weakened, making U.S. crops cheaper in terms of other monies. The yuan advanced to a 17-year high against the U.S. currency yesterday. “The fundamentals are all in place for a very strong rally all of this year,” said Gary Mead, an analyst with VM Group in London. “The USDA figures sent a bolt of lightning through the market because the stocks-to-use ratio is going to be tight indeed through the end of August. And we have a lot of weather uncertainties to get through.”
Commodities Boom Signals Growth With U.S. Companies Benefiting - U.S. investors should welcome, not fear, climbing commodity prices. The increases are “largely a reflection of the fact that the pace of economic growth, particularly in the U.S., has picked up,” “It’s not something to be worried about.” The Standard & Poor’s GSCI Spot Index of 24 commodities has climbed 24 percent during the past year to its highest level since September 2008 as prices of raw materials from oil and copper to wheat and cotton have increased. That has prompted investor concerns that that rising energy and other costs might derail the U.S. recovery by robbing consumers of purchasing power and pinching corporate profit margins. History suggests they’re wrong to be concerned, said Michael Darda, chief economist for MKM Partners in Stamford, Conn. Commodity prices usually move in tandem with U.S. production, income and the stock market, so the increase is a reason to be bullish, not bearish, about the outlook, he said."
Fortune: America's secret commodities crunch - The commodities crunch is corporate America's dirty little secret. Even as consumers open their wallets once again and sales volume improves, inflationary pressure is creeping in. It's hitting companies small and large. And even giant corporations with plenty of heft to negotiate the best possible rates from suppliers are feeling the pinch. Procter & Gamble's (PG) chief financial officer, Jon Moeller, told us on Squawk Box that the consumer-products giant saw a 160-basis-point impact from higher input costs late last year. For now, P&G has offset that rise with its productivity and cost-saving programs. That can't continue indefinitely, of course. Commodities prices continue to skyrocket -- last year crude-oil prices were up 17.3%, sugar climbed 25.5%, and wheat rose 49.3% -- and eventually will start seriously chomping into corporate profits "Either the revenue picture will start increasing more rapidly over the next few quarters, and that will offset higher costs, or profits will get hit," "Something has to give."
Unilever chief warns over global crisis in food output - Telegraph - The chief executive of one of the world's largest food producers is to warn that the global crisis in food production is reaching 'dangerous territory' with prices soaring and demand outstripping supply. In a speech on Tuesday, Paul Polman, the chief executive of Unilever, will say that market distortions created by European Union subsidies work against the needs of the developing world. He will also demand fewer subsidies for harmful first-generation bio-fuels and say that climate change must be tackled by companies changing to sustainable models of agriculture. In an interview with The Sunday Telegraph Mr Polman said that short-term speculators were also driving up prices. "One of the main things in food inflation is that it has attracted speculators for short-term profit at the expense of people living a dignified life," Mr Polman said. "It is difficult to understand if you want to work for the long-term interests of society.
Food Inflation Comes To America: General Mills, Kraft And Kellogg Hike Prices On Selected Food Products - After denying for months that surging food prices will eventually come to the consumer, hoping that instead food companies could absorb the margin drop, sellside research is finally capitulating to the reality of what is really happening in the retail store. In a note discussing General Mills, Goldman Sachs says the company raised prices on snack bars some 7% last week. Goldman further clarifies that "this reportedly followed a comparable increase taken by K on its snack bars in mid-December. In addition, KFT has reportedly announced a 6% increase on select Planters branded nut products. We expect more price increases to be announced by the food companies in the coming weeks." Maybe, but the Chairman sure doesn't. And the Chairman is always 100% correct.
Countering the Prevailing Myth that "The World is Running Out of Food" – Kalpa - One thing that is easy to notice when reading as much main stream news covering agriculture as I do is that the subjects relating to food supply are often hyped and over-dramatized. Every time there is a weather event, or a commodity that goes up in price the media cries "the world will be unable to feed itself" or "we are running out of food". Recently, high food prices have been in the forefront of news headlines. However, if one looks more closely at the FAO food index, it is sugar, oils and coarse grains which have made the basket more expensive. Rice, a staple which feeds 60% of the world's population is in adequate supply and costs half as much as it did during the 2008 food scare. Wheat stocks also remain well above 2008 levels although soybean and wheat prices are rising. Corn ethanol policy, not true food scarcity, is the key driver in the high coarse grains price index. In other words, the food is being produced and is theoretically available, but its chosen use is not as food at this time. It is greatly concerning that global biofuel production is taking many acres of production away from global food supplies and raising overall food prices.
Record Food Prices Causing Africa Riots Stoke U.S. Farm Economy - The same record food prices causing riots in Algeria and export bans in India are allowing President Barack Obama to combine the biggest-ever U.S. farm exports with the tamest inflation since the 1960s. Global food costs jumped 25 percent last year to an all- time high in December, according to the United Nations. Countries probably spent at least $1 trillion on imports, with the poorest paying as much as 20 percent more than in 2009, the UN says. In the U.S., the largest exporter, retail food rose 1.5 percent last year and will gain as little as 2 percent in 2011, the Department of Agriculture estimates. Governments from Beijing to Belgrade are boosting imports, limiting sales or releasing stockpiles to curb food inflation. Higher prices will push U.S. agricultural exports up 16 percent to a record $126.5 billion this year, according to a USDA forecast. While U.S. consumers haven’t been squeezed so far, grocers from Winn-Dixie Stores Inc. to SuperValu Inc. have said they plan increases. Commodities will keep rising, according to a Bloomberg survey of more than 100 analysts and traders.
Spike in global food prices contributes to Tunisian violence - The state of emergency in Tunisia has economists worried that we may be seeing the beginnings of a second wave of global food riots. Battered by bad weather and increasing demand from the developing world, the global food supply system is buckling under the strain. This month, the U.N. Food and Agricultural Organization (FAO) reported that its food price index jumped 32 percent in the second half of 2010 -- surpassing the previous record, set in the early summer of 2008, when deadly clashes over food broke out around the world, from Haiti to Somalia. An FAO report noted that "recent bouts of extreme price volatility in global agricultural markets portend rising and more frequent threats to world food security." In announcing the new numbers, Abdolreza Abbassian, the FAO's chief economist at the FAO, told reporters that "We are entering a danger territory.""Certainly the kind of weather developments we have seen makes us worry a little bit more that it may last much, much longer. Are we prepared for it? Really, this is the question," he said.
African Food Riots Spread To Persian Gulf As Oman Is Next; Adverse Implications For Oil Prices?- While deadly protests in Africa have been largely ignored, because, well, they are in Africa, and they don't even have iPads there and Kindle WhisperNet coverage is spotty if any, the world may be forced to start paying just a little more attention as food riots get ever closer to the center of the oil extraction infrastructure in the Persian Gulf. From BBC Monitoring, which discusses the latest outbreak of protests sweeping Oman 'Most participants in the protest were reluctant to be quoted as they were government employees. However, some said they protested against low salaries and soaring prices.' Luckily, for now the protest is still peaceful. The thing about hunger is that it doesn't go away if you ignore it. And as Oman borders the UAE, all it takes is for the riots to jump one more border and then it gets interesting. And to all those observent enough to note that soaring prices continue to occur in countries with 'growing unemployment' i.e., economic slack, and wonder how this is possible, after all the Fed said record slack can never lead to inflation, don't worry - you are certainly not alone.
Food Riots 2011 - The stunningly violent food riots in Tunisia and Algeria show just how quickly things can change. Just a few months ago, these two northern Africa nations were considered to be very stable, very peaceful and without any major problems. But now protesters are openly squaring off with police in the streets. In Algeria, several protesters have been killed by police and several others have actually set themselves on fire to protest the economic conditions. In Tunisia, more than 100 people have been killed and the president of that country actually had to flee for his life. But on a global scale, food shortages have not even gotten that bad yet. Yes, food prices are starting to go up and food supplies are a little bit tighter right now, but much worse times than these are coming. So what in the world are the cities of the world going to look like when we have a very serious food shortage? Just as we saw during the food riots of 2008, when people get to the point where they can't even feed themselves anymore, they tend to lose it. In the video posted below, you can really feel the desperation of these young Algerians as they riot in the streets....
When Rising Food and Energy Prices Begin to Wreak Havoc - This morning, we see Britain’s consumer price index grew in December to an annualized 3.7%. Fuel prices are growing at their fastest pace since July, and food prices are zooming at a rate last seen in May 2009. Like the US Federal Reserve, the Bank of England has an inflation “sweet spot” of 2%. But Britain’s CPI has been above 3% for 13 months now. Unlike in the United States, even the “core” rate of inflation in the UK is rising at an alarming 2.9%. “If history is any guide,” Chris Mayer contends, “inflation will likely get much worse. Everyone seems to know the US inflationary story of the 1970s. The official inflation rate hit nearly 14% by 1980.“Emerging markets have been a vital part of the investment story of the last decade, for sure. Yet rising food and energy prices pose a big risk to them. “In India, food prices are at their highest levels in more than a year, rising 18%. “In China, the typical Chinese also faces rising prices for nearly everything. The official inflation rate recently hit a 28-month high. But it’s the surging price of coal that may prove to be China’s Achilles’ heel, at least in the short term. Coal is what powers the great boom in China. And coal is at two-year highs.“The basics like food and energy are like brakes on these economies.”
Price Surge Reaches France's Heart as Baguette Makers Pass On Wheat Costs - “Liberty and baked bread” are all people really need, an old French proverb says. One of those is about to get more expensive as bakeries raise baguette prices to pass on surging grain costs. “We have no choice,” “Wheat prices have exploded. We’ll have to pass on 4 to 5 cents when flour prices start to rise, probably in February.” The French consume about 23 million baguettes a day -- more than 8 billion every year -- supplied by 33,000 bakeries and retailers such as Carrefour SA, the National Association of French Millers estimates. Wheat prices almost doubled in the past 12 months on NYSE Liffe in Paris, with March-delivery wheat closing at 251 euros ($336) a metric ton on Jan. 14, after a drought in Russia and floods in Canada and Australia wiped out crops.
Bringing tears to Indians' eyes - HEADLINES about the Indian economy—particularly in the international press—have in recent times been dominated by excitement about near double-digit growth and speculation about when (and whether) India is on track to start growing faster than China. But domestically, (and now elsewhere, too) the big economic—and increasingly political—issue is a familiar one: runaway inflation. The Indian press is obsessively following the price of onions, which saw a massive spike at the end of last year and the beginning of this one. On Twitter, Indians have noted sarcastically that at one point last week, the prices of a kilo of onions, a litre of petrol and a bottle of beer (presumably in some places, since alcohol taxes vary a lot by state because of state-level taxes) were all the same. Onions get a lot of attention in India partly because many people believe (perhaps rightly, I can’t claim to be sure) that they’re one of the things that even the poorest Indians buy (along with rice or wheat, cooking oil and salt).
What is so special about onions in India? - You might find it hard to believe, but high prices of onions can trigger the fall of the government in India. In 1998, a supply side shock led to a sharp increase in onion prices in the country and most notably, in the state of Delhi. In the following elections, the ruling party was routed in large part due to its failure to control the price of onions in the capital state. Today, onion prices in India are up again, rising by over 100% in just three weeks in December. On December 20th and 21st onion prices had skyrocketed to Rs 70-85/kg in major cities of India from Rs 30-35 in early December, due to crop damage caused by abnormal rainfall in the key growing states of Maharashtra and Karnataka. Realizing the possible political fallout as a result of the price increase, the government has moved swiftly this time to bring prices down. Apart from cracking down on hoarders, the government has lowered import duties on onions, ordered state-run trading agencies to import more onions from neighboring countries and banned the export of onions
Will Rising Food Prices Kill the Recovery? - If food costs more, will you buy any less? Surprisingly enough, that simple question may be the key to whether 2011 sees a strong rebound in economic growth, or is, instead, a bust. The issue is that raw food prices are indeed way up. Corn is at a two and a half year high. And some think it could rise by another 30% this year. Sugar was up 77% in the last six months of 2010. Beef prices are up as well. On the face of it, climbing food prices seem like a bad thing. It can cause inflation and cause people to buy less of everything else. Rising food prices have already lead to violent riots in Tunisia and Algeria. But a number of economists, including Goldman Sachs' Andrew Tilton and IHS Global Insight's Nariman Behravesh, say this time around, food prices won't necessarily be a recovery killer. Here's why:
A different kind of commodity price boom - A key idea in natural resource economics, called Hotelling's rule, says that non-renewable resource prices (oil, natural gas, coal, etc) should rise at about the rate of interest. The basic idea is that natural resources held in the ground and not sold need to earn a fair return, just like any other asset. That hasn't happened. The long-run trend has been flat or downward (the last few years exempted). Most economists have argued that the reason prices haven't increased is because extraction costs have declined. There have also been some complicated stories about depletion effects on extraction costs. These cost-related factors are very important for individual extracting firms, and may explain falling prices for a little while. But costs cannot really reconcile broad resource price trends with Hotelling's rule, which actually holds up pretty well, even with complex cost functions and rapid technological change (see this paper for technical detail of this obscure, but often overlooked point). In my rapidly aging (and unpublished) dissertation, I argued that a key reason prices haven't trended up is because prices have covaried negatively with the stock market and the aggregate economy.
The ‘food bubble’ is bursting, says Lester Brown, and biotech won’t save us - For years -- even decades -- Earth Policy Institute president and Grist contributor Lester Brown has issued Cassandra-like warnings about the global food system. His argument goes something like this: Global grain demand keeps rising, pushed up by population growth and the switch to more meat-heavy diets; but grain production can only rise so much, constrained by limited water and other resources. So, a food crisis is inevitable. In recent years, two factors have added urgency to Brown's warnings: 1) climate change has given rise to increasingly volatile weather, making crop failures more likely; and 2) the perverse desire to turn grain into car fuel has put yet more pressure on global grain supplies.
Monsanto Alfalfa Backed by Farm-Panel Republicans - Monsanto Co.’s genetically engineered seeds were endorsed by Republicans now holding power in the House Agriculture Committee who say opponents of the technology see dangers where there are none. “A product that has repeatedly been found safe should be deregulated,” panel Chairman Frank Lucas, Republican of Oklahoma, said during a committee meeting today to review the approval process for biotech products. Yesterday, Lucas and Senate Republicans Saxby Chambliss of Georgia and Pat Roberts of Kansas sent Agriculture Secretary Tom Vilsack a letter asking Vilsack’s department to “deregulate without conditions” genetically engineered alfalfa. Vilsack was scheduled to speak at today’s meeting.
10,000 Cattle Dead In Vietnam: Cows, Buffalo Part Of Mass Die-Off - In the latest of a string of mass animal deaths, 10,000 cows and buffalo have died in Vietnam. Vietnam's Ministry of Agriculture and Rural Development confirmed the news this week that more than 10,000 cows and buffalos died nationwide due to harsh weather conditions. Cattle have been dying throughout Vietnam, which has had a particularly intense winter. The northern mountainous province of Cao Bang was hardest hit with 2,260 dead cattle, per Thanh Nien News. Some have said the number of total dead cattle may be as high as 13,000. Mass animal deaths have been in the news quite a bit lately. Hundreds of birds were found dead in South Dakota early this week, and before that birds were found dead in Italy and birds fell from the sky in Arkansas, among other incidents.
EPA Said to Allow 15% Ethanol for Cars Made for 2001-2007 Years- The Environmental Protection Agency will grant a request from ethanol producers to raise the amount of the corn-based additive in gasoline for vehicles made for the 2001 model year and later, an administration official said. The agency as early as today will announce that refiners can add as much as 15 percent ethanol, up from 10 percent, said the official, who requested anonymity before the decision is made public. The agency in October allowed the 15 percent blend for vehicles made for 2007 and later. The EPA has been pressed by advocates for the ethanol industry to raise the limit to increase demand. U.S. carmakers and engine manufacturers last month asked an appeals court to force the agency to reconsider its October ruling. Oil companies, automakers and environmental groups say increasing ethanol in fuel may damage engines, boost food prices and worsen air quality, and refiners and convenience stores that sell fuel may be reluctant to market the new blend.
E.P.A. Approves Increased Ethanol in Auto Fuel -As reported Friday in The New York Times, the Environmental Protection Agency has approved ethanol formulations of 15 percent in unleaded gasoline, up from the 10 percent standard that is used in most of the country.Ethanol, derived primarily from corn in the United States — versus beet sugar and switchgrass in leading ethanol-producing nations like Brazil — has lost much of the buzz that surrounded it in 2008, when companies like E-Fuel envisioned ethanol pumps in every driveway. Still, the fuel enjoys federal backing because it is viewed as a “home-grown fuel,” according to Lisa P. Jackson, the E.P.A. administrator. Service-station owners, meanwhile, have noted that many of their pumps are not certified by Underwriters Laboratories to pump E15, and few are willing to incur the expense to replace equipment to accommodate the new formulation. And despite the E.P.A.’s assurances, some motorists and engine manufacturers still might require further convincing that higher formulations would not cause engine damage and thereby void vehicle warranties.
How many Senators does it take to screw a taxpayer? - When bipartisanship breaks out in Washington DC, check to make sure your wallet is still in your pocket. Every time you fill up your car this winter you are participating in the biggest taxpayer swindle in history. Forcing consumers to use domestically produced ethanol is one of the single biggest boondoggles ever committed by the corrupt brainless twits in Washington DC. Ethanol prices have soared 30% in the last year as the supplies of corn have plunged. Only a policy created in Washington DC could drive up the prices of gasoline and food, with the added benefits of costing the American taxpayer billions in tax subsidies and killing people in 3rd world countries.
Walker kills project to convert power plant to burn biofuels - A plan to spend $100 million on a boiler that would burn plant-based fuels at UW-Madison's Charter Street power plant was axed Thursday by Department of Administration Secretary Mike Huebsch. The DOA is overseeing the rebuild of the plant. Work will continue on outfitting the plant with new natural gas boilers. The cost of the project with the biofuel boiler would have been $250 million — the most expensive building project in the university's history. Huebsch halted spending on the boiler based on Walker's wishes. Walker, even before taking office, said he wanted the agency to focus instead on installing new natural gas boilers rather than the more expensive boiler that would be built to burn switchgrass, wood chips and other plant-based fuels grown in Wisconsin.
Tea party, environmentalists should join to ditch energy subsidies - With global warming deniers now in charge of the House, there would seem to be little hope for major legislation on clean energy or climate in this Congress. Even a member of his own party, West Virginia’s new senator, Joe Manchin, has boasted of extracting “a deep commitment and personal commitment” from Senate Majority Leader Harry Reid “that cap-and-trade is dead.”But all is not lost. If Obama wants to set us on a path to a sustainable-energy future -- and a green one too -- he should propose a very simple solution to the current mess: eliminate all energy subsidies. Yes, all of them -- oil, coal, gas, nuclear, ethanol, and wind and solar. Energy subsidies are the sordid legacy of more than 60 years of politics as usual in Washington. It would be better for national security, the balance of payments, the budget deficit and even the environment if we simply wiped the slate clean and let all energy sources compete for the future.
In Corrupt Global Food System, Farmland Is the New Gold - Famine-hollowed farmers watch trucks loaded with grain grown on their ancestral lands heading for the nearest port, destined to fill richer bellies in foreign lands. This scene has become all too common since the 2008 food crisis. Food prices are even higher now in many countries, sparking another cycle of hunger riots in the Middle East and South Asia last weekend. While bad weather gets the blame for rising prices, the instant price hikes of recent times are largely due to market speculation in a corrupt global food system. The 2008 food crisis awoke much of the world's investment community to the profitable reality that hungry people will do almost anything, even sell their own children, in order to eat. And with the global financial crisis, food and farmland became the "new gold" for some of the biggest investors, experts agree. In 2010, wheat futures rose 47 percent, U.S. corn was up more than 50 percent, and soybeans rose 34 percent. "We have set up a global food system that supports speculation. And with [such] markets, we can't get speculators out of the food business," "Farmland is better gold than gold for speculators,"
The Mass Extinction of Scientists Who Study Species - We are currently in a biodiversity crisis. A quarter of all mammals face extinction, and 90 percent of the largest ocean fish are gone. Species are going extinct at rates equaled only five times in the history of life. But the biodiversity crisis we are currently encountering isn’t just a loss of species, it’s also a loss of knowledge regarding them. Scientists who classify, describe and examine the relationships between organisms are themselves going extinct. The millions of dollars spent globally on technology to catalog species may actually be pushing out the people we rely upon: taxonomists and systematists. We’re like young children frantic to add new baseball cards to our collections, while the actual creators of the baseball cards themselves are vanishing.
Researchers aim to resurrect extinct mammoth in five years - Japanese researchers will launch a project this year to resurrect the long-extinct mammoth by using cloning technology to bring the ancient pachyderm back to life in around five years time. The researchers will try to revive the species by obtaining tissue this summer from the carcass of a mammoth preserved in a Russian research laboratory, the Yomiuri Shimbun reported. Under the plan, the nuclei of mammoth cells will be inserted into an elephant's egg cell from which the nuclei have been removed, to create an embryo containing mammoth genes, the report said. The embryo will then be inserted into an elephant's uterus in the hope that the animal will eventually give birth to a baby mammoth.
With health care ‘repealed,’ GOP turns to climate change - Now that the House of Representatives has voted to repeal the health care law, Republicans say they’re likely to move soon to another target — a rewrite of the Clean Air Act so that it can’t be used to fight climate change. The Environmental Protection Agency in December said it would draw up performance standards that would help cut heat-trapping gases produced by refineries and coal-fired power plants. The EPA hasn’t proposed the specifics yet, and existing plants wouldn’t be affected until the later years of the decade, but opponents of regulation aren’t waiting.The new chairman of the House Energy and Commerce Committee said he'd have hearings about the impact of the EPA's emission reduction plan on jobs. "Standing up for American workers and addressing EPA's rampant regulations is a top priority, Rep. Fred Upton, R-Mich., said Thursday. "We will be active and aggressive using every tool in the toolbox to protect American jobs and our economy by rolling back the job-destroying (greenhouse gas) regulations."
2010 Tied for Warmest Year on Record, NASA Research Finds - Global surface temperatures in 2010 tied 2005 as the warmest on record, according to an analysis released Jan. 12, 2011 by researchers at NASA's Goddard Institute for Space Studies (GISS) in New York. The two years differed by less than 0.018 degrees Fahrenheit. The difference is smaller than the uncertainty in comparing the temperatures of recent years, putting them into a statistical tie. In the new analysis, the next warmest years are 1998, 2002, 2003, 2006, 2007 and 2009, which are statistically tied for third warmest year. The GISS records begin in 1880. The analysis found 2010 approximately 1.34 F warmer than the average global surface temperature from 1951 to 1980. To measure climate change, scientists look at long-term trends. The temperature trend, including data from 2010, shows the climate has warmed by approximately 0.36 F per decade since the late 1970s. "If the warming trend continues, as is expected, if greenhouse gases continue to increase, the 2010 record will not stand for long," said James Hansen, the director of GISS.
Top 10 global weather events of 2010 - A panel of weather and climate experts ranked the the Top 10 global weather and climate events of 2010. Voters considered the scope and unusualness of the event, its immediate human and economic impact, and whether it is emblematic of climate trends or variability. They voted during the first week of December, so the following weeks' extreme winter weather in Europe, which may have deserved a spot in the Top 10, received an honorable mention.
$#*! My Texas AG Says: “It is almost the height of insanity of bureaucracy to have the EPA regulating something that is emitted by all living things.” - You can’t make this crap up. KERA Dallas reports (with audio!):Texas is the only state that has refused to establish a greenhouse gas permit process…. [Texas AG Greg] Abbott: “Congress did not authorize the EPA to regulate greenhouse gases. One of the key greenhouse gases the EPA is regulating is carbon dioxide. It is almost the height of insanity of bureaucracy to have the EPA regulating something that is emitted by all living things.”So the EPA shouldn’t regulate the discharge from living things. I guess the Texas AG just wants crap all over the place. Literally. [Insert your joke about sewage treatment here.] Of course, the carbon dioxide emissions from living things don’t throw the carbon-cycle horribly out of balance — industrial emission do (see “Humans boosting CO2 14,000 times faster than nature, overwhelming slow negative feedbacks“).
Stuff Happens - Krugman - Joe Romm has some fun with the Texas Attorney General, who declares himself opposed to regulation of CO2 on the grounds that It is almost the height of insanity of bureaucracy to have the EPA regulating something that is emitted by all living things. As Joe points out, this argument says that we should adopt an equally laissez-faire attitude toward sewage. But hey, there was a time when conservatives did, in fact, argue for doing nothing about effluent of any kind. In the years leading up to the Great Stink of 1858, which finally got the British to build a London sewer system, The Economist editorialized against any such foolish notion (pdf): suffering and evil are nature’s admonitions—they cannot be got rid of. Or, to put it (almost) in the modern vernacular, stuff happens. And given the way we’re heading — with politicians arguing that the federal government has no right to ban child labor — don’t be surprised to see the anti-sewer movement making a comeback, and to see elected representatives, even if they know better, holding their noses and going along.
Population: one planet, too many people? (report) A groundbreaking Population report (Wed 12 January) by the Institution of Mechanical Engineers (IMechE) has revealed the world is hurtling towards population overload placing billions at risk of hunger, thirst and slum conditions. Population: One planet, too many people? is the first report of its kind by the engineering profession. Unless the engineering solutions highlighted in the report are urgently implemented then the projected 2.5 billion more people on earth by the end of this Century (currently there is 6.9 billion) will crush the earth’s resources. Urbanisation will soar. ‘Mega-cities’ of more than 10 million people will rise to 29 by 2025 and the urban population will increase from 3.3 billion (2007) to 6.4 billion (2050). Food will also become an increasingly precious commodity and developed areas such as the UK will be forced to stamp out its ‘throwaway’ lifestyle. Water consumption will increase by 30% by 2030 and there is projected to be a 50% hike in water extraction for industrial use in Asia. This, the report states, could create civil unrest and land battles for resources as climate change looms.
The Mediterranean Sea: The Other Great Garbage Patch - If you think the Great Pacific Garbage patch is bad (which it is, despite recent news reports), just imagine all that trash smooshed into a nearly land-locked sea surrounded by even higher human population densities. Welcome to the modern Mediterranean—the historic heart of western civilization, now pumped full of all its crap. Preliminary surveys of the surface of the Mediterranean taken this summer reveal that the top several inches of the sea are swarming with plastic—more than 250 billion pieces across the entire Med. This equates to nearly 500 tons of garbage and presents an enormous threat to wildlife and challenge to the many fisheries and other industries that depend upon a healthy sea—and its famous beaches. Most of the plastic particles found were "micro-debris" with weights of 1.8 milligrams or less. These particles mix in with plankton and are then ingested by small fish which in turn are consumed by larger fish, which then wind up on our dinner plates. Not only can the plastic particles physically harm wildlife, but as accumulators of toxins, they can also poison them—and us.
Temperatures way way above normal in northeastern Canada; Hudson Bay still not frozen over Some fascinating weather has unfolded across the Northern Hemisphere over the last month, but you may have only heard about part of it. The media dutifully reported on the heavy snow that battered the mid-Atlantic and New England states in late December. It was also the United Kingdom’s coldest December in at least the last century. Meanwhile, the sparsely populated Canadian Arctic basked in near-unprecedented mildness. It’s the second chapter of a tale that began a year ago, when Canada as a whole saw the warmest and driest winter in its history. Much of the blame went to El Niño, which typically produces warmer-than-average weather across Canada. So far, so good—but similar things are happening this winter, even with a La Niña now at the helm. Just how mild has it been? The map at right shows departures from average surface temperatures for the period from December 17, 2010, to January 15, 2011, as calculated by NOAA’s Earth Systems Research Laboratory. The blue blip along the southeast U.S. coast indicates readings between 3 and 6 °C (5.4–10.8 °F) below average for the 30-day period as a whole. That’s noteworthy—and in fact, it was the coldest December in more than a century of record-keeping across south Florida (see PDF summary). Blue also shows up across the UK, where December averaged 5.2 °C (9.4 °F) below normal.
New Melt Record for Greenland Ice Sheet - New research shows that 2010 set new records for the melting of the Greenland Ice Sheet, expected to be a major contributor to projected sea level rises in coming decades. "This past melt season was exceptional, with melting in some areas stretching up to 50 days longer than average,” said Dr. Marco Tedesco, Director of the Cryosphere Processes Laboratory at the City College of New York (CCNY – CUNY), who is leading a project studying variables that affect ice sheet melting.“Melting in 2010 started exceptionally early at the end of April and ended quite late in mid- September.” The study, with different aspects sponsored by World Wildlife Fund (WWF), the US National Science Foundation (NSF) and NASA, examined surface temperature anomalies over the Greenland ice sheet surface, as well as estimates of surface melting from satellite data, ground observations and models. In an article published today in Environmental Research Letters, Dr. Tedesco and co-authors note that in 2010, summer temperatures up to 3°C (5.4°F) above the average were combined with reduced snowfall.
Gareth Renowden, Hot Topic: 2010 GREENLAND ICE SHEET MELT SETS NEW RECORD, 2011 STARTS WARM - he 2010 ice melt season on the Greenland ice sheet (see video) set new records, according to Marco Tedesco, director of the Cryospheric Processes Laboratory at the City University of New York. The melt season was “exceptional,” Tedesco said. Melting in some areas lasted as much as 50 days longer than average, starting very early at the end of April and ending later than usual in mid-September. During the summer, temperatures over large parts of Greenland were as much as 3 ºC above average, snowfall was below average, and the capital, Nuuk, had its warmest spring and summer since records began in 1873.Tedesco is lead author of a paper published today, The role of albedo and accumulation in the 2010 melting record in Greenland(*), which integrates weather, satellite and ground data with modelling to build a detailed picture of the melt season. Here’s the abstract:
Marco Tedesco: Greenland ice melt sets a record — and could set the stage for sea level rise - Greenland’s ice sheet melted at a record rate in 2010, and this could be a major contributor to sea level rise in coming decades.The ice in Greenland melted so much last year that it formed rivers and lakes on top of the vast series of glaciers that covers much of the big Arctic island, with waterfalls flowing through cracks and holes toward the bottom of the ice sheet. Take a look at video from Marco Tedesco of City College of New York, who is leading a project to study what factors affect ice sheet melting. The photo at left shows a camp by the side of a stream flowing from a lake — all of it on top of the ice sheet."This past melt season was exceptional, with melting in some areas stretching up to 50 days longer than average,” Tedesco said in a statement. “Melting in 2010 started exceptionally early at the end of April and ended quite late in mid- September.”
Loss of reflectivity in the Arctic doubles estimate of climate models - A new analysis of the Northern Hemisphere's "albedo feedback" over a 30-year period concludes that the region's loss of reflectivity due to snow and sea ice decline is more than double what state-of-the-art climate models estimate. The findings are important, researchers say, because they suggest that Arctic warming amplified by the loss of reflectivity could be even more significant than previously thought. The study was published online this week in Nature Geoscience. It was funded primarily by the National Science Foundation, with data also culled from projects funded by NASA, the Department of Energy and others. "The cryosphere isn't cooling the Earth as much as it did 30 years ago, and climate model simulations do not reproduce this recent effect," said Karen Shell, an Oregon State University atmospheric scientist and one of the authors of the study. "Though we don't necessarily attribute this to global warming, it is interesting to note that none of the climate models used for the 2007 International Panel on Climate Change report showed a decrease of this magnitude."
Global warming: Impact of receding snow and ice surprises scientists - The seasonal cooling effect of light-reflecting snow and ice in the Northern Hemisphere may be weakening at twice the rate predicted by climate models, a new study shows, accelerating the impact of global warming. The study, which appeared online Sunday in the journal Nature Geoscience, represents a first cut at trying to calculate from direct measurements the impact of climate change on the Northern Hemisphere's cryosphere. The study was conducted by a team of federal and university scientists who examined data gathered between 1979 and 2008. Of particular interest is a self-reinforcing process, or feedback, though which warming reduces snow and ice cover. Those reductions expose more ocean and landscape to sunlight during spring, summer and fall. After absorbing the sunlight, these exposed features radiate the heat back into the atmosphere. This accelerates the loss of snow and ice already triggered by global warming.
World Meteorological Organization: 2010 equals record for world’s hottest year and the “data confirm the Earth’s significant long-term warming trend.” - 2010 "characterized by a high number of extreme weather events" In 2010, global average temperature was 0.53°C (0.95°F) above the 1961-90 mean. This value is 0.01°C (0.02°F) above the nominal temperature in 2005, and 0.02°C (0.05°F) above 1998. The difference between the three years is less than the margin of uncertainty (± 0.09°C or ± 0.16°F) in comparing the data…. Arctic sea-ice cover in December 2010 was the lowest on record. The World Meteorological Organization announcement follows fast on the heels of the release of NOAA and NASA data showing 2010 tied with 2005 for hottest year on record. WMO takes into account data from NASA, NOAA and UK Meteorological Office Hadley Center, as well as the satellite data, which is why 1998 is so close. .
Must-read Hansen and Sato paper: We are at a climate tipping point that, once crossed, enables multi-meter sea level rise this century - Right now, we’re headed towards an ice-free planet. That takes us through the Eemian interglacial period of about 130,000 years ago when sea levels were 15 to 20 feet higher, when temperatures had been thought to be about 1°C warmer than today. Then we go back to the “early Pliocene, when sea level was about 25 m [82 feet] higher than today,” as NASA’s James Hansen and Makiko Sato explain in a new draft paper, “Paleoclimate Implications for Human-Made Climate Change.” The question is how much warmer was it in the Eemian and early Pliocene than today — and how fast can the great ice sheets disintegrate? We already know we’re at CO2 levels that risk catastrophe if they are sustained or exceeded for any extended period of time (see Science: CO2 levels haven’t been this high for 15 million years, when it was 5° to 10°F warmer and seas were 75 to 120 feet higher).
Straight Talk with Paul Kedrosky: Don't Count on Technology To Save Us - You spend your time focusing on the intersection of entrepreneurship, innovation and the future of risk capital. From your vantage point, what are the most important trends you see right now to be driving – or threatening – the advancement of our society? The list is endless. High on that list, however, is financialization: the absurd, uneconomic and disastrous distortions introduced into the U.S. economy by its overreliance on the financial sector. We are losing many of our best engineers, scientists, and others to the financial sector at precisely the time that we face some of the most difficult problems in history -- precisely the sorts of problems that these people could help us with, were they not too busy creating exotic financial instruments to trade with one another.
Scientists Warn California Could Be Struck By Winter ‘Superstorm’ - A group of more than 100 scientists and experts say in a new report that California faces the risk of a massive "superstorm" that could flood a quarter of the state's homes and cause $300 billion to $400 billion in damage. Researchers point out that the potential scale of destruction in this storm scenario is four or five times the amount of damage that could be wrought by a major earthquake. It sounds like the plot of an apocalyptic action movie, but scientists with the U.S. Geological Survey warned federal and state emergency officials that California's geological history shows such "superstorms" have happened in the past, and should be added to the long list of natural disasters to worry about in the Golden State.
California’s ‘Big One’ could be massive ‘superstorm’ that floods state: scientists - The planet's rising temperatures mean California is at greater risk of a "superstorm" that could flood the state's Central Valley, causing damage that would dwarf even a major earthquake, scientists have warned. At a conference in Sacramento last week, 117 researchers brought together to study flooding risks in California presented a chilling model they say could become a distinct possibility: A winter storm that brings warm South Pacific air over parts of California, creating an "atmospheric river" that could bring 10 feet of rain over 40 days, flooding large tracts of the state and bringing flood water to nearly a quarter of the state's homes. Such a storm could bring water into California at a rate equivalent to that of 50 Mississippi rivers, the climate model projected. As sensational as that scenario sounds, researchers say it's based in historical reality: Such storms have hit California before, most notably in 1861 and 1862, when floods turned a 300-mile stretch of the Central Valley into a lake. The New York Times reports:
Stiglitz: Green policies offer life to economies - Green policies could prove a tonic for the ailing global economy, according to Nobel economics laureate Joseph Stiglitz. In a lecture at the Reserve Bank yesterday, the former World Bank chief economist said the need to switch to green technology should be seen as an opportunity and not a burden. “Some of this way of thinking – of focusing on the costs and not the opportunities – has contributed to getting us bogged down,” Stiglitz said. He was referring to the failure to achieve an international agreement on how to curb greenhouse gas emissions, which are changing climate patterns around the world. He argued that a switch to green technology would stimulate demand for a range of goods and services, which would have a beneficial impact in the aftermath of the global recession. And he urged policymakers not to be held back by short-term perspectives.
Savoring the Horse and Rabbit Stew - Will technological innovation be cranked up to tackle the problem of climate change? To anyone who thinks about the course of events since, say, 1939, it is obvious that innovation policy can be a very powerful tool in emergencies that involve a common enemy. The list of technologies that governments pioneered includes nuclear energy, jet engines, satellites, modern medical technologies, computers and the Internet. Only recently, though, have economists begun thinking systematically about directed technical change as a major weapon against global warming. One of the most interesting sessions at the economic meetings in Denver last week, organized by Nicholas Stern, author of an influential report on global warming for the British Treasury, had to do with such measures. Here were three good investigations, built around a theory paper, “The Environment and Directed Technical Change,” by Daron Acemoglu (of the Massachusetts Institute of Technology), and Philippe Aghion, Leonard Bursztyn and David Hemous (all of Harvard), fifteen experts altogether engaged in a lively discussion of something that really matters.
Shell Chief Executive Says ‘Clock is Ticking to Mitigate Climate Change - Royal Dutch Shell Plc’s chief said the implementation of climate change agreements made at Cancun last month “won’t happen overnight”, and policymakers must take action now “because the clock is ticking.” “In the short term, we should focus on areas where we can get the cheapest and quickest carbon dioxide reductions,” Chief Executive Officer Peter Voser said at a renewable energy conference in Abu Dhabi today. “It will take a while for international standards to be implemented, but we are of the opinion that we have to move now.” Voser offered four ways for policymakers to begin reducing CO2 emissions: energy efficiency, increased use of natural gas, carbon capture and storage projects, and biofuels
ExxonMobil warns carbon emissions will rise by 25% in 20 years. Rise predicted in annual ExxonMobil energy outlook effectively dismisses hopes that runaway climate change can be prevented - ExxonMobil, the world's largest oil company, expects global carbon emissions to rise by nearly 25% in the next 20 years, in effect dismissing hopes that runaway climate change can be arrested and massive loss of life prevented. According to the company's annual Outlook for Energy report – due to be published in the next few weeks – demand for power will increase by nearly 40% in the next 20 years, lifting emissions by around 0.9% a year at least until 2030. Beyond 2030, it says, any progress on cuts will require "more aggressive gains in energy efficiency as well as the use of less carbon-intensive fuels. New technologies will by then be essential.". "It is a significant rise [in emissions], but it is substantially slower because of [expected] improved efficiency and a shift towards lower carbon fuels," says the report, previewed today at the World Future Energy conferencein Abu Dhabi.
Fraudsters Tap Carbon Offset Mkt, Climate Scientists - Built it, and they will scam. This seems to be the mantra of money-hungry fraudsters everywhere, even in the carbon-credit and global warming fields, both recent targets of pilferers. The EU, for one, has suspended trading on its carbon market because hackers have lifted millions of dollars in credits from the computerized system. From the Wall St Journal: “The European Commission will suspend transactions, except for allocation and surrender of allowances, in all EU ETS [Emissions Trading System] registries at least until 26 January 2011,” it said in a statement. The suspension went into effect late Wednesday in Europe.
Solar Firms Frustrated by Permits - Fifteen Verengo employees, Mr. Button said, are dedicated solely to researching and tailoring permit applications to meet the bureaucratic idiosyncrasies of the dozens of towns in the company’s market. And because most jurisdictions require applications to be submitted in person, Verengo employs two “permit runners” whose only job, Mr. Button said, is to “take those permit packs and physically drive them around, stand in line, and pay the fees.” “We have 50 different permitting authorities within 50 miles of our office,” Mr. Button said. “They all have different documentation requirements, different filing processes, different fee structures. It’s like doing business in 50 different countries — just in Southern California.” His lament is being echoed by solar companies across the country. In a new study, the industry estimates that the permit dance adds an average of $2,500 in costs to each installation, and streamlining things could provide a $1 billion stimulus to the residential and commercial solar power market over the next five years.
Lack of Transmission Lines Is Restricting Wind Power - Texas is in the midst of a wind-power boom, and at the heart of it lies a conundrum: While plenty of ranchers are eager to host wind turbines, few want the unsightly high-voltage transmission lines needed to carry the power to distant cities running through their property. The lack of transmission lines — and the relatively low price of natural gas — has thwarted the ambitions of wind-power advocates to expand the use of this alternative energy source in Texas. The oilman T. Boone Pickens, for example, bet heavily on wind a couple of years ago, ordering hundreds of turbines and announcing plans to build the world’s largest wind farm in the Panhandle at a cost of up to $12 billion. He later scaled back, canceling some of the turbine orders, giving up his land lease and saying he was looking elsewhere to build.
BPA won’t pay negative prices for wind power - At a December 2010 meeting, the federal Bonneville Power Agency announced that it would not pay wind power producers in its area to curtail during overgeneration events that sometimes result from the way the agency manages water flow through hydropower facilities to comply with environmental regulations. When reservoirs are full, the BPA’s dams can either generate power or spill any excess water. High water conditions common during late spring in the Pacific Northwest sometimes put the BPA up against environmental limits on how much water it can spill, so driving it to want to produce and distribute as much power as possible. (Spilling too much water leads to high concentrations of dissolved gas in the water, a hazard to fish.) In the past, BPA would essentially give away power in order to maximize power generation, and utilities in the area were happy to take the cheap power and shut down their thermal power plants which were costly to run. Over the past few years, however, the growth of wind power in the BPA’s area has presented the agency with a new problem. Wind power producers who can obtain from $20 to $40 per MWh in federal and state subsidies while they are producing power don’t want to shut down for nothing. If the BPA wants to curtail them, they’d like to be compensated for their losses. The BPA says it will not pay; in a statement it explains why
In Ventura, a retreat in the face of a rising sea - Construction crews are removing a crumbling bike path, ripping out a 120-space parking lot and laying down sand and cobblestones. The effort by the city of Ventura is the most vivid example to date of what may lie ahead in California as coastal communities come to grips with rising sea levels and worsening coastal erosion. As the coastline creeps inland, scouring sand from beaches or eating away at coastal bluffs, landowners will increasingly be forced to decide whether to spend vast sums of money fortifying the shore or give up and step back. "Managed retreat, as it's called, is one of the things that we're going to have in our quiver to deal with sea-level rise and increasing storms," Sea levels have risen about 8 inches in the last century and are expected to swell at an increasing rate as climate change warms the ocean, experts say. In California, the sea is projected to rise as much as 55 inches by the end of the century and gobble up 41 square miles of coastal land, according to a 2009 state-commissioned report by the Pacific Institute.
A bad climate for global warming - Last week, the National Oceanic and Atmospheric Administration and NASA’s Goddard Institute for Space Studies announced that 2010 had registered as the hottest year on record. Nothing new here: nine of the last 10 years have been among the warmest ever.The news highlighted one of Washington’s biggest failures over the last two years: its inability to advance climate legislation. It was also a grim reminder that things could get worse. Some crucial policy areas have always been neglected and some initiatives stalled. But rarely has a first-order concern like the nation’s climate and energy policy actually regressed — and so dramatically as we’ve seen since the last presidential election.
Thinking through the climate change challenge - Open letter - Late last year, a group of leading thinkers on environmental policy met at the Sustainable Consumption Institute at the University of Manchester for a conference in honour of Nobel economics Laureate Tom Schelling.1 At the event we formulated guidance for policymakers which draws on work that Schelling (perhaps best known for his pioneering efforts on nuclear deterrence) has done on climate change. The analysis here relies on his concept of identifying “focal points” on which agreements can be based, and his emphasis on designing policies that are credible as well as easily monitored and enforced.
Study claims 100 percent renewable energy possible by 2030 - Achieving 100 percent renewable energy would mean the building of about four million 5 MW wind turbines, 1.7 billion 3 kW roof-mounted solar photovoltaic systems, and around 90,000 300 MW solar power plants. Mark Delucchi, one of the authors of the report, which was published in the journal Energy Policy, said the researchers had aimed to show enough renewable energy is available and could be harnessed to meet demand indefinitely by 2030. Delucchi and colleague Mark Jacobson left all fossil fuel sources of energy out of their calculations and concentrated only on wind, solar, waves and geothermal sources. Fossil fuels currently provide over 80 percent of the world’s energy supply. They also left out biomass, currently the most widely used renewable energy source, because of concerns about pollution and land-use issues. Their calculations also left out nuclear power generation, which currently supplies around six percent of the world’s electricity.
Climate Change Could Happen Much Faster Than Previously Thought - Humans are in danger of making large parts of the Earth uninhabitable for thousands of years because of man made climate change, according to new evidence based on geological records. The US study predicted that if society continues burning fossil fuels at the current rate, atmospheric levels of carbon dioxide could rise from the current level of 390 parts per million (ppm) to 1,000 by the end of this century"The last time the world had such high levels of carbon dioxide temperatures were on average 29F(16C) above pre-industrial levels. Evidence has been found of crocodiles and palm trees at the Poles and only small mammals were able to survive. Jeffrey Kiehl, of the National Center for Atmospheric Research (NCAR), who carried out the study, said the Earth could return to such temperatures over hundreds or even thousands of years. But unlike last time, when it happened over millions of years, temperatures will rise too fast for species to adapt and change.
A world in breakdown - The events of a single day in three continents are a lesson in the interlocking crises that will define the decade. A recurrent theme in this series of columns is that in the second decade of the 21st century the global community faces grave insecurities in three areas: the environment, conflict, and the economy. The interlocking nature of these problems makes them all the more severe; the seductive view propagated by power-holders that they are temporary aberrations makes them all the more difficult to address. Yet in face of evasion and denial there are occasions - even single days - when elements of all three issues combine in an illuminating way. 12 January 2011, and the events that happened then on three continents, was one such.
Masters on Brazilian floods: Brazil’s deadliest natural disaster in history - The role of near-record sea surface temperatures - Following fast on the heels of another extreme drought hitting the Amazon comes devastating Brazilian floods. According to scientists, this climate-whipsawing from mega-drought to mega-flood will become increasingly common as human emissions intensify the hydrological cycle (see Study: Global warming is driving increased frequency of extreme wet or dry summer weather in southeast, so droughts and deluges are likely to get worse). Indeed, it’s just happened to both Australia and this country (see “Hell and High Water hits Georgia“). In this Wunderblog repost, Meteorologist and former hurricane hunter Dr. Jeff Masters has the story — and an analysis of the “departure of temperature from average for the moisture source regions of the globe’s four most extreme flooding disasters over the past 12 months”
Brisbane floods: before and after - ABCNews interactive - High-resolution aerial photos taken over Brisbane last week have revealed the scale of devastation across dozens of suburbs and tens of thousands of homes and businesses. The aerial photos of the Brisbane floods were taken in flyovers on January 13 and January 14. Hover over each photo to view the devastation caused by flooding.
Steel price rise stokes inflation concerns - The price of steel has risen more than a third in two months, adding to global inflationary pressures as food and energy costs are also soaring. Floods in Queensland have severely disrupted global supplies of coking coal, a major steelmaking ingredient, prompting a scramble among manufacturers to stock up on steel. That has pushed the price of benchmark US hot-rolled coil steel 37 per cent higher since early November to a two-year high of $783 a tonne, said CRU, a consultancy. The Australian state accounts for more than 50 per cent of coking coal supply to the global seaborne market, on which steel mills in Asia, and to a lesser extent, western Europe rely. Spot cargoes of coking coal have traded as high as $350 a tonne – up 55 per cent from quarterly contracts agreed at $225 just a few weeks ago. Iron ore, the other major ingredient in steel, is rapidly rising towards record high prices, with benchmark grades delivered to China up 20 per cent since the start of November at $178.30 a tonne. “The Queensland floods are giving a shot in the arm to steel prices. People are scrambling to get supplies,”
Coal Prices Gain as Floods in Australia Curb Supplies - Power station coal prices rose for a seventh week to a more than two-year high and steelmaking coal gained 5.7 percent after heavy rain and flooding curbed output in Australia, the world’s biggest exporter of the fuel. The price for thermal coal at the port of Newcastle in New South Wales, the benchmark for Asia, jumped $6.70, or 5.1 percent, to $138.50 a metric ton in the week ended Jan. 14, the highest since September 2008, according to IHS McCloskey, a Petersfield, U.K.-based provider of coal data. Queensland’s worst flooding in 50 years may have cost A$2.3 billion ($2.3 billion) in lost coal sales, Queensland Resources Council estimates, with only 15 percent of the state’s mines operating at full production. “We’re loading everything we possibly receive. It comes back to the ability of the mines to supplement the stockpiles that we’re drawing down. We’re kind of hand-to-mouth at the moment.”
Wage and inflation risks loom after Australia floods (Reuters) - Extensive reconstruction after Australia's floods risks fuelling a wages blow-out, as flooded states and the booming resource sector bid for scarce workers, which will in turn push up inflation and add pressure for a tightening of interest rates. The initial impact of flooding in four states is an expected 1 percentage point drop in gross domestic product growth for Australia's A$1.3 trillion economy, with reconstruction costs ranging from A$3 billion to A$20 billion. But most analysts see a short-term "V" shaped recovery when $24.5 billion annual coking coal exports fully resume to Asia. The government has pledged to return the budget to surplus by 2012-13, as promised before the floods, but the pledge may be tested if the forecasts of more extreme weather in the next two months proves true and resource exports are again hit. The more worrying long-term scenario facing the economy and government is that Australia does not have enough skilled labour for both its booming mining industry and flood reconstruction, particularly in Queensland state where an areas as big as South Africa has been hit by floods. The government may have little option but to increase skilled migration, a sensitive issue with voters, if it is to avoid the greater political risk of a wages blow-out and rising inflation and interest rates which will hurt voters.
Report reveals flooding’s massive impact on farms and mining - THE devastation from recent floods will cost the Australian agricultural sector $500-600 million, while coal exports will take a $2-2.5 billion hit in 2010-11, according to a new report. 'The Australian Bureau of Agricultural and Resource Economics and Sciences says coal exports could fall by 15 million tonnes between December 2010 and March 2011 as a result of the floods. The figures are, however, just an initial estimate of the impact of the recent floods in Queensland, NSW and Victoria. The impact of the floods on fruit and vegetables, cotton, grain sorghum and winter crops has been significant, according to the report out today. ABARES deputy executive director Paul Morris said while it was too early to assess the full impact of the flood, the information in the initial report had been gathered from reliable sources including grain handlers, marketing organisations, agricultural and mining companies, state departments, transport authorities, the Bureau of Meteorology and satellite imaging.
La Niña as Black Swan – Energy, Food Prices, and Chinese Economy Among Likely Casualites -- Yves Smith - Reader Crocodile Chuck highlighted an important post at Houses and Holes, an economics-oriented Australian blog. While Australia is reeling from the immediate impact, the broader impact of 2010-11 weather patterns may have much bigger ramifications for food and energy prices in Australia and abroad. The post focuses on the possibility, increasingly endorsed by top meteorologists, that the heavy Australian rains are the result of a super La Niña, the last of which was seen in 1973-4,the time of the last severe flooding in Queensland. Super La Niñas are hugely disruptive to agricultural production and can have other nasty knock-on effects (some contend the 1917 La Niña helped spawn the 1918 influenza pandemic). In this case, the damage of a super La Niña will not only increase food costs at a time when price rises and food scarcity are already a major concern, but will likely extend to energy prices as well. That one-two punch would be particularly devastating to China. In Australia, fruit and vegetable prices are projected to increase 30% this year as a result of La Niña. And recall Australia is a major agricultural exporter, so production shortfalls there will hit other markets. Super La Niñas tend to impair food output overall. 2007-8 saw a borderline super La Niña, and we saw sharply higher food prices in the first half of that year. Note that the UN’s Food and Agriculture Organisation reports that staples are already more costly than at any time in 2008.
Water in the Hole: Postcard From Australia - As a follow up to last week’s post, China Lights, Global Floods, Australian Coal, I’ve helpfully received various emails, reports, and some photographs from friends and contacts in New Zealand and Australia. Below is a classic Before and After portrait of the Baralaba Mine, flooded by the Dawson River. I also spoke with Max Keiser this week about the floods in Australia and their impact not only on coal production, but overall global energy supply. | see: On the Edge with Max Keiser, Gregor Macdonald interview 14 January 2011. One point that I could have made a bit more clearly in my conversation with Max relates to the measurable divergence now observed between the frequency of geophysical catastrophes and weather-related disasters. This is an important, statistically meaningful trend that has caught the eye of the insurance industry and was clearly visible to me when I saw the recent Munich Re Report on catastrophe-losses to the industry. Better still, Joe Romm at Climate Progress communicated directly with Munich Re about the report:
West Virginia mountain-top removal coal mining equals job removal, job killer, bad health, polluted streams - We will start today’s post with a simple hypothesis. Mountaintop removal means FEWER mining jobs for Appalachia. We will go into the correlation with poverty, the horrific physical health problems, the desperate need for economic diversification in the region, the permanent aquatic impacts, the other opportunities Appalachian Voices’ and others are fighting for, and how Appalachian coal is in permanent decline. But for now, lets review why mountaintop removal has been a decades long NIGHTMARE for fans of job creation in Central Appalachia. Mountaintop removal mining is designed specifically to remove the miner from the process, replacing manpower with machinery, and lowering the coal companies’ overhead cost. Coal mining employs fewer people today than it did at the turn of the 19th century. West Virginia, which once employed over 130,000 coal miners, now has a coal mining workforce of about 20,000 miners. Declining coal production and productivity in central Appalachia ensures that this downward trend will continue.
A Clear No for the Spruce Mine - If the Obama administration stays the course, the Environmental Protection Agency’s decision last week to revoke a permit for one of the nation’s biggest mountaintop-removal mining projects could be the beginning of the end of a mining practice that has caused huge environmental harm across Appalachia... The Spruce No. 1 Mine, owned by Arch Coal, would have required dynamiting the tops off mountains over an area of 2,278 acres to reach subsurface coal seams. The resulting rubble, known as spoil, would then be dumped into the valleys and streams below — ruining, by the E.P.A.’s estimate, six miles of high-quality streams and causing “unacceptable” damage to the environment. Thousands of miles of streams in Appalachia have already been poisoned in this manner in clear violation of the Clean Water Act.
Increased insurance claims may be due to climate change - According to Scientific American, this past year saw an increase in natural disasters in the United States. There were 247 blizzards, thunderstorms and floods. The total number of such disasters in 1980 were 60. There has also been an increase in “meteorological disasters”. In 1980 there were a little over 50 damaging storms. In 2010 that number had climbed to 150. Yes, some of the increase is due to urban sprawl. People With people moving into areas previously unoccupied, disasters in those areas are now being felt by insurance companies as well as the insured. One such example is the amount of devastation that occurred only from thunderstorms last year. That figure is $9 billion which is a 500 percent increase over 1980. The above $9 billion dollar figure does not include the losses from last winters snow storms, December’s snow storms and the California floods. Munich Reinsurance has detected what seems to be a changing weather pattern.But it’s likely that the number of strong storms involving rain, snow and hail is also rising because of warming temperatures, says Ernst Rauch, who heads the company’s Corporate Climate Center. “We believe we see indications that weather patterns — so the frequency and intensity of convective storms — in some parts of the United States has already changed,” he said yesterday. “So we believe we have indications that climate change is already, at least to some extent, visible.”
Munich RE: Overall picture of natural catastrophes in 2010 -- very severe earthquakes and many severe weather events - Several major catastrophes in 2010 resulted in substantial losses and an exceptionally high number of fatalities. The overall picture last year was dominated by an accumulation of severe earthquakes to an extent seldom experienced in recent decades. The high number of weather-related natural catastrophes and record temperatures both globally and in different regions of the world provide further indications of advancing climate change.Altogether, a total of 950 natural catastrophes were recorded last year, nine-tenths of which were weather-related events like storms and floods. This total makes 2010 the year with the second-highest number of natural catastrophes since 1980, markedly exceeding the annual average for the last ten years (785 events per year). The overall losses amounted to around US$ 130bn, of which approximately US$ 37bn was insured. This puts 2010 among the six most loss-intensive years for the insurance industry since 1980.
Quotas 'would tackle fuel poverty… A system of energy rationing is needed to tackle fuel poverty and ensure cuts in greenhouse gas emissions, a report commissioned by a group of MPs has said. Under the tradable energy quotas (TEQs) scheme, all adults would receive an equal free allocation of units of energy credit, which would be redeemed every time they bought gas and electricity or petrol for cars. The amount every adult received would be equal but not necessarily enough to meet their needs - forcing people to directly think about their energy use. Surplus units could be bought and sold, while businesses and Government would have to buy their units in a regular auction which would generate money to help shift the economy to a low-carbon footing. The units could be rated on the basis of how much carbon they produce, as part of efforts to meet national carbon "budgets" and reduce the UK's emissions by 80% by 2050, the report by the Lean Economy Connection for the All Party Parliamentary Group on Peak Oil said.
British lawmakers propose energy rationing - A group of MPs have suggested that the UK should introduce a system of energy rationing to deal with what they view as impending energy and climate crises. Under the proposed system, a set number of tradeable energy quotas (TEQs) would be issued and used to purchase energy, whether through fuel or electricity. The amount of energy being used would essentially be capped, and anyone wishing to use more than their personal allowance would have to pay a market rate for that. The scheme, as proposed by the All Party Parliamentary Group on Peak Oil, would run like this:
- The Committee on Climate Change issue TEQs on a weekly basis, 40 per cent of which would be given for free to individuals and 60 per cent of which would be auctioned off.
- When users, whether individuals or businesses, pay for energy, they pay the monetary value but also surrender a certain amount of TEQs Effectively, energy users pay double for their energy.
- Each entity that gets paid for their energy pays in turn for their energy through TEQs, all the way up to the primary producers, who then redeem that with the government.
Government announces plans to ration energy use and reduce heating oil costs - A report has been released which details proposals for a scheme aimed at rationing how much energy households can use, which will help reduce their heating oil costs. Earlier this week, the Lean Economy Connection and All Party Parliamentary Group on Peak Oil announced the Tradable Energy Quotas (TEQs) initiative, intended to bring energy use in line with carbon emission targets.Under the proposal, people will be able to get units of 'energy credit', while extra units can be bought and sold by consumers. This means that if people want to use more energy they will have to pay for it and those who do not use their entire quota will be able to gain financial benefit for helping the government achieve environmental goals. Leader of the Green Party Caroline Luca said: "TEQs is the kind of approach we will need if we are to mobilise the infrastructure of a zero-carbon future fast, under pressure."
Sunoco shuts Oklahoma crude line after Weds. leak - Sunoco Logistics reported to the National Response Center that it had a crude oil spill at a pipeline in Oklahoma on Wednesday morning, the Environmental Protection Agency said on Thursday. The 1,250-barrel spill was in Garvin County, said David Bary, a spokesman for the EPA. Sunoco spokesman Thomas Golembeski said that the pipeline was shut after the leak was found in the 10-inch line running from Eola to Maysville, Oklahoma. Sunoco said it did not think any refineries were impacted by the outage.
ONGC Shuts Some Wells at India’s Biggest Oil Field After Pipeline Leakage - Oil & Natural Gas Corp., India’s largest energy-exploration company, closed some wells at the nation’s biggest oil field after a pipeline leakage off the west coast. The shares fell to the lowest in almost eight months. The spill is estimated to be about one mile (1.6 kilometers) long and the state-run explorer may have lost 25,000 barrels of crude oil, according to an e-mailed statement from the company today. ONGC didn’t say what caused the leak in the pipeline, which has a capacity of 212,000 barrels a day. The spill, about 80 kilometers off the Mumbai coast, was spotted at 8:45 a.m. local time, according to the statement
Oil Spill Commissioner Pledges to Address Health Issues - In an emotional public meeting on Wednesday, January 12th, citizens from across the Gulf Coast urged the president’s oil spill commission to help solve the growing health crisis here — and got a pledge of support in return. During the question and answer session, people from coastal communities across the gulf stood up with a common message: We need more than just a report, we need immediate help now to address an urgent and growing health crisis along the Gulf Coast. “I really see no sense of urgency here … Where is the sense of urgency?” asked Robin Young of Orange Beach, Alabama. “Is there anything being put in place? Has anyone talked about getting somebody on the ground now with a team of doctors?” Dr. Riki Ott, a marine toxicologist who has studied and lived through the Exxon Valdez spill, estimates that four to five million gulf coast residents have been exposed to dangerous levels of oil and dispersants.
Miliband Environmental Worries Over BP Arctic Oil Deal- The Labour leader, Ed Miliband, has voiced concern over BP's deal with Russian energy firm Rosneft. A deal was signed on Friday to exploit potentially huge deposits of oil and gas in Russia's Arctic shelf.The "strategic global alliance" between BP and Rosneft will see the firms exchange expertise in exploring Russia's Arctic region. Environmental campaigners have criticised the plans, with Greenpeace saying BP had learned nothing from its failures in last year's Deepwater Horizon disaster in the Gulf of Mexico. Mr Miliband said finding alternative forms of energy was the way ahead. 'Clean way' The former climate change secretary was speaking on the BBC's Andrew Marr Show on Sunday."I'd be pretty worried about this," Mr Miliband said. "I think that the lesson of the Deepwater Horizon, the Gulf oil spill, should be that... the task for all of us, private companies, government and so on, is not to just keep digging and digging deeper and deeper for oil. "It is actually to find those alternative forms of energy that can help us move forward in a clean way."
Rep. Markey seeks immediate review of BP-Rosneft (Reuters) – Representative Edward Markey on Thursday asked Treasury Secretary Timothy Geithner to launch an immediate investigation into a $16 billion share-swap plan between BP and state-owned Russian oil firm Rosneft. In a letter to Geithner, Markey, a leading House Democrat on energy and environmental issues, cited "several" national security concerns over the deal. "I believe that there is clearly sufficient evidence that this deal may pose an unacceptable threat to U.S. national security," he said in asking Treasury's Committee on Foreign Investment in the United States to conduct the probe.
Spill panel co-chair: 'Drill, baby, drill' will drain US oil reserves - If the United States embraces a so-called “drill, baby, drill” philosophy, the country’s oil will run out by 2031, the co-chairman of the national oil spill commission said Wednesday. Former Sen. Bob Graham (D-Fla.) said efforts to curb U.S. dependence on foreign oil by expanding domestic production would quickly deplete state oil reserves. “If we were to adopt that and if the current estimates of reserves are accurate, we will drain the last drop of oil out of the United States in the year 2031,” Graham said. Graham’s comments are a stern warning to Republican lawmakers who are pushing for expanded domestic oil production amid concerns about rising gas prices and the economy. For example, Sen. David Vitter (R-La.) sent a letter to Office of Management and Budget Director Jack Lew on Tuesday asking for information on the administration's projections for expected revenue from oil drilling and renewable energy in an effort to highlight the money that drilling generates for the federal government.
December Liquid Fuel Production - The IEA is now out with their December liquid fuel stats (later in the month than usual). That lets me update my graphs of oil production with all the latest stats. See above for the short term view since the beginning of 2008. As you can see, it still looks, right now, that Nov 2010 is a new high of monthly liquid fuel production. The IEA revised November up by 300 kbd (thousand barrels/day), and then showed December falling by the same amount. OPEC showed December flat over November. Here's a slightly longer term view (since 2002) showing the whole "bumpy plateau" era (which began in late 2004). This also includes spot oil prices on the right scale (CPI corrected to Jan 2010 dollars).
A Brave New World Of Fossil Fuels On Demand - In September, a privately held and highly secretive U.S. biotech company named Joule Unlimited received a patent for “a proprietary organism” – a genetically adapted E. coli bacterium – that feeds solely on carbon dioxide and excretes liquid hydrocarbons: diesel fuel, jet fuel and gasoline. This breakthrough technology, the company says, will deliver renewable supplies of liquid fossil fuel almost anywhere on Earth, in essentially unlimited quantity and at an energy-cost equivalent of $30 (U.S.) a barrel of crude oil. It will deliver, the company says, “fossil fuels on demand.” We’re not talking “biofuels” – not, at any rate, in the usual sense of the word. The Joule technology requires no “feedstock,” no corn, no wood, no garbage, no algae. Aside from hungry, gene-altered micro-organisms, it requires only carbon dioxide and sunshine to manufacture crude. And water: whether fresh, brackish or salt. With these “inputs,” it mimics photosynthesis, the process by which green leaves use solar energy to convert carbon dioxide into organic compounds. Indeed, the company describes its manufacture of fossil fuels as “artificial photosynthesis.”
CNBC: Venezuela Says Oil Reserves Surpass Saudi Arabia's - Venezuela has overtaken Saudi Arabia as the world leader in oil reserves with certified deposits leaping to 297 billion barrels at the end of 2010, President Hugo Chavez's government said Saturday. Energy Minister Rafael Ramirez told Reuters that the new reserves, which pushed the total 41 percent higher than the previous year, were booked in the South American OPEC member's vast Orinoco extra heavy crude belt. A jubilant Chavez told parliament that Venezuela's reserves now surpassed those of Saudi Arabia. "We have enough for 200 years," the former soldier said in a speech in which he denied he was a dictator, complained that he was being unfairly "demonized" and offered to give up much-criticized decree powers a year ahead of schedule.There are suggestions that countries, including Saudi Arabia and Venezuela, have exaggerated their oil reserves in the past, though the producers deny doing so.
TheOilDrum: Tech Talk - Past, Present and Future Venezuelan oil production - Last week I wrote a little about the planned production of heavy oil from the Orinoco Basin in Venezuela and used that as the basis for a discussion on API gravity and refinery gains. What I would like to do today is to revisit this area of Venezuela and discuss a little more of the region and the potential for increased production, and how it might be achieved. But let me start with overall production from Venezuela, for which data is not always consistent. Taking the curve developed at Energy Export Data Browser for the country, the initial impression is a classic example of a depleting system, with rising internal consumption having a negative impact on overall exports, which have already fallen below 2 mbd. The EIA note (and this has been a problem for a while) that it is difficult to assess the make-up of the production stream, but estimate that in 2008 about 250,000 bd came from condensate, NGLs and refinery gains. The United States has seen a steady decline in the amount of oil that it imports from Venezeula, with the daily rate falling below 1 mbd towards the end of last year. Within the past two weeks it has fallen as low as 650,000 bd.
Global Oil Production Update - For oil production data-heads the EIA’s decision to terminate the International Petroleum Monthly has produced a small tremor. Yes, the data supposedly will be available each month through one of EIA’s databrowsers. However, these embedded browsers are actually not as user-friendly as the EIA might assume. For chart-makers like myself, we need Excel files. And many of us hope (and assume) there will be an extractable Excel file for global crude oil production data once the transition is made. For now, EIA has just produced its last IPM (December 2010) which updates data through October of 2010. Let’s take a look at the most recent revisions, and latest production levels (click to enlarge). A new post-crisis global oil production high was reached in October, at 74.08 mbpd (million barrels per day). It should be cautioned however that downward revisions every month this year have taken away previous monthly peaks, and we will have to wait until next year to see how 2010 settles out. Volatility in both production (and data gathering) in regions from Canada to the North Sea have produced wild swings this year. Meanwhile, Non-OPEC supply is getting another boost from Russia, even as the rest of Non-OPEC languishes.
OPEC raises forecast for 2011 world oil demand growth - THE OPEC oil cartel revised upwards on Monday its 2011 world oil demand growth estimate given the pace of global economic recovery, as well as the cold winter weather in the northern hemisphere. 'Given the latest upward revision in world GDP (gross domestic product), world oil demand growth is forecast at 1.23 million barrels per day (bpd) averaging 87.3 million bpd in 2011, 50,000 bpd higher than last month's estimate,' the Organization of Petroleum Exporting Countries said in its latest monthly bulletin. 'The magnitude and the speed of the world economic recovery will have a remarkable impact on world oil demand this year,' it said, adding: 'Weather in the northern hemisphere is gaining momentum and has slightly affected the heating and fuel oil demand.' In terms of sector, the petrochemical and transport industries would be the main driver of growth in world oil demand, the cartel stated.
Pickens Says U.S. Spent $337 Billion on Oil Imports - T. Boone Pickens, the billionaire energy investor, said the U.S. spent $337 billion in 2010 on oil imports, a 28 percent gain from the previous year. The U.S. imported 61 percent of its oil last year, according to the Federal Reserve Economic Database, Pickens said today in an e-mailed statement. The U.S. is sending approximately $641,172 per minute to other countries to pay for the oil, Pickens said. “America has an energy crisis that needs to be addressed,” Pickens said. “In 2010, we imported 4.25 billion barrels of oil at a cost of $337 billion, putting our economic and national security at risk.”
IEA sounds oil price alarm - The head of the International Energy Agency (IEA) has warned that current oil price levels are “alarming” and could have a negative impact if allowed to spiral upwards. With oil prices surging towards $100 a barrel, market eyes are on Opec to see whether the producers group will boost crude supplies to dampen prices. IEA executive director Tanaka told reporters on the sidelines of an industry conference that Opec "needs to show more flexibility" in increasing oil production according to Reuters. "If the current price continues, it will have a negative impact," he said. However, the oil ministers of Iran, Venezuela and Libya have said they see no need for producers to act if oil reaches $100 a barrel. Nonetheless, United Arab Emirates Oil Minister Mohammed al-Hamli downplayed the IEA’s concerns, saying that fluctuating oil prices were not a cause for concern. "The price keeps going up and down and all I can say for now is that we are happy,"
World Oil Price Edges Near To $US100 - World oil prices rose slightly on Tuesday as the IEA warned that crude near $100 was posing a real risk to the global economic recovery. Brent North Sea crude for delivery in March rose 59 cents to $98.02 a barrel in late afternoon London trade. New York's main contract, light sweet crude for February, was 17 cents lower at $91.37 in mid-afternoon trade on the New York Mercantile Exchange (NYMEX). In its latest monthly report, the International Energy Agency said "recent price levels already pose a real economic risk - something of deep concern to producers and consumers alike." Oil prices of $100 a barrel represent a burden of five percent of gross domestic product on the global economy, the IEA calculated, and said such levels in the past "have clearly been associated with economic problems.
No Opec action as $100 oil looms - Iran, which holds the rotating presidency of Organisation of the Petroleum Exporting Countries (Opec), says it sees no need for oil exporters to hold an emergency meeting if crude prices rise to $100 a barrel. Amid mounting fears about the impact on Western economies, Iran's Oil minister, Masoud Mir-Kazemi, said: "The increase toward $100 is not worrisome enough to warrant an emergency meeting. None of the Opec members considers this figure as being unreasonable." Opec accounts for 40 per cent of global oil supply, and Iran is its second-biggest producer after Saudi Arabia. Last week, Brent crude for February settlement rose by 62 cents, or 0.6 per cent, to $98.68 a barrel in London.
TOP Oil Market News: Oil Declines to One-Week Low; Supply Drops - Oil fell to a one-week low as builders began work on fewer U.S. homes than projected in December, a signal that the economic recovery may be slowing. U.S. crude supplies probably fell for a seventh week on the shutdown of the Trans Alaska pipeline and as a premium for Brent oil from the North Sea drew cargoes to Europe, a Bloomberg News survey showed. BP Plc bought barges of jet fuel from sellers including Glencore International AG at a lower premium than yesterday. Heating oil rose to a 27-month high as forecasts for colder-than-normal weather in the U.S. Northeast indicated higher fuel demand and the dollar slipped. Brazilian oil deposits below a layer of salt in the Atlantic Ocean hold at least 123 billion barrels of reserves, more than double government estimates, according to a university study by a former Petroleo Brasileiro SA geologist.
The Peak Oil Crisis: It’s Not Adding Up! - In the last week, the three official forecasters of the supply and demand for oil, the IEA in Paris, the EIA in Washington, and the OPEC Secretariat in Vienna, released new forecasts of what they believe will happen to global oil prices and the availability during the next two years. As everybody should know by now, this may be a critical time for global oil production which is hardly growing at all; and consumption in some parts of the world has been increasing rapidly. Of late, interest has centered on demand for oil with some scattered concerns about how much spare capacity OPEC really has. With global supply close to stagnant, very little growth is expected in the global oil supply in the next two years with the possible exception of the Saudis turning on what spare capacity they have ready to go.
No More Oil - Reuters reports: OPEC will hold an emergency meeting only if oil climbs above $100 a barrel and stays at that level, a Gulf delegate said on Thursday. A second Gulf delegate said the price strength would probably not last and customers were not asking for extra oil. Over at NRO, Kevin Williamson gloats: Good news for Generic Republican, who already has established himself as a legitimate contender for the White House in 2012: OPEC is not bailing us out. The oil cartel is making it known that it is cool with $100 oil and will not act unless prices move significantly higher and stay there....Oil producers have a real good to sell, one with intrinsic value. They do not want to be paid in devalued currencies. Please. How many times does OPEC have to play this game for guys like Williamson to catch on to the con? OPEC isn't sitting on its hands because they don't want to take our yucky devalued dollars. In the short term they can hedge against the dollar just like anyone else if they want to, and in the long term they can invest the surpluses in their sovereign wealth funds in any instrument they feel like. The reason for their apparently lackadaisical attitude is much simpler: they're already pumping at near their maximum production capacity.
Hedge Funds Raise Oil Bets as Prices Reach 27-Month High: Energy Markets - Hedge funds raised bullish bets on oil by the most in five weeks as crude reached the highest level in more than two years amid signs that the global economic recovery is gaining momentum. The funds and other large speculators increased net-long positions, or wagers on rising prices, by 12 percent in the seven days ended Jan. 11, according to the Commodity Futures Trading Commission’s weekly Commitments of Traders report. It was the biggest advance since the week ended Dec. 7. Crude hit a 27-month high on Jan. 12 as Chinese customs data showed oil imports to the world’s largest energy user rose 18 percent in 2010 and the U.S. Energy Department in Washington said stockpiles declined to an 11-month low in the week ended Jan. 7. Prices also advanced as an Alaskan pipeline carrying about 11 percent of U.S. output shut because of a leak.
A dramatic shift in the peak oil discussion: "You don't have to take my word for it" - If you write about, speak about, or talk with your family, friends and co-workers about peak oil, you've almost certainly been asked: "Well, who else is saying what you're saying?" This confirmation strategy has worked against the peak oil movement for many years as very few highly placed people dared to utter the words "peak oil" in public--even if they believed the issue was important. That has changed rather radically in the last 12 months, and it hands peak oil activists another important rhetorical tool, namely, the phrase: "You don't have to take my word for it." In rhetorical terms this phrase is, of course, an appeal to authority.A shortcut for them is to check out what experts and officials are saying. Increasingly, those experts and officials are saying that peak oil is near, that it is a serious danger, and that we are unprepared for it. Perhaps the most important announcement in this respect is the turnabout at the International Energy Agency (IEA) late last year in its 2010 World Energy Outlook.
Could Inefficiency Save Us From Peak Oil? - Whether it is activists claiming that a "globalized consumer society without oil is nonsense"or Richard Heinberg arguing that we'd best get used to life without growth when peak oil hits—the idea that the end of cheap oil means a permanent and drastic change to our entire notion of economics keeps cropping up recently. The argument that our economy can't keep functioning without cheap oil because no replacement for cheap oil exists is, on the surface, pretty convincing. But I'm wondering whether our very inefficiencies might prove to be our savior too. The fact is that cheap oil has lead us to us to believe that oil is cheap. And when you undervalue something, you use it without thinking.
OPEC Under Pressure as African, Asian Oil Tops $100 - OPEC is facing growing calls to boost oil production as crude prices in Asia and Africa surpass $100 a barrel for the first time in two years. Nigeria’s Bonny Light grade, from which traders gauge the cost of West African oil, rose to $100.12 a barrel on Jan. 17, passing $100 for the first time since October 2008, according to data compiled by Bloomberg. Malaysia’s Tapis and Indonesia’s Minas breached that level a week ago, trading at $104.36 and $104.01, respectively this week. The International Energy Agency, an adviser to consuming nations, said Jan. 18 that “three-digit oil prices risk damaging” the economic recovery, signaling that the Organization of Petroleum Exporting Countries should raise output. OPEC responded the same day by saying that global supplies are sufficient to meet demand. African and Asian oil grades typically trade at a premium to other oils because of their lower sulfur content and higher gasoline and jet fuel yields. Nigeria, Angola and Gabon supply 15 percent of U.S. crude imports, according to data from the U.S. Energy Department in Washington.
Analysis: Russia opens Arctic to BP to remain top oil nation (Reuters) - Russia's move to open up its prized Arctic reserves to oil major BP (BP.L) is driven by the Kremlin's desire to avoid a fall in production and remain the world's leading oil nation. Analysts and bankers told Reuters that the deal, in which BP agreed to a multi-billion-dollar share swap with state major Rosneft (ROSN.MM), is a boost to Russia's investment climate, though any stocks rally would be capped by political and oil tax regimes uncertainties. The deal gives BP a direct line to powerful Prime Minister Vladimir Putin and access to new reserves as it emerges from its Gulf of Mexico spill disaster. But it also locks BP into a partnership with any Kremlin regime for the decades to come. "For Russia to maintain production at or above 10 million barrels per day, the investments required are huge. Decline rates in West Siberia are very steep and projects in East Siberia are fairly limited,"
Rosneft Deal Brings BP Trove of Untapped Reserves - BP Plc’s deal with Russia’s state- controlled OAO Rosneft may give the U.K. driller access to one of the largest untapped oil troves left on earth. Seismic work indicates the three Arctic blocks BP will explore with Rosneft may have as much as 50 billion barrels of oil in place and between 12 billion and 15 billion barrels of recoverable crude, said a person with knowledge of the matter, declining to be identified because the data are confidential. By comparison, about 23 billion barrels have been pumped from the U.K. sector of the North Sea in the last four decades. BP agreed last week to exchange $7.8 billion of its equity for a 9.5 percent holding in Russia’s largest oil producer. As part of the accord, the two companies will explore a 125,000 square-kilometer (48,000 square-mile) area of the Kara Sea, north from Russia’s largest developed fields in West Siberia.
China Turns Net Diesel Importer on Domestic Shortage - China, the world’s biggest energy user, turned a net importer of diesel for the first time since November 2008 after refineries increased overseas purchases to ease a domestic shortage. Net diesel imports reached 290,000 metric tons in December after China more than tripled overseas purchases to 460,000 tons compared with November, customs data showed today. Exports of the fuel used in trucks and power generators dropped to 170,000 tons last month, the lowest since January 2009. China Petroleum & Chemical Corp. and PetroChina Co., the nation’s largest refiners, resumed imports of the fuel in November and December after electricity rationing forced factories to switch to diesel-fueled generators. The country’s oil processing volumes rose to a record last month as refiners maximized production, boosting stockpiles of diesel, gasoline and kerosene.
China strengthens rare-earth regulation — China has drawn-up national planning regions for rare-earth and iron mines to strengthen government regulation over the development of the metals. According to the Ministry of Land and Resources, the national planning regions are comprised of 11 rare-earth mining blocks covering 2,534 square meters (27,275 square feet) in Ganzhou, Jiangxi Province. It also includes 466.94 square meters of vanadium titano-magnetite mining areas in western Panzhihua in Sichuan Province. Since 2010, the Chinese government has accelerated the consolidation of the country’s rare-earth resources. According to a plan set by the Ministry of Industry and Information Technology, China will reduce the number of rare-earth refining companies to 20 from the current number of more than 100 by 2015. The Ministry of Commerce set quotas for 2011’s first batch of rare-earth exports at 14,446 metric tons on Dec. 28, a 35% decline from the same period last year.
Toyota Pursues Electric Motor Without Costly, Rare Earth Metals Controlled by China - Toyota Motor Corp. is striving to develop a new type of electric motor to escape a simmering trade conflict involving China’s grip on a rare mineral. The Japanese auto maker believes it is near a breakthrough in developing electric motors for hybrid cars that eliminates the use of rare earth metals, whose prices have risen sharply in the past year as China restricted supply. The minerals are found in the magnets used in the motors.All electric motors rely on magnets to make them work. The new motor Toyota is working on is based on the very common and inexpensive induction motor, found in such devices as kitchen mixers. Induction motors use electromagnets—magnets that only have their magnetic attraction when power is applied to them. Most motors used in electric and hybrid cars today use a different type of motor that relies on permanent magnets made from neodymium, a rare-earth mineral that is almost entirely mined and refined in China.
“China is running out of water. It is not short of water. It is running out of water.” - I began an 7.5 year residence in China while my wife and I taught at a university there. It was about the best eight years of my life. We traveled a great deal in the Chinese countryside (the real China) and became very familiar with an issue central to China that nearly every pundit misses where China is concerned. China is running out of water. It is not short of water. It is running out of water. I have discussed this with a very prestigious Chinese scientist, government officials in the countryside, and hundreds of students in my classes, who came from a large sample of Chinese villages, in great detail.China is about to run completely out of water. That ruins all the forecasts that fail to recognize this fact. Far from being a Juggernaut that will take over the world, China, with her water problem and immensely overbuilt real estate is about to burn to the ground
China's electricity consumption up 15% in 2010 - Electricity consumption in China soared nearly 15 percent in 2010, state media said Monday, as the country’s thousands of factories cranked up production to meet growing domestic and global demand. Key data to be released this week is expected to show the world’s second largest economy grew 10 percent last year on the back of strong demand for Chinese-made products. Total electricity consumption rose 14.6 percent year-on-year in 2010 to more than 4.2 trillion kilowatt hours, the official Xinhua news agency said, citing industry group China Electricity Council. That compares with an increase of around six percent in 2009, according to official data. The manufacturing and industrial sectors used most of the electricity, with consumption rising 15.4 percent on year to 3.1 trillion kilowatt hours, despite local authorities cutting power supply to meet Beijing’s energy-saving targets.
China projects to help modernize U.S. power plants - Foreign partnerships in China’s rapidly growing energy sector could eventually help the United States replace its own aging power infrastructure with efficient low-carbon plants, energy firms said on Wednesday. With Chinese President Hu Jintao in Washington this week on a state visit, energy companies stressed the need for partnerships between the world’s two largest economies in areas such as nuclear and coal-fired electricity. Development of nuclear power in China could help lay the groundwork for a long-hoped-for U.S. nuclear renaissance, said Ricardo Perez, the top operations official for Westinghouse. Foreign investment in China’s nuclear infrastructure “is not a threat or a liability”, Perez said at a U.S.-China clean energy forum hosted by the Brookings Institution. “It’s an unbelievable benefit” that could create jobs in both countries.
China bank loans near 500 billion yuan in January - Chinese banks continued their lending frenzy in the beginning of the year, doling out 500 billion yuan ($75.6 billion) in new loans in the first week of January alone, putting fresh pressure on the central bank to tighten policy to put a lid on inflation. The loan figure includes about 210 billion yuan extended by the "Big Four" state lenders, sources with direct knowledge of the figures told Reuters on Wednesday. The overall lending figure would roughly equal the new loans extended during all of December. New lending in December reached 480.7 billion yuan, meaning China overshot the government's target of keeping bank loans to 7.5 trillion yuan in 2010. In the past, China used loan quotas to keep a handle on lending. This year, the central bank has pledged to refine that system with regular calibrations of reserve requirements.
Shanghai Prepares for Property Tax to Curb ‘Speculative’ Buying; China Addresses Symptom NOT Problem - China's problem is rampant growth in money supply. Instead of curbing the problem, China prepares to address the symptoms, city by city it appears. Please consider Shanghai Prepares for Property Tax to Curb ‘Speculative’ Buying - Shanghai, China’s financial center, will this year prepare for a trial property tax, becoming one of the first cities in the nation to introduce the measure aimed at curbing “speculative” investment. Mayor Han Zheng announced the move in a speech to the Municipal People’s Congress yesterday, without giving details of how much the tax would be or when it would be implemented. Shanghai and southwestern Chongqing are the two cities that will begin trials of a property tax, “We will step up macro-control measures, prioritize the supply of non-luxury residential units to be owned and occupied by ordinary citizens, and prepare for the trial reform on property tax as required by the central government,” Han said. China has pledged to speed up property tax trials to rein in surging prices that have made housing too expensive for an increasing proportion of the population. Premier Wen Jiabao said on Dec. 26 that measures control housing costs weren’t well implemented and that he would introduce more policies to crack down on speculation. China has tightened rules on down payments, suspended mortgages for third homes last year.
PBSNewsHour: Slideshow: China's 10 Largest Cities - "China [has moved] one percent of its population from villages to cities every year during the last 30 years, which amounts to a total of 390 million people, larger than the entire population of the U.S.," .By 2025, China is on pace to have 219 cities with more than one million inhabitants and 24 cities with more than five million people, predicted a McKinsey Global Institute report. "A city with a million people doesn't necessarily count as a big city in China now," said Jeffrey Wasserstrom, a China expert and history professor at the University of California Irvine. "You can have a city twice the size of San Francisco and it's seen as smallish."
Dongguan Ghost Mall And China’s Property Boom - This is what the biggest mall in the world looks like on a typical Saturday, very reminiscent of this Hugh Hendry video of China’s empty skyscrapers and this video of China’s empty city
China Goes to Nixon - Paul Krugman - China has stumbled into a monetary muddle that’s getting worse with each passing month. Furthermore, the Chinese government’s response to the problem — with policy seemingly paralyzed by deference to special interests, lack of intellectual clarity and a resort to blame games — belies any notion that China’s leaders can be counted on to act decisively and effectively. In fact, the Chinese come off looking like, well, us. How bad will it get? Warnings from some analysts that China could trigger a global crisis seem overblown. But the fact that people are saying such things is an indication of how out of control the situation looks right now. The root cause of China’s muddle is its weak-currency policy, which is feeding an artificially large trade surplus. As I’ve emphasized in the past, this policy hurts the rest of the world, increasing unemployment in many other countries, America included. But a policy can be bad for us without being good for China. In fact, Chinese currency policy is a lose-lose proposition, simultaneously depressing employment here and producing an overheated, inflation-prone economy in China itself.
Guest Post: The puzzle of China’s rising household saving rate - Yves here. I thought this post from VoxEU was worth featuring because it provides concrete support for one theory about how to reduce US/Chinese trade imbalances. As long as China has a high savings rate and low domestic consumption, it will have to also show a high level of exports, which in turn means other countries or countries wind up showing high levels of consumption and rising debt levels. And worryingly, China’s consumption as a percent of GDP has been falling, a very unusual pattern for a developing economy. One common prescription is for China to improve its social safety nets. This analysis indicates that might have merit. Admittedly, there are practical obstacles to implementing it, one of the large ones being the level of corruption in provincial governments. In an effort to reduce its sizeable current-account surplus, the Chinese government has made it a priority to “rebalance” growth in China by stoking private consumption. This column examines the determinants of the high household saving rate that keeps Chinese consumption so low.
China at a Crossroads: Trade Tensions Vie with Consumer Needs - On the surface, China seems to have fully recovered from the depths of the global recession and consolidated its position as the world's biggest exporter and the second-largest economy behind the United States. Although China's GDP growth rate steadily declined from 11.4% in 2007 and 9.6% in 2008 to 8.7% in 2009, it went up again, to 9.6%, year-on-year, during the third-quarter of 2010. Moreover, China's trade surplus has also started to rise. During the third quarter of 2010, its surplus was $65.6 billion, or 31% higher than a year earlier. That was the largest quarterly figure since its $114 billion surplus in the last three months of 2008. But the very strength of the recovery is putting China back on a collision course with its trading partners -- and in the process, possibly undermining its path toward long-term prosperity and a more "normal" pattern of consumer-driven development. With a swelling middle class of perhaps half a billion people, China has to become less focused on export-fueled growth, experts say, and more focused on making consumer goods. Yet the World Bank recently forecast that China's trade surplus will grow from $247 billion in 2010 to $273 billion in 2011 and $314 billion in 2012.
The real cost of Chinese NPLs (Michael Pettis) Throughout modern history, and in nearly every economic system, whether we are talking about China, the US, France, Brazil or any other country, there has really only been one meaningful way to resolve banking crises. Whenever non-performing loans or contingent liabilities surge to the point where the solvency of the banking system is threatened, the regulators ensure that wealth is transferred in sufficient amounts from the household sector to borrowers or banks to replenish bank capital and bring them back to solvency. The household sector, in other words, always pays to clean up the banks. There are many ways to make them pay. In some cases, and certainly in the US before the 1930s, banks simply defaulted and their depositors absorbed the full loss. In that case it was the actual bank depositors, mainly households, who directly bore the full cost of the losses, in the form of reduced, or sometimes no, repayment of their deposits.
Connecting the Dots Between China’s Falling Consumption Level and Its Banking Crisis - Yves Smith - As countries become more affluent, consumption tends to rise in relationship to GDP. And the ample evidence of colossally unproductive infrastructure projects in China (grossly underoccupied malls, office and residential buildings, even cities) raises further doubts about the sustainability of the Chinese economic model.The post crisis loan growth in China, in tandem with visible signs that a meaningful proportion of it has little future economic value, has stoked worries that Chinese banks will soon be struggling with non-performing loans. China bulls scoff at this view, contending that China’s 2002-2004 episode of non-performing loans was cleaned up with little fuss (I never bought that story and recall how Ernst and Young was basically bullied by the Chinese government into withdrawing a 2006 report that NPLs at Chinese banks were a stunning 46% of total assets of its four largest banks. Note estimates of the NPLs as a percent of total loans from that crisis vary widely, even excluding Ernst, from 20% to 40%). The latest post by Michael Pettis links the two phenomena, the fall in Chinese consumption and the cleanup of its last banking crisis. If his analysis is correct, this bodes ill for any correction in global imbalances.
China still fully coupled - The dominant mood in liberal economic circles as 2010 drew to a close, in contrast to the cautiously optimistic forecasts about a sustained recovery at the end of 2009, was gloom, if not doom. Fiscal hawks have gained the upper hand in the policy struggle in the United States and Europe, to the alarm of spending advocates like Nobel laureate Paul Krugman and Financial Times columnist Martin Wolf who see budgetary tightening as a surefire prescription for killing the hesitant recovery in the major economies. But even as the United States and Europe appear to be headed for deeper crisis in the short term and stagnation in the long term, East Asia and other developing areas show signs of decoupling from the Western economies. This trend began in early 2009 on the strength of a massive Chinese stimulus program, which not only restored China to double-digit growth but swung several neighboring economies from Singapore to South Korea from recession to recovery. By 2010, Asia's industrial production had caught up with its historical trend, The United States, Europe, and Asia seem to be going their separate ways. Or are they?
Policymakers Hesitate with Spongy Loan Brakes - The People's Bank of China estimated 2011 deposit reserve ratios for the nation's major banks at a monetary policy conference in early January, while also promising commercial bankers more consensus-building and policymaking transparency. Elsewhere in Beijing, China Banking Regulatory Commission officials were busy exploring ways to control non-performing loans and improve the asset classification process, even while planning their own policy conference with bankers. The flurry of new-year activity, however, could not hide the fact that central bank and CBRC officials had stalled on a key policy decision usually set in stone by January: Determining an all-year ceiling for nationwide, new commercial bank lending.As of mid-January the government's official lending limit, which was set at 7.5 trillion yuan last year, had not been announced.
The China syndrome - CHINA'S rise is, by any account, a remarkable story. The world's most populous country, China represented an outsized share of global output for centuries prior to the Industrial Revolution. As the industrial west rose, China fell behind, then fell further behind amid occupation, revolution, and communist mismanagement. But then, about thirty years ago, China's luck changed. Its leaders embarked on a path toward liberalisation, and its economy began to grow. China had plenty of ground to make up, and growth rates soared toward double-digits. It now seems likely that China will cross a symbolic but important threshold sometime in the next decade to become the world's largest economy. This growth story isn't unique. The route from underdeveloped country to rapidly growing economy is increasingly well-trod. Unfortunately also not unique is the round of American handwringing and self-doubt that accompanies these stories. My colleague at Democracy in America directs us to a Financial Times piece by Francis Fukuyama entitled "US democracy has little to teach China". It contains sweeping claims about the governmental force in Beijing:
The US-China power balance, trade and currencies - The BBC produced a nice little graphic this week to go illustrate comparisons between the US and Chinese economies, alongside the talks between President Obama and President Hu Jintao. Relations between the two countries have been strained by issues such as the trade imbalance and China’s growing military might. The figures here give some background to those issues. They also have a video of an interview with Dambisa Moyo, in which she suggests that protectionism will necessarily be a topic of discussion between the two presidents and, controversially, suggests that such a policy may be the only way for the US to go in the future, with an unemployment rate in December of 9.4%. On the other hand, Jim O’Neill of Goldman Sachs plays down those risks, suggesting that there is actually a slowdown in China’s trade surplus. If you want a little more background on the ‘currency wars’ issue, which was a major feature in the G20 talks last November, this article may help explain the link between ‘competitive devaluations’ and global trade imbalances
The Yuan's Coming Out Party - For years now, China has kept strict control over its currency, leading the U.S. and other countries to accuse China of "undervaluing" the yuan. It's a claim China has consistently denied.But this week, there was sign, albeit a small one, that China may be finally willing to loosen its grip. If you walk into a Bank of China branch in New York or Los Angles, you can now open a personal savings account, denominated in yuan. It may not sound like a big deal, but one way China has kept control over its exchange rate all these years is by limiting the amount of yuan bills you can take in and out of the country. These new bank accounts are the type of thing that used to make China very nervous. Why? Because if everyone opens up yuan bank accounts, that could increase demand for the currency and push the exchange rate up. China doesn't want that happen because it wants to keep its goods cheap for foreign buyers.
Senators talk tough on China currency - Senate Democrats renewed their push to crack down on countries that manipulate their currencies, ahead of a key meeting between Chinese President Hu Jintao and U.S. President Barack Obama in Washington. A bill introduced Monday by Senator Charles Schumer and two other Democrats, would impose penalties, including possible tariffs, on nations that manipulate their currencies -- particularly China. The Senators told reporters in a conference call that China's currency and trade polices undercut U.S. manufacturers and are costing American jobs. "China's currency is like a boot on the throat of America's economic recovery," Schumer said. The senators and other critics say the government-controlled People's Bank of China artificially undervalues the yuan, bringing down the cost of Chinese exports and giving it an unfair advantage in the international market.
Rebalancing the US-China relationship - China has become the world’s second largest economy, the main driver of global growth and an increasingly assertive economic power. The U.S. is by far the world’s largest economy and one of the richest. Even as their GDP levels gradually converge, a huge gulf remains between China and the U.S. in terms of their per capita incomes and their levels of institutional and financial development. Nevertheless, China has used its growing economic might to gain enormous strategic advantage in a number of areas. It successfully seized the high ground in the debate on global imbalances by accusing the U.S. of taking irresponsible monetary policy actions that hurt other countries; this argument has resonated with many emerging markets that are bearing the brunt of capital flows fueled by cheap money in the U.S. and other advanced economies. China has also used its economic leverage to build partnerships with a number of advanced and emerging market economies that back China’s policies as they see its strong growth as important for their own success. These developments have been aided by the defensive position that the U.S. has found itself in—as the epicenter of the global financial crisis and as a country with massive rising levels of public debt. The U.S. is also viewed as getting a free pass on its fiscal profligacy and excess consumption as it is the issuer of the main global reserve currency, a tenuous situation that persists perhaps only for want of alternative
Obama, Hu Seek New Balance - Their uneasy balance—neither friend nor foe—is emerging as the operating principle behind the globe's most critical bilateral relationship. In a one-hour press conference in the White House's East Room, the two leaders sought to demonstrate they can live with areas of tension, even if they can't cure them, including China's currency policy, its human-rights record and the nuclear ambitions of North Korea. In private sessions, senior administration officials said, the two leaders addressed some of the countries' friction points: They spent about half their time discussing economic issues, and the rest on Iran, North Korea, human rights and other areas, aides said. President Obama's aides said that he pressed Mr. Hu more gently than Congressional critics did on letting China's currency rise, noting it has gradually risen 3.5%, and more if inflation is accounted for. "But he said that China needs to do more, needs to move faster," said a senior aide.
What a “Get Tough With China” Stance Would Really Look Like - Yves Smith - Before every get-together with China, the US goes through some ritualized complaining (the value of its currency has been the recent big talking point), the Chinese do some sabre rattling of their own, and perilous little of substance happens, except that the Chinese continue to have an economy with a substantial current account surplus, which not only works to the detriment of its major trade partners, but at this scale contributes to financial It is key to recognize that Chinese consumption has not risen relative to GDP, which is what needs to happen for the imbalances to moderate. And even though the grumbling between the US and China has focused on the exchange rate, there are other issues in play which get little commentary. One of the frustrations in talking about China is that it is not well recognized (at least in the MSM) how mercantilist its policies are. Many people in the US have come to accept the idea that China’s cheaper labor costs trump all, hence the US goose is cooked as far as manufacturing is concerned. The problem is that for most products, that’s urban legend. Direct factory labor is ~10% for a whole raft of goods. For manufacturing moved to China, where the US is a substantial part of the end market, you typically see meaningful offsets to the labor cost savings: increased managerial/coordination costs (particularly if the work is outsourced rather than merely “offshored”), increased shipping costs, increased financing costs (due to longer supply chains). And you also have an increase in risks, which amounts to a hidden cost.
Beijing feels that time is on its side (FT) Shortly before President Barack Obama visited Beijing for the first time, he set out US policy to China: “We welcome China’s efforts to play a greater role on the world stage,” he declared. “Power does not need to be a zero-sum game and nations need not fear the success of each other.” I am prepared to bet that Mr Obama will say something very similar when he welcomes President Hu Jintao to Washington this week. And I’m sure the Chinese leader will respond with warm words.But, beneath the rhetoric, things are shifting fast. There is a long and growing list of disputes between China and the US. Old arguments over Taiwan and human rights are now supplemented by a new set of disputes over currency, trade, the South China Sea and China’s military build-up. The increasing number of Sino-American disputes is not just a coincidence or a run of bad luck. The global economic crisis has fundamentally shifted the logic of US-Chinese relations. Before the crisis, most Americans were still comfortable with the rise of China. Both countries were prospering economically – and China did not then seem a plausible challenger to America’s position as the world’s only superpower.
China’s lending hits new heights (FT video) China has lent more money to other developing countries over the past two years than the World Bank, a stark indication of the scale of Beijing’s economic reach and its drive to secure natural resources.China Development Bank and China Export-Import Bank signed loans of at least $110bn (£70bn) to other developing country governments and companies in 2009 and 2010, according to Financial Times research. The equivalent arms of the World Bank made loan commitments of $100.3bn from mid-2008 to mid-2010, itself a record amount of lending in response to the financial crisis. The volume of overseas loans by the two banks indicates how Beijing is forging new patterns of China-led globalisation, as part of a broader push to scale back its economic dependency on western export markets. The financial crisis allowed Beijing to push the commercial interests of its energy companies by offering loans to producer countries at a time when financing was hard to come by.
Can Asia remain the world's locomotive? - You see Asia's growth in the statistics. While it will take another year or two for most advanced economies, including Britain's, to get back to pre-recession levels of gross domestic product, Asian economic activity and Asian trade are comfortably above pre-crisis levels and rising fast. You also see it in booming construction, with new skyscrapers dwarfing and in many cases replacing the old ones. Rising Asian prosperity is tangible, as the world's top retailers, which populate its shopping malls, are aware. Nowhere in the world is the middle class growing more rapidly than in Asia. Asia is not the whole story of this new growth phenomenon. Many economies in Africa are booming, and not just on the back of soaring commodity prices, as is much of Latin America. Asia, however, is the driving force, the world's locomotive. In 2009, the worst year for the global economy in the post-war era, Asian economies grew by 4% while advanced economies shrank by a similar amount. Last year Asia grew by more than 8%. This year, according to Goldman Sachs, Asia will grow by more than 7%, three times advanced country growth and nearly four times the rate of growth in the eurozone. China, by offering to help the eurozone with its difficulties, is demonstrating the country's increased economic clout.
GE to Announce Chinese Projects Yielding $2.1 Billion in Sales - General Electric Co. plans to announce Chinese rail, aviation and energy projects yielding at least $2.1 billion in sales during President Hu Jintao’s visit to the U.S. this week. The joint ventures and orders include high-speed rail, locomotives, power turbines, clean coal technology and avionics. They may support about 5,000 jobs including from U.S. suppliers, the Fairfield, Connecticut-based company said. GE’s China sales are rising at about 20 percent annually and should grow in the “high double-digits” in 2011 as the company builds partnerships and seeks orders, Chief Executive Officer Jeffrey Immelt said last month. The company got about $33 billion of its $157 billion in 2009 revenue from emerging markets, with more than $5.3 billion in China.
Latin America’s China Challenge - China Petrochemical Corporation bought Occidental Petroleum’s Argentina operations, capping close to $15 US billion of Chinese foreign investment in Latin America for 2010. In addition to this new source of foreign investment, China has become a new export market for Latin America. Well over $50 billion of Latin American products, chiefly iron and copper ores, soya, and crude oil, will reach China this year as well. China’s unprecedented and impressive growth has been a great boon to Latin America in the short-term. It is up to Latin American nations to translate these short-term gains into longer-run economic development. Not only has China become a new source of export and investment demand for Latin American commodities, China’s demand has boosted the price of key commodities as well. That means that indirectly through China then, Latin Americans enjoy a higher price for their key commodities across the globe. In the aftermath of the crisis, Latin America is set to grow at a pace more than five percent in 2011, according to the IMF. In order for Latin American nations to leverage its new economic relationship with China for long run benefit, Latin Americans will have to use newfound gains to enable macroeconomic stability, economic diversification, and environmental protection.
Brazil Slams Brakes To Curb Inflation, Risking Hot Money Tsunami - Brazil has raised interest rates sharply, following China, India and host of countries across the emerging world in acting to curb inflation and counter the flood of dollar liquidity from the US. Alexandre Tombini, the new head of Brazil’s hawkish central bank, kicked off his tenure by raising the key Selic rate a half point to 11.25pc, despite fears that this will push the over-valued real to extreme levels. Poland also tightened, raising rates a quarter point to 3.75pc in a "pre-emptive" move to nip price pressures in the bud. Brazil faces an acute dilemma since high rates have made it the darling of the global "carry trade", attracting US, European and Japanese funds chasing yield. The inflows have turned the real into Latin America’s "Swiss franc", driving it up 39pc against the dollar and almost as much against China’s semi-fixed yuan over the past two years. Rising rates make it almost impossible to stop the tsunami of capital, though the authorities are defending a line in the sand at 1.67 to the dollar for now by direct purchases of US assets.
Sacrificing Microcredit for Megaprofits - IN the 1970s, when I began working here on what would eventually be called “microcredit,” one of my goals was to eliminate the presence of loan sharks who grow rich by preying on the poor. In 1983, I founded Grameen Bank to provide small loans that people, especially poor women, could use to bring themselves out of poverty. At that time, I never imagined that one day microcredit would give rise to its own breed of loan sharks. But it has. And as a result, many borrowers in India have been defaulting on their microloans , which could then result in lenders being driven out of business. India’s crisis points to a clear need to get microcredit back on track. Troubles with microcredit began around 2005, when many lenders started looking for ways to make a profit on the loans by shifting from their status as nonprofit organizations to commercial enterprises. In 2007, Compartamos, a Mexican bank, became Latin America’s first microcredit bank to go public. And this past August, SKS Microfinance, the largest bank of its kind in India, raised $358 million in an initial public offering.
What Price Microfinance? - Maxine Udall - A couple years ago I heard Vikram Akula speak at a top graduate business school about his for-profit micro-finance firm in India, SKS. But the most remarkable thing I remember about his talk was that when it was done, he fielded question after question from different members of the audience, all on a theme of "how do I come work for SKS?" Even at only 80 cents on the MBA starting salary dollar, a lot of the audience wanted to come work for SKS.This is not news. Economist Robert Frank provided evidence some years ago that people are willing to work for less when they believe they are doing some good in the world. A couple weeks ago, my friends and readers began sending me links to articles about "beneficiaries" of micro-finance in India resorting to suicide when their indebtedness became overwhelming. More recently, Muhammad Yunus, micro-finance originator and Nobel Peace Prize winner, weighed in with this condemnation of for-profit micro-finance. This was followed by a fairly predictable response from the Philanthrocapitalism blog making the usual arguments in support of for-profit micro-finance and this more nuanced and thoughtful response by Felix Salmon.
Indian farmer suicides rise to 17,000 a year - The National Crime Records Bureau (NCRB) study titled "Accidental Deaths and Suicides in India" revealed the rise without attributing causes, with the states of Maharashtra, Karnataka and Andhra Pradesh the worst affected. Many farmers, particularly in the southern and western states listed, were pushed further into debt in 2009 after the weakest monsoon in 37 years left fields parched and crops ruined. Despite economic development in cities, two out of three Indians still live and work in rural areas and as many as 150,000 farmers have killed themselves in the past decade, the Tata Institute of Social Sciences said in 2009.
Practice of killing of newborn babies on the rise in Pakistan - In the conservative Muslim nation, where the birth of children outside of marriage is condemned and adultery is a crime punishable by death under strict interpretations of Islamic law, infanticide is a crime on the rise. More than 1,000 infants -- most of them girls -- were killed or abandoned to die in Pakistan last year according to conservative estimates by the Edhi Foundation, a charity working to reverse the grim trend. The infanticide figures are collected only from Pakistan's main cities, leaving out huge swathes of the largely rural nation, and the charity says that in December alone it found 40 dead babies left in garbage dumps and sewers. The number of dead infants found last year -- 1,210 -- was up from 890 in 2008 and 999 in 2009.
India's economy: Headed for trouble? - I've written in the past that India's economy emerged from the Great Recession in better shape than China's, despite its slightly lower growth rate. But now India looks like it's running into choppy times as well, with frighteningly high inflation, big budget and trade deficits and weakening competitiveness versus China and other rivals. Here's what Ken Courtis, an economist and founding partner of private-equity firm Themes Investment Management, had to say in a recent email: The Indian economy has entered a period of quickly deteriorating macro economic conditions…Unless addressed quickly, purposefully, and systematically, left to its present course, India is headed for difficulty. The problems India is facing show just how divided the world economy has become. While the advanced economies have been struggling to create growth and jobs and fight deflation, the roaring emerging world is struggling with the negative spin-off effects of rapid growth and strong domestic demand, and are fighting rising inflation.
Pillars of boom - Yesterday Bloomberg published an interesting article on Rio's iron ore output: Production climbed to 50.1 million metric tons in the three months from 47.2 million tons in the same period a year earlier, according to a statement today from London-based Rio, the second-biggest exporter of the commodity. The figure beat a UBS AG estimate of 46.1 million tons. Rio Chief Executive Officer Tom Albanese, who is studying expanding iron ore operations by a further 50 percent by 2015 at a cost of about $14.8 billion, said today that demand is growing from steel mills. Prices may rise to a record $250 a ton this year, Credit Suisse Group AG said this month. Don't adjust your computer. You read it right. CSG are forecasting a $250 ore price this year, despite the rising supply. And with monthly contracts in the offing, forecasts for Australian iron ore revenue will be blown away. To give you some idea of just how big this boom threatens to become, I've graphed above Australia's top 10 export earners since 2003/04.
Iron ore prices soar to record high - Iron ore prices have hit an all-time high as supply disruptions in India, the world’s third-largest exporter of the steelmaking commodity, tighten the market just as Asian steelmakers rush to buy ahead of the Chinese New Year.The spike will add further inflationary pressures to the global economy as the cost of the commodity filters into steel prices and, ultimately, into the cost of everyday goods such as cars and washing machines. But it will also boost the profit-ability of the world’s largest iron ore miners: Vale of Brazil and London-listed Rio Tinto and BHP Billiton. The three miners will release their results for the second half of 2010 next month and analysts are expecting them to deliver billions in dividends after iron ore prices rallied. The price of spot Australian benchmark iron ore, which includes freight costs, hit a peak of $185 a tonne on Wednesday, according to price provider Platts.
Pakistani cement sector feeling the heat of soaring coal price -Dawn reported that not as much now because of previous inventory build up, Pakistan's cement sector is likely to feel the heat of the soaring international prices of coal, going forward. Global coal prices continue to climb, already 34% up since June 2010. The two major reasons listed by market watchers were temporary supply shocks from Australia and a higher demand in China. Mr Farhan Bashir Khan analyst at InvestCap said that "Floods in Australia have somewhat caused a chaos in the world coal market. He added that the lower hydel generation and increasing proportion of coal in China's energy mix was perceived to be the major reason behind the optimistic demand trend. Meanwhile, the floods in Australia had caused a coal supply flux, which eventually reflected in higher coal prices. But for all that analyst points out that coal is still trading at historical discount levels to crude oil prices. The price gap had, however, narrowed due to additional demand of the black heating commodity. The rally in coal prices is at least in part attributed to crude oil movements.
Cars: Argentina's new piggy bank - Argentines are buying cars in record-breaking numbers this year, but not necessarily because they're burning to drive. With currency markets uncertain and inflation expected to reach 30 percent in 2011, Argentines are trying to find places to park their savings. "Those who can buy property, but those who can't buy cars," said Hernan Valdez, who bought a new Peugot. He said many of his friends bought cars this year, too. Fueled by record soy and corn harvests last year as well as strong Brazilian demand for Argentine-made cars and manufactured goods, Argentina is one of Latin America's fastest growing economies. Its GDP is forecast to grow between 7 and 9 percent this year. Yet Argentina also has Latin America's second highest inflation rate, next to Venezuela. The national statistics agency reports annual inflation at 11.1 percent (see chart above), but private analysts say Argentina's actual inflation rate is closer to 26 percent and set to increase with government spending ahead of next year's presidential election.
Do capital controls work? - The global crisis has reignited debate on the desirability of capital controls. This column examines evidence from Argentina and Chile and argues that capital controls can be effective, but that their effectiveness and efficiency varies. It adds that controls need to be considered as part of a macro-prudential toolkit to prevent asset inflation and overvaluation that is costly to revert in the down cycle.
Has the World Run Out of Spare Capacity? - Krugman -- Samuel Brittan points us to John Kemp suggesting that global growth is hitting supply-side limits. The argument is that while high unemployment and low inflation may prevail in advanced economies, the rest of the world is facing accelerating inflation, together with rising commodity prices. And that is, indeed, a fair picture of what’s going on. What’s more questionable is the assertion that “The problem is not aggregate demand but its distribution.” In fact, it’s both. Let’s look at measures of industrial production from the World Trade Monitor; I’ve indexed everything to Dec. 2005=100, so you can see the 5-year trend. Here’s the world: Production has recovered the ground lost during the recession, but it’s still only slightly higher than the previous peak, which puts it well below any reasonable estimate of trend. But this overall picture hides a sharp divergence between advanced and emerging economies:
Eurosclerosis, Then and Now - Krugman -- One simple indicator is the fraction of prime-working-age adults — that is, 25-54 — that are, in fact, employed.. Here’s America versus the cheese-eaters over the years: In the 90s, with US employment surging while France (and much of Europe) was having trouble creating jobs, there was a lot of talk about the European employment problem. By the eve of the current crisis, however, the European job picture had changed a lot for the better, while even a business-cycle recovery didn’t seem to do much for US jobs. Many Americans, even those who imagine themselves well-informed, don’t realize that there has been a big change here; my sense is that the US elite picture of Europe is stuck in a sort of time warp, in which it’s always 1997, and we have the Internet and they don’t. But things have moved on a lot since then.
European policy...really? - Rebecca Wilder - This week Trichet laid down the ECB's hand, (effectively) announcing his intention to maintain inflation at the ECB's target rather than allow it to overshoot. For all intents and purposes, 2% inflation stabilizes the real exchange rate rather than furthering real depreciation in the Periphery and real appreciation in Germany (or the Core). Ambrose Evans-Pritchard agrees with my interpretations of Trichet's speech: Mr Trichet’s fire-breathing rhetoric can be taken as a signal that the ECB will continue to run monetary policy for German needs and tastes, refusing to accommodate a little slippage on inflation to let Club Med regain lost competitiveness without having to endure the agony of debt-deflation. Indeed, the ECB seems to have picked up some of the worst habits of its mentor. Only the rebalancing of inter-euro current accounts will bring stable fiscal finances for debtor and creditor countries alike, something made more difficult with 2% average inflation! On the aggregate, Euro zone economies 'living well beyond their means' are now doing so in two respects: the current account deficit and public deficits. They're not the same. Don't even start with the 'twin deficit' story - Rob Parenteau refuted that some time ago.
EMU Policies Are Pushing Southern Europe Into Systemic Political Crisis - Let us assume for the sake of argument that Europe succeeds in containing the immediate EMU debt crisis, with help from Asia, and that Germany’s fractious coalition actually agrees to a bail-out fund big enough to make any difference. What does this achieve, other than allowing banks to buy time by offloading liabilities onto European and Chinese taxpayers? The 30pc gap in labour competitiveness that has built up between Germany and Club Med since the eurozone currencies were locked together in perpetuity will remain. Greece, Portugal, Spain, and Ireland will stay trapped in structural depression through this year, and well into next, rotating from a liquidity crisis to a chronic political and social crisis that exposes the inability of elected governments to counter 1930s job wastage.. There is an awful possibility – or probability -- that German über-growth will increase the pain for peripheral Europe before it offers a meaningful lifeline to Club Med through trade stimulus. The central assumption of EU policy is that a rising economic tide will ultimately lift all boats. It is a fatal self-deception. A rising tide in Germany is precisely what risks shattering weaker vessels.
Europe’s Challenge - Getting Growth Amid Austerity - Economic growth is an elixir for struggling economies, but in Europe it’s likely to come slowly to the countries that need it most. The recovery that has flickered to life in the United States and much of Northern Europe is missing in euro zone nations straining under huge debt and harsh austerity measures — places like Greece, Ireland and Portugal that have imposed large spending cuts and tax increases. Those measures may eventually lead to healthier economies, but the process will take years, economists and analysts say. In the meantime, the drag on growth is increasing pressure on the euro, and tethering competitive countries like Germany, a major growth engine, to the faltering fortunes of the European Union’s weakest members. Countries using the euro will grow an average of 1.5 percent this year, according to the International Monetary Fund, less than the 2.3 percent growth it predicted for the United States. While some of that difference reflects slower population growth in Europe, it points to the further relative decline of Europe’s weight in the global economy.
Thinking the Unthinkable - My baseline assumption is that Europe kicks the sovereign debt can down the road for the rest of the year. We have seen Portuguese debt sales go well this week, even if at a very steep price. Spain looks like it will also do OK. Trichet is beginning to drum up support for an even bigger fund to stave off the bond vigilantes. It is unthinkable, we are told in many corners of Europe, that a sovereign nation would default on its debt or obligations. But, in my experience, it is the unthinkable things that can rise up to bite you in the derriere. Sometimes rather viciously. It was unthinkable that US subprime mortgages would infect the entire planet. Well actually, not entirely, as some of us did think that very thing in writing, well in advance of the crisis.
Pimco’s El-Erian: European Bond Investors Must Accept Losses Investors in European bonds should prepare for losses, says Pimco co-CEO Mohammed El-Erian. Nonetheless, it’s an exciting time to be an investor, especially for those who keep a sharp eye for well-placed bond offerings. "The main issue right now is the integrity of the eurozone is getting weaker and weaker as we delay the problem,” El-Erian tells CNBC. “They are simply kicking the can down the road." "Ultimately there will be a haircut to bonds issued by certain governments in the eurozone, and the longer we delay that recognition the bigger the problem and the more disorderly the process will be."
El-Erian believes U.S. municipal bonds are an especially interesting market now. "We are in the midst of a massive adjustment in the state and local level that we're going to have to undertake," he says. "The key issue when you invest in municipals is two things: It's not just in the rate risk, it's interest rate and credit risk, and therefore be highly differentiated. You want to be very high up in the credit curve."
Time for default - IT WAS about one year ago that yields on the debt of a few struggling European economies, Greece chief among them, began drifting steadily upward. Since that time, the loss of market confidence has generated a series of yield spikes, each of which has been associated with a brief period of crisis and a flurry of policy bandages sufficient to stave off an immediate meltdown. But through it all, yields have continued their long march upward. Nothing European leaders have done—not crash austerity plans, not ECB bond purchases, and not emergency bail-out funds—has convinced markets that the situation is under control. And the longer this dynamic persists, the less likely it is to be controllable. The Economist has approached the question of debt restructuring cautiously. Default wouldn't be simple, or pretty, or a cure-all. But at this point restructuring looks like the best hope for a clean resolution of the crisis:
Accelerating Deposit Flight In Ireland Forces Irish Central Bank To Print Money Independent Of ECB - It appears that Irish savers are sufficiently smart to realize that their money is no longer safe in a banking system whose existence is now only backstopped merely from referendum to referendum. As it is very unclear what will happen to the IMF/ECB rescue mechanism once the Irish election is held in March, with a material possibility that the whole plan will be unwound, leaving the country's financial system in the wind, a behind the scenes bank run is accelerating. So faced with the prospect of accelerating deposit redemptions, what does the Irish Central Bank go ahead and do? According to the Independent it has gone ahead and proceeded with that traditional recourse to all regimes in the bring: print money. "The Irish Independent learnt last night that the Central Bank of Ireland is financing €51bn of an emergency loan programme by printing its own money." In other words, whereas Ben Bernanke may be 100% confident that US inflation courtesy of POMO and inflation printing will be absorbed by the "massive" excess slack in the economy (oddly enough it wasn't in Tunisia, as food prices hit records despite surging unemployment), we wonder if he feels the same way about other countries in the world, which are already part of a monetary union, yet which have decided to boost the "other assets" line in their balance sheets.
ECB Steps Up Bond Purchases as Governments Seek to Revamp Crisis-Measures - The European Central Bank stepped up its government bond purchases to the highest in five weeks as European officials are seeking ways to overhaul their crisis- response measures. The Frankfurt-based ECB said today it completed 2.313 billion euros ($3.07 billion) of purchases last week after settling 113 million euros the previous one. It will take seven- day term deposits tomorrow to neutralize 76.5 billion euros of liquidity created through bond purchases since the program started on May 10, it said today. The ECB was forced to extend emergency liquidity measures for banks after Ireland’s aid package failed to convince investors that governments can push down budget deficits and prevent a breakup of the 17-member euro area. European finance ministers are meeting in Brussels today to discuss a revamp of of the crisis-fighting strategy that may result in an increase in size and mandate of the region’s rescue fund. If the European Financial Stability Facility “were to buy government bonds, and that improved the functioning of the monetary policy transmission mechanism, that might render some of the ECB’s non-standard measures no longer necessary,”
EU ministers seek rescue fund boost - Euro zone finance ministers called today for an increase in the effective lending capacity of the union's rescue fund, but Germany said there was no urgency and it would be March before a firm plan was in place. Growing realisation that a deal to widen the bailout fund was not imminent caused the euro to retreat on today from a one-month high reached after successful debt auctions by Portugal and Spain last week. Dutch finance minister Jan Kees de Jager said it was vital that euro zone governments under pressure forge ahead with structural economic reforms and deficit-cutting to make debt levels sustainable.
Europe is running fast to stand still - Mohamed El-Erian - The sequencing of Europe’s debt crisis is depressingly similar – the plot stays the same, with a slightly different cast depending on the country in the spotlight. Yet, judging by the run-up to the meeting of European Union finance ministers in Brussels on Monday, European officials seem intent on repeating it over and over again. Last week, higher borrowing costs raised concerns as to whether Portugal could successfully tap the market in a regularly scheduled government bond auction. Fearing that the country would join Greece and Ireland in both losing access to new market funding and facing alarmingly high risk spreads on existing debt, the official cavalry jumped into action. Portuguese officials sought to reassure the markets of their fiscal credentials. The EU talked of enhancing the flexibility of its rescue funds. The European Central Bank stepped up its market intervention, buying millions more Portuguese bonds. To make absolutely sure that the auction would succeed – and it did – China and Japan signalled their willingness to buy European debt instruments. This is the same game plan that was used for Greece and Ireland. The probability of success is the same – very low. You do not solve a debt problem by adding new debt on top of old debt. Yet it seems that European officials are fixated on this approach. How else would you explain the two main proposals discussed ahead of today’s meeting – namely, to enlarge the lending resources of the rescue fund and enable it to buy existing debt?
One Step Forward in the Euro Zone? - It would have been hard to believe only a few weeks ago that the euro zone could be the source of any good news. Yet, with last week’s successful bond auctions and the pledge of international superpowers such as Japan and China to buy Euro zone debt and the ECB’s sudden more hawkish tones, the obvious question is: are we out the woods yet? Hardly, but it was interesting to observe the almost coy manner in which the ECB slowly but surely began the move towards contemplating thinking about raising interest rates. We are not there, yet of course, and I still think that any hike in the ECB’s refi rate are, for now, confined to Axel Weber’s dreams and a very distant playbook sitting around somewhere in bowels of the ECB’s Frankfurt tower. But let us be honest, stranger things have happened than the ECB raising rates just before the next downturn. Indeed, you might even call this a leading indicator. In the meantime, the patchwork which is the Euro zone rescue/bail-out/backstopping mechanism is frantically being sown together..
Central Bank steps up its cash support to Irish banks financed by institution printing own money - EMERGENCY lending from the ECB to banks in Ireland fell in December, the first decline since January 2010, but only because the Irish Central Bank stepped up its help to banks. The Irish Independent learnt last night that the Central Bank of Ireland is financing €51bn of an emergency loan programme by printing its own money. ECB lending to banks in Ireland fell from €136.4bn in November to €132bn at the end of December, according to the figures released by the Irish Central Bank yesterday. At the same time, the bank increased its emergency lending by €6.4bn, bringing the total it is owed to €51bn. However, the figures also provide the latest evidence that responsibility for funding Ireland's broken banks is being pushed increasingly back on to Irish taxpayers. The loans are recorded by the Irish Central Bank under the heading "other assets". A spokesman for the ECB said the Irish Central Bank is itself creating the money it is lending to banks, not borrowing cash from the ECB to fund the payments. The ECB spokesman said the Irish Central Bank can create its own funds if it deems it appropriate, as long as the ECB is notified. News that money is being created in Ireland will feed fears already voiced this week by ECB president Jean-Claude Trichet that inflation is a potential concern for the eurozone.
Ireland Wields Stick Forcing Bank Bondholders to Accept Pain: Euro Credit - Irish Finance Minister Brian Lenihan is about to inflict more pain on bank investors. Unless they take it, analysts say worse may follow. Junior bondholders in Dublin-based Allied Irish Banks Plc will decide this week on an offer to buy back more than $5 billion of subordinated debt at 30 percent of face value. Analysts at BNP Paribas SA recommend investors accept the package or risk getting “the stick” after the government passed laws allowing it to reduce payments to bondholders. “The draconian powers granted to the Irish finance minister in December are a game-changer for subordinated bondholders in Irish banks,” said Ivan Zubo, a London-based credit analyst at BNP Paribas. “Clearly, there is a risk that the more drastic powers could be used if Allied Irish needs more capital in the future.” Costs to insure the subordinated debt of Allied Irish, the country’s second-biggest bank, was 63.5 percent upfront and 5 percent a year as of Jan. 14, meaning it cost 6.35 million euros"
Irish Government Collapses, Six Cabinet Members Resign, Election March 11; How To Negotiate Haircuts - In a fitting tribute to a disgraceful performance by Irish Prime Minister Brian Cowen in which Cowen crammed losses of Irish banks down the throats of taxpayers, his government has at long last collapsed. Six cabinet members (40%) resigned representing justice, health, trade and enterprise, defense and transport. Earlier in the week his foreign minister resigned making the total six. I have a wide selection of articles to choose from. Here is a representative sample. Irish Central reports Irish leader Brian Cowen calls an election for March 11; The Independent reports Irish government falls and calls 11 March poll; Yahoo! News reports Irish premier sets early election for March 11...
A German-led eurozone rescue - Not too long ago, the European financial stability facility was greeted as a “shock and awe” strategy to end the eurozone bond crisis. Today, it is considered too small. The European Commission and some member states want to raise its lending capacity. They also want to change its operational rules. At present, the EFSF can give credits only to sovereign governments. It cannot lend to the private sector, it cannot purchase government bonds in the secondary market and the interest rates it charges are too high. Would a higher ceiling and a wider remit constitute a solution to the crisis? The answer is that this depends on how it is done. The notional size of the entire eurozone rescue package is €750bn. This is made up of €440bn from the EFSF, €60bn from the European Commission and €250bn from the International Monetary Fund. But this is only a number for headline writers. It is not real. Greece and Portugal cannot be expected to pay for Ireland, and vice versa. To obtain a triple A rating, the EFSF has to over-collateralise its lending so that, instead of €440bn, it can lend only €250bn. That reduces the total from all three sources combined to a little over €450bn. Germany has expressed readiness to turn a notional €750bn into a real €750bn, perhaps by increasing the guarantees. The markets would celebrate the agreement for a few days and would test the higher ceiling shortly afterwards. But there is a way to construct the EFSF so that it could be part of a genuine solution to the crisis. There are some influential people in Brussels who have been working out the details. Willem Buiter, chief economist at Citigroup, also dissected this option in his most recent paper on the subject – possibly the best analysis so far about the short and long-term economics of this crisis.
Portuguese Bailout Will Make Euro Crisis Worse - No sooner had Europe’s bond traders, politicians and central bankers gotten back to their desks than it was time to begin tussling over the fate of a small economy on the periphery of Europe. This time around, it’s Portugal. And yet the script seems very similar to the one played out already in Greece and Ireland. Bond yields surge. The government denies furiously there is any need for a bailout. French and German leaders rehash some of their lines about the importance of European solidarity. And the guys at the International Monetary Fund and the European Union pack their bags and check flight schedules.Before you know it, the defiant words have vanished, and the bailout has begun.And yet so far, most of the discussion has been about when Portugal gets rescued. There has been very little talk about a far more important question -- whether it should be.
Spain To Sell Bonds Through Syndicate Instead Of Auctions - Spain has canceled government bond auctions scheduled for later this week and will instead look to issue debt through a group of banks, the country's treasury announced on Monday. The country had planned to auction 10- and 15-year benchmark obligaciones or long-term bonds on Thursday. This will be replaced by the issue of a 10-year benchmark bond through a syndicate of banks. In a bond syndication, one or more banks buy an entire issue of bonds from the state and re-sell them in smaller parts to investors. Smaller eurozone countries usually issue bonds through syndication to attract a wider range of investors, although it is more expensive because of the service charges demanded by the banks for handling the sale.
Spain Offers Premium to Existing Debt for New 10-Year Bond Sale - Spain is having to offer a premium over its existing debt to sell new 10-year bonds as Europe’s sovereign deficit crisis pushes up borrowing costs. The nation, which is planning a gross 93.8 billion euros ($125 billion) of bond issuance this year, is selling the notes through a group of banks and canceled two auctions scheduled for Jan. 20, according to the Treasury’s website. The bonds will be priced to yield 225 basis points more than the mid-swap rate, said two people familiar with the matter, which equates to about 12 basis points over Spain’s existing 4.85 percent October 2020 securities. Spain faces surging borrowing costs as it attempts to convince investors it can rein in the euro region’s third- largest budget deficit while shoring up its struggling savings banks. The cost of insuring its debt surged, with credit-default swaps on the nation jumping from the lowest in six weeks. “Spain has a lot of issuance to do in 2011 and they want to secure as much funding as soon as possible in January,”
Spain to Ramp Up Banks Bailout - Spain plans to pour billions more euros into its troubled savings banks and force them to be more open about their lending practices, people familiar with the matter said, an acknowledgment that previous efforts to fix the banks have fallen flat as the country seeks to ward off an international bailout. In a first step, Spain is preparing to issue €3 billion ($4 billion) in debt in coming days, the people familiar with the matter said. Government officials are putting plans in place to eventually raise as much as €30 billion, according to these people, though some say the final tally will be less. The hope is that a series of capital injections will quell investor jitters about the savings banks, known as cajas (literally, "boxes"), which have been a thorn in Spain's side as it seeks to convince investors that the country's finances are stable.
Spain To Bail Out Cajas, More Billions In Taxpayer-Funded Risk Transfer - The WSJ has just announced that the Spanish government is about to inject a fresh round of billions of euros into its insolvent savings banks (cajas) sector. This is not at all surprising. Back in July 2010, Zero Hedge penned the following article, "The Ticking Time Bomb That Are The Spanish Cajas" which predicted just this development, and it is troubling that it has taken the country this long to acknowledge just how bad things are. We can only speculate that in the meantime the fundamentals have deteriorated materially. Bottom line: Europe is getting tired of kicking the can and may be forced to come to grips with reality far sooner than Ben Bernanke hoped. As for the question where all this bailout money is coming from... it is better left unasked.
Spain plans partial nationalization of savings banks (Reuters) - Spain plans a partial state takeover of its weakest savings banks as it seeks to reassure investors a rescue will not weigh on its deficit.A source familiar with the matter told Reuters on Friday the government would force debt-laden regional savings banks to become conventional banks and seek stock market listings to persuade skittish investors that they are good investments. The state-backed bank restructuring fund (FROB) would then take stakes in the banks -- known as cajas -- that fail to attract private investment, the source said. Up to now the FROB has functioned as a lender of last resort to the cajas. Deputy Prime Minister Alfredo Perez Rubalcaba told reporters a new savings bank plan was coming soon and could include new laws, implying a reform of the FROB. High levels of bad property loans at the cajas are seen as a major risk for Spain, working to slash its budget deficit to stave off fears it will need an Ireland-style rescue from the European Union and International Monetary Fund.
For Greece, Buyback Of Bonds Is Floated - Analysts said on Wednesday that having Greece buy back its own devalued bonds could be an important step toward solving Europe’s sovereign debt crisis. A German government spokesman denied reports that such a plan was in the works. But if Greece bought back the bonds with help from other euro zone countries, the country would not have to repay the full amount of the debt when the bonds reached maturity. “It’s the first time we’ve got an indication Europe is starting to think outside of the box,” “Ultimately, it’s the return to some kind of stable debt path that will provide the biggest turnaround in confidence,” Talk of a restructuring has been taboo among European leaders, who fear that a default by a euro country could permanently undermine the credibility of the common currency.
Greece Denies Seeking Repayment Extension - Greece's Socialist government insisted Tuesday it was not seeking a repayment extension of its overall debt, hours after the country's deputy prime minister expressed surprise support for the idea. The government — which held a successful treasury bill auction Tuesday — played down the televised remarks by Theodoros Pangalos, who backed an extension beyond the euro110 billion ($146 billion) in international rescue loans that are keeping the country afloat. In an interview broadcast early Tuesday, Pangalos said he favored a broad extension instead of opting for a possible haircut — or a reduction in the amount of money owed. He told private Skai television: "You might ask me: 'isn't that restructuring?' It is, technically, but in the sense that there is never any doubt of our obligation to pay back the debt, and to pay back everything we owe."
Greece Says No Debt Restructuring Amid `Complicated' EU Talks - Greek Finance Minister George Papaconstantinou said his country isn’t considering restructuring its debt and that “difficult and complicated” discussions are under way at the European Union to reach a joint solution to the EU’s debt crisis. “At the moment an extremely difficult and complicated discussion is taking place on how there will be a collective solution to the problem we have,” Papaconstantinou said in an interview on Mega Television in Athens. “In this discussion there are many opinions. I want to say that the government isn’t thinking along the lines of debt restructuring.” Greek bonds fell today after Die Zeit newspaper reported that Germany is considering a plan that would allow the Mediterranean nation to buy back its own securities. The country’s 300 billion euros ($404 billion) of debt sparked a sovereign-debt crisis in Europe after Prime Minister George Papandreou revealed the budget gap was four times the EU limit. A 110 billion-euro bailout crafted by the EU and International Monetary Fund has failed to stem soaring borrowing costs for the country amid concerns of a Greek default.
EU's Leaders Must End Debt Restructuring `Taboo,' German CDU's Lauk Says - European leaders should drop their “taboo” against debt restructuring, the head of the business caucus of Chancellor Angela Merkel’s party said, indicating that she has support to take more aggressive action in stamping out the euro-area crisis. “I would recommend looking at it very closely, stop declaring it taboo and do the appropriate analysis to see where that would lead,” Kurt Lauk, president of the German Christian Democratic Union’s Economic Council, said in a phone interview. The pick-up in European economic growth means the bloc can better withstand default by debt-addled smaller countries such as Greece, Ireland and Portugal, Lauk said. He also revived a proposal aired last year by German Finance Minister Wolfgang Schaeuble for a “European Monetary Fund,” saying it would be the centerpiece of a broader crisis-fighting strategy. Lauk’s comments contrast with the immediate criticism by some lawmakers in Merkel’s coalition to proposals that emerged last week to blunt the crisis.
Greek Bondholders Unlikely to Get Repaid in Full, Goldman Says - Greek bondholders are unlikely to get all their money back on schedule unless borrowing costs fall, said Andrew Wilson, head of fixed-income at Goldman Sachs Group Inc. “Unless we have a dramatic change in the interest-rate structure, particularly for a country like Greece, I think some form of restructuring is a relatively high-probability event” after 2011, Wilson said in Bloomberg Television’s “On the Move with Francine Lacqua.” Greece spawned the euro-region sovereign debt crisis a year ago when investors became concerned spending cuts wouldn’t be enough to bring down the country’s budget deficit, which was more than three times the limit laid down by the European Union. Greece’s 110 billion-euro ($149 billion) bailout in May failed to stop its bond yields surging, infecting other so-called peripheral nations including Spain and Italy.
Germany Should Prepare for Greek Default, Adviser Feld Tells Handelsblatt - Germany should set funds aside to prepare for a Greek default, Lars Feld, a designated economic adviser to the German government, was cited as saying in an interview with Handelsblatt newspaper. “I don’t believe that Greece will manage to deal with its debts without a cut,” Feld, nominated by the Cabinet to a five- member panel of economists who advise the government and a professor at the University of Freiburg, was cited as saying. “And then German guarantees will come due.” Feld’s comments underscore Europe’s effort to solve the debt crisis that began in Greece and now threatens Portugal and Spain. European Union governments aim to assemble a solution by March, German Finance Minister Wolfgang Schaeuble said Jan. 13. Purchases of outstanding Greek debt and lower interest rates on rescue loans as well as aid for Portugal and guarantees against excessive debt are all being considered, four people with direct knowledge of the talks told Bloomberg News
Belgium Raises Just 3 Bln With 10-Yr Bonds - Belgium scored only limited success with a 10-year bond sale via banks on Tuesday, a day after fiscally stretched euro zone peer Spain took greater advantage of a dip in borrowing costs. Belgium, under market scrutiny over government debt almost as large as its annual economic output and politically deadlocked for seven months, raised only 3 billion euros ($4 billion) from the sale, the country's debt agency said. That compares with the 4 billion or 5 billion euros raised in each of the past five years from new 10-year bonds.
Why Europe’s periphery should restructure their bonds - The drumbeat for debt restructurings on Europe’s periphery is becoming too loud to ignore. The Economist has now come out strongly in favor; its leader gives the strongest case for biting the bullet now. And Mohamed El-Erian has now officially signed on:You do not solve a debt problem by adding new debt on top of old debt. Yet it seems that European officials are fixated on this approach… More people are recognising that the time has come for another approach – what this week’s Economist magazine calls “Plan B”. This involves the orderly restructuring of some European sovereign debt on terms that allow a meaningful chance of re-accessing markets in future at sustainable rates. This would be accompanied by measures to enhance growth prospects in highly indebted European countries; ring fence the other, fundamentally sound economies; and push banks and other institutional holders of restructurable debt to raise prudential capital. The FT article El-Erian links to quotes all manner of other private-sector actors, including Citigroup chief economist Willem Buiter, saying that there will inevitably be several euro area sovereign debt restructurings over the next few years. And if there’s one thing that everybody can agree on, it’s that if you’re going to restructure your debt, it’s always better to do it sooner rather than later.
Do eurozone leaders need to keep failing? - We are told that eurozone finance ministers meeting yesterday and today (with other EU ministers) in Brussels are keen to put the crisis in the single currency behind them. Well, maybe. But you could argue that they shouldn't put it too far behind them. Why? Because across the eurozone, governments are pinning their recovery hopes on a weak euro. And in 2011, most analysts are expecting the euro to go up. Arguably, the only way to stop the euro from strengthening, in the current global environment, would be for ministers to continue to mismanage the crisis. In other words, to support the real economy, they need to fail to put at least some of the markets' worries to rest. Naturally, I am being a little facetious. But I have been struck by the number of city forecasters predicting that the euro will go up in 2011. Goldman Sachs, for example, is betting that one euro will be worth $1.50 by the end of this year.
Germany resists reforms to EFSF - Encouraged by the success of the Portuguese and Spanish bond auctions, Germany is ready to offer only minimal concessions on the EFSF; Schäuble says Germany was only willing to raise the level of guarantees to full utilise the existing ceiling; Barroso says Germany is wrong; Trichet says a new EFSF needs to be much more flexible and agile; Angela Merkel says deal only imaginable as part of a wider package (meaning tougher fiscal measures and more deflationary adjustment elsewhere); Wolfgang Münchau says small extension of EFSF is pointless; Brian Cowen faces a leadership contest as foreign minister calls for change in party leadership; Slovakia says Greece should restructure its debt; Lorenzo Bini Smaghi said the Irish stress tests had cast doubt on the stress tests elsewhere; the French European affairs minister wants another grand industrial project; Willem Buiter, meanwhile, says no sovereign is safe in the present situation. [more]
Germany rejects major boost to EU bailout fund - Germany's finance minister rejected talk of a major expansion of the euro750 billion ($1 trillion) eurozone rescue fund as he prepared to meet Monday with his European counterparts. The European Commission last week advocated bolstering the size of the fund, with some suggesting it should be doubled. But German Finance Minister Wolfgang Schaeuble said that "with such isolated approaches, the matter doesn't become easier but more complicated." Berlin argues that the only point which needs addressing is how to make sure the fund's full headline value is actually available to lend. At present, it doesn't have the full amount on tap in part because, to get a triple-A credit rating, governments committed to guarantee 120 percent of the value of the bonds the fund issues. "We have to discuss in the medium term what we can do there, but currently there is no need for this agitated discussion — it only unsettles the markets," Schaeuble told Deutschlandfunk radio
Germany is extracting a very high price for a very small concession - Schäuble wants more fiscal discipline – above and beyond the stability pact – for a marginal increase in the EFSF’s lending ceiling; no decision taken yesterday, no timetable for a decision given either; Germany remains opposed to some of the more ambitious proposals on the EFSF’s mandate, including bond purchases; A Reuters poll of economists suggests that the EFSF’s ceiling should go up to €700bn; Peter Praet and Elena Kohutikova are proposed for a vacant job at the ECB; Frankfurter Allgemeine wonders what purpose the increase in the EFSF’s ceiling would serve; Orphanides says decision to widen remit of EFSF would get ECB off the hook in terms of its own bond purchases; France is unhappiness about Axel Weber as ECB president, and is still desperately searching for alternatives; the Portuguese central bank has agreed to cut wages; Merkel proposes joint European retirement age of 67; bond spreads move sideways, except for the French spread, which moves up; Germany, meanwhile, has taken up the latest economic fad, exploring the development of a happiness indicator. [more]
Bonds at Risk as Moody's, S&P Poised to Lower Credit Ratings -Europe’s most-indebted countries are vulnerable to additional rating cuts driving up their borrowing costs, which may pressure policy makers to muster a more aggressive response to the region’s debt crisis. “To say that we are at the bottom of credit ratings cycle, by implication one will have to believe that the deleveraging process has come to an end,” “I don’t think that’s the case.” Fitch Ratings cut Greece to BB+ on Jan. 14, joining Standard & Poor’s and Moody’s Investors Service in bestowing junk status on the country’s debt. Moody’s began reviewing Portugal and Spain in December after S&P started its three-month clock on whether to downgrade Spanish debt. The European Union’s so-called peripheral countries have seen their creditworthiness evaporate as surging budget deficits and slumping economic growth boosted debt. The bailouts of Greece and Ireland have focused investor scrutiny on other high- deficit countries such as Portugal, Spain and Belgium.
Dutch finance minister rattles the markets - Ecofin rejects increase in EFSF’s nominal ceiling of €440bn, but a compromise to raise effective ceiling is still on; a misleading announcement by Jan Kees de Jager sent some peripheral eurozone bonds into a tailspin; he also said that the Dutch parliament would reject a more flexible EFSF; ministers also agree in principle that the new stress tests should account for liquidity and solvency, but many disagreements remain; El Pais says core tier one requirements in the stress tests would be raised to beyond 6%; Reuters Breakingviews says stress tests were “inching towards credibility”; Axel Weber predicts German deficit to fall to 2.5% this year; S&P announces mass downgrade threat for European structured mortgage products; there is more pressure in France for a scrapping of the wealth tax; Unctad says exit from stimulus packages could land eurozone in another stagnation; Wolfgang Münchau says Germany’s FDP has become an incompetent anti-European ragbag; Brian Cowen, meanwhile, has survived a leadership challenge. [more]
Ecofin discussed a concrete Greece debt restructuring scheme - So much for all the denials: European finance ministers considered a scheme under which Greece, supported by the EFSF, would buy back its own debt; Regling says EFSF’s effective lending ceiling should be raised to the nominal ceiling, and says that ceiling is big enough for Spain; European Systemic Risk Council meets for the first time; Portugal has another private debt placing; Barroso says Ireland only has itself to blame for its irresponsible fiscal and financial policies; FT writes in a news analysis that finance ministers will only act if pushed by the markets; the European Commission is planning a scoreboard of five criteria to measure imbalances; Jean Quatremer says Paris is ready to veto Axel Weber, and may end up without a representative for a year; Frankfurter Allgemeine argues that the ECB will find it hard to maintain its banking policies and fight inflation at the same time; Anna Iara and Guntram Wolff make the case for numerical fiscal rules; French think tanks favours payroll tax cuts to close competitiveness gap with Portugal; Peter Ehrlich, meanwhile, says Merkel should consider Barroso’s job post-2014. [more]
EU Leaders Must End Default `Taboo,' CDU's Lauk Says - European leaders should drop their “taboo” against debt restructuring, the head of the business caucus of Chancellor Angela Merkel’s party said, indicating that she has support to take more aggressive action in stamping out the euro-area crisis. “I would recommend looking at it very closely, stop declaring it taboo and do the appropriate analysis to see where that would lead,” Kurt Lauk, president of the German Christian Democratic Union’s Economic Council, said in a phone interview. The pick-up in European economic growth means the bloc can better withstand default by debt-addled smaller countries such as Greece, Ireland and Portugal, Lauk said. He also revived a proposal aired last year by German Finance Minister Wolfgang Schaeuble for a “European Monetary Fund,” saying it would be the centerpiece of a broader crisis-fighting strategy.
Euro Gains Amid Optimism Leaders Will Act to Ease Debt Crisis -- The euro rose against all its major counterparts as speculation increased that European policy makers will craft a long-term approach to handle the region’s sovereign-debt crisis.The 17-nation euro advanced the most against the currencies of commodity-exporting countries, such as the South African rand and New Zealand dollar, on concern China will take more measures to cool economic weakened, curbing appetite for raw materials. Canada’s dollar weakened, touching parity with its U.S. counterpart, after the nation’s central bank held interest rates unchanged. The U.S. dollar fell against the euro before a Federal Reserve policy meeting next week.“There’s still a degree of optimism that the leaders will deliver something on the European Financial Stability Facility fund,” said Alan Ruskin, global head of Group-of-10 foreign exchange strategy at Deutsche Bank AG in New York.
ECB Backs Off Rate Hikes; The Art of Buying Time - The Euro soared in conjunctions with a "successful" auction on Portugal (about 3.5% higher than German 10-Year Bonds) followed by comments from Trichet about rate hikes when the Euro was in a strenuously oversold condition.Crashes come from oversold conditions, not overbought ones, and central bankers are well aware of it. Trichet got the reaction he wanted, now he attempts to "fine tune" investor expectations. Please consider ECB Officials Retreat From Threat of Higher Rates “The Governing Council of the ECB sees present interest rates as adequate,” council member Ewald Nowotny said at an event in Budapest yesterday. “We do not see a need for an interest rate change in the foreseeable future.” Bundesbank President Axel Weber also said he expects inflation to remain below the ECB’s 2 percent limit in the medium term, softening his language on the risks to price stability. “It looks like the ECB is now trying to fine-tune market expectations,”
Germany wants the non-triple A countries to share the bailout costs - Germany wants a fairer burden sharing between AAA and not triple A countries in providing funds for EFSF; Schäuble is in principle open to the idea of a bond buy back, but seeks a comprehensive package; calculations suggest that the scheme would at most have a marginal impact; the Bundestag is likely to oppose any scheme that involves a larger EFSF ceiling, or a larger German contribution; Brian Cowen was forced to announce early elections in Ireland after his cabinet reshuffling failed spectacularly; Irish taxpayers footing the bill for bondholders could well become a campaign issue; Draghi and Weber have both been elected to the ESFB’s steering committee, the centre of power in Europe’s latest unwieldy institution; the failure of property developers in Spain – and the associated costs to the banking sector –could be worse than the previous worst-case estimates; OECD report says policies in favour of home ownership prevent necessary labour mobility; the changes in Spanish dismissal laws have led to a small increase in the number of permanent job contracts; The French tax system is effectively not progressive after all; German long term bond yields on the rise; Samuel Brittan, meanwhile, argues that the central banks should completely ignore the rise in food and energy prices. [more]
Three-and-a-half questions for the Davos gurus - For the last several years, the World Economic Forum (WEF) has published an annual report on global risk, as part of the run-up to the storied annual meeting in Davos. The 50-page report makes for gloomy reading: it is a dense collection of some of the major threats to the world’s security — from asset price collapse to weapons of mass destruction — and the interconnections between them. And they’re all carefully mapped in terms of their perceived likelihood and perceived economic impact. You’ve got hand it to WEF: their report is thorough and sobering, and makes a great reference tool for later in the year. Last year’s report said that “there is a rising risk of sovereign defaults,” and that proved more accurate and expensive than anyone wished. Yet for all its insistence on a big-picture, global perspective, the WEF risk report can seem internally contradictory or just hollow, as if pieces of cloth were produced in separate quarters with no one sewing them into a coherent quilt. And so, for those who want the big picture to be even bigger, here are three-and-a-half major questions raised, but not answered by the WEF risk report.
World needs $100 trillion more credit, says World Economic Forum - The world's expected economic growth will have to be supported by an extra $100 trillion (£63 trillion) in credit over the next decade, according to the World Economic Forum. This doubling of existing credit levels could be achieved without increasing the risk of a major crisis, said the report from the WEF ahead of its high-profile annual meeting in Davos. But researchers warned that leaders must be wary of new credit "hotspots", where too much lending takes place, as the world emerges from a financial catastrophe blamed in large part "to the failure of the financial system to detect and constrain" these areas of unsustainable debt. "Pockets of credit grew rapidly to excess – and brought the entire financial system to the brink of collapse," said the report, written in conjunction with consulting firm McKinsey. "Yet, credit is the lifeblood of the economy, and much more of it will be needed to sustain the recovery and enable the developing world to achieve its growth potential."
UK Debt May Double on RBS, Lloyds Liabilities, Telegraph Says - The U.K.’s debt may more than double to 2.5 trillion pounds ($4 trillion) from 971 billion pounds, the Sunday Telegraph reported today, citing data from the Office for National Statistics. The ONS will publish the debt figures at the end of January, the Telegraph said, when the statistics agency will include liabilities for the government’s bailout of banks, including Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc, for the first time. “It’s been the ONS’s intention to incorporate Lloyds and RBS into the public finances since 2009, following the support they received in 2008,” a Treasury spokesman cited by the newspaper said. “This change won’t affect the Government’s deficit-reduction plan.”
CIA Fun Facts - The CIA produces the World Fact Book. There is a lot of interesting information to look at. The spooks have been updating the info for 2010. Some of the year over year comparisons are interesting. In its intro to the Global Economy they had the following to say. I think they summed things up pretty well: The fiscal stimulus packages put in place in 2009-10 required most countries to run budget deficits - government balances have deteriorated for 14 out of every 15 countries. Treasuries issued new public debt - totaling $5.5 trillion since 2008 - to pay for the additional expenditures. To keep interest rates low, many central banks monetized that debt, injecting large sums of money into the economies. As economic activity picks up, central banks will face the difficult task of containing inflation without raising interest rates so high they snuff out further growth.