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

Saturday, January 8, 2011

week ending Jan 8

US Fed's balance sheet at record in latest week -  (Reuters) - The Federal Reserve's balance sheet rose to $2.418 trillion in the week ended Jan. 5 from $2.403 trillion the prior week. The balance sheet has been expanding since the U.S. central bank last month began a second round of quantitative easing, known as QE2. The Fed expects to but about $600 billion in U.S. government debt over an eight-month period in an effort to stimulate the economy.The balance sheet topped the previous record of $2.333 trillion set in May as the Fed was about to end its initial round of bond purchases that involved $300 billion of Treasuries and $1.425 billion in mortgage-related securities. The second round of quantitative easing follows the Fed's use of proceeds from maturing mortgage securities in its portfolio to buy Treasuries -- a move that started in August. Since that time, it has purchased about a combined $254 billion in Treasuries. The central bank's holdings of U.S. government securities totaled $1.031 trillion on Wednesday, up from $1.016 trillion last week.

Fed's Balance Sheet Expands In Latest Week‎ -  The U.S. Federal Reserve's balance sheet expanded in the latest week as the central bank's Treasury holdings increased and commercial bank borrowing fell. The Fed's asset holdings in the week ended Jan. 5 rose to $2.439 trillion, from $2.423 trillion a week earlier, it said in a weekly report released Thursday. The Fed's holdings of U.S. Treasury securities rose to $1.031 trillion on Wednesday from $1.016 trillion a week earlier. Meanwhile, Thursday's report showed total borrowing from the Fed's discount lending window slipped to $44.62 billion Wednesday from $45.08 billion a week earlier.Borrowing by commercial banks fell to $10 million Wednesday from $58 million a week earlier. Thursday's report showed U.S. government securities held in custody on behalf of foreign official accounts rose to $3.355 trillion, from $3.351 trillion in the previous week.  U.S. Treasurys held in custody on behalf of foreign official accounts climbed to $2.621 trillion from $2.618 trillion in the previous week.

Foreign central banks' US debt holdings rise - Fed - (Reuters) - Foreign central banks' overall holdings of U.S. marketable securities at the Federal Reserve rose in the latest week, data from the U.S. central bank showed on Thursday. The Fed said its holdings of U.S. securities kept for overseas central banks rose $3.44 billion in the week ended Jan. 5, to stand at $3.355 trillion.The breakdown of custody holdings showed overseas central banks' holdings of Treasury debt rose by $2.6 billion to stand at $2.621 trillion.Foreign institutions' holdings of securities issued or guaranteed by the biggest U.S. mortgage financing agencies, including Fannie Mae and Freddie Mac, rose by $849 million to stand at $734.34 billion. For balance sheet graphic: Overseas central banks, particularly those in Asia, have been huge buyers of U.S. debt in recent years, and own over a quarter of marketable Treasuries. China and Japan are the biggest foreign holders of Treasuries.

FOMC Minutes: Economic improvement "not sufficient" for QE2 changes - From the December 14, 2010 FOMC meeting. These are probably the key sentences:  While the economic outlook was seen as improving, members generally felt that the change in the outlook was not sufficient to warrant any adjustments to the asset-purchase program, and some noted that more time was needed to accumulate information on the economy before considering any adjustment. Members emphasized that the pace and overall size of the purchase program would be contingent on economic and financial developments; however, some indicated that they had a fairly high threshold for making changes to the program. And on the outlook:  Regarding their overall outlook for economic activity, participants generally agreed that, even with the positive news received over the intermeeting period, the most likely outcome was a gradual pickup in growth with slow progress toward maximum employment.

Fed Minutes: High Bar for Changes to QE2 - Minutes from the December Federal Reserve meeting point to a high bar for the central bank to change its $600 billion bond buying program. Some have argued that a recent run-up in interest rates as evidence the Fed’s program is ineffective. But officials noted a number of reasons for the increase, including stronger growth prospect, year-end positioning by the markets and the package of tax cuts that provide stimulus but also add to deficit concerns. There was another reason mentioned – that the Fed’s bond-buying program was smaller than markets expected. “A number of participants indicated that, because the backup in rates appeared to importantly reflect changes in investors’ expectations about the size of Federal Reserve asset purchases, the backup was consistent with purchases helping to keep longer-term yields lower than would otherwise be the case,” the minutes said. This was seen as evidence that the program is working, and made clear that changes are unlikely.

Fed Minutes: Economy Still Too Weak To Cut Off Stimulus - The economy remains sluggish and the jobs situation too bleak for the Federal Reserve to consider halting the $600 billion asset purchase plan announced in November, the minutes of the last Federal Open Market Committee meeting said Tuesday. Although participants saw incoming info "pointing to some improvement in near-term outlook," policy makers remained deeply concerned about unemployment hovering near 10 percent. With the Fed suggesting the risk of deflation is receding and that core inflation has bottomed out, the benefits of the bond purchase program outweigh any possible negative consequences, according to Fed officials.

Fed May Keep Easing at `Full Throttle' Until Jobless Rate Falls - Federal Reserve officials signaled they’ll probably push ahead with unprecedented stimulus until the recovery strengthens and many of the 15 million unemployed Americans find work.  The jobless rate hasn’t fallen below 9.4 percent since May 2009 and will probably average that figure this year, according to a Bloomberg News survey of economists. Unemployment probably declined to 9.7 percent last month from 9.8 percent in November, according to the average estimate of a Bloomberg poll prior to a Labor Department employment report on Jan. 7.  While growth has picked up since the Fed announced plans on Nov. 3 to buy $600 billion of bonds, policy makers remain focused on their failure to achieve their goals of full employment and an inflation rate of about 2 percent, according to the minutes of their Dec. 14 meeting released yesterday. The recovery’s pace is likely to “remain modest, with unemployment and inflation deviating from the committee’s objectives for some time,” the minutes said.

Fed’s Hoenig Defends Role of Dissenter -The man who opposed every official action taken by the Federal Reserve last year continued to express his opposition to the current stance of monetary policy Wednesday, and said he believes the economy should continue to recover and add jobs in 2011. “The economy is in recovery, although at a moderate pace,” Federal Reserve Bank of Kansas City President Thomas Hoenig said. “Barring unexpected surprises, the recovery should gain momentum, which will encourage hiring and slowly bring down the unemployment rate,” he said, adding that while it would be nicer to see a faster retreat in the unemployment rate, the economy is undergoing a major readjustment that slows the rate of improvement. Hoenig’s comments come from the text of a speech he was to give in Kansas City before the Central Exchange. He has rotated out of the voting roster of the interest rate setting Federal Open Market Committee, after an action packed stint in 2010. The official cast dissenting votes at all eight of the Fed’s meetings, worrying that the very low stance of interest rates, followed by the resumption of a program to buy longer-dated Treasury bonds, were setting the stage for future financial problems.

Fed’s Evans: Weak Outlook Calls for Continued Strong Fed Action - A key Federal Reserve official argued forcefully Friday for the central bank to continue providing support to the economy, saying the improving economic outlook is unlikely to bring much relief on the unemployment front for some time. Given the outlook, “substantial policy accommodation continues to be warranted,” Federal Reserve Bank of Chicago President Charles Evans said. “We need to keep short-term nominal policy rates low for an extended period,” he said, describing the bond-buying program as “a complementary policy tool in this regard as it solidifies our commitment to keeping short-term rates low for an extended period.” Collectively, “our policies are striving to achieve this appropriate accommodation,”

What's QE2 accomplishing? -BUTTONWOOD continues his scepticism of the value of the Federal Reserve's new asset purchases in a post citing a study by David Ranson of Wainwright Economics. Mr Ranson has conducted a basic analysis tracking growth and inflation between 1950 and 2007, relative to change in the monetary base. He finds that growth is higher in years with slower monetary base growth, and Buttonwood concludes:QE just expands claims on wealth, not wealth itself, and thus does not really help the economy. As you might expect, I don't find this particularly persuasive. For one thing, the monetary base doesn't move off trend that much, and when it does its typically due to countercyclical Fed action: The base drops as the Fed tries to cool an overheating economy, rises as the Fed tries to perk up a lagging economy, and soars when crisis strikes. It should be obvious that growth is generally the response to, rather than the cause, of an expectation of slowing growth.

Bernanke on Munis, Oil and Fed’s Mandate - Federal Reserve Chairman Ben Bernanke pontificates on the municipal bond market (worries are overblown), the dollar (it’s holding up), oil (don’t blame him for its rise) and the Fed’s mandate (he welcomes a debate on it) in the question and answer session of his testimony with the Senate Budget Committee. Here are the highlights so far:

  • 1) Mr. Bernanke downplayed the notion that many state and local governments run the risk of defaulting and that the municipal bond market could be headed for turmoil. The muni market, he says, has been functioning “reasonably well,” with lots of bond issuance and liquidity in trading.
  • 2) Mr. Bernanke says his quantitative easing policy is not to blame for the sharp increase in the price of oil. Instead, oil’s rise is the result of strong demand from emerging markets.
  • 3) He welcomed a congressional debate about the Fed’s legal mandate. Mr. Bernanke said he’s not seeking a change in the mandate, but could live with a change if Congress decides to pursue one.

Revealing Study of FOMC References to the Fed's Mandate - John Taylor - Dan Thornton of the Federal Reserve Bank of St. Louis just completed a very revealing paper called What Does the Change in the FOMC’s Statement of Objectives Mean? in which he traces FOMC references to the Fed’s mandate over many years. He documents a historically significant recent shift in the language with important legislative and policy implications. Until very recently the FOMC policy statement did not explicitly mention the “maximum employment” part of the dual mandate in the Federal Reserve Act. But on September 21, 2010 the FOMC changed the policy statement by starting to refer explicitly to “maximum employment.” The change coincides with efforts to promote QE2 and thereby provides factual evidence that the dual mandate was a factor in gaining support for this unconventional large-scale asset purchase program, Dan Thornton finds no references to “maximum employment” from 1979, when Paul Volcker took over as Fed chair, until the language was inserted in the December 2008 Directive.

What is the Treasury Up To? -As I pointed out here, the QE2 Treasury security purchases by the Fed have actually had little effect on the stock of outside money, principally because there have been large inflows into the Treasury's General Account at the Fed. That continues to be the case. The first chart shows securities held outright by the Fed. According to plan, the Fed's stock of securities has increased about $122 billion since the QE2 program began in November 2010. However, in the next chart, we see modest increases in currency and reserves. Since early November, the increase in currency is about $18 billion, and in reserves only about $10 billion. The next chart, however, shows that the Treasury accumulated $81 billion in its General Account over the same period.  In its General Account and Supplementary Financing Account with the Fed, the Treasury now holds a total of about $315 billion.

Fed Watch: A Solid Start To 2011 - The ISM manufacturing number was not a blowout by any means. Indeed, the rise to 57.0 headline number was slightly below expectations. Still, it is a solid number and the internals were generally supportive. New orders gained while inventory measures declined, suggesting solid sales that will sustain future production. Not surprisingly, the pricing component remains high, consistent with rising commodity prices - indeed, according to the report, no industries reported falling prices. The disappointment in the report was the employment measure, which fell from 57.5 to 55.7. I am not sure this tells us much about the impending employment report for the final month of 2010 - I don't think anyone had high hopes that the manufacturing sector would lead a jobs recovery; the minimal gains in durable goods manufacturing stalled out in the second half of 2010 while employment in nondurable goods generally continued the free fall initiated in the mid-90s. Overall, the ISM report was generally consistent with the relatively upbeat flow of data seen in recent weeks suggesting that growth accelerated to something above trend at the end of 2010. This, coupled with decreasing initial unemployment claims, supports the consensus expectation for 140k nonfarm payroll gain in Friday's report. While well above the dismal October report, it would promise persistent high unemployment, as 140k would be at the top end of estimates of natural labor force growth.

Fed Watch: Generally Positive - Today's ISM nonmanufaturing headline figure provided further evidence the US economy left 2010 on firmer footing. Generally solid internals as well, with both production and new orders posting solid gains. Like its manufacturing cousin, the weak spot was employment, a critical determinant for the evolution of Fed policy this year.  In contrast, the ADP numbers were released with great fanfare, suggesting a 297k gain in private nonfarm payrolls. A potential blowout in the making given that expectations for Friday's employment report was 140k overall. However, a word of caution regarding the ADP figure via the Wall Street Journal: But there is a seasonal quirk in the ADP number that may have inflated the December number. ADP and Macroeconomic Advisers do a seasonal adjustment that takes into account a typical December purge, where employers who have fired workers over the course of the year but don’t remove them from officials payrolls right away clear the rolls.

Fed’s Duke Plays Down Inflationary Threat - U.S. Federal Reserve governor Elizabeth Duke on Friday sought to allay worries over a potential inflationary threat and to defend a controversial bond-buying program that is expanding the central bank’s already ballooned balance sheet. “The expansion of securities holdings was worth implementing to support the economy and make the recovery more durable,”  The program, through which the Fed is buying $600 billion in additional U.S. government debt by the end of the second quarter, was meant to drive down interest rates. But long-term rates have instead risen as the Fed’s Treasury holdings have climbed above the $1 trillion mark. Duke attributed the rising rates to “a strengthening in market participants’ outlook for the economy and a corresponding decrease in the market’s expectation for future accommodation.”

Why Inflation Fears Are Seriously Misguided - Here is a quiz for all the hard-money advocates of the world: what common message do the following three figures tell us? The first figure shows for the combined balance sheets of households, non-profits, corporations, and non-corporate businesses the percent of total asset that are liquid ones. The traditional money assets include cash, checking accounts, saving and time deposits, and money market funds. The figure is created using the flow of funds data. Note the sudden and sustained spike in the liquid share over the past few years: The second figure shows the velocity of various money measures. Note that all velocity measures have fallen and remain well below pre-crisis levels: The third and final figure shows the level of total current dollar spending per capita. Note here that nominal spending per person as of the 2010:Q3 is where it was in 2007:Q2:

2011: Year of the Yellow Brick Road - Let's enjoy the dream for a moment: the Federal Reserve (Fed) has sprinkled money on the economy, Congress has kept taxes low and we see signs of a recovery. A recovery driven by consumers with more disposable income. Where do they get it from? The reduced payroll tax? Maybe, but how about all the money consumers have at their disposal now that they have stopped paying their mortgage? What a wonderful life this must be! Because the Fed doesn't quite believe in the recovery, we believe QE2 will run it's course - Fed Chairman Bernanke has repeatedly stated that one of the grave policy mistakes during the Great Depression was that monetary policy was tightened too early. He appears committed to not letting history repeat itself; investors may want to trust him on that, as well as his commitment to push inflation higher. The challenge the Fed has, of course, is that while it can create asset inflation, the Fed has a difficult time influencing which assets inflate.

The American Dream - The AMERICAN DREAM is a 30 minute animated film that shows you how you've been scammed by the most basic elements of our government system. All of us Americans strive for the American Dream, and this film shows you why your dream is getting farther and farther away. Do you know how your money is created? Or how banking works? Why did housing prices skyrocket and then plunge? Do you really know what the Federal Reserve System is and how it affects you every single day? THE AMERICAN DREAM takes an entertaining but hard hitting look at how the problems we have today are nothing new, and why leaders throughout our history have warned us and fought against the current type of financial system we have in America today. You will be challenged to investigate some very entrenched and powerful institutions in this nation, and hopefully encouraged to help get our nation back on track.

End of the Recession? Who’s Kidding Whom? - The media are telling us that the economic “crisis” is over, and that the world-economy is once more back to its normal mode of growth and profit. On December 30, Le Monde summed up this mood in one of its usual brilliant headlines: “The United States wants to believe in an economic upturn.” Exactly, they “want to believe” it, and not only people in the United States. But is it so? First of all, as I have been saying repeatedly, we are not in a recession but in a depression. Most economists tend to have formal definitions of these terms, based primarily on rising prices in stock markets. They use these criteria to demonstrate growth and profit. And politicians in power are happy to exploit this nonsense. But neither growth nor profit is the appropriate measures.

Deep Hole Economics, by Paul Krugman, Commentary, NY Times: If there’s one piece of economic wisdom I hope people will grasp this year, it’s this: Even though we may finally have stopped digging, we’re still near the bottom of a very deep hole.  What particularly concerns me is the risk of self-denying optimism — that is, I worry that policy makers will look at a few favorable economic indicators, decide that they no longer need to promote recovery, and take steps that send us sliding right back to the bottom.  We’re not talking Morning in America here. Construction shows no sign of returning to bubble-era levels, nor are there any indications that debt-burdened families are going back to their old habits of spending all they earned. But all we needed for a modest economic rebound was for construction to stop falling and saving to stop rising — and that seems to be happening. Forecasters have been marking up their predictions; growth as high as 4 percent this year now looks possible.  Jobs, not G.D.P. numbers, are what matter to American families. And when you start from an unemployment rate of almost 10 percent, the arithmetic of job creation — the amount of growth you need to get back to a tolerable jobs picture — is daunting.

Facing a marked global reversal, by Joseph Stiglitz - 2008 showed that our global era can bring faster growth, but faster declines too – as a crisis made in America spread quickly. 2009 saw the benefits of a global response, but in 2010 divisions returned. Asian growth bounced back, but advanced countries were mired in high unemployment. 2011 will see further divergences. In spite of evidence that Keynesian policies worked (China being the pre-eminent case) and austerity led to predictable contractions, much of Europe is pushing austerity anyway. The moment of coordinated macropolicies aimed at recovery is a faint memory. Worse, America’s quantitative easing is now viewed as an update of the policies that marked the Great Depression. The world is waking up to the way exchange rates can be used in self-promotion at the expense of others – discouraging imports and enhancing exports. America says its monetary policy promotes investment by lowering interest rates, not exchange rates. But emerging countries claim their interventions are to build up reserves, not protect against volatile capital markets. Such beggar-thy-neighbour policies didn’t work in 1930s, because countries responded in kind. Today the same will happen. Indeed, emerging markets are already responding to unwanted funds with capital controls, taxes on capital gains, exchange rate interventions and lower interest rates. The result? More uncertainty in financial markets, greater fragmentation of capital markets, and a marked reversal in globalisation.

Why the World Is Financially Doomed in Four Charts - Though the complexities may appear endless, the global economy's coming implosion is really fairly easy to understand: here are four charts which do the heavy lifting. It boils down to these basics:

  • 1. When money is dear and difficult to borrow, then productivity and capital accumulation are encouraged, speculation, malinvestment and debt-based consumption are discouraged.
  • 2. When money is "free" (zero-interest rate policy) and liquidity is unlimited, then the opposite conditions hold: speculation in risk assets, malinvestment and debt-based consumption are all encouraged, and productivity and capital accumulation are heavily discouraged.
  • 3. When debts exceed the value of the underlying assets, the only way out of the Tyranny of Debt is to write off the debt on both the borrower and lender's balance sheets, wiping out their capital via liquidation and bankruptcy.
  • 4. The "extend and pretend" policy pursued by all major nations is simply transferring the impaired debt from private hands to the taxpayers (public debt), crippling the economy with higher taxes and higher debt service.

30 Reasons Why 2011 Is Going To Be Another Crappy Year For America’s Middle Class -Do you think that 2011 will be a good year for America's middle class?  Well, you might not be so optimistic after you read the 30 statistics posted below.  The truth is that 2011 is going to be another crappy year for America's middle class, and there is not a whole lot that you or I can do about it.  Sadly, what we are facing as a nation is not just a short-term economic downturn.  Rather, there are some very serious long-term economic trends that are absolutely ripping apart the U.S. middle class.  For example, did you know that even though our population has been growing at a brisk pace we have lost about ten percent of our middle class jobs over the past decade?  The vast majority of jobs that have been created have been low paying service jobs.  We now have hordes of highly educated young people that are waiting tables and that are welcoming customers to Wal-Mart.  Without good paying jobs there is no middle class, but today American corporations are actually creating more jobs overseas than they are inside the United States.  This has helped pad the profits of the big corporate fatcats, but it has been devastating for middle class communities across the United States.

Battles loom between creditors and borrowers - A few weeks ago, a large US investment bank asked a discreet question of its biggest institutional investor clients. How long would it be before the debt crisis that has struck Europe reached the US? One, two or three years, or never? “Under 10 per cent said never,” says a banker involved in the polling.Last year brought the eurozone debt crisis. Greece and Ireland had to be bailed out and big question marks still hang over Portugal and Spain. But the focus is now likely to widen. The question for 2011 is how much of the western world could be caught up.“It is definitely looking more systemic,” says Kenneth Rogoff, a Harvard professor who was formerly chief economist at the International Monetary Fund. “Whenever there is a wave of banking crises, a wave of sovereign debt crises follows a few years later.” For many, the focus on government debt merely represents the latest act in a sprawling drama that ensnared emerging markets at the end of the last century and has since moved on to developed nations. It culminated with the bursting of the credit bubble three years ago in an event that both ended the debt-fuelled housing boom and sparked the financial crisis.

Central banks underpin euro and diversify toward "other currencies"-- Rebecca Wilder -The IMF released its Q3 2010 Currency Composition of Official Foreign Exchange Reserves (COFER) report. The COFER database provides the breakdown of official central bank portfolio holdings by currency across advanced and emerging/developing market economies. The picture is roughly half complete, as 44% of the global reserve positions go unallocated. But the trend in reported FX holdings indicates that central banks are supporting the euro, giving it a lower bound. Furthermore, there has been a shift in portfolio holdings toward "other currencies" in advanced and emerging market central bank portfolios. According to the report, Q3 2010 total central bank reserve holdings increased to $9.0 trillion, up by $564.4 billion over the quarter. $317.7 billion of the increased asset holdings are not "allocated" a currency denomination ("unallocated reserves" in the charts below), but the rest, $247 billion new portfolio holdings, were denominated in the following currencies:

    • $107.7 billion in new assets denominated in US dollars
    • $3.4 billion in new British pound assets
    • $24.2 billion in new Japanese yen assets
    • $0.3 billion in new Swiss franc assets
    • $87.5 billion in new Eurozone euro assets
    • $23.6 billion in new "other currency" assets

World Bank issues first yuan-denominated bond - The World Bank has issued its first yuan-denominated bond in a move that will help China as it tries to increase the use of its currency in global markets. The Washington-based lender said Tuesday it would raise 500 million yuan (76 million dollars) from the two-year bond issue on Hong Kong's yuan-denominated bond market. The move will "further deepen the market and permit investors to diversify their currency holdings and expand renminbi exposure", the World Bank said in a statement, using the official name for the Chinese unit. Last month, China said its second yuan-denominated bond issue in Hong Kong had initially raised five billion yuan, with plans for another three billion yuan to be sold.The move followed Beijing's first yuan-denominated bond issue in Hong Kong in September last year, worth about six billion yuan.

World Bank Issues Its First-Ever Yuan Bonds - The World Bank said it is issuing its first-ever bond denominated in China's currency, the yuan, in Hong Kong, as the country promotes international use of its currency, also known as the renminbi.  The World Bank said in a statement dated Monday that it is raising 500 million yuan ($76 million) by issuing the two-year bonds, which pay out 0.95 percent in interest semiannually. It said the money would be added to its normal pool of cash, rather than being raised for a specific purpose. The bonds are issued by the Washington-based lender's International Bank for Reconstruction and Development arm and get its "AAA" rating, the highest possible.

If a Stronger Yuan is Good, Can A Weaker Dollar be Bad? - One of the top themes for 2010 in economics, politics, and diplomacy was the damage being done to the U.S. economy by an undervalued Chinese yuan. As the yuan began to appreciate in the second half of the year, slowly in nominal terms but more rapidly in real terms, everyone cheered. At the same time the yuan appreciated, the dollar depreciated, not just relative to the yuan, but to all foreign currencies on average. The broad weakness of the dollar was welcomed much less enthusiastically. Words like "unpleasant" and "grim" tended to be used instead. So what gives? If a stronger yuan is good, can a weaker dollar really be bad?

Top Economists Question Continued U.S. Dominance - Many economists meeting in Denver for the annual conference of the American Economic Association believe the Federal Reserve hasn’t done a good job in steering the economy, with at least one predicting the Chinese yuan will supplant the U.S. dollar as the world’s dominant currency. “The age of American predominance is over,” said Simon Johnson, a professor at the Massachusetts Institute of Technology and formerly a top economist at the International Monetary Fund. He believes the yuan will become the world’s reserve currency in two decades. The global financial crisis caused by the U.S. never ended, he told a panel on the causes of the crisis, because big and powerful banks can still bring down the U.S. economy by going under. John Cochrane, an economist from the University of Chicago, said he believes the financial crisis is over. But he fears the outcome will be “goodbye financial crisis, hello sovereign debt crisis,” he said, warning that California may become for the U.S. what Greece was for Europe.

Why is the euro so expensive? - LAST year, the euro was just about the worst-performing of the thirty-odd “major” currencies tracked by Bloomberg. That seems fitting: the sovereign-debt crisis at the euro zone’s edges was the biggest macroeconomic nasty in 2010. The wonder is that the euro did not fall harder. It lost “only” 6.6% of its value against the dollar, not a huge sell-off for a currency whose very existence seemed under threat. Even now, after an early-year rally in the dollar, the euro stands at $1.31 or so. The Economist’s Big Mac Index says $1.08 is the purchasing-power parity for the euro. So why isn’t the euro much cheaper? Perhaps foreign exchange market believe that the worst of the euro-zone crisis is over, that the troubles can be contained, or that Europe will somehow muddle through as it did last year. But it seems far more likely that trouble flares up again in a way that weighs heavily on the euro (and brings stock markets down to earth, too).Another explanation for the euro’s resilience is that investors hate the dollar at least as much, if not more. The deeper roots of the euro-zone’s sovereign-debt crisis lie with a competitiveness problem in Greece, Ireland, Italy, Portugal and Spain—countries that account for around a third of euro area GDP. These countries need a weak currency. But so does America.

George Soros: The United States Must Stop Resisting The Orderly Decline Of The Dollar, The Coming Global Currency And The New World Order - In the video you are about to see, George Soros talks about "the creation of a New World Order", he discusses the need for a "managed decline" of the U.S. dollar and he talks at length of the global need for a true world currency. So just who is George Soros? Well, he is a billionaire "philanthropist" who came to be known as "the Man Who Broke the Bank of England" when he raked in a staggering one billion dollars during the 1992 "Black Wednesday" currency crisis. These days Soros is most famous for being perhaps the most "politically active" (at least openly) billionaire in the world. His Open Society Institute is in more than 60 countries and it spends approximately $600 million a year promoting the ideals that Soros wants promoted. Soros and his pet organizations have played a key role in quite a few "revolutions" around the globe over the last several decades, but these days the main goal of George Soros is to bring political change to the United States.

Saving conservatives from themselves - I have a problem with several recent Forbes articles by John Tamny, who seems proud of his lack of expertise in the subject he writes about. In a new column, Tamny has accused me of calling anyone who favors the gold standard a “knuckle-dragger.” I don’t recall making that accusation (in this post), nor do I believe it to be true.  Indeed many highly intelligent economists favored the gold standard, as Tamny accurately points out.  Here’s the statement that led me to accuse Forbes magazine of anti-intellectualism:  if price stability were policy, it would still be the case that a phone call from Houston to Dallas would cost $15 for a half hour of conversation. It would similarly mean that we’d be paying thousands of dollars for flat-screen televisions, not to mention even more for computers that perform very few functions. When I tell other economists about this passage, even Tamny’s fellow libertarians, they break out laughing.  That’s not good.  I want libertarians to succeed.  We both favor small government. 

National Debt Ends 2010 By Topping $14 Trillion - There was a nice little New Year’s Eve present from the Department Of The Treasury that you might not have heard of Some milestone’s worth noting:

  • The national debt passed the $ 13,000,000,000,000 mark on June 3, 2010. It took 212 days for an additional trillion dollars to be added to the national debt.
  • Before that, it last passed a milestone number on November 17, 2009 when it hit $ 12,000,000,000,000. It took only 198 days for an additional trillion dollars to be added to the national debt.
  • Since Barack Obama took the Oath of Office, the national debt has increased from $ 10,626,877,048,913.08 to $ 14,025,215,218,708.52. That’s an increase of $ 3,398,338,169,795.44 in 710 days.

US Closes 2010 With $14,025,215,218,708 And 52 Cents In Debt, A $154 Billion Increase Overnight - When we predicted a few weeks ago that the US would end 2010 with $13.8 trillion in debt we miscalculated the settlement dates on all the last round of bond auctions . As a result, we are happy to announce that as of December 31, 2010, the US now has $14,025,215,218,708 and 52 cents in debt (incidentally this is an increase of $154 billion in debt on the US balance sheet overnight). As a reminder the debt ceiling is 14,294,000,000,000. Which means at a run rate of $125 billion in net monthly issuance, the US may not even get to the end of March at the current burn rate. Which also means Congress better start the discussion on raising the debt ceiling as soon as February. Which means someone is about to [win/lose] some serious cash on the Feb 28 debt ceiling hike InTrade contracts.

Is There Enough Oil to Pay Our Debt? - Whether you’re a taxpayer in the UK, Ireland or the US, it must already be pretty clear that you’re on the hook for a lot of IOUs borrowed from your future. What’s not clear is exactly how your government is going to pay that debt back.History would suggest that the yield on a ten-year US Treasury bond should be close to double what it is, given the size of Washington’s borrowing program. The reason it’s not is that creditors and debtors both share a common belief that a powerful economic recovery lies just around the corner—one so powerful, in fact, that tax revenues will suddenly fill government coffers and let bondholders be paid the huge sums they are owed while at the same time sparing taxpayers an otherwise draconian fate. The only problem is that the economic growth everyone is counting on is powered by oil. And as you’ve probably noticed, that’s getting more and more expensive to burn. So consider just how sustainable economic growth would be in a world of oil prices of $100 to $225 per barrel. Because those are the price parameters we’d be facing in the unlikely event that we actually see the kind of economic growth that bond markets and public treasuries around the world are so desperately depending on.

Fed Likely to Add New Dealers for Treasury Market - After a hiatus of more than one year, the Federal Reserve is likely to expand a select group of dealers to help with hefty Treasury debt sales and the central bank’s monetary-policy operations, according to traders and dealers familiar with the matter. Demand for safe-haven Treasurys has eased over the past couple of months as optimism over the economic outlook sparked more buying interest in riskier assets such as stocks. That means dealers need to play a bigger role in underwriting Treasury sales to avoid the risks of weak auctions.Lackluster participation by primary dealers could force the government to pay higher interest rates to issue debt, which in turn would hurt the broader economy by raising rates for consumers and companies. Treasury yields are benchmarks for mortgage rates and a variety of other borrowing costs for consumers and companies.

China Ex-PBOC Advisor Repeats Call to Cut Tsy Holdings - China should cut its holdings of U.S Treasuries to minimize losses on its foreign exchange reserves and let the yuan move more freely, Yu Yongding said in an opinion piece published in Caijing magazine.  Moving towards a more market-driven exchange rate would mean reduced intervention in the foreign currency markets, giving China the option of winding down its holdings of U.S. debt, Yu said.  "China should strive to reduce instead of further increasing (its holdings of) dollar assets," he said. "Specifically, China should reduce the growth of its foreign exchange reserves as soon as possible

Bill Gross Tells Bloomberg To "Avoid Dollar Denominated Government Debt" - When Nassim Taleb and Marc Faber say that US government debt is a suicide investment, one can be allowed some skepticism. After all, they are likely just talking their book. On the other hand, when the manager of the world's biggest bond fund, whose flagship fund Treasury holdings amount to almost $80 billion goes on Bloomberg and says to "avoid dollar-denominated government debt" better known as US Treasuries, and instead recommends viewers invest in "stable" currencies like the Peso, the BRL or the CAD, then you know the bottom in bonds is in. So in addition to dumping fixed rate bonds (which means Pimco will again be able to buy on the cheap ahead of QE3, which as Larry Meyer has by now likely advised Pimco is a sure thing), Gross also told Bloomberg that his other two strategies are to buy floating rate debt (over fixed), and lastly recommend credit spreads over interest rate duration risk. For those who find something troubling with a $1 trillion fixed income manager talking down his investments, and are still wondering whether or not QE3 is coming, we suggest putting one and one together. And while at it, they should also consider that Pimco now holds over $100 billion in MBS: a notional amount last held just as QE1 was announced.

Fear `Mindless' U.S. Deficit Spending, Pimco's Gross Says… Pacific Investment Management Co.’s Bill Gross said investors should favor emerging market corporate and sovereign debt as “mindless” U.S. deficit spending may result in higher inflation, a weaker dollar and the eventual loss of America’s AAA credit rating.  Buying debt in emerging market countries with higher real interest rates, wider credit spreads and strong balance sheets will offer more return as well as protection from dollar depreciation as U.S policy makers run up record deficits at the expense of economic growth, Gross, the manager of the world’s biggest bond fund, wrote in his monthly investment outlook.  “The problem is that politicians and citizens alike have no clear vision of the costs of a seemingly perpetual trillion dollar annual deficit,” Gross wrote in a note on Pimco’s website today. “As long as the stock market pulsates upward and job growth continues, there is an abiding conviction that all is well and that ‘old normal’ norms have returned. Not likely. There will be pain aplenty.”

Federal Budget Deficit in First Quarter of Fiscal Year 2011—$371 Billion - The federal budget deficit was $371 billion in the first quarter of fiscal year 2011, CBO estimates in its latest Monthly Budget Review, $18 billion less than the shortfall in the same period of fiscal year 2010. Revenues were 9 percent higher than they were a year ago, whereas outlays were only 3 percent higher. Later this month, CBO will issue new budget projections for fiscal year 2011 and the following 10 years. Revenues through December totaled about $531 billion, $43 billion more than in the same period last year.  Most of that net increase stems from higher withholding of individual income tax and social insurance payroll taxes, which rose by $33 billion (or 8 percent) in the first quarter because of strengthening economic conditions. Revenues also increased because individual tax refunds were lower than the abnormally high amounts for the same period a year before.

Government seen hitting debt limit in March or April - Wall Street economists, looking at recent seasonal spending and revenue trends, estimate the $14.3 trillion debt limit will be reached toward the end of March or sometime in April if Congress fails to raise it before then. Hitting the limit could force shutdowns of federal offices, as happened in 1995, threaten payments for Social Security and other federal benefits, or even cause a default on federal debt payments. "Bondholders don't like excitement. They like to be paid and do not like to read a lot of stories about possibly not getting paid,"

The US as deadbeat: discuss - BBC - Asked to name the biggest threat hanging over the global economy in 2011, most people will tell you it's the crisis in the Eurozone. Newsnight spent a lot of time debating its future only last night.   I decided we should also think about a more distant - but ultimately much larger - cloud on the global economic horizon. That is the possibility of a full-scale loss of confidence in US assets.  It's not an issue for the next few months, perhaps, especially with decent prospects for US growth in 2011. But both at the state and the federal level, America is awash with red ink, with debt rising "as far as the eye can see." Looking at thes numbers, and America's dysfunctiona politics, if investors ever started to question America's creditworthiness, or seriously sell the dollar, it could make the bailouts on the European periphery look like a tea party.

Number of the Week: Interest Payments on Federal Debt - 3.4%:

The Congressional Budget Office’s estimate of interest payments on the U.S. federal debt, as a share of annual economic output, in the year 2020. As the Obama administration girds for a potential showdown in Congress over raising debt limits to accommodate the budget deficit, it’s helpful to get a sense of just how much that debt is costing U.S. taxpayers. It’s actually not that expensive at the moment, but it’s likely to get pretty painful over the next ten years. Thanks to the Federal Reserve’s efforts to keep interest rates extremely low, the U.S. government is currently getting a very good deal on its borrowings, according to the Congressional Budget Office. Low interest rates, however, won’t last forever — assuming the U.S. economy doesn’t succumb to long-term, Japanese-style stagnation. The CBO estimates that interest rates on 3-month bills and 10-year notes will reach 5.0% and 5.9%, respectively, by 2020. That, together with a rapidly rising debt load, would cause annual net interest payments to more than double by 2020 — to $778 billion, or a record 3.4% of GDP. That’s closer to what the government spends every year on national defense.

European Default Concern Will Spread to U.S., Japan, Buiter Says - Fears of a sovereign default are “manifest” in Europe and will soon spread to Japan and the U.S. as governments struggle to control deficits, according to Citigroup Inc. economists led by former Bank of England policy maker Willem Buiter.  “Despite the recent drama, we believe we have only seen the opening and second act, with the rest of the plot still evolving,”  “There is absolutely no safe” sovereign.  The warning comes after the threat of default forced Greece and Ireland to seek bailouts and as borrowing costs for Portugal this week surged at a six-month bill sale as investors speculate it will be next to seek aid. Elsewhere, U.S. lawmakers last month extended tax cuts and are now wrangling over whether to raise the nation’s debt limit, while Japan’s public debt is set to exceed twice the size of the economy this year.  “The U.S. and Japan likely cannot continue to ignore the issues of fiscal sustainability,” said the Citigroup economists, who added that it’s “only a matter of time” before the U.S. government can only fund itself through debt issuance at “significantly higher interest rates.”

Deficit must fall, Bernanke warns - Federal Reserve Chairman Ben S. Bernanke laid out a dire scenario on Friday of what could happen to the U.S. economy if the government cannot develop a plan to bring down the budget deficit in the years ahead, even as he said that the economic recovery appears to be gaining momentum. Bernanke also offered his strongest warning yet over the nation's high deficit. If the United States does not set a fiscal course that is more sustainable, "the economic and financial effects would be severe," he said. If federal debt were to rise at the pace assumed in a plausible scenario analyzed by the Congressional Budget Office - such as extending most of the 2001 and 2003 tax cuts as spending rises at a steady rate - "diminishing confidence on the part of investors that deficits will be brought under control would likely lead to sharply rising interest rates on government debt and, potentially, to broader financial turmoil," Bernanke said. He added that the high borrowing rate would limit private investment and push up the nation's foreign debt, hurting U.S. incomes and standards of living.

Goolsbee: Obama to Make ‘Tough Choices’ on Budget - Austan Goolsbee, President Barack Obama’s top economic adviser, said the administration wants to “juice” the economy amid signs that the economic recovery is continuing at a gradual pace.Mr. Goolsbee, chairman of the White House Council of Economic Advisers, said on ABC’s “This Week” that the administration is focusing on spurring investment and improving U.S. exports and innovation to boost economic growth. And he said that steps already taken, such as cutting payroll taxes by two percentage points and giving small businesses new tax incentives, should soon provide some economic fuel.  But he suggested budget cuts will also be part of the long-term economic plan. “We are going to have to make, in the medium run, a series of tough choices, and the president’s not afraid to do that, and I think you will see in his budget that he’s willing to,”

Budget-Arsonists-Wearing-Firechief-Hats Watch: Greg Mankiw vs. Greg Mankiw - Why oh why can't we have a better press corps? Let the record show that when Greg Mankiw was chair of the President's Council of Economic Advisers he worked for a president, George W. Bush, who took less than zero regard for the long-term fiscal stability of the United States. And let the record show that Mankiw did not put his or his staff's credibility on the line in an attempt to reverse either of the five big budget-busting decisions--the 2001 abandonment of congressional PAYGO, the 2003 shift of taxes from the present into the future, the 2003 decision not to raise taxes to pay for any portion of the war in Iraq, and the 2003 decision not to find a revenue source to cover any part of the expense of Medicare Part D--of the George W. Bush administration.

The Very Real Threat of a U.S. Debt Default - This morning, CEA chairman Austan Goolsbee warned Republicans against playing games with the nation’s credit rating by refusing to raise the debt limit and creating a technical default. I have been warning people about this problem for more than a year because I know there is a widespread belief among the nuttier right-wingers that a debt default is just what the country needs to force massive spending cuts into effect. Many stupidly believe that the budget would be balanced overnight because the government couldn’t spend any more than the available cash flow from taxes would permit.   What I haven’t figured out how to properly convey is that a default triggered by a failure to raise the debt ceiling is of a completely different nature than the sort of default that Ken Rogoff and Carmen Reinhart wrote about in their book. All of those cases were market-driven, where investors refused to buy or refinance a nation’s debt because of fiscal profligacy, irresponsible monetary policies etc. A U.S. default, by contrast, would be 100% self-inflicted based on loss of the Treasury’s legal authority to issue bonds, not because of a lack of market demand for those bonds. The historically low level of real and nominal interest rates on Treasury securities is proof that there is still strong demand for Treasury securities.

Angus tries to be a one armed economist -  I'm not proud to admit this but I'm afraid of the House Republicans and the crazy sh*t they will no doubt try and pull. Yes I know, checks and balances and all that, but they worry me. If they go after the Fed, throw a lot of heat and light on rolling back HCR and the financial oversight bill, and try to shut down the government over the debt ceiling, we could be right back into economic doldrums. Look, I am not a big fan of the Fed or of HCR as currently constituted, but my advice to the Republicans would be to wait until after 2012 when the economy should be much sounder and maybe you also have the Senate to try and make your move. The biggest thing Washington could do right now to help the economy would be to take a 14 month vacation.

George Will Calls Opposition To Raising Debt Ceiling Suicidal - In addition to his comments about Sarah Palin, George Will also weighed in yesterday on the ongoing battle over the raising the debt ceiling: I know of no other developed nation that has a debt ceiling. This is a purely recurring symbolic vote to make people feel good by voting against it. The trouble is it’s suicidal if you should happen to miscalculate and have all kinds of people voting against it as a symbolic vote and turn out to be a majority. Because if the United States defaults on its sovereign debt, the markets will be — well, it will be stimulating. I’m really beginning to think that all this talk about blocking a rise in the debt ceiling by some in the GOP is just that, talk. They really can’t be serious about it, can they?

What is the debt ceiling, and does the United States really need one? - Yet again, economic storm clouds are forming over Washington. Unless Congress acts, and soon, the United States could face "a worse financial economic crisis than anything we saw in 2008," warns Austan Goolsbee, chairman of the president's Council of Economic Advisers (and former Slate contributor). Treasury Secretary Timothy Geithner sent a stern letter to Congress: Inaction would cause "catastrophic damage to the economy, potentially much more harmful than the effects of the financial crisis of 2008 and 2009." Geithner and Goolsbee aren't worried about the United States' ability to pay its debts so much as its willingness to do so. Indeed, they're having nightmares not about the debt, but about the debt ceiling—a relic of an earlier budget era and a redundant mechanism for managing the nation's finances. Which raises the question: Why does the United States even have a debt ceiling in the first place?

That Debt Ceiling Again - Responding to my post from earlier this week, a reader wrote me this: This current article has raised questions for me. Why is it assumed that failure to raise the debt ceiling must necessarily result in a default? Is it not feasible that when forced to choose between default and cutting something that the correct choice would be made? It seems to me that until that awful decision is faced, meaningful spending cuts will never occur. Here, I think, is the answer to his question. Our debt is not a function of immediate spending decisions but of very-long-term spending trends. That means that in order to pay just the interest on the debt, the government has to roll over some existing debt by borrowing. It is simply not possible to cut spending enough immediately to avert this with some additional borrowing. Spending cuts will reduce the debt in the long term, so that we don’t have to raise the limit again; but they cannot reduce it immediately and could only put off the need to borrow more for a very short time. Raising the debt ceiling is about, as I wrote, existing obligations racked up by Obama and the last Congress.

Beyond the Debt Limit Rhetoric - Judging by some of the recent rhetoric out of Washington, you could be forgiven for thinking that the United States is lurching toward an imminent default on its debt obligations. However, that scenario is highly unlikely. What we are seeing is the early stages of posturing for a particularly aggressive negotiation over the country’s fiscal future that will begin to play itself out in the debt limit debate. Treasury Secretary Tim Geithner warned yesterday in a letter to congressional leaders of “catastrophic damage” that would be “unthinkable” if Congress fails to act, while the President’s top economic adviser recently labeled such an outcome “insanity.” There are always voices willing to accept those consequences and vote no, but history shows that Congress always comes through with a debt limit increase. The consequences of not doing so are too severe, both economically and politically. Those in a position of responsibility in Congress realize that failure to act on the debt limit is a counterproductive response to the fiscal mess

House Republican Rule Changes Pave the Way For Major Deficit-Increasing Tax Cuts, Despite Anti-Deficit Rhetoric - House Republican leaders yesterday unveiled major changes to House procedural rules that are clearly designed to pave the way for more deficit-increasing tax cuts in the next two years. These rules stand in sharp contrast to the strong anti-deficit rhetoric that many Republicans used on the campaign trail this fall. While changes in congressional rules rarely get much public attention, these new rules — which are expected to be adopted by party-line vote when the 112th Congress convenes on January 5 — could have a substantial impact and risk making the nation’s fiscal problems significantly worse. Current House rules include a pay-as-you-go requirement that any tax cut or spending increase for a mandatory (i.e., entitlement) program must be offset by cuts in other mandatory spending or increases in other taxes, in order to avoid increasing the deficit. [1] Current rules also bar the House from using budget “reconciliation” procedures — special rules that facilitate speedy action on specified budget legislation — to pass bills that would increase the deficit. The new rules would alter and greatly weaken these commonsense measures:

Tax Cuts Trump Deficit Reduction for House Republicans - Are House Republicans serious about dealing with the deficit? You could listen to their rhetoric — or you could read the rules they are poised to adopt at the start of the new Congress, . . . [which] suggest that the new GOP majority is determined to continue the spree of unaffordable tax-cutting,” the Washington Post’s lead editorial today explains. A report we issued just before Christmas takes a close look at the new rules: As the report notes, we’ve been here before. In the 1990s, when pay-as-you-go rules applied to tax cuts as well as spending increases and Congress used reconciliation solely to reduce deficits, the country went from large deficits to a balanced budget. But in the early 2000s, Congress set aside pay-as-you-go and used reconciliation to push through costly, unpaid-for tax cuts that contributed heavily to the return of large deficits after 2001. Now, House Republicans plan to restore the very type of permissive budget rules that caused much of the budgetary deterioration we’ve seen over the past decade

Would Republicans Really Choose Default Over Raising Taxes? - Congressional Republicans don’t want any more deficit spending–unless it’s deficit spending done through the tax code.  They think they can play a good game of “chicken” when it comes to the statutory debt ceiling by refusing to raise it, as discussed in this AP story: Some Republican lawmakers said Sunday they opposed raising the ceiling on the nation’s debt without tackling government spending, and President Barack Obama’s top economic adviser warned against “playing chicken” on the issue. To some conservatives, refusing to raise the limit on the federal debt could be an effective tactic to force lawmakers into cutting spending and facing such contentious issues as the rising costs of Social Security, Medicare and other entitlement programs. “This is an opportunity to make sure the government is changing its spending ways,” Graham said But hitting the debt ceiling won’t stop those “spending ways” because policymakers aren’t really willing to stop those “spending ways.”  It wouldn’t reform the Social Security and Medicare programs or automatically repeal any other kind of government spending (wasteful or otherwise).  Instead of being a magic brake on deficit-financed government spending, it would be a disastrous brake on financial markets and the entire U.S. and global economy.

Austerity is first order for Boehner's installation as House speaker -  Austerity is the theme of Boehner's ascendancy to House speaker this week, placing the start of this new Congress in stark contrast to the more lavish festivities that accompanied Democrat Pelosi's swearing-in four years ago.  Boehner will recite the oath and take the gavel from Pelosi with the attendant pomp and no more - except, perhaps, a few tears.  In his speech, Boehner intends to survey the difficult choices facing the country and pledge to "listen to the American people" and to reform the way the House has operated in the past under control of both parties, according to a GOP leadership aide.  "The American people want a smaller, more accountable government. And starting Wednesday, the House of Representatives will be the American people's outpost in Washington, D.C.," Boehner said. "We are going to fight for their priorities: cutting spending, repealing the job-killing health care law and helping get our economy moving again."

Washington Post Somehow Doesn’t Realize People Care About The Economy - The Washington Post asks readers to rank eight issues they want the new Congress to address: Notice anything missing? Like, say "jobs" or "the economy"? Four of the eight options are geared towards deficit reduction -- and there’s nothing about jobs, at a time of historic levels of sustained unemployment. Amazing. Unsurprisingly, real polls, conducted by people who aren’t as spectacularly out of touch as the Washington Post, find that far more people identify unemployment as the most important issue facing the nation than deficits. In a Bloomberg poll conducted last month, for example, 50 percent of respondents said "unemployment and jobs" is the most important issue -- twice as many as those who said "federal deficit and spending." So, to the American people, unemployment is the top priority, by a huge margin. To the Washington Post, it doesn't crack the top eight.

WaPo Editors Finally Realize The GOP Isn't Serious About The Debt - For the better part of the past year, the editors of the Washington Post have been generically a-screech with worry over the deficits, and their insistence that the Obama administration needs to get serious about them. Well, today, the editors seem to have finally realized that the alternative is not much better, and that the GOP may actually not be all that serious about taming them either: Are House Republicans serious about dealing with the deficit? You could listen to their rhetoric - or you could read the rules they are poised to adopt at the start of the new Congress. The former promises a new fiscal sobriety. The latter suggests that the new GOP majority is determined to continue the spree of unaffordable tax-cutting.  The ominous signs come in the wording of the new majority's version of its pay-as-you-go rules, which normally require that new programs or tax initiatives be covered with cuts to other programs or new revenue. In the GOP concept, pay-as-you-go applies only to spending programs. When it comes to tax cuts, it's all go, no pay. Taxes can be cut, and the national debt increased, without any offsetting savings. It seems to have caught them by surprise!

Are they really that uninformed or just acting the part? - When Congress starts up the 112th session later this week, we will have the displeasure of watching the newly elected teabaggers and their brethren open their pieholes and wax poetic about the meaning of the constitution, the debt ceiling, healthcare for all Americans, the separation of church and state, the environment and many other issues that the graduates from Nutter U seem to think are easily solved by just referring to the Constitution itself. Oh, and Darryl Issa is vying for King of the Crazies with his rhetoric that Obama's administration is "one of the most corrupt" in our history. His..cough.. list of Obama transgressions here.  Where was this fucking asshole/douchenozzle during Bush43's administration? Issa will have subpoena power come January 5th. Lindsey Graham, who used to be somewhat sane and a moderate, joined the ranks of the wingnuts Sunday on Meet The Press with his pronouncement that the debt ceiling will not get raised on his watch without a major overhaul of government spending.

House GOP Backtracks on Pledge to Cut $100 Billion - Even if you put the close-to-impossible politics aside, any budget wonk would have told the GOP that for purely technical reasons it was going to be almost impossible to deliver on the promise it made in its Pledge to America to cut $100 billion from the federal budget this year. That's why it was anything but a surprise when, as Jackie Calmes noted in yesterday's New York Times, on the first day they formally took control of the House of Representatives Republicans did what every fiscal technician knew was inevitable: They announced that they were not going to cut domestic discretionary spending to 2008 levels as they repeatedly said they would do.

Debt Limit Showdown In March And More - Congress will return on January 5th to battle over the budget for much of the year. The new House Republican majority (242R-193D) won't wait for the normal budget process to send the Senate weekly spending cuts, which the Senate won't take up.   House Republicans will do away with the Gephardt rule that automatically passed a debt limit increase as part of the budget resolution. From now on, the House will have to explicitly vote on every debt limit increase. Since many Republicans and a few Democrats have long campaigned on never voting for a debt limit increase, passing one will be very difficult indeed. With the pre-Christmas $856 b. extension of the Bush tax cuts and extended unemployment benefits, a debt limit increase will be required in March or so according to an informal CBO estimate.   "CUTGO" will replace of "PAYGO." The current "pay-as-you-go" limit on mandatory (entitlement) spending would be replaced with "cut-as-you go," so tax increases could not pay for increased entitlement spending. Reconciliation could not be used to increase direct spending. Here's a summary of the proposed rules changes, and here's the legislative language.

Debt Ceiling Vote Will Be The GOP’s First Test - Sometime within the next couple months, Congress will once again face the necessity of having to pass a bill raising the debt ceiling so that the United States can continue borrowing, and it is shaping up to be a battle that the incoming Tea Party are dying to lead:  The Obama Administration is already starting the rhetorical fight by portraying those who would use the debt ceiling vote to make a political point as far outside the mainstream: Former Reagan economic adviser Bruce Bartlett agrees with the Administration:In other words, we don’t really know what the consequences of a U.S. debt default would mean, but at the very least it would create uncertainty in the Bond and Stock Markets unlike anything we’ve seen before, and it would bring to an end the era where U.S. Treasuries were considered the safest investment in the world. It would also mean a government shutdown unlike anything we’ve seen before. The fact that the government would no longer have the legal ability to borrow money would mean that everything would have to be shut down, even “essential” services that would normally continue operating in the case of a  shutdown caused by failure to pass a budget

White House Warns Failure to Raise Debt Ceiling Would Mean Economic 'Crisis' - The top White House economic adviser warned lawmakers Sunday that the United States faces a catastrophe if Congress does not raise the debt ceiling, as spend-averse Republicans indicated they'd be willing to support the increase so long as certain conditions are met.  The debt ceiling debate is one of the first major legislative clashes on tap as lawmakers return to Washington this coming week for the start of the 112th Congress. The $13.9 trillion national debt is creeping closer to its $14.3 trillion ceiling, and a vote to increase that limit is expected in the spring.  Though lawmakers will no doubt use the vote to extract promises over future spending cuts, White House Council of Economic Advisers Chairman Austan Goolsbee urged Congress not to "toy with" the issue.  "This is not a game," Goolsbee said on ABC's "This Week." "If we hit the debt ceiling, that's essentially defaulting on our obligations, which is totally unprecedented in American history. "The impact on the economy would be catastrophic. I mean, that would be a worse financial economic crisis than anything we saw in 2008," Goolsbee said. "I don't see why anybody's talking about playing chicken with the debt ceiling."

Adviser: Debt ceiling must be raised -- If Congress does not raise the debt ceiling, the result could be "catastrophic" for the American economy, Austan Goolsbee, chairman of the Council for Economic Advisers, said Sunday. Speaking on ABC's "This Week," Goolsbee said that the debt ceiling was not something to toy with for political ends. "If we hit the debt ceiling, that's essentially defaulting on our obligations, which is totally unprecedented in American history," he said. "The impact on the economy would be catastrophic. I mean, that would be a worse financial economic crisis than anything we saw in 2008." The debt ceiling is one of the biggest budget fights facing the new Congress that convenes this week. Currently, the debt limit stands at more than $14 trillion. The last time it was raised was in February 2010.If the ceiling were ever breached, the country would effectively be in default. That would slam bonds, the dollar and creditors' portfolios

Austan Goolsbee: Hitting Debt Ceiling Would Be 'First Default In History Caused Purely By Insanity' - Austan Goolsbee, the chairman of the Council of Economic Advisers, laid out the fairly alarming implications of the United States defaulting on its obligations while asking the question: What type of insanity would persuade us to do this?  "Well, look, it pains me that we would even be talking about this," . "This is not a game. You know, the debt ceiling is not something to toy with. If we hit the debt ceiling, that's essentially defaulting on our obligations, which is totally unprecedented in American history. The impact on the economy would be catastrophic. That would be a worse financial economic crisis than anything we saw in 2008."  "As I say that's not a game," Goolsbee went on. "I don't see why anybody's talking about playing chicken with the debt ceiling. If we get to the point where you've damaged the full faith and credit of the United States, that would be the first default in history caused purely by insanity. There would be no reason for us to default other than that would be some kind of game. We shouldn't even be discussing that. People will get the wrong idea. The United States is not in danger of default. We do not have problems with that. This would be lumping us in with a series of countries throughout history that i don't think we would want to be lumped in with."

Henry Paulson Urges Debt Limit Increase Vote - Former Treasury Secretary Henry Paulson on Thursday urged lawmakers to raise the debt ceiling beyond the $14.3 trillion level, warning that failing to do so “is simply not an option.”“I applaud the commitment lawmakers have made to reduce spending and put the country on a more fiscally responsible path,” he said in a statement. “As they pursue smarter spending, it’s also vital to protect America’s creditworthiness, and therefore I’m confident Congress will act to increase the debt limit well before it is reached. To do otherwise is simply not an option.” Republicans have said they want major spending cuts in exchange for any vote to raise the debt ceiling.

Republicans acknowledge debt limit should rise - (Reuters) – Republicans acknowledged on Thursday they will have to sign off on more deficit spending to avoid a debt default that would roil financial markets and bring the government to a grinding halt. Treasury Secretary Timothy Geithner pressed lawmakers to raise the nation's $14.3 trillion debt limit to allow the United States to borrow more and avert a crisis in the coming months.House Budget Committee Chairman Paul Ryan, a Republican, said he recognized the need to allow the government to go deeper in debt. "Will the debt ceiling ... have to be raised? Yes," said Ryan, who leads Republican efforts to slash deficit spending. But he called for deep spending cuts in 2012 and the Pentagon announced it would trim its budget by $78 billion as both government and opposition in Washington vied to outdo each other in promises of tighter spending.

The Big Lie - Robert Reich - Republicans are telling Americans a Big Lie, and Obama and the Democrats are letting them. The Big Lie is our economic problems are due to a government that’s too large, and therefore the solution is to shrink it. The truth is our economic problems stem from the biggest concentration of income and wealth at the top since 1928, combined with stagnant incomes for most of the rest of us. The result: Americans no longer have the purchasing power to keep the economy going at full capacity. Since the debt bubble burst, most Americans have had to reduce their spending; they need to repay their debts, can’t borrow as before, and must save for retirement. The short-term solution is for government to counteract this shortfall by spending more, not less. The long-term solution is to spread the benefits of economic growth more widely (for example, through a more progressive income tax, a larger EITC, an exemption on the first $20K of income from payroll taxes and application of payroll taxes to incomes over $250K, stronger unions, and more and better investments in education and infrastructure.)

Jobs Vs The Deficit - The roadmaps showing the way out of our 1.4 trillion dollar federal deficit almost always begin at the same starting points. During 2010, it became taken-for-granted that today's record-setting red ink is a result of unrestrained government spending — especially stimulus spending.The December release of the federal debt panel's Simpson-Bowles report crystallized a mass re-set of priorities, with politicians and pundits freely equating solutions to 'the deficit crisis' with economic recovery. While conservatives and liberals reacted differently to the report's specifics, the assumption that immediate deficit reduction would be healthy and virtuous was largely accepted.  November ended with three out of four of the lead columns in the Washington Post providing advice on the subject. US News and World Report called on the president to get busy and "name a deficit Czar". Deficit reduction? There's an app for that. A prominent New York Times feature titled "You Fix the Budget" included an interactive Iphone/Ipad application that urged readers to "Make your own plan and share it online". Jobs and growth have inspired no such apps thus far.

House Republicans Outline Budget Cuts - — The incoming Republican majority in the House is moving to make good on its promise to cut $100 billion from domestic spending this year, a goal eagerly backed by conservatives but one carrying substantial political and economic risks.  House Republican leaders are so far not specifying which programs would bear the brunt of budget cutting, only what would escape it: spending for the military, domestic security and veterans.  The reductions that would be required in the remaining federal programs, including education and transportation, would be so deep — roughly 20 percent on average — that Senate Republicans have not joined the $100 billion pledge that House Republicans, led by the incoming speaker, Representative John A. Boehner, made to voters before November’s midterm elections.  Even if adopted by the House, the Republicans’ budget is unlikely to be enacted in anything like the scale they envision, since Democrats retain a majority in the Senate and President Obama could veto annual appropriations bills making the reductions.

Growing or Declining?: Defense Budgets, Baselines, and the Art of Spin - It is definitely spin season for the budget, especially the defense budget. Bloomberg's Tony Capaccio () reports today that the DOD base budget (excluding war costs) request for FY 2012, due in February (but leaking already, for the sake of spin) will be $554 billion, which he calls "modest growth" over this year.   Tony has been spun, but ya have ta follow the bouncing baseline ball to see how.  A DOD base budget of $554 billion would only be growth over FY 2011's budget if the defense budget for FY 2011 were frozen at the FY 2010 level of $531 billion.  But this would be a significant cut of more than 3% this year from the $549 billion the Pentagon asked for and zero growth over FY 2010.  Figure there will be inflation; that's a budget cut.  Of course, the problem is that the FY 2011 budget level has not been set and, as I noted yesterday (), the new Republican House leadership has put defense on the table, along with everything else.  So the baseline for FY 2011 from which anyone would measure the FY 2012 request is unknown.  But it is almost certain to be a cut of some kind.

US Military Spending Is No Longer A Sacred Cow - Word is out all around Washington that the Obama Administration plans to cut US defense programs by $78 billion and 70,000 troops by 2015. Defense Secretary Robert Gates, a holdover from the Bush Administration with credibility within the military community, is spearheading the administration’s press on this issue. Separately, Eric Cantor, the new majority leader in the Republican–controlled House of Representatives, has said that military spending cannot be a "sacred cow". The new Republican congress is also putting military spending cuts on the table, so the Obama administration can do as well, without looking weak on defense. Moreover, the Obama Administration announced earlier today that it is sending 14,000 more troops to Afghanistan, demonstrating that it is still committed to national defense.

Of Defense Budget Realities and Myths - Secretary Gates deserves credit for coming to closer terms with reality yesterday in his new defense budget presentation. Of course, the need for him to do so was not by choice. The White House made it clear that the deal he thought he had for the "out-years" (defense-speak for the future) when he negotiated his FY 2011 budget last year was OBE'd - thanks to debt reductions commissions and a newly determined, budget-minded Congress.  The White House jumped in front of the parade and, some say, asked the Secretary to find as much as $150 billion out of his "out year" plan, starting with more than $20 billion in FY 2012.

Federal Spending More Popular than the Tea Party Says - The substantial and broad-based support that exists for federal spending will become common wisdom as individuals, businesses, industries, associations, communities, mayors, county executives, governors and even whole regions of the United States fight openly to prevent the spending reductions that Congressional Republicans say they’re going to consider this year. Ironically, the best example of what’s ahead may well be the military base realignment and closure commissions that so often are held up as paragons of how budget decisions should be made. I’ve said in the past that BRACs are special situations and that their process cannot be easily extrapolated to other budget issues. A BRAC is asked to do one very specific thing: determine which military facilities should be closed after a political decision has already been made that some should be shuttered. That’s very different from the much larger policy questions of whether, when and how the federal deficit should be reduced — the types of questions typically asked of budget commissions like the recently failed Bowles-Simpson panel.

G.O.P. Aims Smaller for Cuts to Budget - Many people knowledgeable about the federal budget said House Republicans could not keep their campaign promise to cut $100 billion from domestic spending in a single year. Now it appears that Republicans agree.  As they prepare to take power on Wednesday, Republican leaders are scaling back that number by as much as half, Now aides say that the $100 billion figure was hypothetical, and that the objective is to get annual spending for programs other than those for the military, veterans and domestic security back to the levels of 2008, before Democrats approved stimulus spending to end the recession.  Yet “A Pledge to America,” the manifesto House Republicans published last September, included the promise, “We will roll back government spending to pre-stimulus, pre-bailout levels, saving us at least $100 billion in the first year alone.”

Republicans’ Deficit Ceiling Bluff an Attack on Social Security - (Real News Video) William K. Black: Forces pushing for cuts in social security preparing conditions for its demise.

CBO’s Preliminary Analysis of H.R. 2, the Repealing the Job-Killing Health Care Law Act - Director's Blog - The House of Representatives is planning to consider a bill (H.R. 2) to repeal the major health care legislation enacted last March—that is, the Patient Protection and Affordable Care Act (PPACA) and the provisions of the Health Care and Education Reconciliation Act of 2010 that are related to health care. CBO has not yet developed a detailed estimate of the budgetary impact of repealing that legislation, although it is working with the staff of the Joint Committee on Taxation (JCT) to complete such an estimate in the near future. Because Congressional deliberations on H.R. 2 are beginning, CBO today issued a less-detailed preliminary analysis of that legislation. Because CBO and JCT estimated that the March 2010 health care legislation would reduce budget deficits over the 2010–2019 period and in subsequent years, we expect that repealing that legislation would increase budget deficits. The resulting increase in deficits projected for fiscal years 2012 through 2019 is likely to be similar in size to—but not exactly the same as—the reduction in deficits that was originally estimated to result from the enacted legislation.

What Has to Be on the Budget-Cuts Table? Everything. - Even defense spending, even tax expenditures.  I did this opening segment of Tuesday’s PBS Newshour broadcast.  One of my standard favorite lines I didn’t get to squeeze in about the politicians’ take on fiscal responsibility and reducing the deficit:  “It seems like a good idea…until you get right down to it”–i.e., it’s always easier in abstract theory than in specific practice. As both Jim Horney (of the Center for Budget and Policy Priorities) and I emphasize in the interview, everything should be on the budget-cuts table, and in fact, many in Congress like to use that line.  But then you listen more carefully and you find Republicans taking revenue increases and defense/national security cuts off the table, and Democrats taking most other types of spending off the table (whether for short-term or longer-term reasons), and you soon realize that what’s really left on the “bipartisan deficit-reduction table”–at least within the current Congress–is really close to nothing. 

Prolonged Unemployment Will Worsen CBO Projections - In his Sunday New York Times column, economist Paul Krugman suggested that even sustained growth at 4% a year wouldn’t restore full employment for several years. Indeed, unemployment would hover around 9% by the end of this year, and it would remain above 8% at the close of 2012. In Paul Krugman’s view, this strengthens the case for increased government spending. There is, however, another way of looking at the impact of sustained unemployment. One danger is that we’ve crafted a federal fiscal policy that assumes a lower level of unemployment for the next several years, and thus makes overly optimistic assumptions about future federal revenues as well as social safety net expenditures. These estimates relied on a baseline projection the CBO released in March of 2009 which assumed that unemployment would average 9% in 2010, 7.7% in 2011, and 5.6% over the years 2012 to 2015 and 4.8% between 2016 and 2019. As we now know, however, unemployment was far higher in 2010. And even growth at a robust rate of 4% a year wouldn’t bring the average unemployment rate to 7.7% in 2011, or indeed in 2012

Why Did America Have A 90% Income Tax Under Eisenhower? - Michael Hudson is interviewed on the Real News Network. He reviews the reasoning behind income tax policy in the 20th century, a good lesson in financial history. Interestingly, he says that data show tax cuts have been followed by slow growth in the US. He also says that "every recovery since World War II has taken place with a larger and larger proportion of debt to income."

The Tax Rate that Maximizes Economic Growth, Part 2... With Tax Burdens Too - This post continues my look at the relationship between taxes and growth, which I will continue expanding on over a series of posts. Today I want to look at marginal rates, effective tax burdens, and how each or both affect growth rates. As an added bonus for non-economists and folks who don’t deal with statistics on a daily basis, I will also expand a bit on regression analysis and the process of building a rigorous “econometric model.” (Some basic material appeared at the Presimetrics and Angry Bear blogs). To begin… its no secret that marginal tax rates don’t always have all that much to do with the amount that taxpayers actually pay. This is especially true for folks with extremely high incomes, particularly if a big chunk of their income doesn’t come with a W-2 attached.So, while the Kimel curve equation I provided last week dealt with the effect of the top individual federal marginal tax rate on economic growth, this week I want to throw the federal “tax burden” into the mix. The tax burden is simply the percentage of income that actually gets paid in taxes, which we can calculate as the personal current federal taxes divided by personal income.

The Biggest Tax Problem Facing Households and the IRS is…The Tax Code - Each year for the past decade, Nina Olsen, the National Taxpayer Advocate at the Internal Revenue Service, has issued a report to Congress on the most serious problems facing taxpayers. She usually focuses on individual provisions of the code, such as the Alternative Minimum Tax, or vexing tax administration problems. This year, Nina reached a quite different conclusion: The most serious problem encountered by taxpayers is…the Tax Code. The whole damn thing. As the report says, “The most serious problem facing taxpayers—and the IRS—is the complexity of the Internal Revenue Code.” Olsen estimates that individuals and businesses spend 6.1 billion hours preparing their returns. That equal to a year’s labor by three million full-time workers. Individual taxpayers are so befuddled by the Code that she reports 89 percent either pay a preparer or buy commercial software to help with the paperwork. The total cost of compliance in 2008, Olsen estimates, was $163 billion, or more than 11 percent of total income tax collections. The average out-of-pocket cost per taxpayer: $258.

The Pew’s Tax Expenditure Database on Housing Subsidies - If one had to name a Holy Trinity of U.S. social programs in the late twentieth century, it would consist of Social Security, Medicare, and the home mortgage interest deduction.  All three programs are budgetary entitlements, protected from the annual appropriations process… And since 1999, the total amount of housing subsidized through tax expenditures has gone up quite a bit. It’s a bit mind-boggling when you actually realize how much money goes through this mechanism. The new Subsidyscope Tax Expenditure Database by Pew is worth your time, particularly their dissection of the subsidies we give towards housing. They created a database estimates by the Department of Treasury and the Joint Committee on Taxation. Since they differ, for the following graphs I take the average of the two different sources by year adjusting for inflation (note to Pew, have data in real and nominal dollars if possible). Here’s Ezra Klein with more.

Who Benefits from Tax Expenditures? - Ezra Klein points out a new tax expenditure database from The Pew Charitable Trusts. More attention to tax expenditures — exceptions in the tax code that reduce tax revenue or, put another way, subsidies channeled through the tax system* — is always a good thing. But Klein also says something interesting that I don’t agree with: “they’re basically the welfare state for the middle class, cleverly arranged such that they don’t look like the welfare state for the middle class. If every year, the government sent every American — from the richest CEO to the greenest public-school teacher — a check covering 30 percent of their health-care costs, we’d think that a bit weird. We’d think it much weirder if we only sent the checks to the workers who happened to be at firms that offered benefits. . . .” I agree with all of that, except the bit about the middle class. Tax expenditures primarily benefit the rich, for a few reasons.

Resolved - Fix the Filibuster - Walter Mondale - WE all have hopes for the New Year. Here’s one of mine: filibuster reform. It was around this time 36 years ago — during a different recession — that I was part of a bipartisan effort to reform Senate Rule 22, the cloture rule. At the time, 67 votes were needed to cut off debate and thus end a filibuster, and nothing was getting done. After long negotiations, a compromise lowered to 60 the cloture vote requirement on legislation and nominations. We hoped this moderate change would preserve debate and deliberation while avoiding paralysis, and for a while it did.  But it’s now clear that our reform was insufficient for today’s more partisan, increasingly gridlocked Senate. In 2011, senators should pull back the curtain on Senate obstruction and once again amend the filibuster rules.  Reducing the number of votes to end a filibuster, perhaps to 55, is one option. Requiring a filibustering senator to actually speak on the Senate floor for the duration of a filibuster would also help. So, too, would reforms that bring greater transparency — like eliminating the secret “holds” that allow senators to block debate anonymously.

How Republicans and Tea Party will use Congress to bash Barack Obama | World news | The Guardian The Republican party is to use the new Congress, which begins on Wednesday, to mount a guerrilla campaign aimed at destroying Barack Obama's healthcare reforms, slashing the federal budget and preparing the ground for his defeat in the 2012 White House race. When the Senate and House convene at noon, both will be awash with Republican members elected in November's crushing victories over the Democrats, many of them backed by the Tea Party movement. In a political shift comparable to the Republican takeover of Congress in 1995 and the Democrats in 2007, the Republicans have a strong platform to harry Obama, having won control of the House and reduced the Democratic majority in the Senate. In a foretaste of what is to come, the godfather of the Tea Party, Senator Jim DeMint, said in an interview with the conservative magazine Human Events that Republicans should prepare for a "showdown" with Obama over spending.

‘Job-killing’ regulation? ‘Job-killing’ spending? Let’s kill this GOP canard. - Republicans these days can't get through a sentence without tossing in their new favorite adjective, "job-killing."  There's "job-killing legislation," in particular the health-care reform law. And "job-killing regulations," especially anything coming out of the EPA and the IRS. Big deficits are always "job-killing," which might come as something of a surprise to all you Keynesians out there, along with the "job-killing spending binge" and even "job-killing stimulus projects."  President Obama, we are told repeatedly, runs a "job-killing administration" with a "job-killing agenda" carried out by, you guessed it, a "job-killing bureaucracy."  In the fevered Republican imagination, the entire federal government is a "job-killing machine" or - my personal favorite - a "job-killing beast."  And if you're a Republican, it is now a violation of House rules to utter the word "taxes" or "tax increase" on the chamber floor without the "job-killing" prefix.

Issa, Senior Republican, Asks Businesses Which Rules They Dislike - Companies spend millions of dollars each year complaining to Congress about burdensome laws and regulations, pressing their concerns in public campaigns and in private meetings. They rarely wait for invitations.  Last month a senior House Republican, Representative Darrell Issa of California, nevertheless dispatched letters to 150 companies, trade groups and research organizations asking them to identify federal regulations that are restraining economic recovery and job growth.  Mr. Issa, incoming chairman of the House Oversight and Government Reform Committee, said the concerns of businesses had been ignored by the Obama administration as it pursued what he described as an unprecedented regulatory expansion.  The responses have been predictable but, in asking, Mr. Issa also is underscoring the commitment of the new House majority to help business by curtailing government.

Issa Asks Corporate Players to Pick Regulations to Target - We know about Darrell Issa’s steady stream of investigations. What we didn’t know is how central federal regulations were to that list. In fact, in determining how to proceed on the regulatory aspect of his oversight hearings, he has enlisted the industries themselves to tell him which regulations to jettison. Because there’s nothing corporations do better than act in the public interest. Rep. Darrell Issa (R-Calif.) wants the oil industry, drug manufacturers and other trade groups and companies to tell him which Obama administration regulations to target this year. The incoming chairman of the House Oversight and Government Reform Committee – in letters sent to more than 150 trade associations, companies and think tanks last month – requested a list of existing and proposed regulations that would harm job growth. …a partial list obtained by POLITICO includes ones sent Dec. 13 to Duke Energy, the Association of American Railroads, FMC Corp., Toyota and Bayer.

The New Financial Elite, Rubinites and the Democratic Party - There’s been a series of back-and-forths about the rumored short-list of the National Economic Council spots, and the ties between those on the list and Wall Street. Brad Delong notes that he has been a Rubinite for 18 years and that “you want to draw your White House staff from successful managers…and that there are only three groups of successful managers who are Democrats: Hollywood studio executives and their ilk, people who have made careers in government and academia, and executives who have worked for traditionally-Jewish investment banks. If you want managers in a Democratic administration, that’s where they have to come from. ” Felix Salmon responds here and here. Brad’s point seems to restate the issue, which is: why is there such an overlap between Wall Street and the Democratic Party, and what consequences does that have?  Finance is a big sector, and Democrats could be picking from any number of places within it (or elsewhere), yet they go for the large investment banks. I’d point out a few reasons why this has consequences.

Gene Sperling 101 - President Obama is said to be ready to name Gene Sperling the chairman of the National Council of Economic Advisers. Mr. Sperling, 52, who held the same job under President Bill Clinton, will succeed Lawrence Summers. Here’s a quick biography and reading list for those who want to get up to speed on Mr. Sperling: He worked for Mario Cuomo, then the governor of New York, in the early 1990s, before joining Mr. Clinton’s presidential campaign. Mr. Sperling worked for the Clinton administration from start to finish — 1993 to 2001. He’s particularly proud of the work he and colleagues did to create the Earned Income Tax Credit, which has become a big part of federal anti-poverty policy. On the ideological spectrum, Mr. Sperling falls between centrist and liberal Democrat. It’s probably fair to say he’s to the right of Robert Reich (the prolific writer who was Mr. Clinton’s labor secretary) and to the left of Timothy Geithner (the current Treasury secretary).

The business community wants policy, not people - In addition to opposing health-care reform, it looks like Bill Daley also opposed the creation of the Consumer Financial Protection Bureau. And this report he co-chaired for the Chamber of Commerce in 2007, which primarily concerns itself with loosening the post-Enron rules on accounting and audits and getting the SEC to do less rulemaking and more "providing informal guidance" to financial players, is also raising eyebrows. This speaks, I think, to Daley's presumed qualifications for the job, which is that his presence in the White House "would almost certainly improve icy relations between the Obama administration and business leaders."

In which I eventually dump on Obama for appointing Bill Daley -You all know that Obama's new Chief of Staff was most recently employed at JP Morgan Chase & Co. where he was, among other things, Head of Corporate Responsibility. If you read JPMC's latest corporate responsibility report you will learn that the bank's primary reason for existence is to foster the painting of rainbows and the raising of unicorns. What you will not learn is how this responsible corporation actually conducts its business.Today, my wife received an e-newsletter from an attorney in the Sacramento area who specializes in real estate law. It was essentially a notification to people in the business about a new tactic Chase is using to squeeze blood from its erstwhile mortgage customers. Bear with me as I attempt to explain, I'm not a professional and I hope this isn't going too far into the weeds.

How tied in with Wall Street is the Obama administration? - President Obama's appointment of William Daley as his chief of staff has elicited two basic reactions. One is to complain that the administration has long cared too much what the business community thinks. The other is to commend the administration for finally paying attention to what the business community thinks.They can't both be right. Can they? One way to measure the administration's "business-friendly" attitude is to examine how many members of it have ties to business. There are several prominent administration officials, past and present, who have come from or left for the business community—in particular, Wall Street. Former director of the Office of Management and Budget Peter Orzsag, for instance, resigned from his post and took a job at Citigroup. Incoming National Economic Council Chair Gene Sperling earned nearly $1 million from Goldman Sachs in 2008. And Daley is an executive at JPMorgan Chase, the investment bank that received a $12 billion bailout during the financial crisis. But a review of the careers of senior administration officials—members of the Cabinet, the economic advisory councils, and the president's special adviseors—shows characteristically minimal ties, but lucrative ones.

The Truth Comes Out: Paul Volcker Was Forced Out, Because The White House Is Going More "Pro Business" -Yesterday when we heard that Paul Volcker was leaving the White House we figured it was normal midterm rotation. Or perhaps, we thought, he was quitting out of frustration. But nope. The man who created the Volcker Rule, the part of Financial Reform with the sharpest teeth, is being forced out, as The White House takes on a more business-friendly stance. According to Bloomberg, Volcker was kept out of discussions to reconstitute the Economic Advisory Recovery Board. Also on the "pro business" front, Obama officially announced that Bill Daly is taking over as chief of staff.Somewhere Larry Kudlow is very, very happy.

The End of New Deal Liberalism - Political events of the past two years have delivered a more profound and devastating message: American democracy has been conclusively conquered by American capitalism. Government has been disabled or captured by the formidable powers of private enterprise and concentrated wealth. Self-governing rights that representative democracy conferred on citizens are now usurped by the overbearing demands of corporate and financial interests. Collectively, the corporate sector has its arms around both political parties, the financing of political careers, the production of the policy agendas and propaganda of influential think tanks, and control of most major media. What the capitalist system wants is more—more wealth, more freedom to do whatever it wishes. This has always been its instinct, unless government intervened to stop it. The objective now is to destroy any remaining forms of government interference, except of course for business subsidies and protections. Many elected representatives are implicitly enlisted in the cause.

The Ninth Decision… and the Road Ahead - When you look back on the eight key economic decisions of the Obama presidency as identified the other day by Ezra Klein, in The Washington Post, what stands out is a ninth choice – the measures that were not taken. The interventions in the financial, auto and housing sectors; the stimulus package; the health care bill; cap-and-trade environmental legislation; the Dodd-Frank financial regulations; and the tax deal: all these have been hashed over pretty well. The ninth decision – the opportunity on which Obama and the 111th Congress took a pass – was the chance to tackle the massive concentration and dysfunctionality of the US financial industry that emerged from the crisis of 2008. Was there really anything that could have been done in the wake of the crash that might have restructured the banks and put them on a path to another fifty years or so of stability, as did the Glass-Steagall Act of 1933 with its combination of government insurance and extensive partitions?

U.S. Seeks Chief For Financial Consumer Agency  - White House adviser Elizabeth Warren and a top lieutenant are quietly asking business and consumer groups for names of people who might run the new Consumer Financial Protection Bureau, people familiar with the matter said. The hunt suggests that Ms. Warren, a lightning rod for some bankers, might not be selected to lead the bureau, a centerpiece of the Dodd-Frank financial overhaul bill that passed this summer. Still, many liberal groups will push to get her in the post. President Barack Obama's choice could signal how he intends to deal with resurgent Republicans in Congress. The feelers to business groups serve as a reminder that any nominee would likely need support from at least seven Republicans in the Senate to win confirmation.  Among the names being discussed are Iowa's attorney general, Tom Miller; New York state bank regulator Richard Neiman; and former Office of Thrift Supervision director Ellen Seidman.

Holly Petraeus To Be Elizabeth Warren’s Pick For Top Post In New Consumer Protection Agency - Holly Petraeus, a longtime advocate for military families, is expected to be named to the senior post sometime later this week, according to the sources, who spoke on condition they not be named. They characterized her selection as part of the administration's designs to crack down on unscrupulous lending operations that have thrived by focusing on vulnerable Americans--not least, military personnel and their families, who have been contending with a weak economy at home just as many breadwinners are serving overseas in the dangerous conflict zones of Iraq and Afghanistan.Petraeus's appointment is aimed at empowering the agency to target abusive lenders without running afoul of Republicans in Congress, said the sources..  General Petraeus enjoys the favor of both Republican and Democratic lawmakers--boosting the administration's hope that his wife and her initiative will be politically difficult to oppose, the sources said. Holly Petraeus has spoken passionately about the often-ruthless lending operations that have proliferated outside military bases.

Memo to Elizabeth Warren: How to Do Things With Documents - Elizabeth Warren has proposed, as one of her first initiatives, that banks should simplify their standardized credit card contracts with customers to insure that customers understand what they are signing.This proposal has generated lots of enthusiasm among centrists as a modest, relatively non-political initiative, something that hardly anyone could be against, but that holds out the possibility of reducing fraud and confusion in the credit markets by at least ensuring that consumers know what they are getting into.  This is a great idea, but I wonder if Warren’s team has explored all the governance possibilities that inhere in something as simple as revising the look and language of a credit document. Here they might take a page from a private industry group specializing in credit documents, the International Swaps and Derivatives Association.

The Credit Card Regulation That Could Hurt Stay-at-Home Parents -  At issue is a proposal by the Federal Reserve that seeks to make sure that those receiving credit can actually afford to pay their bills. Currently, credit applicants are judged by their entire household income—in other words, the salaries earned by both partners. Under the proposed regulations, that would change. Instead, applicants would need, according to a report in The Wall Street Journal, to demonstrate “independent” income. If they can’t do that, they would likely be automatically denied unless they applied jointly with their income-earning husband or wife. The possible change is expected to have a particularly large impact on those non-working spouses—who are, of course, mostly female—seeking to increase existing credit lines or applying for instant credit from retailers.

Hot Pursuit of Customers: The Real Reason More People are Turning to Payday Loans - As one who studies the advertising and marketing plans of payday and title loan companies, I was interested in two Wall Street Journal articles published this week on the topic of payday loans, one claiming that Dodd-Frank has pushed many consumers into the hands of payday lenders, and another describing how hard payday lenders are working to steal customers from banks. Since many payday loan customers do not fully understand the terms of the loans, it isn’t that hard to steal customers from banks.  Payday loans, often at least ten times more expensive than credit cards, are easier to get. The lenders are far friendlier to customers and have more locations and business hours.  Plus, have you seen the advertising? It makes it sound easy and even fun to take out a 500% loan.  Payday loan industry experts now claim that their toughest business challenge going forward is not collecting on bad loans but finding enough new customers to keep the hundreds of thousands of stores afloat.

Agencies' budget crunch threatens rollout of Wall Street reform regulations - The Dow Jones stock index plummeted nearly 900 points in a matter of minutes last May in a "flash crash" that frayed the nerves of traders on Wall Street.  Five months later, federal agencies fingered computer algorithm-based trading as the primary culprit of the crash and vowed to step up oversight. Officials at the Securities and Exchange Commission (SEC) went through more than 1,000 applications and found five algorithm experts they wanted to bring on board to provide expertise in the technology. Now they just need the cash to hire them. The budgets of the SEC and the Commodities Future Trading Commission (CFTC) remain locked at fiscal 2010 spending levels, thanks to the continuing budget resolution passed by Congress in December, even though the workloads for both agencies have increased exponentially since the "flash crash" occurred.

Market Governance is about People (and how they think) This week I want to raise with you a few thoughts about the way forward on financial regulation that have come out of interviewing and observing regulators in their interactions with market participants over ten years.   Before I get started though, the wider theme this week is going to be how vitally important it is to get out in the market and among regulators and talk to people rather than to just assume we know what a rational person in this or that role might think or do. I am continually amazed at how little we know about what regulators think and do; how little they know about what market participants think and do; how little market participants know about each other; how little the journalists know about any of this. And yet there is a growing body of very serious and solid empirical qualitative research out there based on long term observation and deep knowledge of particular markets that we could be relying on to answer these questions. Some examples: Doug Holmes on central bankers, Vincent Lepinay and Hiro Miyazaki on derivatives traders, and my work, and the work of Credit Slips’ own Anna Gelpern on lawyers. We need to start basing out regulatory policies on the empirical facts--on what we know about how real people in the markets think and act--not on what we imagine they might do. 

On the Dole, Corporate Style - Imagine that Congress or your state legislature passed a law tomorrow saying everybody except you got a tax break because the politicians in both parties disliked your business.  Even if the loser were Julian Assange's WikiLeaks, that law would be struck down by the courts on any number of grounds, including violating the Constitution's equal protection clause and perhaps the third clause under Article I, section 9, which prohibits bills of attainder.  But what about the opposite case? What if the government passed a law requiring every business to pay a tax except your competitor's business?  That kind of government meddling in the market goes on every day in America.

JP Morgan Markets Its Latest Doomsday Machine (or Why Repo May Blow Up the Financial System Again) - Readers of ECONned will be very familiar with the name of Gary Gorton, author of ‘Slapped in The Face by the Invisible Hand’, which explores the relation of the so-called shadow banking system to the financial crisis. His work is pretty fundamental to understanding some of the mechanisms which made the crisis so acute. Now he’s done an interview, which I would like to have a growl at; but first, he has some basic points about shadow banking, useful later in this rather long post.The other point you need to know: we are talking about an unregulated banking system that at its height was just as big as the regulated banking system, yet coupled to it, and apparently more profitable, though, as we now know, much riskier.

Why Is The US Taxpayer Subsidizing Facebook – And The Next Bubble? - Simon Johnson - Goldman Sachs is investing $450 million of its own money in Facebook, at a valuation that implies the social networking company is now worth $50 billion.  Goldman is also apparently launching a fund that will bring its own high net worth clients in as investors for Facebook. On the face of it, this might just seem like the financial sector doing what it is supposed to – channeling funds into productive enterprise.  The SEC is apparently looking at the way private investors will be involved, but there are some more deeply unsettling factors at work here. Remember that Goldman Sachs is now a bank holding company – a status it received in September 2008, at the height of the financial crisis, in order to avoid collapse.  This means that it has essentially unfettered access to the Federal Reserve’s discount window, i.e., it can borrow against all kinds of assets in its portfolio, effective ensuring it has government-provided liquidity at any time.

The Financialization of America - Scott Sumner tries to explain why finance is so much more lucrative today than it was in the 50s and 60s: Finance becomes extremely important in an economy where it is not at all clear what should be produced, or on what continent that production should take place. This seems pretty unpersuasive. If Wall Street were making truckloads of money on their VC investments, then OK. Maybe he'd have a point. But I'm pretty sure that true venture capital constitutes a tiny fraction of finance sector earnings. Likewise, allocating capital to old-line industries is just....allocating capital to old-line industries. Why does it matter whether those industries are in Pittsburgh or Mumbai? If the finance sector were truly creating lots of extra value, then most of us probably wouldn't mind that bankers were taking home outsize paychecks. But are they? Are overall global growth rates higher today than they were 50 years ago? Is productivity growth higher? Is modern finance repsonsible at all for higher economic growth than it was in 1965?

Interview with Gary Gorton - Minneapolis Fed - Shadow banking—the intricate web of financial arrangements and techniques that developed symbiotically with the traditional, regulated banking system over the past 30 or so years—is territory Gorton has studied for decades, but it (and he) have been largely on the periphery of mainstream economics and policy.  That all changed in mid-2007, when panic broke out in the subprime mortgage market and financial institutions that support it. Expressions like “collateralized debt obligation” and “repo haircut” escaped the confines of Wall Street and business schools, and began to fill the airwaves. We’re still struggling to come to terms—and few are in a better position to help than Gorton. Gorton also consulted for AIG Financial Products, where he worked on structured credit, credit derivatives, and commodity futures. Thus, Gorton’s appreciation of modern banking and its vulnerabilities is informed by practice as well as theory. Sharing that understanding requires considerable effort; we’ve provided a glossary to help with the terminology and, fortunately, Gorton is a lucid narrator of a complex tale. And as Wright suggests, the rewards to studying this material are profound.

How the Financial Crisis Made Big Banks Bigger -Banks are finally beginning to lend, the big ones that is. Commercial and industrial lending is up this quarter 0.2% from the third quarter, according to Moody's Analytics.  That's true, but this trend reveals something else: the financial crisis has created an environment where big banks are getting bigger, as the small ones struggle.  This report comes from the Wall Street Journal. Here's how it starts:  Some big U.S. banks are starting to increase their lending to businesses as demand for loans rises and healthier banks seek to grab customers from weaker rivals. After declining steadily for most of the past two years, the amount of commercial and industrial loans held by commercial banks inched upward during the past two months, according to the Federal Reserve. Unfortunately, the article is a little thin on hard macro-level data that supports this claim. Instead, it provides some anecdotal examples of big banks increasing their lending. JP Morgan's middle market lending is up 7% this year, while its small business lending is up more than 40%. Wells Fargo is also more liberally extending credit to businesses.

FIR against Pandit threatens to lock Citi global brass in Indian litigation - Police have registered a first information report against the Citibank global top brass, including India-born chief executive Vikram Pandit, on the basis of a complaint filed by an investor in a fraudulent scheme run by a relationship manager of the bank. Banking analysts said the senior officials of Citigroup may find it hard to wriggle out of litigation in India. However, a clause in the bank’s articles of association may offer some protection to Pandit and others. “The FIR was registered following a complaint by a high networth individual who was cheated. A probe is still on as many more people seem to be involved in the scam,” said Gurgaon police commissioner S.S Deswal.  Besides Pandit, the names of Citibank chairman William R. Rhodes, chief financial officer John Gerspach and chief operating officer Douglas Peterson (based in New York) figure in the FIR.

Unofficial Problem Bank list at 932 Institutions -  Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Jan 7, 2011. Changes and comments from surferdude808: The FDIC got back to work closing some banks and updating their structure database, which contributed to most of the seven removals this week. Also, there were four additions this week. The net changes leave the Unofficial Problem Bank List standing at 932 institutions with aggregate assets of $410 billion.

FDIC goes after former execs of failed banks to recover losses - The Federal Deposit Insurance Corp. may sue as many as 109 former executives of failed banks in an effort to recover federal losses. According to data, which the agency began releasing Tuesday, the FDIC authorized lawsuits to recover approximately $2.5 billion. The FDIC can sue former bank officials after a bank failure in what it calls a "personal liability lawsuit," because the federal agency absorbs all the losses from the failure. Before seeking recoveries from former officials, the FDIC investigates the cause of each bank's failure. Executives including officers, directors, accountants, appraisers and brokers are eligible to be sued for either "gross or simple negligence" in overseeing the bank and its funds. Between 1985 and 1992, the FDIC brought claims against directors and officers in 24% of bank failures. In 2010, two lawsuits were filed with 107 others authorized.

FDIC sues 109 bank execs for negligence - US banking regulators have authorised lawsuits against 109 bank officials so far as they seek to recover at least $US2.5 billion in losses connected to recent bank failures. The Federal Deposit Insurance Corp said the suits target bank directors and officers for "either gross or simple negligence." It is seeking to recoup money for its deposit insurance fund, which backs customer accounts. The FDIC has previously said it was pursuing such legal actions but now has unveiled a website with updated numbers. The website will be updated monthly with a running tally of the amount of lawsuits authorised and how much the agency is seeking to recover. So far, however, the FDIC has only filed suits against directors and officers from two banks.

How did a Relatively Small Number of Subprime Loans Cause a Record Crisis? - A number of analyses of the U.S. and global crisis begin by attempting to explain what they assume to be a paradox – how could so small a market segment (subprime housing and CDOs backed by subprime) have caused (1) the largest financial bubble in history, (2) a U.S. economic crisis, and (3) a nearly global crisis?  I will show that the focus on subprime loans was excessive and allude briefly to the points I have made in prior columns about the variant causes of the global crisis. The next column will address in more detail how criminologists determine the true incidence of mortgage fraud. Subprime loans were and are a serious problem, but there has been a destructive overemphasis on subprime loans as the core of the U.S. crisis. “Liar's” loans are a far greater problem, and most problem subprime loans are actually liar's loans. While the nonprime mortgage industry's preferred euphemisms were “alt-a” and “stated income” loans, it was the industry that accurately dubbed them liar's loans. It was the industry that created liar's loans and it is liar's loans that made so many officers wealthy.

More on Ending the 30-Year Fixed-Rate Mortgage - Last May, I had a post asking "Should We End the 30-Year Fixed-Rate Mortgage?" That post featured the graph above illustrating how the significant interest rate risk of 30-year mortgages contributed to the 3,000 bank failures during the S&L crisis.  Because S&L's were borrowing deposits at short-term, variable interest rates and lending mortgage money long at 30-year fixed rates, many banks became insolvent by the early 1980s when rising interest rates resulted in S&L's paying short-term rates on deposits as high as 10-15% to finance 30-year fixed rate mortgage assets at rates as low as 5-7%. When a bank is paying 15% variable-rates on deposits and receiving only 5% on fixed-rate assets, that's a sure prescription for bank failure.   A related article appeared in yesterday's NY Times by Bethany McLean who asks "Who Wants a 30-Year Mortgage?"  Here are some excerpts

Electronic Trading Creates a New Financial Landscape - A SUBSTANTIAL part of all stock trading in the United States takes place in a warehouse in a nondescript business park just off the New Jersey Turnpike.  Few humans are present in this vast technological sanctum, known as New York Four. Instead, the building, nearly the size of three football fields, is filled with long avenues of computer servers illuminated by energy-efficient blue phosphorescent light.  Countless metal cages contain racks of computers that perform all kinds of trades for Wall Street banks, hedge funds, brokerage firms and other institutions. And within just one of these cages — a tight space measuring 40 feet by 45 feet and festooned with blue and white wires — is an array of servers that together form the mechanized heart of one of the top four stock exchanges in the United States.  The exchange is called Direct Edge, hardly a household name. But as the lights pulse on its servers, you can almost see the holdings in your 401(k) zip by.

Fast money - New York Times published a long piece on a wave of investment in new financial market infrastructure. In a nutshell, financial market trading is now done almost exclusively through electronic means, and a host of firms are pouring money into their networks in order to allow as many people and institutions as possible to trade as fast as possible as cheaply as possible. The Times piece casts these developments in terms of a clear set of trade-offs. The good news is that transaction costs have plummeted, which should make for more efficient and liquid markets. The bad news is that massive, computerised, blink-of-an-eye trading could produce instabilities, like those which led to the flash crash last year.

Michael Hudson: Average Stock Held for 22 Seconds and Average Foreign Currency Position Held for 30 Seconds - Michael Hudson is a highly-regarded economist. He is a Distinguished Research Professor at the University of Missouri, Kansas City, who has advised the U.S., Canadian, Mexican and Latvian governments as well as the United Nations Institute for Training and Research. He is a former Wall Street economist at Chase Manhattan Bank who also helped establish the world’s first sovereign debt fund. Yesterday, Hudson said: Take any stock in the United States. The average time in which you hold a stock is–it’s gone up from 20 seconds to 22 seconds in the last year. Most trades are computerized. Most trades are short-term. The average foreign currency investment lasts–it’s up now to 30 seconds, up from 28 seconds last month. See also this and this.

U.S. Yield Spreads Fall Below Rest of the World - For the first time on record, investors are demanding a smaller premium to own U.S. corporate bonds than global company debt.  Bondholders demand 166 basis points more in yield to hold U.S. investment-grade company debt instead of Treasuries, compared with an average 169 basis-point spread worldwide, according to Bank of America Merrill Lynch data. At the height of the credit crisis in December 2008, companies paid about 150 basis points more to attract U.S. investors to their bonds than borrowers seeking buyers elsewhere in the world.  The shift highlights confidence in North America’s economic recovery as companies across the Atlantic in Europe contend with the cost of bailing out Greece and Ireland while waiting to see whether the fiscal crisis ensnares more countries. The U.S. economy is forecast to grow faster this year than either the euro region or Japan, according to Bloomberg surveys.

 Individual losses in a banking crisis have long-lasting effects on expectations and behaviour - The systemic and macroeconomic issues associated with a banking crisis are much in the news. The cost of banking crises is usually measured as the loss of output and the fiscal cost of cleaning up the financial system (e.g. Reinhart and Rockoff 2009, Laeven and Valencia 2010). While these may well be substantial, there is also a third potential cost, which is more long-term and difficult to measure. A sweeping crisis could affect people’s confidence in financial stability for decades, leading to more cautious investment behaviour and higher risk premia. A banking crisis could then be a drag on the economy for many years. This column focuses on the impact on individuals, particularly those who experienced losses, and presents evidence of effects on their expectations and behaviour lasting a decade or more.

New Year’s Hope against Hope, by Joseph E. Stiglitz: .It has become fashionable among politicians to preach the virtues of pain and suffering, no doubt because those bearing the brunt of it are those with little voice – the poor and future generations. To get the economy going, some people will, in fact, have to bear some pain, but the increasingly skewed income distribution gives clear guidance to whom this should be: Approximately a quarter of all income in the US now goes to the top 1%, while most Americans’ income is lower today than it was a dozen years ago. Simply put, should innocent victims and those who gained nothing from fake prosperity really be made to pay even more? Debt restructuring – writing down the debts of homeowners and, in some cases, governments – will be key. It will eventually happen. But delay is very costly – and largely unnecessary. Banks never wanted to admit to their bad loans, and now they don’t want to recognize the losses, at least not until they can adequately recapitalize themselves through their trading profits and the large spread between their high lending rates and rock-bottom borrowing costs

CMBS delinquencies hit record high in December - The delinquency rate on commercial mortgage-backed securities reached 9.2% in December, the highest on record, according to analytics firm Trepp. When the delinquencies dipped in October, analysts began anticipating a continued recovery, but the rate jumped 35 basis points in November and another 27 bps in December. A total of $61.5 billion in commercial mortgages are either more than 30 days delinquent, in foreclosure or REO as of December, up from just over $60 billion the month before."

As CMBS Delinquencies Hit All Time Record, Wall Street Looks For Greater Fools | zero hedge - After we read earlier that according to CRE experts TREPP, CMBS delinquencies have hit an all time record, we were confident that somehow Wall Street would do everything in its power to offload as much toxic crap from its books (and if inventory was missing, it would do its darnedest to create some) as possible, and start selling the most worthless piece of paper imaginable (see Howard Davidowitz). Sure enough, not much searching confirmed just that: per Bloomberg "Deutsche Bank AG, UBS AG and JPMorgan Chase & Co. are preparing the year’s first bond sales tied to commercial property loans, according to people familiar with the transactions. Deutsche Bank and UBS are teaming up to issue as much as $2.5 billion in commercial mortgage-backed securities linked to loans on office buildings, shopping malls and hotels in what would be the largest offering of its kind since the market froze in June 2008, according to a person familiar with the deal. JPMorgan plans to sell $1.5 billion in similar debt, a person familiar with that sale said."

Commercial Real Estate on the Mend? - The easiest way to determine if things are getting better would be to look at delinquencies. Here are some measures: Let's look at each of these lines. First, the green one shows commercial mortgage-backed securities (CMBS) portfolios and includes the earliest-term delinquencies. Although they continue to rise, they're doing so consistently more slowly, as the distances between each point have been decreasing for about a year. The red line is the most severe delinquencies, as 90 days or more delinquent means that the properties are essentially defaulted. Its story is similar, as delinquencies have continued to grow, but not as quickly as they had in prior quarters. Finally, delinquencies on 60 or more day multi-family portfolios owned by Fannie Mae actually declined during the quarter. This data hardly indicates that all problems are behind the commercial mortgage market, but it does suggest that a recovery probably isn't far off.

U.S. Shopping Center Vacancies Rise as Unemployment Rate Climbs -Vacancies at U.S. neighborhood and community shopping centers climbed in the fourth quarter from a year earlier as unemployment lingered close to 10 percent, real estate research company Reis Inc. said. The vacancy rate at shopping centers rose to 10.9 percent from 10.6 percent a year earlier, the New York-based firm said today in a report. It was unchanged from the prior two quarters, when the rate reached the highest level since 1991. The record of 11.1 percent was set in 1990, according to Reis data going back 30 years. Retail tenants and landlords are grappling with a jobless rate that rose to 9.8 percent in November, the latest period for which figures are available, from 9.6 percent the prior month. The best holiday sales in five years likely had little impact on vacancies, leading only to short-term leases by seasonal retailers, according to Reis

Key to Real-Estate Rebound: Solid Economic Growth  - After dragging the U.S. economy into a severe recession, property markets across the country now are relying on an economic recovery to help cure their hangover in the new year. The housing sector, weighed down by a glut of unsold homes, needs job growth to boost demand and curb the flow of delinquent loans into foreclosure. For commercial real-estate investors, lackluster hiring means fewer new jobs to fill empty office space and less consumer confidence to drive activity in stores and distribution warehouses.  "The No. 1 biggest risk is that, for whatever reason, the overall economy does not grow sufficiently to produce any meaningful rebound in jobs,"said Thomas Lawler, a housing economist. New housing construction is stuck at its lowest levels in more than 40 years. "That will help absorb supply in ways that a lot of people underestimate,"

Amherst Securities: Investors Underestimating Severity of Housing Problem - Yves Smith - Amherst Securities, whose mortgage research is well respected, published a new article on Monday which gives a sobering reading of the prospects for the housing market. It gives a detailed analysis of default rates among performing and non-performing mortgages, and concludes that the outlook is far worse than most investors assume.  The big source of risk is what they call the “non-agency” market, which is often called the “private label” market. They’ve argued in the past that 11.5 million homeowners are at risk of losing their residences. They contend that where other analysts and investors are missing the boat is by focusing primarily on loans that are already in trouble. Loans that have always been current but where the borrower has significant negative equity also have a reasonable risk of default. Amherst Mortgage Insight January 3, 2011 One caveat about this report: it notes that once a borrower gets in arrears, the odds of the loan getting back on track, even with a mod, are low. Note that this is an indictment of the current way mods are done rather than mods in general. As Adam Levitin and Tara Twomey point out in a recent paper:

What about those Option ARMs? - There were many subprime defaults in 2007 and 2008, and many people have been worried about a "2nd wave" of Option ARM and Alt-A defaults. Here is an updated chart from Zach Fox at SNL Financial as of February 2010: Credit Suisse: $1 trillion worth of ARMs still face resets Most of the resets are expected to occur through 2012. Between 2010 and 2012, the chart indicates that $253.25 billion of option ARMs will adjust, while Alt-A loans totaling $163.71 billion will reset over that time. Altogether, $1.010 trillion worth of ARMs will reset or recast during the three-year period. The chart is labeled "resets" with a comment on "recasts" at the bottom. Resets are not a problem right now with low interest rates.Looking at the 2nd chart, it appears there is another wave coming in 2011 and 2012 - but probably not a large wave for several reasons. First, many of the loans have already defaulted. Second, some of these loans were modified (Option ARMs and Alt-A loans were targeted by the banks for internal modification programs), and some of these borrowers have probably refinanced - the few that had some equity.

Bank of America Sees $2 Billion Charge on Home Loans - Bank of America Corp., the biggest U.S. lender by assets, paid $2.8 billion to Freddie Mac and Fannie Mae after the U.S.-owned firms demanded the company buy back mortgages they said were based on faulty data. The bank rose as much as 5.6 percent in New York trading.  Resolving the disputes cost Bank of America about $3 billion in the fourth quarter, including additions to loss reserves for loans that weren’t a part of the deals announced today, the Charlotte, North Carolina-based lender said in a statement. The agreements “largely addressed” liabilities from Fannie Mae and Freddie Mac, Bank of America Chief Financial Officer Charles H. Noski said on a conference call.  Mortgage buyers including McLean, Virginia-based Freddie Mac and Washington-based Fannie Mae are trying to force lenders to repurchase loans that may have been made with incorrect data on income and home values. Before today’s announcement, Bank of America faced $12.9 billion in unresolved putback demands, with about half related to government-sponsored entities, according to an Oct. 19 presentation. The company said in October it had reserved $4.4 billion for costs related to the problem.

Bank of America Deal on Loan-Repurchase Demands Sets `Template' for Banks - -- Bank of America Corp.’s agreement to settle Fannie Mae and Freddie Mac’s demands it buy back billions of dollars in faulty loans may pave the way for U.S. lenders to resolve similar disputes with the government-sponsored entities, easing investors’ concerns that costs may surge.  Bank of America’s announcement yesterday that it settled claims on at least $4.1 billion in loans from its Countrywide Financial Corp. unit sent the KBW Bank Index of 24 stocks up 2.3 percent to its highest level since May. A willingness by the GSEs to negotiate may let other lenders cap costs from mounting demands they buy back loans that allegedly had bad or incomplete information about borrowers’ incomes, home values or other data.  “It’s unlikely GSE claims could spiral out of control from here,” “I think that’s a positive broadly for the group,"

BofA Freddie Mac Putbacks Resolved for 1¢ on $ - Bank of America settled numerous claims with Fannie Mae for an astonishingly cheap rate, according to a Bloomberg report. A premium of $1.28 billion was paid to Freddie Mac to resolve $1 billion in claims currently outstanding. But the kicker is that the deal also covers potential future claims on $127 billion in loans sold by Countrywide through 2008. That amounts to 1 cent on the dollar to Freddie Mac. Imagine if you had a $500,000 mortgage, and you got to settle it for $5,000 — that is the deal B of A appears to have gottem from Freddie Mac. B of A also paid $1.52 billion to Fannie Mae to resolve disputes on $3.1 billion in loans (~49 cents on the dollar). They remain liable for $2.1 billion in repurchase requests, as well as any future demands from Fannie Mae.

Waters: Taxpayers lose with Bank of America deal - A senior Democrat on Tuesday argued that the $2.8 billion settlement between mortgage giants Freddie Mac, Fannie Mae and Bank of America may be a 'backdoor' bailout that props the bank at the expense of taxpayers. "Given the strong repurchase rights built into Fannie Mae and Freddie Mac's contracts with banks, and the recent court setback for Bank of America in similar litigation with a private insurer, I'm fearful that this settlement may have been both premature and a giveaway," said Rep. Maxine Waters (D., Calif.). "The fact that Bank of America's stock surged after this deal was announced only serves to fuel my suspicion that this settlement was merely a slap on the wrist that sets a bad example for other negotiations in the future." Bank of America on Monday agreed to settle a legal spat with Fannie and Freddie over losses on hundreds of billions of dollars in home loans that the lender sold to the government-owned mortgage giants

Is Fannie bailing out the banks? -Why yes, say critics of the giant banks. They charge that Monday's rally-stoking mortgage-putback deal between Bank of America (BAC) and Fannie Mae and Freddie Mac is nothing more than a backdoor bailout of the nation's largest lender. It comes courtesy, they say, of an administration struggling to find a fix for the housing market while quaking at the prospect of another housing-fueled banking meltdown. Monday's arrangement, according to this view, will keep the banks standing -- but leave taxpayers on the hook for an even bigger tab should a weak economic recovery falter. Sound familiar? "The administration is trying to weave a path between two bad alternatives,"  "They want to bail out the big banks without doing apparent damage" to the sagging U.S. budget position. Pinto says truly holding BofA responsible for all the mortgage mayhem tied to its 2008 purchase of subprime lender Countrywide would likely drive it into the arms of the Federal Deposit Insurance Corp., which has enough problems to deal with.

For B. of A., mortgage ‘put backs’ aren’t over — Bank of America Corp. unveiled a $2.8 billion deal with Freddie Mac and Fannie Mae on Monday that settles legal spats over losses on hundreds of billions of dollars in home loans that the lender sold to the government-owned mortgage giants.  However, the agreement only deals with part of Bank of America’s (NYSE:BAC)  exposure to mortgage repurchase, or “put back,” requests, according to analysts.  The put back problem stems from the housing boom, when lenders originated lots of home loans then sold them to Fannie and Freddie, or packaged them up into mortgage-backed securities that were sold to private investors and sometimes insured by private insurers.  When the housing bust and financial crisis hit, lots of these loans and securities turned toxic. Now Fannie, Freddie, mortgage investors and insurers are looking for errors in the underwriting of these loans and asking the banks to repurchase them at the original value. That’s left the banking industry facing billions of dollars in losses. Read about the issue here.

Chris Whalen on Radio Free Dylan. A 30 minute podcast of Chris Whalen and Dylan Ratigan on Bank of America. How would you like to be the most sued company in all of America?  That’s an honor most of us would hope not to achieve, but Bank of America has come in first place in that category.  Chris Whalen, co-founder of Institutional Risk Analytics, once again joins Dylan to highlight the latest problems with Bank of America.  ” There may be no better representation of sick and desperate than the state of affairs right now at Bank of America, who absorbed not only Merrill Lynch in the financial crisis, but Countrywide,” says Dylan.

Fed Moves To Gut Predatory Lending Regulation - The Federal Reserve is pushing a new mortgage regulation that would effectively eliminate the most powerful federal remedy for predatory lending.  The regulation would severely limit a practice called "rescission," used to strike down demonstrably-illegal or fraudulent loan contracts and void a bank's ill-gotten gains from such predatory lending practices. When a mortgage borrower wins a rescission case in court, the bank loses the right to foreclose, and has to give up all profits from interest and fees on the loan. The borrower still has to repay the principal -- the original amount of money extended by the bank -- but can't be kicked out of the house. Under the Fed's new proposal, however, borrowers would be required to pay off the balance of the loan before the bank loses its right to foreclose -- that means borrowers could still lose their homes, even in cases where banks have broken the law. Unsurprisingly, banks support the move, but consumer advocates say this would essentially make rescission worthless to borrowers.

Fed Plans to End Tough Sanction Against Predatory Lending-- Yves Smith - Not only has the gutting of regulation made it hard to win criminal prosecutions for financial fraud, but the Fed plans to eviscerate a key sanction against predatory lending. If you somehow still had any doubts as to whose interests are really being served by banking regulators, look no further than this latest largely under the radar move. From Zach Carter at Huffington Post: The regulation would severely limit a practice called “rescission,” used to strike down demonstrably-illegal or fraudulent loan contracts and void a bank’s ill-gotten gains from such predatory lending practices. When a mortgage borrower wins a rescission case in court, the bank loses the right to foreclose, and has to give up all profits from interest and fees on the loan. The borrower still has to repay the principal — What gets interesting is how recission plays into the securitization model. The borrower is still on the hook for the principal, but with no ability to foreclose, it’s hard to compel the borrower to repay. And remember from our previous discussions of securitization, that “banks”, meaning servicers, are keen to foreclose because they get to repay themselves for fees (including junk fees and foreclosure-related charges) and principal and interest advances (remember they keep advancing principal and interest even when the borrower has quit paying, in theory they could stop once the loan is severely impaired, in practice pretty much no one does).

HuffPo: Fed Reverses Position, Prepared to Rein in Mortgage Abuses -- Yves Smith - I don’t want to jinx it, but the age of miracles may not be past. Huffington Post has been reporting on the split between the FDIC and other regulators on getting tough with mortgage, more specifically, securitization, abuses. The FDIC has been serious about putting serious securitization reforms in place; it launched a well-thought-out proposal early last year. By contrast, other banking regulators, the Fed in particular, have been taking up the sell side industry’s point of view, which is that any meaningful change would be detrimental. But of course, this is yet another case where what is good for the banking industry is not so hot for a lot of other constituencies, such as investors, homeowners, and communities.  Huffington Post has learned the Fed is in the process of reversing its position on this issue. As Zach Carter writes: The Federal Reserve has reversed its opposition to new rules reining in foreclosure abuses, and will support stronger regulations on the nation’s largest banks… The FDIC has been pushing hard to ensure that new regulations on the mortgage bond market include clear instructions for how banks handle mortgages– and under what circumstances they can evict delinquent borrowers…

US Trustee Sides With Borrowers in Foreclosures With Questionable Assignments, MERS - Yves Smith - As we’ve suggested, a not-well-recognized effect of the widespread publicity on robo-siging abuses and more recently, the widespread failure of securitization industry participants to adhere to their own agreements is more pushback in the courts. It takes a while for new information to trickle into courtroom strategies, but as the abuses get more press, it isn’t just attorneys for borrowers that are taking a new stance, but also some judges and other official watchdogs. An example today comes via the US trustee, which is a Department of Justice overseer of bankruptcy courts, in two cases in Albany, New York. In both, the US trustee has filed responses which are effectively in support of the debtor (the bankrupt borrower) and in opposition to creditors, which in this case are servicers claiming to act on behalf of securitization trusts. The issue? The parties trying to foreclose haven’t presented a document trail that the bankruptcy trustee finds persuasive.  Both cases, one with GMAC, the other with BAC as the servicer, both involve a foreclosure mill, the Baum Law Firm, which had been sanctioned and fined for submitting pleadings with documentation defects. As the first pleading, the one with BAC as plaintiff, noted “The state court judge called the Baum Firm’s actions ‘reprehensible.’”

How the mortgage clearinghouse MERS became a villain in the foreclosure mess - On March 4, 1994, the MBA unveiled its plan to county recorders who were charged with keeping track of titles signifying the ownership of land. Not everyone was sold on the idea.  "There needs to be some outside control or oversight," one recorder said, according to a transcript of the meeting.  Another said that if errors were put into the electronic system, "they're really hard to track further down the road."  Sixteen years down the road, the mortgage business is a mess. The electronic clearinghouse has become a reality; Virginia-based Mortgage Electronic Registration Systems, a registry with 67 million mortgages on file, has become part of the industry's standard operating procedure.  Critics say promises to increase transparency and iron out wrinkles in recordkeeping haven't panned out. The firm, which tracks more than 60 percent of the country's residential mortgages but whose parent company employs just 45 people in a Reston office building, is now on the firing line.

Emerging Battleground on Mortgage Abuses: Foreclosure Mills - - Yves Smith - An item from last week that I sat on still seems worthy of comment, so consider this a turn of year post. I’ve said that the efforts to clean up mortgage abuses will not have gone far enough until we see some foreclosure mill attorneys disbarred, and better yet fined and/or put in jail. And that is harder than it ought to be. One of the frustrating issues in trying to rein in fraud is the way that essential accessories, namely, accounting firms and law firms, are close to beyond the reach of the law. For instance, if a law firm clearly permitted perjury or engaged in document fabrication that led someone to have their house foreclosed upon when they were actually current on their mortgage, the wronged homeowner could not sue the law firm. It could only sue the party that was the plaintiff in the suit (presumably a trust). Perversely, the only parties to a transaction that can sue banks and accountants are their clients, even when those firms were integral actors in scams. As we described in ECONNED

Make Yourself Heard on Mortgage Abuses - - Yves Smith - One of the most frustrating parts of the financial reform game is how powerless most of us really are, most of the time. Take this story: Top policymakers at the Federal Reserve are fighting efforts to rein in widely reported bank abuses, sparking an inter-agency feud with the FDIC and the Treasury Department. The Fed, along with the more bank-friendly Office of the Comptroller of the Currency, is resisting moves to craft rules cracking down on banks that charge illegal fees and carry out improper foreclosures. The same day the New York Times takes note of how banks are breaking and entering on a regular basis during the foreclosure process, we learn that the Fed is trying to prevent even the meekest regulations on their behavior. This time, though, there is a way to stand up against the banks. And the reason is because in this case, Sheila Bair at the FDIC actually wants to do the right thing. There’s an open letter from Wall Street reformers to regulators advocating a wide range of new measures on the mortgage and securitization fronts. Congressman Brad Miller, who has been on predatory lending since 2004, penned a letter to the regulators. His effort is getting traction. And now there’s a petition that you can sign, at

“Citizens call for tough regulation of residential mortgage servicers” - Yves Smith - We just e-mailed the following message, along with a spreadsheet of signatures and messages, to Timothy Geithner, Ben Bernanke, Mary Shapiro, Sheila Bair, Ed DeMarco, and John Walsh. Thanks for your interest and involvement in curbing bad practices in the mortgage arena. My name is Yves Smith, and I run the economics-focused blog I am writing to submit thousands of names of people asking you to impose regulations on mortgage servicers as part of the risk-retention piece of the Dodd-Frank regulatory reform act. We support the Rosner-Whalen letter on mortgage servicer regulation. Over 12,000 people have signed our petition, which you can see at It is quite obvious that the broken securitization market cannot be fixed without clear rules for mortgage servicing. Furthermore, regulatory failure to effectively police mortgage servicing is impairing the value of mortgage backed securities. You have the legal authority to write such rules as part of Dodd-Frank, and my readers and I encourage you to do so.

Attorney General Tom Miller Reneges on Promise to Prosecute Mortgage Fraud (Updated) - Yves Smith - I’m not exactly surprised at the bait and switch by Iowa’s Attorney General Tom Miller, who is leading the 50 state investigation by state attorney generals into mortgage abuses. Less than a month ago promised that he would “put people in jail” Now he’s apparently decided to adopt a “move along, nothing to see here” posture. Per Bloomberg: The five largest loan servicers, including Bank of America Corp. and JPMorgan Chase & Co., may be the first to settle with the 50 state attorneys general probing foreclosure practices, Iowa Attorney General Tom Miller said…..The group isn’t pursuing a criminal investigation, Miller said. “Our focus is to reform the servicing process and that’s inherently civil, not criminal,” he said.  That’s funny, reader and former bankruptcy litigator Fractal thinks it would not take a lot of effort to come up with criminal charges. His message was directed at the activities of the foreclosure mills, but since they were operating as the arms and legs of servicers, many of these theories would presumably apply to them as well, since the communication between those law firms and their clients was frequent and ongoing. And he also points out why civil actions (or the threat of mere civil actions, since the AGs are on their way to sweeping these abuses under the rug) are inadequate:

Florida’s Killer Presentation on Foreclosure Fraud -  I’ve mentioned this report from the Florida Attorney General’s office twice now, but I thought I’d highlight it again, because it makes the issues in foreclosure fraud so completely clear. The report consists of 98 slides, laying out the specific activities of mortgage servicers, foreclosure mills and the parent company banks to swindle homeowners and pursue illegal foreclosures with fraudulent documents. It’s a full pictorial history of the past decade in the mortgage industry, complete with actual shots of improper mortgage assignments. They show the same name of a bank officer being written four different ways, clearly forged. They show stamps from notarizations that expired after before they were used to certify foreclosure documents. I don’t have a copy of the script that goes along with this presentation, but the slides make it very clear. In slide 7, you see the text “The History of Mortgages in America: Banks used to take the original note and mortgage and secure it in a vault.” That simple line shows how radical a change we’ve seen in the past decade, where notes are traded like bubble-gum cards, routinely lost or not conveyed properly at all, and then mocked up and forged after the fact.

US mortgage foreclosures rise sharply - US mortgage foreclosures jumped in the third quarter as fewer borrowers qualified for loan modifications that would have reduced their monthly payments, bank regulators have said. The rise in repossessions and decline in loan modifications are further signs that problems in the US housing market are persisting, in spite of forecasts by some analysts of a recovery before the year-end.The number of homes entering foreclosure rose 31 per cent compared with the second quarter and 3.7 per cent compared with the year-earlier period, the Office of the Comptroller of the Currency and the Office of Thrift Supervision said. These newly foreclosed homes will add to a growing backlog of 1.2m properties already in some stage of repossession, a 4.5 per cent increase over the second quarter and 10 per cent more than the previous year. As of the end of the third quarter, 187,000 homes completed the foreclosure process, a 14.7 per cent increase over the second quarter and a 57.5 per cent jump from the same period a year ago. As these properties come on the market, they are expected to depress home prices by between 5 per cent and 10 per cent over the next year,

Regulators: Completed Foreclosures in Q3 Up 57% from Year Ago - New data from federal regulators show that the nation’s largest banks and thrifts repossessed nearly 187,000 homes during the third quarter of 2010. The number of foreclosures completed during the three-month period is up 14.7 percent from the previous quarter and is 57.5 percent more than a year earlier. The figures provided by the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) are based on information collected from nine institutions with the largest mortgage servicing portfolios among national banks and thrifts.   The report covers about 64 percent of all first-lien mortgages in the country, worth $5.8 trillion in outstanding balances. The regulators’ quarterly mortgage performance report shows that new foreclosures initiated by these institutions also rose during the July to September timeframe, before the robo-signing scandal broke. The number of foreclosure starts in Q3 increased to more than 382,000 – 31.2 percent more than in the previous quarter and 3.7 percent more than in the third quarter of 2009.

U.S. Home Foreclosures May Top 100,000 In January - Over the holidays, many lenders put foreclosures on hold. But that temporary freeze is over now. Industry watchers are expecting thousands of foreclosed properties to hit the market in the weeks and months ahead. Home foreclosure sales slowed down at the end of 2010 for two reasons: the regular holiday foreclosure freezes, and the remnants of the so-called robo-signing scandal. In the fall, many lenders put evictions on hold while they reviewed their foreclosure procedures. Rick Sharga of RealtyTrac says that's behind us now — and the pace of foreclosure is about to pick up. "I'd be really, really surprised if we didn't see a probably record quarter in the first quarter of this year," he says. Sharga expects banks to repossess close to 100,000 homes in January alone.

Foreclosures May Be Undone by Massachusetts Ruling on Mortgage Transfers - Massachusetts’s highest court is poised to rule on whether foreclosures in the state should be undone because securitization-industry practices violate real- estate law governing how mortgages may be transferred.  The fight between homeowners and banks before the Supreme Judicial Court in Boston turns on whether a mortgage can be transferred without naming the recipient, a common securitization practice. Also at issue is whether the right to a mortgage follows the promissory note it secures when the note is sold, as the industry argues.  A victory for the homeowners may invalidate some foreclosures and force loan originators to buy back mortgages wrongly transferred into loan pools. Such a ruling may also be cited in other state courts handling litigation related to the foreclosure crisis.

Pending Massachusetts Supreme Court Ruling May Invalidate Securitization Mortgage Transfers - 01/06/2011 - Yves Smith - Bloomberg has a bombshell today, that a case before the Massachusetts Supreme Court may invalidate certain types of mortgage transfers, a central process in mortgage securitizations. A ruling for the plaintiffs would render some past foreclosures invalid, raising the possibility that the borrowers could sue for damages. It would also have far reaching implications, since it would also be a significant setback to the argument made by the American Securitization Forum and the major securitization law firms who have issued opinion letters in support of securitization industry procedures.  The securitization agreements called for the notes to go through a specific number of parties, usually at least two between the originator and its final home, a trust. They required the note have a specific chain of endorsements (as in in theory each party could still endorse in blank, meaning not sign it over specifically to the next required party, as long as each party in the chain did sign it in blank and it bore evidence of indeed having passed through all the required parties). It appears Massachusetts may have problems with the endorsement in blank process, which was allegedly pervasive.

Top Court in Massachusetts Voids Foreclosures by 2 Banks - The highest court in Massachusetts ruled Friday that U.S. Bancorp and Wells Fargo erred when they seized two troubled borrowers’ properties in 2007, putting the nation’s banks on notice that foreclosures cannot be based on improper or incomplete paperwork.  Concluding that neither institution had proved it had the right to evict the borrowers, the Supreme Judicial Court voided the foreclosures, returning ownership of the properties to the borrowers and opening the door to other foreclosure do-overs in the state.  Legal experts said that while this ruling did not set a precedent for other states, the outcome will be closely watched across the country because it is the first such ruling from a state’s highest court. Investors viewed the ruling as negative for banks; an index of financial company shares fell almost 1 percent on the day.  “The broad implication is you’ve got to dot your i’s and cross your t’s,” said Kathleen G. Cully, an expert in bankruptcy and lender regulatory law in New York. “You need a proper chain of title, and in both of these cases there was a gap in the chain.”

Massachusetts court voids Foreclosures -  From Bloomberg: Banks Lose Pivotal Massachusetts Foreclosure Case  The state Supreme Judicial Court today upheld a judge’s decision saying two foreclosures were invalid because the banks didn’t prove they owned the mortgages, which he said were improperly transferred into two mortgage-backed trusts. The concurring opinion by Justice Cordy helps clarify the situation:  I concur fully in the opinion of the court, and write separately only to underscore that what is surprising about these cases is not the statement of principles articulated by the court regarding title law and the law of foreclosure in Massachusetts, but rather the utter carelessness with which the plaintiff banks documented the titles to their assets. There is no dispute that the mortgagors of the properties in question had defaulted on their obligations, and that the mortgaged properties were subject to foreclosure.  Although there was no apparent actual unfairness here to the mortgagors, that is not the point. ...

Banks Lose Pivotal Massachusetts Foreclosure Case -  U.S. Bancorp and Wells Fargo & Co. lost a foreclosure case in Massachusetts’s highest court that will guide lower courts in that state and may influence others in the clash between bank practices and state real-estate law. The ruling drove down bank stocks.  The state Supreme Judicial Court today upheld a judge’s decision saying two foreclosures were invalid because the banks didn’t prove they owned the mortgages, which he said were transferred into two mortgage-backed trusts without the recipients’ being named.  Joshua Rosner, an analyst at the New York-based research firm Graham Fisher & Co., called the decision “a landmark ruling” showing that at least in Massachusetts a mortgage “must name the assignee to be valid.”  “This is likely to open the floodgates to more suits in Massachusetts and strengthens cases in other states,” Rosner said. “We agree with the judge that the plaintiffs, who were not the original mortgagees, failed to make the required showing that they were the holders of the mortgages at the time of foreclosure,” Justice Ralph D. Gants wrote for a unanimous court.

Mass Supreme Court Rules Against Wells Fargo, Deutsche Case on Validity of Mortgage Transfers in Securitizations -- Yves Smith - Bottom line: even thought the Supreme Court ruling in this Massachusetts case, Ibanez, was narrow, it still represents a major blow to the securitization industry. The judges based their ruling strictly on Massachusetts law issues, and did not opine on the New York trust law issues we have highlighted. The ruling emphasized the horrible job the banks did in protecting and documenting their ownership interest and the overall carelessness of the securitization process. Effectively this shows the shortcomings of the fundamental design of the securitization process, of developing a one-size-fits-all process when some states have long-standing law (real estate is very well settled) that is idiosyncratic. How, in this case, could you design a securitiztion process that did NOT account for the need to handle the assignment of the mortgage, as Massachusetts requires? If you read the decision, you will see the judges recite the history of the two mortgages at issue and how they describe the language of the PSA and its requirements, how the banks did not adhere to its requirements, and how the documents the banks provided fail to link the properties in question specifically to the securitizations (meaning you can’t look at the closing documents and see clear evidence that the loans in question were even intended to be in these pools).  This is the key sentence from the decision, that the use of a securitization does not alter or reduce the requirements that apply to transfers and ownership of the loans and the related property: Where, as here, mortgage loans are pooled together in a trust and converted into mortgage-backed securities, the underlying promissory notes serve as financial instruments generating a potential income stream for investors, but the mortgages securing these notes are still legal title to someone’s home or farm and must be treated as such.

Some Very Bad News For The "Sweep Fraudclosure Under The Rug" Brigade - This was an Amicus Curiae brief (friend of the court) filed by the Massachusetts Attorney General Martha Coakley. (see attached) Page 10:  “Plaintiffs’ claims that the Land Court’s ruling will cause widespread confusion or significant cost to innocent parties are greatly exaggerated, and such reasoning does not warrant ignoring the plain requirements of the law designed to protect Massachusetts consumers. Indeed, it is the foreclosing entities themselves who will bear the greatest cost of clearing titled from their invalid foreclosures.   Having profited greatly from practices regarding the assignment and securitization of mortgages not grounded in the law, it is reasonable  for them to bear the cost of failing to ensure that such practices conformed to Massachusetts law.”

US foreclosure ruling to reverberate - The Massachusetts high court has ruled that Wells Fargo and US Bancorp wrongly foreclosed on two homeowners in a case that could have wide implications for the way homes are repossessed. The Massachusetts Supreme Judicial Court upheld a lower court ruling that Wells Fargo and US Bancorp did not have the right to claim the homes because they could not prove they owned the mortgages at the time of foreclosure. Legal experts said the ruling was likely to serve as a barometer for thousands of cases across the US, where homeowners have challenged foreclosures over sloppy or missing paperwork. The attorneys-general of all 50 states are investigating foreclosure practices amid allegations that bank employees rubber-stamped paperwork and in other ways subverted the foreclosure process. “This screams out for some sort of national correction to impose standards that ensure lenders keep track of who owns these loans,” Wells Fargo said the Massachusetts ruling did not prevent foreclosures on securitised loans, but rather set a standard legal process that mortgage servicers must follow in that state.

Honey, I Shrunk The Credit Score - "I just asked to see my note, and they dinged my credit score. My insurance premiums have already gone up," Marks told HuffPost. "I went to see a lawyer, we're trying to figure out what my options are. After this, we're thinking about some forced mediation. Why keep paying if my credit score gets battered anyway?" Marks asked the bank for documentation through a "Where's The Note?" website created by the Service Employees International Union and the African American grassroots-advocacy group Color of Change. Amid reports of widespread fraud in the foreclosure process, resulting in everything from illegal fees to improper evictions, the site's stated purpose is to offer borrowers legal leverage to challenge bank wrongdoing.

House Price Indexes: Case-Shiller vs. FHFA; Based on FHFA, There's No Threat to Economic Recovery -  In a post yesterday, I discussed Alan Reynolds' recent editorial in the IBD titled "Do Falling Home Prices Imperil Recovery?, where he points out that house price declines in a "few troubled cities in a few states [based on the Case-Shiller 20-city composite house price index] do not represent the entire nation."  This was in response to a recent front-page Wall Street Journal article ("Housing Recovery Stalls") that fretted about how "A new bout of declining home prices (based on the October decline in the Case-Shiller house price index) is threatening to hamper the U.S. recovery, just as consumers and the overall economy have been showing signs of healing."  Like the chart in the previous post, the chart above provides further evidence of the significant disconnect between the Case-Shiller Home Price Index (10-city composite above)and the FHFA U.S. House Price Index.   Based on the FHFA House Price Index, there's no threat to the U.S. economic recovery.  

Assessing the Housing Sector - A few economists are contending that our housing market is now in a “double dip,” based in part on last week’s report of housing price indexes for September and October that were lower than they were during the summer. In my opinion, the data on housing prices and construction do not show any significant housing market change during the second half of 2010. When connecting the housing sector with the wider economy, three different measures of housing prices are helpful: inflation-adjusted housing prices, inflation-unadjusted housing prices and cost-adjusted housing prices. Inflation-adjusted housing prices tell us how much the prices of homes have changed relative to the prices of other consumer goods.  In this case I look at a housing price index that has been normalized by a consumer price index.

S&P warns on 'shadow inventory' — Standard & Poor’s Ratings Services said Monday that it’s taking longer for the U.S. housing market to absorb foreclosed homes, which means there may be a major drag on prices for a few more years.  The New York metropolitan area may suffer the most from this, the ratings agency also said.  At the end of the third quarter of 2010, the principal balance of foreclosed homes topped $450 billion, which represents about a third of the nonagency residential mortgage-backed securities market, according to S&P managing director Diane Westerback.

US house prices – Roll out the welcome mat for a double-dip - Let’s take a look at the situation after the October data from the Case-Shiller home price index has come in[1]: You see all major metropolitan areas peaking between March and May 2010 (the end of the first-time home-buyer tax credit). After only 8 months in positive territory, the overall index comprising 20 cities is back into the red (-1% in October). 14 out of 20 regions now show declining house prices. Prof. Robert Shiller (one of the creators of the index) pointed out that 6 out of 20 cities in the index have hit new lows (even lower than in early 2009). He said that the economy would face “serious worries” if house prices kept falling this fast.[2] Why did he say “this fast”? To understand, you have to look at the annualized rate of change of the last 3 months[3]. And it is not a pretty picture:

Housing Prices Face Potential Of Double Digit Decline In 2011 - Residential real estate prices in the US are expected to fall another 10% in 2011 as the supply of distressed properties continues to weigh down the housing market . Fitch Ratings said it is cautious about the outlook for the property market and a substantial stabilization is not likely as key factors, including negative equity , lower loan modification volume, and slightly higher loss severities weigh it down. And a survey of economists by Macro Markets, a financial technology company, suggests that national property prices will not increase until the fourth quarter of 2012. It says that prices in the fourth quarter of 2010 will show a 1.13% drop from a year ago, but will begin to stabilize. Then at the end of 2011, prices are expected to remain 0.17% below where they will be at the end of this year. But by the close of 2012, prices will have begun their long journey to recovery, increasing nearly 2% from 2011, according those surveyed. Robert Shiller , chief economist at MacroMarkets, said less than 3% of those surveyed expected a negative change in 2015.

Home Prices Will Decline for Years: Zuckerman - Home prices will continue to decline for several years, Mort Zuckerman, the chairman and CEO of Boston Properties, told CNBC Monday. “I’m pessimistic about residential real estate,” said Zuckerman, whose firm specializes in high-end commercial real estate and last week bought the iconic John Hancock Tower in Boston’s Back Bay for $930 million.  Zuckerman, who is also the chairman and editor in chief of the weekly news magazine U.S. News & World Reports and publisher of the New York Daily News, blamed the continuing price decline on the so-called shadow inventory of foreclosed homes that's yet to come on the market. “That’s what’s going to put downward pressure on residential prices,” Zuckerman added, “And in my judgment, that’s going to continue for several years.”

Decades for home prices to recover - -- Move over, Cleveland. Make room, Detroit. Beat it, Buffalo. There are some competitors for the title of America's most depressed real estate market.  These are not old Rust Belt post-industrial cities, where the manufacturing economy vanished years ago; these cities were flourishing as recently as 2005. But they got crushed by the housing bubble, and most won't recover from the damage until at least 2030. "The bubble caused a lot of over-investment in these markets," "It's all collapsing because of the recession and over-valuation." So, bring on the contenders. Chen estimates that Las Vegas home prices won't return to their pre-recession peak until after 2032; in Phoenix, the rebound will take until 2034; and Salinas, Calif., and Naples, Fla., won't come back until sometime around 2038.  And these are nominal prices: Inflation-adjusted recovery will take even longer.

New American Ghost Towns - We can argue about the national reach of individual rulings in foreclosure fraud, or whether the banks will eventually be brought low. But the foreclosure crisis is a personal issue. It’s tied up in millions of individual decisions and actions, most of them forced upon the homeowner. Whatever the circumstance, we’ve seen this mass migration from the top of the housing bubble, where millions of families have had to uproot themselves and find alternative shelter. That has a startling effect on communities as a whole, particularly ones created or bolstered by the housing bubble. The amount of infrastructure poured into these communities will go almost entirely to waste now. The Los Angeles Times writes poignantly today about the new American ghost towns popping up across the country.

Private Construction Spending increases in November - The Census Bureau reported overall construction spending increased in November compared to October. [C]onstruction spending during November 2010 was estimated at a seasonally adjusted annual rate of $810.2 billion, 0.4 percent (±1.6%)* above the revised October estimate of $806.7 billion. Private construction spending also increased in November: Spending on private construction was at a seasonally adjusted annual rate of $491.8 billion, 0.3 percent (±1.1%)* above the revised October estimate of $490.5 billion. This graph shows private residential and nonresidential construction spending since 1993. Note: nominal dollars, not inflation adjusted. Private residential spending increased in November; private non-residential construction spending is still declining. Residential spending is 65% below the peak early 2006, and non-residential spending is 38% below the peak in January 2008.

U.S. Light Vehicle Sales 12.55 million SAAR in December - Based on an estimate from Autodata Corp, light vehicle sales were at a 12.55 million SAAR in December. That is up 13.1% from December 2009, and up 2.7% from the November 2010 sales rate. This graph shows the historical light vehicle sales (seasonally adjusted annual rate) from the BEA (blue) and an estimate for December (red, light vehicle sales of 12.55 million SAAR from Autodata Corp). This is the highest sales rate since September 2008, excluding Cash-for-clunkers in August 2009. The second graph shows light vehicle sales since the BEA started keeping data in 1967. Note: dashed line is current estimated sales rate. The current sales rate is still near the bottom of the '90/'91 recession - when there were fewer registered drivers and a smaller population.

GM Continues To Stuff Dealers With Its Cars - GM just reported its December sales numbers to a reaction that led all women in Phil LeBeau's presence to order what he is having. The uberbullish take home message from the report: "General Motors dealers reported 223,932 total sales in December, a 16-percent increase from a year ago for the company’s four brands. The gain was driven by solid retail sales which were 27 percent higher than a strong December a year ago. For the calendar year, total sales for GM’s four brands increased 21 percent to 2,202,927, while retail sales rose 16 percent for the year. GM’s four brands sold 118,435 more vehicles this year than the company did with eight brands in 2009, and will gain total and retail market share for the year." And on the surface this is pretty: after all the comparison is between a number of 193,824 from a year ago, and 223,932 as of December. But shouldn't the comparison actually be between 385,000 and 511,000? These are the numbers that show what GM's dealer inventory was for the months of December 2009 and 2010. In other words, there was an increase of 30k in sales... accompanied by a 125k increase in "stuffed" vehicles held at dealers.

ISM Manufacturing Index increases in December - From the Institute for Supply Management: December 2010 Manufacturing ISM Report On Business® Manufacturing continued to grow in December as the PMI registered 57 percent, an increase of 0.4 percentage point when compared to November's reading of 56.6 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting. ISM's New Orders Index registered 60.9 percent in December, which is an increase of 4.3 percentage points when compared to the 56.6 percent reported in November. This is the 18th consecutive month of growth in the New Orders Index. ...ISM's Employment Index registered 55.7 percent in December, which is 1.8 percentage points lower than the 57.5 percent reported in November. Here is a long term graph of the ISM manufacturing index. This was slightly below expectations and in line with the regional Fed manufacturing surveys.

Manufacturing’s Doing Great. Manufacturing Jobs, Not So Much. - Orders for goods made in U.S. factories rose in November, according to government figures out today. The numbers are the latest in a string of indicators suggesting that American manufacturing is making a strong comeback from the recession. But even as sales rise for manufacturers, jobs in manufacturing keep disappearing. The sector shed jobs in every month between July and November last year; over the past few years, millions of manufacturing jobs have disappeared. This combination of trends — a growing manufacturing sector, and shrinking manufacturing employment — is not a function of the recent recession; it's the result of a long shift toward high-tech manufacturing that goes back decades, and allows U.S. manufacturers to make and sell more while employing fewer people.

Factories Expand 17 Consecutive Months, Jobs Don't - The latest ISM reports show Factories grow for 17th straight month in December. Manufacturers produced more goods and booked more orders last month, leading to the fastest growth in factory activity since May. The Institute for Supply Management said Monday that its index of manufacturing activity rose to 57 in December from 56.6 in the previous month. Any reading over 50 indicates growth. The latest is well above the recession's low of 32.5, hit in December 2008. But it's below the reading of 60.4 in April, the highest level since June 2004. The report shows that manufacturers carried considerable momentum into the new year. Automakers, computer and electronics companies, and industrial machinery firms showed particular strength, In spite of 17 consecutive months of manufacturing expansion, hiring was only up 7 of those months, and not once in the last 4.The BLS Current Statistics report shows November lost 13,000 jobs, October 11,000 jobs, September 6,000 jobs and August 26,000 jobs.

What Are Tech Companies Saving For? - Why won’t technology companies spend money? What are they saving for, exactly? An interesting phenomenon has taken hold in tech companies, with the bulk of such companies saving for a rainy day, one that never comes. Their cash balances continue to climb, even as the growth rate in their core markets tails off. Check the following figure from JP Morgan today: What’s going to happen? Things that can’t go on, won’t, so it will end. The question is, how.

Recession Recovery? Not Around Here -The recession is getting worse, not better, in the heart of the Central Valley, according to a new study released Monday by the Craig School of Business at Fresno State. For the first time since initiating the survey in September 2010, the San Joaquin Valley “Business Conditions Index” has sunk below growth neutral, says th survey’s author, Ernie Goss of the Goss Institute for Economic Research in Denver. The survey of individuals making company purchasing decisions in firms in Fresno, Madera, Kings and Tulare counties indicates that growth for the first half of 2011 will be weak. The index, a leading economic indicator for the area, is produced using the same methodology as that of the national Institute for Supply Management.

Total Consumer Credit Increases Minimally, Revolving Credit Posts 27th Consecutive Monthly Decline | That total consumer credit increased modestly and in line with expectations in November, exclusively on the back of non-revolving credit, used for such purchases as cars financed and sold by recently IPOed makers of shitty cars, and student loans, the most recent entrant in the $1 trillion + never to be repaid market, is not surprising: after all, GM had to finance its dealers to hoard its channel stuffed inventory of 500k+ cars as discussed previously. What is even less surprising, is that the credit that does matter, the revolving variety, used for credit card purchases of everyday items which are increasing in price every single day courtesy of the Fed's monetary policy, declined once again, more specifically the 27th consecutive time. In other words, in November revolving credit decreased by $4.2 billion, which non-revolving credit increased by $1.3, a drop of $5.7 billion from October's revised $7 billion which surged on the back of $12.4 billion in non-revolving credit.

Seasonal Retail Hiring: Rebound in 2010 - According to the BLS employment report - and combining October through December - retailers hired seasonal workers at well above last year, and somewhat close to the pre-crisis levels. Here is a graph of the historical net retail jobs added for October, November and December by year (not seasonally adjusted). This really shows the collapse in retail hiring in 2008 and modest rebound in 2009.  Retailers hired 646 thousand workers (NSA) net during the 2010 holiday season. This is well above the 501K hired in 2009, but still below the pre-crisis average of 720 thousand for the same three months.

Where the Jobs Aren’t - Manufacturing, construction labor forces faltering. Oklahomans looking for jobs in the manufacturing and construction industries will continue to have a tough time this year. Those sectors are still struggling to recover from the recession and are expected to continue shedding jobs in 2011, according to local experts. The Oklahoma Employment Security Commission predicts a two-year loss of 12,650 manufacturing jobs and 5,100 construction jobs for the period ending in mid 2011. Many of those jobs will never be replaced, because manufacturers have automated and updated equipment, so they can operate with fewer workers

Financial Armageddon: Here We Are - Instead of squandering trillions on reckless imperialism and pointless wars, giveaways and bailouts for the rich, ill-conceived public works projects, bloated and dysfunctional bureaucracies, and a safety net that's sown the seeds of its own demise, shouldn't we have been saving for and investing in something that matters -- our nation's infrastructure? Unfortunately, as the following reports make clear, it looks like the bills are now coming due at a time when the public purse is almost bare. Third World America, here we come are!

ADP: Private Employment increased by 297,000 in December - ADP reportsPrivate-sector employment increased by 297,000 from November to December on a seasonally adjusted basis, according to the latest ADP National Employment Report® released today. The estimated change of employment from October to November was revised down but only slightly, from the previously reported increase of 93,000 to an increase of 92,000. This month’s ADP National Employment Report suggests nonfarm private employment grew very strongly in December, at a pace well above what is usually associated with a declining unemployment rate.  Note: ADP is private nonfarm employment only (no government jobs).

Good News On The Jobs Front? It’s unclear how this will correlate to the official unemployment report due out on Friday, but the private sector jobs report from ADP is looking really, really good:(Reuters) – U.S. private employers added 297,000 jobs in December compared with a revised gain of 92,000 in November, a report by a payrolls processor showed on Wednesday. The November figure was originally reported as a gain of 93,000. The reaction from economists is very positive:

ADP's Strong December Jobs Report: Er, Not So Fast -According to Bloomberg, one report released yesterday more-or-less confirmed that the worst has passed as far as the U.S. economy is concerned: Private-sector payrolls expanded at a very strong pace in December, according to data released Wednesday. Private-sector jobs in the U.S. rose by 297,000 last month, according to a national employment report [NER] published by payroll giant Automatic Data Processing Inc. (ADP) and consultancy Macroeconomic Advisers. The report said the gain "suggests nonfarm private employment grew very strongly in December, at a pace well above what is usually associated with a declining unemployment rate." Er, not so fast. As it happens, the economic advisory firm that helps ADP compile the data served up a few caveats (at its blog) after the NER was released

The Caveat Behind the Strong ADP Jobs Gain - A strong gain in a preliminary measure of private payrolls has raised hopes for the official Labor Department employment report to be released this Friday, but the numbers may be inflated by seasonal issues. The U.S. added 297,000 private-sector jobs in December, according to a report by payroll giant Automatic Data Processing and consultancy firm Macroeconomic Advisers. Some raised their estimates in the wake of the ADP report, with the median forecast rising to 150,000. But there is a seasonal quirk in the ADP number that may have inflated the December number. ADP and Macroeconomic Advisers do a seasonal adjustment that takes into account a typical December purge, where employers who have fired workers over the course of the year but don’t remove them from officials payrolls right away clear the rolls. Ben Herzon of Macroeconomic Advisers explains: “If companies were laying off fewer employees throughout 2010 than had been the case in recent years, the amount by which the seasonal adjustment process subtracted from [ADP National Employment Report] growth last year through November was too great. Following the same logic, fewer layoffs through November implies fewer December purges than in recent years, so the boost to December employment growth to offset the normal December purge may have been too large.”

Sorry ADP, Not Everyone Believes the Economy Created 297,000 Jobs - CNBC - That big positive surprise this morning from the ADP jobs report was nice while it lasted — which was all of about 30 seconds by market standards. Unfortunately, a number of traders and economists aren't willing to take seriously the report that ADP and Macroeconomic Advisors put out suggesting the economy created 297,000 jobs over the past month.  A quick straw poll this morning showed a lot of disbelief in the ADP numbers, and the report did virtually nothing to move the stock market, though futures pared some losses immediately after the release.  But don’t expect many major revisions for Friday’s Labor Department report, expected to show nonfarm job increases of 140,000 jobs and an unchanged unemployment rate of 9.7 percent.

Economy Adds Fewer Jobs Than Expected - The U.S. economy added fewer jobs than expected in December, but the unemployment rate fell to its lowest level in 19 months as more people who still remain in the work force found employment.  The jobless rate fell to 9.4% in December, its lowest level in 19 months, but the economy added just 103,000 new jobs, fewer than expected. Nonfarm payrolls rose by 103,000 last month as private-sector employers added 113,000 jobs, the Labor Department said Friday. The November number was revised up significantly to show an increase of 71,000 jobs from a previous estimate of 39,000.  The unemployment rate, which is obtained from a separate household survey, fell to 9.4% last month, the lowest level since May 2009 and the biggest fall in more than a decade. Still, about 14.5 million people who would like to work can't get a job.  Economists surveyed by Dow Jones Newswires had forecast payrolls would rise by 150,000 and that the jobless rate would fall slightly to 9.7%.

December Employment Report: 104,000 Jobs, 9.4% Unemployment Rate - From the BLS: The unemployment rate fell by 0.4 percentage point to 9.4 percent in December, and nonfarm payroll employment increased by 103,000, the U.S. Bureau of Labor Statistics reported today.  Payroll for November was revised up 70,000 and the October payroll was revised up 38,000. The following graph shows the employment population ratio, the participation rate, and the unemployment rate. The unemployment rate decreased to 9.4% (red line).  The Labor Force Participation Rate declined to 64.3% in December (blue line). This is the lowest level since the early '80s. (This is the percentage of the working age population in the labor force. The participation rate is well below the 66% to 67% rate that was normal over the last 20 years.) The Employment-Population ratio increased to 58.3% in December (black line).  The second graph shows the job losses from the start of the employment recession, in percentage terms aligned at maximum job losses.

Unemployment Rate Drops To 9.4%, But Job Growth Still Anemic - The Obama Administration is likely to focus on the fact that the unemployment rate in December dropped 4/10ths of a percentage point but, as always, the devil is in the details: The United States economy ended the year by adding 103,000 jobs in December, the Labor Department said Friday, a number that missed expectations. In addition, the unemployment rate fell to 9.4 percent last month from 9.8 percent. The agency also revised estimates from the two earlier months, now saying that 210,000 jobs were created in October instead of 172,000, and 71,000 in November, instead of 39,000. As with previous months, all of the gain in December — 113,000 jobs — came from private companies. Federal, state and local governments continued to shed jobs — cutting another 10,000 last month after trimming 8,000 in November, revised from 11,000 mostly on the local level. States and municipalities dealing with tighter budgets may be faced with further cuts as they try to shrink their deficits.

U.S. Added 103,000 Jobs Last Month - Rate Fell to 9.4% - The United States economy ended the year by adding 103,000 jobs in December and with a lower unemployment rate, the Labor Department said Friday, but as thousands of Americans gave up looking for work, the numbers suggested that joblessness could continue to weigh on the recovery. The unemployment rate fell to 9.4 percent last month from 9.8 percent, its lowest rate since July 2009, the department said in its monthly report. But the figures also showed that the civilian labor force declined by 260,000 in December, as many Americans stopped applying for jobs.  “It is certainly a disappointment,” “The drop was more attributed to a decline in the number of unemployed people, rather than an increase in the number of employed people. There was not a surge in employment.”. While the overall statistics showed that jobs were added, the monthly growth was not enough to significantly reduce the ranks of the unemployed or keep pace with people entering the work force. And the outlook remains bleak for many workers. More than 14.5 million people were out of work in December, among them 6.4 million who have been jobless for six months or longer.

EMPLOYMENT SITUATION (9 charts) The December employment report showed a continuation of the past few months trend as payroll employment rose 103,000 and the household survey showed a gain of 297,000. The unemployment rate fell to 9.4%, but almost half of the drop was due to a 260,000 drop in the labor force. The gains in payroll employment reflected a 113,000 gain in private jobs and a 10,000 fall in government employment. Now that the census employment distortions have moved out of the data it is now showing the fundamental trends as both of the changes were near the averages of 2010.Although the employment gains were weak by historic standards, they are about the same as in the 1990s jobless recovery and moderately stronger than in the 2000s jobless recovery. Average weekly hours for nonsupervisory rebounded to 33.6 hours, the same as two months ago. As with the employment data, the hours worked data is strong compared to the last two jobless recoveries but weak by historic norms.

The Employment Report is Weaker than Expected - The employment report came out today, and it’s weaker than many people expected. The unemployment rate did fall to 9.4 percent in December. However, a deeper look into the numbers reveals that a big part of the decline is due to the fact that 260,000 people left the labor force. The employment population ratio did increase, so there were employment gains, but the establishment survey indicates that only 103,000 jobs were created in December. That’s barely enough to keep up with normal population growth, and far short of what is needed to reemploy the millions who have lost jobs and would like to work again. Dean Baker provides more detail on the underlying numbers:

How “missing” workers impact the jobless data - The labor force should have increased by around 4.2 million workers from December 2007 to December 2010 given working-age population growth over this period, but instead it has fallen by 246,000. This means that the pool of missing workers now numbers around 4.4 million.
If just half of these workers were currently in the labor force and were unemployed, the unemployment rate would be 10.7% instead of 9.4%. None of these workers is reflected in the official unemployment count, but their entry or re-entry into the labor force will contribute to keeping the unemployment rate high. --From Heidi Shierholz' analysis of the latest unemployment report.

Unemployment Falls to 9.4 Percent, but 260,000 Leave Labor Force… The Labor Department reported that the unemployment rate fell to 9.4 percent in December, however much of the reason for the decline was a drop of 260,000 in the size of the labor force. The 0.4 percentage-point drop in the unemployment rate was the largest since April of 1998, but this decline may just be an aberration. The drop in unemployment showed up primarily among white men, who saw their unemployment rate fall by 0.6 percentage points from 9.1 percent to 8.5 percent, as their EPOP rose by 0.4 percentage points. The unemployment rate for white women edged down by 0.2 percentage points to 7.3 percent. African Americans had a modest 0.2 percentage-point drop in their unemployment rate to 15.8 percent, but this was all due to people leaving the labor force. The EPOP for African Americans fell from 52.5 percent to 52.2 percent.  The story was also not good for Hispanics. While the unemployment rate dipped slightly to 13.0 percent, this was almost entirely due to people leaving the labor force as the EPOP for Hispanics fell 0.2 percentage points to a new low. By age, employment growth continues to be concentrated among workers over age 55. They accounted for 73.4 percent of December employment growth.

More of the Same, by Tim Duy: The jobs report was a clear disappointment relative to both expectations at the beginning of the week and certainly after the blowout ADP report.  After adjusting expectations to the upside, ADP once again scores a major miss (how we came to care about this data series still remains a mystery to me).  That said, the overall tenor of fourth quarter employment reports suggest an economy growing around trend growth.  Better, but not good enough to prompt a policy response from the Fed. The headline NFP gain was 103k overall, 113k private.  Consensus had been looking for something around 140k at the beginning of the week.  On the upside, the BLS revised up the October and November numbers, so that the average monthly NFP gain during the fourth quarter was 128k, pretty much right in the middle of the 100k to 150k estimates of growth required to keep a lid on unemployment. 

Painfully Slow Jobs Progress - The job market is getting better — but oh so slowly, especially given how far it still has to go. The chart below shows the three-month average change in employment, going back to the start of the recession. You can see that since the economy deteriorated this past summer, it has started to recover again. Today’s employment report continues to show recovery. But the pace of job creation is now only barely fast enough to keep up with population growth. Over the last three months, the economy has added an average of 130,000 jobs a month. If that pace picked up to 200,000 jobs a month, almost 10 years would have to pass before the unemployment rate fell below 6 percent. If the pace picked up to 250,000 a month — roughly what it was in the late 1990s (controlling for population size) — five more years would have to pass. These grim projections are reason to be disappointed that today’s report wasn’t stronger.

Employment: The Declining Participation Rate - An interesting question is why the unemployment rate fell so sharply, even with relatively few payroll jobs added (103,000 jobs added in December). First, it is important to remember that there are two separate surveys for the Employment Situation Summary. The unemployment rate comes from the Current Population Survey (CPS: commonly called the household survey), a monthly survey of about 60,000 households. The payroll jobs number comes from Current Employment Statistics (CES: payroll survey), a sample of "approximately 140,000 businesses and government agencies representing approximately 410,000 worksites". See this post for a discussion of the two surveys.  The following table is based on the Household survey (all seasonally adjusted):

Don’t Blame the Snowstorms for Disappointing Jobs Data - Snowstorms hit much of the Northeast in late December, while snow blanketed other regions of the U.S. earlier during the month. But they don’t appear to have done much to hit employment. Severe weather can suppress payroll figures, particularly if the snow keeps people out of work for a week. About half of U.S. companies issue weekly paychecks. Last February, the back-to-back snowstorms kept some workers at home for the week during which the Labor Department bases its employment survey. As a result, they weren’t counted as employed under the payroll survey. (Many U.S. workers are not paid for snow days.) That led to weak payroll gains in February — an increase of just 39,000 — followed by a sharper increase of 208,000 in March (part of it payback from February).  But December 2010 was different. The snowstorms in the Northeast came long after the Labor Department’s survey week (which is the week that includes the 12th of the month), at a time when many workers would’ve been off for the holidays anyway.

Why Did the Unemployment Rate Drop? - The U.S. jobless rate dropped substantially to 9.4% in December, but the government’s broader measure of unemployment dropped at a more modest pace to 16.7%, highlighting the problem of the long-term unemployed. The comprehensive gauge of labor underutilization, known as the “U-6″ for its data classification by the Labor Department, accounts for people who have stopped looking for work or who can’t find full-time jobs. The key to the discrepancy between the two number was an increase in the number of workers considered marginally attached to the labor force. The figure increased in December. The number of workers part-time for economic reasons fell slightly. The increase in the number of discouraged workers highlights the problem of the long-term unemployed. Some four million people have been without a job for 52 weeks or longer in December, according to the Labor Department.

Labor Force Participation Rate Drops To Fresh 25 Year Low, Adjusted Unemployment Rate At 11.7% - While today's unemployment number came at a low 9.4%, well below expectations, the one and only reason for this is that the labor force in America has plunged to a fresh 25 year low. Assuming a reversion to the mean in the long-term average participation rate back to 66%, means that the civilian labor force, which in December came at 153,690, a drop of 260,000 from November, is in reality 157.6 million, a delta of 3.91 million currently unaccounted for. Maybe someone can ask Bernanke during his imminent presentation before Congress what happened to the unemployed population, which would have been 18.4 million if this labor force delta was incorporated, resulting in an unemployment rate of 11.7%.

Comparing Recoveries: Job Changes - The United States added 103,000 jobs on net in December, the Labor Department said today. While growth is better than shrinking, of course, the number was substantially lower than what economists had been expecting. The growth was primarily driven by jobs added in leisure and hospitality (in particular, the sub-sector of food services and drinking places) and in health care. Other industries’ payrolls remained largely flat. The chart above shows job changes in this recession compared with recent ones, with the black line representing the current downturn. The line has risen since last year, but still has a long way to go before the job market fully recovers to its pre-recession level. Since the downturn began in December 2007, the economy has shed, on net, about 5.2 percent of its nonfarm payroll jobs. And that doesn’t even account for the fact that the working-age population has continued to grow, meaning that if the economy were healthy we should have more jobs today than we had before the recession.

Employment Summary and Part Time Workers, Unemployed over 26 Weeks - This graph shows the job losses from the start of the employment recession, in percentage terms - this time from the start of the recession.  In the previous post, the graph showed the job losses aligned at the bottom. The dotted line shows payroll employment excluding temporary Census workers.  This is by far the worst post WWII employment recession.The number of workers only able to find part time jobs (or have had their hours cut for economic reasons) declined slightly to 8.931 million in December. This has been around 9 million since early 2009 - a very high level. These workers are included in the alternate measure of labor underutilization (U-6) that declined to 16.7% in December. Still very grim.This graph shows the number of workers unemployed for 27 weeks or more.  According to the BLS, there are 6.441 million workers who have been unemployed for more than 26 weeks and still want a job. This was up from 6.328 million in November. It appeared the number of long term unemployed had peaked, however the increases over the last three months are very concerning.

Snap analysis: The incredible, shrinking U.S. workforce (Reuters) - Even the "good" news had a dark lining in Friday's U.S. employment report. The unemployment rate dropped to 9.4 percent in December, even though employers reported hiring a disappointingly skimpy 103,000 new workers. But the reason for the big drop from 9.8 percent in November is somewhat disconcerting. While the Labor Department's volatile survey of households showed employment surging by 297,000, the labor force shrank by some 260,000. Even though the U.S. economy added jobs in every month in 2010, hundreds of thousands of people gave up looking for work. The number of discouraged workers climbed to 1.32 million in December, from 1.28 million the month before. In order to be counted as unemployed, people must be actively looking for work, so the rise in the ranks of discouraged workers has the somewhat perverse effect of helping to bring down the jobless rate.

Free Market Fraud -  At first glance, the December jobs report seems to be a step in the right direction. An unemployment rate of 9.4 percent, the lowest level in 19 months. And a president, happy to boast about another 103,000 jobs being created last month. However, renowned economist Peter Morici points out two important caveats. For one, 260,000 Americans simply dropped out of the labor force in December. They are out of work, yet no longer counted as unemployed by the government. And secondly, 103,000 jobs is nowhere near the number of jobs we need to be adding each month. To bring unemployment down to 6 percent by 2013, businesses need to hire an average of 350,000 new workers each month. Even Federal Reserve Chairman Ben Bernanke, who continues to defend his Quantitative Easing (aka money-printing) program, couldn't ignore the writing on the wall during a Senate hearing Friday morning. "If we continue at this pace", said Bernanke, "we are not going to see sustained declines to the unemployment rate."

Jobs-Spin Baby Spin - Here is the blaring headline on Marketwatch: Jobless rate falls to 9.4% Looks fantastic. Except it is more government bullshit. According to your government the number of unemployed plunged from 15 million to 14.5 million. Sounds AWESOME!!!! But wait, let’s look at the details. It seems that 434,000 Americans decided to leave the workforce in December according to the BLS. Give me a fucking break. The economy is a shambles, people are desperate for money, and 434,000 decided to sit back and take it easy? The number of people who want a job went up by 223,000, but somehow the government decides they shouldn’t be considered unemployed. Orwell is spinning wildly in his grave.  The employment to population ratio dropped again and is now the lowest since 1983.

Gallup Finds Unemployment Increased In December, Underemployment Is At 6 Month High, Blasts Government Data Fudging -  Following this week's ebullient ADP private payrolls report, the sellside has succumbed to an orgiastic frenzy suggesting that tomorrow NFP number may be as high as 580,000 (as reported earlier). While there is no chance on earth of that happening absent all of US data gathering to have been outsourced to Beijing, what is more interesting, is that organizations which track employment trends in real time have found that neither is ADP's optimism justified, nor is there absolutely any basis to expect a blow out NFP number tomorrow. Gallup has found that not only did the unemployment rate increase in December from 9.4% to 9.6%, that disgruntled part-time workers who want full-time work increased from 8.6% to 9.4%, the highest since September, but that the most important metric in a labor force increasingly consisting of part-time workers, underemployment, has surged to 19%, the highest since June!  Unemployment, as measured by Gallup without seasonal adjustment, increased to 9.6% at the end of December -- up from 9.3% in mid-December and 8.8% at the end of November.

Jobless Rate May Not Return to 5% Until 2020s - The economy lost almost 8.4 million jobs from December 2007 to December 2009. It added 1.1 million jobs in 2010. At December’s pace, just replacing the rest of those lost jobs would take 70 more months — roughly six years, taking us to November 2016. That would be almost nine years from the start of the recession for U.S. payrolls to return to where they peaked before the downturn. But the economy also needs to add 100,000 to 125,000 jobs a month just to keep pace with growth in the labor force. That means the gap created since the recession started was closer to 12 million jobs (leaving 11 million after the gains in 2010). The U.S. unemployment rate is unlikely to move much lower if job gains continue only at December’s pace. Even employment gains close to October’s pace (210,000 jobs) would take us into the next decade before seeing the unemployment rate back near 5%.

Economy Needs To Create 235K Jobs A Month To Return To Pre-Depression Levels By End Of Obama Second Term - When we last ran this number, the economy needed to create 232,400 jobs per month to get to the same unemployment rate as last seen in December 2007, just before the depression started, courtesy of today's massive disappointment we can now increase the creation requirement to 235,120. As a reminder this is the number of jobs per month that need to be created between December 2010 and November 2016, or the end of Obama's now improbable second term, for jobs to recover their losses when taking into account the natural growth of the labor force of 90,000 people per month. Also, when ignoring the demographic shift, or just accounting for the absolute number in jobs without accounting for the labor force growth which is so wrong only the BLS looks at that number, the breakeven has been pushed back from June 2013 to July 2013. Economic collapse you can finally believe in.

A Figment of the Bulls' Imagination… Based on a recent survey of more than 2,400 hiring managers and human resource professionals across industries and company,, the largest online employment website, is predicting a "healthier" employment picture this year. Here are a few of the key findings [italics mine]: Twenty-four percent of employers plan to hire full-time, permanent employees in 2011, up from 20 percent in 2010 and 14 percent in 2009. Seven percent plan to decrease headcount, an improvement from 9 percent in 2010 and 16 percent in 2009. Fifty-eight percent anticipate no change in their staff levels while 11 percent are unsure. Call me a cynic (for the umpteenth time), but the fact that less that less than a quarter of employers plan to boost full-time hiring this year -- a measly four percentage-point increase from last year -- doesn't sound especially "healthy" to me.

Real wages for the previously unemployed - Catherine Rampell reports: Nearly 7 in 10 of the survey’s respondents who took jobs in new fields say they had to take a cut in pay, compared with just 45 percent of workers who successfully found work in their original field. Of all the newly re-employed tracked by the Heldrich Center, 29 percent took a reduction in fringe benefits in their new job. Again, those switching careers had to sacrifice more: Nearly half of these workers (46 percent) suffered a benefits cut, compared with just 29 percent who stayed in the same career.

Corporate America, paving a downward economic slide - We are now America, the downwardly mobile.   The decade just concluded is the first in which Americans, on average, have seen their incomes decline. Median household income increased by about $4,000 per decade in the 1980s and '90s: from $42,429 in 1980 to $46,049 in 1990 to $50,557 in 2000 (in 2007 dollars). In 2009, the most recent year for which we have figures, it had declined to $49,777 - but 2009, of course, was a year of deep recession. If we go back to the peak year of the last decade, 2007, we find that median household income was just $50,233- roughly $300 less than it had been in 2000.  Until the housing and financial bubbles burst, of course, we enjoyed the illusion of prosperity through the days of wine and credit. Now we stand on unfamiliar terrain in which almost all the signs of long-term economic health point downward. Our private sector isn't creating jobs at a rate commensurate with our increasing population, much less at a level to significantly reduce unemployment. The social pathologies long associated with the inner-city poor - single-parent households, births out of wedlock, drug and alcohol abuse - now stalk the white working class in rural and post-industrial regions far removed from big cities. The middle is falling.

The Great Middle Class Swindle - Matt Yglesias isn't buying my story that skyrocketing Wall Street earnings—and the skyrocketing incomes of the super-rich in general—are basically coming out of the pockets of the working and middle classes:  As it happens, swelling health care benefits aren't enough to account for more than a small amount of middle class income stagnation over the past three decades. The arithmetic just doesn't work out. But Matt is right that the weakest part of my story is coming up with a good causal account of how the top 1% sucked up so much money from the middle classes. But I think it's a mistake to get overly wonky and look for some kind of geometric proof of how this happened. You're just never going to get that. You're never going to be able to point to a specific policy at time X that caused a specific transfer of income share at time Y.

The Jobs They Are A-Changin' - A large fraction of displaced workers who have found new jobs have had to switch careers, and most of those career-changers have downgraded to a lower-paying job, according to a new report from Rutgers’s Heldrich Center for Workforce Development. The report, which I wrote about in this weekend’s paper, reveals survey results of a group of American workers who were unemployed as of August 2009 and periodically re-interviewed about their job status. As of November 2010, only about a third of these original workers had found replacement jobs, either as full-time workers (26 percent) or as part-time workers who do not want a full-time job (8 percent). Of those workers who found jobs, more than 4 in 10 — 41 percent — said  they took a job in a “new field or career.”. But most of those entering new careers had not taken a class or training course for skills (even if the portion of career-changers who’d had retraining was higher than the portion of non-career-changers). The new-fielders were also more likely to take a hit in pay and a reduction in fringe benefits than those who managed to find re-employment in their existing career.

Unemployment: A Jobs Deficit or a Skills Deficit? - Millions of Americans remain unemployed nearly a year and a half after the official end-date of the Great Recession, and the nation’s official unemployment rate continues at nearly 10%. Why? We are being told that it is because—wait for it—workers are not qualified for the jobs that employers are offering. Yes, it’s true. In the aftermath of the deepest downturn since the Great Depression, some pundits and policymakers—and economists—have begun to pin persistently high unemployment on workers’ inadequate skills. The skills-gap message is coming from many quarters. Policymaker-in-chief Obama told Congress in February 2009: “Right now, three-quarters of the fastest-growing occupations require more than a high school diploma. And yet, just over half of our citizens have that level of education.” His message: workers need to go back to school if they want a place in tomorrow’s job market.

Facts or Fallacies Part III: Combinations, Murder and the Primordial Lump - In Part I, I compared the statistical fact that non-farm employment was lower in September 2010 than it had been in December 1999 with the assertions that those who believed any such thing could occur were guilty of a lump-of-labor fallacy. In Part II, I rehearsed debating points regarding Paul Krugman's columns citing the alleged fallacy. My intention in Part III is not to refute the fallacy claim. I believe I did that sufficiently in "Why Economists Dislike a Lump of Labor" and "The Lump-of-Labor Case Against Work-Sharing." To date, no one has brought forward a substantive rebuttal to those articles. Instead, I will explore further the evolution of the fallacy claim.

Underemployed at 17% Shows Small Business Gain With Part-Timers - As the U.S. economy gains momentum heading into 2011, small-business employment is lagging behind other drivers of the recovery. While past rebounds were led by companies with fewer than 500 people adding full-time workers, some owners say they'll rely on part-time help and push their staffs to be more productive as they wait as much as a year for demand to improve. This has helped keep unemployment near a quarter-century high, even as household purchases have risen for five straight months.

The State of Native America: Very Unemployed and Mostly Ignored - As the new year begins, it’s as good a time as any to look at a topic almost completely ignored by mainstream media: how Native American people are faring in the U.S. labor market. The economy and its paucity of jobs dominated U.S. headlines throughout 2010, but news media overlooked the particularly difficult experiences of native peoples. In late November, the nonpartisan think tank Economic Policy Institute released a report looking at unemployment figures among American Indians. According to Algernon Austin of EPI, unemployment in Indian Country is bleak.  For instance, the national unemployment rate among Native people spiked from 7.7 percent in the first half of 2007 to 15.2 percent in the first half of 2010. Whites experienced a 4.1 percent and 9.1 percent unemployment rate respectively, in the same time period. In his brief “Different Race, Different Recession: American Indian Unemployment in 2010,” Austin writes that:We find some of the largest disparities in employment between American Indians and whites in Alaska, the Northern Plains, and the Southwest.These are also the regions of the country where the ratio of the Native to non-Native population is among the highest.

America’s Inverted Wealth Pyramid

Ezra Klein - Some thoughts -- and graphs -- on inequality… The story this graph seems to tell goes something like this: From about 1947 to 1970, times are good for the average American and not as good for the average rich American. That's the part of the story that gets a lot of attention: It suggests that perhaps there's a connection between falling inequality and rising wages. But the timing of the next few inflection points doesn't really work for that theory: In the 1970s, median household income begins stagnating. But it's not until the mid-1980s -- and really beginning in 1987 -- that the income share of the top 1 percent begins skyrocketing. Then in the ’90s, inequality rises sharply, but so too do median household incomes. And then in the aughts, inequality rises, but median household incomes don't. There's not a consistent relationship between the two variables. But that graph, which has informed my thinking on inequality, is, in some crucial ways, misleading: It compares changes in a percentage of something (the top 1 percent's share of income) to changes in the value of something. Here's a graph that's apples-to-apples: It tracks changes in the dollar value of median household incomes against changes in the dollar value of incomes for the top 1 percent (both data sets are adjusted for inflation). I've set the level both incomes were at in 1947 to be the baseline:

Income inequality: Our global oligarchs - The Economist -Our light-speed, globally connected economy has led to the rise of a new super-elite that consists, to a notable degree, of first- and second-generation wealth. Its members are hardworking, highly educated, jet-setting meritocrats who feel they are the deserving winners of a tough, worldwide economic competition—and many of them, as a result, have an ambivalent attitude toward those of us who didn’t succeed so spectacularly. Perhaps most noteworthy, they are becoming a transglobal community of peers who have more in common with one another than with their countrymen back home. Whether they maintain primary residences in New York or Hong Kong, Moscow or Mumbai, today’s super-rich are increasingly a nation unto themselves....[T]he global “nation” in which they increasingly live and work is doing fine—indeed, it’s thriving. For the super-elite, a sense of meritocratic achievement can inspire high self-regard, and that self-regard—especially when compounded by their isolation among like-minded peers—can lead to obliviousness and indifference to the suffering of others.

The rise of the new global elite (Atlantic) This widening gap between the rich and non-rich has been evident for years. In a 2005 report to investors, for instance, three analysts at Citigroup advised that “the World is dividing into two blocs—the Plutonomy and the rest”:  In a plutonomy there is no such animal as “the U.S. consumer” or “the UK consumer”, or indeed the “Russian consumer”. There are rich consumers, few in number, but disproportionate in the gigantic slice of income and consumption they take. There are the rest, the “non-rich”, the multitudinous many, but only accounting for surprisingly small bites of the national pie.  Before the recession, it was relatively easy to ignore this concentration of wealth among an elite few. The wondrous inventions of the modern economy—Google, Amazon, the iPhone—broadly improved the lives of middle-class consumers, even as they made a tiny subset of entrepreneurs hugely wealthy. And the less-wondrous inventions—particularly the explosion of subprime credit—helped mask the rise of income inequality for many of those whose earnings were stagnant.

CharlesHughSmith: No Wonder We're Failing: Our Power Elites' Sole Expertise Is Being Privileged - The Power Elite which has been raised to occupy the privileged seats of political and financial power in America has a skillset limited to navigating the world of privilege.  The Power Elites are not monolithic: there are three distinct layers, each with its own defining characteristics.  Correspondent Judy T. recently recommended an extraordinary essay on the education and grooming received by the Political and Financial Power Elite: The Disadvantages of an Elite Education by William Deresiewicz.  In essence, Deresiewicz suggests that the Elite youth being groomed at exclusive Ivy league universities--an Elite education--are functionally incompetent in the real world and only skilled at a superficial facsimile of "independent thought" which is merely a higher order of groupthink and its attendent obedience.  I have roughly excerpted this long and important essay below.

How to deal with the plutocrats -- Chrystia Freeland has a long essay in the Atlantic on the new global elite, which will eventually become her next book. It’s well timed to coincide with the self-congratulatory plutocratic gabfest that is Davos, which kicks off in three weeks’ time, and with which Chrystia is very familiar.- The difference between the new global elite and the old global elite is that today the world is owned and run largely by first- or second-generation money: people who tend to think that they’ve earned it, somehow, especially if they came to their wealth from a background in the lower-middle classes: It’s not that these people are utterly bereft of noblesse oblige: Chrystia points out that “in this age of elites who delight in such phrases as outside the box and killer app, arguably the most coveted status symbol isn’t a yacht, a racehorse, or a knighthood; it’s a philanthropic foundation.” But those philanthropies don’t benefit the left-behind middle classes: they tend to follow a barbell distribution, with the money going either to the world’s poorest or else to well-endowed universities and cultural institutions. The US middle class is sneered at for being fat and lazy and unworthy of their wealth:

Wealth Really Does Go To Your Head - Harvard professor Roy Y.J Chua and London Business School assistant professor Xi Zou found that people who live luxuriously may be psychologically different than everyone else.   More specifically, people who drive around in town cars and zip across the country in private jets make selfish decisions that enable them to do so.  They make decisions that best benefit themselves and don't consider others as much. Chua says this could be the reason so many high-paid executives, like those on Wall Street, act irresponsibly. "People who were made to think about luxury prior to a decision-making task have a higher tendency to endorse self-interested decisions that might potentially harm others," Chua and Zou wrote in their February 2010 paper, "The Devil Wears Prada? Effects of Exposure to Luxury Goods on Cognition and Decision Making." The drive for luxury, Chua found, doesn't make people intentionally harm others; it makes them less concerned about others. Any harm caused is really just a side effect.

Are the rich making you poor? - MOST adults accept that life is not fair, but the word fairness gets used a lot when we talk about income inequality. What’s fair and whether it matters depend on one's personal values. But for policymakers, the important issue to think about is the nature of the income inequality. Are the rich getting richer while the poor and middle class stay the same? Or, are the rich getting rich at the expense of the poor? When the latter is true, the case for intervention is stronger. According to a recent New York Times article the rich getting richer has made the poor worse off. The argument is that the poor and middle class become discouraged and give up: Inequality has been found to turn people off. A recent experiment conducted with workers at the University of California found that those who earned less than the typical wage for their pay unit and occupation became measurably less satisfied with their jobs, and more likely to look for another one if they found out the pay of their peers. Other experiments have found that winner-take-all games tend to elicit much less player effort — and more cheating — than those in which rewards are distributed more smoothly according to performance.

Have the rich caused middle class wage stagnation? - I don't always agree with Kevin Drum, but usually I find that he has good arguments.  In this passage, however, I think he is overreaching: First, take a look at middle class income stagnation. What caused that? Matt already pointed to one cause: monetary policy since the late 70s that's kept inflation low at the cost of keeping labor markets persistently loose. To that, I'd add several other trends that have marked the past three decades: trade policies that accelerated the decline of U.S. manufacturing; domestic deregulation policies that squeezed workers; stagnation in the minimum wage; immigration policies that reduced wages at the low end; and a 30-year war against labor that devastated unions and reduced the bargaining power of the working class. First, money matters in the short-run most of all.  Tight money (unless maybe it is radical deflation, but even then the U.S. resumed growth out of the GD fairly quickly and furthermore the median worker was not unemployed) is not a plausible cause of median income stagnation over decades.  The link between trade and wage stagnation does not find support in the data.

Income Redistribution: The Key to Economic Growth? - Since the 1970s, households at the lower end of the income distribution have experienced income stagnation – “real average hourly earnings (excluding fringe benefits) now stand roughly at 1974 levels” – while those at the top of the distribution have continued to do quite well. The result has been ever-widening income inequality, and inequality has now reached levels rivaling those that existed during the Gilded Age.  Inequality is already high, and if it continues to grow it could reach the point where it becomes morally intolerable, and there is evidence that social ills grow as inequality widens. But there is an economic reason to care, as well. There is an equivalent of a Laffer curve for inequality, but the variable of interest is economic growth rather than tax revenue. We know that a society with perfect equality does not grow at the fastest possible rate. We also know that a society where one person has almost everything while everyone else struggles to survive – the most unequal distribution of income imaginable – will not grow at the fastest possible rate either. Thus, the growth-maximizing level of inequality must lie somewhere between these two extremes. We may be near or even past the level of inequality where growth begins falling.

The Income Distribution - - This piece by Mark Thoma is a strange one, but it at least got me thinking. Mark starts with: There is an equivalent of a Laffer curve for inequality, but the variable of interest is economic growth rather than tax revenue. We know that a society with perfect equality does not grow at the fastest possible rate. We also know that a society where one person has almost everything while everyone else struggles to survive – the most unequal distribution of income imaginable – will not grow at the fastest possible rate either. The "Laffer curve for inequality" is new to me, so I was hoping for a little more in terms of theory, but I guess the rest of the paragraph will have to do. Here's what Mark might have in mind here, though it's hard to tell.

How the Other Half Lives -Yves Smith  - Even though most people face some form of financial stress in their lifetime, and the financial crisis upended the affairs of many who had been comfortable, the poor and near poor contend with ongoing difficulties. The Community Service Society conducts an annual survey, The Unheard Third, which catalogues some of the conditions poor and near-poor New Yorkers face. My impression is that New York has fared much better than the rest of the country in the aftermath of the crisis precisely because of the massive overt and covert subsidies given to the financial services industry, which is the foundation of the local economy. Thus I suspect if you were to conduct the same sort of survey in other US cities, the results would be even more grim. The survey focused on low income residents, with those defined as poor (household earnings at or below federal poverty standards, or FPL) sampled most intensively. Notice how many of the poor have trouble affording food (click to enlarge):  The near poor are better off, but not by much:  I encourage you to read the results in full. It is ugly out there.

29% Of Americans Say It's Difficult To Afford Food - The Pew Research Center for the People & the Press released their year-end survey on December 15, 2010. Their pollling revealed that for the public, a tough year ended on a down note. Consistent with the mood of the nation all year, 2010 is closing on a down note. Fully 72% are dissatisfied with national conditions, 89% rate national economic conditions as only fair or poor, and majorities or pluralities think the country is losing ground on nine of 12 major issues.Pew's survey results are not surprising, and I would cover them in depth if it weren't for some rather important information that was buried in the next to last paragraph. The survey finds that a majority of the public (57%) says it is very difficult or difficult to afford things they really want. About the same percentage said this two years ago (55%). And for many Americans, affording basic necessities remains a struggle – 51% say it is difficult to afford health care, 48% say the same about their home heating and electric bills, and 29% say it is difficult to afford food.

Census: Number of poor may be millions higher -  The number of poor people in the U.S. is millions higher than previously known, with 1 in 6 Americans — many of them 65 and older — struggling in poverty due to rising medical care and other costs, according to preliminary census figures released Wednesday.  At the same time, government aid programs such as tax credits and food stamps kept many people out of poverty, helping to ensure the poverty rate did not balloon even higher during the recession in 2009, President Barack Obama's first year in office. Under a new revised census formula, overall poverty in 2009 stood at 15.7 percent, or 47.8 million people. That's compared to the official 2009 rate of 14.3 percent, or 43.6 million, that was reported by the Census Bureau last September. Across all demographic groups, Americans 65 and older sustained the largest increases in poverty under the revised formula — nearly doubling to 16.1 percent. As a whole, working-age adults 18-64 also saw increases in poverty, as well as whites and Hispanics.

Hunger Up Across Utah as Recession Lingers and Food Pantries Feel the Pinch - The Utah Food Bank has seen a 40 percent increase in the number of hungry people asking for help, compared to last year. And while a national study says that actual hunger and what it calls "food insecurity" may be declining since a mid-recession high in late 2009, the needs remain fairly astounding. An estimated 16.67 percent of households struggled to feed their families during the first half of 2010."We are continuing to see an increase in requests for food assistance," said Jessica Pugh, spokeswoman for the food bank, which supplies 150 food pantries and agencies across the Beehive state. "More families than ever are requesting food assistance. People have had hours cut back in terms of regularly paying jobs. Or they have had seasonal jobs that ended. It is a tough time for so many families throughout Utah

Food Stamps Used by Record 43.2 Million in October, USDA Reports -  The number of Americans receiving food stamps rose to a record 43.2 million in October as the jobless rate stayed near a 27-year high, the government said.  Recipients of Supplemental Nutrition Assistance Program subsidies for food purchases jumped 15 percent from a year earlier and increased 0.7 percent from September, the U.S. Department of Agriculture said today in a statement on its website. Participation has set records for 23 straight months.  An average of 43.3 million people, more than an eighth of the population, will get food stamps each month in the year that began Oct. 1, according to White House estimates.

'Need' is Not a Seasonal Condition - The Salvation army says 2010 was a banner year for the wrong reason.  More of the needy "needing" help than ever. "I've seen a lot of the economic trends of the country, seen some recessions over the last 30 years and this one certainly is deep and it's effected the service of the salvation army obviously having to do a lot more service then we've had to in the past," said Major Mark Martsolf with the Olathe Salvation Army.  Major Martsolf said 'need' is not seasonal. The Salvation Army says it saw a 40 percent increase in services in 2010 metro wide.

How Private Is 'Private Charity'? - Is this private giving properly called charitable? The word charity evokes images of the better-off in society showing generosity toward the poor and helpless.  As the chart below suggests, a good part of private donations in the United States would be more accurately described as voluntary private financing of civic institutions that benefit all members of society. Museums, educational and religious institutions, public parks and monuments and so on come to mind. Is supporting such institutions really providing charity?

Won't someone hand these people some pitchforks? - I RECENTLY wrote a post on the lack of economic-driven anger among many Americans, that read in part:In America, the language of the angriest is very similar to that of the plutocrats themselves. Indeed, the complaint that today’s elite lack the noblesse oblige of the aristocrats of old, and are therefore risking public anger, seems to badly misread American public opinion. The middle class doesn’t want hand-outs from condescending rich people. They want moralistic language and complaints about deficits. Matt Yglesias says: Kevin Drum endorses this, but I think it’s really mistaken. The only problem here is that populist rage in America doesn’t happen to line up with the policy objectives of the mainstream Democratic Party. Every poll I’ve seen shows strong support for higher taxes on rich people and lower taxes on non-rich people.. Democrats flirted with making this part of their agenda, but ultimately blinked...

Bankruptcies top 1.5 million in 2010-- The number of Americans filing for bankruptcy in 2010 ticked up 9% over the previous year to more than 1.53 million, industry groups said Monday. The number of consumers filing for bankruptcy has increased each year since 2005, when bankruptcy laws were revamped, according to the American Bankruptcy Institute and the National Bankruptcy Research Center.The 2010 figure far outpaces the 1,407,788 total consumer filings that were recorded during 2009, a trend that the American Bankruptcy Institute attributes to high debt and a stagnant economy."The steady climb of consumer filings notwithstanding the 2005 bankruptcy law restrictions demonstrate that families continue to turn to bankruptcy as a result of high debt burdens and stagnant income growth,"

Debt Causes Bankruptcy (But Sometimes in Counter-Intuitive Ways) I like NPR's Marketplace, but stories like this drive me nuts: "Why bankruptcy claims aren't as high as one would think." The story repeats a premise I often hear in media calls that I receive. The conversation usually starts something like this: "Foreclosures are up, unemployment is high, the economy is a wreck: why have bankruptcies stopped climbing?" Wrong question. But fair enough. I get called because I am supposed to know something about bankruptcy filing rates, and my caller often has just picked up the assignment for the day. If that is the wrong question, what should we be taking away from trends in bankruptcy filing rates?

Personal Bankruptcies in 2010, by State - Personal bankruptcies rose 9% to 1,530,078 in 2010 from a year earlier, reaching their highest level since a revamp of the bankruptcy law took effect in 2005, according to the American Bankruptcy Institute, an association of attorneys and other bankruptcy professionals, and the National Bankruptcy Research Center. But some states fared better than others. Southern states such as Tennessee, South Carolina, North Carolina, Alabama and Kentucky posted declines in the number of bankruptcies recorded last year. Meanwhile, states still struggling with housing busts, such as California, Arizona and Florida were among those with the largest increases.

Prison Populations, Crime and “Present Orientedness” - In 2011 criminal sentencing reform might be on the table. Collapsing state budgets and ever-increasing prison populations (and the costs associated with them) are forcing the issue. .To understand where this may go, we need to understand where we’ve been.   There’s been a massive increase in the prison population since 1980.   This increase has been helped intellectually by the widespread acceptance of two strains of conservative thought. We discussed them recently over the winter break (one, two). The first is the school of thought known as Incapacitation Theory, a theory that says, in the words of James Q. Wilson: “Wicked people exist. Nothing avails except to set them apart from innocent people.”The second is known as Broken Windows, the idea that a neighborhood could be separated into orderly and disorderly people. As disorder sets in, orderly people flee or retrench from the neighborhood, and new disorderly people are emboldened to enter and take over. It also points to an idea of a police force that doesn’t solve crimes but rather one that maintains order. In this vision, the police force isn’t there to investigate crimes, present evidence to a prosecutor who then presents evidence to a jury.

Public Workers Facing Outrage as Budget Crises Grow - Across the nation, a rising irritation with public employee unions is palpable, as a wounded economy has blown gaping holes in state, city and town budgets, and revealed that some public pension funds dangle perilously close to bankruptcy. In California, New York, Michigan and New Jersey, states where public unions wield much power and the culture historically tends to be pro-labor, even longtime liberal political leaders have demanded concessions — wage freezes, benefit cuts and tougher work rules.  It is an angry conversation. Union chiefs, who sometimes persuaded members to take pension sweeteners in lieu of raises, are loath to surrender ground. Taxpayers are split between those who want cuts and those who hope that rising tax receipts might bring easier choices.  And a growing cadre of political leaders and municipal finance experts argue that much of the edifice of municipal and state finance is jury-rigged and, without new revenue, perhaps unsustainable. Too many political leaders, they argue, acted too irresponsibly, failing to either raise taxes or cut spending.

Taking Aim at Public Workers Public employees are much in the political bull’s-eye these days, as governors, mayors and legislatures struggle beneath the burden of three years of declining tax revenues, all brought on by the Great Recession. I wrote Sunday about how this struggle has played out in New Jersey, where Gov. Chris Christie, a Republican, has taken after the public-employee unions like a bloodhound to the scent. He wants the unions to pay more into their health plans and more into their pension plans, and to accept wage freezes. Echoes of his attack are heard across the nation, in cities like Chicago, where Mayor Richard M. Daley has said the pension plans may go bankrupt before there is reform, and Los Angeles, where Mayor Antonio Villaraigosa has hammered at the teachers’ union to accept changes in tenure rules. In Wisconsin, the incoming Republican governor has even talked of revoking the right to collective bargaining, leaving public unions stillborn.

Do Public Workers' Diplomas Justify Their Pay? - Several studies have found that public workers tend to have more education than private-sector workers, and a reader asks if this perhaps indicates that public workers are overeducated. Jeffrey Keefe, a Rutgers professor, studied this issue for the Economic Policy Institute and found that 57 percent of public-sector New Jersey employees hold four-year degrees, compared with 40 percent in the private sector. But in large part this owes to two factors, the first of which goes to the nature of public-sector employment. Teachers, who all have four-year degrees and often master’s and other advanced degrees, make up the single largest part of the public work force. Similarly, the professionalization of police departments most often means that even patrol officers hold at least two-year degrees and brass most often hold four-year degrees and more. As one jumps from department to department, from social workers to environmental workers to budget analysts, college degrees are as often the coin of the realm.

States Seek Laws to Curb Power of Unions - Faced with growing budget deficits and restive taxpayers, elected officials from Maine to Alabama, Ohio to Arizona, are pushing new legislation to limit the power of labor unions, particularly those representing government workers, in collective bargaining and politics. State officials from both parties are wrestling with ways to curb the salaries and pensions of government employees, which typically make up a significant percentage of state budgets. On Wednesday, for example, New York’s new Democratic governor, Andrew M. Cuomo, is expected to call for a one-year salary freeze for state workers, a move that would save $200 million to $400 million and challenge labor’s traditional clout in Albany.  But in some cases — mostly in states with Republican governors and Republican statehouse majorities — officials are seeking more far-reaching, structural changes that would weaken the bargaining power and political influence of unions, including private sector ones.  For example, Republican lawmakers in Indiana, Maine, Missouri and seven other states plan to introduce legislation that would bar private sector unions from forcing workers they represent to pay dues or fees, reducing the flow of funds into union treasuries. In Ohio, the new Republican governor, following the precedent of many other states, wants to ban strikes by public school teachers.  Some new governors, most notably Scott Walker of Wisconsin, are even threatening to take away government workers’ right to form unions and bargain contracts.

The never-ending questions about public sector pay - A story in the Times today covers the ongoing attempts by politicians to decrease the pay and power of unions: State officials from both parties are wrestling with ways to curb the salaries and pensions of government employees, But in some cases — — officials are seeking more far-reaching, structural changes that would weaken the bargaining power and political influence of unions, including private sector ones. And yesterday, at the Economix blog, Times reporter Michael Powell had some more comments on a previous article he’d written about public sector pay, where he made this claim: A raft of recent studies found that public salaries, even with benefits included, are equivalent to or lag slightly behind those of private sector workers. An important note about these public sector studies is that I don’t believe that any of their authors are claiming that there is no public sector union wage premium. Just like in the private sector, being in a union raises your wages by over 10%.

Public-sector workers earn less - Last year, EPI published a paper by Rutgers University professor Jeffrey Keefe, which supplied overwhelming evidence that public-sector workers, on the whole, earn less than those in the private sector. Keefe offered some suggestions for why these public employees are often perceived to be overcompensated. For starters, public sector workers are, as a group, more highly educated, work in more highly paid occupations and they tend to work moderately fewer hours than those in the private sector. In addition, it is frequently noted that public employees earn more in benefits such as health care and pensions: therefore, a simple wage comparison will not accurately capture difference in total compensation. Nonetheless, after controlling for multiple factors including level of education, hours worked and non-cash compensation, Keefe’s 2010 paper, Debunking the Myth of the Overcompensated Public Employee found that, on average, full-time state and local employees are undercompensated compared to “otherwise similar private-sector workers.”

The Shameful Attack on Public Employees - In 1968, 1,300 sanitation workers in Memphis went on strike. The Rev. Martin Luther King, Jr. came to support them. That was where he lost his life. Eventually Memphis heard the grievances of its sanitation workers. And in subsequent years millions of public employees across the nation have benefited from the job protections they’ve earned. But now the right is going after public employees. Public servants are convenient scapegoats. Republicans would rather deflect attention from corporate executive pay that continues to rise as corporate profits soar, even as corporations refuse to hire more workers. They don’t want stories about Wall Street bonuses, now higher than before taxpayers bailed out the Street. And they’d like to avoid a spotlight on the billions raked in by hedge-fund and private-equity managers whose income is treated as capital gains and subject to only a 15 percent tax, due to a loophole in the tax laws designed specifically for them. It’s far more convenient to go after people who are doing the public’s work - sanitation workers, police officers, fire fighters, teachers, social workers, federal employees – to call them “faceless bureaucrats” and portray them as hooligans who are making off with your money and crippling federal and state budgets.

Government Unions and the Government - Last January when the Bureau of Labor Statistics released its annual report on union membership, the report showed that for the first time in American history government employees represented a majority of the nation’s union members. Unions representing public-sector workers seemed to have about five minutes to celebrate. Almost immediately, it seemed, government officials in state after state and city after city started to ask public-sector unions to accept freezes on salaries  and concessions on pensions. That trend has only picked up steam as my colleague Michael Powell wrote in his front-page article on Sunday. I have an article in today’s paper that examines the latest development in this push to rein in the nation’s public-sector unions. With many new Republican governors being inaugurated this week and with Republicans winning control of 26 state legislatures, up from 14, Republican lawmakers in several states are moving quickly to try to weaken public-sector unions.

City Unemployment: Little Progress - Most cities made little progress on the jobs front in the twelve months ended November 2010, according to new data from the Labor Department. Unemployment rates were higher or unchanged in November than a year earlier in 206 metropolitan areas, and lower in 166 areas, the Labor Department said. The jobless rate declined in just 18 of the 49 most populous metro areas. Area’s hit hardest by the housing bust continued to face the biggest struggles. California’s Inland Empire and Las Vegas were tied for the highest unemployment rate among large cities at 14.3%. Florida had four cities in the top 10 highest rates. Detroit had the largest drop in the unemployment rate, falling to 12% in November 2010 from 15% a year earlier, but that was largely the result of a shrinking labor force. The number of people with jobs in the city declined in November from a year earlier. The following interactive chart tracks unemployment changes in the 49 most populous cities.

Unemployment Rises In Two-Thirds Of Metro Areas - Unemployment rates rose in more than two-thirds of the nation's largest metro areas in November, a sharp reversal from the previous month and the most since June. The Labor Department said Tuesday that unemployment rates rose in 258 of the 372 largest cities, fell in 88 and remained the same in 26. That's worse than the previous month, when rates fell in 200 areas and rose in 108. The economy is strengthening, but employers have been reluctant to create jobs. Hiring will pick up in 2011, but not enough to significantly lower the unemployment rate, economists forecast. Metro areas in states with the weakest housing markets, such as California, Nevada, Florida and Georgia, are seeing ongoing increases in unemployment. Las Vegas, Atlanta, San Francisco and Miami all saw their rates rise. Construction jobs haven't returned. Real estate agents and mortgage broker positions have also disappeared.

American Cities That Are Running Out Of People - The population of the United States has increased steadily by roughly 2.5 million people every year since World War II. Throughout prosperity and hard times, Americans continue to have families.  There are some cities, however, which have experienced such severe hardship and decline that their populations have actually decreased significantly. New Orleans has lost more than a quarter of its population in the past ten years as the result of Hurricane Katrina. The rest of the cities that have lost major parts of their population have seen their flagship industries which include coal, steel, oil, and auto-related  manufacturing fall off or completely collapse. America moved away from its status as an industrial superpower in the second half of the 20th century as the services sector rose to replace it. Millions of US manufacturing jobs have moved overseas. All of the cities on this list experienced at least one of these devastating problems which have caused tens of thousands, and in some cases, hundreds of thousands of its residents to leave the region for other jobs and other homes. While it has been the primary focus of these cities to create new sources of employment for their residents, it may be years before people return, if they do at all.

The Pain of Economic Change - Michigan is the only state in the union showing a net negative population trend in the recent census report, and is an interesting case study of the pain of economic change. For several decades after WWII, Michigan enjoyed above average prosperity on the backs of the Big 3 auto makers and the employment model of the United Auto Workers, with lateral benefits and trickle down to construction, tourism, retail, services and health care. Both the private sector economy and local/state government systems were built on the broad foundation of prosperity.  Tax and regulatory systems were not hospitable to non-manufacturing businesses and non-union businesses, but with enough money in the system all of this was tolerable (money can ease many hurts).

City of Flint's annual audit shows nearly $17 million deficit The city of Flint's annual audit showed the city ended the 2010 fiscal year with a nearly $17 million deficit.  The finding was revealed tonight at the audit presentation given to Flint City Council members. The audit showed the city is spending less than it has in previous years, but it's also taking in less revenue because of decreased property taxes, state aid, income taxes and fees. The city spent $64.74 million out of its general operating fund in the 2010 fiscal year that ended June 30, but it only took in $60.23 million. That shortfall — along with smaller deficits in the parks and recreation fund, building fund and garbage fund — combined with last year's $10.1 million deficit to add up to the nearly $17 million deficit, officials said.

US States Lost One-Third of Revenue in 2009, Wash. Post Says - U.S. states lost one-third of their revenue in 2009 as a result of the recession, the Washington Post reported, citing a Census Bureau report released yesterday.  Total state revenue fell almost 31 percent to $1.1 trillion in fiscal 2008-2009, the newspaper said.  The drop in revenue came from investment losses at state pension funds, a drop in income from taxes and increased demand for unemployment and other benefits, the newspaper reported.

Cuomo Plans 1-Year Pay Freeze for State Workers - Cuomo quickly brushed away the nostalgia to begin governing in a historic fiscal and ethical crisis in New York state government, leaving few resources and little time for the liberal politics in which he and his father engaged for decades. Declaring "no new taxes, period," Cuomo told reporters he will seek to allow a temporary income tax on the wealthy to sunset and enforce 900 layoffs opposed by some of New York's strongest special interests. The state's powerful public workers unions, traditional Democratic allies, have strongly opposed the layoffs ordered by former Democratic Gov. David Paterson. Paterson had ordered the layoffs after he said union leaders refused to contribute $250 million in concessions in the face of New York's fiscal crisis. Promoted by Democrats as a "millionaire's tax," the temporary income tax surcharge takes a bigger bite out of New Yorkers making as little as $200,000 a year. The tax raises more than $1 billion annually.

Cuomo Plans One-Year Freeze on State Workers’ Pay - Gov. Andrew M. Cuomo will seek a one-year salary freeze for state workers as part of an emergency financial plan he will lay out in his State of the State address on Wednesday, senior administration officials said.  The move will signal the opening of what is expected to be a grueling fight between the new governor and the public-sector unions that have traditionally dominated the state’s political establishment.  It will also come days after the New Year’s Eve layoffs of more than 900 state workers, an event that union representatives marked with a candlelight vigil on the steps of the Capitol and outside government offices in five other cities.  “The governor said during his campaign that the difficult financial times call for shared sacrifice,” “A salary freeze is obviously a difficult thing for many government workers, but it’s necessary if the state is going to live within its means.”

NY county budgets reveal painful times - Broome isn't the only county in New York with budget woes. In Sullivan County, legislators froze salaries because of growing pension and health care costs. In Dutchess County, 85 positions aren't being filled and agencies are being consolidated.  In Monroe County, 114 positions are being eliminated, two buildings are being sold and federal stimulus money is being used to close a $46 million budget gap. And money woes aren't just limited to county governments. In an extreme case, the City of Newburgh recently approved a 71 percent property tax increase. The scenes of financial distress are playing out across the state as counties start a new fiscal year. The problem is they are facing growing costs for pension, health care and mandated services at a time when tax revenue has stagnated and state aid has flattened, county officials said.

Why Do People Live In New York City Again? - Yesterday, James Joyner noted one of the “joys” of living in the Big Apple; the fact that most Manhattan apartments don’t come with a washer/dryer unit. Today, we learn that parts of Manhattan have gone ten days without residential garbage pickup thanks to Sanitation Department trucks being diverted to snow removal: Garbage is the new snow in New York City. Bags of trash tower on the sidewalks outside apartment buildings, while garbage cans left buried since the city’s last pickup, on Christmas Eve, poke through dirty mounds of melting snow.

Texas and New York, different - THERE is an ongoing and irksome debate within the American blogosphere concerning whether and why the state of Texas is different or special or something, economically speaking. Many of the pro-Texas arguments take the exasperating form of: look at the amazing growth in Texas's so-and-so (population, employment, etc) which is due to so-and-so (policy I like). This is generally greeted with a response the form of which is: no it isn't, because so-and-so (unemployment rate) is the same in Texas as it is in so-and-so (state with policies I prefer). We saw the first argument emerge in December when new Census figures were released. Texas' population increased substantially over the past decade, which some writers were all too ready to attribute to low taxes and regulation. In fact, the dynamics involved are far more complicated, and revolve in part around Texas' decision to allow rapid growth in its housing supply. Paul Krugman offers up an example of the second argument today in a post aiming to undermine the case for a "Texas miracle" through this chart:

Brown Faces a Reckoning in California as $28 Billion Gap Shadows Inaugural - Jerry Brown returns as California governor today after an absence of almost three decades, facing a “day of reckoning” over a $28 billion budget gap that promises battles with lawmakers, unions and investors threatening to shun the bonds of the most-indebted state.  Brown, 72, a Democrat who served two terms as governor from 1975 to 1983, has pledged an austerity budget, due Jan. 10, that will be free from gimmicks and that will skirt the gridlock that forced the state to pay bills with IOUs two years ago. . Whether that will mean higher taxes, he hasn’t said.  In the U.S. state with the biggest economy and population, Brown faces a super-size version of the stress governors confront coast to coast. States will contend with about $140 billion in deficits in the next fiscal year after closing $160 billion in gaps this year, the Center on Budget and Policy Priorities, a Washington research group, estimated Dec. 16.

New California Governor Proposes Initiative to Extend Tax Increases - In February 2009, California approved its budget, including a temporary increase in income and sales taxes, designed to enable the state to balance its budget. The income tax increases—0.25 percentage points on each tax bracket—expired on December 31, 2010. The sales tax increase-1 percentage point-will expire on July 1, 2011, as will a higher vehicle license tax (from 0.65% to 1.15%). Officials around newly sworn-in Gov. Jerry Brown (D) are hinting that he will seek a ballot initiative to re-enact the income tax increase and extend the sales tax increase. From the Los Angeles Times: Gov.-elect Jerry Brown is readying a budget plan that would call for a special election to ask voters to extend the soon-to-expire tax hikes, according to people involved in the discussions.

State plan gives some services to cities, counties - As California faces a budget deficit that could top $28 billion over the next 18 months, Gov. Jerry Brown and other state leaders are poised to shift the responsibility for providing some services from the state to counties and cities. In one of his first meetings as governor, Brown spoke with county leaders Tuesday about significantly restructuring government. He also attempted to allay the fears of some local officials that the state could pass off duties without providing sufficient means to pay for them. "We're going to shift funding to the local level, we're going to make sure there's enough responsibility and discretion to use the money in the wisest possible ways," Brown told reporters after the meeting, adding that he does not believe it will be an easy change. "There will be controversies." Brown did not publicly lay out a specific plan, but said he is considering changing the way foster care, welfare, food stamps, redevelopment, and parole and probation services are provided to the public.

Los Angeles Deficit May Grow Sixfold If Parking Garage Lease Plan Falters - Los Angeles should take steps such as forcing workers to take more unpaid days off to close a budget gap that may grow more than sixfold if it fails to lease nine parking garages, two city officials said in a memo.  Entire departments in the second most-populous U.S. city may be closed for a day each week under the furlough plan recommended by City Administrative Officer Miguel Santana and Chief Legislative Analyst Gerry Miller. The actions were outlined by the officials in a memo to Mayor Antonio Villaraigosa that was released yesterday.   The city included $53.2 million in revenue from the lease in its budget for the current fiscal year, according to the memo. If the plan falls through, the deficit will grow from $9.5 million to $62.7 million this year through June, they said.

Why California’s Budget Gap Isn’t as Bad as Low-Tax Arizona’s - California — which has a well-known spending problem — has a smaller relative budget gap than lower tax Arizona, according to a paper released today by the Brookings Institution. Both states have the same obvious imbalance — they spend more money than they take in — but for different reasons. While California spends too much money, Arizona doesn’t raise enough taxes. The paper is a reminder that when it comes to budget deficits, opposite politics often produce the same result. The Brookings paper examines four western states — Arizona, California Colorado and Nevada — and attempts to break out their cyclical versus structural budget gaps. The cyclical budget gap can be defined as all the temporary problems brought on by a down economy (weaker sales tax receipts, for instance). The structural deficit is the longer-term problems brought on by spending promises that can’t possibly be solved with the current tax burden (things like retiree health care and pension obligations). The results: In fiscal year 2011, California’s 21% projected budget deficit was 12% cyclical and 9% structural. Arizona’s 33% projected deficit was 21% structural.

Housing bust creates new kind of declining city - In the Inland Empire and other former home-building hot spots, the housing bust has created a new kind of declining city, different from the nation's traditional rusting centers of industry, that could languish for years. Although the causes of the decline in these metropolitan areas are distinct from the loss of employment from shrinking manufacturing and industry in some of the nation's old industrial powerhouses, these areas could experience fates similar to places such as Cleveland and Detroit, with neighborhoods experiencing high rates of vacancies for a very long time, according to a study to be released Thursday. "Some neighborhoods are going to suffer tremendously or are never going to come back or come back very, very slowly," Potential candidates for long-term decline named by the study are the areas hit hardest by the drop in home prices in recent years. They include several inland California metropolitan areas that grew rapidly during the boom, including Stockton, Modesto, Fresno, Riverside and San Bernardino. Las Vegas and Miami also made the list.

There's One Huge State Budget Crisis That Everyone Is Refusing To Talk About# You know the story and you know the names: states like Illinois, New Jersey, New York, and California are supposed to be in huge financial trouble thanks to bloated governments, business-unfriendly regulations, and strong public sector unions. After a crisis-free 2010, investors are expected to punish these hotbeds of bad governance in a muni bond market rout, at least if pundits like Meredith Whitney are correct. But there's one state, which is fairly high up on the list of troubled states that nobody is talking about, and there's a reason for it. The state is Texas. This month the state's part-time legislature goes back into session, and the state is starting at potentially a $25 billion deficit on a two-year budget of around $95 billion. That's enormous. And there's not much fat to cut. The whole budget is basically education and healthcare spending. Cutting everything else wouldn't do the trick. And though raising this kind of money would be easy on an economy of $1.2 trillion, the new GOP mega-majority in Congress is firmly against raising any revenue.

2011 Budget Shortfall - A budget shortfall as high as $25 billion is projected as lawmakers head into the 2011 legislative session, according to estimates from economists and the comptroller's office. Texas writes budgets biennially, or in two-year terms, so the shortfall affects the 2012-2013 state budget. Leadership in the Texas Legislature, which is dominated by fiscal conservatives, is not expected to support attempts to raise taxes to fill the multibillion-dollar hole. But social service advocates say the state's safety net system can't afford any further budget cuts.

The Texas Omen, by Paul Krugman - These are tough times for state governments. Huge deficits loom almost everywhere, from California to New York, from New Jersey to Texas. Wait — Texas? Wasn’t Texas supposed to be thriving even as the rest of America suffered? Didn’t its governor declare, during his re-election campaign, that “we have billions in surplus”? Yes, it was, and yes, he did. But reality has now intruded, in the form of a deficit expected to run as high as $25 billion over the next two years. And that reality has implications for the nation as a whole. For Texas is where the modern conservative theory of budgeting — the belief that you should never raise taxes under any circumstances, that you can always balance the budget by cutting wasteful spending — has been implemented most completely. If the theory can’t make it there, it can’t make it anywhere.

Tax-Exempt Bonds for Beginners - Felix Salmon linked to an article by David Kotok on Build America Bonds (BAB), which reminded me that I’ve been meaning to write about them (now that they no longer exist). BAB were introduced in the 2009 stimulus bill. If a state or local government issues BAB, the federal government pays 35 percent of the interest on the bonds; the bondholder pays tax on all the interest, as usual for corporate bonds — but not for traditional state or local government bonds (“munis”). BAB were initially only authorized for two years, and were not extended in the recent tax cut compromise.The Republican attack line on BAB is that they “subsidize states in more imprudent-type budget and debt scenarios” (Rick Santelli, quoted in Kotok’s article) or they are “a back-door handout for profligate state and local governments, allowing them to borrow more money while shifting some of the resulting interest costs to the federal government” (Daniel Mitchell). Well yes, BAB are a subsidy for state and local borrowing. But to criticize them for that without even mentioning the alternative is either uninformed or irresponsible.

Issuance Plunges 91% From Year Ago as Build America Bonds End - Municipal-debt issuance plunged 91 percent this week from a year earlier after federal initiatives such as the Build America Bonds program ended Dec. 31.  States and local governments are poised to borrow about $628 million through Jan. 7, compared with $7.36 billion in debt sold in the first week of trading last year, according to data compiled by Bloomberg. Since 2004, the first five days of each year’s trading has averaged about $2.84 billion in sales.  Many issuers probably brought forward potential first- quarter 2011 sales to the last three months of 2010 to take advantage of the programs, said Alan Schankel, director of fixed-income research for Janney Montgomery Scott LLC, a Philadelphia-based money-management firm.

Bernanke Is Being Grilled About Muni Debt Because Republicans Want The States To Collapse - Ben Bernanke is speaking in front of the Senate today, and one of the big topics during the Q&A session is the state of muni finances.  The Fed Chairman doesn't expect any state to default, but he also says he doesn't believe it's within his mandate to bail out the states (e.g. by buying muni debate) should it come to that.  The Senators keep hammering on this point, and there's a reason for it. The GOP is hoping for states to collapse, and they want to be absolutely sure nothing gets in the way of that.That's not our opinion... James Pethokoukis, the conservative Reuters columnist, reported in December that republicans have a "secret plan" to pusht he states into bankruptcy. Part of that plan was the non-inclusion of the Build America Bond program in the lame-duck tax deal.

Bernanke Rejects Bailouts - Federal Reserve Chairman Ben Bernanke on Friday ruled out a central bank bailout of state and local governments strapped with big municipal debt burdens, saying the Fed had limited legal authority to help and little will to use that authority.  The $2.9 trillion municipal-bond market has been stung recently by worries that some cash-strapped cities or states won't be able to pay off or roll over debt. Costs have risen broadly for municipal borrowers. The market also faces challenges from the expiration of the Build America Bonds program, which helped cities and states borrow $165 billion at interest rates held down by federal subsidies.  Some analysts speculate the Fed could jump into the market by purchasing muni debt or lending to struggling borrowers.  "We have no expectation or intention to get involved in state and local finance," Mr. Bernanke said in testimony before the Senate Budget Committee. The states, he said later, "should not expect loans from the Fed."

Illinois Has Days to Plug $13 Billion Deficit That Took Years to ProduceIllinois lawmakers will try this week to accomplish in a few days what they have been unable to do in the past two years -- resolve the state’s worst financial crisis.  The legislative session that begins today will take aim at a budget deficit of at least $13 billion, including a backlog of more than $6 billion in unpaid bills and almost $4 billion in missed payments to underfunded state pensions.  The fiscal mess is largely of the lawmakers’ own making, and failure to address the shortages threatens public schools, local governments and other public services, said Dan Hynes, the state’s outgoing comptroller.  “We’ve reached a very critical and concerning point,”  “What’s missing right now is a general understanding by the public of where we are, of how bad it is, and what the fallout would be if we don’t deal with it properly.”

Lawmakers Return to Springfield; Tax Hike Possible - State lawmakers head back to Springfield tomorrow to finish up the lame duck session. And a possible income tax hike could be bigger than originally thought. State Representatives returning to Springfield have some major decisions to make... and a possible income tax increase dominates their agenda. "It would be from the current three percent to five percent for individuals, that being said, that will generate in round numbers five to six billion dollars a year." Representative Jim Sacia says that income would cut the deficit in half, but the budget still needs to be cut. "I've watched this state increase income in round numbers a billion dollar a year, we have outspent it three to one every sing one of the eight years I've been there, that's unconscionable."

Illinois income taxes could go up -  -- An increase in state income taxes could be imminent Thursday if lawmakers in Springfield agree on a hike.  State lawmakers have not committed to exact percentages yet. They gave an indication that they would know more specifics later Thursday following talks.  "There is so many different variables, I don't know whether it's permanent, whether it's temporary, but that's what we have got to talk about," With the state under pressure to plug the estimated $15 billion deficit, an income tax hike is an attractive proposition. It is an option that Governor Pat Quinn pushed for last year, but because of the November elections, lawmakers kept it on the back burner until now, during the lame-duck session.

Income tax could rise 75 percent -- Top Democrats in Springfield say they have an agreement that will erase Illinois' $15 billion deficit, send more money to Illinois schools and limit state spending for three years. But it will take a 75-percent hike in income taxes and billions more in state borrowing to make it all happen. Illinois Senate President John Cullerton, D-Chicago, announced the deal late Thursday. A vote on the measure is pending. Under the provisions, Illinois taxpayers will see their income tax rate jump from 3 percent to 5.25 percent. The corporate tax rate would climb to 8.4 percent. Cullerton estimates that the personal income tax increase will bring in $6.2 billion to the state. He put the price tag for the corporate tax hike at $1 billion a year. The deal also includes just over $12 billion in borrowing. Cullerton said $3.7 billion of that borrowed money will go to pay this year's pension obligations. The rest will go toward Illinois' mountain of unpaid bills.

State budget office predicts $829 million gap this year, $1.4 billion by 2013 - At a legislative workshop Thursday morning, Harry Bell, with the state budget office, said in his 15 years in the budget office, this year is the worst he's ever seen. For 2011, Bell says lawmakers have about $1.2 billion in spending and only $428 million available. Some of the reasons for that difference include flat revenues from the lottery and losing some $350 million in federal stimulus dollars. The state is also losing federal money on medicaid and medicare payments. Bell said typically the state pays 30 cents for every dollar of medicaid and medicare payments. The feds pick up the rest of the tab. The past two years, South Carolina has only paid 20 cents for every dollar. Now it's going back up to 30 cents.

Serious, high-cost issues loom in 2011 for Asheville area - Some news is all but impossible to predict. But a massive, $3-billion-plus statewide budget deficit that likely will affect every North Carolinian next year is not. It's waiting for state legislators when the General Assembly reconvenes Jan. 26. Likewise, county and city officials know some of the looming tasks they'll have to handle in 2011, as do local educators. Experts in local real estate and the job market also see some elements of 2011 coming into focus, and that may include a slightly sunnier housing market and cautious optimism when it comes to job growth. But the looming statewide budget deficit, which will easily surpass $3 billion and may approach $3.7 billion, depending which source you use, undoubtedly will take center stage.

New Conn. governor and lawmakers face fiscal woes - Shortly after Connecticut Gov.-elect Dan Malloy takes the oath of office on Wednesday, amid pomp and circumstance, it will be time to face a harsh reality. . "I've been spending a lot of time preparing people for how desperately bad things are in Connecticut. I think that most people are starting to understand that we have the largest per capita deficit in the United States by all accounts," Malloy said."I think what we'll be saying on the 5th, 'These are challenging times. We will rise to the challenge. We have a history of rising to the challenge,'" Malloy said. Connecticut's new governor and legislature officially take office on Wednesday at a time when daunting financial challenges will undoubtedly scale back expectations for this year's legislative session. Asked what he would consider a success from the 2011 session, Malloy jokingly replied, "June 1st," referring to one of the final days of the session.

Tennessee, Georgia face big budget hurdles - The Great Recession may be over, but Tennessee and Georgia leaders say its painful aftermath lives on as they face the need for deeper cuts in upcoming 2011-12 budgets. States are looking at a financial cliff because federal stimulus funds will disappear this year before state tax revenues have recovered from their worst pummeling in decades. In Georgia, where state spending was slashed from $21 billion to $17 billion over the last three years, Gov.-elect Nathan Deal and majority Republican lawmakers are looking to cut an additional $1.5 billion to $2 billion. "It'll be painful, and we're going to be looking -- just like we did the past couple of years -- to where we can streamline,"

Increase In 'Fees' Rankles Georgians - Opposition is growing against the increasing number of fees levied by the state that are supposed to pay for specific services but wind up in the general treasury. Many critics say they're merely a tax increase dressed up to fool voters. The practice of taking user fee money to shore up the rest of the state budget started more than a decade ago but has accelerated in recent years as the state grapples with declining income from taxes on sales and income. In the last session, the General Assembly raised dozens of fees to help plug a budget hole, from drivers licenses to court filing. With next year's budget projected to have a nearly $2 billion shortfall, observers predict the fee swap-out will continue.

Birmingham school district faces $30 million deficit in FY 2012 – Birmingham school officials say the city school system faces a $30 million deficit in the coming fiscal year with no reserve fund to make up the difference.  Chief financial officer Arthur Watts tells The Birmingham News the city is paying $17 million in salaries and benefits this year with one-time federal stimulus money. That won't be available when fiscal year 2012 starts on Oct. 1.  Watts says the district is also losing about $8 million in state funding because of declining enrollment and about $5 million will be lost to an anticipated 4 percent proration in 2012.  Watts says that means the city will need to close and consolidate more schools, sell surplus property and have mass layoffs.

Kansas Delays School Aid Payments— Kansas delayed half of the aid payments due to its public school districts at the start of the new year for a few days because of concerns about a short-term cash crunch, an official confirmed Tuesday.Elaine Frisbie, deputy state budget director, told The Associated Press that $98 million in funds that normally would have reached school districts Monday won't get to them until the end of this week. The state paid the other half of the aid on time. She said the state decided to be cautious after its tax collections in December were about $22 million short of expectations. Postponing part of the aid to schools allowed the state to avoid a delay in meeting other financial obligations, such as paying bills from health care providers for services to needy Kansans under the Medicaid program.

State superintendent declares California schools in 'state of emergency" -- Saying schools are in a "state of financial emergency," the Superintendent of Public Instruction on Thursday called on Californians to get involved in local schools and support tax measures that benefit education. "It is time to call it what it is," Tom Torlakson said during his first news conference since taking office earlier this week. "It is indeed a crisis of the proportion of an emergency." He said $18 billion in education cuts over the past three years have caused thousands of layoffs, increased class sizes, shortened school years in many districts and eliminated or reduced programs such as libraries, art and music. He said 174 of the state's 1,077 school districts are in financial distress, signaling they may not be able to pay their bills in the next three years

Detroit School System May Use GM-Style Restructuring - The Detroit Public Schools, which considered bankruptcy protection last year, may try a General Motors-style restructuring that would divide the district to deal with a $327 million deficit, said Robert Bobb, the district’s emergency financial manager.  Splitting the district in two, with one half unburdened by debt, is among three options that Bobb said he will give state officials by Jan. 10. The others are getting the state to issue bonds to fill budget holes and creating ranks of charter schools as New Orleans did after Hurricane Katrina. Bankruptcy isn’t an option, he said in an interview in Bloomberg’s Detroit bureau.  Cleaving the district “gets us out of the larger deficit and gives the district a chance to start over,”

State budget deficit threatens tuition increase - Until recently, Ohio State students had avoided that phrase and higher bills, but Buckeyes should start planning to hear it frequently and prepare to pay more to attend classes. Ohio Gov.-elect John Kasich, who is expecting a more than $8 billion deficit and must propose a new budget by March 15, refuses to rule out further tuition hikes. OSU officials already are cutting costs, and other state universities facing budget gaps have started raising tuition. In a Cincinnati Enquirer article published Dec. 8, Kasich said higher education spending is rising too quickly, but refused to predict what the funding would be or whether the state would put a cap on tuition or college spending.

Georgia Facing a Hard Choice on Free Tuition - The Hope scholarship program is about to be cut by a new governor and Legislature facing staggering financial troubles.  The lingering effects of the recession and the end of federal stimulus funds have sunk many states into a fiscal quagmire. The seriousness of the problem, and a growing concern over how much worse it might become, have many states struggling to find ways to trim services or raise revenues.  In Georgia, that means taking a slice out of the Hope scholarship. When it was begun in 1993, the program was covered easily by Georgia’s state lottery. Politicians enjoyed how happy it made middle-class constituents. Educators praised the way it improved SAT scores and lifted Georgia from the backwaters of higher education.

Americans Boost Student Loan Debt, Cut Credit-Card Borrowing - Americans kept their credit cards at bay in November, subdued by high joblessness and fallen home values. The 27th straight drop in revolving credit restrained overall consumer borrowing, according to the Federal Reserve’s monthly consumer credit data. The report Friday also said consumer credit outstanding increased $1.3 billion, or 0.7%, to $2.40 trillion. Climbing student loans drove the unexpected increase. Economists surveyed by Dow Jones Newswires had predicted consumer credit in November would remain unchanged. The Fed revised up October consumer credit sharply, saying it climbed 3.5% instead of an originally reported 1.7%. The back-to-back increases in consumer credit followed 20 straight declines during large charge-offs by banks on bad loans and tightened lending standards in the wake of the recession.

Making the grade: Equity and efficiency in education - How countries fare in international tests of student achievement is a magnet for media attention the world over. In December 2010, for instance, two of the world's leading newspapers, the New York Times, and The Financial Times reported on the remarkable scores of students from Shanghai in the latest Programme for International Student Assessment (Pisa) tests, which assess the reading, maths and scientific skills of the world’s 15-year-olds. How countries score in international tests are seen by many as report card on their national educational policies. Summarising evidence from international maths exams, this column finds that the highest-scoring countries are those with the least inequality in test scores, suggesting a “virtuous” equity-efficiency trade-off. It also finds that countries perform even better when test scores are highly correlated with the number books in the family home.

We’re Number One (in Self-Promotion) -Just as the year ended, however, the Education Trust issued a report indicating that nearly a quarter of all applicants to the Armed Forces, despite having a high-school diploma, can’t pass the necessary military entrance exam.  This isn’t Rhodes Scholarships we’re talking about, but not having “the reading, mathematics, science, and problem-solving abilities” to become a bona fide private in the U.S. Army.  We’re talking the sort of basic that, according to an Education Trust spokesperson, makes it “equally likely that the men and women who don't pass the test are [also] unprepared for the civilian workforce." Last month, as if to emphasize the seriousness of the problem, Shanghai’s students came in number one in the Program for International Student Assessment, a well-respected test given to 15-year-old students in 65 countries in reading, science, and math skills.  U.S. students came in a glorious 17th in reading, 23rd in math, and 31st in science.

UC Leaders Respond To Executive Pension Request - University of California leaders today made their strongest statement yet in response to the revelation last week that 36 highly paid executives threatened to sue UC unless their pensions are increased. UC President Mark Yudof and Regents Chairman Russell Gould issued a joint statement saying they disagreed with the executives' interpretation that a board vote in 1999 automatically entitles them to higher pensions and had retained legal counsel "in the event this position should need to be defended in the courts." The executives -- who all make more than $245,000 a year -- sent a letter to the board of regents in December saying they deserved pension payments calculated on their entire salaries because the IRS had lifted a cap that previously required UC to calculate pensions only on salary up to $245,000.

NJ Public Pension Slugfest Reporting Omits 15 Years of Governors Stealing From Workers -  Yves Smith - If you live in the world according to the mainstream media, the row between state executives and unions is all about (by implication) greedy unions trying to preserve their perquisites when budget “realities” demand that they suffer. Consider this excerpt from a recent article New York Times article about the fight in New Jersey: Across the nation, a rising irritation with public employee unions is palpable, as a wounded economy has blown gaping holes in state, city and town budgets, and revealed that some public pension funds dangle perilously close to bankruptcy. Um, the “wounded economy” trashed the state budget? Funny how the article fails to point fingers at the real perp, which is the global financial crisis, brought to you by your friendly TBTF banks. Funny, their staff and executives got record bonuses in 2009. So maybe the unions have the wrong strategy. They need to screw up in a particularly destructive manner.  The shell game started in 1995 with Christine Todd Whitman. As Bob Herbert reported:

Duncan Black, Ph.D. who Specializes in the Economies of Cities, Explains It All to You - Bruce has made this point repeatedly. Dr. Black puts it in more direct language: [I]nevitably the Social Security Trustees will, perfectly justifiably, tweak a few assumptions about future economic activity so that there will be a DOOM scenario, an EVERYTHING'S AWESOME scenario, and a "uh oh maybe in about 40 years we will have a problem" scenario. And then Fred Hiatt will print another million ZOMG WE MUST DESTROY SOCIAL SECURITY NOW IN ORDER TO SAVE IT FORTY YEARS FROM NOW columns and some future president will marvel at those worthless IOUS and blah blah blah. We know how this works. And the Sensible Centrists* are gathering behind someone who wants to do just that.

State's budget deficit presents difficulties - The main issue on almost every state lawmaker's mind this year is the budget. The $500 million budget deficit for the next fiscal year is "a tough thing to get a grasp on this year,". "It's tough, and it's tough on everybody," That's about $83 for each of the 6 million Missourians, according to the most recent Census estimate. Presumptive House Speaker Steve Tilley has said Republicans won't support tax increases, so the General Assembly will probably have to find that $500 million in cuts to the budget. And they have a limited pool to cut from. Only a little less than a third -- about $7.5 billion -- of this year's budget comes from "general revenue," or places where legislators are free to cut, said Budget Director Linda Luebbering. About three-fourths of general revenue is now spent on health care or education, which means legislators face some tough choices.

Some European Countries Shore Up Public Pensions by Seizing Private Funds - All across the world, defined-benefit public pension programs are facing demographic pressures of more retirees and fewer workers, economic pressures of returns lower than expectations, and political pressures to make benefits more generous than can be sustained.  Much of the private sector in the United States has switched over to defined-contribution retirement programs, such as 401(k) plans, which shift the risk (and reward) to the individual. The issue is one of the key ones we track at the state and local level.  That's why I found this Christian Science Monitor report astonishing, on how some European countries are shoring up their public pension programs

Sanford Releases Proposed Spending Plan - S.C. Gov. Mark Sanford released his final proposed state spending plan Tuesday, one that avoids cutting days from the school calendar as some lawmakers have suggested.But all state employees earning more than $35,000 a year would take a 5 percent pay cut, doctors and hospitals would be paid less to treat patients in the state-run Medicaid program, and colleges and universities would have to cut $100 million from their budgets. Sanford's proposed budget also would carve out $10 million in money for a new highway trooper class, additional money for job recruitment and $7.9 million to buy and preserve land.  What impact Sanford's proposal will have on the state's looming budget debate is unknown.

NY's Cuomo Weighs $2.1 Billion Medicaid Spending Cut, WSJ Says - New York Governor Andrew Cuomo may reduce the state’s spending on Medicaid by more than $2.1 billion, the Wall Street Journal reported, citing sources it did not identify.  When combined with a subsequent reduction in matching federal funds, the spending cut would be as much as $4 billion, the newspaper said.  Cuomo is seeking ways to close a $10 billion budget gap and may ask for additional federal aid, the newspaper said, citing a source it did not identify.

Medicaid cost crisis looms for Bay State -Governor Deval Patrick approved a record $9.6 billion last July for the state’s health insurance program for the poor — sufficient, he assumed, to last a year. But the program’s costs quickly outpaced expectations, forcing the governor to approve an additional $329 million in October and then seek $258 million more, which lawmakers approved last week. And even that may not last, with six months remaining in the budget year. The ballooning cost of Medicaid is one of the biggest challenges facing Massachusetts and other states, which have seen demand for the program jump during the recession as increasing numbers of unemployed residents enroll in the subsidized insurance plan.

Hard choices ahead for Medicaid - Gov.-elect Terry Branstad rightly characterized Medicaid as the biggest challenge in the state budget. The federal government picks up much of the cost of health insurance for the poor. However, the expense to Iowa is expected to increase from $856 million in fiscal year 2011 to $1.16 billion in 2012. Among the ideas for controlling costs Branstad said he is willing to consider: using more generic drugs and increasing co-payments for some enrollees. "I feel so strongly that people need to have some skin in the game,"

Texas social services chief blunt on severity of cutbacks on children, elderly - As lawmakers gear up to hunt for every penny they can use against an unprecedented budget gap, Texas' safety net for the poor and vulnerable figures to get a lot of scrutiny.  At lawmakers' elbows will be the chief of state social services, Tom Suehs. He predicts an agonizing process.  "There are not too many nice and easy decisions," he said recently. "That's why they're going to migrate to cutting some of the optional" services in Medicaid, a health program covering 3.3 million poor children, pregnant women and frail adults.  But Suehs is quick to add that optional services – which can be taken away from adults on the program, though not from youngsters – are not frills. Cuts will be costly and painful.

Health Spending By US Outpaced Insurers in 2009 as Economy Struggled - U.S. government spending on Medicaid and Medicare rose almost six times faster than insurance company expenditures in 2009 from the prior year as the recession pushed more Americans onto public assistance, a federal report said. The U.S. and states combined to spend $373.9 billion on Medicaid, the federal health program for the poor, an increase of 9 percent. Outlays for Medicare, aiding the elderly and disabled, rose 7.9 percent to $502.3 billion. Insurance companies led by UnitedHealth Group Inc. spent $801.2 billion, an increase of 1.3 percent. The economic slowdown drove 3.5 million people onto Medicaid’s rolls in the period, said the report from the U.S. Centers for Medicare and Medicaid Services. The unemployment rate reached 10 percent and 6.2 million fewer people were enrolled in private health insurance, a 3.2 percent decline, according to the study

Big Health-Care Changes Arrive in New Year - New taxes on drug makers, lower prescription-drug costs for seniors and restrictions on tax-free medical spending accounts are among a slate of health-law provisions that kick in Saturday. The changes show how the law will begin to reshape American health care, even as opponents try to overturn the measure in Congress and the courts. Although House Republicans are threatening to starve the law of funding and stage a symbolic repeal vote, those actions aren't likely to block any significant pieces of the law aimed at consumers for 2011. That's because the changes generally involve new rules and don't require spending.  "The debate over defunding and repeal is going to be much more of a political story in 2011 than something that actually means something for consumers immediately," said Larry Levitt, vice president at the nonprofit Kaiser Family Foundation.

GOP Newcomers Set Out to Undo Obama Victories - Soon after the 112th Congress convenes Wednesday, Republicans in the House plan to make good on a campaign promise that helped vault many new members to victory: voting to repeal President Obama’s health care overhaul.  The vote, which Republican leaders pledged would occur before the president’s State of the Union address later this month, is intended both to appeal to the Tea Party-influenced factions of the House Republican base and to emphasize the muscle of the new party in power. But it could also produce an unintended consequence: a chance for Democrats once again to try their case in support of the health care overhaul before the American public.  Democrats, who in many cases looked on the law as a rabid beast best avoided in the fall elections, are reversing course, gearing up for a coordinated all-out effort to preserve and defend it. Under the law, they say, consumers are already receiving tangible benefits that Republicans would snatch away.

No Evidence for House Republican Charge that Health Reform Is a “Job-Killer” - Health reform will change the American economy in many ways over the next few decades, but it will not significantly change the number of jobs or the unemployment rate. A nonpartisan economic assessment by the Congressional Budget Office (CBO) finds a variety of possible labor market effects, some positive and some negative, but nothing that justifies the inflammatory “job-killing” rhetoric invoked in House Republicans’ efforts to repeal the legislation. House Republican claims that the legislation (the Affordable Care Act) is a “job-killer” imply that health reform measures will be a major drag on the economy because they will allegedly increase employers’ costs. But these claims are not supported by evidence, and they are at odds with leading non-partisan assessments of how health reform legislation will affect the economy and labor markets. Unlike House Republicans’ claims that health reform is a “job killer,” CBO’s assessment that health reform will have only modest effects (both positive and negative) on U.S. labor markets is based on an examination of the evidence.

Repealing health-care reform would cost hundreds of billions of dollars — and Eric Cantor knows it - House Republicans are in a pickle: One of their new rules says that new legislation must be paid for. But the health-care bill reduces the federal deficit by more than $100 billion over the next 10 years. Luckily, they've figured out an answer to their problem: They've decided to simply exempt the repeal bill from the rules. That means they're beginning the 112th Congress by lifting their own rules in order to take a vote that will increase the deficit. Change we can believe in, and all that. Republicans are aware that this looks, well, horrible. So they're trying to explain why their decision to lift the rule requiring fiscal responsibility is actually fiscally responsible. Majority Leader Eric Cantor got asked about this, and he returned the reporter's serve with a volley of nonsense. "About the budget implications, I think most people understand that the CBO did the job it was asked to do by the then-Democrat majority, and it was really comparing apples to oranges,” Cantor said. “It talked about 10 years' worth of tax hikes and six years' worth of benefits. Everyone knows beyond the 10-year window, this bill has the potential to bankrupt this federal government as well as the states."

The GOP's Health Care Repeal Problem: $230 Billion In Lost Revenue And Counting - Today, CBO forecast that the 10-year cost of repealing health care reform is actually $230 billion. That's nearly $100 billion higher than one might have expected, given that just under a year ago, the same budget analysts concluded that the Affordable Care Act would reduce the deficit by $143 billion in the first decade. And if the CBO's projections for the law hold, the cost of repeal will grow larger and larger the longer the law stays in effect. CBO's initial cost estimate of the health care law -- the $143 billion in additional revenue that its various cost-cutting and revenue-raising measures would bring to the Treasury -- covered the impact of the bill between its enactment and the end of 2019. But the CBO also predicted that in the second decade, as cost cutting, spending, and revenue measures take fuller effect, the bill's deficit reducing impact would increase dramatically. One year later, and the 10-year window takes us into that second decade, when the health care law will bring more money in.

Why Does It Cost $230 Billion to Repeal Health Reform? - Last spring, the Congressional Budget Office estimated that the new health legislation would reduce the deficit by $143 billion over ten years. Yesterday, CBO estimated that repealing that legislation would increase the deficit by $230 billion over ten years. What gives? Why would it cost $87 billion more to repeal the law than was saved by enacting it? The main reason is that the 10-year budget window moved. The health debate started in 2009, so CBO used a 10-year window that ran from 2010 to 2019. It’s now 2011, so the repeal law will be judged against a 10-year window that runs from 2012 to 2021. . The second reason is that Congress decided to cut $15 billion from the subsidies created by the health legislation. Because those cuts reduced future subsidies, it is now $15 billion more expensive to repeal the overall health reform. The third reason is that the original health legislation wasn’t just about health policy. It also included fundamental reforms to the way the government subsidizes college loans. The repeal bill wouldn’t undo those changes, which resulted in budget savings of $19 billion over 2010 to 2019. Finally, the original health reform included about $7 billion in net budget costs during 2010 and 2011.

ObamaCare Repeal: GOP Should Be Careful What It Wishes For - Republicans in the House, now in the majority, say they'll vote to repeal the health-care law on Jan. 12. It will largely be a symbolic vote: Even in the unlikely event that 60 senators agree, Republicans don't have the votes to override President Obama's certain veto.  A more likely scenario in the weeks and months to come will be the Republicans' attempt to strip the Department of Health and Human Services of the money necessary to implement the law's requirement that all Americans buy health insurance. This could easily precipitate a showdown with the White House—and a government shutdown later this year.  The individual mandate is the linchpin of the health-care law because it spreads the risks. Without the participation of younger or healthier people, private insurers won't be able to take on older or sicker customers with pre-existing medical conditions, or maintain coverage indefinitely for people who become seriously ill.

Health Care: Feel the Fraudulence - It’s worth actually reading the House Republican attack on the CBO’s health reform estimates, just to get a sense of the utter, deliberate fraudulence of the whole thing. Here’s the key picture: So, let’s look at the pieces of the adjustments that allegedly turn a deficit-reducing policy into a deficit-increasing policy.

  • 1. The doc fix: this is childish stuff, blaming the health reform for costs that will happen whether or not the reform happens.
  • 2. Alleged “double-counting” of Medicare savings; actually, there’s no double-counting involved. Savings are savings. .
  • 3. “Appropriations” — that’s administrative costs, of which the great bulk would be incurred even without the bill.
  • 4. Social Security taxes — I think they mean Medicare, but anyway, additional tax revenue does reduce the deficit, regardless of what trust fund it’s allocated to.
  • 5. CLASS Act: this will reduce the deficit over the next 10 years, but will have some long-run costs. But if you’re going to talk long run, you should do it everywhere – and health reform gets better, not worse, over time. In fact, the main reason repeal costs more than the original estimate of savings is that moving the window forward a year makes the benefits of reform bigger.

Connecticut, Vermont Move Forward on Their Own Health Care Options - With talk of repealing health care in the air, I thought it would be a good time to look at a couple New England states going in the opposite direction: Vermont and Connecticut. Both of them are in the midst of designing or recommending alternatives to the private health care market, which could go all the way up to a single payer program. First, in Connecticut, as Jon Walker described this week, the Board of Directors of SustiNet has put together for the state legislature a concept for a Basic Health program that would cover Connecticut low-income residents who make up to 200% of the Federal Poverty Level (FPL). Maria Cantwell put into the Affordable Care Act the option for states to create a Basic Health plan, which operates in a similar way to a public option, providing a higher-level product than the subsidized insurance exchanges, at a lower cost to the individual and the government. The Connecticut Post has a story today about this plan:

I'll Never Ration. Not Me. Not I. - Opposition to health-care rationing is a little like opposition to growing up. It sounds great. It’s just not very practical. A society’s resources are always limited. So we have to make choices about what we can afford and what we can’t. Not everyone can afford to own a vacation home — which means vacation homes are rationed. Not everyone can afford to live in towns with excellent public schools — which means that good public education is rationed. Similarly, we can’t afford to try every feasible medical treatment on every patient. Instead, we make choices. The most obvious form of rationing is the millions of Americans who lack health insurance today. Most of them get less medical care than they need and, in the process, keep down the nation’s total medical bill. But even those with health insurance experience rationing. How? In many ways.

A health-care fight Democrats should welcome - If the incoming Republican leadership in the House of Representatives is serious about trying to repeal health-care reform, there's only one appropriate Democratic response: "Make my day."  Just to be clear, there's no earthly chance that a bill repealing the landmark health-care overhaul could make it through Congress and be signed into law. Even if Republicans managed to hold together their new majority in the House, they would face the inconvenient fact that Democrats still control the Senate. And even if a repeal measure somehow sneaked through the Senate, President Obama would veto the thing faster than you can say "preexisting conditions."  So this exercise in tilting at windmills can't even be described as quixotic, since that would imply some expectation of success, however delusional. The whole thing is purely theatrical - and woefully ill-advised.

Blue Shield proposes 59-percent rate hike -- Blue Shield is proposing huge new rate hikes that could mean an increase of nearly 60 percent for policyholders. Now California's new insurance commissioner is calling for a delay. The rate hikes could affect hundreds of thousands of Californians.He's been on the job less than a week and already California Insurance Commissioner Dave Jones has had to play hardball with Blue Shield, which just told nearly 200,000 California customers with individual health policies their rates are going up as much as 59 percent as of March 1."I have asked that the company postpone its rate increase 60 days in order to afford me the opportunity to fully review the proposed rate increase," said Jones.

Blue Shield of California seeks rate hikes of as much as 59% for individuals - Another big California health insurer has stunned individual policyholders with huge rate increases — this time it's Blue Shield of California seeking cumulative hikes of as much as 59% for tens of thousands of customers March 1. Blue Shield's action comes less than a year after Anthem Blue Cross tried and failed to raise rates as much as 39% for about 700,000 California customers. San Francisco-based Blue Shield said the increases were the result of fast-rising healthcare costs and other expenses resulting from new healthcare laws. "We raise rates only when absolutely necessary to pay the accelerating cost of medical care for our members," the nonprofit insurer told customers last month.

Is something wrong with the sexual development of human males? - Have you noticed there aren’t as many males in the world anymore? Well, there isn’t. A growing body of evidence has begun to show something is wrong with the sexual health of human males. To begin with, Sperm counts have dropped by 50% in the last 50 years worldwide. (1) On the other hand, sperm abnormalities and rates of male infertility have increased radically. Rates of testicular cancer have also doubled in the last 20 years.The question is, why? Scientist now believe certain man made chemicals are to blame. These chemicals have been known to interfere with the male hormonal system where they wreak havoc on the building blocks of male sexual development. The problem is, they are everywhere. 60 years ago synthetic chemicals were a futuristic novelty. Since that time, the chemical industry has developed more than 90,000 man made compounds and the vast majority have never been tested for effects on human beings.

The Rich Stay Healthy, the Sick Stay Poor - Health and Economic Development Primer in one easy lesson ():This is not surprising to see the contrast between the prosperous (at least until now) areas, in green where chronic illnesses prevail but are diseases tied to aging, as opposed to the semi-periphery and periphery where infectious / parasitic diseases are prevalent along with accidental deaths. Obviously, to be born and live in a prosperous society makes life more secure on different levels. Extending lifespans and expanding health has been, for the most part, a Macro story of discontinuities. The rise of vaccines (with a possible contribution from the coincident rise of people getting a high school education) got the Developed World to the point where Major Organ Failure became a primary factor. Lungs are first: pneumonia and tuberculosis don't kill the young so often as they did. (Vaccines, testing). The heart was next. Major advances in the immediate post-WW II (what the Europeans tend to call "post-war") period—up to and through transplants and ever-advancing bypass surgeries—made it more difficult to die because your heart was weak or flawed. The next step is the brain; rather more problematic, though progress gets made.

World Food Prices Rise to Record on Sugar, Meat Costs - World food prices rose to a record in December on higher sugar, grain and oilseed costs, the United Nations said, exceeding levels reached in 2008 that sparked deadly riots from Haiti to Egypt.  An index of 55 food commodities tracked by the Food and Agriculture Organization gained for a sixth month to 214.7 points, above the previous all-time high of 213.5 in June 2008, the Rome-based UN agency said in a monthly report. The gauges for sugar and meat prices advanced to records.  Sugar climbed for a third year in a row in 2010, and corn jumped the most in four years in Chicago. Food prices may rise more unless the world grain crop increases “significantly” in 2011, the FAO said Nov. 17. At least 13 people died last year in Mozambique in protests against plans to lift bread prices.  “There is still, unfortunately, the potential for grain prices to strengthen on the back of a lot of uncertainty,”

Corn Rationing Needs to Begin -The corn market is extremely tight heading into the New Year, and analysts expect short supplies and heavy use to keep upward pressure on corn prices in 2011. "The corn market has one job and one job only—to go high enough to make people stop using the product,"  "We are past the point of encouraging more supply." Turner predicts 2011 corn futures prices will exceed 2008 highs. "I don’t know if it will happen in January or June, but it will happen," he says. Soaring corn prices will slice into demand, with corn exports expected to fall first followed by feed usage. Analysts anticipate the cattle industry to begin rationing earlier than other livestock sectors due to poor margins, but rationing in poultry, hog, and dairy will be close behind. "It will be very painful," Turner adds. USDA’s latest World Agricultural Supply and Demand Estimates (WASDE) put the carryout for the 2010-11 U.S. corn crop at 832 million bushels, less than half the previous year’s carryout of 1.7 billion bushels.'

Weather, Supply and China to Dominate Grain Prices - As 2010 comes to a close, it becomes more apparent by the day that the dominant stories of the last half of this year will continue well into 2011. Worldwide grain supply is the chief concern and that story will be dominated by global weather patterns and China's voracious appetite for grains and oilseeds, says Thomas Grisafi, CEO of Indiana Grain Co. Grisafi, an independent trader from Valparaiso, Ind., says "weather trumped all in 2010." The markets watched questionable weather conditions all year, but news of super genetics and technology in the nation’s seed supply and continuous higher yields in the recent past made the market believe the U.S. crop was invincible. With each USDA report throughout the fall, the market became more and more aware that any amount of technology can’t always outsmart Mother Nature.

Extreme weather events help drive food prices to record highs - In 2009, Lester Brown and Scientific American asked “Could Food Shortages Bring Down Civilization?” This summer’s extreme global weather raised fears of a “Coming Food Crisis,” as CAP’s John D. Podesta and Jake Caldwell warned in Foreign Policy:  “Global food security is stretched to the breaking point, and Russia’s fires and Pakistan’s floods are making a bad situation worse.” Now the Financial Times reports the UN Food and Agriculture Organization’s “food price index, a basket tracking the wholesale cost of wheat, corn, rice, oilseeds, dairy products, sugar and meats, has jumped to a record high, surpassing in December the peak of the 2007-08 food crisis” (see figure). As ClimateWire and SciAm explains,”world food prices hit a record high in December thanks to crop failures from a series of extreme weather events around the world“:

Extreme Weather Helps Drive Up Food Prices - As my colleague William Neuman reports, the United Nations Food and Agriculture Organization announced this week that food prices hit a record high last month. Its Food Price Index was 214.7 for December, the highest level since the organization created the index to measure the price of a standard basket of goods in 1990.  Some environmental groups are attributing this partly to an increase in extreme weather that scientists say is probably linked to global warming.  OxfamAmerica said that a “major contributor” to this price surge has been the disastrous effect of extreme weather events on harvests of certain crops. “The record rise in food prices is a grave reminder that until we act on the underlying causes of hunger and climate change, we will find ourselves perpetually on the knife’s edge of disaster,” said Gawain Kripke, policy director for the organization. This summer, for example, Russian wheat crops were devastated by a season of unusual drought and wildfire. Pakistan’s crop yields were reduced because of floods. In Laos and Cambodia, food production was compromised by “delayed and erratic rains,” the Food and Agriculture Organization said.

Practical Survival Skills 101 - Water - In this continuation of our series on practical survival, we’re going to discuss water: where to find it and what to do with it to make it "safe." Water is a common theme in survival - it is unique in that it is both an absolute necessity and a looming threat at the same time. Behind breathable oxygen, it is the single most important element on our survival saw, and we have just three days to ensure a clean, potable supply of water if we are to survive. This is an overview of the “hard” way of procuring safe drinking water. Obviously, Katadyne filters, iodine tablets, and other methods of purification are superior, when they are available. However, we can’t always count on technology, and so here we’ll talk about how to strain impurities/debris and kill microbes in the water.

SilentCountry: Should we be preparing for World Wide Food Shortages right now? - Most of use have our food stashes but I can't help wondering if it will be enough. With all the recent natural disasters around the world, a lot of them affecting crops, could we see a world wide food shortage coming in the next few weeks? If you haven't prepared maybe you should be thinking about it right now. Today.

Recovery May See Producers Pass On Commodity-Price Inflation - Commodities logged some of 2010’s strongest gains as strong demand for crops and materials in developing countries — coupled with a flood of monetary liquidity into the global economy from the Federal Reserve and other developed country central banks — prompted investors to buy everything from soy beans to copper futures. This anticipatory buying helped palladium, which is used in car parts, to gain 96.5% while cotton broke its Civil War record with a 91.5% price increase. These higher prices manifested in rampant inflation in many parts of the developing world, where robust economic growth is helping a new class of consumers discover the material comforts that developed country consumers are accustomed to. New coffee drinkers in Brazil and China, for instance, helped augment existing demand to lift bean prices 77% last year. Global food prices rose to a record in December, with the Food and Agriculture Organization of the United Nations’s food price index reporting its sixth straight monthly increase to 214.7. The index tracks monthly changes in international prices of a basket of commodities including meat, dairy, cereals, oils and sugar.

Peak Fertilizer? - The theory known as “Peak Oil” became popular a few years ago when mainstream media outlets caught on to the concept that there was a finite supply of crude oil in the earth and at some point production would reach past the pinnacle.  Today, a similar theory is being applied to the fertilizer industry: “Peak Fertilizer.” This concept is gaining strength in the agriculture industry and could have significant ramifications for the industry. Like the “Peak Oil” theory, “Peak Fertilizer” theory is also based on reaching the pinnacle of the production curve.  In the past year, more stories and articles have been popping up claiming that the world is going to run out of phosphorus in the next 20 to 30 years. A recent blog said, “In 2007, Canadian physicist Patrick Dery attempted to apply M. King Hubbard’s work on peak oil to rock phosphate and came to the conclusion that world production actually peaked in 1989. Unlike gas and oil, there are no mineral substitutes for phosphorous. Without phosphorus, plants become ‘phosphorous limited,’ constraining production no matter how many other nutrients can be supplied.”

The World According to Monsanto - 109 min -

Germans Fear Dioxin Has Contaminated Small Farms - German officials halted sales from more than 4,700 small farms after dioxin was found in some feed for chickens and pigs and as fears grew about how far contaminated food might have spread.  South Korea and Slovakia on Friday banned the sale of some animal products imported from Germany, while Britain and the Netherlands were investigating whether imported foods like mayonnaise, were safe to eat, according to the Associated Press.  The order to stop sales from the farms , has led to the withdrawal from the market of millions of eggs as prosecutors investigate how a rapeseed oil processed by a company that supplied the feed became contaminated by dioxin. The substance can cause severe health problems in humans, including cancer and miscarriages.

Researchers Find "Alarming" Decline In Bumblebees (Reuters) - Four previously abundant species of bumblebee are close to disappearing in the United States, researchers reported Monday in a study confirming that the agriculturally important bees are being affected worldwide. They documented a 96 percent decline in the numbers of the four species, and said their range had shrunk by as much as 87 percent. As with honeybees, a pathogen is partly involved, but the researchers also found evidence of inbreeding caused by habitat loss. "We provide incontrovertible evidence that multiple Bombus species have experienced sharp population declines at the national level," the researchers reported in the Proceedings of the National Academy of Sciences, calling the findings "alarming." "These are one of the most important pollinators of native plants," In recent years, experts have documented a disappearance of bees in what is widely called colony collapse disorder, blamed on many factors including parasites, fungi, stress, pesticides and viruses. But most studies have focused on honeybees. Bumblebees are also important pollinators, Cameron said, but are far less studied. Bumblebees pollinate tomatoes, blueberries and cranberries, she noted.

There Go The Bumblebees - Today I'd like to share with you this abstract of a recent study called Patterns of widespread decline in North American bumble bees. I edited it very slightly for clarity. We show that the relative abundances of four species have declined by up to 96% and that their surveyed geographic ranges have contracted by 23–87%, some within the last 20 years. We also show that declining populations have significantly higher infection levels of the microsporidian pathogen Nosema bombi and lower genetic diversity compared with co-occurring populations of the stable (nondeclining) species. Higher pathogen prevalence and reduced genetic diversity are, thus, realistic predictors of these alarming patterns of decline in North America, although cause and effect remain uncertain. Cause for concern? Ya' think? The UK newspaper The Guardian provided a number of details about the role of bumblebees as crucial pollinators of "wild plants and agricultural crops around the world, including tomatoes and berries."

Earth's Population to Reach 7 Billion in 2011 - A clock is ticking. Sometime late this year, the United Nations Population Division predicts that with about five babies born every second, the world will have 7 billion people.  Seven billion. It was fewer than 1 billion in 1800, 3 billion in 1960, and 6 billion as recently 1999.  The number keeps growing. The planet does not. Thomas Malthus famously predicted in 1798 that at some point, it would all be too much: starvation and disease would kill people more quickly than we can replace them.  "With the population still growing by about 80 million each year, it's hard not to be alarmed," writes Robert Kunzig, the author of National Geographic magazine's January cover story, "7 Billion." "Right now on Earth, water tables are falling, soil is eroding, glaciers are melting, and fish stocks are vanishing. Close to a billion people go hungry each day."

Food crisis threatens India - The specter of another food crisis has the whole world nervous. But in India, skyrocketing food prices threaten to send the entire economy into a tailspin, as the government struggles to balance growth and inflation — and create a safety net for the millions still mired in poverty. Government data revealed on Thursday that India's food inflation topped 18 percent for the week ending Dec. 25, with vegetables prices up more than 50 percent from the same period last year. The steep increase came as a surprise to economists, who had predicted a moderation in prices due to last year's good monsoon.For India, a spike in food prices means real suffering. But a prolonged and seemingly unstoppable rise in the cost of basic commodities like the one India has witnessed over the past two years could have farther reaching effects.

Speculators and Instability - I think speculators get a bad rap and speculation is a stabilizing impact on commodity prices. The easiest illustration of this comes from the price of onions. Onion futures trading was banned in 1958 at the behest of then-congressman (later president) Gerald Ford who felt speculators were engaged in price manipulation. The result is that onions are one of the most unstable commodities out there: In general, commodities speculation is a good thing. For any given commodity at any given time, there’s always someone who wishes the price were either higher or lower and that person tends to complain about speculators. But if you constantly had to pay the spot price for everything, prices would be more unstable and ordinary households and firms would need to spend more time stockpiling goods to hedge against price fluctuations. The world of derivatives is a convenient playground for Wall Street firms interested in designing products whose purpose is regulatory arbitrage and this is a bad thing. But the problem there is with the regulatory arbitrage, not the speculation.

Arkansas officials stumped as birds fall from sky - (Reuters) - State wildlife officials were going door-to-door on Sunday in the town of Beebe, Arkansas, to collect dead birds after thousands of mostly blackbirds mysteriously fell from the sky. Workers were searching Beebe, a town of about 4,500 people located 30 miles northeast of the state capital, to collect what officials estimated as between 4,000 and 5,000 birds which began falling from the sky late on New Year's Eve and continued into the next day. The birds were still being collected from rooftops, trees and yards and will be sent on January 3 to testing facilities in Little Rock and Madison, Wisconsin.

CNN: Massive fish and bird kill in Arkansas -- Arkansas officials are investigating the death of an estimated 100,000 fish in the state's northwest, but suspect disease was to blame, a state spokesman said Sunday. Dead drum fish floated in the water and lined the banks of a 20-mile stretch of the Arkansas River near Ozark, about 125 miles northwest of Little Rock, said Keith Stephens of the Arkansas Game and Fish Commission. A tugboat operator discovered the fish kill Thursday night, and fisheries officials collected some of the dying animals to conduct tests. Stephens said fish kills occur every year, but the size of the latest one is unusual, and suggested some sort of disease was to blame. Ozark is about 125 miles west of the town of Beebe, where game wardens are trying to find out why up to 5,000 blackbirds fell from the sky just before midnight New Year's Eve.

CNN: 2 million fish found dead in Maryland -"Natural causes appear to be the reason," the Maryland Department of the Environment said in a news release. "Cold water stress exacerbated by a large population of the affected species (juvenile spot fish) appears to be the cause of the kill." The investigation comes days after the deaths of an estimated 100,000 fish in northwest Arkansas. Authorities suspect disease was to blame there, a state spokesman said. In Maryland, preliminary tests showed water quality to be acceptable, officials said. "The affected fish are almost exclusively juvenile spot fish, 3 to 6 inches in length," the Maryland department said. A recent survey "showed a very strong population of spot in the bay this year. An increased juvenile population and limited deep water habitat would likely compound the effects of cold water stress."

Now East Texas also reports hundreds of dead birds -  Texans are observing hundreds of dead birds on an East Texas bridge, according to a breaking report by KLTV in Tyler. This latest discovery compounds the mystery of recent reported discoveries of dozens, hundreds, even thousands of dead birds and fish documented in the southern United States as well as dead wildlife reports in other parts of the world this week.  Around 200 birds were found dead on a Hwy 155 bridge over the Lake O' the Pines, this morning. The cause of death of the birds identified as American Coots is unknown. Lake O' the Pines is located on Big Cypress Creek in the Cypress River Basin, 25 miles northeast of Longview.

Why Are Birds Falling From the Sky? - A mysterious rain of thousands of dead birds darkened New Year's Eve in Arkansas, and this week similar reports streamed in from Louisiana, Sweden, and elsewhere. (See pictures of the Arkansas bird die-off.)But the in-air bird deaths aren't due to some apocalyptic plague or insidious experiment—they happen all the time, scientists say. The recent buzz, it seems, was mainly hatched by media hype. At any given time there are "at least ten billion birds in North America ... and there could be as much as 20 billion—and almost half die each year due to natural causes," said ornithologist Greg Butcher, director of bird conservation for the National Audubon Society in Washington, D.C.

Is The New Madrid Fault Earthquake Zone Coming To Life? - What in the world is happening in the middle of the United States right now?  Thousands of birds are falling dead from the skies, tens of thousands of fish are washing up on shore dead, earthquakes are popping up in weird and unexpected places and people are starting to get really freaked out about all of this.  Well, one theory is that the New Madrid fault zone is coming to life.  The New Madrid fault zone is six times bigger than the San Andreas fault zone in California and it covers portions of Illinois, Indiana, Missouri, Arkansas, Kentucky, Tennessee and Mississippi.  The biggest earthquakes in the history of the United States were caused by the New Madrid fault.  Now there are fears that the New Madrid fault zone could be coming to life again, and if a "killer earthquake" does strike it could change all of our lives forever. So exactly what events have happened recently that are causing people to take a close look at the New Madrid fault zone?  *According to the U.S. Geological Survey, more than 500 measurable earthquakes have been recorded in central Arkansas just since September.

Mass Animal Deaths Around the World: Dead Birds Fall from Sky, Millions of Fish & Crabs Wash Ashore - As you're likely aware, there's been a pretty bizarre spate of mass animal deaths reported around the world. First, it was the thousands of birds that fell from the sky in Arkansas on New Year's Eve. Some 100,000 fish also washed up on the shores of a river 100 miles away. Birds fell from the sky in Louisiana and Kentucky, too. Two million fish washed up dead in Chesapeake Bay. 50 birds fell from the sky in Sweden. 100 tons of fish washed ashore in Brazil. 40,000 crabs were found dead in England. All of this carnage has left people around the world wondering the same thing: What the hell is going on? Unfortunately, there's no good answer. The explanations offered up so far run the gamut -- from being dismissed as a series of unrelated, unfortunate coincidences to the suggestion that the deaths are a result of unusually cold weather to full-bore conspiracy theories that claim the US government is behind it all -- but nothing conclusive has been determined. Here's a closer look at the various incidents:

Dead Birds Fall From Sky In Sweden, Millions Of Dead Fish Found In Maryland, Brazil, New Zealand Millions of dead fish surfaced in Maryland's Chesapeake Bay in the U.S., Tuesday, while similar unexplained mass fish deaths occurred across the world in Brazil and New Zealand. On Wednesday, 50 birds were found dead on a street in Sweden. The news come after recents reports of mysterious massive bird and fish deaths days prior in Arkansas and Louisiana. The Baltimore Sun reports that an estimated 2 million fish were found dead in the Chesapeake Bay, mostly adult spot with some juvenile croakers in the mix, as well. Maryland Department of the Environment spokesperson Dawn Stoltzfus says "cold-water stress" is believed to be the culprit. ParanaOnline reports that 100 tons of sardines, croaker and catfish have washed up in Brazilian fishing towns since last Thursday. In New Zealand, hundreds of dead snapper fish washed up on Coromandel Peninsula beaches, many found with their eyes missing.   UPDATE: Hundreds and possibly thousands of dead birds have reportedly fallen from the sky in Italy. Wildlife officials say that even more previously unreported dead birds were found in Kentucky last week. 

Tree-conomics --  Many trees are private goods. If you own some, you can probably do whatever you want with them. As a rational economic actor, you can respond effectively to incentives. If the price of wood goes up, you can decide to chop your trees down and sell them. But trees are also public goods — they generate benefits for other people, creating what economists call positive externalities. Most trees are beautiful. Most create habitat for an immense variety of creatures that don’t know the meaning of property rights. All trees sequester carbon until they die, helping buffer the effect of carbon dioxide emissions from automobiles, power plants and other sources (our most worrisome public bad). The difference between private and public benefits explains why some local communities regulate tree management. But more profoundly, it drives a hardwood wedge between individual and social outcomes, with disturbing implications. Deforestation is contributing to global warming

SUVs lead U.S. auto sales growth despite efforts to improve fuel efficiency - If U.S. consumers are in the midst of a green revolution, the news hasn't reached car buyers. With the end of the recession, bigger vehicles have made a comeback, sales figures show, and it has come at the expense of smaller, more-efficient cars.  Leading the growth were sales of midsize sport-utility vehicles, which jumped 41 percent through the first 11 months of the year, led by vehicles such as the Jeep Grand Cherokee and the Honda Pilot, each of which get about 18 miles per gallon.  Sales of small cars, by contrast, remained flat despite otherwise surging demand for automobiles. Sales of the Toyota Corolla and the Honda Civic declined, and even the fuel-sipping Toyota Prius, the hybrid darling of the eco-conscious, dropped 1.7 percent.  "You have about 5 percent of the market that is green and committed to fuel efficiency," said Mike Jackson, the chief executive of AutoNation, the largest auto retailer in the country. "But the other 95 percent will give up an extra 5 mpg in fuel economy for a better cup holder."

The Nissan Leaf – a perfect use for that unwanted Christmas jumper One thing that's not mentioned in the hype for the Nissan Leaf – which is being touted as the first "mass market" electric car – is that you'll need a good jumper. Or at least that's what I found when I took it for a spin during the chilly pre-Christmas weather. The Leaf is available to buy in the UK from March, costing a hefty £28,350. But from 1 January, the government will be subsidising the price of this and other electric cars to the tune of £5,000. So what's it like? Driving the Leaf to Charles Darwin's old home, Down House, in Surrey it began to snow. But switching the heating on has an unfortunate side-effect – the battery-range display plummeted from 77 to 54 miles. You can see why people talk about "range anxiety" with electric cars, even on this one, which officially goes for 110 miles on a full charge. Fortunately, having the lights and Radio 4 on don't have such a dramatic effect.

Even Low Estimates for EV Sales May Be Optimistic - I think it’s time to focus on HPM (hype-per-million): misleadingly high press popularity that masks underlying revenue model problems. Electric cars seem to be heavy on the hype — by the vendors, the business press, the general press and even politicians — while sales are barely improved from the first great coming of the EV. (And this time, there’s no one to blame for poor sales but the invisible hand of basic economics.) An AP report Friday was stark in its assessment: GM sold 250 to 350 Chevy Volts this month, and Nissan's (NSANY.PK) sales totaled fewer than 10 Leaf sedans in the past two weeks. Production for both is slowly ramping up. It will be well into 2012 before both the Volt and Leaf are available nationwide. And if you're interested in buying one, you'll need to get behind the 50,000 people already on waiting lists.

EU will surpass 20% green energy goal - The European Union will exceed its target of meeting 20 percent of its energy needs from renewable sources by 2020, a report by the European Wind Energy Association (EWEA) said on Tuesday. Of the bloc’s 27 member states, 25 expect to meet or exceed their national targets, EWEA said, based on its analysis of national action plans submitted by EU governments to the European Commission. “Taken together, the action plans show that the EU-27 will meet 20.7 percent of its 2020 energy consumption from renewables,” said Justin Wilkes, policy director at EWEA. Of the 15 EU countries which expect to exceed their 2020 target, Spain predicted it would surpass its goal by 2.7 percentage points. Germany said it would exceed the target by 1.6 percentage points.

How Will G.O.P.’s House Budget Affect Clean Tech? - Taking House Republicans at face value on their pledge to cut 20% of all non-defense discretionary spending, we took a quick look at what cuts might mean for America’s ability to compete in the $2 trillion clean energy market. While there are certainly areas of the nation’s energy budget that should get cut or eliminated, to achieve $100 billion in savings every program — even those that help fuel the economic growth the new majority says it wants — is going to suffer. Thanks to smart government investments, many clean energy businesses are getting off the ground or expanding in the U.S. This means new jobs created by Dow at a battery plant in Michigan, by Nissan for electric vehicles in Tennessee or Southern Company to build a new nuclear reactor in Georgia. So what might a 20% chop look like?

House Republicans seek to limit EPA climate rules - The 112th Congress has just begun, and so have the attacks on the Environmental Protection Agency’s ability to regulate greenhouse gases. Three Republican House members — Marsha Blackburn (Tenn.), Shelley Moore Capito (W. Va.) and Ted Poe (Tex.) have each introduced separate bills aimed at blocking EPA from regulating carbon dioxide and other greenhouse gases under the Clean Air Act. The three measures hamstring the agency’s authority in different ways: Blackburn’s would “amend the Clean Air Act to provide that greenhouse gases are not subject to the Act,” even though the Supreme Court ruled in 2007 that they are; Capito’s would delay EPA from regulating carbon dioxide and methane for two years; and Poe’s would prohibit any agency funding “to be used to implement or enforce a cap-and-trade program for greenhouse gases.”

GOP Targets EPA Rules To Address Global Warming - House Republicans wasted no time Thursday in trying to block the Obama administration from acting to stem global warming. On their second day in power, Republican lawmakers introduced several bills that would hamstring the Environmental Protection Agency from moving forward with regulations to reduce heat-trapping pollution from factories and other sources that they say contributes to global warming. The bills are part of an effort by House Republicans to reverse what they consider job-killing policies of the administration. Poe's measure would prohibit the EPA from using any money to implement or enforce regulations to impose a limit on global warming gases. Blackburn's bill would change the Clean Air Act so the EPA could no longer use the law to control greenhouse gases. A 2007 Supreme Court decision said the EPA had the authority to regulate carbon dioxide and other global warming gases under the statute.

Boxer takes shot at GOP agenda - Sen. Barbara Boxer took a first swing Thursday at her new House counterpart on environmental issues, calling out Energy and Commerce Committee Chairman Fred Upton over his plans to stymie the Obama administration’s global warming and air pollution rules. The Environment and Public Works Committee chairwoman joined the chorus of Senate Democrats who have quickly criticized the House GOP majority as it targets rules covering everything from health care to the environment. “I believe what Chairman Upton has indicated he wants to do, which is essentially stop all progress on this front, is against the law,” Boxer (D-Calif.) told reporters.

Republicans kill global warming committee -  The kick-off of the 112th Congress on Wednesday also marked the end of an era in the House – the demise of a committee devoted solely to climate change and energy issues. The Select Committee for Energy Independence and Global Warming, created by Nancy Pelosi in 2006, has been shuttered under the new Republican leadership. In the final days of the committee, staffers released a report on what the committee accomplished in its brief tenure – an epitaph of sorts. Tackling issues from the politicisation of climate science to the explosion of the Deepwater Horizon, the committee held 80 hearings and briefings. It played a role in shaping policy for the 2007 energy bill, the 2009 stimulus package (which included $90bn [$58bn] in energy, efficiency, and other green elements), and, of course, the 2009 climate bill (the one that never became law, of course, because the Senate didn't act on it). The final report concludes with the question of whether the United States will respond to all the information that the committee has compiled during its lifespan on the climate and energy challenge:

Should we get rid of all energy subsidies? - Should the U.S. get rid of energy subsidies altogether? In a new piece for Washington Monthly, Jeffrey Leonard argues just that: “Get the Energy Sector off the Dole.” Amory Lovins argued something similar in The Weekly Standard in past October. Way back in 2002, Ed Crane (head of the libertarian Cato Institute) and Carl Pope (then head of the Sierra Club) made the same argument in a Washington Post op-ed. So, is it a good idea? Today I want look to at the question from a policy angle. Tomorrow I’ll get into the politics. Can government get out of the energy game?

Why Cancun Trumped Copenhagen  I wrote about this in some detail in my December 13th essay, “What Happened (and Why): An Assessment of the Cancun Agreements.” The challenges awaiting delegates later this year (December, 2011) at COP-17 in Durban, South Africa, will be tremendous, particularly in regard to trying to negotiate the massive divide that exists between most Annex I countries and virtually all non-Annex I countries on the fate of a second (post-2012) commitment period for the Kyoto Protocol. However, on this first day of 2011, it may be helpful to reflect again on the recent success in Cancun, and ask – in particular – why it occurred, because understanding that could provide some valuable lessons for the organizers and hosts of COP-17 in Durban.  However, on this first day of 2011, it may be helpful to reflect again on the recent success in Cancun, and ask – in particular – why it occurred, because understanding that could provide some valuable lessons for the organizers and hosts of COP-17 in Durban.  This was the question I addressed in a brief December 20th Op-Ed in The Christian Science Monitor, and so rather than attempting to summarize or expand it, I simply reproduce it below.

Chesapeake Bay Is Freezing Over - Chesapeake Bay, more than 4,000 square miles of waterway in the United Sates, circled by Maryland and Virginia, has not frozen it’s surface to ice since 1976, an extremely rare occurrence. It may be ready to freeze once again. The latest satellite data reconnaissance from the U.S. Naval Oceanographic Office indicates that the surface temperature of much of Chesapeake Bay has reached 33 degrees, just one degree short of freezing over, turning to ice. Chesapeake Bay is the only inlet of waterway from the Atlantic, serving Baltimore, Washington DC, Alexandria, and countless other ports in the region. The winter of 2010 – 2011 is shaping up to be one of the coldest on record in many regions of the world. If it continues, many ports of entry could be impacted, which in turn could impact your life.

NSIDC: Lowest December Arctic sea ice extent in satellite record - The cold may make the news, but it ain't the story - The National Snow and Ice Data Center has released its December report on Arctic sea ice.  The human-driven decline continues, spurred by a strong negative phase of the Arctic Oscillation, which leads to this regional air temperature anomaly:  Parts of Canada are astoundingly warm.  Nunatsiaq Online reports: … temperatures around South Baffin reached record highs as much as 20 degrees above normal.Iqaluit set new records with temperatures rising to +1.2 C Jan. 3 breaking the record of —1.7 C set in 1970, said Yvonne Bilan-Wallace, a meteorologist with Environment Canada. Jan. 4 saw another new record for the capital with a high of +1.5 C, breaking the old mark of —1.1 C set in 1969. “The normal around this time of year is around -22C,” she said. “So yeah, you’re way above normal.” Pangnirtung also set a record high temperature, peaking at +8 C Jan. 4,

High Water: Hottest year ends with unprecedented, “biblical” Australian floods covering an area “the size of France and Germany combined.”  - As Dr. Kevin Trenberth, head of the Climate Analysis Section at the National Center for Atmospheric Research, explained it, “there is a systematic influence on all of these weather events now-a-days because of the fact that there is this extra water vapor lurking around in the atmosphere than there used to be say 30 years ago. It’s about a 4% extra amount, it invigorates the storms, it provides plenty of moisture for these storms and it’s unfortunate that the public is not associating these with the fact that this is one manifestation of climate change. And the prospects are that these kinds of things will only get bigger and worse in the future.” Last year appears to have been the hottest year on record — and it saw an astonishing amount of intense rainfall from Nashville’s ‘Katrina’ to the great Pakistani deluge.” And so it should be no surprise that the year ends with another unprecedented deluge of “biblical proportion.”  Meteorologist Dr. Jeff Masters has the tale of the tape:

Humans Have Intentionally Modified Weather for Military Purposes and Climate Control for Decades - Weather modification is a well-known endeavor. For example, governments have been seeding clouds for decades to create more rain. And during warfare to create mud to slow the enemy’s ability to use roads. As the Guardian reported in 2001: During the Vietnam war, the Americans launched Project Popeye, a secret mission to seed the tops of monsoon clouds and trigger phenomenal downpours that would wash away the Ho Chi Minh Trail used for ferrying supplies.  Interestingly, U.S. weather modification efforts during the Vietnam war were revealed as part of the Pentagon Papers. As the Washington Post reported...

Australia Flood Is Concern For Coal Prices, A Commodities Lesson - Floods not seen in the modern era have shuttered coal mines throughout an area of Queensland, Australia, the size of Texas. Several large international miners, including Rio Tinto (NYSE: RTP), will take huge losses. That is only part of the trouble. The interruption may go on for months, which will almost certainly make the price of coal rise. There is a significant coal shortage in China, and there is no immediate relief for the problem. China is a major consumer of coal just as its is of crude oil. Demand from the world’s second largest economy by GDP will push up prices. The coal mine problem in Australia could have an immediate effect on steel prices. The island nation produces about half of the world’s coking cola for the steel industry. Coal prices have already started to rise, and the expectation is that the increase will accelerate. “The Macquarie Group said the spot price for coking coal was heading from a current level of $US246 ($240) towards $US300 a tonne, and this may be reflected in the next round of quarterly export contracts. The current contract price is $US225,” according to The Australian.

Coal prices soar as warmest sea surface temperatures on record fuel ‘biblical’ Australian floods - Australian floods now cover an area “the size of France and Germany combined.” Yesterday, their government’s Bureau of Meteorology released its “Annual Australian Climate Statement 2010,” which helps explain why — record sea surface temperatures: Based on preliminary data (to November 30), sea surface temperatures in the Australian region during 2010 were +0.54 °C above the 1961 to 1990 average. This is the warmest value on record for the Australian region. Individual high monthly sea surface temperature records were also set during 2010 in March, April, June, September, October and November. Along with favourable hemispheric circulation associated with the 2010 La Niña, very warm sea surface temperatures contributed to the record rainfall and very high humidity across eastern Australia during winter and spring. The most recent decade (2001−2010) was also the warmest decade on record for sea surface temperatures following the pattern observed over land.

The Queensland Flood is Coming to Your Neighborhood - The news this week that about one-third of Australia's coal production has been halted by massive flooding in the state of Queensland is an opportunity to look at the coal supply situation in Asia and the impact it could have on global energy prices in the next few months. For several decades now, China has been the epicenter of rapidly increasing global coal production. In fact, it is hard to understate the significance of the China's coal industry's contribution in recent years to the world's economic growth. With total coal production of circa 1 billion metric tons in 1990, Beijing was able to grow its coal industry to the point where it might (the numbers aren't in yet) have produced on the order of 3.2 billion tons including a 10 percent or nearly a 300 million ton increase in production during 2010 alone. Now this is a whopping amount of energy. The utility of coal and oil of course are not the same for the world's transportation systems run on the liquid fuels derived mainly from oil, while the world's coal production mainly goes to generate electricity, heat buildings and make coke for steel.

Coal’s burnout: Have investors moved on to cleaner energy sources? - The headline news for the coal industry in 2010 was what didn’t happen: Construction did not begin on a single new coal-fired power plant in the United States for the second straight year. This in a nation where a fleet of coal-fired plants generates nearly half the electricity used. But a combination of low natural gas prices, shale gas discoveries, the economic slowdown and litigation by environmental groups has stopped – at least for now – groundbreaking on new ones. “Coal is a dead man walkin’,” “Banks won’t finance them. Insurance companies won’t insure them. The EPA is coming after them. . . . And the economics to make it clean don’t work.”

Coking coal prices might jump 33 percent -  Coal companies like Consol Energy Inc. that produce coking coal for steelmaking will benefit from the Australia floods that disrupted its huge output and might boost those coal prices by as much as 33 percent, industry experts said Thursday. Prices may increase to between $270 and $300 a ton, analysts said. Steel mills in Asia agreed to pay $225 a ton for the three months starting Jan. 1, Bank of America Merrill Lynch analysts said. Mines in the flooded region of Queensland account for most of the premium hard coking coal supply globally, said Alex Tonks, a commodity strategist at Bank of America Merrill Lynch in Sydney. About 37 percent of the world's traded coking coal is affected, according to analysts from Macquarie. "A lot of operations have been impacted,"

Will Flooded Met Coal Impact US Mills? - “Flooding in Queensland, Australia has left half of the world seaborne metallurgical coal under water. Our colleagues estimate it take 2-6 wks to dewater a flooded open pit once the rain stops. At this time it is difficult to know how impactful the floods may be, but already spot met prices are seen rising to ~$300/t from ~$225.  More than half the U.S. production of steel is mini-mill based, and therefore uses scrap and not met coal and iron ore. We spoke to U.S. Steel and AK Steel, the two exposed names under our coverage, and they reiterated they have annual contracts for coal (unlike global peers) and would expect no disruption to entirely U.S. based coal supply. Coal prices will rise into 2011, but AK said it locked in a 2011 annual price before the floods, and US Steel said most of its pricing had been finalized.U.S. benchmark HRC prices have already risen $220/short ton to $740 after a rapid succession of price hikes driven largely by scrap prices. A $100/t coal price hike equates to about a $50/t increase in the cost of steel, so would already be more than covered by U.S. mill price hikes.

Australia flood pushes up Chinese coal price (Xinhua) 篓C Affected by the flood in Aust ralia, the world's major coal exporter, international coal price is ri sing and it may even go higher than the Chinese price in a short term. China's power producers thus have lost a bargaining chip in the recent negotiations with coal suppliers. A coal company insider revealed that China's coal price i n key contracts for 2011 rises 30-50 yuan/tonne. China's coal import has been increasing since 2010, and i t is estimated at 160 million tones for 2010, of which three quarters were power coal and anthracite and a quarter was coking coal.

China and India buying U.S. coal mines, and tar sands operations, invests in Chesapeake Energy - China, for instance, has gained international renown for the speed at which it's developed an alternative fuels manufacturing and power-generating sector. But the bigger money in China, and the alliances formed to make it, involve carbon-emitting coal, oil, and natural gas produced in and outside the fastest growing energy consumer on earth. Royal Dutch Shell, for instance, is collaborating with CNPC, the Chinese National Petroleum Corp., to develop big new natural gas reserves in the deep shales below Sichuan province in a project aided by the U.S. Department of Energy. Sasol, the big South African oil company, is negotiating to build a huge refinery in Ningxia province to turn coal into liquid fuels. The world's engineering firms are lining up to help China turn a proposal into an actual project to build a 2,000-mile long pipeline from the Bohai Sea inland to desperately dry Xinjiang province to provide coal mines with process water and power plants with cooling water. Though China has announced its commitment to produce 15 percent of its electricity from renewable alternatives roughly 70 percent will still come from the 3.5 billion to 4.5 billion tons of coal it is expected to consume annually by the end of the decade.

China counts £130bn cost of economic growth - China's economic growth is inflicting more than a trillion yuan's worth of damage on its environment each year, according to a government report that increases pressure on planners to slow the breakneck speed of development. In one of the longest-term accountings of ecological degradation, the China academy for environmental planning calculated that the cost of pollution spills, deteriorating soil, vanishing wetlands, and other impacts surged to 1.3tr yuan (£130bn) in 2008. This was equivalent to 3.9% of the country's GDP. Most of these costs do not appear on corporate balance books or government budgets, but they are accumulating year by year to an environmental deficit that threatens the country's long-term prospects. The central government has increased efforts to clean up the nation's notoriously filthy air and contaminated water, but the report's authors – who are affiliated to the Ministry of Environmental Protection – say the cost of pollution spills and other environmental damage rose by more than 74.8% in the five years up to 2008.

Pennsylvania allows gas drillers to dump pollution into drinking water supplies - The natural gas boom gripping parts of the U.S. has a nasty byproduct: wastewater so salty, and so polluted with metals like barium and strontium, that most states require drillers to get rid of the stuff by injecting it down shafts thousands of feet deep. Not in Pennsylvania, one of the states at the center of the gas rush. There, the liquid that gushes from gas wells is only partially treated for substances that could be environmentally harmful, then dumped into rivers and streams from which communities get their drinking water. In the two years since the frenzy of activity began in the vast underground rock formation known as the Marcellus Shale, Pennsylvania has been the only state allowing waterways to serve as the primary disposal place for the huge amounts of wastewater produced by a drilling technique called hydraulic fracturing, or fracking.

Massive Natural Gas Field Found of Israel’s Coast While it is one of the world's richest natural gas reserves, the Levant Basin Province is located between countries with endless amounts of mutual hatred. It straddles the sea borders of Israel, Lebanon, Palestine, the Republic of Cyprus and the Turkish Republic of Northern Cyprus. The largest section discovered so far, the Leviathan gas field, is believed to possibly contain, alongside natural gas, 4.2 billion barrels of oil. Leviathan straddles the Israeli-Lebanese maritime border. Israel is currently in a state of war with Lebanon and does not recognize the de-facto Hamas Palestinian government in the Gaza Strip.

Moritz Lehmann and others: a drastic change to a "warm water mode" occurred in the western North Atlantic in the early 1970s, changing dominance of the Labrador Current to the Gulf Stream  - Examination of deep sea corals reveals that there have been drastic changes to oceanic currents in the western North Atlantic since the 1970s. The influence of the cold water Labrador Current, which is in periodic interchange with the warm Gulf Stream, has been decreasing continually since the 1970s. Occurring at the same time as global warming, this phenomenon is unique in the past 2000 years. These results are reported by researchers from the University of Basel and Eawag in the current edition of the scientific journal Proceedings of the National Academy of Sciences.

Scientists Find Drastic Shift In Atlantic Ocean Currents - Science News - Swiss researchers reported on Tuesday that they found evidence of a "drastic" shift since the 1970s in the north Atlantic Ocean currents that usually influence weather in the northern hemisphere. The team of biochemists and oceanographers from Switzerland, Canada and the U.S. detected changes in deep sea Atlantic corals that indicated the declining influence of the cold northern Labrador Current. They said that change "since the early 1970s is largely unique in the context of the last approximately 1,800 years," and raised the prospect of a direct link with global warming.  The Labrador Current interacts with the warmer Gulfstream from the south. Scientists have pointed to a disruption or shift in the oscillation as an explanation for moist or harsh winters in Europe in recent years.  They have a complex interaction with a climate pattern, the North Atlantic Oscillation, which has a dominant impact on weather in Europe and North America.

BP oil disaster’s effects will ‘go global,’ Gulf Coast activist warns (video) The effects of the disaster that poured millions and millions of barrels of oil into the Gulf of Mexico last spring will have global ramifications, a Gulf Coast activist recently warned. "What's been done in the Gulf is going to eventually affect every single American citizen," Kindra Arnesen told Project Gulf Impact in a recent interview. She continued, "This isn't just about the United States. This isn't just about the Gulf Coast. This is about a whole planet because one hand washes the other," she added. Arnesen, a South Louisiana mother who with BP's invitation toured areas devastated by the Macondo Well explosion, described the negative health effects to which she and others, including oil spill clean up crews, were exposed around the Gulf Coast.  One such crew she encountered had brown spots on their bodies. Her friend on the same crew currently has bruising across her stomach, she said. "It didn't look like someone punched her in the stomach," Arnesen explained. "It looked like the blood vessels underneath the skin surface were literally breaking and the blood was slowly coming to the surface."

US oil spill: Bad management led to BP disaster - The companies involved in the Gulf of Mexico oil spill made decisions to cut costs and save time that contributed to the disaster, a US panel has concluded. In a chapter of its final report, to be published next week, the presidential commission said the failures were "systemic" and likely to recur. BP did not have adequate controls in place to ensure safety, it found. The April blast aboard the Deepwater Horizon rig killed 11 people and caused one of the worst oil spills in history. The Macondo well, about a mile under the sea's surface, eventually leaked millions of gallons of oil into the Gulf of Mexico, damaging hundreds of miles of coastline before it was capped in July.

Failure in the Gulf - Editorial - NYTimes -The document released Wednesday by the presidential commission investigating last spring’s oil blowout in the Gulf of Mexico is a riveting and chilling indictment of “systemic failures” throughout the oil business and of the federal agencies that allowed themselves to be captured by the people they were supposed to regulate. The commission will offer specific recommendations for reform in its full report next Tuesday. But the chapter it decided to release early is, by itself, a powerful summons to the Obama administration to press rapidly forward with stronger regulations, and to the industry as a whole to behave far more responsibly than it has. Another tragedy like the one in the Gulf of Mexico could well occur, the report suggests, unless there is “significant reform in both industry practices and government policies.”

SLIDESHOW: The Photos That BP Doesn't Want You To See - Dying Birds, Corexit & Corruption

Drilling Is Stalled Even After Ban Is Lifted - More than two months after the Obama administration lifted its ban on drilling in the deep-water Gulf of Mexico, oil companies are still waiting for approval to drill the first new oil well there. Experts now expect the wait to continue until the second half of 2011, and perhaps into 2012. The administration says it is simply trying to enforce new safety rules adopted in the wake of the April 20 explosion of the Deepwater Horizon drilling rig, which killed 11 workers and set off the worst offshore oil spill in U.S. history. Environmental groups say the administration is right to take its time because the Gulf disaster exposed the risks of offshore drilling. But the delay is hurting big oil companies such as Chevron Corp. and Royal Dutch Shell PLC, which have billions of dollars in investments tied up in Gulf projects that are on hold and are paying hundreds of thousands of dollars a day for rigs that aren't allowed to drill.

Oil up 34% since May; average gas price hits $3.07 - The price of oil is poised for another run at $100 a barrel after a global economic rebound sent it surging 34% since May. That could push gasoline prices to $4 a gallon by summer in some parts of the country, experts say. The run-up in oil prices this year sent the average gas pump price to $3.07, according to AAA, Wright Express and Oil Price Information Service. That's 43 cents, or 16%, more than a year ago.  Benchmark oil for February delivery rose $1.54 on Friday to end the year at $91.38 a barrel on the New York Mercantile Exchange. It reached $92.06 earlier in the day. Flying, shipping a package and ordering a pizza all likely will get more expensive if companies pass along higher energy costs. Some economists say rising energy prices will slow economic growth. Gasoline expert Fred Rozell predicts that 15 states — including Alaska, Hawaii, Connecticut and Rhode Island— will see gasoline prices top $4 a gallon by Memorial Day. "A dollar more per gallon isn't that much — probably about $750 more per year for each motorist, but there's a psychological aspect to gas prices," he said. "People are going to be up in arms about this."

Peak travel  - A study of eight industrialized countries, including the United States, shows that seemingly inexorable trends — ever more people, more cars and more driving — came to a halt in the early years of the 21st century, well before the recent escalation in fuel prices. It could be a sign, researchers said, that the demand for travel and the demand for car ownership in those countries has reached a saturation point... Most of the eight countries in the study have experienced declines in miles traveled by car per capita in recent years. The U.S. appears to have peaked at an annual 8,100 miles by car per capita, and Japan is holding steady at 2,500 miles. Here is more.

As High Gas Prices Loom, New Congress Faces Pressure on Drilling - Party leaders in the new Congress have yet to unveil their full agenda, but lobbyists and observers see one issue they’ll likely confront: what to do about rising gas prices. Pump prices jumped over the past six weeks, and some experts predict they will continue climbing. Former Shell Oil President John Hofmeister predicts that increased worldwide demand and lack of production could push gas prices in the United States to $5 per gallon by 2012. “We continue to demand more,” Hofmeister said today, repeating comments he made that were first aired by “Platts Energy Week.” “The world continues to demand more, and the U.S. has no plan to address it. That could drive us to the kind of numbers that get to $5 a gallon in this country.”

Energy cornucopia? - Don Boudreaux and Mark Perry are among those who regard John Tierney's claims of energy cornucopia to be persuasive. Here are Tierney's strongest arguments: Giant new oil fields have been discovered off the coasts of Africa and Brazil. The new oil sands projects in Canada now supply more oil to the United States than Saudi Arabia does. Oil production in the United States increased last year, and the Department of Energy projects further increases over the next two decades. Let me discuss each of these observations in turn.

Gas and oil prices remain high - Drivers may be bracing for more pain at the pump in 2011 as gas prices continue to head higher. The price for a gallon of gas has risen 3% over the past 12 days and last week, prices crossed the $3 mark for the first time since October 2008. At $3.073 a gallon, gas prices are still 25% below their peak of $4.114 set in July 2008.  Still, former Shell Oil president John Hofmeister recently said drivers could be paying $5 for a gallon of gas by 2012 as the global demand for oil increases. And that's no joke.

Happy New Year from The North Sea. Or, Secrecy By Complexity - The dramatic fall of Mexican oil production, and its largest field Cantarell, is often cited as a signature example of the problems facing Non-OPEC supply. Since the production highs of 2004-2005, Mexican production has lost over 800 kbpd (thousand barrels per day) which is fairly dramatic for a country that was producing around 3.4 mbpd as recently as 5-6 years ago. But as accelerated as these declines have been in Mexico, another oil producing region has seen even quicker declines. The North Sea, which comprises “United Kingdom Offshore, Norway, Denmark, Netherlands Offshore, and Germany Offshore” has just lost 25% of its production in less than 24 months, falling over a million barrels a day.

Oil at $90 brings small OPEC supply rise: survey -(Reuters) – OPEC output has risen slightly in December as Nigerian supply has increased, a Reuters survey found, indicating the group has yet to boost production substantially in response to prices at a 26-month high.Supply from the 11 members of the Organization of the Petroleum Exporting Countries with output targets, all except Iraq, has averaged 26.75 million barrels per day (bpd) this month, up from 26.70 million bpd in November, according to the survey of oil companies, OPEC officials and analysts on Thursday. The increase mainly reflects higher supply in Nigeria after a pipeline was fixed and other technical factors elsewhere in the group that affected output. OPEC officials have said a rise in prices to $100 a barrel -- above the 26-month high of $91.88 hit this week -- would not necessarily prompt a supply increase.

No need for more OPEC oil - Kuwait (Reuters) - Kuwait's oil minister said on Wednesday he considered oil at $80 to $100 a barrel to be a "fair price" and did not expect OPEC to increase output in the first half of this year.Speaking to reporters outside the Kuwait parliament, Sheikh Ahmad al-Abdullah al-Sabah also said he did not foresee the oil producer group gathering ahead of its next scheduled meeting in June unless "something dramatic happens." He did not elaborate.  Last month, al-Sabah said that the global economy can withstand oil to be at $100 a barrel. Analysts have warned that the rallying oil price may hurt the global economy unless producing countries boost output this year.

Pemex 2010 Output Falls to Lowest Level in 20 Years - Petroleos Mexicanos, the state-owned oil company, saw production fall to its lowest level in 20 years after autumn storms in the Gulf of Mexico curbed output.  Production dropped to 2.576 million barrels a day in 2010, the lowest daily average since 1990, Pemex, as the Mexico City- based company is known, said today in a preliminary report on its website. In 2009, crude output was 2.601 million barrels of oil a day.  Pemex posted its first 12-month gains in output since 2006 in June, July and August before autumn storms.  Chief Executive Officer Juan Jose Suarez Coppel had been seeking Pemex’s first output gains since 2004 as he stabilized production at the company’s Cantarell field and brought new projects online. The company is counting on new performance- based contracts with foreign operators to boost production.

Gasoline prices' rise evokes 2008 - The grumbling you've been hearing at gas stations isn't your imagination: It's the sound of motorists looking at pump prices that have been rising toward record highs for this time of year. The average retail price of a gallon of gasoline Friday was $3.083 nationally and $3.342 in California, up substantially from $2.709 nationally and $3.032 in California a year earlier, according to AAA's daily survey of fuel prices. The Energy Department's weekly gasoline price survey, released Monday, showed similar results. Analysts attribute the surge largely to higher crude oil costs, which on Monday jumped to $92.66 a barrel, a 26-month high, before settling lower. Oil closed Friday at $88.03 a barrel in New York futures trading.The last time gasoline prices began the year at similar levels, in 2008, they reached all-time highs by June and July. That has motorists concerned that such a run-up might happen again.

Dramatic spike in gas prices forecasted - Oil and gasoline prices have risen to their highest levels in two years, and analysts say prices could shoot up dramatically this year as the thirst for fuel grows in the U.S. and around the world.  The former head of Shell Oil has warned that gas prices could hit $5 a gallon by 2012 because of fast-growing demand in emerging countries such as China and India, where more and more people are buying cars, combined with restraints on drilling in the U.S. in the wake of last year's disastrous Gulf oil spill.  Less-worrisome forecasts are calling for a rise in gas prices to $3.75 a gallon by spring from today's $3.07 average level, with premium crude prices easily exceeding $100 a barrel this year as demand for oil around the world returns to pre-recession levels last seen in 2007.

Hedge Funds Raise Crude Bets to Four-Year High - Hedge funds raised bullish bets on crude oil to the highest level in more than four years on speculation that futures will climb as the U.S. recovers from the deepest recession since the 1930s. The funds and other large speculators increased net-long positions, or wagers on rising prices, by 4.6 percent in the seven days ended Dec. 28, according to the Commodity Futures Trading Commission’s weekly Commitments of Traders report. It was the biggest total in records going back to June 2006. Futures advanced as high as $92.58 yesterday after the Institute for Supply Management’s U.S. factory index climbed to 57 in December, the fastest pace in seven months. Fuel demand increased to the highest since May 2008 in the week ended Dec. 24, Energy Department figures showed last week. “Crude oil prices are up, and people expect them to keep going up,”

Are Oil Prices Are About To Wake Up To Peak-Production Realities? Somehow the government is sticking with an outlook that sees crude prices not hitting triple digits until 2015.It is an estimate that would get smirks on Wall Street and get you laughed out of the room at the peak oil conference in D.C. Just look at the chart on right to see why.The crude trend line from 2003 to 2008 headed for $120 and higher, and it was only interrupted by the global recession. Now we're getting back on track and oil cracked $90 this week.This chart comes from seminal peak oilist Chris Skrebowski's presentation at the ASPO-USA conference.Click here to see why oil prices could soar >

Rising oil price threatens fragile recovery - High oil prices threaten to derail the fragile economic recovery among developed nations this year, the leading energy watchdog has warned, putting pressure on the Opec oil cartel to increase production. Over the past year the oil import costs for the 34 mostly rich countries that make up the Organisation for Economic Co-operation and Development have soared by $200bn to $790bn at the end of 2010, according to an analysis by the International Energy Agency.  The increase, due to high crude prices, is equal to a loss of income of about 0.5 per cent of OECD gross domestic product, according to the IEA. “Oil prices are entering a dangerous zone for the global economy,” said Fatih Birol, the IEA’s chief economist. “The oil import bills are becoming a threat to the economic recovery. This is a wake-up call to the oil consuming countries and to the oil producers.”  Oil prices have edged closer to $100 a barrel in recent weeks and Brent crude hit $95 a barrel for the first time in 27 months on Monday as the economic recovery has gathered pace

The Oil – Employment Link, Part 1 - From what I can see, oil consumption and employment are very closely linked. It is this link that seems to be contributing to the unemployment problems we have now in the US. Going forward, we know that the US is heavily dependent on oil imports. If these drop, either because world oil production is dropping, or because world oil production is close to flat, and the US is being outbid for the oil, then it seems likely that employment in the United States will drop even more. These are a selection of slides from my presentation:

'Peak Oil' Doesn't Matter - Are we running out of oil? According to the New York Times, apparently not. The paper of record ran two articles in close proximity over the holiday week, both of which regale us with stories of how wrong all those silly "Malthusian pessimists" have been. So we should feel warm and fuzzy about not facing vast energy shortages, right?  I'd say no, since both of these articles are shockingly negligent in what they don't talk about. The debate about moving away from fossil fuels is not just a battle between resource optimism and gloomy pessimism. No, this is about much larger issues. Even if you skip over the risks of fossil-fuel extraction (BP spill, anyone?), or the cost to business of relying on volatilely-priced inputs, how can you discuss oil and not even mention two rather inconvenient, but enormous, problems: climate change and global security.

Peak Oil, International Trade And Population - Oil is a finite resource! Eventually the oil remaining on the planet will be exhausted and no longer able to be used by humanity.Humanity will no longer be able to use the oil remaining on the planet when one of two conditions exist--- the first condition, is when wells are drilled and oil is not obtained from the wells or only a minimum amount of oil is obtained; the second condition, when it takes more energy to find, obtain, process, and deliver oil than the oil produces when it is used--- example, it takes 200 units of energy to find the oil, drill for it, process it, and deliver it to where it is used but when it is used it only produces 100 units of energy. In this example it would not make sense to expend 200 units of energy to obtain the oil when the oil only produced 100 units of energy. In this example there may be substantial amounts of oil remaining on the planet, but that oil would not be usable by humanity.

Forecast 2011 - Gird Your Loins for Lower Living Standards - The outstanding question from the get-go of 2011 is just this: can a political economy be kept floating along like a Winnie-the-Pooh balloon on gusts of sheer fakery? To me, the simple answer is no. The people running things in the USA have tried everything from pervasive accounting fraud to complete opacity in trading procedures to looting the republic's future. The consensus trance of "recovery" makes itself manifest through every conduit of public utterance - cable TV news, The New York Times, the pronouncements of every last elected official - even though the Gross Domestic Product index omits items such as food, gasoline, and heating oil in its calibrations, while heaping on fictional "hedonic" adjustments.  What's left of the American economy is a web of financial rackets divorced from the production of real wealth, dependent on an elaborate computerized three-card-monte edifice of swindling. Those groans and creakings you hear are the agonies of this ediface swaying under its burden of lies, while underneath it the ground of history shifts.   A secondary outstanding question - I get it all the time - is whether the people running things know how fake this picture is, and how horrifying the view behind-the-curtain is.

Hanson on the Technological Singularity -- Robin Hanson of GMU talks with EconTalk host Russ Roberts about the idea of a technological singularity--a sudden, large increase in the rate of growth due to technological change. Hanson argues that it is plausible that a change in technology could lead to world output doubling every two weeks rather than every 15 years, as it does currently. Hanson suggests a likely route to such a change is to port the human brain into a computer-based emulation. Such a breakthrough in artificial intelligence would lead to an extraordinary increase in productivity creating enormous wealth and radically changing the returns to capital and labor. The conversation looks at the feasibility of the process and the intuition behind the conclusions. Hanson argues for the virtues of such a world.

Is a Tainter-Style Collapse in Our Future? - Gloom, doom, and apocalyptic musings seem to be a permanent feature of modern society. But we’ve had more in the way of dystopian movies and talk of imperial decline in the last ten years than in the preceding ten. Quite a few readers have taken to mentioning Joseph Tainter’s classic, The Collapse of Complex Societies, in comments, a sign it might be worth discussing formally.Tainter, an archeologist, developed his thesis out of his considerable dissatisfaction with prevailing collapse theories, which he duly enumerates and shreds. His argument is straightforward:

    • 1. Human societies are problem solving organizations
    • 2. Sociopolitical systems require energy for their maintenance
    • 3. Increasing complexity carries with it increased cost per capita
    • 4. Investment in sociopolitical complexity often reaches a point of declining marginal returns

At Least 40% of LME Copper Shorts in March Held by One Company, Data Show - One unidentified company held a short position in copper for March delivery on the London Metal Exchange that equaled at least 40 percent of the contract’s open interest, according to bourse data.  The short position, which could be a bet on price declines or a hedge against a long position elsewhere, was dated Dec. 30, according to the exchange. Open interest for March amounts to 42,856 lots (1.1 million metric tons), the most in any copper futures contract. As of the same date, one unnamed firm held 50 percent to 79 percent of LME copper stockpiles, bourse data show.  “The large short position is possibly the dominant stockholder’s hedge,” “I can’t imagine they would leave such a big exposure uncovered.”

Rise In Copper Prices Causes Increase In Theft - While gold prices have skyrocketed, a less glamorous metal has also gone way up in price and become the target of thieves across the state. Copper, which is used in plumbing and wiring, is over four dollars a pound and Cedar Rapids police spokesperson Cristy Hamblin says thieves have been bold about stealing it. “They know no boundaries, because in 2010 we’ve had just a very sharp, almost triple the amount, we’ve had 73 reported cases of copper theft,” Hamblin says. Copper thieves were brazen enough to cut part of the wiring at the Vineyard Church of Cedar Rapids while a church service was underway. Sergeant Hamblin says abandoned homes have typically been a target of copper thieves, but she says the recent thefts have gone well beyond that. “They are in new construction sites or in businesses as well,” Hamblin says, “and they’re stealing spools of copper, or they’ll go into the businesses you know and steal things that are made of copper. But with that sharp increase in the price of copper, we’re seeing just a vast increase.”

Copper Theft - The Growing Epidemic - Skyrocketing prices for metals, especially copper, have made what was once a minor nuisance into a major problem costing over $1 billion/year according to the US Dept of Energy. Pipes, wires, cables, gutters, flashing are being torn from walls and buildings. Roof-top air units are being stripped of their copper coils. In addition, the collateral damage done ripping pipes and wires out of walls far exceeds the actual cost of the copper stolen. Thieves target copper in vacant buildings or difficult to secure areas,often without power or communication lines including:

  • Construction Sites - theft of copper plumbing, wiring, generators and materials.
  • Vacant Buildings - theft of copper plumbing, wiring, air conditioners.
  • Communications Towers - theft of copper busbars, wiring and cables.
  • Electrical Sub-stations - theft of copper grounding bars and cables.
  • Foreclosed Properties - theft of copper plumbing, wires, sprinkler systems, and cooling systems

China says will take 300 years to turn back deserts - At the current rate of progress it will take 300 years to turn back China’s advancing deserts, a senior official said on Tuesday, bemoaning the low level of investment in fighting a serious environmental problem. Over a quarter of China’s land area is covered by desert, or land which is turning into desert in which soil loses its fertility, putting crops and water supplies at risk for the world’s second-largest economy.“The area of land being desertified is enormous, and prevention work most hard,” Liu Tuo, head of China’s anti-desertification efforts, told a news conference.

Chinese Intellectual Property Acquisition Tactics Exposed - "In an interview published in, Chinese rail engineers gave a detailed account of the history, motivation, and technologies behind the Chinese high-speed rail system. More interestingly, they blatantly revealed the strategies and tactics used in acquiring high-speed rail tech from foreign companies (Google translation of Chinese original). At the beginning, China developed its own high-speed rail system known as the Chinese Star, which achieved a test speed of 320km/h; but the system was not considered reliable or stable enough for operation. So China decided to import the technologies. The leaders instructed, 'The goal of the project is to boost our economy, not theirs.' A key strategy employed is divide-and-conquer: by dividing up the technologies of the system and importing multiple different technologies across different companies, it ensures no single country or company has total control. 'What we do is to exchange market for technologies. The negotiation was led by the Ministry of Railway [against industry alliances of the exporting countries]. This uniform executive power gave China huge advantage in negotiations,' said Wu Junrong, 'If we don't give in, they have no choice. They all want a piece of our huge high speed rail project.' For example, [Chinese locomotive train] CRH2 is based on Japanese tech, CRH3 on German tech, and CRH5 on French tech, all retrofit for Chinese rail standards. Another strategy is buy-to-build. The first three trains were imported as a whole; the second three were assembled with imported parts; subsequent trains contain more and more Chinese made parts."

Invented threats - ANOTHER day, another scary story about how China is taking over the world. This latest one is about how China is (gasp) becoming more focused on innovation. That’s supposed to be a problem because economic leadership derives from the ability to innovate. And there appears to be a large-scale industrial policy underway, designed to turn the Chinese into innovators. In 2009, about 300,000 applications for utility patents were filed in China, roughly equal to its total of invention patents, which have been growing slightly faster than utility filings in recent years. But even if just half of China’s total filings in 2015 are for invention patents, the national plan calls for a huge leap, to one million, by 2015. By contrast, patent filings in the United States totaled slightly more than 480,000 in the 12 months ended in September, according to the patent office. China’s patent surge has been evident for years. In October, Thomson Reuters issued a research report, forecasting that China would surpass the United States in patent filings in 2011. “It’s happening even faster than we expected,”

China Dec Manufacturing Eases On Tightening Moves - A survey says China's manufacturing boom eased off slightly in the last month of the year, reflecting tightening policies taken by authorities to keep inflation in check. The state-affiliated China Federation of Logistics and Purchasing said Saturday that its purchasing managers index, or PMI, dipped to 53.9 last month from 55.2 in November and 54.7 in October.  It was the first decline in five months but the 22nd straight month that the reading has stayed above 50, the benchmark for expansion. The survey covered 820 companies across a range of industries and is an indicator of future trends.

Beijing Residents Rush to Register New Cars to Meet China's Quota System - Residents in Beijing, the city ranked as having the world’s worst traffic, rushed to apply for new vehicle licenses under a quota system started Jan. 1 as China’s government seeks to ease the congestion.  A total of 53,549 applications were made on the first day of the year, more than double the number of license plates to be available each month, the Beijing News reported yesterday.  The government said on Dec. 23 it would set a monthly quota of 20,000 new vehicle licenses in the Chinese capital.  China surpassed the U.S. last year to become the world’s biggest car market as tax cuts and government subsidies aimed at spurring auto sales fueled a surge in traffic. Beijing tied with Mexico as having the world’s worst traffic, according to a survey by International Business Machines Corp. last year.

China's war on inflation a threat to global recovery - China's Premier Wen Jiabao has vowed to step up the country's fight against inflation, increasing the likehood of further interest rate rises that could threaten the strength of a global economic recovery. Mr Wen's pledge to curb inflation came as new government figures revealed that measures already taken are leading to a slowdown in manufacturing growth.Chinese inflation is at the highest rate for more than two years – 5.1pc – sparking fears in the government of social unrest as the price of food soars. China raised interest rates for the second time in three months on Christmas Day, lifing them 0.25 to 5.81pc.
Policymakers have also raised the amount of money banks must keep in reserve in an effort to restrain bank lending that has powered the economy but also driven up prices. However, a clampdown by China on inflation threatens to slow the growth of the domestic and global economy, which has been heavily reliant on the strength of the world's second largest economy.

World on red alert over China's inflation - China could be hit by inflation of 7pc to 8pc over the next two months, panicking Beijing's policy-makers into dramatically raising interest rates, economists have warned. The prospect of at least four further interest rate rises in the world's second-largest economy is likely to alarm global markets, which tumbled in shock at China's decision to raise rates on Christmas Day. However, inflation has become the central concern for the Communist Party, which is struggling to contain growing outrage in the People's Republic over rising prices. "If you look at the sequential growth over the last two months, inflation is rising at double digits. In the very worst-case scenario, if Beijing does not take action, we could see double-digit inflation this year," At stake is the future of the global economy, according to Andy Xie, the former China economist at Morgan Stanley. Writing in Caixin, a Chinese magazine, he said that the two most likely candidates to trigger the next financial crisis are either the US's sovereign debt or China's inflation.

It's only a matter of time before China's housing bubble bursts - Despite a multitude of measures, many of them considered decisive and effective, taken by the central government to curb wild property prices, the overheating Chinese home market shows few signs of cooling-off.  Property developers everywhere are competing to break records for the highest land-bidding prices, hence, we see a series of "kings of the land," referring to lots acquired at the highest bid.What's more, the fever for land acquisition is spreading from the major cities, mostly coastal ones, to medium and small cities. The masses are puzzled.

Yet Another Sign Of How China Is Twisting Itself In Knots To Beat Inflation...At some point the Chinese economy will go bust, but before that happens something else will happen: Beijing will go further and further down the rabbit hole of trying to stamp out inflation, and adjust tiny imbalances, in a failing effort to continue the success of a planned economy with an artificially cheap currency.We just got another sign of that. According to WSJ, the country is implementing all kinds of new anti-monopoly, anti-collusion, and price-setting regulations in the vain hope that it can beat inflation by fiat. Under the new rules, competitors will be banned from reaching agreements to fix prices, while business partners will be barred from agreeing to minimum resale prices, the NDRC said. Companies that have a so-called dominant market share will be barred from charging "unfairly high prices" for their goods, and from paying "unfairly low prices" for inputs. Various anticompetitive pricing strategies adopted by companies with a dominant market share will also be prohibited, including pricing goods below their production cost, using special rebates to force out competitors and discriminatory pricing between similar customers.

China growth may be cooling: Credit Suisse - Dong Tao, the chief economist for Asia excluding Japan at Credit Suisse in Hong Kong, said the purchasing managers’ index for December, released by the China Federation of Logistics and Purchasing on Saturday, backs the view that the mainland economy peaked in the third quarter of last year. “We think that gross domestic product growth has showed its strongest momentum on a sequential quarter-on-quarter basis for the time being, while the year-on-year growth pace should decelerate from previous quarters, Tao said. He said the recent round of increases in bank’s reserve requirement ratios, interest rates hikes and tighter controls over bank lending in December had been effective in instilling a more cautious sentiment among China companies.

Overheating East to falter before the bankrupt West recovers - Policy levers in the US, Europe, and Japan remain set on uber-stimulus with the fiscal pedal pressed to the floor and rates near zero everywhere, yet OECD industrial output has not regained the peaks of 2007-2008 by a wide margin. Leading indicators are tipping over again. We are one shock away from a liquidity trap.  The East-West trade and capital imbalances that lay behind the Great Recession are as toxic as ever. Surplus states are still exporting excess capacity with rigged currencies -- the yuan-dollar peg for China and, more subtly, the D-Mark-Latin peg within EMU for Germany.  Dangerously high budget deficits of 6pc, 8pc, or 10pc of GDP in countries with dangerously high public debts near 100pc may have prevented an acute depression, but they have not prevented the weakest rebound since World War Two, and they cannot continue, whatever the assurances of New Keynesians and pied pipers of debt.

Feldstein: U.S., China Trade Gap on Path to Resolution - Domestic imperatives rather than the tinkering of political leaders will likely close the trade gap between the United States and China, a top economist said Friday. Harvard University economic professor Martin Feldstein made the case that a series of forces already in play will help do what political leaders have failed to accomplish, which is put in place a path to help rebalance a relationship that sees a massive outflow of dollars from the U.S. into Chinese hands. This imbalance is a major driver of America’s overall trade deficit, and become a major political problem complicating the two nations’ relationship. Feldstein’s outlook will strike many as overly optimistic, given that the U.S. and others have been working with little apparent success to induce the Chinese to allow the yuan, which is currently pegged to the dollar, to rise relative to the greenback. While Chinese authorities have allowed a very modest appreciation of late, many have said what has happened is insufficient to redress a situation almost all view as unsustainable.

Think again: America decline -The Chinese challenge to the United States is more serious for both economic and demographic reasons. The Soviet Union collapsed because its economic system was highly inefficient, a fatal flaw that was disguised for a long time because the USSR never attempted to compete on world markets. China, by contrast, has proved its economic prowess on the global stage. Its economy has been growing at 9 to 10 percent a year, on average, for roughly three decades. It is now the world's leading exporter and its biggest manufacturer, and it is sitting on more than $2.5 trillion of foreign reserves. Chinese goods compete all over the world. This is no Soviet-style economic basket case.

China BRICS up Africa - There can be no two opinions that Beijing made a smart move. Its decision to anoint South Africa as a new member of BRIC (Brazil, Russia, India and China) will be projected as based on economic grounds, but there are any number of other dimensions.  The choice of South Africa can even be spotted as a gutsy move to disprove a prediction from Jim O'Neill, chairman of Goldman Sachs Asset Management and guru of the BRIC concept, that Nigeria was better placed to make the grade.  The next BRIC summit - or BRICS as it will now be known - is scheduled for April in Beijing, where for the first time South Africa will participate as a member of the group.  Arguably, why South Africa? In the size of its economy, growth rate or population, South Africa lags far behind the BRIC average.

In the grip of a great convergence - Convergent incomes and divergent growth – that is the economic story of our times. We are witnessing the reversal of the 19th and early 20th century era of divergent incomes. In that epoch, the peoples of western Europe and their most successful former colonies achieved a huge economic advantage over the rest of humanity. Now it is being reversed more quickly than it emerged. This is inevitable and desirable. But it also creates huge global challenges.  Rapid convergence on the productivity of advanced western economies is not unprecedented in the era following the second world war. What is unprecedented this time is not convergence, but the scale. Suppose China were to follow Japan’s path during the 1950s and 1960s. Then it would still have 20 years of very fast growth in front of it, reaching some 70 per cent of US output per head by 2030. At that point, its economy would be a little less than three times as large as  that of the US, at PPP, and larger than that of the US and western Europe combined. India is further behind. At recent rates of growth, India’s economy would be about 80 per cent of that of the US by 2030, though its gross domestic product per head would still be less than a fifth of US levels. China is today where Japan was in 1950, relative to US levels at that time. But its output per head is far higher in absolute terms, since US levels have themselves risen threefold. Today, China’s real GDP per head is roughly where Japan’s was in the mid-1960s and South Korea’s in the mid-1980s. India’s are where Japan was in the early 1950s and South Korea in the early 1970s.

Singapore Economy Rebounds on Manufacturing Surge - Singapore’s growth rebounded last quarter as manufacturing surged, capping the biggest annual increase in output since independence in 1965. Stocks rose.  Gross domestic product rose an annualized 6.9 percent in the three months through Dec. 31 from the previous quarter, when it contracted a revised 18.9 percent, the trade ministry said in a statement today. The median forecast of eight economists surveyed by Bloomberg News was for a 9.4 percent expansion.  Singapore is on course to be the world’s second-fastest growing economy, adding to inflation pressures that have prompted policy makers to allow faster currency gains and take steps to cool the property market. The expansion may signal Asia will in 2011 sustain an outperformance over developed markets hampered by Europe’s sovereign credit woes and U.S. unemployment that remains above 9 percent.

Currency Intervention by Chile Central Bank - Central Bank of Chile plans to buy $12 billion in the foreign exchange market tomorrow in order to depreciate the peso against the US dollar. Jose De Gregorio, Central Bank President disclosed a plan yesterday to buy $50 million a day from January 5 until February 9, the second times in less than three years. Chile's peso appreciated 17 percent against the US dollar since the end of June 2010, and also against the Australian dollar due to rise in copper prices that boosted the trade prospects in the country, the world's biggest producer of copper. "This is the biggest exchange rate intervention that has been announced in our country," Finance Minister Felipe Larrain told reporters in Santiago. "It seems to us to be a measure that is on the right track and that will have an impact on the exchange rate."

Brazil Moves To Curb Rising Currency - Brazil has made a fresh attempt to keep the lid on its rising currency with new curbs on speculative trading designed to discourage ramping of the real against the dollar.  The move is Brazil’s third since October aimed at discouraging “hot money” from chasing the real higher and so undermining the nation’s competitiveness in the face of a weak dollar.   Brazil was the first country last year to highlight the dangers of “currency wars” and Mr Mantega made it clear on Wednesday that the nation was equally alive to the problem this year. “We’re not going to allow our American friends to melt the dollar,” he said, believing that the US’s $600bn (£388bn) injection into its economy was an unfair attempt to boost exports.  Brazil will force lenders to maintain the reserve deposits in cash – on which they will not earn interest. Aldo Mendes, the central bank’s director of monetary policy, said the new curbs had the potential to trim short positions in the dollar to $10bn from last month’s $16.8bn.

Downward to Stagnation: Wage policies in times of crisis - A new report produced by the ILO, Wage Policies in Times of Crisis, provides evidence on the decline in wage growth during the crisis, and highlights the particularly severe reductions that have occurred in industrialized countries. The world’s salaried employees suffered a decline in real wage growth from 2.2 percent in 2007 to 0.8 percent in 2008 and 0.7 percent in 2009. Real wages fell in 12 of 28 industrialized countries in 2008, including Australia (-0.9%), Germany (-0.4%), Italy (-0.7%), Japan (1.9%), Mexico (-2.6%), S. Korea (-1.5%) and the U.S (-1.0%).  And although some countries recovered in 2009 (in some cases due to the fall in inflation), real wage growth continued to be negative in Germany (-0.4%), Mexico (-5.0%), Japan (-1.9%), and S. Korea (-3.3%), whilst France (-0.8%), the U.K (-0.5%), and Russia (-3.5%), also entered into negative territory.  Moreover, these figures likely over-represent real wage growth, as job losses have been more concentrated on low-wage workers, who by no longer working are no longer considered in the sample. By 2009, the ranks of the unemployed had reached 210 million, a global unemployment rate of 6.4 percent.

India’s Microfinance Industry Fuels Mass Suicides - Most of us remember Muhammad Yunus’s 2006 Nobel peace prize for microfinance, small loans to start businesses, with extremely low default rates. Now it looks like this industry has done what many American financiers have done, lent more than people can ever pay back, in order to make greater profits. In India and other parts of Asia, however, cultural factors mean that over indebtedness causes more than just sadness and bankruptcy. This lending without regard to ability to repay has causes massive suicide on the part of borrowers. This is particularly insidious, given that- unlike home loans or payday loans in the U.S. -  the whole point of microfinance is to help the poor start businesses.

Suicide by Pesticide: India's Hidden Climate Change Catastrophe - Over the past decade, as crops have failed year after year, 200,000 farmers have killed themselves. "He'd been unhappy for a month, but that day he was in a heavy depression. I tried to take the tin away from him but I couldn't. He died in front of us. The head of the family died in front of his wife and children - can you imagine?" The death of Mr Naik, a smallholder in the central Indian state of Andhra Pradesh, in July 2009, is just another mark on an astonishingly long roll. Nearly 200,000 Indian farmers have killed themselves in the past decade. Like Mr Naik, a third of them choose pesticide to do it: an agonizing, drawn-out death with vomiting and convulsions. The death toll is extrapolated from the Indian authorities' figures. But the journalist Palagummi Sainath is certain the scale of the epidemic of rural suicides is underestimated and that it is getting worse. "Wave upon wave," he says, from his investigative trips in the states of Andhra Pradesh and Maharashtra. "One farmer every 30 minutes in India now, and sometimes three in one family." Because standards of record-keeping vary across the nation, many suicides go unnoticed. In some Indian states, the significant numbers of women who kill themselves are not listed as "farmers", even if that is how they make their living.

Monsanto connected to at least 200,000 suicides in India throughout past decade When India's seed economy was forced by the World Bank to become globalized in the late 1990s, economic conditions within the nation's agricultural sector almost immediately took a nosedive for the worst. Much of the common Indian seed stock turned from saveable heirloom varieties to patented, genetically-modified (GM) varieties that expire after a single use and require the application of expensive and cumbersome pesticides in order to grow, which plunged many Indian farmers into abject poverty. And nearly 25 years later, the devastating effects of this corporate takeover of Indian agriculture has resulted in countless suicides, 200,000 of which have occurred just in the past ten years. According to a recent report in the U.K. Independent, many Indian farmers have lost their farms and land over the past several decades. One of the primary causes is failed investments by farmers that banked heavily on the success of newly-introduced GM crops. Multinational biotechnology giants like Monsanto and Syngenta promised farmers that GM crops would bring incredible yields at lower costs, and save the country from poverty. But in reality, many of the crops ended up failing, leaving millions of Indian farmers with absolutely nothing.

Disasters and the traps of poverty and wealth - Who do we blame for the earthquake in Haiti earlier in the year on January 11th that killed around a quarter of a million people? Is the answer that no one is to blame because the disaster was categorized as natural? Was human agency uninvolved? There is an old and true saying among seismologists – earthquakes don’t kill people, buildings kill people. Virtually the only cause of death in an earthquake is the massive trauma caused by building collapse when homes, businesses and schools transform from familiar sunny places of comfort to dark alien tombs. You need an earthquake to have an earthquake disaster, that’s the natural part of it but you equally must have buildings and buildings are man-made. So if buildings kill people and people build buildings then do people really kill people in earthquakes? Could proper action have avoided disaster just like in the Gulf of Mexico? Failure to enforce building codes, that’s the answer! That’s what we always hear. The Earth writhed and the buildings killed because they were not built to code. It is equally easy to blame corruption, even neglect and malfeasance or regulatory failure in The Gulf of Mexico too. But the Earth writhed there as well. It pushed back hard at the drillers as they tried to complete the well and move on to the next.

Africa: One of the World’s Fastest-Growing Regions - MUCH has been written about the rise of the BRICs and Asia’s impressive economic performance. But an analysis by The Economist finds that over the ten years to 2010, six of the world’s ten fastest-growing economies were in sub-Saharan Africa. On IMF forecasts Africa will grab seven of the top ten places over the next five years (our ranking excludes countries with a population of less than 10m as well as Iraq and Afghanistan, which could both rebound strongly in the years ahead). Over the past decade the simple unweighted average of countries’ growth rates was virtually identical in Africa and Asia. Over the next five years Africa is likely to take the lead. In other words, the average African economy will outpace its Asian counterpart.

Japan population shrinks by record in 2010 – Japan's population fell by a record amount last year as the number of deaths climbed to an all-time high in the quickly aging country, the government said Saturday. Japan faces a looming demographic squeeze. Baby boomers are moving toward retirement, with fewer workers and taxpayers to replace them. The Japanese boast among the highest life expectancies in the world but have extremely low birth rates. Japan logged 1.19 million deaths in 2010 — the biggest number since 1947 when the health ministry's annual records began. The number of births was nearly flat at 1.07 million. As a result, Japan contracted by 123,000 people, which was the most ever and represents the fourth consecutive year of population decline. The top causes of death were cancer, heart disease and stroke, the ministry said. Japanese aged 65 and older make up about a quarter of Japan's current population. The government projects that by 2050, that figure will climb to 40 percent.

Contrary to the NYT’s Assertion, Japan Does Not “Face a Looming Demographic Squeeze” - The article tells readers that the share of the population over 65 is projected to rise from 25 percent in 2010 to 40 percent in 2050. Given that roughly 20 percent of the population is under age 20, this implies that the current ratio of people ages 20-65 to people over age 65 is approximately 2.2 to 1. Assuming the under 20 portion falls to 15 percent of the population by 2050, in that year the ratio will be 1.4 to 1. If productivity growth averages just 1.5 percent annually (it has been averaging more than 2.0 percent in the U.S. over the last 15 years), then output per worker will be more than 80 percent higher in 2050 than it is today. If the average retiree currently consumes 70 percent as much as a prime age worker, then this increase in productivity would allow retirees in 2050 to enjoy a 50 percent rise in living standards above current levels, while still leaving workers almost 30 percent better off.

The Japan Myth - Policymaking is often dominated by simple “lessons learned” from economic history. But the lesson learned from the case of Japan is largely a myth. The basis for the scare story about Japan is that its GDP has grown over the last decade at an average annual rate of only 0.6% compared to 1.7 % for the US. The difference is actually much smaller than often assumed, but at first sight a growth rate of 0.6 % qualifies as a lost decade. According to that standard, one could argue that a good part of Europe also “lost” the last decade, since Germany achieved about the same growth rates as Japan (0.6%) and Italy did even worse (0.2 %); only France and Spain performed somewhat better.But this picture of stagnation in many countries is misleading, because it leaves out an important factor, namely demography.

Why do some rich economies grow faster than others? - Between 1973 and 2007 the twenty rich nations in the following chart averaged a 2% per year growth rate of per capita GDP. But some of them grew faster than others. Why? One reason is “catch-up”: partly because they could borrow technology from the leaders, countries that began with a lower per capita GDP tended to grow more rapidly. The growth rates shown here adjust for this. What else matters? The list of hypothesized causes is lengthy. It includes investment, consumption, education, natural resources, macroeconomic policy, levels of taxation, welfare state size and structure, industrial policy, government regulations, the distribution of income, interest group organization, corporatist concertation, the partisan complexion of government, interest group-government coherence, cooperation-promoting institutions, and institutional coherence, among others.

The Euro and the European Project – Krugman -Some readers have chimed in that the euro is essentially a political rather than economic project. Well, it’s both; that has been the European strategy ever since the Schuman declaration. The point is to deliver a series of economic integration plans that do double duty: they’re economically productive, but they also create “de facto solidarity”, moving Europe closer to political union. For 60 years, this strategy has been highly successful. Europe is one of the great, inspiring stories of the modern world, maybe of all time: peace, prosperity, and democracy flourishing where once there were minefields and barbed wire. But: the strategy depends on each move toward economic integration being both a political symbol and a good economic idea. That was clearly true of coal and steel, the common market, the eurosausage, and so on. It is, however, by no means clear that the euro passes that test. Europe’s limited labor mobility (although there’s more than there used to be) and, crucially, lack of fiscal integration makes a common currency a dubious proposition at best.

A year of truth for the eurozone - Estonia has joined the eurozone as its 17th member; decision has few new economic implications, but opposition to euro membership has been rising constantly in the country; Frankfurter Allgemeine expresses the hope that Germany would have an ally in Estonia for support of a break-away northern European monetary union; Poland and Czech Republic reiterate commitment not to join the eurozone; Merkel and Sarkozy appeared to have co-ordinated their New Year’s addresses: both speak in solemn terms to do whatever it takes to save the euro; Wolfgang Schäuble rejects Eurobond, and says bond spreads were a useful device to maintain fiscal discipline; Wolfgang Münchau argues that the commitment to do whatever it takes to save the euro will be tested in 2011; Belgian and Italian bond spreads have been widening significantly since the end of last year; Frankfurter Allgemeine, meanwhile, says that Angela Merkel may have changed her mind on Axel Weber as president of the ECB.[more]

ECB Balance Sheet Grew 5.2% In 2010 To EUR2.004 Trillion At Year End - The balance sheet of the European Central Bank and its 16 national central banks expanded by 5.2% last year to stand at EUR2.004 trillion by the end of the year, according to the bank's consolidated financial statements, released Wednesday. The figures summarize a year in which the euro zone's sovereign debt crisis repeatedly frustrated the bank's efforts to unwind the emergency measures it had used to stem the financial crisis in 2008 and 2009. Some observers had expected the ECB to go back to rationing its liquidity in 2010, but first the Greek then the Irish debt crises forced it to keep to abandon the "exit" from its non-conventional support measures, notably its policy of "fixed-rate, full allotment" at its regular lending operations. Under this system, banks can essentially borrow as much as they want against the required collateral, thus ensuring that even banks which are basically insolvent wouldn't collapse and cause a wave of bank defaults in the European financial system.

Austerity may not be enough to save the EU's weakest links…Analysts at the credit ratings agency Moody’s Analytics have issued a stark warning that even with budget deficit programmes and savage cuts in public spending across the eurozone some of the weaker peripheral nations will still default on their debts, requiring a "restructuring".  They say: "It is hard to escape the conclusion that austerity will not end the debt crisis, and that restructuring may be necessary, as Germany's Chancellor Merkel has indicated."  Arguing that Europe is the "weakest link" in the global economy, they say that the fortunes of Asia and the West will diverge further next year, and that the United States' prospects have "improved only somewhat" with the passage of the recent budget deal in Congress.  But China also represents a threat to growth around the world.  "Although China will continue rapid growth, it faces downside risks from inflation and a real-estate market correction. Despite these problems, our baseline outlook for recovery assumes Europe and China will go through orderly restructurings that will prevent further financial panic."

Armageddon Can Wait, by Kenneth Rogoff - After three years of huge, crisis-driven exchange-rate swings, it is useful to take stock both of currency values and of the exchange-rate system as a whole. And my best guess is that we will see a mix of currency wars, currency collapses, and currency chaos in the year ahead – but that this won’t spell the end of the economic recovery, much less the end of the world. Let’s start by acknowledging that the modern system of floating exchange rates has, on the whole, acquitted itself remarkably well. True, given complex risk factors and idiosyncratic policy preferences, it has been particularly challenging of late to divine the logic underlying big exchange-rate swings. For example, even though the United States was at the heart of the financial crisis, the dollar initially soared. But, even if exchange rates work in mysterious ways, their cushioning effect is undeniable. In hindsight, these exchange-rate swings mirrored the initial collapse and subsequent rebound in global trade, helping to mitigate the recession.

The January test for the eurozone - Portugal was on Wednesday forced to pay big interest rate premiums to borrow from the markets in the country’s first test of sentiment of the new year. Lisbon had to pay 3.68 per cent in yields for six-month loans, a jump from 2.04 per cent compared with a similar sale in September and 0.59 per cent a year ago. One strategist said: “This is ominous. Portugal is heading towards a bail-out as the country’s borrowing costs are continuing to rise. This is unsustainable.” The article is here, there is more to come in what will be an active month for European bond issues.

Portugal Pays Higher Rate to Sell Debt - Portugal successfully raised euro500 million in a Treasury bill sale Wednesday but had to pay sharply higher interest to attract investors, fueling fears its borrowing costs could spiral and force it to follow Greece and Ireland in seeking a multibillion-euro bailout. The auction showed that the debt crisis that plagued Europe all last year is still very much around despite efforts to calm markets with a new bailout fund to backstop governments that get into trouble. Though debt-laden Portugal is one of the eurozone's smallest economies, representing less than 2 percent of the bloc's gross domestic product, Europe may need to assist Portugal to prevent the continent's financial crisis spreading to much bigger Spain.

Europe Crisis Drives Banks to Sell Bonds Before Sovereigns - Deutsche Bank AG and Rabobank Nederland led European lenders selling U.S. bonds yesterday ahead of euro-area countries, beset by the sovereign debt crisis, that need to raise $1.1 trillion this year.  Germany’s biggest bank issued $1 billion of five-year notes in its first dollar-denominated sale since March, while Rabobank sold $2.75 billion of securities, according to data compiled by Bloomberg. European lenders offered $7.25 billion of bonds yesterday, driving corporate sales to $21.2 billion, the most since September 2009, while today saw the year’s first senior bank bonds in euros.  European banks are competing for investors after the region’s crisis drove borrowing costs for its most indebted governments to the highest on record. For financial companies, relative yields on dollar-denominated debt are at the tightest since May, while spreads on bonds in euros are about the widest since July

EU's Bailout Bond Three Times Oversubscribed - The European Commission's bond issue for the bailout fund for Ireland was three times oversubscribed, the European Union's executive body said Wednesday.  "This morning, the commission started a €5 billion ($6.65 billion) issuance in light of the economic situation in Ireland," EU spokeswoman Amelia Torres said. "There were three times as many requests to take it up as we could satisfy." The bond is a key test of investor support for the region's new sovereign-bailout mechanism, with proceeds earmarked for the EU's emergency funding program, the European Financial Stabilisation Fund

Spanish inflation rises to 3% - Despite the recession, Spain still manages an inflation rate that is more than 1% higher than Germany’s; Ireland has been suffering a massive flight of deposits in 2010, as savers shifted their funds elsewhere in the eurozone; the cash for clunkers scheme has ended in France, as the industry is staring down into an abyss; there is some good news from the eurozone as well, as the manufacturing purchasing managers index reaches a new cyclical high; Lucas Zeise says 2011 is going to be a good year – the problem is that this will postpone bank resolution; the Bavarian CSU opposes Wolfgang Schäuble’s plans for a political union; bond spreads, meanwhile, have been extraordinarily volatile in recent days, with Spanish and Irish rising massively overnight. [more]

Rising oil prices send eurozone inflation above ECB’s target - Eurozone inflation rises to 2.2% in December, driven entirely by rising commodity prices; ECB unlikely to react to the increase, but Yves Mersch is already warning that stimulus policies must end now; inflation likely to rise further as oil prices have since continued to increase; EIA warns that rise in oil prices could lead to a significant slowdown in OECD growth; Spanish unemployment falls in December, but the underlying trend remains negative; Sarkozy’s UMP ponders abolition of 35-hour week; Greek finance minister says consolidation plan is progressing, but large scale reforms are very tough to implement; eurozone bond markets remain volatile, as Irish spreads shoot through the roof; Ken Rogoff warns that eurozone debt crisis will take years to play out; Wolfgang Munchau, meanwhile, says economic liberals will need to embrace global macro-coordination, or lose the battle. [more]

Irish Bailout Begins as Europe Sells Billions in Bonds - The European Union began issuing bonds on Wednesday to finance its rescue fund for Ireland, even as Portugal was required to pay more to sell short-term debt. At the same time, Europe got a vote of support from China when Li Keqiang, the deputy prime minister, reaffirmed Beijing’s commitment to continue buying Spanish bonds. As a step toward mastering the crisis, one of Europe’s new bailout agencies took its first foray into the market Wednesday to help pay for the 85 billion-euro ($112 billion) Irish rescue.  The European Financial Stabilization Mechanism, an agency set up to finance rescues of embattled governments, issued five billion euros in five-year bonds, carrying an interest rate of 2.59 percent. That was well above the 1.85 percent on comparable bonds of Germany, the largest euro zone economy.

U.S. taxpayers will contribute $5 billion to Irish bailout - As Ireland is set to receive its first  $7 billion in IMF funds this week it has been revealed that U.S. taxpayers will contribute $5 billion to the bailout. $30 billion of the Irish bailout is being given by the the International Monetary Fund.  The U.S. contributes 17 per cent of the IMF budget making its contribution to the bailout about $5 billion. In addition US institutional investors hold about $25 billion in Irish assets according to the Switzerland-based Bank for International Settlements.That amounts to about 15 per cent of the total $170 billion invested in Irish banks by foreign lenders.If Ireland were to default  then the US taxpayer and institutional investors would be hard hit.Repudiating the debt is exactly what international financier George Soros believes that the next Irish government will do however.

Spanish Bank Stocks Drop on Funding Cost, Led by BBVA - BBVA, which yesterday issued 1.5 billion euros ($2 billion) of three-year covered bonds at a spread of 225 basis points over swaps, fell 1.3 percent to 7.50 euros in Madrid after declining as much as 4.5 percent during the session. Banco Santander SA, which sold five-year covered bonds today, fell 0.7 percent to 7.94 euros, paring an earlier drop of as much as 4.5 percent.  Raising money is getting more costly for banks in indebted euro nations as investors demand a higher return for taking the risk of holding their debt. Ireland in November followed Greece by seeking a bailout, while investors remain concerned about the growing debt burden in Portugal, Spain and Italy.  “The signals from the bond market are not very encouraging,”

EU Proposes Bank Failure Plan, European Bond Spreads Increase - Here is a look at European bond spreads from the Atlanta Fed weekly Financial Highlights released today (graph as of Jan 4th):  From the Atlanta Fed:  Greek, Irish, and Portuguese bond spreads (over German bonds) continue to be elevated, rising since the December FOMC meeting. Since the December FOMC meeting, the 10-year Greek-to-German bond spread has widend by 105 basis points (bps) (from 8.85% to 9.90%) through January 4.  Similarly with other European peripherals’ spreads, Portugal’s is 38 bps higher, and Ireland’s spread is 88 bps higher.  Note: the Atlanta Fed has added Belgium. The bond yields have increased today. The Portugal 10 year is at 6.96%, the Ireland 10-year bond yield is over 9%, and the Greece 10-year bond yield is at a record 12.64%.

EU Proposes Plan for Bank Failure The European Union is proposing an areawide framework for confronting bank and investment-firm failures that urges bondholders to share the burden.  The EU executive arm, the European Commission, Thursday released a 100-plus page consultation paper that aims to abolish the excuse that a bank is too big to fail. The paper, which is open to public comments until March 3, asks whether bank bondholders should share in paying for future bailouts and seeks to give greater authority to national regulators over bank leadership and business strategies when a country's economic stability is at risk.  [A] diplomat added: "The overriding objective is to make sure creditors bear the appropriate share of losses of a failing bank and these aren't immediately passed along to taxpayers."

Portuguese, Spanish Bonds Decline Amid Debt-Auction Speculation - The extra yield investors demand to hold Portuguese securities rather than benchmark German bunds widened to the most in a month as the IGCP debt office announced the sale of 2014 and 2020 debt, scheduled for Jan. 12. Belgian bonds tumbled after the nation’s political leaders failed to restart seven- party negotiations to form a government. German bunds rose. “The underlying story behind this slide in Portuguese government bonds is supply-related,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London, who said he had heard speculation about the Portuguese sale before it was announced. “Next week we will keep on running at full steam in the primary market with supply from Spain and Italy,” he said. Portugal is raising taxes and cutting wages to convince investors it can narrow its budget gap after the Greek debt crisis led to a surge in bond yields for euro nations last year. The Portuguese government said today it met its target for a budget deficit of 7.3 percent of gross domestic product in 2010.

China helps take pressure off euro - Spain, Portugal and Greece -- three of the eurozone's most financially shaky members -- in recent months have touted a lifeline thrown to them by China: a promise to buy these countries' embattled bonds.The pledges from the government in Beijing temporarily took some pressure off European debt markets, but China has been quiet on how much money it will actually invest. What is clear is that China has an immense interest in helping the eurozone, its biggest trading partner, out of its current woes.On Wednesday, Spain signed more than a dozen business accords with China, two days after Vice Premier Li Keqiang wrote in daily El Pais that his country will keep on buying Spain's public debt as a show of support. That follows similar deals and promises from China for already bailed-out Greece and Portugal, seen by many as the next weakest link in the 17-country eurozone.

Europe sovereign-debt insurance costs rise further - The cost of insuring Western European sovereign debt against default continued to push into record-high territory on Friday. The spread on the five-year Markit iTraxx SovX Western Europe index, which is made up of debt from 15 Western European countries, rose six basis points to 218 basis points, according to data provider Markit. That means it would now cost $218,000 a year to insure $10 million of debt for five years. Worries about upcoming bond issuance by Portugal contributed to the rise, along with an ongoing political stalemate in Belgium, pushing up CDS spreads for both countries. Meanwhile, the spread on the Markit iTraxx Senior Financials index rose 4 basis points to 200, approaching a level last seen in March 2009, after the European Union late Thursday confirmed it was weighing new rules that could require senior debt holders to take writedowns in the event of future bank failures.

And now the euro slumps – crisis back in full force - Euro down to under $1.30 overnight; bond yields rise in France, Italy and Belgium; Belgian CDS now up to 240bp; KBC has to make large provisions for its Irish exposures; western European government bonds are now riskier than emerging market debt for the first time, according to the iTraxx indices; Belgium’s royal mediator resigned after his proposal were rejected by the Flemish seperatists; two French MPs close to Sarkozy are making far-reaching proposals for eurozone governance reforms, including Eurobond; Sarkozy says 35-hour week is already effectively dead; Michel Barnier has proposed changes to allow bondholder bail-ins at banks; Germany FDP, meanwhile, has postponed the assassination of its leader. [more]

Europe unveils sweeping plans to govern reckless banks - Brussels has called for sweeping powers for regulators to seize failing EU banks, sack board members, and impose haircuts on senior bank debt, aiming to ensure that taxpayers are never again held hostage by high finance.  The European Commission’s "Framework for Bank Recovery and Resolution" draws on Scandinavia’s hard-line approach during their banking crises in the early 1990s. The goal is to end the pattern of moral hazard and mispricing of risk that generated Europe’s debt woes.  "Banks will fail in the future and must be able to do so without bringing down the whole financial system," said Michel Barnier, the internal market commissioner Mr Barnier’s consultation paper will lead to a "legislative proposal for a harmonized EU regime" as soon as this summer, with an insolvency structure in place by 2012.

Eastern Europe is Now a Better Bet than Western Europe - From the Financial Times: Another sign of the dwindling fortunes of the eurozone emerged this week. The economies of western Europe overtook their neighbours in central and eastern Europe as greater default risks....An index that measures the risk of default of 15 western European economies, including Germany, France and the peripheral eurozone countries, has surged higher than a comparable one comprised of countries such as Hungary and Ukraine. These indices, which measure the cost to insure the two geographical groups against default, suggest any hopes that the festive lull could give the eurozone a breathing space appear to be fading, only one week into the new year. The article explains the key reason for the change is both the ongoing deterioration of the Eurozone periphery  and the improving lot of Eastern European countries like Hungary, Ukraine, and Poland.  The Euro itself  has been a big contributor to this mess.  Its existence meant applying a one-size-fits-all monetary policy to vastly different economies. 

PM told risk of new GFC significant  Prime Minister Julia Gillard has been warned by her top officials that the international economy is fragile and the risk of another global financial crisis is significant.  But the recovery in the domestic economy appears to be ''well under way'', the Department of Prime Minister and Cabinet says in its red book, the incoming government brief prepared by its officials. ''The outlook for the international economy is fragile and the risk of another financial crisis emerging remains significant,'' it says.

VAT Increased To 20 Per Cent - The rate of VAT has risen from 17.5 to 20 per cent as the government attempts to cut the UK’s debt. Analysts believe retailers will be significantly affected by the change. Opponents of the increase fear the poorest will suffer the most from the change. The rise was announced in the June budget. The government says boosting tax revenues is necessary to cut the country’s debt levels. Children’s clothing, food and newspapers are not subject to VAT. Online shopping group Kelkoo and the Centre for Retail Research say retailers will be hit hard. Research by the groups suggests sales will drop by £2.2 billion in the first three months following the change. The British Retail Consortium (BRC) warned the change may also shorten the typical January sales period.

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