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

Saturday, February 12, 2011

week ending Feb 12

Fed balance sheet grows to record size in week - The Federal Reserve's balance sheet grew to a record size in the latest week, spurred by its $600 billion bond program aimed at supporting economic growth, Fed data released on Thursday showed. The balance sheet expanded to $2.483 trillion in the week ended February 9 from $2.452 trillion the prior week. The central bank's holding of U.S. government securities jumped to $1.167 trillion on Wednesday from last week's $1.138 trillion total. Meanwhile, the Fed's ownership of mortgage bonds guaranteed by Fannie Mae (FNMA.OB), Freddie Mac (FMCC.OB) and the Government National Mortgage Association (Ginnie Mae) held steady at $965.08 billion in the latest week. The Fed's holdings of debt issued by Fannie, Freddie and the Federal Home Loan Bank system totaled $144.62 billion, unchanged from a week earlier. Meanwhile, the Fed's overnight direct loans to credit-worthy banks via its discount window averaged $48 million a day in the week ended Wednesday, below the $51 average last week.

Fed's Balance Sheet Grows To $2.5T In Latest Week = The U.S. Federal Reserve's balance sheet rose last week to hit $2.5 trillion in assets as the central bank continued to buy billions of dollars worth of government debt in an effort to spur economic growth. The Fed's asset holdings in the week ended Feb. 9 climbed to $2.504 trillion, from $2.473 trillion a week earlier, it said in a weekly report released Thursday.  The Fed's holdings of U.S. Treasury securities rose to $1.167 trillion on Wednesday from $1.138 trillion.  Thursday's report showed total borrowing from the Fed's discount window edged down to $22.11 billion Wednesday from $22.60 billion a week earlier. Borrowing by commercial banks fell to $18 million Wednesday from $36 million a week earlier.  Thursday's report showed U.S. government securities held in custody on behalf of foreign official accounts rose to $3.368 trillion, from $3.359 trillion in the previous week.  U.S. Treasurys held in custody on behalf of foreign official accounts increased to $2.618 trillion from $2.607 trillion in the previous week. Holdings of agency securities, meanwhile, fell to $749.10 billion from the prior week's $751.75 billion

Fed Assets Rise to Record $2.5 Trillion on Purchases Under QE  - The Federal Reserve’s total assets rose by $31.3 billion to $2.5 trillion as the central bank bought Treasury securities as part of the second round of its quantitative easing strategy.  Treasuries held by the Fed rose by $28.9 billion to $1.17 trillion as of yesterday, according to a weekly release by the central bank today. The Fed’s holdings of mortgage-backed securities and federal agency debt were unchanged.  The central bank has purchased $320.7 billion in Treasuries since Nov. 12 under plans to purchase $600 billion of government debt through June and reinvest proceeds from maturing mortgage debt. M2 money supply rose by $39.5 billion in the week ended Jan. 31, the Fed said. That left M2 growing at an annual rate of 3.7 percent for the past 52 weeks, below the target of 5 percent the Fed once set for maximum growth. The Fed no longer has a formal target.  M1 increased $34.2 billion, and over the past 52 weeks M1 rose 9 percent, according to the central bank. The Fed no longer publishes figures for M3.

Lacker Says FOMC Should `Seriously' Re-evaluate Stimulus Plan - Federal Reserve Bank of Richmond President Jeffrey Lacker said the quickening U.S. recovery means policy makers need to take “quite seriously” their commitment to review a $600 billion monetary-stimulus program. “The distinct improvement we’ve seen in the economic outlook since the program was initiated suggests taking that re- evaluation quite seriously,” Lacker said today in a speech in Newark, Delaware. Replying to a question during a panel discussion, he said that while the program shouldn’t end now, a halt may be warranted in coming months if job growth strengthens and gains in consumer spending persist.

Fed’s Lacker: Re-Evaluation of Bond Purchases Needed -The Federal Reserve should seriously reconsider its bond purchases now that the U.S. economy looks stronger, a top Fed official said Tuesday. Richmond Federal Reserve President Jeffrey Lacker said he expects the economy to expand close to 4.0% this year, lifted by robust consumer spending. The Fed official, who tends to worry about inflation and has been skeptical of the central bank’s latest attempt to support the economy by buying government bonds, said he expects consumer prices to remain tame this year despite the rise in commodity prices. He said several indicators point to an improvement in the jobs market, including the decline in January’s unemployment rate.

Bernanke Presents Grim Metrics for Job Growth - The end may be coming into sight for the Federal Reserve’s bond-buying program, even as central bank chief Ben Bernanke warns an ugly jobs market will stick around for a long time to come. The central bank boss told Congress Wednesday that even in an ideal world it will still take years to bring the unemployment rate down to normal levels. Bernanke made his comments as financial markets fret about a commodity-driven surge in inflation, and as investors struggle to predict whether the Fed will stop short with stimulus efforts rather than add to them. Ultimately, the important decisions lying before the Fed are uncomfortable, and hint at a time where monetary policy may not have much to contribute to a still troubled economy.

Fed Watch: Acceleration Alert - For those of us still fretting over a struggling US economy, the first week of February delivered a host of data that should raise red flags. Simply put, the solid activity of 4Q2010 looks to have carried through into the new year. This could be shaping up to be a far more interesting year for monetary policy than I would have imagined just six weeks ago. While I believe the baseline forecast – complete the current asset purchase program and then move to the sidelines for the remainder of 2011 – incoming data suggests a need to be prepared for a fallback position. And that fallback is no longer toward additional easing. If you believed the 4Q10 GDP report revealed a far stronger economy than the headline number suggested, you would have been looking for some blowout numbers from the ISM reports. And that is just what we got. In addition to the headline gain, the ISM manufacturing report had very strong internals.  Moreover, its service sector counterpart revealed similar trends, albeit to a lesser degree.

The Fallback Position is Further Easing - Tim Duy gives his usual trenchant analysis on the US economic position. I am with him on most of the data issue, I take issue only with the policy interpretation. While I believe the baseline forecast – complete the current asset purchase program and then move to the sidelines for the remainder of 2011 – incoming data suggests a need to be prepared for a fallback position. And that fallback is no longer toward additional easing. Duy’s position, in short, is that the numbers are on fire. In particular he was excited by the 7.1% surge in final sales last quarter. Basically, that is GDP would have grown at a 7.1% annual rate if you didn’t adjust downward for the fact that many of the things sold at the end of 2010 had inventory that was already sitting on the shelf.

Ron Paul vs. the Federal Reserve: Does he really want to End the Fed? - Rep. Ron Paul's feelings about America's central bank are a matter of public record. An extensive public record: In dozens of congressional hearings over the past four decades, he has ribbed, cajoled, harassed, or annoyed any representative or defender of the Federal Reserve brave or unlucky enough to appear before him.  Normally, his interrogations concern America's profligate money printing, Congress' unnecessary spending, the Fed's secrecy, and, especially, gold, which he believes should underpin the currency to render it sound. But his distrust runs wide and deep.  His career in and out of public office has been devoted to two propositions: 1) The Fed is bad. 2) The gold standard is good. His consistency has been impressive—which is not to say he has been influential. He rarely gets satisfactory answers in hearings, and he'll probably never get satisfaction in his long, lonely crusade to radically alter America's monetary policy.

The Benefits of an Independent Central Bank - Ken Rogoff in an interview with Real Time Economics: You’re probably best known in academic circles for your work demonstrating the benefits of having an independent central bank. In the wake of the Federal Reserve’s unprecedented moves to bail out the banking sector and the broader economy, though, that independence is coming under fire. Are you concerned? Throughout the financial crisis, recession and recovery, the central bank has been used as an end run around Congress, as a tool of fiscal policy. And we should be thankful for it. The Fed was able to act when Congress and the Treasury were paralyzed. Unfortunately, there is now severe political pushback that threatens to spill over into the area of monetary policy. That would be a sad day for macroeconomic stability. There are serious people who believe we’ve solved the inflation problem, and we don’t need central bank independence anymore. They think the stagflation of the 1970s was like teenagers experimenting with alcohol and it won’t happen again. I think that’s very wrong-headed, particularly at a time when extremely high debt levels create a temptation for governments to inflate away part of the real value of the debt.

I come to praise Bernanke - Fed Chairman Ben Bernanke has come under fire recently from many directions.  Of course I've been a frequent critic of Ben Bernanke over the years. I thought he missed the housing and credit bubble when he was a member of the Fed Board of Governors from 2002 to 2005. And I frequently ridiculed his comments when he was Chairman of the President Bush's Council of Economic Advisers from June 2005 to January 2006. But I've also noted that once Bernanke started to understand the financial problems, he was very effective at providing liquidity for the markets. And there is no question that the short-term liquidity facilities were very effective and successful.  And I think Fed Chairman Ben Bernanke deserves praise today. His speech was very clear and he made several key points during the Q&A:  QE is an extension of conventional monetary policy at the zero bound. As Bernanke noted Conventional monetary policy easing works by lowering market expectations for the future path of short-term interest rates ... By comparison, the Federal Reserve's purchases of longer-term securities do not affect very short-term interest rates, which remain close to zero, but instead put downward pressure directly on longer-term interest rates.

Bernanke says job growth, inflation still too low  (Reuters) - U.S. unemployment is too high despite an improving economy, Federal Reserve Chairman Ben Bernanke told Congress, suggesting the central bank has no intention of cutting short a $600 billion bond-buying program. In testimony to the House of Representatives Budget Committee that largely echoed a speech he delivered last week, the Fed chief also warned about the dangers of unsustainable budget deficits. Acknowledging a recent pickup in the economy, Bernanke said a sharp drop in the jobless rate to 9 percent in January from 9.8 percent in November, the biggest two-month decline since 1958, was "grounds for optimism." However, he noted hiring is still anemic. "The job market has improved only slowly," he said, noting the economy had only made up just over one million of the more than eight million jobs lost during the deepest recession in generations. "This gain was barely sufficient to accommodate the inflow of recent graduates and other new entrants into the labor force and, therefore, not enough to significantly erode the wide margin of slack that remains in our labor market," he added.

Morning Update – Disinformation Edition - I’ll get to the Employment Report in a second, but first let’s clear out the disinformation created by the “Fed” Chairman, Ben Bernanke, yesterday in his speech. He took complete credit for creating a higher stock market… oh yeah, no lying about that. But then he turned around and denied that his policies had anything to do with higher food prices around the globe, and certainly had no hand in creating the violence in Egypt! As they say, “Denial isn’t just a river in Egypt.” To be clear, food inflation is massively high. Yesterday I pointed to a study showing that overall global food prices rose by 3.4% in January… that gain is in just one month! And I think it may be understated as many food commodities have increased at rates far greater than that. That gain was the seventh month in a row of gains, and if you annualize that figure it works out to a whopping 40.8% inflation rate in the price of food!  Imagine that you live in a country where it requires 40% of your earnings just to feed yourself. At that rate it won’t be long before you are literally starving. Bernanke’s malfeasance is beyond compare. He is a danger to this country and to the entire planet.

Fed's Lockhart Says U.S. Inflation Still Too Low - U.S. inflation is still below the central bank's comfort level and increases in prices for specific goods and services do not signal broader inflation is around the corner, a top Federal Reserve policymaker said on Tuesday. Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, noted "inflation anxiety is rising" in the general public. He used his speech to lay out the difference between broad inflation and the cost of living -- which can rise with prices for specific items like food and gas. Lockhart said monetary policy is too blunt a tool to tackle individual price rises. "For the moment, inflation, properly defined, is tame, in my view. And the rise of individual prices does not signal incipient inflation," Lockhart told the Calhoun County Chamber of Commerce. "Underlying inflation is currently below the level that I would define as price stability," he said, a view in line with his previous comments. Lockhart said he expects core inflation to rise gradually, to within the Fed's informal 2 percent target range by 2013. While headline inflation has picked up in the United States, core inflation has held near a five-decade low.

Fed’s Lockhart Plays Down Inflation Pressures - Noting “inflation anxiety is rising,” a key Federal Reserve policy maker sought to calm nerves and said broadly speaking price pressures remain low, in remarks that explained the limitations the central bank faces when trying to achieve price stability.“As a policy maker, I watch prices — that is, the behavior of highly evident and prominent prices we all take note of,” Federal Reserve Bank of Atlanta President Dennis Lockhart said. While he said he was “interested” in changes in prices households pay for key items, he said “I am focused most intently on broad inflation because I believe long-term stable prices to be fundamental to a healthy and growing economy.” And in the broad scheme of things, “for the moment, inflation, properly defined, is tame, in my view,” Lockhart said. “The rise of individual prices does not signal incipient inflation.”

Structural Impediment -  Krugman - Interesting and depressing interview with Charles Plosser, the Fed’s reigning inflation hawk. What’s striking is that he is completely committed to the view that we’re experiencing structural employment: Mr. Plosser’s answer is unequivocal: This mess was caused by over-investment in housing, and bringing down unemployment will be a gradual process. “You can’t change the carpenter into a nurse easily, and you can’t change the mortgage broker into a computer expert in a manufacturing plant very easily. Eventually that stuff will sort itself out. People will be retrained and they’ll find jobs in other industries. But monetary policy can’t retrain people. Monetary policy can’t fix those problems.” It really makes you despair: we’ve been over and over the evidence, and there’s not a hint in the data that a mismatch between occupations and jobs can explain any important fraction of the jobless rate. Oh, and later he argues that monetary policy should be based on growth rates, not estimates of the output gap; clearly the Fed needed to tighten sharply in 1934:

Paul Ryan Criticizes Bernanke for Failing to Contain Tooth Fairy - In a Congressional hearing today, Representative Paul Ryan (R-WI), chair of the House Budget Committee, strongly criticized Federal Reserve Chair Ben Bernanke for failing to contain the severe inflation threat posed by the Tooth Fairy. Ryan pointed to numerous studies showing that, despite ongoing economic sluggishness, the Tooth Fairy is paying much more for children’s baby teeth than in past years. In neighborhoods such as Winnetka, Cleveland Park, the Upper East Side, and Palo Alto, children can receive more than $20 per tooth — a dramatic increase from the 25-50 cents that the Tooth Fairy paid only a decade or two ago. In the Hamptons, summertime prices for teeth can easily exceed $100, according to a survey commissioned by the American Enterprise Institute.* Because the Tooth Fairy is able to create money magically, her purchases of unused teeth (with no apparent economic value**) increase the money supply, fueling inflation. Without explicitly accusing Bernanke of participation in the Tooth Fairy’s scheme, Ryan implied that the Tooth Fairy’s higher payouts may be part of the Federal Reserve’s quantitative easing scheme.

Lowest. Inflation. Ever. -- Inspired by David Leonhardt, here's the graph to show any of your friends who think that inflation might be a problem thanks to Fed monetary policy or deficit spending. It shows core inflation (inflation minus food and energy) over the past 50 years, which is a good way of visualizing basic inflationary trends in the economy without getting distracted by normal swings in volatile commodity prices. Right now, core inflation has been trending down steadily for four years and is as low as it's been since the end of World War II. There's no evidence that food and energy prices are feeding through to core inflation, and no evidence that there's even a trace of broad inflationary pressure in the economy. It's just not there. Employment and growth are our problems, not inflation.

U.S. faces $70 billion inflation hit - Rising food and energy prices could deal a $70 billion blow to the economy, but the recovery is likely to limp along anyway. If the recent run-up in energy and agricultural commodities persists, U.S. consumers will have to shell out $20 billion more for energy and $50 billion more for food this year, Capital Economics estimates. Among other things, that squeeze on consumer budgets will eat up most of the payroll tax holiday bonus that Americans were supposed to get out of the deal in Congress that extended the Bush tax cuts, at some cost to the deficit. So much for the stimulus bump. Even so, the weak U.S. recovery doesn't appear to be at risk. The economy is showing signs of picking up, with industrial production rising at an almost 6% annual clip in December. Consumers have been spending more despite scarce jobs, weak wages and stagnant property prices, in a development that is promising if at least a little head-scratching.

Inflation, in One Picture - On Capitol Hill, members of Congress are grilling Ben Bernanke, the Federal Reserve chairman, about his attempts to lift economic growth by reducing long-term interest rates — the Fed’s so-called Q.E.2 program, or quantitative easing. Some members of Congress think Mr. Bernanke is fighting the wrong battle. They want him to take steps to stamp out inflation, which they believe is dangerously high or soon will be. Here is core inflation — economists’ preferred measure of inflation, because it’s more predictive than headline inflation — over the last 40 years:  Does it look dangerously high? Or might the slow pace of economic growth and the high level of unemployment be larger problems?

Inflation Expectations and Asset Prices - There’s been a bit of interesting discussion this week surrounding the new paper by David Glasner. (See e.g. Scott Sumner, Kevin Drum, Paul Krugman.) In it, Glasner provides solid econometric evidence of the strong correlation between inflation expectations and asset prices as measured by the S&P 500 - but only since 2008. The heart of the paper is, as has been noted by others, a picture like this, which while not actually in Glasner’s paper nicely illustrates its central point:The point is that there was a statistically significant - one might say profound - structural break in the relationship between inflation expectations and asset prices, somewhere in 2008. Before that time, inflation expectations and asset prices had little or no correlation with each other; after that time the correlation was nearly perfect. Some commenters have cited this as further proof that the US economy has been characterized by an insufficiency of demand for the past three years. Kevin Drum asks for a better understanding of the specific reasoning behind that inference, however.  The reason it doesn’t seem obvious to you that this is evidence that the US economy is facing a shortfall of demand is because it’s not. Not by itself, anyway.

Why Expectations Matter – Krugman - Paul Segal has a good post over at the FT about inflation expectations, and in particular about what the UK should do in the face of a recent rise in headline inflation: Hawkish discussions of inflation expectations today, and their potential effects on actual inflation in the future, remember the conclusion but seem to have forgotten the argument. Expectations of high future inflation lead to high actual inflation in the future only if workers and firms are able to pass that expected price rise through to their own contracts.  Indeed. As I’ve tried to explain in the past, what we need to worry about is a sort of leapfrogging process that perpetuates inflation once it has gotten embedded in the economy: Suppose that I’m setting my price for the next year, and that I expect the overall level of prices — including things like the average price of competing goods — to rise 10 percent over the course of the year. Then I’m probably going to set my price about 5 percent higher than I would if I were only taking current conditions into account.

Inflation confusion - Atlanta Fed's macroblog - As opinion about rising food prices and the consequences thereof divides between "the Fed did it" and "the fundamentals did it" camps, I am reminded of the tricky nature of the semantics of any discussion about "inflation."  In case you need convincing of that yourself, take a look at the results of the most recent Pew News IQ Quiz. Of 13 multiple-choice questions on the quiz, the question that received the fewest correct answers was whether the national inflation rate reported by the government (as of November 2010, when the poll was taken) was closer to 1 percent, 5 percent, 10 percent, or 20 percent. Only 14 percent of the 1001 adults surveyed knew that the answer was 1 percent;  That response does not indicate a general lack of knowledge about economic issues.  What I think the failure to identify the reported inflation rate probably represents is slippage between the definition of inflation that the average person has in mind and the definition that economists and central bankers are so intently focused upon.

Remember why inflation expectations matter - Macroeconomists have understood for a long time that inflation expectations are an important determinant of inflation. But those who argue that interest rates must be raised today in order to keep inflation expectations down have forgotten why these expectations matter in the first place.The idea that governments can systematically stimulate the economy at the cost of high, but stable, inflation went bust during the stagflation of the 1970s. The reason is that high inflation over time leads to high expected inflation, and that these expectations will themselves then tend to raise inflation in the future as wage bargaining and other contracts take expected inflation into account. The result is not high and stable inflation, but rather high and ever-increasing inflation – - an unsustainable situation. Hawkish discussions of inflation expectations today, and their potential effects on actual inflation in the future, remember the conclusion but seem to have forgotten the argument.

The inflation disconnect - Atlanta Fed's macroblog - Reuters's Brad Dorfman and Mark Felsenthal pick up the theme of our last macroblog post: "Inflation in the United States? The Fed might not see it, but company executives, especially those who sell to consumers, say if it is not here yet, it is on its way.… " 'There definitely seems to be a disconnect with the Fed's commentary and the experience of the common man,' said Lawrence Creatura, a portfolio manager with Federated Investors."Messrs. Dorfman and Felsenthal offer this as one possible source of the disconnect: "So why the disconnect between consumers and executives and the Fed?"It is because the Fed's top officials, including Bernanke, look at the economy through a prism that compares how fast the economy would grow if firing on all cylinders versus its pace when sputtering. So it appears they are saying: The Fed thinks inflation can't occur in theory, and therefore it fiddles while the inflation embers burn.

Consumers Turning Into Inflation Hawks - Consumers see more inflation ahead. That views puts them at odds with Federal Reserve officials and private sector economists. According to Friday’s consumer sentiment survey released by Reuters/University of Michigan, inflation expectations have been rising since late summer. Back in September, U.S. consumers expected the inflation rate one year out to hit 2.2%. In early-February, the one-year expected inflation rate is up to 3.4%.  Contrast that rate with the tamer forecasts at the Fed and among private economists. On Wednesday, Fed chairman Ben Bernanke told the House Budget Committee that “inflation is expected to persist below the levels that Federal Reserve policymakers have judged to be consistent over the longer term with our statutory mandate to foster maximum employment and price stability.” That would suggest that the Fed expects consumer inflation will remain below 2% this year. The headline consumer price index rose 1.5% during 2010, while the core CPI, which excludes food and energy, was up only 0.8%. How can households be more hawkish about inflation than the Fed?

Is Inflation Baked In? - Whenever I write about inflation or the lack thereof, I get a lot of remarkably angry mail from people who are focused on commodity prices; they just can’t imagine how people like me or Ben Bernanke can be relaxed about the overall inflation picture when the prices of wheat, oil, etc. have risen so much lately. But I’ve realized something else: many of my correspondents don’t seem to realize how little role commodity prices play in overall consumer prices. Consider, for example, a humble loaf of white bread.In December, says the Bureau of Labor Statistics, a one-pound loaf cost an average of $1.386. How much of that was the cost of wheat? As best I can tell, a bushel of wheat produces about 63 pounds of bread; wheat has lately been selling at around $10 a bushel; so we’re talking maybe 16 cents of that loaf of bread, or less than 12 percent of the price, reflecting the cost of wheat. What I get from this is that wholesale food prices have a surprisingly small impact on the price of food, let alone on overall consumer prices.

Inflation verses relative price changes - It is starting to look like the cyclical bottom in inflation may be at hand. But there is much confusion over current price changes. There are two types of price changes to consider. One is the change in relative prices. The other is the change in the overall price level, or inflation. Currently we are seeing large change in relative prices, but little change in the overall price level, or inflation. From their 2008 peak the CRB for foodstuffs fell from 525 to 330 and has since rebounded to 609. So it is now 16% above its 2008 peak. Over the same period the CRB for industrial raw materials fell from 427 to 286 and rebounded to 464, an 8% gain, while oil fell from $133 to$40 and rebounded back to $90. But the deflator for personal consumption expenditures is now at 111.6 versus its’ 2008 peak of 110.9. The later is a measure of the overall price level, or inflation, while the swings in commodity prices measure changes in relative prices, not inflation. Part of the reason that inflation and swings in raw material prices are two very different things is that raw material prices are such a small portion of final costs and big changes in raw material cost have little impact on final prices.

Interview: Jim Rickards On Inflation And Currency Wars - I think there is a definite and highly significant danger of inflation coming from QE and QE2 specifically.  A lot of people have said, in fact, the Fed has said, that, if you look at the key price indices, the Producer Price Index (PPI), Consumer Price Index (CPI), and the Personal Consumption (PC) price deflator, they are very, they use the phrase, “well behaved”.  For the past year and a half, the critics, and I would include myself, have been saying that this situation is dangerous and unstable.  The Fed has been pointing to the price indices and saying that you can’t find inflation under a rock, you can’t find inflation with a microscope, so what are you worried about?

How Confident Are You in a Hyperinflationary Future? - My longtime friend G.F.B. recently asked me: "If you really expect the dollar and the financial system to collapse, why not max out your credit cards and live large, knowing you'll never have to pay the money back?"  This banter of old friends is also a fair and insightful question, for it ties our actions in the real world (behavior) to our stated beliefs and convictions. Indeed, if someone is absolutely confident that the dollar will go to zero, i.e. hyperinflation, then it makes compelling sense to immediately run up $50,000 in credit card debt and buy tangible goods or unique experiences, knowing you will be able to pay it off with the wages from a month, week or even a day in the future.  Similarly, if the financial system collapses, then who's going to come after a measely $50,000 in unsecured credit card debt?

Travesty of a Mockery of a Sham, Phase II - The facsimile of U.S. "growth" now depends entirely on Central State manipulation and stimulus of risk trades and financial slight-of-hand.  The U.S. economy has become increasingly dependent on asset bubbles, financial legerdemain, credit expansion, Federal borrowing and the manipulation of risk trades to maintain the illusion of "growth." Compared to an economy based on organic demand and productive growth, the current U.S. economy is a travesty of a mockery of a sham, and has been since 2001.  There are a number of factors at work, but let's start with two: the ratchet effect, and the Keynesian Project.

IMF calls for dollar alternative - International Monetary Fund managing director Dominique Strauss-Kahn (pictured) has called for a new world currency to help reduce the world’s dependence on the dollar and get a tighter grip on financial markets.  In a speech in Washington last night, Strauss-Kahn’s said as an alternative the reserves held by nations within the IMF could be used as a proxy currency, or special drawing rights (SDR), to price international trade and also provide an alternative to the dollar in central banks’ foreign currency reserves. He added that SDRs could be used to price internationally traded assets such as sovereign bonds and good like commodities to peg currencies and report balance of payments data The value of SDRs are currently measured on basket of four major currencies – the dollar, sterling euro and yen and Strauss-Kahn suggested more this should be extended to cover a broader depth of currencies including those in key emerging markets such as the Chinese yuan.

IMF boss calls for new international currency - The International Monetary Fund issued a report Thursday on a possible replacement for the dollar as the world's reserve currency. The IMF said Special Drawing Rights, or SDRs, could help stabilize the global financial system.  SDRs represent potential claims on the currencies of IMF members. They were created by the IMF in 1969 and can be converted into whatever currency a borrower requires at exchange rates based on a weighted basket of international currencies. The IMF typically lends countries funds denominated in SDRs While they are not a tangible currency, some economists argue that SDRs could be used as a less volatile alternative to the U.S. dollar.

IMF Urges Overhaul Of Global Monetary System - The head of the International Monetary Fund called on key global economic players Thursday to accept an increased role for an alternative reserve currency as a way to curb trade imbalances that are at risk of widening further. The alternative in mind is the IMF’s special drawing rights, or SDRs. And Dominique Strauss-Kahn, in prepared remarks delivered in Washington, said the IMF is open to changing the basket of currencies that determine the SDR’s value by giving more weight to emerging market currencies – including the yuan. “Over time, there may be a role for the SDR to contribute to a more stable international monetary system,” Mr. Strauss-Kahn said. “Increasing the role of the SDR would clearly require a major leap in international policy co-ordination. For this reason, I expect the global reserve asset system to evolve only gradually, and along with changes in the global economy.”

Our G-Zero World - Nouriel Roubini - We live in a world where, in theory, global economic and political governance is in the hands of the G-20. In practice, however, there is no global leadership and severe disarray and disagreement among G-20 members about monetary and fiscal policy, exchange rates and global imbalances, climate change, trade, financial stability, the international monetary system, and energy, food and global security. Indeed, the major powers now see these issues as zero-sum games rather than positive-sum games. So ours is, in essence, a G-Zero world. In the nineteenth century, the stable hegemon was the United Kingdom, with the British Empire imposing the global public goods of free trade, free capital mobility, the gold standard, and the British pound as the major global reserve currency. In the twentieth century, the United States took over that role, imposing its Pax Americana to provide security to most of Western Europe, Asia, the Middle East, and Latin America.  Today, however, the US “empire” is in relative decline and fiscally over-stretched. Moreover, the rising power, China, which is not a liberal democracy, is pursuing a model of state capitalism, and is free-riding on the current global system.

Dollar_Eyes_Rebound_as_Event_Risk_Fills_Out_Stimulus_Under_Review - The US dollar hasn’t taken that critical step to secure a true reversal; but the fundamental drivers that would achieve the necessary shift are starting to line up. From price action alone, this past week has proven to be relatively quiet given the lack of scheduled event risk and off-the-docket developments. However, the benchmark currency finds itself loaded with potential energy that can quickly turn kinetic given the right catalyst. Taking stock of the strained position the dollar finds itself, EURUSD is eyeing the 1.3550 level that has held the pair back from retracing its January rally for three weeks, GBPUSD has settled on the floor of a 1,000-point rising trend channel and AUDUSD has once again dropped back to parity. What can lead the dollar to that next step in a reversal? As it happens, two of the three most critical fundamental drivers behind the currency have already started to line up. Relative growth (and the forecast for that lead to hold up) has already been accounted for. New to the mix but still hesitant in its support of the greenback is early speculation that the second stimulus program could come under review. Early commentary doesn’t necessarily mean the Federal Reserve will immediately abandon the loose policy stance; but the speculative crowd priced in the adoption of QE2 well before the actual November announcement. So, it stands to reason that the forecast for its withdrawal will pique curiosity

China Begins to Worry about Fannie and Freddie Bonds - In a House Financial Services committee hearing yesterday, some witnesses recommended that the U.S. force future losses from Fannie Mae and Freddie Mac's mortgage portfolio on bondholders, instead of taxpayers. One clear political problem with this proposal, however, is China. They hold about a half trillion dollars of this debt, so the Chinese might not be pleased if the U.S. forces them to take losses after assuring them that they would back up the mortgage companies' commitments. According to Dow Jones Newswires, senior China's Industrial Bank economist Lu Zhengwei has issued a warning about this political risk: The Obama administration has committed unlimited amounts of aid to ensure that the firms meet their obligations to holders of their debt, as well as investors in asset-backed securities issued by the two companies. Nonetheless, Lu said in his note that this commitment amounts to an "empty check" without the support of the U.S. Congress.

Prominent Chinese Economist Advises Country To Sell Its $500 Billion In GSE Holdings Before QE2 Ends - Add one more pill to the daily Oxycodone consumption by the Chair Central Planner. In what is about to become the latest headache for Bernanke, popular Chinese economist Lu Zhengwei, a senior economist at China's Industrial Bank Co., has advised that China should promptly sell its GSE holdings on concerns that continued "blank check" writing by Congress to the GSEs will be "almost impossible" as well as fears that as soon as QE2 ends, the entire US bond complex will see a major sell off. In other words welcome to the world of game theory defection: he who sells first, loses the least.  From Dow Jones: A popular Chinese economist on Thursday said China should be aware of risks in its holdings of debt issued by U.S. government-controlled mortgage giants Fannie Mae (FNMA) and Freddie Mac (FMCC), and suggested that China sell the securities soon.

NY Fed Official: Bond Buying Hasn’t Compromised Treasury Market - The Treasury market continues to function normally despite significantly sized bond buying by the Federal Reserve, a key central bank staffer said Wednesday. “Our purchases do not appear to be causing significant strains on the liquidity or functioning of the Treasury market,” Federal Reserve Bank of New York executive vice president Brian Sack said. The official heads the regional Fed’s Markets Group and is responsible for implementing the monetary policy directives of the central bank. Sack was addressing the impact on the government bond market of the Fed’s program to buy $600 billion in longer-dated Treasurys by mid-year, which is joined with a large sized operation to invest the proceeds of Fed-owned mortgage securities into the government bond market as well.

Fed's Lockhart Says He Would Oppose Monetizing Debt - Federal Reserve Bank of Atlanta President Dennis Lockhart said he would oppose any attempt to persuade the Fed to monetize the growing federal debt.  “I have no intention of supporting, under political pressure, the monetizing of the debt,” Lockhart said today in a speech in Atlanta. That would be “a central banker’s cardinal sin.”  The U.S. budget deficit will widen this year to $1.5 trillion, the Congressional Budget Office said in a report Jan. 26. The projected shortfall, up from last year’s $1.3 trillion, is set to increase, in part, because of the $858 billion tax-cut measure passed by Congress, the nonpartisan agency said. 

Can Econometrics Distinguish between the Effects of Monetary and Fiscal Policy During the Crisis? - People are taking victory laps over monetary policy, saying it's now clear that either fiscal policy doesn't work or, even if it does, it will be offset by monetary policy? Or they are making the claim that those who said monetary policy is ineffective at the zero bound have been shown to be wrong? I'm sorry, but it's too soon to do this. I knew this was going to happen, it always does, and tried to warn about it in August 2009:...Much of the uncertainty in economics derives from our inability to do laboratory experiments, and that includes uncertainty about which model best describes the macroeconmy. When the present crisis is finally over, those who advocated fiscal policy, those who advocated monetary policy, and those who advocated no policy at all will all say "I told you so" based upon their reading of the evidence.

Federal Budget Deficit in First Four Months of Fiscal Year 2011—$424 Billion - CBO Director's Blog - The federal government incurred a budget deficit of $424 billion in the first four months of fiscal year 2011, CBO estimates in its latest Monthly Budget Review, slightly less than the shortfall recorded in the same period last year. If appropriations for the rest of this fiscal year are set at the same annualized amounts as those in effect for the first several months and the Congress were to enact no other legislation affecting spending or revenues, CBO expects that the federal government would end fiscal year 2011 with a deficit of nearly $1.5 trillion, around $200 billion more than the $1.3 trillion deficit recorded in 2010. Receipts for the first four months of fiscal year 2011 were about $64 billion (or 9 percent) higher than receipts during the comparable period last year, CBO estimates. Nearly all of that increase was from individual income and social insurance taxes, which together rose by $60 billion (or 10 percent). Withholding from employees’ paychecks for income and payroll taxes increased by $45 billion (or 8 percent), at least partly reflecting higher wages and salaries; the increase would have been slightly larger but for the Making Work Pay tax credit, which was in effect in 2010, and the temporary payroll tax reduction, which started in January 2011.

Fed’s Lockhart Warns About Deficits - The U.S. must “come to grips” with its fiscal problems, a top Federal Reserve official said Thursday. Noting mounting deficits and debt, Federal Reserve Bank of Atlanta President Dennis Lockhart said the U.S. cannot make its way out of its fiscal hole at current rates of growth. “That is not a solution,” he said. Instead, the Fed official said, lawmakers must come to a bipartisan plan to put the U.S. on a more solid financial footing. Lockhart spoke at a forum entitled, “Facing Public Debt, a U.S.-Swiss Dialogue on Fiscal Policy.” Central bank officials, including Fed Chairman Ben Bernanke, are speaking out more often on the fiscal side of the economic equation, Lockhart said, because the issue of U.S. debt has become more pressing.

The Vast and Daunting Deficit Misunderstanding - As a result of my work I'm on lots of mailing lists for publications from various types of companies. I open up my personal inbox this morning to find this press release from Deloitte: I read it, and I sigh. Of course. "The imbalance is driven by... entitlement[s]". No mention of the contribution of tax cuts - it's purely a spending problem.See, the thing is, I know how the communications departments of these sorts of companies work. They're not trying to be slanted or biased. In fact, I'm sure that they think that they're being neutral. They recognize that they're so big, and have so many diverse clients, that they can't afford to appear ideologically biased in any way.  Which is why this is so depressing. The notion that the federal deficit is simply the result of out-of-control spending is so deeply entrenched in corporate America - by which I mean millions of individuals, good and bad, liberal and conservative (and mostly middle-of-the-road), who work in large corporations - that they don't even have an inkling of the possibility that there's another part of the story:

Bernanke warns against steep budget cuts (Reuters) - Federal Reserve Chairman Ben Bernanke on Wednesday warned against sharp cuts in spending at a time when the economic recovery is still fragile enough to require extraordinary support from the central bank. Even as he warned about the need for a long-term plan to address "unsustainable" budget deficits, Bernanke said steep reductions in government outlays could compromise growth at a time when employment is just beginning to rebound. "The cost to the recovery would outweigh the benefits in terms of fiscal discipline," Bernanke told the House of Representatives' Budget Committee. "I think we really need to take a long-term view." Bernanke offered few clues into whether the Fed might extend its controversial policy of buying $600 billion in government bonds beyond its June deadline, nor did he signal any inclination to cut the program short.

Geithner: Debt Ceiling Will Be Raised - Treasury Secretary Timothy Geithner said Wednesday that Congress would soon raise the $14.3 trillion debt ceiling, casting aside criticism from some Republicans lawmakers who have threatened to try and block a looming vote on the matter. His remarks came during a wide-ranging interview with Judy Woodruff at the Newseum in Washington.  The rest of the interview included a combination of observations on the economy, a preview of the White House’s budget proposal next week, and jabs at Republicans on Capitol Hill.There won’t be a detailed plan in President Barack Obama’s budget next week that specifies what new tax rules could look like. There will, though, be a “Very detailed proposal about how we bring the deficits down over time.”

FY2012 Budget Debate Began Yesterday - In case you missed this yesterday waiting for the Super Bowl to begin, the communications battles on the fiscal 2012 budget began yesterday with this op-ed in the New York Times by OMB Director Jack Lew that provides the first few details about the reductions that will be proposed next Monday. Most of the op-ed is a repeat of the themes the president used when talking about the budget in his State of the Union Address.  But unless I missed them somewhere else, these three soon-to-be-proposed cuts were mentioned for the first time:

  1. Community Service Block Grants: Cut by $350 million with the remaining amount changed from a formula to a competitive grant
  2. Great Lakes Restoration Initiative: Cut by $125 million
  3. Community Development Block Grants: Cut by $300 million

House Republicans move to slash domestic programs -  Republicans now controlling the House promised Thursday to slash domestic agencies' budgets by almost 20 percent for the coming year, the first salvo in what's sure to be a bruising battle over their drive to cut spending to where it was before President Barack Obama took office. 'Washington's spending spree is over,' declared Paul Ryan, the House Budget Committee chairman who announced the plan. 'The spending limits will restore sanity to a broken budget process,' he said, returning 'to pre-stimulus, pre-bailout levels.' Republicans won't get everything they want. Democrats are in charge of the White House and the Senate, and even House Republicans may have second thoughts when the magnitude of the cuts sinks in. The White House says the GOP effort could cause widespread furloughs of federal employees, force vulnerable people off subsidized housing, reduce services in national parks and mean less aid to schools and police and fire departments.

Republican-proposal to ‘right our fiscal ship’ throws more workers overboard - Today the House Appropriations Committee released a list of 70 proposed cuts House Republicans would like to make in their efforts to come up with a level at which to fund government operations for the rest of fiscal year 2011. The cuts included in the committee’s proposal are extensive in both their depth and their reach. In total, House Republicans propose funding the government $74 billion below President Obama’s FY 2011 budget request. Of that, $58 billion, or over three-quarters of the cut, would apply to non-security discretionary spending.Included on the chopping block are a $224 million cut to Amtrak, a $256 million cut in assistance to state and local law enforcement, an $889 million cut for energy efficiency and renewable energy programs, a $1 billion cut to NIH, and $1.3 billion cut to community health centers, and a $1.6 billion cut to EPA. All cuts can be seen proportionally, below:

The Easy Cuts Are Behind Us - Rand Paul -The solution to the government's fiscal crisis must begin by cutting spending in all areas, particularly in those that can be better run at the state or local level. Last month I introduced legislation to do just that. And though it seems extreme to some—containing over $500 billion in spending cuts enacted over one year—it is a necessary first step toward ending our fiscal crisis.  My proposal would first roll back almost all federal spending to 2008 levels, then initiate reductions at various levels nearly across the board. Cuts to the Departments of Agriculture and Transportation would create over $42 billion in savings each, while cuts to the Departments of Energy and Housing and Urban Development would save about $50 billion each. Removing education from the federal government's jurisdiction would create almost $80 billion in savings alone. Add to that my proposed reductions in international aid, the Departments of Health and Human Services, Homeland Security and other federal agencies, and we arrive at over $500 billion.

Paul Ryan’s budget: unnecessary pain with no long-term gain - Last Thursday, House Budget Committee Chairman Paul Ryan (R.–Wisc.) and House Appropriations Committee Chairman Hal Rogers (R.–Ky.) unveiled their budget for the remaining months of the fiscal year. A new allocation cutting and capping appropriations levels will be entered into the Congressional Record early this week. There will be no vote on the magnitude of the cut; new House rules enacted in early January effectively approved this budget before it had been written. Ryan’s backdoor budget resolution would cut non-security discretionary (NSD) spending, which excludes Defense, Homeland Security, and Veterans Affairs and military construction appropriations, back to 2008 levels for the remaining seven months of the fiscal year. (After Senate Republicans filibustered an omnibus appropriations bill in December, Congress passed a continuing resolution holding funding roughly at 2010 levels through March 4).

Job Killing Spending Cuts -The Republicans have come up with a list of spending cuts that appear to sum to a mere $35 billion a year – sort of pennies on the dollar as far as balancing the budget without tax increases. In that list is a reduction in the IRS budget of $593 million, which will make tax evasion even easier. Kent Hoover, however, is more concerned with what is being cut – as we all should be: Many of the budget cuts would come in programs that are dear to Obama’s heart, including spending on scientific research, loan programs to support alternative energy, and infrastructure investments. Let’s start with research. Republicans propose cutting $1.1 billion from the Department of Energy’s Office of Science, which is the nation’s largest supporter of basic research in the physical sciences. The plan calls for a $1 billion budget cut at the National Institutes of Health, the federal government’s medical research agency. The Centers for Disease Control would see its funding drop by $755 million. Agricultural research would be cut by $246 million.

Proposed House GOP Non-Security Discretionary Cuts: Deeper Than They Appear - CBPP The cuts in non-security discretionary programs required by a proposal from House Republican leaders are deeper than you might think, as we explained in a report late last week.GOP leaders say their plan would cut this category of funding by 9 percent.  In fact, non-security programs – from K-12 education to biomedical research, food safety to the FBI – would shrink for the rest of the year, on average, by 15.4 percent below current funding under the continuing resolution (which expires March 4) and 19.4 percent below what President Obama proposed for fiscal year 2011.  That’s because much of the fiscal year will be over by the time Congress must act on the spending cuts.We also know that not every category of spending will face the average cut, per the funding allocation – known as the 302(b) – that the House Appropriations Committee will likely make for its 12 Appropriations Subcommittees.  Transportation and housing programs would be cut by more than one quarter, while the costs of running Congress would be cut less than 4 percent.  Further, much more radical spending cuts, as proposed by the Republican Study Committee, may become part of the House proposal once it reaches the House floor.

New Obama strategy: Beat up poor people -The Obama administration, reports National Journal's Mark Ambinder, will propose big cuts to a program that provides energy assistance to poor people when it unveils its suggested 2012 budget. "The Low Income Home Energy Assistance Program, or LIHEAP," writes Ambinder, "would see funding drop by about $2.5 billion from an authorized 2009 total of $5.1 billion." The news is generating a lot of outrage from progressives, in large part because of a paragraph that suggests that the White House wants to gain political advantage from being seen as tough on the most vulnerable Americans -- people who can't afford heating oil during cold winters.It's the biggest domestic spending cut disclosed so far, and one that will likely generate the most heat from the president's traditional political allies. That would satisfy the White House, which has a vested interest in convincing Americans that it is serious about budget discipline.

Federal Budget Cheat Sheet - President Barack Obama will propose his budget for 2012 on Monday, which he has said will include painful cuts, targeted spending increases, and an eye toward deficit reduction. The budget proposal is just a proposal, because Congress must vote to authorize spending. Still, the budget is a significant document because it will frame the negotiations between the White House and congressional Republicans, who are intent on dramatically curtailing federal spending. Here’s a budget cheat sheet, to put things in context and aggregate what we already know.

$1.30 > $1.00 - Bruce Bartlett (hat tip Catherine Rampell) reproduces a table from a paper by Suzanne Mettler showing that most people don’t realize that they are beneficiaries of government social programs. For example, 60 percent of people who take the mortgage interest deduction say they “have not used a government social program.” Now, while the mortgage interest deduction is a subsidy designed to enable people buy houses, you could get into an argument about whether it’s really a “social program.” But these are the analogous figures for some more classic welfare programs:

  • Social Security retirement and survivors’ benefits: 44%
  • Unemployment insurance: 43%
  • Medicare: 40%
  • Social Security Disability Insurance: 29%
  • Medicaid: 28%
  • Food stamps: 25%

Science Programs Hit Hard By Proposed Budget Cuts "The House of Representatives Committee on Appropriations has released a list of proposed spending cuts for the US Federal Government. The proposed cuts include reductions in spending on many science organizations and funds such as NASA, NOAA, nuclear energy research, fossil fuel energy research, clean coal research, the CDC, the NIH, and numerous EPA programs. There are also quite a few cuts proposed on domestic services, such as Americorps and high speed rail research. The House Appropriations Chairman, Hal Rogers, acknowledges that the cuts go deep, and would hurt every district across the country. But they are still deemed necessary to rein in Congressional spending. Notoriously absent from the proposed budget cuts are two of the largest spending sinks in the federal budget: the Department of Defense and Social Security."

Eat the Future -  Krugman - The public says it wants to see government spending cut — and the Tea Partiers really, really want spending cut — but people don’t want to cut any program they like; and they like almost everything. What’s a conservative to do? The obvious answer, once you think about it, is to eat the future: to cut spending in a way that undermines the nation’s long-run prospects, but doesn’t impose all that much pain on voters right now. And that, as best as I can tell, is the running theme in the cuts proposed by House Republicans. The proposal is, deliberately I think, hard to read and interpret. But on a quick read, here are some of the cuts that jumped out at me: WIC is nutritional aid for pregnant women and women with young children; let’s cut that, because the damage to the nation from malnourishment is a problem for future politicians. NOAA is weather and climate — hey, what we don’t know can’t hurt us. Nuclear nonproliferation — well, we probably won’t feel the pain of a terrorist nuke assembled from old Soviet fissile material for a couple of years. FEMA — well, how often do hurricanes hit New Orleans? CDC — with luck, by the time plague hits someone else can be blamed.

Deficit Hawks Down - Jamie Galbraith - The Fiscal Solutions Tour is the latest Peter G. Peterson Foundation effort to rouse the public against deficits and the national debt — and in particular (though they manage to avoid saying so) to win support for measures that would impose drastic cuts on Social Security and Medicare. It features Robert Bixby of the Concord Coalition, former Comptroller General David Walker and the veteran economist Alice Rivlin, whose recent distinctions include serving on the Bowles-Simpson commission. I went. Mr. Bixby began by describing the public debt as “the defining issue of our time.” It is, he said, a question of “how big a debt we can have and what can we afford?” He did not explain why this is so. He did not, for instance, attempt to compare the debt to the financial crisis, to joblessness or foreclosures, nor to energy or climate change.  A notable feature of Bixby’s presentation were his charts. One of them showed clearly how the public deficit soared at the precise moment that the financial crisis struck in late 2008. The chart also shows how the Clinton surpluses had started to disappear in the recession of 2000. Flashing this chart, he merely commented that “Congress took care” of the budget surplus. Still, the charts did show the facts — and in this respect they were the intellectual highpoint of the occasion.

Bingo!!! - The Republicans are trying to right a sinking Ship without throwing any cargo overboard. They want everything untouched which pleases them, and will junk anything from which they do not directly benefit as a Class or personally. Catherine Rampell hints at the idea these Republicans may lack for foresight. Almost every household utilizes Medicare, dito for Student loans, Home mortgage deductions, Unemployment Insurance upon need, and any Veterans’ benefit which apply. They are allowed Investment Tax Credits, and chose to place their pre-School children in organizations drawing assistance to defray the Cost of this baby-sitting. There is no comfort for Anyone who would champion Cuts in these programs. I think the Problem should be approached differently. I once heard of a thing called ‘Spanish Casino’ or ‘Spanish Bingo’.

Medicare, Medicare, Medicare - I basically agree with David Brooks about this: The foreign aid people, the scientific research people, the education people, the antipoverty people and many others have to form a humane alliance. They have to go on offense. They have to embrace plans to slow the growth of Medicare, to reform Social Security and to reform the tax code to foster growth and produce more revenue. But, again, this basically all comes down to Medicare. It’s true, obviously, that at the margin the money is fungible. But the rate of growth in Medicare is much larger than the rate of growth in Social Security, and the growth of Social Security has a modest and projected endpoint whereas the projected rate of growth in Medicare is unbounded. Last, Medicare and Social Security both provided benefits to the same group of people—the elderly. Social Security gives elderly people money, money that can be exchange for health care services. Medicare simply gives elderly people health care services, services that cannot be exchanged for money.

Keep Your Government Hands Off My Government Programs! - In a smart column today, Bruce Bartlett looks at why it’ll be so hard for politicians to cut government spending: because so many Americans who currently say they support cutting government programs don’t realize just how much they benefit from them.Remember, for example, when a town hall attendee famously told his congressman to “keep your government hands off my Medicare“? Apparently that bewilderingly blinkered sentiment is hardly unique. Mr. Bartlett produces the following chart, from a recent paper by the Cornell political scientist Suzanne Mettler, showing how many recipients of government benefits somehow don’t believe they’ve received any benefits:

Don't Cut You, Don't Cut Me - Krugman - Cut the fellow behind the tree that’s overseas. Pew on public fiscal views isn’t really all that surprising, but it’s still striking: people want spending cut, but are opposed to cuts in anything except foreign aid: And they want state governments to balance their budgets without cutting spending or raising taxes: The conclusion is inescapable: Republicans have a mandate to repeal the laws of arithmetic.

White House to propose $53B for existing rail, high-speed project - The White House will dedicate $53 billion over the next six years to improve existing rail corridors and dedicate new tracks for high-speed trains, Vice President Joe Biden announced today. The $53 billion injection will start with an $8 billion down payment in President Obama’s 2012 budget, which is set to be released Monday. The investment builds on President Obama’s promise in the State of the Union address to give 80 percent of Americans access to high-speed rail in 25 years. “As President Obama said in his State of the Union, there are key places where we cannot afford to sacrifice as a nation — one of which is infrastructure,” said Biden, speaking with Transportation Secretary Ray LaHood in Philadelphia this morning. “As a longtime Amtrak rider and advocate, I understand the need to invest in a modern rail system that will help connect communities, reduce congestion and create quality, skilled manufacturing jobs that cannot be outsourced.”

Obama Seeks $53 Billion Over Six Years to Build High-Speed Rail Networks…President Barack Obama will ask Congress next week to approve a six-year, $53 billion program for construction of a national high-speed and intercity rail network, Vice President Joe Biden said.  “There are key places where we cannot afford to sacrifice as a nation -- one of which is infrastructure,” Biden said in a speech today at 30th Street Station in Philadelphia. Obama submits his fiscal 2012 budget to Congress on Feb. 14. Under the budget proposal, about $8 billion would be spent in the first year to develop or improve interconnected rail corridors that Biden said would form the backbone of a national high-speed rail system.  Such corridors would be divided into three categories: “core express” for trains achieving speeds of between 125 and 250 miles per hour or more; “regional” lines for trains traveling between 90 to 125 miles per hour and “emerging” rail lines for passenger trains traveling as much as 90 miles per hour.

Which Parts of Stimulus Worked Best? - Economists trying to figure out how stimulative the stimulus package that Congress approved in early 2009 was have got bogged down in the sort of problem economists are always getting bogged down in: There’s no way to know what the world would have looked like sans stimulus.“Without a counterfactual, the best we can do is fall back on our models,” write Dartmouth College economists James Feyrer and Bruce Sacerdote in a paper published by the National Bureau of Economic Research. “Unsurprisingly, the models tell the same story today that they did when arguments for and against the stimulus were being made.” The two use what they think is the better approach of comparing states and counties that got a heavy dose of stimulus spending with those that didn’t. The difficulty with this is that one would naturally expect the places that got hardest hit by the recession to get the most money.

Americans Aware of Changes to Social Security, Tax and Benefits Programs- (Harris Interactive) When Americans who believe they will receive additional money in 2011 as a result of recent changes in tax legislation and Social Security policy were asked to think about how likely they are to use the funds in various ways, over half say they will use the money to pay down their debt (52%). Just under half of Americans who think they will receive additional money this year say they will likely use it for everyday spending, such as paying bills and buying groceries (46%), two in five say they will use this money to add to their savings and/or investments (41%) and one in five say they will use the money to make a specific purchase, such as a car, new home, home renovation or piece of jewelry (19%). Fewer Americans say they will use the money to take a vacation (15%) and very small numbers say they will do something else with the money (2%) or that they are not at all sure how they will spend it (4%).

For Federal Programs, a Bit of Market Discipline - Wouldn’t it be nice if taxpayers could somehow get a refund for government programs that didn’t work?  Instead, the opposite tends to happen. Programs that fail to make a difference — like many of those that train workers for new jobs — endure indefinitely. Often, policy makers don’t even know which work and which don’t, because rigorous evaluation is rare in government. And competition, which punishes laggards in the private sector, is typically absent in the public sector.  But there is some good news on this front. Lately, both American and British policy makers have been thinking about how to bring some of the competitive discipline of the market to government programs, and they have hit on an intriguing idea.

Fannie, Freddie, and the Mortgage Interest Deduction - Tomorrow, the White House will release its ideas for overhauling mortgage giants Fannie Mae and Freddie Mac.  While there is little agreement in Washington over just what to do, there is broad bipartisan support for big changes. In large part that’s because when the implicit government guaranty behind Fan and Fred turned explicit in the wake of the 2008 housing collapse, taxpayers were socked with a bill of $130 billion. Pols are shocked that we’d add $130 billion to the nation’s burgeoning debt to subsidize owner-occupied housing this way. Except we spend far more than that each year buying down the cost of home ownership through the tax code. The one-time $130 billion cost to taxpayers of the failure of Fan and Fred is a fraction of the $210 billion annual cost of the mortgage interest deduction, the deduction for state and local property taxes, and the exclusion of capital gains taxes on owner occupied housing. Over a decade, those tax subsidies will cost more than $2 trillion. The single biggest housing subsidy is the mortgage deduction, which will add $130 billion to the deficit in the coming year alone.  The Tax Policy Center estimates that more than 70 percent of the benefit of the mortgage and property tax deductions go to the highest-earning 20 percent of households—those making $104,000 or more. 

Voluntary Disclosure Renewed for Offshore Cheats - In 2009, the IRS provided a generous voluntary disclosure program for people who had money socked into offshore accounts.  See 2009 Voluntary Disclosure Program, IRS. Ordinarily, the taxes, interest (at 20%), accuracy-related penalty (at 20% of the tax liability) and FBAR penalties --at 50% of the account amount over several years--could add up to considerably more than the amount in the account.  The 75% penalty for fraud is a definitepotential, and criminal prosecution (for tax evasion, failure to file a return, filing a false return, etc.) is a possibility too.   The 2009 voluntary disclosure program required taxpayers to reveal all previously undisclosed foreign accounts, amend their returns, and pay all taxes due.   When the ABA tax section met in Boca Raton Florida in late January, IRS officials announced that there will be a second voluntary compliance program for those persons who still have not come forward.  To maintain credibility for future such programs, of course, the IRS will have to be sure that the penalties for disclosure at this later stage will be higher than the penalties for the earlier disclosure program.

Offshore bank accounts--getting riskier - As I noted in an earlier posting, the IRS has continued its focus on secret offshore bank accounts. Naturally, the media covers this issue for their wealthy readers who are following the IRS's every action in this matter. See, e.g., Paul Sullivan, Hiding Money Overseas? You're Taking a Big Chance, NYTimes, Feb. 4, 2010.  Sullivan runs through the ways that it has become riskier to hide accounts, as Wikileaks now has indicated that it plans a release of additional names provided by a whistleblower. It's not just whistleblowers that secret account holders need to worry about, of course. Jilted lovers, business competitors, disgruntled employees--anyone who knows about the account could turn into a whistleblower for personal reasons, with the whistleblower reward just icing on the cake.

Vision: Everyday Brits Are in Revolt Against Wealthy Tax Cheats — Can We Do That Here? - Imagine a parallel universe where the Great Crash of 2008 was followed by a Tea Party of a very different kind. Enraged citizens gather in every city, week after week—to demand the government finally regulate the behavior of corporations and the superrich, and force them to start paying taxes. The protesters shut down the shops and offices of the companies that have most aggressively ripped off the country. The swelling movement is made up of everyone from teenagers to pensioners. They surround branches of the banks that caused this crash and force them to close, with banners saying, You Caused This Crisis. Now YOU Pay. As people see their fellow citizens acting in self-defense, these tax-the-rich protests spread to even the most conservative parts of the country. It becomes the most-discussed subject on Twitter. Even right-wing media outlets, sensing a startling effect on the public mood, begin to praise the uprising, and dig up damning facts on the tax dodgers. Instead of the fake populism of the Tea Party, there is a movement based on real populism. It shows that there is an alternative to making the poor and the middle class pay for a crisis caused by the rich. It shifts the national conversation. Instead of letting the government cut our services and increase our taxes, the people demand that it cut the endless and lavish aid for the rich and make them pay the massive sums they dodge in taxes.

Financialization Era: how banking welfare captured our economy and ravaged the wealth of the working and middle class. Building profits through financial debt leverage.- The American banking system has transformed the economy into one enormous speculative casino with bells and whistles and free cocktails for those that participate.  The problem of course is that most don’t have excess income to drop into the financial slot machines.  Now banking in better times should be seen as the lubricant of the economy.  It allocates capital to areas in the economy where actual real growth was occurring.  Today the financial sector operates as an incestuous industry funding growth in its own industry.  A snake swallowing its own tail but when the inevitable end comes, it is society that is forced to pick up the tab.  Ultimately profits have to come from something real and not just skimming imaginary profits from interest.  This banking welfare is largely a reason why our economy is faltering on the vine and Wall Street banking profits are soaring.  It is no coincidence that as debt pilfered the economy that financial profits soared.  We are living in era that can be dubbed the financialization of the American economy.

Fed Seeks to Identify Firms That Pose ‘Systemic’ Risk - Federal regulators on Tuesday took an expansive view of the types of companies that could be deemed essential enough to the financial system that they should be subjected to greater oversight.  The Federal Reserve, in a 22-page proposal required by the Dodd-Frank financial legislation, outlined initial criteria for identifying ”systemically important financial institutions,” whose collapse would pose a serious threat to the economy.  The Fed says at least 35 companies, all of them big banks, may pose systemic risks, but that number could grow to include nonbanks like large hedge funds, insurers, asset managers and consumer finance companies. Even payment companies like Visa and MasterCard could face greater oversight under the Fed’s proposed guidelines.  “They have made sure that nobody is going to be excluded on a definitional basis,”"What’s left to play out is how regulators employ this authority.”

Questioning Goldman’s “Market Making” Defense - Yves Smith - The notion underlying the Volcker rule is that too big to fail institutions have a government backstop and therefore their activities should be restricted to the types of intermediation that support the real economy. The taxpayer has no reason to fund “heads I win, tails you lose” wagers. Various firms, most notably “doing God’s work” Goldman, has tried to play up the social value of its role, whenever possible wrapping its conflict-of-interest ridden trading activities in the mantle of “market making”. A big problem in taking about market making versus position trading is that, Goldman piety to the contrary, the two are closely linked. Even though all the major dealer banks created proprietary trading operations to allow top traders to speculate with the house’s capital, plenty of positioning also takes place on dealing desks. While dealers are obligated to make a price to customer (well, in theory, it’s amazing how many quit taking calls in turbulent markets), they are shading their prices in light of how they feel about holding more or less exposure at that time. And the dealing desks, just like the prop traders, are seeking to maximize the value of their inventories over time.  A Goldman discussion of risk management presented yesterday (hat tip reader Michael T) gives reason to question that much has changed on Wall Street regarding the role of position taking, now taxpayer supported, in firm profits. One slide shows that nearly half their positions are held more than 45 days.

Wallison and the three “des” – Deregulation, Desupervision and De Facto Decriminalization - Peter Wallison dissented from the Commission’s finding that deregulation played a material role in the crisis. The Commission report and the dissents do not distinguish between the three “des” – deregulation, desupervision, and de facto decriminalization. Deregulation occurs when one reduces, removes, or blocks rules or laws or authorizes entities to engage in new, unregulated activities. Desupervision occurs when the rules remain in place but they are not enforced or are enforced more ineffectively. De facto decriminalization means that enforcement of the criminal laws becomes uncommon in the relevant industries. These three regulatory concepts are often interrelated. The three “des” can produce intensely criminogenic environments that produce epidemics of accounting control fraud. In finance, the central task of financial regulators is to serve as the regulatory “cops on the beat.” When firms gain a competitive advantage by committing fraud, “private market discipline” becomes perverse and creates a “Gresham’s” dynamic that can cause unethical firms and officials to drive their honest competitors out of the marketplace. The combination of the three “des” was so criminogenic that it generated an unprecedented level of accounting control fraud, which in turn produced unprecedented levels of “echo” fraud epidemics. The combination drove the crisis in the U.S. and several other nations.

Wall Street Knows Meltdown Was Just Bad Dream: Simon Johnson… Robert Benmosche, chief executive officer of America International Group Inc., made several comments last week that were so stunningly ignorant that it’s hard to believe he actually said them.  “All of the states where we’re a leader, where we’re the No. 1 insurer, are red states. All of the states where we’re at the bottom are blue states,” Benmosche said last week at a conference in Washington. “Part of what we found out is that our model is about culture, and it’s about the attitude in the public. And what we find is where there’s more of a tendency for people to be more liberal, more that the government is responsible for what happens to me.”  It’s even harder to believe that someone with such views is not only the top officer at one of America’s largest financial institutions, but one of the many that only exists at all because the government bailed it out with billions and billions of taxpayer dollars -- something Benmosche and too many of his fellow CEOs in finance pretend never happened.   If AIG and Benmosche have really discovered that political beliefs affect creditworthiness in a measurable way, this is a major scientific breakthrough. Let’s hope AIG will either back up his claims with hard data or Benmosche will retract his statement.

“To Blame Wall Street For the Financial Meltdown Is Absurd” - Simon Johnson - At the heart of the Treasury Department’s strategy for refloating our largest financial institutions is an important assumption – decision-makers at our largest institutions have “learnt their lesson” and will be more careful going forward. The latest string of pronouncements from the top of Wall Street suggests that this assumption is badly flawed. In a column now running on Bloomberg, I review the recent statements of Robert Benmosche (AIG) and Bob Diamond (Barclays).  Their views are not encouraging.  They want to run bigger, more global and extremely complex financial institutions.  They also appear to favor a great deal of leverage (high debt relative to equity) wherever possible. Steve Eckhaus – a top Wall Street compensation lawyer (he will get you your bonus) – articulated the underlying view with great clarity to Saturday’s Wall Street Journal, “To blame Wall Street for the financial meltdown is absurd.” The absurdity here is that we have created Too Big To Fail banks (and insurance companies) and that we are allowing them to become Too Big To Save – while our political elite blithely looks the other way.

In Mind-blowing Show of Hypocrisy, AIG Bites Hand That Feeds It - In the world of American Big Business, memory is short and chutzpah is long. At a little gathering of insurance folks in Washington, D.C., AIG’s chief Robert Benmosche revealed that the company which used Uncle Sam as the Great Sugar Daddy deems the ‘liberal’ culture of relying on government bad for business. Bloomberg reports: “American International Group Inc.’s mortgage insurer does more business in Republican-leaning states as it signs up more reliable customers than those in “more liberal” areas, Chief Executive Officer Robert Benmosche said. “All of the states where we’re a leader, where we’re the No. 1 insurer, are red states, all of the states where we’re at the bottom are blue states,” Benmosche, 66, said yesterday at a conference in Washington. “Part of what we found out is that our model is about culture and it’s about the attitude in the public. And what we find is where there’s more of a tendency for people to be more liberal, more that the government is responsible for what happens to me.” After getting away with defrauding investors and then sucking up boatloads of taxpayer cash in a massive 182 billion government bailout initiated by red-stater George W. Bush, Benmosche condemns a culture of irresponsibility he believes is bred in blue states. Never mind that red states generally receive much more in federal dollars than they pay into the system.

Resurfacing exchanges - Now, the noises about moving the “derivatives problem” to exchanges seem to be dying, let unreason rule, and let’s suggest something off the wall: Move everything to a single exchange! Doesn’t sound off the wall?Then how about making the central bank the exchange. Simply mandate that the only counterparty for an OTC contract can be the central bank, and make all other derivatives (which are not traded on other recognized exchanges) illegal.The requirement would be that the CB has to accept the contract when offset by equal-and-opposite with other party, but also that the CB can set the collateral requirements.That would immediately produce a couple of results. For a starter, it would remove the single-point of failure problem, and make a failure resolution somewhat easier, without the TBTF problem

Why Are the Big Banks Still So Bad? - Yesterday, Elizabeth Warren and the new Consumer Financial Protection Bureau convened their first roundtable of religious leaders at the White House. Why does this matter? Because there is a lot that still needs to change about the behavior of our financial institutions, and this bureau has the opportunity to make some big strides in the right direction. When I was at the World Economic Forum in Davos, Switzerland the other week, I kept hearing business leaders talking about the struggle to actually change business behavior. Why is it so hard to change some of these practices? If there is a lot of money to be made in confusing, misleading, or tricking consumers, it becomes very hard not to do it. If you can hide some of the real costs for whatever it is you are selling, you can pull business away from a competitor who doesn’t hide those costs. This is why we need some basic rules of the road for our economy and some fundamental protections for America’s families from dishonest and unfair marketing practices — which is what Elizabeth Warren believes is the mission of the CFPB.

Political shift poses test for Warren - Harvard law professor Elizabeth Warren’s biting criticism of Wall Street won her fans across the country and a powerful appointment from President Obama to oversee a new consumer protection agency. But now that Warren has settled into her office near the White House and as she readies the agency to enforce rules on banks, loans, and credit cards that could affect every American family, she finds herself operating in a dramatically changed political climate. The Obama administration has shifted from bashing Wall Street “fat cats’’ to courting some of the same groups that fiercely opposed Warren and her agency. That has left Warren with a pair of challenges: being a tough industry watchdog in what is now characterized as a business-friendly administration and trying to quickly assemble and manage an agency when her skills are rooted in the proverbial ivory tower at Harvard Yard.

Elizabeth Warren Is Expecting Your Call - The new Consumer Financial Protection Bureau is open to your suggestions. Officials have said they expect that the bureau will become  the “cop on the beat” to enforce laws on consumer financial products and services like credit cards and student loans and will serve as a voice for consumers. But the bureau doesn’t get most of its legal authority until July. In the meantime, it introduced its Web site earlier this month with the goal of hearing from consumers as the agency is under development. “We wanted to launch the Web site for one very important reason -– to start a conversation with you,” Elizabeth Warren, assistant to the president and special adviser to the secretary of the Treasury on the Consumer Financial Protection Bureau, said in a video on the site. And as text on the site states: “Before we begin carrying out federal consumer financial laws, we want to know what you think. The Consumer Financial Protection Bureau exists to serve the American public, and Open for Suggestions is your opportunity to offer input.”

Payday Lenders Join With Indian Tribes - The Modoc chief said the payday-loan business is a welcome addition. Here, the Stables, a Modoc casino in Miami, Okla. It is a run-of-the-mill call center in a cookie-cutter suburban office park, except for this: At least a dozen payday lenders doing business through AMG are owned by American Indian tribes. Such loans average about $400 and are secured by the borrower's next paycheck. Because of the sovereign immunity granted to tribes by the U.S. government, they are shielded from interest-rate caps and other payday-loan regulations. Tribal lenders can even lend in the 12 U.S. states where lawmakers have kicked out the rest of the payday-loan industry. Those advantages are luring American Indian tribes into the payday-loan business, and unleashing a scramble by lenders to team up with tribes. Much like the casino boom that began about 25 years ago, payday loans are emerging as a promising revenue stream for economically struggling tribes, especially those willing to let outside companies piggyback on their freedom from state and U.S. lending laws.

Investment in financial literacy and saving decisions - The demographic transition is increasingly shifting the responsibility of saving decisions from the welfare system to individuals. The switch from defined benefits to defined contributions pension systems is making individuals more liable for their long-term saving choices. In addition, the recent financial crisis has questioned people’s ability to manage their debts. Previous research has suggested that low levels of financial literacy can often be blamed for poor financial decisions by individuals, with knock-on effects for the wider economy. This column adds empirical evidence based on cross-country aggregate and micro-data, showing that indeed countries with higher financial literacy also have higher saving rates and greater wealth.

Wall St. Joins S.E.C. in Plea for Bigger Budget - The Securities and Exchange Commission is nearly broke.Not just “broke” as in it failed to regulate Wall Street or that it missed catching Bernard L. Madoff’s Ponzi scheme. But “broke” as in it is out of money. At least that’s what Mary L. Schapiro, the S.E.C.’s chairwoman, has been telling anyone who will listen about the agency’s financial problems. With President Obama planning to freeze the budget and Congress looking for cuts, the department could be deprived of a $160 million budget increase, keeping its annual funds flat at $1.1 billion. Amid the looming financial constraints, the S.E.C. is cutting back on investigations, halting hiring — Ms. Schapiro was supposed to hire 800 new people this year — and canceling much-needed technology upgrades to monitor the markets. (Think “flash crash.”)  You might expect that most Wall Street lawyers would be quietly breathing a sigh of relief. But, perhaps curiously, some of the industry’s best-known lawyers, many of whom once worked at the agency, have been not-so-secretly lobbying Congress for the S.E.C. to get more money.

Exchange Mergers, or “Pump Up The Volume”  - Yesterday we were treated to news that the LSE and TMX are looking to merge, as well as the NYX and Deutsche Bourse. We listened as Wall Street analysts opined on CNBC how the NYX / Deutsch Bourse proposed merger was natural, good for all shareholders and parties, and good for liquidity, and therefore markets in general. We thought on that quite a bit. Without doubt, the NYX – Deutsche Bourse combination will be an exceptionally powerful derivatives exchange; it will provide perhaps the last real opportunity in electronic trading to form a monopoly-like cash machine. Scott Wapner on CNBC had this right all day yesterday, and hats off to him; the merger is about derivatives dominance. For shareholders of both companies, the NYSE and Deutsche Bourse, this deal is a home run. Why? Effectively we will have the largest futures exchange in the world (yes bigger than the CME/CBOT which control 99% of the US Futures market in their listed contracts), and because of the synergies of having one clearing house, the amount of revenue and technology cost savings will be substantial. Oh, and regarding options, NYX and ISE have about a 40% market share in listed options (Deutsche Bourse owns Eurex, which owns the ISE, which in turn owns 31% of Direct Edge incidentally).

Gingrich Sees NYSE Talks as ‘Fundamental Blow’ to U.S. - Former House Speaker Newt Gingrich on Thursday called talks that could lead to Deutsche Boerse acquiring the New York Stock Exchange “a fundamental blow to our capacity to lead the world.” Mr. Gingrich  told a gathering of conservatives in Washington that the deal would be “a major sign of decline” for New York as the financial capital of the world, and he said President Barack Obama’s policies were to blame. “Why are we falling behind?” Mr. Gingrich asked an audience at the Conservative Political Action Conference on Thursday. “Why is the New York Stock Exchange being taken over by Frankfurt? Why are we in a mess? Why is unemployment over 9%?” The short answer (according to Mr. Gingrich): “The Obama administration is anti-jobs, anti-small business, anti-manufacturing, pro-trial lawyers, pro-bureaucrat, pro-deficit spending and pro-high taxes.”

Is the Proposed NYSE-Deutsche Börse Merger All It’s Cracked Up to Be? -- Yves Smith - The financial media is duly falling in line and giving a thumbs up to the proposed merger between the New York Stock Exchange and Deutsche Börse. Mayor Bloomberg contends it is both good for New York City and provides customers better service in an era of increasingly global equity trading. Industry analysts approved. Not surprisingly, stocks of other exchanges are up based on takeover speculation. Your truly is wary about concentrations of power in the financial arena, and consolidation of stock exchanges has the potential to go in that direction. One critic of the deal was former Goldman Sachs co-chairman John Whitehead. Admittedly, some of his objections sound quaint, echoing the hand wringing of the 1980s when the Japanese acquired trophy assets such as the Rockefeller Center. From Bloomberg:

The GOP Attack on "Job-Killing Regulations" is Dumb - Robert Reich - Republicans aim to end all “job-killing regulations” — especially those that, according to House Speaker John Boehner, are “strangling” business with detailed requirements over health, safety, the environment, corporate governance and finance.Here’s another instance of where the White House’s attempt to preempt Republican rhetoric ends up legitimizing it — and reframing the public debate around an issue that’s hardly central to what ails America. The reason we have continued sky-high unemployment has nothing to do with excessive regulation. There was no sudden outpouring of federal regulation in 2007 before the economy tanked and millions lost their jobs. If anything, the economy unraveled because of too little regulation. Wall Street went on a binge, remember? The Street could get almost free money from the Fed (which had reduced interest rates to near zero) and do just about whatever it wanted with it.

Watchdog says IMF missed crisis risks - The International Monetary Fund badly missed the risks that led to the global financial crisis because of a naive admiration of light-touch US and UK financial regulation and a “groupthink” mentality, according to its watchdog.  A sharply critical report from the fund’s independent evaluation office, published on Wednesday, said that the IMF was very late to spot the severe interconnected problems in the world’s advanced economies. As late as the summer of 2008, the IMF’s management was confident that “the US has avoided a hard landing” and “the worst news are [sic] behind us”, the report said.

Q&A: Ken Rogoff Says Crises Are Like Heart Attacks, Predicting Timing Is Tough - Few people on the planet can claim to know as much about financial crises as Harvard University economist Kenneth Rogoff. Together with Carmen Reinhart of the Peterson Institute for International Economics, he has created a database on banking, currency and debt crises going back to the 13th Century, and written an entire book on the uncanny human ability to ignore the lessons of financial history. Today, those efforts — along with his work on monetary policy and exchange rates — have won him the Deutsche Bank Prize in Financial Economics, a 50,000-euro award presented every two years by the Goethe University Frankfurt’s Center for Financial Studies. On the occasion, we speak with him about how he sees the world faring in the wake of the latest financial crisis — and solicit some advice on exchange rates.

Morgan Stanley's Liquidity Pool - It’s now official: the week of September 15, 2008 was a really bad week to work in Morgan Stanley’s prime brokerage. And the next week wasn’t so hot either. Various internal documents released with the FCIC report provide a fairly detailed picture of Morgan Stanley’s liquidity position during the crisis, and it’s not pretty. Prime brokers like Morgan Stanley relied heavily on customer cash held in prime brokerage accounts (known as “free credits”) to fund themselves. So when hedge funds all pulled their cash from Morgan Stanley’s prime brokerage after Lehman failed, that had a direct effect on Morgan Stanley’s liquidity pool. On one day alone (Wednesday, September 17th), Morgan Stanley’s prime brokerage lost $36.6 billion in free credits.

What Did Bank CEOs Know And When Did They Know It? - Simon Johnson - One view of executives at our largest banks in the run-up to the crisis of 2008 is that they were hapless fools.  Not aware of how financial innovation had created toxic products and made the system fundamentally unstable, they blithely piled on more debt and inadvertently took on greater risks. The alternative view is that these people were more knaves than fools.  They understood to a large degree what they and their firms were doing, and they kept at it up to the last minute – and in some cases beyond – because of the incentives they faced. New evidence in favor of the second interpretation has just become available, thanks to the efforts of researchers who went carefully through the compensation structure of executives at the top 14 US financial institutions during 2000-2008.  The key finding is that CEOs were “30 times more likely to be involved in a sell trade compared to an open market buy trade” of their own bank’s stock and “The dollar value of sales of stock by bank CEOs of their own bank’s stock is about 100 times the dollar value of open market buys”   Disproportionately more sales than purchases strongly suggests that the CEOs felt their stock was more likely overvalued than undervalued.

3 Ex-IndyMac Executives Are Accused of Fraud - The Securities and Exchange Commission on Friday accused three former top IndyMac executives of fraud, saying they painted a rosy picture of the California lender’s health even as it was collapsing in 2008. By announcing civil fraud charges against senior executives of what was once one of the country’s largest mortgage lenders, the S.E.C. has injected new life into its investigations into the financial crisis. The IndyMac charges are shaping up to be among the agency’s biggest cases stemming from the crisis. IndyMac’s former chief executive and two former chief financial officers are accused of filing “false and misleading” documents with regulators. The executives, the S.E.C. said, led shareholders to believe that the bank could rebound from months of hefty losses, causing its shareholders to be defrauded in July 2008, when IndyMac’s stock price plummeted and the bank shut its doors. IndyMac’s failure sent shock waves through Wall Street. At the time, it was the second-largest bank failure in United States history.

So Why is the FCIC Protecting Bernanke & Co? -  Yves Smith - Yes, the question in the headline is rhetorical. We know that great efforts have been made and are continuing to be made not to reveal certain aspects of the financial crisis, and the only rationale that makes an iota of sense is the information would embarrass certain people in power. The latest object lesson is the failure of the FCIC to post the full recording of its 2009 interview with Bernanke. The rationale is that the interviews contain “legal or proprietary information”, so it is being withheld for five years. Are these people unable to use a calendar? The critical phase of the crisis was pretty much over as of end of 2008. Any sensitive customer or transaction position information from that period is now stale. And if it really was sensitive (say it somehow fell in trade secret category), that means it would not be kosher to release it five years hence. From BloombergThe Financial Crisis Inquiry Commission, created by Congress to investigate and report on the causes of the market meltdown late last decade, won’t publicly release its full 2009 interview with Federal Reserve Chairman Ben S. Bernanke, a commission spokesman said.

The Wrong Crisis - Dean Baker - The Financial Crisis Inquiry Commission (FCIC), tasked by Congress with determining the causes of that slump, isn’t giving us the more complete picture. The problems with the FCIC’s report, released at the end of January, stem from the Commission’s very inception: it was focused on the wrong topic. The FCIC investigated risky investments, lax regulation, excessive leverage. And it downplayed the more mundane, but vastly more important, collapse of the housing bubble.The FCIC was set up to investigate a sidebar rather than the real story. Given the definition of its mission, the Commission did a reasonably good job. However, its 662-page report is a distraction from the real reasons why 25 million Americans are unemployed, underemployed, or have given up looking for work altogether. The real story doesn’t require 662 pages; it can easily be summed up in a few paragraphs.

Foreclosures, house prices, and the real economy - Vox EU - Several academics, policymakers, and regulators emphasise the role of foreclosures in the Great Recession and subsequent global crisis. This column provides one of the first attempts to show this empirically. Using micro-level data from all US states, it shows that foreclosures had a significant negative effect on house prices, residential investment, durable consumption – and consequently the real economy.

Is AIG Getting Yet More Presents from the Treasury, Meaning the Chump Taxpayer? - Yves Smith - On the one hand, as we pointed out, the Treasury has from the get go of its ongoing rescue of AIG engaged in continued subsidization of the giant insurer, starting with the all too frequent restructurings of its financings. The net effect was not simply to provide more dough to the AIG, but to put the taxpayer in a worse and worse position. The taxpayer effectively owned AIG, with the first financing secured by all the assets of the company and further holding 79.9% of the equity. The first rule of being a creditor in a troubled company is that you want the most senior position in the capital structure, always. That rule was repeatedly violated with AIG.  The latest until now took place in the pre-IPO restructuring, which looks to have provided a further $6 billion to AIG. Some creative accounting allowed Treasury to claim to the public that the expected losses for TARP accounting purposes were lower, when nothing fundamentally had changed. And if we read the latest, somewhat ambiguous press reports (hat tip reader Hubert, who flagged the issue), it looks like the Treasury’s creative accounting move is at odds with continued leaks at AIG. It appears that the Treasury has given another $2 billion to AIG, at least per Bloomberg and the Wall Street Journal.

A Seer On Banks Raises A Furor On Bonds - If one stock-picker emerged intact from the wreckage of the financial crisis, it was Meredith Whitney. With a prescient warning about bank stocks in 2007 — as well as a gift for the perfect sound bite — she became a media darling, celebrated in a Fortune cover article and in frequent television appearances as a market seer. Until now, that is. These days, Ms. Whitney, 41, finds herself pilloried in the news media and by colleagues for predicting a calamity in municipal bonds. Critics say the call is overstated, but it has alarmed investors in that usually sleepy market. Ms. Whitney is also drawing scrutiny from Washington, where a Congressional panel will meet on Wednesday to examine the turmoil in the muni bond market, including whether Ms. Whitney’s call has fed the volatility and allowed some investors to profit unfairly.

Goldman “Partner” Hedging Circumvents Intent of Pay Reforms - Yves Smith - While I don’t want to overdo the criticism of Wall Street pay practices (on second thought, I am not sure such a thing is possible), I’d be remiss if I neglected to highlight a very good job of analysis and reporting by Eric Dash of the New York Times (and on this topic.  The Times has been picking apart a partnership that Goldman preserved after it went public in 1999 and is the vehicle that holds stock options and shares allotted to the top producers of the firm, a 475 member group. It already holds 11.2% of the firm and its share is likely to increase as options vest. The report published tonight reveals that members of the Goldman partnership would routinely hedge their Goldman exposures. That defeats the purpose of share grants and equity linked pay. The recipients are supposed to have their fates rise and fall with those of the outside shareholders. After all, the idea is they have a vested interest to do what is right for public owners. If they can truncate their downside, it simply reinforces the the tendency to take undue risks since the management group received the bennies of price appreciation and can shed the loss of failures.

Unofficial Problem Bank list at 944 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Feb 11, 2011. Changes and comments from surferdude808:  After five removals and three additions, the Unofficial Problem Bank List has two fewer institutions this week at 944, but assets increased by $1.8 billion to $413 billion.

Big Banks to Pay Larger Premium to Insure Deposits - Big financial institutions will pick up a greater portion of the cost to protect deposits when banks fail, under a plan adopted Monday by federal regulators.  The new fee structure, which takes effect in April, will result in about 110 large banks covering about 80 percent of the premiums paid into the government’s deposit insurance fund each year, up from 70 percent. The fund, administered by the Federal Deposit Insurance Corporation, is expected to collect $14 billion in premiums this year. The change, approved unanimously by the five-member board of the agency, was a result of the Dodd-Frank financial regulations that passed last year. Addressing complaints by small banks that they were taking on too much of the financial burden to save failing banks, the law directed the F.D.I.C. to re-evaluate the fees according to the value of assets held by each bank, instead of the level of deposits.

Toxic' Assets Still Lurking at Banks- During the financial crisis, investors fretted over "toxic," hard-to-value assets that banks were carrying. Those fears have faded as bank profits have rebounded, loan delinquencies have declined, and bank stocks have soared 25% in the past five months.But banks still hold plenty of the bad assets that once spooked investors: mortgage-backed securities, collateralized debt obligations and other risky instruments. Their potential impact concerns some accounting and banking observers. In part due to those bad assets, the top 10 U.S.-owned banks had $13.8 billion in "unrealized losses" that have lasted at least a year in their investment portfolios as of Sept. 30, according to a Wall Street Journal analysis. Such losses are baked into banks' book value, but don't get counted against earnings as long as the banks believe the investments will later rebound. If those losses were assessed against earnings, it would have reduced the banks' pretax income for the first nine months of 2010 by 21%

Audit Notes: Toxic Assets, Foreclosure Mills, SEC (Finally) Looking at CDOs - What ever happened to that pile of toxic assets that the banks were sitting on? Wall Street Journal reporter Michael Rapoport took a look at that the other day.  But banks still hold plenty of the bad assets that once spooked investors: mortgage-backed securities, collateralized debt obligations and other risky instruments. Their potential impact concerns some accounting and banking observers. In part due to those bad assets, the top 10 U.S.-owned banks had $13.8 billion in “unrealized losses” that have lasted at least a year in their investment portfolios as of Sept. 30, One problem centers largely on “Level 3” securities, illiquid investments that can’t be easily valued using market prices. According to the Journal analysis, as of Sept. 30, the top 10 banks had $360.7 billion in “Level 3” securities. That amounts to 42.6% of the banks’ shareholder equity, a pile of assets whose value is hard to verify.The Journal is good to point out, too, that these assets are valued at what the banks say they’re valued at. In other words, they’re marked to myth.

Bank of America to Create Troubled Loans Unit - Bank of America said Friday that it would create a unit to handle 1.3 million soured mortgages as Brian T. Moynihan, the bank’s chief executive, tried to distance the company from the fallout of the mortgage crisis. The entity, known as Legacy Asset Servicing, will become the repository for tens of billions of dollars in troubled assets, including many subprime products that are no longer offered by Bank of America but continue to hang over the company. Most of the loans were picked up when Bank of America bought Countrywide Financial in 2008. Legacy Asset Servicing will also lead the handling of home loans in default, including initiating foreclosure proceedings, and deal with billions of dollars in claims by investors seeking to force Bank of America to buy back bad mortgages.

FDIC Advances Bonus Pay Curbs, But Execs Have a Work-Around - Here’s the thing about the FDIC: They try. Almost alone among the major regulators, they have pressed for real limits on risk-taking activities at the major banks. Since they ultimately have to spend from their budget should banks fail, they have plenty of incentive. And they have a leader in Sheila Bair who takes her regulatory commitment seriously, rather than as a service for Wall Street. So Bair is trying again. The FDIC voted yesterday to require bigger banks to pay more into the agency fund to cover the cost of bank failures. They also proposed a three-year deferral for half of all bank bonuses for top executives at the largest financial institutions. They advanced this rule on Monday on all firms with over $50 billion in assets. It would apply to all executives who stand to cause losses in a particular company.  The problem is that the execs at the top firms have already discovered a work-around on this one. Even though many firms shifted more bonus pay into company stock to comply with the expected rules, through hedging they can eliminate the downside risk.

Rich Take From Poor as U.S. Subsidy Law Funds Luxury Hotels - The landmark Blackstone Hotel in downtown Chicago, which has hosted 12 U.S. presidents, opened in 2008 after a two-year, $116 million renovation. Inside the Beaux Arts structure, built in 1910, buffed marble staircases greet guests spending up to $699 a night for rooms with views of Lake Michigan.  What’s surprising isn’t the opulent makeover: It’s how the project was financed. The work was subsidized by a federal development program intended to help poor communities.  The biggest beneficiary of taxpayer help for the Blackstone revamp was Prudential Financial Inc., the second-largest U.S. life insurer. The company got $15.6 million in tax credits from the U.S. Department of the Treasury for helping to fund the project, according to Chicago city records, Bloomberg Markets magazine reports in its March issue.

Housing Bubbles Are Few and Far Between, by Robert Shiller - WHAT’S the outlook for home prices over the next decade? It’s not easy to tell. We need to confront the basic fact that near the beginning of the 21st century, the market for homes in much of the world suddenly became more speculative than ever.  This enormous housing bubble and burst isn’t comparable to any national or international housing cycle in history. Previous bubbles have been smaller and more regional.  We have to look further afield for parallels. The most useful may be the long trail of booms and crashes in the price of land, particularly of farms, forests and village lots. Those upheavals may give some insights into the present situation, and some guidance for the next decade.  In the 19th century and most of the 20th, speculation in land was a powerful phenomenon. There was little speculative activity around homes, however, which were usually viewed as rapidly depreciating assets whose value was to be found almost entirely in physical buildings, not the land beneath them. Eventually, the buildings were expected to be torn down and replaced, so there was little bubble psychology for housing on any large scale. 

THE PERFECT BAILOUT: Fannie And Freddie Now Send Taxpayer Cash Directly To Wall Street - As the terror of the financial crisis recedes, many folks have forgotten about the two huge taxpayer-owned mortgage companies, Fannie Mae and Freddie Mac. But they're still there, money-manager Barry Ritholtz reminds us. And they're still sending billions of dollars of taxpayer cash directly to Wall Street, in what might be described as the "perfect bailout." How does this bailout work? Fannie and Freddie got a "blank check" from Treasury Secretary Tim Geithner at the end of the financial crisis. This blank check allows the housing giants to lose as much money as they want, with the taxpayer footing the bill. Fannie and Freddie use much of this money to buy mortgages from Wall Street at what may be grossly inflated prices.  This is a super arrangement for the banks, because they get to unload all their terrible mortgages at prices that won't produce losses. And it's fine for Fannie and Freddie because, well, because they have the blank check. But of course there's no free lunch. And in this scheme, the US taxpayer is, as usual, footing the bill.

The Real Estate Industrial Complex - Barbara J. Thompson, executive director of the National Council of State Housing Agencies, a non-profit organization that purports to keep homes in the US affordable, is either deeply misguided or a shrewd manipulator working on behalf of the business segment of what Business Week's Lorraine Woellert calls "The Real-Estate-Industrial Complex". The Real Estate Lobby Is Ready to Rumble Barbara J. Thompson plans to put a human face on the high-stakes debate over whether to preserve cherished U.S. government subsidies for home loans. Hundreds of faces, in fact. Next month, she'll lead a legion of "everyday people" to Capitol Hill to affirm the virtues of homeownership and urge Congress not to abandon federal support for low-cost mortgages. The present US housing finance system, in which the government - through Fannie Mae, Freddie Mac, Ginnie Mae, the FHA and others-, guarantees all losses from mortgage loans for the lenders, but none for the borrowers, is the prime perpetrator in, if not the outright cause of, the financial -and political- crisis the US finds itself in. It's those government -read: taxpayer- guarantees that made it possible for lenders to throw all caution to the wind, lend to anyone who could fog a mirror, and use the proceeds to engage in ultra-high-stakes poker games in the international finance markets.

Number of the Week: Government’s Overwhelming Role in Mortgages - 92%

— The share of new mortgage loans backed by the U.S. government. One of the most crucial issues in safeguarding the U.S. against another financial disaster is figuring out what to do with Fannie Mae and Freddie Mac, the giant mortgage firms the government bailed out in the midst of the financial crisis. Given how deeply the government has waded into the mortgage market, it won’t be an easy task. Fannie alone ranks as the world’s largest bank by assets, while Freddie is in the top ten. The firms’ subsidized mortgages encourage Americans to take on a lot of debt. Their balance sheets, consisting of long-term investments financed with short-term borrowing, make them highly susceptible to sudden credit freezes. Their government ownership means taxpayers stand to lose tens of billions of dollars if the firms get into trouble again. On Friday, the U.S. Treasury published a “white paper” with some ideas on how to handle the behemoths. Fannie and Freddie can curb borrowers’ ability to get too deep into debt by requiring larger down payments and lowering loan limits. They can increase the fees they charge for mortgage guarantees to bring those fees more in line with the risk they’re taking on. And they can gradually wind down their businesses, ceding the market to private lenders who must have ample capital to protect them from bankruptcy in the event of losses. All that can help remove market distortions and save taxpayers’ money.

A Big Two Weeks For The Housing Policy Debate - After nearly 30 months of conservatorship, the new House and the Administration are expected to signal just how they plan to reform Fannie Mae and Freddie Mac, the housing government-sponsored enterprises (GSEs). Given how dominant Fannie and Freddie are in terms of market share today, reform of these institutions will largely determine the future of the $11 trillion market for residential mortgage finance. The analytical challenge presented by reform is that the most egregious excesses of the previous GSE model are not what precipitated all the taxpayer losses. For example, the first instinct of many reformers would be to ensure that the GSEs (or their successors) are never again able to build big mortgage portfolios. The second instinct would probably be to strictly limit the mortgages that would qualify for purchase (or guarantee) by the new GSEs

Dimon Calls Fannie, Freddie ‘Biggest Disasters of All Time’ - JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said government-sponsored mortgage companies Fannie Mae and Freddie Mac were “the biggest disasters of all time” and a leading cause of the U.S. financial crisis. “That one was an accident waiting to happen,” Dimon said in an interview with the Financial Crisis Inquiry Commission. The congressional panel yesterday released audio files of interviews gathered during its 18-month investigation into the causes of the crisis.  The Obama administration is set to announce in Washington today its recommendations on how to restructure the U.S. housing finance system. Washington-based Fannie Mae and Freddie Mac, in McLean, Virginia, have taken more than $150 billion in federal aid since regulators seized their operations in September 2008.  “We all knew about it, we all worried about it, no one did anything about it,” Dimon, 54, told investigators.

Moody's Zandi: Replace Fannie, Freddie With Public-Private Hybrid -  Mortgage rates could be one percentage point higher and house prices 10% lower if the U.S. mortgage market were fully privatized, according to a paper to be released Tuesday by Mark Zandi, chief economist at Moody's Analytics. The calculations help build Mr. Zandi's case for replacing Fannie Mae and Freddie Mac with new entities constituting a public-private hybrid system for financing home loans. The proposal is the latest in a growing list of white papers by economists and academics looking to influence the debate over how to reinvent the nation's mortgage market. The Obama administration is set to issue its own recommendations as soon as this week.

Arithmetic and the Fannie/Freddie Fix - Dean Baker - Arithmetic is a skill that is in short supply among economists in policymaking positions. The Obama administration is about to come out with its plans for replacing Fannie and Freddie. The word in the media is that the administration will propose a range of options, with one option maintaining a Fannie/Freddie type structure and one option going to a completely private system for the main sector of the housing market. (Presumably the Federal Housing Authority would remain in place even in the private system to provide credit to moderate income households.) The third option, that apparently many Washington policy wonks are smiling upon, is a hybrid system with private institutions buying mortgages with a government guarantee standing behind them. (Depending on the construction, the government may either guarantee the institution or the mortgage backed security -- more likely it will be the latter.) According to a new paper by Moody's, this sort of hybrid system will reduce the cost of a 30-year mortgage by 90 basis points (9/10ths of a percentage point) compared to a purely privatized system. The Moody's analysis also calculates that it will raise house prices by 8 percent compared to a privatized system.

Plans Near for Freddie and Fannie - The Obama administration and House Republicans are settling into a game of chicken over Fannie Mae and Freddie Mac, with each side daring the other to advance a plan for replacing the two housing finance companies.  The White House missed a deadline at the end of January for telling Congress what it wants to do. That report will be released as early as Friday, people with knowledge of its contents said, but it will present a range of options without stating a preference.  One possibility favored by some of President Obama’s economic advisers, and by many Republicans, would not create any federal replacement for Fannie and Freddie, leaving the private markets to provide mortgages for most Americans. The alternative approaches instead would continue some form of federal mortgage backstop. .

Will Obama's Plan for Fannie and Freddie Crater Housing? - Two years on from the government takeover of Fannie Mae and Freddie Mac, Washington wants out of the housing business. Tomorrow, the Obama administration is going to recommend slowly phasing out the government's role in the mortgage market, and who can blame them? Housing prices are still falling, foreclosures are rising, and there's so much inventory on the market that experts like Yale economist Robert Shiller say its going to take four or five years for prices to stabilize.The question is, will the private sector really be able to fill government shoes? Washington has been responsible for 9 out of every 10 new home loans in the last year. Meanwhile, banks have been sitting on their bailout cash, too spooked to doll it out in an economic recovery that still seems precarious.

The Administration's Proposal for Fannie and Freddie Will Increase Mortgage Costs - There are three alternative plans in the administration’s proposal. The first would still provide insurance for some mortgages, but the role of Fannie and Freddie would be substantially reduced. The second and third proposals would only provide relief during crises when the mortgage market is threatened with failure, and are therefore likely to have the larger consequences than the first proposal.All of these proposals reduce the amount of insurance on mortgage loans, and hence would be expected to cause an increase in mortgage interest rates to compensate for the increase in risk. However, there are some countervailing forces that will help to limit how much rates rise. First, there is also a proposal to gradually increase the down payment required to purchase a home to 10%. This will make it harder for many borrowers to obtain loans, and the fall in activity that results from this restriction will put downward pressure on mortgage rates. The down payment is still a big hurdle for borrowers, so even though this may lower rates some relative to where they would have been, it will still be harder to get credit.

Is Obama's Plan to Replace Fannie and Freddie Feasible? - First of all, let's start with what's clear: The government is not going to exit the housing market. Yes, after the White Houses GSE reform, Uncle Sam may play a more limited role, but that might take as long as 7 years for that transition. Mortgages are likely to become more expensive, but probably not by much. What's not clear: What exactly will replace Fannie Mae and Freddie Mac? What the impact on housing prices will be? And, most importantly, is Obama's plan any better than what we have now? On Friday, in a widely anticipated joint report from the Treasury Department and Department of Housing and Urban Development, the White House made clear that Fannie Mae and Freddie Mac, the large government mortgage guarantors, which many have in part blamed for the financial crisis - and have become one of the most costly parts of the clean up - are going to disappear. Although in a call with reporters, Secretary Tim Geithner said that path way from Fannie and Freddie would take 5 to 7 years.

White House wants less government in mortgage system - The Obama administration wants to shrink the government's role in the mortgage system -- a proposal that would remake decades of federal policy aimed at getting Americans to buy homes and would probably make home loans more expensive across the board. The Treasury Department rolled out a plan Friday to slowly dissolve Fannie Mae and Freddie Mac, the government-sponsored programs that bought up mortgages to encourage more lending and required bailouts during the 2008 financial crisis. The first option proposed by the administration would give the government no role beyond helping poorer and middle-class borrowers through agencies like the Federal Housing Administration, which provides insurance on mortgage loans. The second and third options would give the government a role as an insurer of mortgages, and each would prompt mortgage companies to pass along fees to borrowers.

Getting the government out of your house - IF ITS bruising battles over financial reform, health care and stimulus have taught Barack Obama anything, it’s that sending policy proposals to Congress can be a crapshoot. And so on housing finance reform his administration has taken a different tack. It’s proposed a handful of options for Congress to chew on, while moving to wind down the federal government’s housing footprint through its own means. The federal government currently guarantees roughly 85% of all new residential mortgages in America. They do so via the Federal Housing Administration, a federal agency charged with backing low downpayment loans to families of modest means, and through Fannie Mae and Freddie Mac. Though nominally still shareholder-owned, both of those firms have been under the thumb of their federal regulator, the Federal Housing Finance Agency (FHFA) and Treasury since being taken into “conservatorship” in 2008 when they teetered on the edge of collapse

Options for the Long-Term Structure of Housing Finance - The Obama Administration released an outline this morning on winding down Fannie and Freddie, and for the future of government involvement in the housing finance market.  Here is the Treasury press release on Fannie and Freddie. And here is the report.  The wind down of Fannie and Freddie will be slow and take a number of years, but the key question is what, if anything, will replace them? The plan offers three options:
Option 1: Privatized system of housing finance with the government insurance role limited to FHA, USDA and Department of Veterans’ Affairs’ assistance for narrowly targeted groups of borrowers
Option 2: Privatized system of housing finance with assistance from FHA, USDA and Department of Veterans’ Affairs for narrowly targeted groups of borrowers and a guarantee mechanism to scale up during times of crisis
Option 3: Privatized system of housing finance with FHA, USDA and Department of Veterans’ Affairs assistance for low- and moderate-income borrowers and catastrophic reinsurance behind significant private capital

Treasury Offers Some Good Ideas on Mortgage Finance - Today was a big one for housing finance. Treasury kicked things off with its much awaited report to Congress on “Reforming America’s Housing Finance Market.” And then the Brookings Institution hosted a full day conference on “Reforming the U.S. Mortgage Market.“ Both Treasury’s report and the conference showed that there’s still important debate about the potential merits and demerits of a continued government backstop in the prime mortgage market. Treasury’s three options, for example, run the gamut from no guarantee to a backstop guarantee that kicks in during bad times to a permanent, broad-based guarantee. I’ll have more to say on these options in the future.For now, I’d like to highlight several other aspects of the Treasury report and the discussion at Brookings that I found encouraging. Based on what I heard (and what I read between the lines of the Treasury report), there appears to be near-consensus on five important issues:

GSE Headfake: Yet More Looting Branded as “Reform” - Yves Smith - As time goes on, the various Ministries of Truth just get better and better at their stock in trade. We’ve gone from artful obfuscation like “extraordinary rendition”, and “Public Private Investment Partnerships” to stress free “stress tests” (particularly the Eurozone version) designed to get bank stocks up and credit default swap spreads down, to even grosser debasement of language. What passes for the left has for the most part been dragged so far to the right that the use of once well understood terms like “liberal” and “progressive” virtually call for definition. And the word “reform” has virtually been turned on its head. Financial services reform was so weak as to be the equivalent of a jaywalking ticket; health care reform was a Trojan horse for even large subsidies to Big Pharma and the health care insurers. But GSE reform takes NewSpeak one step further by turning the “reform” concept on its head and using the label to describe an effort to institutionalize even bigger subsidies to the mortgage industrial complex.While Team Obama appears to have backed down from the trial balloon floated by the Center for American Progress (note that press reports give another rationale) and is expected to offer a menu of choices for “reform” in its overdue white paper on Friday, don’t be fooled. The proposals coming from the lobbyists expected to have real influence on which ideas get the green light are virtually without exception serving up such a narrow menu of choices as to constitute unanimity. We offered our take as of the release of the CAP report; a subsequent proposal by Moody’s Mark Zandi (see details here) is more of the same.

NY Fed: 2005 Bankruptcy Bill Led to Hundreds of Thousands of Unnecessary Foreclosures - Three economists at the New York Federal Reserve have put out a paper laying the rise in foreclosures partially at the feet of the 2005 bankruptcy bill. Economists Donald P. Morgan, Benjamin Iverson, and Matthew Botsch find that the subprime foreclosure rate increased by 29,000 per quarter nationwide after the passage of the bill, which equals well over 200,000 foreclosures that may not have occurred otherwise.The bankruptcy bill of 2005, strongly supported by Republicans, bank lobbyists and the Democrats who own them (see Joe Biden, D-MBNA), forces households with higher incomes who file for bankruptcy into a means test that does not allow them to discharge their unsecured debts under Chapter 7, but instead puts them into Chapter 13, where they must still pay unsecured lenders. While mortgages are not unsecured, the money freed up through the discharge of the other debts could have gone to mortgage payments, thereby saving the home. In addition, bankruptcy judges were not allowed under the new reform to modify the terms of a primary residence mortgage, even though they could modify a yacht, a vacation home or the loan on most other assets. That was a longstanding practice that didn’t change in the 2005 law; however, under the new rules, bankruptcy filers under Chapter 13 are not able to cram down auto loans, either, again raising their monthly payments post-bankruptcy..

Mortgage Rates for U.S. Loans Rise to 10-Month High - U.S. mortgage rates climbed to a 10- month high, reducing affordability for homebuyers as the housing market struggles to recover from depressed levels.  Mortgage rates are rising along with yields on the benchmark 10-year Treasury note, which reached a nine-month high this week. The increase in borrowing costs from record-low levels in November may reduce demand for purchases as the market enters its key spring selling season.“It will have a slight dampening impact on homebuying,” “Mortgage rates around 5 percent are still very low by historical standards, but these increases do seem to be putting people off.”Mortgage applications fell for the second time in three weeks, a Mortgage Bankers Association index showed yesterday. The group’s gauge of purchases decreased 1.4 percent in the week ended Feb. 4, and its refinancing measure dropped 7.7 percent.

Mortgage Rates Hit 1-Year High; NAR Whines for Government (Taxpayer) Support of Fannie, Freddie; "*" the NAR - With the recent spike in 10-year treasury yields, mortgage rates have climbed as well. If you needed to (or were able to) refinance, you should have done it three to six months ago. Courtesy of Bankrate and Bloomberg, here is a Table of Mortgage Rates that shows just that. In a 100% completely expected whine, the NAR says GSE Structures Must Protect Taxpayers and Ensure Mortgage Availability Continued government participation in the secondary mortgage market is essential to ensuring affordable and available home mortgages to qualified consumers when private lenders withdraw from the market, according to the National Association of Realtors®’ recommendations for restructuring the government-sponsored enterprises (GSEs). As the leading advocate for home ownership, NAR believes that the federal government must continue to play a role in the mortgage markets to ensure the steady flow of safe and affordable mortgage funding that middle-class consumers need, and only the government can provide that backing,” said NAR President Ron Phipps

CoStar: Commercial Real Estate prices increased slightly in December - This graph from CoStar shows the indexes for investment grade, general commercial and a composite index. The general commercial index was down, the other two were up slightly from November. From CoStar: CoStar Commercial Repeat-Sale Indices, February 2011 Release:

• At the national level, CoStar’s Investment Grade Repeat-Sale Index was up nearly 7% for the month of December continuing the see-saw pattern observed with oscillating monthly pricing data, resulting in a slight positive quarter. ... From its peak in July 2007, the Investment Grade pricing index is down 34.1%, with the trough occurring in January 2010 when the Index was down 40%.
• The strong performance of the Investment Grade index was enough to lift the U.S. national Composite Index, which is an equal-weighted repeat sales analysis of all commercial real estate sales, with two thirds of the transaction count contained within the General Index. The Composite Index was up 1.8% for the month, down 5.8% for the quarter and down 6.3% for the year. Overall the Composite Index is down 22% over the past two years.

Fed's Sarah Raskin warns on mortgage servicing – A top Federal Reserve official on Friday warned mortgage servicing industry executives they could face enforcement actions and that they shoulder some of the blame for a sluggish economic recovery."I have seen little or no evidence of improvement in the operational performance of servicers since the onset of the crisis in 2007," Fed Governor Sarah Raskin said in remarks to an industry conference in Park City, Utah. "Until these operational problems are addressed once and for all, the foreclosure crisis will continue and the housing sector will languish," she said. Raskin, formerly the top bank regulator for the state of Maryland, said a review of loan servicing practices shows widespread weaknesses still exist. The industry suffered a black eye in 2010 when it emerged that institutions were using machines to send foreclosure notices to homeowners, sometimes in disregard of actual circumstances.

Fed's Raskin: No improvement in Mortgage Servicer operational performance - From Fed Governor Sarah Bloom Raskin: Putting the Low Road Behind Us. Excerpt:  Late last year, the federal banking agencies began a targeted review of loan servicing practices at large financial institutions that had significant market concentrations in mortgage servicing. I can tell you that these deficiencies pose significant risk to mortgage servicing and foreclosure processes, impair the functioning of mortgage markets, and diminish overall accountability to homeowners.I'm sure this has been said, but I'll say it again because I have seen little to no evidence of improvement in the operational performance of servicers since the onset of the crisis in 2007: Until these operational problems are addressed once and for all, the foreclosure crisis will continue and the housing sector will languish.  I do not want to revisit all of the sordid events that brought us to economic crisis in 2008 but, suffice it to say that, in the housing sector, we traveled a very low road that had nothing to do with looking out for the greater good.

Mirabile Dictu! SEC is Taking a Hard Look At Bad Mortgage Practices - Yves Smith - While it is far too early to break out any champagne, the Powers That Be seem to be taking notice of the continuing train wreck in courtrooms all over the US as far as banks’ ability to foreclose is concerned. Apparently, the American Securitization Forum’s “Drive on by, nothing to see here” mantra is becoming less and less convincing with every passing day. It’s worth nothing that only the Financial Times seems to be carrying this story (yours truly did check on key word variants in Google News and came up empty-handed). They also deem it to be worthy of front page placement. What is particularly interesting is that the SEC seems to be targeting specifically the sort of abuses that we have chronicled at length on this blog: failure to convey mortgages to the securitization trusts in accordance with the pooling and servicing agreements (which were part of the offering documents); whether robosiging is inconsistent representations made to investors (this frankly is a novel angle, I’m impressed the SEC is considering it), as well as an issue that has gotten more attention in the media, that investors appear to have been mislead on a widespread basis about the quality of mortgages in late vintage subprime mortgage bonds.

New Jersey Appeals Court Shoots Down Foreclosure Over Bad Documents -  Late last month, a New Jersey appellate court invalidated a foreclosure by insisting on a fundamental concept of due process: It said a bank must properly authenticate documents it uses to make its case. With the taint of robo-signing hanging over all foreclosure documents, the need for proper enforcement of authentication standards is more obvious than ever -- but not every court is making banks play by the rules. It's a basic rule of evidence that documents have to be authenticated to be admissible in a court case. Standards vary: When New Jersey litigants use the procedure called summary judgment to bypass a full trial, they authenticate documents by asserting personal knowledge that they're are real and accurate. But when Wells Fargo (WFC) tried to foreclose on Sandra A. Ford's home by summary judgment, the bank used documents that weren't authenticated. Specifically, Wells Fargo's representative didn't cite personal knowledge -- or any other source -- to support the idea that Wells was the 'holder and owner of the note,' that the submitted 'mortgage and note are 'true copies,' ' or that the 'purported assignment of mortgage' was real. That is, Wells didn't authenticate any of the documents it needed to prove it had the right to foreclose. And the loan note wasn't endorsed to Wells -- it showed Ford owed the money to Argent Mortgage Company."

Foreclosure case could have big impact - A Palm Beach county homeowner fighting alleged foreclosure fraud has ended up before the Florida Supreme Court. An appeals court last week requested that the high court consider the case of Greenacres homeowner Roman Pino as a matter of "great public importance." The decision by the 4th District Court of Appeal in West Palm Beach was unusual as neither the bank nor the homeowner requested such a review. "We conclude that this is a question of great public importance, as many, many mortgage foreclosures appear tainted with suspect documents," the appeals court wrote in certification to the Supreme Court. Should the case be accepted by the Florida Supreme Court and a decision rendered in favor of Pino, thousands of cases could be impacted as allegations of document fraud run rampant throughout the state.

Amended Complaint in LPS/Prommis Solutions Litigation Provides More Details of Alleged Kickbacks, Impermissible Fee Sharing - Yves Smith - We’ve been following litigation against Lender Processing Services, which among other things is the leading provider of default management services to mortgage services in the US, handling over 50% of foreclosures. The complaint that is moving forward the fastest (and fast in litigation land is not all that fast) is the Mississippi Northern District Bankruptcy court and alleges that Lender Processing Services along with another service provider in the default services space, Prommis Solutions both engaged in impermissible sharing of legal fees (only law firms are permitted to do legal work; even referral fees are consider not-kosher fee splitting). This case is seeking class action certification, and the Chapter 13 Trustee for the Northern District has joined the plaintiffs on her own behalf and for all Chapter 13 Trustees as a class.

Florida Foreclosure Mill King David Stern Shows Crime Sure Did Pay - Yves Smith - The Associated Press has a juicy story on the rise and fall of Florida’s foreclosure mill kingpin David Stern (hat tip Lisa Epstein). It combines sordid detail with an account of how his business as a business went wildly off the rails. For those new to this blog, the Law Offices of David Stern was the biggest foreclosure mill in Florida, one of the first to be targeted by a state attorney general, and per both reports on the ground as well as revelations from official and media investigations, one of the worst abusers of court procedures and borrower rights. Aside from depicting how utterly out of control Stern was as a businessman, the AP story helps explain how the mortgage business got to be such a horrorshow. Moe Tkacik, a financial writer who has poked around the dark corners of the securitization and muni finance businesses, and I chatted a couple of nights ago about the foreclosure crisis. One of the questions that was nagging at her was who came up with the idea of robosigning?

1 factor explains one-third of mortgage modifications - One factor, little-known by borrowers, can play a large role in whether banks are willing to renegotiate mortgages with homeowners who are struggling to meet payments.Unfortunately, it is a factor that homeowners have no control over.Researchers found that mortgages owned by lenders were 26 to 36 percent more likely to be renegotiated than very similar mortgages that the original lenders sold to other companies, which turned them into securities. "Homeowners don't have a say in whether their bank sells their mortgage or not, but that can have a significant impact on whether their loan is re-negotiated,"

U.S. Homeowners in Foreclosure Process 507 Days Late Paying at End of 2010 - U.S. homeowners in the foreclosure process were an average of 507 days late on payments at the end of last year as lenders handled a record rate of mortgage delinquencies, Lender Processing Services Inc. said today.  The average grew 25 percent from 406 days at the end of 2009, according to the Jacksonville, Florida-based mortgage processing and default management company.  “The sheer volume of loans going through the system is going to extend those timelines,” said Herb Blecher, senior vice president for analytics at Lender Processing. Foreclosure processing also was slowed by “an abundance of caution” in the last three months of 2010 after lenders were accused of using faulty documentation and procedures to seize homes, he said.  A national jobless rate of 9 percent is increasing loan defaults and weighing down prices as foreclosed properties sell at a discount. Homeowners with 6.87 million loans -- 13 percent of all mortgages -- were at least 30 days behind on their payments as of Dec. 31, Lender Processing said.

LPS: Overall mortgage delinquencies declined in 2010 - LPS Applied Analytics released their December Mortgage Performance data. According to LPS:
• The average loan in foreclosure has been delinquent a record 507 days. This is up from 406 days at the end of 2009, and up from 499 days at the end of November.
• Overall, mortgage delinquencies dropped nearly 18% in 2010.
• On the other hand, foreclosure inventories were up almost 10% in 2010, and are now at nearly 8x historical averages
• “First-time” foreclosures are on the decline, with over 30% of new foreclosure starts having been in foreclosure before
This graph provided by LPS Applied Analytics shows the percent delinquent, percent in foreclosure, and total non-current mortgages.The percent in the foreclosure process is trending up because of the foreclosure moratoriums.  According to LPS, 8.83% of mortgages are delinquent (down from 9.02% in November), and another 4.15% are in the foreclosure process (up from 4.08% in November) for a total of 12.98%. It breaks down as:
• 2.56 million loans less than 90 days delinquent.
• 2.12 million loans 90+ days delinquent.
• 2.2 million loans in foreclosure process.

In a jam, more skip mortgage payments - Tens of thousands of Massachusetts property owners are living in their homes without making mortgage payments as they fight foreclosure, plead with lenders for loan modifications, or simply take advantage of free housing while awaiting eviction. About 36,000 borrowers statewide have not written a mortgage check in at least three months, and one-third of those borrowers are a year or more in arrears, according to the most recent data from Lender Processing Services Inc., a Florida company that collects mortgage data nationwide. Most homeowners fail to pay their mortgages because they are out of work, have had their wages cut, or are saddled with ballooning interest rates on subprime loans, housing advocates say. Some abandon hope of ever catching up, staying put for months — sometimes years — while lenders slog through the increasingly long process that leads to foreclosure.

Strategic Default, A Mortgage Isn’t a Life Sentence - Dylan Ratigan That’s the segment I did with someone who walked away from his mortgage, his home, and his $120,000 down payment after wrestling with the bank for months.  It’s powerful, and it’s hopeful. “It feels great,” Burton said without hesitation. “I’m starting again. I’ve still got my talent; I’ve got my intelligence. I’ve got my health. At least I’m free of the enormous amount of stress that I had and the frustration of doing the best I could and it wasn’t good enough. It wasn’t working. Ultimately, I made a decision that my physical and mental health was more valuable than this house and my investment in it.” At this point in the housing crisis, if you’re having problems, it’s clear that no authority is coming to help you.  Not bank regulators.  Not Obama.  Not the Republicans or Democrats in Congress.  And especially not your bank.  But the good news is there is hope.  You have options.  Ryan Grim, Lucia Graves, and Arthur Delaney interviewed 50 people thinking of walking away from their mortgages, and then interviewed them a year later.  They wrote up what they found.  For those who were able to walk away, it was a profoundly liberating experience.

Foreclosures ramp up as 30% of mortgages are underwater - Sometime, somehow, the foreclosure crisis will ease. But probably not anytime soon. Home prices dropped 2.6% nationwide during the last three months of 2010, pushing more borrowers underwater, according to a quarterly real estate market survey from 27% of homeowners with mortgages owe more than their homes are worth. That's up from 23.2% a quarter earlier.That will surely lead to higher foreclosure rates soon. That's because being underwater is second only to unaffordable payments in leading to foreclosure, according to Zillow's chief economist, Stan Humphries. Additionally, the report found that more than one-third of all homes were sold at a loss in December. That trend has been on a steady uptick for the past six months, as homeowners try to find ways around foreclosure or out from under their homes. The so-called "robo-signing" events of the fall also forced the number of underwater mortgages higher.

Foreclosure Inventories are 7.8 Times above Normal and Rising - A report by Lender Processing Services today confirms Fitch Ratings’ analysis yesterday that the volume of defaulted loans moving to REO status has fallen to a trickle as a consequence of the Robo-gate scandal, contributing to a backlog of foreclosures that threatens to reverse the overall decrease in foreclosure inventory caused by the steady decline in new delinquencies last year. Even though most moratoria have been lifted, Fitch reported that the flow of defaulted loans into REOs will continue to be slow due to outside scrutiny and servicers’ concerns over legal liability.  As a result, Fitch extended its estimate of the time it will take to clear the current inventory of distressed properties to four years.  See Robo-gate Will Haunt REO Inventory for Four Years. LPS said the total number of delinquent loans is nearly twice as high as historical averages - and foreclosure inventory is currently 7.8 times higher than historical averages and is rising. Just over 2.1 million loans are 90 days or more delinquent but not yet in foreclosure, with nearly 6.9 million loans in some stage of delinquency or foreclosure.

RealtyTrac: Foreclosure Activity Increases slightly in January - From RealtyTrac: Foreclosure Activity Increases 1 Percent in January RealtyTrac® ... today released its U.S. Foreclosure Market Report™ for January 2011, which shows foreclosure filings — default notices, scheduled auctions and bank repossessions — were reported on 261,333 U.S. properties in January, a 1 percent increase from the previous month but a 17 percent decrease from January 2010. “We’ve now seen three straight months with fewer than 300,000 properties receiving foreclosure filings, following 20 straight months where the total exceeded 300,000,” said James J. Saccacio, chief executive officer of RealtyTrac. “Unfortunately this is less a sign of a robust housing recovery and more a sign that lenders have become bogged down in reviewing procedures, resubmitting paperwork and formulating legal arguments related to accusations of improper foreclosure processing.”

US Home Foreclosures Rise in January, More Seen - U.S. home foreclosures jumped 12 percent last month, but the sharp divide between states  suggests the industry remains backlogged by investigations into the foreclosure process.According to a report from real estate data firm RealtyTrac, lenders foreclosed on 78,133 properties in January, up 12 percent from the month before, but down 11 percent from January a year ago.  Bank seizures at states with non-judicial foreclosure processes jumped 23 percent, while states with a judicial process saw a decrease of 7 percent.  "It suggests the system is still frozen up. We should have seen a much larger increase in both overall activity and bank repossession," said Rick Sharga, senior vice president at RealtyTrac."The numbers will inevitably go up, it's just a question of will it be sooner or will it be later."

Housing Seizures Rise -Any discussion about house prices ends up dwelling on the "shadow inventory"--the backlogs of houses that really need to be sold, but nonetheless aren't on the market.  There are the owners who want or need to move, the banks who are too overwhelmed to foreclose on everyone who's behind, and the bank-owned houses that haven't been put on the market yet because what's the point when there are four other foreclosures for sale on the same block?  As prices tick up, those houses will be put on the market--which will, of course, depress prices again.  Our own Dan Indiviglio reports that the shadow inventory may be shifting towards real inventory:  Foreclosures are speeding up again. For three straight months through December, foreclosure activity had declined as banks worked to refine their procedures and documentation. In January, however, foreclosure activity increased by 1.4%, according to foreclosure tracker RealtyTrac. The delays might not be completely over yet, but they may be starting to abate.

Stiglitz Expects 2 Million U.S. Foreclosures This Year - Nobel Prize-winning economist Joseph Stiglitz said another 2 million foreclosures are expected in the U.S. this year, adding to the 7 million that have occurred since the economic crisis of 2008. “U.S. foreclosures are continuing apace,” Stiglitz told a conference near Port Louis, the capital of Mauritius, today. “A quarter of U.S. homes are underwater.” The number of U.S. homes worth less than their outstanding mortgage jumped in the fourth quarter as prices fell and lenders seized fewer properties from delinquent borrowers, Zillow Inc. said in a report today. About 15.7 million homeowners had negative equity, also known as being underwater, at the end of the year, up from 13.9 million in the previous three months, the Seattle-based real estate information company said. The total represented 27 percent of mortgaged single-family homes, the highest in Zillow data dating to the first quarter of 2009.

Coming Soon: A 300-Percent Increase in Foreclosures - At Calculated Risk, Tom Lawler, a real estate economist and former risk policy veep at Fannie Mae, tries to figure out how many people have actually lost their homes to foreclosure, short sales or deed-in-lieu desertions. The answer: Not enough. Lawler (who is now living the life of Riley on a Virginia farm) says the number of foreclosures that have been completed so far is a drop in the bucket compared to the number of loans that have gone bad: On the other hand, the above numbers could well OVERSTATE significantly the number of homeowners who lost their primary home either to foreclosure or to a short sale. A “significant” % of completed foreclosure sales has been completed foreclosures on non-owner-occupied homes, though estimates vary as to what that % has been. In addition, not all short sales have involved homeowners “involuntarily” leaving their home, but who instead wanted to (for economic or other reasons) move and who were able to negotiate a short sale with their lender.

Lawler: Housing Vacancy Survey appears to massively overstate number of vacant housing units - Many analysts use the quarterly Housing Vacancies and Homeownership survey from the Census Bureau to estimate the number of vacant housing units in the United States. This survey probably overstates the number of vacant units.  From economist Tom Lawler ...  Early Look at a Few States’ Housing Stock Numbers from Census 2010 Suggests that Housing Vacancy Survey Massively Overstates Number of Vacant Housing Units The Census Bureau has starting releasing Census 2010 data for selected states, with the first “batch” being Louisiana, Mississippi, New Jersey, and Virginia. On its website, the data shown include not just population counts, but housing counts as well – occupied as well as vacant. I don’t know if these are the “final, official” housing count totals, but here are the data shown on the website for these states.

CoreLogic: House Prices declined 1.8% in December - CoreLogic reports the year-over-year change. The headline for this post is for the change from November to December 2010. The CoreLogic HPI is a three month weighted average of October, November, and December and is not seasonally adjusted (NSA). From CoreLogic: CoreLogic® Home Price Index Shows Decline for Fifth Straight Month CoreLogic ... released its December Home Price Index (HPI) which shows that home prices in the U.S. declined for the fifth month in a row. According to the CoreLogic HPI, national home prices, including distressed sales, declined by 5.46 percent in December 2010 compared to December 2009 and declined by 4.39 percent in November 2010 compared to November 2009.This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100.  The index is down 5.46% over the last year, and off 31.6% from the peak.

Tax Credit Hangover Continues with Negative Equity Up, Home Values Down- It was another tough quarter for the U.S. housing market. Home values fell 2.6% from Q3 to Q4 and 5.6% year-over-year, and negative equity rose from 23.2% in Q3 to 27% in Q4, according to Zillow fourth quarter Real Estate Market Reports. Pretty grim numbers. But there might be some good news hiding in those depressing figures. Yes, home values are declining faster. They had stabilized somewhat during 2009/early 2010 because the government was paying people to buy homes with the homebuyer tax credits. The credits stimulated the market, but what the market really needed was to return to a state of natural equilibrium between supply and demand. We believe that the market is back on track now. It’s falling, but that means it’ll reach equilibrium faster. And that also means the bottom is on its way, and will probably be here by the end of the year. As our chief economist Dr. Stan Humphries puts it, “It’s darkest before the dawn.” So buck up, homeowners, the end of the housing recession is near!

Housing Crisis Represents the Greatest Threat to the Recovery…The corner we hoped we had turned in 2010 looks more like a long blind bend in a never-ending road. We face the risk of another major downturn in the housing market, a so-called double dip that seems on the way with the news that, according to the S&P/Case-Shiller index, home prices fell by 1 percent in November from October after declining 1.3 percent in October from September across 20 major markets—and fell for the fourth month in a row. This now represents the greatest strategic threat to the recovery of the economy. Millions of homes and condos stand empty. We have had a dramatic decline in prices and home equity values. The latter has declined by some $9 trillion since 2006, according to, the property information service company. Simultaneously, mortgage rates have tumbled so far that the affordability index compiled by the National Association of Realtors is the most favorable on record for buying a home since the association started measuring it in 1970. As of October, families earning a median income of $62,141 needed to devote only about 13.6 percent of their income to payments on a median priced home, compared to the conventional affordability level of 25 percent of income. Yet still the signs proliferate across the land: For Sale! Foreclosed!

Homeowners Face 'New Normal' In Housing Bust - Life has changed in ways big and small in this central California county, which is still trapped in the wreckage of a housing boom that went bust five years ago. The median home price, $116,000, is down 68% from its peak in 2006. Three of five homeowners with a mortgage here owe more on their loans than their houses are worth, compared with about one in five nationally. Socked by a sharp loss of property and sales tax revenue, Merced County and its cities have slashed budgets, workers and services. The grass is being mowed less often in city parks. A senior center is open fewer hours. Families have adjusted, too. Forget dreams of making big bucks on California real estate. Many here now count the years — guessing, really — until they'll no longer owe more on their homes than they're worth.

Vacant Homes Targeted By Copper Thieves - If you're trying to sell your home, police have a warning for you: There's a good chance you could be targeted by copper thieves. Hancock County Sheriff's deputies tell WLOX News vacant homes are being broken into at an alarming rate, and what's being stolen is copper. The Deer Park Community in Northwest Hancock County is just one of the areas being terrorized by copper thieves, leaving their victims lives in financial turmoil. Norma Rocha had hoped her new Deer Park home would be ready for her family to move into by Spring. She says now that won't happen. Her house is the latest in the neighborhood to be stripped of its copper pipes and wires.  Thieves kicked holes in the walls through-out the house to get to the cooper. And her air conditioning unit was ripped out of the attic and tossed into a nearby bedroom.

Cash Buyers Lift Housing - Buyers in markets around the U.S. are snapping up homes in all-cash deals, betting that prices are at or near bottom and breathing life into some of the nation's most battered housing markets.  Cash buyers represented more than half of all transactions in the Miami-Fort Lauderdale area last year, according to an analysis from real-estate portal In the fourth quarter of 2006, they represented just 13% of deals. Meanwhile, downtown Miami prices rose 15% in 2010 from a year earlier, according to the Miami Downtown Development Authority.  The percentage of buyers in Phoenix paying cash hit 42% in 2010—more than triple the rate in 2008, according to Raymond James's equity research division. Nationally, 28% of sales were all-cash transactions last year, according to the National Association of Realtors. The rate was 14% in October 2008, when the trade group began tracking the measure.

Consumer Credit increases in December - The Federal Reserve reportsConsumer credit increased at an annual rate of 2-1/2 percent in the fourth quarter. Revolving credit declined at an annual rate of 2-3/4 percent, and nonrevolving credit increased at an annual rate of 5-1/2 percent. In December, consumer credit increased 3 percent at an annual rate.This graph shows consumer credit since 1978. The amounts are nominal (not inflation adjusted). Revolving credit (credit card debt) is off 17.8% from the peak. Non-revolving debt (auto, furniture, and other loans) is now slightly above the old peak. Note: Consumer credit does not include real estate debt.  This was the first increase in revolving credit since August 2008 following 27 consecutive months of declines.  Banks again reported an increased willingness to make consumer installment loans, and a small net fraction of respondents reported easing standards for approving consumer credit card applications.

Credit-Card Debt Up for First Time Since 2008 -Americans’ credit-card debt rose for the first time since 2008, a possible sign they are growing more confident about the economy and opening their wallets wider. The surprising rise in December revolving credit as tracked by the Federal Reserve pushed up consumer credit outstanding by $6.1 billion, or 3.0%, to $2.41 trillion. Economists surveyed by Dow Jones Newswires had forecast the Fed data Monday would show consumer credit rising by only $2.5 billion. The Fed also revised up November consumer credit, saying it rose $2.0 billion instead of an originally reported $1.3-billion gain. Consumer borrowing also rose in October. The three straight increases add to evidence the economy is gaining traction against such headwinds as an ailing housing sector and high joblessness.

Why Aren’t You Saving Money? - Room for Debate - NYTimes - For a short time, Americans seemed to be born-again savers. In the second quarter of 2009, in the depths of the Great Recession, households put away 7 percent of disposable income, compared with under 2 percent in the third quarter of 2007. Yet the savings rate is falling again, down to 5.3 percent in December. According to a Harris Poll released last week, 27 percent of Americans have no personal savings and 34 percent have no retirement savings, an increase from over a year ago.  At the same time, people are spending more. Borrowing is up, perhaps a sign of consumer confidence in the recovery.  Why was the era of thrift so short-lived? Why are Americans spending again, yet unable to save?

The Great Global Debt Prison - Our economy, our culture, our entire world, is built upon debt. No one ever asked us if that’s how we wanted it, it is simply how the system was designed when we came into it. Many of us have lived our entire lives under the assumption that debt is a necessary function of daily commerce and a valuable driver of successful society. Most households in America operate at a steep loss, trapped in constantly building cycles of liability and interest. There are even widely held schools of economic thought that are centered completely on the production and utilization of nothing but debt. Only recently have many people begun to ask themselves what the tangible benefits are (if any) in being dependent on debt based finance. After careful examination, it becomes evident that debt does not fuel economy, it suffocates it. It does not nurture growth, it stunts and poisons it. Extreme debt is not a fundamental organ in a body of commerce; it is an aberration, a spreading cancer which disrupts the circulation of healthy trade. Debt is, in large part, unnecessary.

Credit card companies figure out how to spin straw into gold - Credit card companies are amazing. Not only do they now offer cards with no annual fees and low teaser rates, they even give you a a rebate for 1 percent of everything you buy. Get an American Express card through Fidelity and you can get 2 percent of your purchases rebated to your investment account. Discover offers 5 percent on selected categories of purchases - groceries, gasoline, travel, clothing - depending on the month and the season. Can 7 percent be far behind? Of course, you may be wondering, as I did, where the credit card companies come up with all the money for these rewards and rebates, which are now a feature on half of all credit cards in active use. At first blush, the money appears to be coming from retail merchants, who are paying ever-escalating fees for the privilege of swiping your credit card through their registers. But according to a wide range of government and private economists, ultimately it's you, the consumer, who is paying for those rebates, as merchants raise their prices to cover those additional costs. When all is said and done, all that's really happening is that the credit card companies are taking money out of your left pocket, setting aside a hefty fee for themselves and putting what's left back in your right pocket.

Take this APR and Shove It "No one ever went to hell for not paying a debt." - At last count, Steven Katz owed $80,000 on his six credit cards, and he has no intention of paying any of it off. In fact, he'd like to show you how to be like him—a "credit terrorist" in open revolt against the banking system. Katz is the founder of ("Sue Your Creditor and Win!"), a five-year-old online forum where he's collected countless tricks and tactics for evading and repelling persistent creditors. He's written how-tos on shielding your assets from seizure, luring collection agencies into expensive lawsuits, and frustrating private investigators looking for debtors on the run. He's even infiltrated the bill collectors' forums, where he's been tagged a "credit jihadist" and his site's been called a "credit terrorist training camp," a label he embraces. "Debtorboards is one of the biggest and most successful temper tantrums ever," the 59-year-old Katz boasts. The site has more than 10,000 members—double what it had in 2009.

Unemployment Rate Dips to 9% as More Quit Looking - Unfortunately, it's hard to do a lot of direct comparison between January and December with the BLS's Household Survey numbers. The agency does a major revision related to population control effects in the January report and does not dynamically update its historical data to reflect the changes.  For some more strangeness, let's look at what happened with those Americans who want a job but are not considered a part of the labor force. Here's a chart showing the BLS estimates for discouraged and marginally attached workers (these are not seasonally adjusted like other statistics discussed): Check out the change from December to January. Weird, right? In January we saw the number of discouraged workers plummet by a whopping 325,000. That's great! But is it? The number of marginally attached workers -- those who want a job but are not considered in the labor force for a reason other than discouragement -- increased by 516,000, or 40%. In other words, it looks an awful lot like the drop in discouraged workers is occurring because they're just switching in status to marginally attached. There's no genuine good news here.

Jobs Report Offers a Mixed Bag, but Little Comfort - The United States labor market is still having trouble achieving liftoff/ Payrolls expanded by 36,000 jobs in January, a sharp decline from the gains of recent months and well below the level economists had forecast. The reluctance of employers to add jobs at a time of robust corporate profits, strengthening consumer spending and other economic improvement renewed concerns that this near-jobless recovery could continue for an extended period.  The picture painted by the Labor Department’s monthly snapshot of the job market was confounded by a more encouraging drop in the unemployment rate to 9 percent, from 9.4 percent a month earlier, for its lowest rate since April 2009. The unemployment rate is gleaned from a survey of households, rather than companies, and can be volatile.

Holiday shipping causes payroll havoc - Increases in online holiday shopping that have spurred the hiring and firing of thousands of express delivery workers is playing havoc with U.S. payroll data, and indicates employment will rebound in coming months, according to economists at Credit Suisse. Employment at courier and messenger services, which include workers at companies like FedEx Corp. and United Parcel Service Inc., plunged by 45,000 in January after climbing by 46,000 the prior month, according to figures from the Labor Department. The swing in that one category, comprising 0.4 percent of all payrolls, accounted for all the slowdown in employment last month, and then some. “It’s eye-popping to think that such a small industry moved the whole payroll count,” Jonathan Basile, a Credit Suisse economist in New York, said in an interview. “That tells you that there are seasonal factors at work that the Labor Department hasn’t been able to adjust. Think of the ways holiday shopping has changed over the years. The government’s adjust process is a slow-moving vehicle.”

Doing the Math on a Jobless Recovery - The latest employment reports have not been encouraging. At the rate of 36,000 new jobs a month—the number gained in January—we will never get back to full employment. Even if we keep adding jobs at the December rate of 121,000 new jobs, we wouldn't achieve full employment in this millennium.  Consider the math of full employment. We now have a labor force of 153 million people, of whom 14 million are officially counted as "unemployed," defined as not working and actively seeking a job. Were we fully employed (defined as 5% unemployment) there would be 7.7 million unemployed workers. So our "excess" unemployment currently hovers around 6.3 million workers.  That number is our initial target for job creation. The trouble is that it's a moving target. Population growth and immigration bring a steady stream of new workers into the labor force every year. They want jobs, too. So our job-creation target grows every month. At the trend growth rate of 1.2% annually, we get another 1.8 million labor force participants a year, and with them, the need for another 1.8 million new jobs.

Participation Rate Update - Last year I looked at some of the cyclical and long term trends for the participation rate: Labor Force Participation Rate: What will happen?. I concluded that most of the decline in the participation rate is due to changes in demographics - not cyclical. I also noted that it is possible that long term trends - especially more older workers participating in the labor force - could push the participation rate up to 66% by 2015 before the participation rate would start to decline again. Goldman Sachs put out a research note last night arguing there would only be a small increase in the participation rate over the next two years as the economy recovers:This analysis is important because it suggests the large decline in the participation rate is mostly because of demographics, and only a portion of because of the decline because of cyclical effects. So the bounce back will probably not be as large as some people expect. Here is a look at some the long term trends (updating graphs through January 2011):

The BLS: A History Of (Downward) Revisions, Or How The Department Of Truth Goosed Markets With Half A Million Fake Jobs In Two Years - Zero Hedge has previously demonstrated the improbable, for lack of a better word, upward bias in revising initial jobless claims applications. Today, we look at an even greater statistical problem at the BLS: that of Non-Farm Payrolls. Courtesy of today's full year revision announced by the BLS, and a granular sort by John Poehling, we have discovered that while revisions added a whopping 55k jobs in the years 2006-2008, NFPs have now been revised to remove 538k jobs in the 2009-2010 period. In other words, based on data revisions, under President Obama, America has suddenly created over half a million jobs less (even if all of them are part time) simply due to statistical adjustments. We won't even go into analyzing just how much worse the S&P would be trading if all those monthly "upside" NFP reports had reflected true and not completely fudged numbers. At an average 22.4K downward monthly revision for every single monthly NFP report in the past two years, we are 100% confident that not even Iosif Shalom Bernanke would be able to offset the market plunge that would ensue each and every of the past 24 months

Government Revisions To "Reality" - Most observers in America live and die according to the official economic reality as defined by government statistics. Politicians certainly do. Over and over again Barack Obama has told us that the economy is recovering, albeit slowly. Every time he did so in 2010, an election year, the President reminded us about how many jobs had been created that year. From CBS News' Obama Heralds 1.1M Private Sector Jobs Created Since January, published on November 5, 2010— Hailing the "encouraging news" from Labor Department announcement, that October saw the addition of 151,000 new jobs, President Barack Obama said the private sector has created 1.1 million jobs over the last ten months. All the numbers Obama cites are from the Bureau of Labor Statistics. The consensual economic "reality" and how people view it is ultimately defined by government statistics. The government makes occasional revisions to the agreed-upon economic "reality" they define. These revisions make a mockery of previous claims like those of Barack Obama last November 5th. The January jobs report included the Labor Department's latest benchmark changes.

Blowing Off The BLS Monthly Numbers - The more disconnected from reality Bureau of Labor Statistics (BLS) reports become, the more scrutiny they receive. This has now become a monthly ritual for bloggers and economists, An astonishing amount of ink was spilled analyzing the effects of January's cold, snowy weather on the latest numbers, but that wasn't the end of it. The BLS changed virtually every important number they define—the population, the labor force, those working, those not working, etc. The economy "lost" 483,000 jobs in December once the benchmark revisions spanning the last 5 years were incorporated. I covered this latest fiasco in Government Revisions To "Reality". If you wanted to find out what the unemployment rate really was, it was easy to do. All you had to do was go over to the Gallup website and look at the current job polling.

Just How Ugly Is The Truth Of America's Unemployment: David Rosenberg Explains - Over the past 3 days America has been battered by one after another apologist explaining just how good the employment data is if one strips out all the "bad", and how all the "bad" can and should be stripped out by all patriots, and attributed solely to bad weather. For those who are beyond sick and tired of listening to this tripe, here is David Rosenberg once again telling it how it is. In summary: "The data from the Household survey are truly insane. The labour force has plunged an epic 764k in the past two months. The level of unemployment has collapsed 1.2 million, which has never happened before. People not counted in the labour force soared 753k in the past two months. These numbers are simply off the charts and likely reflect the throngs of unemployed people starting to lose their extended benefits and no longer continuing their job search (for the two-thirds of them not finding a new job). These folks either go on welfare or they rely on their spouse or other family members or friends for support."

Still Nearly 5 Unemployed Workers for Every Opening - There were still nearly five unemployed workers for every job opening in the United States in December, according to a Labor Department report released today. During the recession, the pain in the job market was initially caused by a surge in layoffs. More recently, layoffs have returned to their recession levels before the recession, and the problem instead has become a reluctance to hire workers (including, of course, the millions laid off during the recession). This can be seen in the disappointing trends in job openings and new hires. In July 2009, right after the recession officially ended, the ratio of unemployed workers to job openings peaked at 6.3. It has fallen since, to about 4.7 in both November and December of 2010. That’s better, of course, but it’s still historically  high and doesn’t provide much hope that the labor market can quickly absorb the nation’s millions of idle workers.

BLS: Job Openings decline in December, Labor Turnover still Low - From the BLS: Job Openings and Labor Turnover Summary The number of job openings in December was 3.1 million, which was little changed from 3.2 million in November. Since the most recent series trough in July 2009, the level of job openings has risen by 0.7 million, or 31 percent. The following graph shows job openings (yellow line), hires (purple), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.  Unfortunately this is a new series and only started in December 2000. The difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. This report is for December, the most recent employment report was for January. Notice that hires (purple) and total separations (red and blue columns stacked) are pretty close each month. When the purple line is above the two stacked columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs.

No New Jobs Is The New Normal - Our statistical recovery is truly a wonder to behold. Gross Domestic Product (GDP) has now reached its pre-recession (2007:Q4) level, but has done so without restoring about 7.5 million of the jobs lost since then. Job gains are supposed to come later we are told. This is the famous "lagging indicator" you've heard about. This hopeful expectation, along with $1.49 (+ tax), will get you a cup of coffee at Starbucks. In Why the January Jobs Report Is Alarming, David Stockman looks at our job creation prospects based on the historical data. His view basically says that there may not be many new jobs created in the next decade—this is the "new normal" for jobs. The January nonfarm payroll number was 130.27 million — a figure first reached in October 1999. For the last 12 years, the nonfarm job count has been revisiting the same point over and over again, and each time it crosses from below Wall Street economists put on their best [Cisco CEO] John T. Chambers imitation and whoop it up for job growth...

Do Initial Claims Overstate Layoffs? - FRBSF Economic Letter - Initial claims for unemployment insurance averaged a stubbornly high 468,000 in the year ending December 2010, but have recently come down quickly. Many analysts interpret this as a sign that layoffs were too high to support a strong labor market recovery during most of 2010. However, claims data may have exaggerated layoffs in 2010 because the fraction of unemployed workers applying for benefits was higher than before the recession. If the proportion of eligible workers who applied were held constant, 2010 claims would have averaged roughly 20% less than the actual reading.

Why Aren’t Employers Hiring? - There’s a growing contrast between how much employers say they want to hire and how much they’re actually hiring. Hiring expectations among human resource executives are near four-year highs, but we’re not seeing these good intentions translate into the hiring data. The Labor Department reported Tuesday that that job opening and hiring rates were essentially unchanged in December from the month before. And as the Labor Department reported last week, employment in January only grew by a scant 36,000.Bad weather might explain away some of the disconnect, but not all of it. Some companies are reluctant to give up the profit margin gains achieved during the cost-cutting of the last couple years. On Monday, President Barack Obama tried to get business back in the game by telling them to stop hoarding cash and start hiring in return for tax breaks and other government support.

Why Small Business Isn't Hiring and Won't Be Hiring - Regardless of their ideological persuasion, pundits and politicos reliably repeat the mantra that "small business is the engine of jobs growth." The mantra is followed by the pundit-politico's belief that a "small business jobs boom is right around the corner."  I have news for the pundits and politicos: ain't gonna happen. Why? The answer cannot be found in the manipulated and massaged Bureau of Labor Statistics numbers (have any real jobs been created, net of jobs lost, in the past year? Who knows?) or in the punditry's Cargo-Cult-like belief in a mythical "small business jobs machine" that they have never experienced and know nothing about.  While a handful of the new crop of politicos are entrepreneurs, most Washington denizens are attorneys, the offspring of wealthy or politically connected families or people who have lived off the government at some level their entire lives. Most have never had a customer or client or had to borrow off a credit card to make payroll. (I have; any pundits who can honestly raise their hands for that one?)

Business Doesn't Need American Workers  - Once again, the job numbers are dismal. In January, the U.S. economy created just 36,000 domestic jobs, far below the roughly 145,000 that economists had forecast. The unemployment rate fell, to 9 percent, but only because more and more discouraged workers are giving up and leaving the workforce. The U.S. still has a jobs gap of about 14 million jobs, and that number is increasing as the labor force grows. Counting people who've given up, or who are working part time when they want full time jobs, the real unemployment number is around 17 percent. America now has about 25 million people either out of work or underemployed. Meanwhile, corporate profits continue to set records. Profits in the third quarter of 2010 were 1.659 trillion, about 28 percent higher than a year before, and the highest year-to-year increase on record. What's going on? Very simply, America's corporations no longer need America's workers.

Obama’s Deal with the U.S. Chamber of Commerce, by Robert Reich: “We can, and we must, work together,” the President told the U.S. Chamber of Commerce today. “Whatever differences we may have, I know that all of us share a deep, abiding belief in this country, a belief in our people, a belief in the principles that have made America’s economy the envy of the world.”Really? I’ve been watching ... the Chamber for years, and all I know is it has a deep, abiding belief in cutting taxes on the wealthy, eroding regulations that constrain Wall Street, cutting back on rules that promote worker health and safety, getting rid of the minimum wage, repealing the new health-care law, fighting unions, cutting back Medicare and Social Security, reducing or eliminating corporate taxes, and, in general, taking the nation back to the days before the New Deal. So what, exactly, is the deal Obama is pitching to the Chamber?He said his administration will “help lay the foundation for you to grow and innovate,” by eliminating “barriers that make it harder for you to compete - from the tax code to the regulatory system,” and by completing more trade deals. In return, the President said he wants businesses to hire more Americans.

The Chamber of Commerce and the President of GE Have a Plan to Restore Business Confidence and Create Jobs, 1931 Edition - I should write something about President Obama’s recent talk to the Chamber of Commerce about how to get jobs started again. I find it funny that it’s only been a few days and already Cato people like Dan Ikenson are writing non-ironic headlines like “Obama Hasn’t Given Enough Ground Yet To Business To Spark Growth.” We do understand that businesses don’t want growth, right? They want to consolidate, handicap their rivals, rent-seek and guarantee profit streams. Remember that right now fewer businesses are opening, and they are more likely to fail when they do. This is a great deal for incumbent businesses. But let’s look at this from a different angle. What would the Chamber want ideally? Let’s set the stage. The United States is struggling. High unemployment, financial sector panics, decreased consumer spending. There are calls for balancing the budget and for the Federal Reserve to tighten money. The President and elites are uncertain about what can be done, both in theory and in practice, to get the economy running again.

No right to work - BARACK OBAMA has been working to win over grumpy business owners with a message of support for the private sector that includes a paring back of burdensome regulation. It's an admirable goal, but the sad truth is that much of the regulatory burden faced by firms and workers is local. And it's growing. For example:While some states have long required licensing for workers who handle food or touch others—caterers and hair stylists, for example—economists say such regulation is spreading to more states for more industries. The most recent study, from 2008, found 23% of U.S. workers were required to obtain state licenses, up from just 5% in 1950, according to data from Mr. Kleiner. In the mid-1980s, about 800 professions were licensed in at least one state. Today, at least 1,100 are. Among the professions licensed by one or more states: florists, interior designers, private detectives, hearing-aid fitters, conveyor-belt operators and retailers of frozen desserts...

Unemployment among veterans highest in five years - Those patriotic House Republicans have yet to introduce a serious jobs bill (they've been way too busy fighting the culture war and figuring out how to punish women). Maybe they should take a bit of time out from trying to invent legislative chastity belts and spend a little time fixing this.(Reuters) - More than 15 percent of Iraq and Afghanistan war veterans were unemployed in January, far higher than the national jobless rate and the highest since the government began collecting data on veterans in 2005, the Bureau of Labor Statistics said on Friday.That rate could go even higher if the U.S. military begins winding down operations in Afghanistan and a flood of veterans return home looking for work, a veterans' advocate said....The government said 15.2 percent of veterans were out of work in January, up from 12.6 percent the same month a year ago. This compares with a overall U.S. unemployment rate of 9.0 percent seasonally adjusted and 9.8 percent without adjustment. The government data for veterans is only presented without adjusting for seasonal differences.

Why It Could Easily Be Another 7 Years Before We're Back To Old Employment Levels - If many of the experts are wrong, and the U.S. employment recovery isn't about to pick up, then we're in for an extremely long slog to get back to pre-recession levels, according to the San Francisco Fed. This chart from the San Francisco Fed shows that, yes, if job growth performs at its post-recession peak, we'll be back to 2008's jobs level by 2013. But, more worrying, it may take until 2018 or later to get back to 2008's jobs level if we grow at an average pace of 82,000 jobs per month. There are a lot of reasons why job growth may not be at that 239,000 job per-month peak:

  • Rising inflation could hit margins at firms, and lead to either more firing or less hiring.
  • Weak domestic demand could stop businesses from hiring, as that don't foresee sales being strong.
  • Or another cyclical downturn could come in and crush job growth.
  • We may never get back to that unemployment number, as the baseline unemployment number in the U.S. may have moved higher.

Unemployment Solidifies Position as Most Important Problem--- Thirty-five percent of Americans name unemployment as the most important problem facing the U.S., the highest percentage since the economic slowdown began and higher than at any point since October 1983 (41%). Unemployment is the most important problem for the second month in a row, with the economy ranking second and healthcare third. From the beginning of the economic slowdown through 2009, mentions of "the economy" in general were consistently the top issue. In the past year, as the government's unemployment rate has stayed in the 9% range, the economy and specific mentions of unemployment have traded the top spot several times. This month, mentions of unemployment increased to 35%, and it now leads mentions of the economy by a significant margin.

House Dems To Reintroduce Longshot Bill For Long-Term Unemployed -- Democratic Reps. Barbara Lee (Calif.) and Bobby Scott (Va.) are reintroducing legislation this week to provide additional weeks of unemployment insurance benefits for "99ers," the long-term jobless who have exhausted their benefits and still haven't found work. "The bill that I am introducing with Congressman Scott, The Emergency Unemployment Compensation Expansion Act, would ensure that these long-term unemployed workers get the long overdue assistance that they need to support their families, make ends meet and contribute to our economy," Lee said in a statement. "Our bill would add 14 weeks of emergency unemployment benefits and would make sure these benefits are retroactively available to people who have exhausted all their benefits and are still unemployed." Given Republican hostility to additional deficit spending -- Lee's office said the cost of the extra benefits would not be offset -- the effort will likely amount to little more than a reminder that long-term unemployment persists even though much of the nation's political discourse is focused on signs of economic recovery.

The Slow Recovery of Unemployment - I don't like to make economic forecasts. Though I do it on occasion, I generally leave that to Tim Duy -- he's much more of a data grubber than I am so he's better at it anyway. I do try to comment on what data says when it's released, mostly at MoneyWatch, but I don't generally consider those to be formal forecasts of where the economy is headed. There's a good reason why I try to avoid forecasts. In the past, whenever I've tried to predict the path the economy would take, I've found myself reading subsequent data releases in a way that supports the forecast. I think that once you make a forecast, it affects your objectivity, and I think that applies generally, not just to me. Perhaps that's why I'm feeling more and more alone in talking about the current state of the economy. Though the worries began long before this, in June of 2008 I did a MarketPlace segment where I predicted that the recovery of unemployment would lag output, and I said that policy should begin addressing the problem immediately due to the long lags between the time when policy begins is first considered and the time it actually has an impact on the economy

US Manufacturing: Normally Lagging, now Leading - Something interesting is happening with this recovery. Actually, it’s something that was also an interesting feature of the Great Recession of 2007-09: the manufacturing sector of the US economy has been performing surprisingly well. In fact, it wouldn’t be too much of a stretch to say that manufacturing has been one of the important drivers behind the economic recovery (such as we’ve had) over the past two years. Normally manufacturing output and job growth lag overall economic recoveries in the US. This time manufacturing is leading it. ...The employment picture tells the story even more clearly. In the previous two recessions, manufacturing lost more jobs, and recovered jobs more slowly (if at all), than the private sector as a whole. But during the Great Recession manufacturing job losses were actually proportionally less than job losses in the rest of the economy, and over the past year the manufacturing has actually been adding jobs.

A Lean, Mean, Manufacturing Machine - The US manufacturing sector is one of the most competitive in the world. First, as I pointed out earlier, manufacturing in the US has been doing relatively well, both compared to its past (lousy) performance and compared to the rest of the US economy. But the US manufacturing sector also looks quite healthy compared to other developed countries. The following chart illustrates.Manufacturing output in the US is nearly back to where it was in 2006. That’s generally not true for other developed countries (Korea being an obvious exception in the chart above), which are typically still 10 or 15% below their 2006 levels. Why is that? The red bars in the graph above contain an important piece of the explanation. Unit labor costs – that is, the amount that companies have to pay to labor for each unit of output that they manufacture, and which depends on both labor compensation and labor productivity – actually fell in the US from 2006-09. In nearly all other developed economies, labor costs per unit of output rose during that time.

What's Driving US Manufacturing Growth? - The other day I noted the surprisingly good performance of the US manufacturing sector. (As another recent example of such evidence, see last week’s strong report on the ISM Manufacturing Index.) I’ve been sifting through some data trying to get a better sense of what sort of manufacturing activities are driving this unexpected strength, and why.  Part of the story is the recovery of the US auto industry, of course. But really, that’s just a small part of the story. The picture below shows US manufacturing production in the motor vehicle & parts industry, compared to the rest of the US manufacturing sector. While the motor vehicle industry has recovered substantially from its nadir in 2009, output remains about 25% below its peak in 2007. The rest of the US manufacturing sector, on the other hand, is only about 5% below its 2007 peak. Note as well that the motor vehicle industry accounts for only about 20% of US manufacturing output.

America's hottest export: Weapons -  Thanks to a surge in overseas demand, the F-15 and other aging U.S. weapons systems are hotter than they've been in years. The Department of Defense last year told Congress of plans to sell up to $103 billion in weapons to overseas buyers, a staggering rise from an average of $13 billion a year between 1995 and 2005, according to Deutsche Bank analyst Myles Walton. Signed agreements have tripled since 2000. Interactive graphic: Up in arms As defense giants like Boeing, Raytheon, and Lockheed Martin increasingly seek to peddle their wares to well-financed (sometimes by the U.S.) international customers, they have a surprising ally: the President. "Obama is much more favorably disposed to arms exports than any of the previous Democratic administrations," says Loren Thompson, a veteran defense consultant. Or, as Jeff Abramson, deputy director of the Arms Control Association, puts it: "There's an Obama arms bazaar going on."

Trade Deficit increased in December - The Department of Commerce reports[T]otal December exports of $163.0 billion and imports of $203.5 billion resulted in a goods and services deficit of $40.6 billion, up from $38.3 billion in November, revised. December exports were $2.8 billion more than November exports of $160.1 billion. December imports were $5.1 billion more than November imports of $198.5 billion. The first graph shows the monthly U.S. exports and imports in dollars through December 2010. Imports had been mostly flat since May, but increased again in December. Exports have started increasing again after the mid-year slowdown. The second graph shows the U.S. trade deficit, with and without petroleum, through December. The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products. Once again oil and China deficits are essentially the entire trade deficit (or even more).

AAR: Rail Traffic increases in January - From the Association of American Railroads: January Freight Rail Traffic Continues Steady Growth. The AAR reports carload traffic in January 2011 was up 8.0% compared to January 2010. Intermodal traffic (using intermodal or shipping containers) is up 7.4% over January 2010. This graph shows U.S. average weekly rail carloads (NSA).  On an unadjusted basis, 15 of the 20 commodity categories saw carload gains on U.S. railroads in January 2011 compared with January 2010. The five commodity categories seeing declines — grain mill products, primary forest products, coke, nonmetallic minerals, and waste and non-ferrous scrap — together accounted for less than 8% of total carloads for the month. The highest-volume commodity categories were all up in January. As the first graph shows, rail carload traffic collapsed in November 2008, and now, over 18 months into the recovery, carload traffic has only recovered part way.The second graph is for intermodal traffic (using intermodal or shipping containers): In January 2011, U.S. railroads originated 863,099 intermodal trailers and containers, an average of 215,775 per week — up 7.4% over January 2010, up 10.1% over January 2009, and the third highest January average in history(behind January 2006 and January 2007).

Biden Announces $53 Billion Rail-Funding Plan - Vice President Joe Biden unveiled a $53 billion plan Tuesday to upgrade and build intercity passenger-rail networks.  Mr. Biden, along with Transportation Secretary Ray LaHood, announced the plan at Philadelphia's 30th Street Station. The six-year program is designed to give 80% of Americans access to passenger-rail service within 25 years—a goal President Barack Obama set in his State of the Union Address—and to create jobs.   "In a global economy, we can't forget that infrastructure is also the veins and the arteries of commerce,"  The administration has already devoted $10.5 billion to passenger-rail programs, with the bulk of the funds going toward California and Florida high-speed rail projects that are currently in the planning stage. Under the new plan, the administration would provide $8 billion for passenger-rail projects in this year's budget, set to be released next week.

Tyler Cowen and "Act of God" Economics - I have not read Tyler Cowen's e-book The Great Stagnation, and - unless somebody decides to pay me to read it - I have no plan to do so. But, based on having read a bunch of reviews of the book, as well as Cowen's own summary of the ideas contained therein, I think I have a pretty good idea of what it's about, and I don't think I'm making a huge mistake by skipping it. Economists may be in the business of telling bedtime stories, but not all stories are created equal.Cowen's main thesis is that the stagnation in American median income over the past few decades is due to a failure of technological innovation. Scientists and engineers, he claims, are just not inventing useful stuff fast enough to raise our standard of living. The reason is that we've already picked all of the Universe's "low-hanging fruit":

The Great Deprivation - Everyone keeps calling it the Great Recession, as though they are not too depressed about the prolonged backslide in gross domestic product, which only recently resumed its upward climb. Backslide may describe what happened to the market economy, but it doesn’t capture what’s happening now in families hit hardest by persistent unemployment. They are suffering not a temporary setback, but a permanent reduction in their ability to develop their own and their children’s capabilities. Put in terms that economists are fond of, their human capital is being … decapitalized. A recent article in The Atlantic by Don Peck eloquently describes the negative long-term effects of unemployment, which are particularly serious for the less-educated.

Guest Post: Leverage, Inequality, and Crises -The US has experienced two major economic crises during the last century – 1929 and 2008. There is an ongoing debate as to whether both crises share similar origins and features (Eichengreen and O’Rourke 2010). Reinhart and Rogoff (2009) provide and even broader comparison. Of the many origins of the global crisis, one that has received comparatively little attention is income inequality. This column provides a theoretical framework for understanding the connection between inequality, leverage and financial crises. It shows how rising inequality in a climate of rising consumption can lead poorer households to increase their leverage, thereby making a crisis more likely.

Postal Service warns of default as losses mount - The U.S. Postal Service warned Wednesday that it may default on some of its financial obligations later this year after reporting yet another quarterly loss. The USPS, a self-supporting government agency that receives no tax dollars, said it suffered a loss of $329 million in the first quarter of federal fiscal year 2011. That compared with a loss of $297 million a year earlier. The agency has been suffering from an ongoing decline in mail volume, which has undercut revenues, while retiree health care costs have been straining its reserves. Excluding costs related to retiree benefits and adjustments to workers' compensation liability, the Postal Service said it had net income was $226 million in the first quarter, which ended Dec. 31.

When Wal-Mart Metastasizes, Neighborhoods Get Poorer - Wal-Mart’s lengthy struggle to open in New York City has hit fresh problems — a controversial report that said America’s biggest discounter does not just sell cheap, it makes neighborhoods poorer. The report concludes that Wal-Mart, the biggest U.S. private employer, kills jobs rather than creates them, drives down wages and is a tax burden because it does not give health and other benefits to many part-time employees, leaving a burden on Medicaid and other public programs.The New York City Council will hold a public hearing on Thursday on the impact a Wal-Mart would have but the retailer has declined to attend. Wal-Mart dismisses the critical report — released in January by City University of New York’s Hunter College Center for Community Planning — as “randomly selected statements from … flawed studies.” The report is based on 50 studies of Wal-Mart openings and comes as the company tries to gain a foothold in some of New York’s poorest neighborhoods

Is Poverty Up or Not? - The effect of the recession on poverty rates — like everything else – depends on official definitions. And currently, as I pointed out in an earlier post, the Census Bureau defines poverty in several different ways, some of which are labeled “experimental.”  By the traditional non-experimental measure, poverty jumped to 14.3 percent in 2009 from 13.2 percent in 2008. This measure, however, does not include the value of in-kind benefits, such as food stamps (under the Supplemental Nutrition Assistance Program), tax benefits such as the Earned Income Tax Credit, and some other government programs that received a special boost from the federal stimulus put into effect in 2009. So this measure understates the positive impact of public policies intended to buffer the recession’s impact.  Good thing we have the experimental measures of poverty, which were designed, in part, to address this problem. Most of these measures indicate little if any change between 2008 and 2009, indicating that public antipoverty programs did their job pretty well. (An editorial in The New York Times recently celebrated this accomplishment.)

The Rich - Paul Krugman - Deconstructing the Income Distribution Debate SYNOPSIS: Broad analysis of current Wage Disparity. Paints picture of rising inequity heightened by Reagan years and inattention . During the mid-1980s, economists became aware that something unexpected was happening to the distribution of income in the United States. After three decades during which the income distribution had remained relatively stable, wages and incomes rapidly became more unequal. Academic researchers soon began arguing vigorously about the causes of the growth in inequality: was it global competition, government policy, changing technology, or some other factor? What nobody, whatever his or her political stripe, questioned was the fact that there had been a dramatic change in income distribution.

America’s Income Inequality Worse than Egypt - One of the driving factors behind the protests is the decades-long stagnation of the Egyptian economy and a growing sense of inequality. “They’re all protesting about growing inequalities, they’re all protesting against growing nepotism. The top of the pyramid was getting richer and richer,” said Emile Hokayem of the International Institute for Strategic Studies in the Middle East.  As Yasser El-Shimy, former diplomatic attaché at the Egyptian Ministry of Foreign Affairs, wrote in Foreign Policy, “income inequality has reached levels not before seen in Egypt’s modern history.” But Egypt still bests quite a few countries when it comes to income inequality, including the United States: According to the CIA World Fact Book, the U.S. is ranked as the 42nd most unequal country in the world, with a Gini Coefficient of 45. In contrast:

  • – Tunisia is ranked the 62nd most unequal country, with a Gini Coefficient of 40.
  • – Yemen is ranked 76th most unequal, with a Gini Coefficient of 37.7.
  • And Egypt is ranked as the 90th most unequal country, with a Gini Coefficient of around 34.4.

Black and white housing: Race, suburbanisation, and homeownership in the US - Over the 20th century, the residential patterns of US households became increasingly divided by race. From 1940 to 2000, the share of the metropolitan white population who lived in the suburban ring increased from 38% to 74%, whereas, even by 2000, over 60% of the black metropolitan population remained in central cities. Economists and sociologists have long maintained that mass movement of whites to US suburbs harmed remaining inner city residents by reducing the tax base and fostering isolated racial enclaves. This column argues that white suburbanisation had a silver lining – it indirectly contributed to the rise in black homeownership.

The Tool And The Fool - O'Reilly — Here is what the Wall Street Journal said, I want you to react to this quote. "Mr. Obama is a determined man of the Left [Obama smiles] whose goal is to redistribute much larger levels of income across society. This is the Wall Street Journal, painting you as a pretty left-wing guy....

  • Obama — The Wall Street Journal would probably paint you as a left-wing guy. Is this the Wall Street Journal's editorial page? [some back and forth]
  • O'Reilly — Do you deny their assessment? Do you deny that you're a man who wants to redistribute wealth?
  • Obama — Absolutely.
  • O'Reilly — You deny that?
  • Obama — Absolutely. Bill, I didn't raise taxes once. I lowered taxes over the last two years.

I want to explain to you why, based on just this exchange between O'Reilly and the President, just how far gone this country is and why it (and many of you) are doomed. A narrative would get very complicated very quickly—human lying and deception is unbelievably subtle—so I will give you a set of numbered bullet points.

White House to Cut Energy Assistance for the Poor - President Obama’s proposed 2012 budget will cut several billion dollars from the government’s energy assistance fund for poor people, officials briefed on the subject told National Journal. It's the biggest domestic spending cut disclosed so far, and one that will likely generate the most heat from the president's traditional political allies. That would satisfy the White House, which has a vested interest in convincing Americans that it is serious about budget discipline. The Low Income Home Energy Assistance Program, or LIHEAP, would see funding drop by about $3 billion from an authorized 2009 total of $5.1 billion. The proposed cut will not touch the program's emergency reserve fund, about $590 million, which can be used during particularly harsh cold snaps or extended heat spells... LIHEAP has been semi-sacred for most Democrats and many Republicans--a program that carries an emotional resonance as it was designed to keep poor people, particularly older poor people, cool in the summer and warm in the winter. “A lot of people in the Northeast are going to be unhappy,” an administration official briefed on the budget said.

A Terrible Divide - The Ronald Reagan crowd loved to talk about morning in America. For millions of individuals and families, perhaps the majority, it’s more like twilight — with nighttime coming on fast.  Look out the window. More and more Americans are being left behind in an economy that is being divided ever more starkly between the haves and the have-nots. Not only are millions of people jobless and millions more underemployed, but more and more of the so-called fringe benefits and public services that help make life livable, or even bearable, in a modern society are being put to the torch.  Employer-based pensions, paid vacations, health benefits and the like are going the way of phone booths and VCRs. As poverty increases and reliable employment becomes less and less the norm, the dwindling number of workers with any sort of job security or guaranteed pensions (think teachers and other modestly compensated public employees) are being viewed with increasing contempt. How dare they enjoy a modicum of economic comfort?

Discover The Network Out To Crush Our Public Workers - It is difficult to read, watch or listen to the news without hearing that public employees are paid too much and get “lucrative” pensions and this is “bankrupting” your state, county or city. Public officials are "in bed" with "union bosses" and state and local government; taxpayer dollars are wasted to pay for people who don’t do much work but live the good life. "Reports" and "studies" confirm this.  People hear the same story over and over and over and over, seemingly coming from everywhere: public employees have it good, with extravagant pay and "lavish" or "plush" pensions, while taxpayers are taking it in the shorts. Public-employee pensions are "bankrupting" the state/county/city. "Unfunded liabilities" are "out of control" and it is time to do something about it before it is too late. This is part of a broad, nationwide attack on public employees and their unions, and through them, on government and democracy itself. 

State tackles how to pay its debt for unemployment benefits - Indiana is moving ahead with its own tax-raising, benefit-cutting plan to replenish the state's unemployment fund, despite a proposal by the White House offering short-term relief to states. Indiana has borrowed $2 billion from the federal government to pay unemployment benefits, and it is not alone. In all, 30 states owe $42 billion to the federal government that must be repaid.Thursday, a state Senate committee voted 8-4 for House Bill 1450, which increases taxes on businesses, but not as much as a bill passed two years ago would have. It also imposes a 13 percent surcharge on businesses so Indiana can begin repaying that federal loan and interest and cuts benefits to the jobless beginning in July 2012.One reason Indiana waited to address the problem was a hope that Congress would step in, because so many states are in the same predicament. This week, the White House floated details of a lifeline President Barack Obama will throw states in the budget proposal he'll release Monday.

State spent $90 million a day on unemployment benefits - California's Employment Development Department spent $22.9 billion on unemployment benefits in 2010, a record amount, the EDD said Thursday. The benefits, paid to 1.7 million Californians, average out to about $90 million each business day. "The numbers are staggering and the need undeniable," said Pam Harris, chief deputy director of the EDD. The state paid out $20.2 billion in unemployment benefits in 2009. That topped the previous record of $8 billion that the state paid out in 2008. Some of the increase can be attributed to the federal unemployment benefit extensions passed by Congress in 2008 and 2009. Some more fun numbers: the state issued 41.2 million unemployment benefit checks in 2010, processed 7.7 million initial claims for unemployment insurance, and handled double the amount of claims processed by the second-highest state (Pennsylvania). It hired 1,000 people to slog through all those claims, and now employs 3,491, although customers have still reported having trouble getting through by phone.

Obama Wants Jobless Aid Help for States — The Obama administration is proposing short-term relief to states saddled with unemployment insurance debt, coupled with a delayed increase in the income level used to tax employers for the aid to the jobless.  The administration plans to include the proposal in its budget plan next week. The plan was described late Monday by a person familiar with the discussions on the condition of anonymity because the budget plan is still being completed. Rising unemployment has placed such a burden on states that 30 of them owe the federal government $42 billion in money borrowed to meet their unemployment insurance obligations. Three states already have had to raise taxes to begin paying back the money they owe. More than 20 other states likely would have to raise taxes to cover their unemployment insurance debts. Under federal law, such tax increases are automatic once the money owed reaches a certain level.

States Cutting Jobs, Hurting Economic Recovery - Cuts in services at the state and local level continue to act as a drag on economic growth, and will continue to do so in the coming year – unless there is a significant course correction by policymakers. Friday’s jobs report from the Bureau of Labor Statistic provides the latest evidence.  BLS estimates that states, cities, counties, school districts, and other units of government cut another 12,000 jobs in December, bringing to 426,000 the number of jobs lost since August 2008.    Here’s the breakdown:

  • Local school districts have cut 154,000 education jobs since August 2008.
  • Cities, counties, and other local governments have cut 202,000 jobs.
  • State governments have cut 69,000 jobs.

Congress Warned Over States’ Bankruptcies - US lawmakers were warned yesterday that allowing states to declare bankruptcy would upend the $2.8 trillion (£1.7 trillion) municipal bond market, making it much harder and more expensive to fund local government, and potentially destablising the economic recovery. A House of Representatives committee was examining the extent of the financial distress in state and local governments, which has become a major topic of concern on Wall Street and among individual investors, and examining ways to prevent the need for a federal bailout of any of the lower rungs of government. "The perfect storm is brewing; already state and municipal governments are coming to Washington, hat-in-hand, expecting a federal bailout like everybody else," Republican Congressman Patrick McHenry said. "But the era of the bailout is over."

Obama Plans to Rescue States With Debt Burdens - President Obama is proposing to ride to the rescue of states that have borrowed billions of dollars from the federal government to continue paying unemployment benefits during the economic downturn. His plan would give the states a two-year breather before automatic tax increases would hit employers, and before states would have to start paying interest on the loans.  The proposal, which administration officials said would be included in the 2012 budget that the president is scheduled to unveil next week, was greeted coolly by Republicans on Capitol Hill, who warned that the plan would ultimately force many states to raise their unemployment taxes in the years to come.  But the White House is calculating that the proposal will ultimately appeal to Republicans because it involves a tax moratorium right now for hard-hit states during a still-fragile economic recovery.

Troubled States - This year, with unemployment still at recession levels, one state after another will lay off teachers, reduce health care for people on Medicaid, defer maintenance on roads and bridges, and make other assorted cuts to balance their budgets. Even though these policies will hinder economic recovery, venerable observers will say the cutbacks are preferable to higher taxes, and some Republicans will relish the chance to slash programs they never liked in the first place. Even liberal Democratic governors and legislators, compelled by balanced-budget requirements in state constitutions, will have no politically feasible alternative except to reduce spending. Although state revenues have begun to grow again, they are still well below 2007 levels, and federal stimulus aid to the states -- perhaps the least appreciated part of an ill-appreciated program -- ends with the new fiscal year (beginning in most states on July 1). This whole experience ought to be a lesson in the limits of stimulus packages and the need for ongoing federal policies that recognize, and correct for, the fiscal pressures that states predictably face in recessions. We have long tolerated a perverse situation where states work at cross-purposes with national macroeconomic imperatives, cutting expenditures when they should be at least holding them steady. We need to change that, and adjusting the federal support for Medicaid is the easiest way to do it.

State Budget Problems Will Push Against the Recovery - The signs for the economy are looking better despite my continued worries about the labor market. But continuing budget problems at the state and local government level could push against a recovery:  Recessions lower revenues and increase the demand for state and local services, and this pushes state and local governments into the red. Since state and local government are required to balance their budgets, this forces forcing them to either cut spending or raise taxes (most are choosing to cut spending). However, since both tax increases and cuts in spending are harmful to employment and growth, as state and local governments bring their budgets into balance it makes it more difficult for the economy to recover.

Pew Research Rediscovers the Magic of Individuality and Irrationality of Crowds - Suppose that you have three people. Adam, who believes in cutting spending to balance the budget. Bill who believes in raising taxes to balance the budget and Chris who believes that state balanced budgets are a pro-cyclical economic destabilizer that should be alleviated by federal transfers, or as he likes to say, “lame.”Now we are going to ask a few questions.  First we ask: Should the state stick to its balance budget requirement? Adam and Bill say yes. Chris says no. We confidently conclude that the public wants balanced budgets. Second we ask: Should we cut spending? Adam says yes. Bill and Chris say no. We confidently conclude that the public doesn’t want to cut spending. Third, we ask: Should we raise taxes? Adam and Chris say no. Bill says yes. We confidently conclude that the public doesn’t want to raise taxes. But wait a minute! Is the public insane! How can we balance the budget if we don’t cut spending or raise taxes.

50 Little Herbert Hoovers and Federal Revenue Sharing - Mark Thoma brings up a couple of related themes. The first being: Recessions lower revenues and increase the demand for state and local services, and this pushes state and local governments into the red. Since state and local government are required to balance their budgets, this forces forcing them to either cut spending or raise taxes (most are choosing to cut spending).However, since both tax increases and cuts in spending are harmful to employment and growth, as state and local governments bring their budgets into balance it makes it more difficult for the economy to recover. Those balanced budget requirements force state and local governments to adopt pro-cyclical fiscal policies, which has been recently dubbed the 50 Little Herbert Hoovers problem (I believe Paul Krugman coined this term). This problem is generally well known by at least the school of economists who appreciate what Lord Keynes was saying in his General Theory and one remedy for this problem is countercyclical movements in Federal revenue sharing.

Muni Fund Investors Pull $1.2 Billion in 13th Week of Outflow, Lipper Says - Investors withdrew about $1.2 billion from U.S. municipal-bond mutual funds this week, the 13th-straight period of withdrawals, Lipper US Fund Flows said.  Outflows have totaled $24.8 billion since mid-November, according to data released yesterday by Lipper, a Denver-based research company. The $1.1 billion that investors took out in the week ended Feb. 2 was the least in two months, Lipper said. Investors pulled $4 billion in the week ended Jan. 19, the most since Lipper started compiling data in 1992.  Some investors exited the $2.86 trillion municipal debt market amid a prediction of municipal defaults amounting to “hundreds of billions of dollars” by Meredith Whitney, an analyst who correctly projected Citigroup Inc.’s dividend cut two years ago. She spoke Dec. 19 on CBS Corp.’s “60 Minutes.”

State Budget Challenges Catch Washington's Attention - A year ago, most states hoped the economy would be strong enough this year that they wouldn't have to cope with deficits like those of the past two years. Unfortunately, economic recovery has been weak and they face continued revenue shortfalls and the cessation of stimulus spending that sustained them through the recession. On February 3, National Governors Association Executive Director Ray Scheppach told the Senate Budget Committee that despite adopting $75 billion of spending cuts and $33 billion of tax increases over the past two years, the states will have to trim another $175 billion over the next few years. Today's Washington Post has this handy chart and detailed article showing what mostly new governors from both parties are up against and what they're proposing. Yesterday's Center for Budget and Policy Priorities analysis adds a lot more.

New Data on State and Local Sales Taxes - Retail sales taxes are correctly described in textbooks as "transparent" taxes; citizens are aware of how much they pay and when. On any particular purchase, an individual can easily identify the amount and percentage he paid in sales tax; it's right there on the receipt. As a result, even people with no interest in taxation have an idea of the general sales tax rate where they live. However, in two-thirds of the country, local-option sales taxes make it somewhat more difficult for citizens to know what the rates are, and transparency suffers. Thirty-three states allow localities to charge a local sales tax. The rates vary from jurisdiction to jurisdiction, and a new Tax Foundation Fiscal Fact averages those in a way that gives an accurate impression of the sales tax in each state. Tennessee, California, Arizona, Louisiana, and Washington have the highest combined state and average local sales tax rates. On the other end of the scale, Delaware, Montana, New Hampshire and Oregon all have the lowest combined rates of zero percent.

My Governor, as usual, Fails Math - You have to love Chris Christie. The man who said NJ couldn't afford a tunnel whose cost with overruns was expected to be less than $10B is now backing a tunnel whose initial cost estimate is $13B. That the great state of New Jersey has sent an actual physicist to Congress, let alone supplies and hosts most of the talent in the Pharmaceutical and Financial Services industry,* and is run by a man who says we couldn't afford $10.5B that PATH would control but should give $13B to something Amtrak will continue to control is rather close to proof that G-d is either non-existent or a thug with a sick sense of humor. And now, he's saving money again (h/t Thers):Bill A3273 would have expanded New Jerseys’ Medicaid program, essentially reversing action Christie took in July 2010 to ensure $7.5 million in taxpayer money would not go to supporting family planning clinics, most of which [29 of 58 is half, not "most," but apparently conservative reporters can't do math either] are run by Planned Parenthood.

Wall Street Journal Encourages Readers Not to Die in New Jersey - Today's Wall Street Journal (subscription required--subscribe at Amazon) advises readers not to "die in New Jersey any time soon." It's the sort of morbid advice you don't normally see in a newspaper, but, for anyone concerned with passing on an estate to their heirs, there's some validity to it. From the article:Here's some free financial advice: Don't die in New Jersey any time soon. If you have more than $675,000 to your name and you die in the Garden State, about 54% may go to the IRS and the tax collectors in Trenton.Better not take your last breath in Maryland either. The tax penalty for dying there is half of a lifetime's savings. That's the combined tab from the new federal estate tax rate of 35% and Maryland's inheritance and death taxes. Maybe they should rename it the Not-So-Free State.

Quelle Surprise! Tax Increases on Rich Do Not Lead to Exodus - Yves Smith - A solid paper by Cristobal Young and Charles Varner, “Millionaire Migration and State Taxation of Top Incomes” helps debunk the idea that high income individuals will pull up stakes if their taxes go up. The case study is an interesting one: New Jersey’s tax increases on top earners. New Jersey made the biggest increase of all US states, and also has the distinction of having a low income tax state (Connecticut) nearby, meaning that tax-sensitive residents had an option of moving not all that far to escape the increase, which presumably would allow them to maintain family ties. Economists and lobbyists love to stress often base their arguments upon economic rationality and contend that everyone is out to maximize his personal bottom line. But moving is a hassle and costly, and most people’s social lives are grounded in their community and their workplace. Relocating is likely to result in a longer commute for those still employed, would cause disruption to any children still in school and would weaken many existing social relationships.

The Shock Doctrine in Wisconsin - Three months ago in this space, I wrote about Wisconsin governor-elect Scott Walker, who was showboating by making bogus demands and proclamations even though he was still two months from being inaugurated. It’s probably no surprise that actually taking office hasn’t diminished Walker’s ambitions (via TPMDC):In an interview with the Associated Press, Scott Walker proposed stripping nearly all government workers of their collective bargaining rights…. Under his plan, which he’ll include in his forthcoming budget proposal, most state workers would no longer be able to negotiate for better pensions or health benefits or anything other than higher salaries, which couldn’t rise at a quicker pace than the Consumer Price Index.He also says this plan is non-negotiable — as in, he’s cut off negotiations with prison guards, teachers and other state workers. Walker’s budget proposal would also reduce employees’ benefits by mandating substantially higher contributions, even though state workers accepted below-private-sector wages in exchange for those benefits in previous labor talks.

Minnesota governor proposing tax increases, jobs spending (Reuters) - Minnesota Governor Mark Dayton said on Wednesday he would propose next week higher taxes on wealthy state residents to help address a projected $6.2 billion budget deficit, and urged further investments to create jobs. In his first "state of the state" address, the Democratic governor also asked business leaders to give his administration two years to turn around Minnesota's budget without "savaging essential public services." Dayton asked for bipartisan support from the Republican-controlled legislature to resolve the state's fiscal crisis and urged lawmakers to pledge there would be no state government shutdown due to a budget impasse. "We were left a horrendous fiscal mess, a decade of economic decline, and state agencies poorly managed," Dayton said in a speech to legislators. "All of that must be turned around. All of it will be turned around, but not by tomorrow, and not entirely by the end of this legislative session."

Stimulus gives Mass. $7B, but funds drying up - More than $7 billion in federal stimulus funds have flowed into Massachusetts over the past two years, money that has helped plug gaping holes in state and municipal budgets and created tens of thousands of temporary jobs, state officials said Tuesday. But while the stimulus appears to have mitigated the recession for state and local governments, the realization is sinking in that the money is running out and budgets being prepared for the fiscal year starting in July will need to be balanced with little or no extra padding from Washington. Michael Widmer, president of the business-backed Massachusetts Taxpayers Foundation, said the stimulus prevented what could have been "catastrophic cuts" in state services. The state now needs to wean itself off that money - and fast.

Mayors stress dire straits of New York's cities -- A planned cut in state aid to municipalities is "ludicrous" at a time when cities are facing increased costs and the possibility of a property tax cap, Binghamton Mayor Matthew T. Ryan said Monday. Ryan made his comments the same day mayors from the largest cities in New York testified in Albany and asked the state Legislature for more money, as well as a number of other reforms ranging from a one-year wage freeze, changes to state pensions and altering the "last in, first out" provision for laying off teachers.The Legislature held its first hearing Monday on the proposed 2011-12 state budget, receiving testimony from city mayors about the cuts in aid sought by Gov. Andrew Cuomo. Cuomo proposed a $1.5 billion cut in school aid and a 2 percent cut in aid to municipalities, which would produce nearly $15 million in savings to the state.

Road Workers Furloughed as Pothole Problem Worsens, Report Says - City drivers who find themselves waylaid by potholes may have budget cuts to blame, the New York Daily News reported. The time it takes the Department of Transportation to fix potholes has nearly tripled, from an average of 2.1 days to 6.1 days, since 2007 due in part to furloughs for the city's road repairers, the News said. Roughly 600 road repairers are being forced to take a day off every two weeks during the first quarter of 2011, under a deal that is expected to save the department $1 million, according to the paper. DOT spokesman Seth Solomonow told the paper that the department's pothole response, claiming that the number of craters filled has actually increased by 12 percent compared to the same period last year. But potholes, which have been exasperated by recent snowfall, continue to be a problem for drivers and perhaps pedestrians, according to the News.

Detroit Offers Cops Abandoned City Homes for $1,000   - Mayor Dave Bing is offering renovated homes in Detroit for as little as $1,000 to city police officers who live in the suburbs under a plan aimed at improving neighborhoods and safety. The city will tap federal stimulus funds to repair up to 200 abandoned houses in the Boston-Edison and Indian Village neighborhoods, Bing said during a news conference Monday. At least 53 percent of the city's 3,000 officers live outside the city, Bing said. Residency requirements for city employees were wiped away by state lawmakers in 1999. Bing said the police presence will hinder crime and create better relationships with residents. Detroit's population has dropped by half after peaking at near 2 million in the early 1950s.

City Needs Millions More To Raze Nuisance Housing — City leaders say the $28 million Dayton has received in federal Neighborhood Stabilization Program funds to aggressively target neighborhoods hit hardest by foreclosure will only make a small dent in the growing list of vacant and deteriorating properties, now estimated to be as high as 10,000.  The program money, which is expected to dry up after 2014, amounts to the demolition of only about 1,500 structures. Housing officials estimate they will need an additional $20 million to $30 million in funds — money the city does not have — to deal with the remaining vacant housing stock.  There are currently plans to demolish 500 of the 1,732 properties on the city’s nuisance list in 2011. So far this year, 27 residential structures have come down, along with four garages. The process to demolish a property can take a year or more and costs an average of $13,800. 

Mandatory Arabic Classes Planned For Some Texas Schools - A plan to make lessons in Arabic and Arab culture mandatory for students in some Texas schools has been put on hold, following feedback from parents.Two Schools in the Mansfield Independent School District planned to incorporate Arabic and Arab culture into every aspect of their curriculum. Students in two other schools in the district would have had the option to pursue similar studies. The district was awarded a $1.3 million grant by the Department of Education last summer as part of the Foreign Language Assistance Program. The Department of Education has identified Arabic, along with Mandarin, as "languages of the future" and the school district said that "students will be at an advantage in an increasingly diverse and economically global society." Some parents expressed concern at a meeting that took place on Monday night, saying that they had not been made aware of the proposals earlier.

California Higher Education Leaders Warn Of Further Tuition Increases - California's public higher education leaders warned Monday that additional tuition increases could be in store this fall if legislators or voters reject Gov. Jerry Brown's plan to extend several recent tax hikes. And even if the tax proposal is approved, the educators said, they expect some academic programs to be eliminated next year. University of California President Mark G. Yudof, California State University Chancellor Charles B. Reed and California Community Colleges Chancellor Jack Scott appeared before a state legislative panel in Sacramento to discuss Brown's plan to cut $1.4 billion from higher education funding. Brown has warned that the reduction will be significantly deeper if the Legislature does not put a trio of tax extensions on the June ballot, or if voters reject the measures. Reed said he hopes the Cal State system can avoid tuition hikes beyond the 10% already approved for the 2011-12 school year. Those increases will bring undergraduates' basic annual charges, not including living costs, to $4,884. But if the tax measure fails, "everything has to be back on the table,"

Degree inequality - It is now generally understood that economic inequality has expanded greatly since about 1970. (Well, there are exceptions. For a couple of decades, some commentators denied that economic inequality was growing, claiming that it was all a statistical illusion. A few holdouts against reality may remain.) Now the debate has shifted to what – if anything at all – should be done about inequality. Most of that discussion has been about income inequality. Between 1979 and 2007, the one-fifth of American households with the highest income experienced a roughly 100% increase in their annual, inflation-adjusted, after-tax income (280% [!] for the highest one percent of households); the middle one-fifth got about 25% more income; and the poorest one-fifth got about 15% more (see pdf). For wealth – property, stocks, and the like – the gap is enormously greater and has also widened over the last few decades (see Ch. 6 here). Less discussed is the widening college degree gap.

The Overselling of Education - In discussing rising inequality in the United States, Federal Reserve Board Chair Ben Bernanke recently said, “It’s a very bad development. … It’s creating two societies. And it’s based very much, I think, on educational differences.” A better-educated workforce is widely touted as the panacea for every economic problem. Education is said to be the cure both for unemployment and income inequality. To hear leaders of the financial sector talk, the underlying problem with the economy has not been a runaway financial sector but an unqualified workforce. In a recent Reuters special report on the U.S. economy, Diane Swonk, an oft-quoted financial-sector economist, said, “The recession merely revealed a reality that has been with us for a long time. We faced a growing gap in education and skills that we tried to fill with debt and credit, which gave us the illusion of growth.”

A look at skyrocketing college debt-- Web-based college financial aid source FinAid clocks the nation’s student loan debt level at more than $888 billion dollars as of this month.  It’s that sky high figure that has many financial experts and analysts calling it the country’s next major financial crisis.      More and more recent college graduates are finding themselves tens of thousands of dollars in debt and unable to find jobs in their field to make those debt payments, let alone meet other costs of livings.  MSN financial writer Liz Pulliam Weston wrote an article documenting e-mails she receives from graduates in $30,000-$40,000 if not more in debt from student loans and are unable to find work.  Some students resort to credit cards to pay what they can, while others take on two or more jobs to pay the bills, but still find themselves coming up short.

Student Loan Debt Clock - This clock reports an estimate of current student loan debt outstanding, including both federal and private student loans.  Total student loan debt outstanding exceeded total credit card debt outstanding for the first time in June 2010. The seasonally adjusted figure for revolving credit in the Federal Reserve's G.19 report (current report, historical data) was $826.5 billion in June 2010. (Credit card debt represents as much as 98% of revolving credit.) Revolving credit started declining in September 2008 when it reached a peak of $975.7 billion. The decrease is probably due a combination of higher minimum payments on credit cards, which were increased to 4% from 2%, lower credit card limits and tighter credit underwriting. Student loan debt, on the other hand, as been growing steadily because need-based grants have not been keeping pace with increases in college costs. Federal student loan debt outstanding reached approximately $665 billion and private student loan debt reached approximately $168 billion in June 2010, for a total student loan debt outstanding of $833 billion. Total student loan debt is increasing at a rate of about $2,853.88 per second.

Default rate for repayment of for-profit college loans hits 25 percent: About one-quarter of students who took out federal loans to attend for-profit colleges defaulted within three years of starting repayment, according to a new federal analysis. The 25 percent default rate in the for-profit sector, part of an Education Department report to be published Friday, was up from a 21 percent rate estimated in December 2009. Loan defaults are on the rise throughout higher education because of economic troubles. The three-year default rate for public colleges is now about 11 percent, up from about 10 percent in the previous report. The rate for private nonprofit colleges is about 8 percent, up from about 7 percent. Federal officials cautioned that the new data, which measured defaults over three years among a group of borrowers who entered repayment in fiscal 2008, are preliminary and are not being used for enforcement. Still, the figures underscore growing challenges facing the for-profit sector.

The Transformation of Student Loans Into Taxes - How might a government go about increasing the amount of money it takes from its population without raising their taxes or visibly generating widespread inflation in the nation's economy?  In considering the explosive growth of the federal direct student loan program in the last two years, it occurred to us that these kinds of loans would be an ideal vehicle for corrupt politicians to extract more wealth from Americans than they ever could directly through income and payroll taxes alone. Here's why. People seeking college educations have three characteristics that would make them desirable as willing marks for this kind of corrupt political strategy. First, they are more likely to earn a lot more money than less educated individuals will over their lifetimes. This factor provides the motivation for both individuals to pursue higher education and for the government to support their doing so, because at a minimum, people who are likely to earn higher incomes will also be likely to pay higher taxes.

City furloughs worsened pension crisis, report finds - Mayor Daley’s plan to require city employees to take 24 annual unpaid furlough days over a three-year period put under-funded city pensions $24.5 million deeper in the hole, the city’s inspector general concluded Tuesday.In 2009, Daley used the furlough plan to help erase a massive budget shortfall — and billed it as a $134 million savings.What he failed to mention is that furloughs reduced employee pension contributions by $11 million without any corresponding reduction in benefits. Since the city’s mandatory contribution is based on the amount employees kick in, the furlough plan also reduced the city’s share by $13.5 million. The entire $24.5 million will have to be made up and only exacerbates the pension crisis.

The State Worker: State worker retirements jumped 23 percent in 2010 - Nearly 12,000 state workers drew their first pension checks last year, up 23 percent from 2009, according to the latest retirement application data from CalPERS. The jump in the rate of employees leaving state service was likely due to a mix of factors: Furloughs that cut take-home play by nearly 15 percent made working less profitable than retirement for some state employees. The state's civil service is weighted toward baby boomers, many of them now reaching retirement age.More people, 2,744, retired in January of this year, the most of any single month tracked by CalPERS going back to 2007. Although that was not quite a 4 percent yar-over-year bump, it was significant because the increase was on top of a large base number - 2,647 retirements in January 2010

CalSTRS set to lose nearly $73 million - CalSTRS stands to lose nearly $73 million after a New York office building it owns was hit with a foreclosure lawsuit. Lenders last month sued in New York state court to foreclose on a Manhattan office building owned by the California State Teachers' Retirement System and its partner, Silverstein Properties. Silverstein is best known as the developer of the World Trade Center.  The two partners invested a combined $75 million in the building five years ago, borrowing the rest. CalSTRS' share of the investment: 97 percent.

Florida cities face underfunded pension benefits - — From Hialeah to St. Petersburg, Florida's cities and counties face a "ticking time bomb" of debt because they do not have enough money to pay future pensions and health care benefits already promised to current employees, according to a report released Wednesday from the LeRoy Collins Institute. The worst offenders — Bradenton, Hollywood, Hialeah, Miami, Cape Coral and Titusville — owe retirees between one and four times in health care benefits than the money they now spend on their total budgets. Miami, for example, owed about $100 million a year in retiree health care and pension payments in 2009, but set aside only $74 million, or 74 percent of what they owed. St. Petersburg owed $51 million that same year, but had set aside about $40 million. The shortfall forces cities to find other funding sources. Similar scenarios are playing out in virtually every large city in Florida, where a baby boomer work force is reaching retirement age.

Retirement system's unfunded liability to take 30 years to pay off -  The New Hampshire Retirement System's $3.7 billion unfunded liability attracted the most attention from members of the public who attended an informational overview of the system at its offices Wednesday. France explained the unfunded liability existed well before the economic downturn in the last decade, but when combined with other challenges facing the system, there arose some funding issues. Those other challenges include employers contributing too low an amount into the system and the creation of the Special Account, which was set up by a legislative decision and designed to pay cost of living adjustments through the retirement system. Anytime the fund earned more than half of 1 percent of its assumed rate — the assumed rate was 8.5 percent — that excess money would go into the Special Account. However, the fund struggled to make its assumed rate of return because extra money was going toward COLAs.

Illinois Expected To Pay High Rates On $3.7 Billion Pension Bond - Illinois is expected to have to pay a relatively high interest rate when it sells $3.7 billion in taxable debt for its public employees' pension system next week, despite the state's recent moves to improve its shaky finances, market participants say. The state's highly visible financial woes, in particular its woefully underfunded pension, "makes this a tough sale," said John Donaldson, director of fixed income at Haverford Investments in Radnor, Pa.  It doesn't help that Illinois, one of the lowest-rated states, has already sold roughly $6.7 billion of taxable debt in the last year, he added.

US lawmakers pound public pensions, fear bailouts - Republican lawmakers swore off any bailout of US state and city governments on Wednesday, turning the screws on states and floating bankruptcy as a radical fix for underfunded pensions and budget problems.  “Reckless spending fueled by bottomless borrowing and guaranteed by endless bailouts is an unsustainable course,” Despite a modest recovery in the national economy since the recession officially ended in 2009, states continue to struggle with low revenues, which are creating multibillion-dollar budget gaps. Altogether, they project budget deficits of at least $100 billion for the next fiscal year, which for most begins this summer.  Those budget woes have prompted investors in the $2.8 trillion municipal bond market to dump their bonds, economists to warn of a drag on the national recovery, and US lawmakers to consider allowing states to declare bankruptcy.

S&P cuts New Jersey rating over pension underfunding - Standard & Poor's on Wednesday lowered its ratings on the state of New Jersey's general obligation debt to AA- from AA, citing financial stresses of its large unfunded pension liabilities.  The New Jersey Division of Investment, Trenton, oversees the state's seven pension funds, which have a combined $70.8 billion in assets. Total liabilities could not be learned by press time.  New Jersey has outstanding some $2.6 billion of general obligation debt, $27.8 billion of appropriation-backed debt and $2.5 billion of moral obligation debt, an S&P report issued Wednesday said.  S&P also lowered ratings on various state agencies' appropriation debt to A+ from AA- and lowered its ratings on the South Jersey Port Corp. to A- from A, the report states.

Retirement savings plans: brilliant economics, lousy psychology - The US has 401(k)s and IRAs. The UK has personal pension schemes. Canada has Registered Retirement Savings Plans or RRSPs. Economists typically support such plans because of their effects on savings. The plans also make the tax system fairer, granting all taxpayers access to the tax advantages enjoyed by employer pension plans. But the truly brilliant part of retirement savings plans is their contribution to the fiscal challenges posed by population aging. In Canada, when a taxpayer turns 71, RRSPs must be converted to registered retirement income funds or RRIFs. Starting at age 72, the taxpayer must make annual, taxable, withdrawals. Similar rules apply to IRAs and 401(k)s. The baby boomers will be withdrawing funds from their 401(k)s and RRSPs -- and paying a good chunk of taxes on those withdrawals -- precisely when the revenue is needed to pay for their health care and other needs.

Retirement Assets Total $16.6 Trillion in Third Quarter - Americans held $16.6 trillion in retirement assets at the end of the third quarter of 2010, accounting for 36% of all household financial assets in the United States, according to the Investment Company Institute. The finding is from "The U.S. Retirement Market: Third Quarter 2010," a report that covers assets held in private-sector defined benefit (DB) plans, government pension plans, defined contribution (DC) plans (including 401[k], 403[b] and 457 plans), annuities and individual retirement accounts. Between June 30, 2010, and Sept. 30, 2010, retirement assets rose 6.1%, from $15.6 trillion to $16.6 trillion. During the third quarter, total return on equities was 11.3%, while bonds returned 2.4%, according to the Standard & Poor's 500 stock index and the Citigroup Broad Investment Grade Bond Index. At the end of the third quarter, IRAs held $4.5 trillion of retirement market assets; another $4.2 trillion was held in employer-sponsored Dc plans, of which $2.9 trillion was held in 401(k) plans. 47% of IRA assets and 53% of DC plan assets were invested in mutual funds.

Aging our way to misery, and financial collapse - We in the United States are not alone in our concerns of the impending finality of the current order: by diverse means. In glancing over a financial piece, by Niel Howe, author of the Fourth Turning. I noted that the Europeans were also concerned. The impact of global aging on the collective temperament of the developed countries is more difficult to quantify than its impact on their economies, but the consequences could be just as important—or even more so. With the size of domestic markets fixed or shrinking in many countries, businesses and unions may lobby for anticompetitive changes in the economy. We may see growing cartel behavior to protect market share and more restrictive rules on hiring and firing to protect jobs.  The author goes on to note that the Chinese will be older than we are by the year 2030: which is true only in so far as we continue to allow people to immigrate to the United States.

Social Security and Pie! - The latest Social Security trustees' report, whose numbers even the White House uses, predicts that the Social Security program can pay all promised benefits for the next 38 years -- with no changes at all. The June 2004 estimate from the nonpartisan Congressional Budget Office projects that Social Security can pay all promised benefits without changes for even longer, until 2052. That's nearly half a century. And we are supposed to be worried about this? It brings to mind the image of Woody Allen as a nerdy young child in "Annie Hall," becoming suddenly depressed because he has discovered that "the universe is expanding" and life on Earth is ultimately doomed.Granted, 38 years is not an eternity. But even after 2042, the Social Security trustees say they will be able to pay an average benefit that is actually higher than what workers receive today -- indefinitely. That's in 2004 dollars -- adjusted for inflation.

Social Security’s Silent Majority - Media coverage reflects what sells, and the political arena is no exception. Conflict and hypocrisy reign supreme, while the realities of policy are often left to fend for themselves. Social Security is a poignant example of such casualties. It is often the victim of misinformation and political agendas, which are designed to obscure the fact that a majority of Americans support the program. Most recently, Social Security was hijacked by the conversation about the national debt, yet another attempt by conservatives to reframe the narrative and detract from the facts. Consequently, the program’s fundamentals were once again lost to media spin, which sees no profitable advantage in telling a non-partisan story. The media’s reluctance to move beyond Republican sound bites is a fundamental disservice to Americans across the country. How else are they supposed to get the full story? The facts alone are telling, but no one talks about them. Social Security provides over 50% of income for two out of every three seniors, and without it most elderly Americans would live in poverty. At the end of 2009, $672 billion dollars was going to 52 million Americans; one in six people receive Social Security benefits. The program is the most effective and efficient in our history; less than 2% goes to administrative overhead and the other 98 plus percent goes right back to beneficiaries.

Medicare Recipients Against Handouts - Krugman - You know, I’d always thought that the “don’t let the government get its hands on Medicare” contingent, while picturesque, wasn’t all that large. But noooo: 44 percent of Social Security recipients, and 40 percent of Medicare recipients, believe that they don’t benefit from any government social program.

Medicaid, prisons could drain General Fund budget - The financial needs of Ala­bama Medicaid and the Ala­bama Department of Correc­tions are so great that they threaten to crowd out the needs of the other agencies paid out of the General Fund. The combined need of both agencies raised the shortfall for the fiscal 2012 General Fund budget from about $555 million, as projected by the state Legislative Fiscal Of­fice, to $738 million, accord­ing to the chairman of the Senate budget committee that must figure out how to fill the hole. The loss of federal stimu­lus dollars and the continu­ing increase in the number of people in Alabama who are eligible for Medicaid has dou­bled what the state needs just to level fund existing serv­ices. Fluctuating federal funding and a continued in­crease in the number of peo­ple incarcerated by the state also is increasing the funds needed by the Department of Corrections.

SC budget board OKs $100M Medicaid agency bailout - A $100 million bailout of South Carolina's Medicaid program approved Tuesday will keep health care on track for the state's elderly, poor and disabled at least through April. The state Department of Health and Human Services told the state Budget and Control Board that it had been able to shave only $3 million from a looming $228 million deficit projection. Agency director Anthony Keck told the board that unless the state agreed to cover the shortfall, Medicaid provider payments would stop by the end of March. Gov. Nikki Haley asked the five member board, which she chairs, to approve a $225 million bailout. But Senate Finance Committee Chairman Hugh Leatherman insisted that the agency only get $100 million immediately, telling Keck to look for other ways to cut the deficit. It's shut off payments for adult dental, vision and podiatry care as well smaller budgetary items, including how often diabetics can get new shoes, accessories for wheel chairs like umbrella holders and some prescription drugs.

Florida Medicaid patients may lose dental, vision, mental health services - State Senate leaders may propose cutting dentistry, optometry and mental health services for Medicaid patients as they try to curb the program's budget, which is expected to top $21 billion next year.The emerging Senate bill calls for making cuts in so-called optional services as well as increasing reimbursement rates and limiting legal liabilities for primary care doctors. Although the increased reimbursement rates would cost more, senators want to encourage primary care doctors to continue taking Medicaid patients.. The bill will require patients to make an appointment with a primary care physician within 30 days of signing up for Medicaid. "We're only going to be able to fund essential services," "My goal is that the Medicaid benefit will be comparable to what a citizen in the private sector has, not worse and certainly not better."

States must cut health care programs - Washington's quandary is shared by many states: Demand for health-related services is growing, voters don't want to raise taxes, payments to doctors, hospitals and clinics have already been reduced, and states risk losing federal funds if they cut eligibility for the joint federal-state Medicaid health program for the poor and disabled. Most states — including Washington — have cut services and budgets during the recession. Even though the economy is picking up, state revenue is weak — and billions in temporary federal stimulus funding that helped many governors avoid deeper cuts dry up June 30. The next fiscal year is shaping up to be the worst since the Great Depression, says Michael Leachman of the liberal Center for Budget and Policy Priorities in Washington, D.C. It reports that 44 states and the District of Columbia project shortfalls totaling $125 billion for fiscal 2012, which begins in July for most.

The Bad Faith of Mandate Critics, Part 2 The conservative legal brief against the Affordable Care Act rests heavily on a simple proposition. Government can’t make us obtain private insurance because, as the argument goes, that would be forcing us to buy a private product. Politically and constitutionally, it may be an effective argument. But do the law's harshest critics, the ones screaming about tyranny, actually believe that? In particular, do they think it's even scarier than a single-payer, government-run program, as they argue in their briefs and Judge Roger Vinson suggested in his Monday ruling? I have my doubts. And while I offered some of my reasons yesterday, I left out a big one: Social Security privatization. You remember privatization, don’t you? The idea was to take Social Security, a mandatory public pension program, and turn it into a system of mandatory personal investment accounts.

Health Care ACA Act: Who does the Roberts Court Work For? -It is an article of faith among many on the Left that the answer is easy: the majority on the Roberts Court is in the tank for the Republican Party. And within certain limits and with qualifications that is my view too. But the question today is WHICH Republican Party? The nativist libertarian leaning Christianist Tea Party? Or the internationalist corporatist Republicans? And the answer is critically important when it comes to the ACA bill. And the key factor is the individual mandate.The sideshow of outright repeal was settled last week The debate over the 'individual mandate': Stuck in neutral? the Republicans got an up or down vote, albeit with a 60 vote majority needed and ended up with a party line 47-51 vote to waive the budget rule, or not even the 50 votes actually needed to win final passage on the underlying amendment or the final bill to repeal. They had their shot, demonstrated to both sides of the Party that they were willing to do the 'right/Right' thing, but had to move onto one of the other three paths available: defunding implementation, piecemealing it, or supporting court action. But there is where things fall apart on them.

Medical Malpractice Reform: Truth in Advertising Needed - Medical malpractice liability reform (Tort Reform) has been a hotly contested item for years, as the GOP, with physician support, has continued to market this as a health reform measure that can contain costs. I think to start, we need to examine results in states where tort reform has already been tried. We need look no further than Texas. Politicians tried to claim that Texas was a success, Rep Bachmann stated ““The state of Texas did a wonderful job of lawsuit reform and actually saw medical costs come down. We know it works.” Others have touted the Texas experiment as a success..but empiric data is a powerful thing, and as we will see, contradicts this sentiment.

ANALYSIS — The Insurers’ Real Agenda for Change - The media had lots of health care news to obsess about last week. A federal judge ruled the health care reform law unconstitutional, and Senate Republicans tried in vain to repeal the law. But most of the press paid virtually no attention to a potentially much more important development — a multi-pronged effort by five major insurers to strip from the law key regulations and consumer protections that aren’t to their liking. The insurers do not want the bill repealed or declared unconstitutional. Congress gave them exactly what they wanted by including in the legislation a requirement that all Americans not eligible for Medicare or Medicaid buy coverage from a private insurance company. That provision alone will result in hundreds of billions of dollars in revenue and profits the insurers otherwise would never see.

GOP leader expects House to block health spending - One of the House's top Republicans says he believes the chamber will soon vote to block spending for President Barack Obama's health care overhaul law. House Majority Leader Eric Cantor told reporters Tuesday that by the time the House approves a government-wide spending bill for this year, it will end up prohibiting the use of money for the overhaul. The House is expected to debate that legislation shortly. That overhaul, which became law last year, is one of Obama's proudest legislative achievements. Republicans have opposed it as a costly, big-government overreach. Spending for government programs expires March 4 unless Congress approves new legislation providing extra funds. Cantor, a Virginia Republican, and other GOP lawmakers want to use the spending bill to cut government expenditures across the board.

Vermont Gov. Proposes Single-Payer Health Plan - Vermont Gov. Peter Shumlin, who was elected last November after promising to reform health care in the state, unveiled a bill Tuesday that would abolish most forms of private health insurance and move state residents into a publicly funded insurance pool. His much anticipated proposal lays out a strategy that leaves a number of key details — including how to pay for the system — open for debate. Under Shumlin's "single-payer" system, Vermont residents would receive health benefits paid for by the state, regardless of their employment status or income. The plan is designed to help stem rising health costs, which state officials say have become unsustainable. "Health care costs are climbing at a rate of more than 12 times the growth of the Vermont economy, and we're not getting the best value for our money," Shumlin said in a prepared statement. "The time for change has come."

Just Go To The Emergency Room - When I read the conservative proposals for tort reform or high deductible, low value health insurance plans, I keep running into this inconvenient truth, and I’m wondering whether anyone dares to approach GOP elected leaders and ask about it: In 1986, Congress enacted the Emergency Medical Treatment & Labor Act (EMTALA) to ensure public access to emergency services regardless of ability to pay. Section 1867 of the Social Security Act imposes specific obligations on Medicare-participating hospitals that offer emergency services to provide a medical screening examination (MSE) when a request is made for examination or treatment for an emergency medical condition (EMC), including active labor, regardless of an individual’s ability to pay. We don’t even have to bring this law up, actually. Republicans raise it all the time, whenever they’re asked about what they plan to do with the tens of millions of uninsured and under-insured that will remain uninsured or under-insured under the conservative approach to health care:

Researchers Link Processed Food To Lower IQs In Kids - It could be that munching on processed foods packed with fat and sugar may make kids a bit less intelligent. British researchers have found 3-year-olds who munch on such grub tend to have a slightly lower IQ when they reach age 8. Meanwhile, 3-year-olds with healthier diets were shown to have higher IQs five years later. CNN reports the link between processed foods and eventual lower IQs stops at age 3. Kids aged 4 to 7 didn't show different IQs at age 8 no matter what their diets were. The study was published in the Journal of Epidemiology and Community Health, but the researchers dubbed the link between diet and IQ as "weak and novel."

Common Insecticide Used in Homes Associated With Delayed Mental Development of Young Children - When the EPA phased out the widespread residential use of chlorpyrifos and other organophosphorus (OP) insecticides in 2000-2001 because of risks to child neurodevelopment, these compounds were largely replaced with pyrethroid insecticides. But the safety of these replacement insecticides remained unclear, as they had never been evaluated for long-term neurotoxic effects after low-level exposure. In the first study to examine the effects of these compounds on humans and the first evaluation of their potential toxicity to the developing fetal brain, scientists of the Columbia Center for Children's Environmental Health at Columbia University's Mailman School of Public Health found a significant association between piperonyl butoxide (PBO), a common additive in pyrethroid formulations, measured in personal air collected during the third trimester of pregnancy, and delayed mental development at 36 months.

India resists efforts to ban pesticide - When she was a child, a helicopter would buzz over Sujata Sundaran's village twice a year, spraying pesticide over the lush trees on cashew farms nearby. Sundaran, 27, said her legs stopped growing when she was about 6 years old, and her mother carries her around like a baby. Sundaran and thousands of other villagers here in the southern state of Kerala say that over the years use of a pesticide called Endosulfan left them disabled.  The villagers helped force a state ban on the pesticide in 2004 and now have joined an international campaign that could result in a global ban.  But the villagers have come up against a powerful opponent: the Indian government.  India is the world's largest producer, exporter and user of the low-cost pesticide, which farmers across the rest of the country continue to use on tea, cotton, rice and other crops. Officials say a ban would jeopardize the country's food security at a time of rising demand and leave millions of farmers without an affordable alternative.

Sara Lee and J.M. Smucker Raising Prices - Sara Lee said it’s planning more price increases for its food and coffee as agricultural commodities are trading far above year-ago levels in the futures market. Also Tuesday, J.M. Smucker said it’s lifting list prices by 10% on its Folgers and Dunkin Donut coffees sold at grocery stores. This comes on top of the 13% increase Smucker enacted in 2010.

What To Make Of Rising Food Prices - Last month, the United Nations Food and Agriculture Organization reported that its index of farm commodity prices reached a new record. Other commodity prices, notably fuel, are also rising. The increased commodity costs have contributed to the overthrow of the Tunisian government and civil unrest in Ghana, Algeria, Pakistan, Yemen and elsewhere. In India, people have taken to the streets in protest over rising onion prices. In China, apple prices have jumped 50% in the past year. With the turmoil in Tunisia and Egypt, some believe that governments in troubled neighborhoods may start snapping up more food to try and ensure supplies for their disgruntled masses, which could add even more to food price pressures. In sum, while precious metals and energy tend to dominate headlines, agricultural commodities may be even more strongly positioned to gain ground in this season of political uncertainty.

Higher food prices ahead as crop reserves sink - Americans should brace for higher food prices in the next few months now that demand for corn has pushed U.S. supplies to their lowest point in 15 years and costs for dwindling supplies of wheat, sugar, coffee and chocolate have risen. The price of corn affects most food products in supermarkets. It’s used to feed the cattle, hogs and chickens that fill the meat aisle. It is the main ingredient in Cap’n Crunch and Doritos. Turned into corn syrup, it sweetens most soft drinks. Major food makers and some restaurants have already said they’ll be raising prices this year because they’re paying more for key commodities that are at historically highs. Weather, such as flooding in Australia and droughts in China and elsewhere, has affected a variety of crops this year. Consumers probably will see price hikes as early as three months from now, though most of the impact won’t be felt for another six months, Some food makers already began selectively raising prices within the past few quarters.

Is this the End of Cheap Food? - Just as people have started to feel a little bit better about the economy, a new threat now looms. The specter of inflation can be seen most clearly in the rise of food prices to record highs -- fueling, among other things, the political tumult that's ripping across the Middle East. The United Nations Food Price Index has moved to a record high and is up 62% from its recessionary low in 2009. Sugar prices are up 122% and dairy is up 92%. And just over the last eight months, the Dow Jones Grains Total Return Index, which is tied to things like corn, soybeans and wheat, is up a whopping 71%. For many, this may seem like just another spin on the boom-and-bust cycle we've been suffering through. We saw a steep rise in food and fuel prices in 2008. Then a global recession that prompted fears of deflation -- falling prices. Now, another fearful bout of inflation. 'Round and 'round we go.

Politics of the Plate: The Price of Tomatoes -Immokalee is the tomato capital of the United States. Between December and May, as much as 90 percent of the fresh domestic tomatoes we eat come from south Florida, and Immokalee is home to one of the area’s largest communities of farmworkers. According to Douglas Molloy, the chief assistant U.S. attorney based in Fort Myers, Immokalee has another claim to fame: It is “ground zero for modern slavery.”   Lucas, a Guatemalan in his thirties, had slipped across the border to make money to send home for the care of an ailing parent. He expected to earn about $200 a week in the fields. Cesar Navarrete, then a 23-year-old illegal immigrant from Mexico, agreed to provide room and board at his family’s home on South Seventh Street and extend credit to cover the periods when there were no tomatoes to pick.  Lucas’s “room” turned out to be the back of a box truck in the junk-strewn yard, shared with two or three other workers. It lacked running water and a toilet, so occupants urinated and defecated in a corner. For that, Navarrete docked Lucas’s pay by $20 a week. According to court papers, he also charged Lucas for two meager meals a day:  Cold showers from a garden hose in the backyard were $5 each. Everything had a price. Lucas was soon $300 in debt.

USDA ‘Partially Deregulates’ GM Sugar Beets, Defying Court Order - A week ago, the USDA shocked the organic-farming community by "fully deregulating" genetically modified alfalfa, after acknowledging that organic farmers had legitimate concerns about the move and hinting they'd be taken into account. On Friday, the agency didn't simply skulk away from its own words in an apparent attempt to appease the agrichemical industry. This time, it defied a court order banning the planting of GM sugar beets until a proper study of their environmental impact can be done. The USDA announced that it would allow farmers to begin planting Monsanto's Roundup Ready sugar beets -- genetically tweaked to withstand copious lashings of Monsanto's herbicide -- even though the environmental impact study has yet to be completed, The Wall Street Journal reports. "The USDA decision is the second big victory for the crop-biotechnology industry in a week," the Journal noted

Corn Rises to 30-Month High as U.S. May Cut Inventory Estimate - Corn rose to a 30-month high in Chicago as the U.S. government may lower its stockpile estimate on increased demand from China and ethanol makers. Wheat gained after Egypt bought U.S. and Argentine grain.  A U.S. Department of Agriculture report due Feb. 9 will forecast corn inventories at 125.4 million metric tons on Sept. 1, down from a month-ago estimate of 127 million tons, according to a Bloomberg News survey. China may import a record 9 million tons of corn, the U.S. Grains Council said last week.  “The tight inventory situation, high demand from the ethanol-producing industry and a gloomier production outlook through Argentina, in our view, are supporting corn prices,” Carsten Fritsch, an analyst at Commerzbank AG in London, said in a report today.

Sugar Shortage Looms as Storm Ruins Australian Crop - World sugar output will probably fall short of demand, said Rabobank, after a cyclone with winds stronger than Hurricane Katrina destroyed homes and smashed crops in Australia, driving prices to 30-year highs.  Tropical Cyclone Yasi ripped through northern Queensland, a region growing a third of the country’s cane, cutting output potential in the area by about 50 percent, producers group Canegrowers said Feb. 4. The storm, which the government says may have wiped out at least A$500 million ($507 million) of agricultural production, raised speculation that the world’s third-largest sugar exporter may struggle to match last year’s output that was the lowest in two decades.

Corn, Soybean May Rise on Speculation Global Supply Tightening - Corn and soybeans may rise, extending last week’s rally to 30-month highs, on speculation that a government report on Feb. 9 will show rising demand eroded global inventories before the 2011 harvests.  Twenty-three of 30 traders and analysts surveyed from Tokyo to Chicago on Feb. 4 said corn will advance this week, and 24 respondents said soybeans will gain. Last week, corn futures for March delivery rose 5.4 percent to $6.785 a bushel on the Chicago Board of Trade. Soybeans for March delivery added 2.5 percent to $14.335 a bushel.  Last week’s gains in corn and soybeans were expected by the majority of respondents surveyed on Jan. 28. Since 2004, the surveys have been correct 54 percent of the time for corn, and 54 percent for soybeans.

U.S. Corn Reserves Hit Lowest Level in More Than 15 Years - Reserves of corn in the United States have hit their lowest level in more than 15 years, reflecting tighter supplies that will lead to higher food prices in 2011. Increasing demand for corn from the ethanol industry is a major reason for the decline, according to federal officials.  The Department of Agriculture reported Wednesday that the ethanol industry’s projected orders this year rose 8.4 percent, to 13.01 billion bushels, after record-high production in December and January. That means the United States will have about 675 million bushels of corn left at the end of the year. That is about 5 percent of all corn that will be consumed, the lowest surplus level since 1996.  The report, which measures global supply and demand for grains, oilseeds and other crops, said its projections for wheat and soybean stocks remained unchanged at historical low levels for reserves.  Corn prices have already doubled in the last six months, rising from $3.50 a bushel to more than $7 a bushel.

U.S. Corn Surplus Cut on Higher Ethanol Output; Smaller World Crop Is Seen - U.S. stockpiles of corn before the next harvest will be 9.4 percent smaller than estimated last month, a bigger drop than expected, because of increased ethanol production, the government said.  The surplus on Aug. 31, the end of the marketing year, will be 675 million bushels, down from 745 million forecast in January and less than 1.708 billion on hand a year earlier, the U.S. Department of Agriculture said today in a report. Analysts surveyed by Bloomberg News expected 729 million bushels, on average. Corn prices have jumped 89 percent in the past year.  “The function of the market could be to trade higher to ration demand,” Dan Cekander, the director of grain research for Newedge USA LLC in Chicago, said before the report. The rally also will help to “encourage a large expansion in planted acreage,” he said.

Bloomberg: China Wheat Drought May Last to Spring, Minister Says -  China, the largest wheat consumer, says the drought in the country’s main growing region may be prolonged, said Minister of Agriculture Han Changfu. Futures in Zhengzhou climbed to a record. About 115.95 million mu (7.73 million hectares) of wheat, or 42 percent of the total planted in the eight major producing provinces, has been hit by the dry spell that may last into spring, Han said in a statement yesterday. Rain on the North China Plain has been “substantially” below-normal since October, the United Nations’ Food and Agriculture Organization said Feb. 8. Drought could force China, largely self-sufficient in wheat, to buy more from overseas, said Jason Britt, an analyst at Central States Commodities Inc. “That sends a little bit of a shiver through the market,” China may import 1 million metric tons of wheat this year, compared with 9.8 million tons by Egypt, the top buyer, according to the U.S. Department of Agriculture.

UN Sees Risk of ‘Widespread’ Hoarding, Wheat Gains -- Global wheat harvests may trail demand for a second year, spurring hoarding and further price gains, said the United Nations. Wheat, corn and soybeans soared to the highest levels since 2008 yesterday as a U.S. government report showed smaller crops and rising demand are eroding global inventories. Governments from Beijing to Belgrade are raising imports, limiting exports or releasing supply from stockpiles to curb inflation. Wheat in Chicago, the global benchmark, soared 72 percent in the past year as drought and floods ruined crops. Dry weather threatens production in China, the top producer. “We need at least a 3 percent to 4 percent increase in total wheat production,” Abbassian said yesterday. The drought in China may cut the chance of replenishing world stockpiles, he said. Inventories may drop 6.4 percent this year, FAO data show. About 42 percent of the total area planted with wheat in China’s eight major producing provinces has been hurt by a dry spell that may last into the spring

Wheat Hoarding Likely to Be `Widespread,' Prompting Price Gains, UN Says - Global wheat harvests may trail demand for a second year, spurring hoarding and further price gains, said the United Nations.  “Whenever you get the market as tight as we are now, hoarding becomes widespread,” Abdolreza Abbassian, a senior economist at the UN Food and Agriculture Organization, said in an interview by phone from Rome.  Wheat, corn and soybeans soared to the highest levels since 2008 yesterday as a U.S. government report showed smaller crops and rising demand are eroding global inventories. Governments from Beijing to Belgrade are raising imports, limiting exports or releasing supply from stockpiles to curb inflation. Wheat in Chicago, the global benchmark, soared 72 percent in the past year as drought and floods ruined crops. Dry weather threatens production in China, the top producer.

Iraqi Flour Prices Triple On Wheat Import Shortages - Iraq’s flour prices have tripled over the last two months because of shortages in imported wheat supplies, threatening to push up food prices that have already stirred protests in some poorer parts of the country.  Iraq is one of the world’s largest wheat importers and much of the government’s budget is spent on a food ration program that supplies 60 percent of Iraqis. Merchants and traders said prices had spiked as officials had been unable to supply flour. “When there is no flour in food rations for a month, market prices go up as people need this important staple and will continue to buy it,” said Mustafa Kadhim, 30, a flour merchant in the main wholesale market in eastern Baghdad. Global food prices hit their highest level on record in January, contributing to turmoil in other countries already facing high unemployment and poverty. Wheat prices on Thursday hit their highest level in two and a half years. In Baghdad markets, a 50-kilogram sack of flour which sold at 10,000 Iraqi dinars, or $8.50, two months ago, now sells for 30,000 dinars, or $26, a bag, according to local merchants. Government officials say price increases are temporary because they have local wheat in stock and are waiting for the arrival of imported wheat from the ports and from overseas to mix with Iraqi produce to manufacture flour. “

Nigeria: Food Prices - Stakeholders Warn On Looming Hunger - Stakeholders in the agriculture industry have warned Nigeria to brace up for a food emergency as World food prices surged to a new historic peak in January, for the seventh consecutive month, according to the updated FAO Food Price Index, a commodity basket that regularly tracks monthly changes in global food prices.The Index averaged 231 points in January and was up 3.4 percent from December 2010. This is the highest level (both in real and nominal terms) since FAO started measuring food prices in 1990. Prices of all monitored commodity groups registered strong gains in January, except for meat, which remained unchanged. "The new figures clearly show that the upward pressure on world food prices is not abating," said FAO economist and grains expert, Abdolreza Abbassian. "These high prices are likely to persist in the months to come. High food prices are of major concern especially for low-income food deficit countries that may face problems in financing food imports and for poor households which spend a large share of their income on food."

Corn Prices To Soar As Chinese Imports Increase Ninefold Compared To Official Projections - Cotton, wheat, rice, and now corn. If revised Chinese import estimates by the US Grain Council are even remotely correct, look for corn prices of $6.80 a bushel at last check to jump by at least 15% in a very short amount of time. As the FT reports, 'Corn prices – and with them, the price of meat – are set to explode if the latest import estimates from China are correct. The US Grain Council, the industry body, said late on Thursday that it has received information pointing to Chinese imports as high as 9m tonnes in 2011-12, up from 1.3m in 2010-11.' Why is this a concern? Because 'the US Department of Agriculture, which compiles benchmark estimates of supply, demand and stocks, forecast Chinese imports at just 1m tonnes in 2011-12.' In other words, the whole forecast supply-demand equilibrium is about to be torn to shreds. And all this excludes the impact of neverending liquidity by the one and only, which will only make the speculative approach to surging corn relentless."

Sugar Shortage Looms as Storm Ruins Australian Crop - World sugar output will probably fall short of demand, said Rabobank, after a cyclone with winds stronger than Hurricane Katrina destroyed homes and smashed crops in Australia, driving prices to 30-year highs.  Tropical Cyclone Yasi ripped through northern Queensland, a region growing a third of the country’s cane, cutting output potential in the area by about 50 percent, producers group Canegrowers said Feb. 4. The storm, which the government says may have wiped out at least A$500 million ($507 million) of agricultural production, raised speculation that the world’s third-largest sugar exporter may struggle to match last year’s output that was the lowest in two decades.  “The whole house was shaking and vibrating,” said Gerry Borgna, 53, whose family has supplied cane to a mill at Tully, about 140 kilometers (87 miles) south of Cairns, since the 1920s. “We could hear things flying past and we thought it was part of the house.” At the farm, power lines were lying across the road, a shed stood precariously and cane was pushed over. “To me, this is a disaster,” he said.

‘Parasitic’ sugar speculators blamed for volatility - Leading sugar traders have blamed recent volatility in the price of sugar on "parasitic" speculators in a letter seen by the Financial Times.  Sugar recently rose to its highest price in 30 years. The World Sugar Committee, which represents big traders, told the ICE Futures US exchange that high-frequency traders "enrich themselves at the expense of traditional market users". But ICE is said to believe such traders are not the cause of price volatility. Algorithmic, or high-frequency, traders use computers and advanced mathematics to buy and sell positions in the market, sometimes within seconds, taking advantage of small differences in price to make profits. The New York-based exchange has said that algorithmic traders help to provide the market with liquidity. But in a letter seen by the Financial Times, Sean Diffley, chairman of the WSC, said: "Arguably, computer-based traders do not even contribute to the traditional function of the speculator in allowing producers and consumers to transfer price risk, since they do not take price risk home."

Turkey Faces Specter Of Slaughtering Milk Cows - Turkish Agriculture Credit Cooperatives Central Union (TTKKMB) General Director Bedrettin Yıldırım has said a shortage of livestock in Turkey, which drives meat prices up, is pushing milk producers to slaughter their milk cows, leading to decreased calf production.  Speaking to Today's Zaman, Yıldırım noted that the livestock sector in Turkey is facing the threat of decreasing milk production, as rising meat prices and falling milk prices force farmers to slaughter their milk cows. “More than 1 million milk cows have been slaughtered in the past few years, ultimately due to the shortage of livestock in the country, which has reduced the number of calves. Our biggest fear is that milk producers will start to slaughter their milk cows again, like in previous years,”

Kenya Coffee Hits New High At $1,022/bag (Reuters) - Kenya's benchmark AA coffee grade fetched a new all-time high of $1,022 per 50 kg on Tuesday, reflecting a trend of soaring commodity prices due to political upheavals in north Africa. "It's generally a shift in commodity prices because of the uncertainty in the Middle East," said Chris Ransley, managing director at the Ransley Coffee Company. Kenyan coffee has been attracting high prices in the past few weeks also after unfavourable weather dried up supply. Authorities warned that unseasonal rains in 2010 interfered with flowering and would cut output in the current October 2010 to September 2011 crop year, after a drop to 40,000 tonnes in the previous year. Although Kenya is a small grower with less than 1 percent of global production, its beans are sought after to blend with those from other regions.

Cost of Feeding World's Poor Leaps —The cost of feeding millions of starving people increased markedly in 2010 as rising grain prices pushed up the cost of staple foods, data from the World Food Program showed Tuesday.  Figures seen ahead of the release of the WFP's annual report show that while the United Nations' food-relief agency bought 22% more food last year than in 2009, the amount it spent rose 30% to $1.25 billion.  Wheat purchases, which account for 39% of supplies, cost 59% more last year as the organization struggled to feed people displaced by devastating floods in Pakistan. The average cost of a metric ton of wheat rose to $246 in 2010 compared with $218 a year earlier.

Can we feed the world? Will we? - The bad news comes in two parts. First, there are a lot of reasons to think that productivity growth may have slowed, and is likely to slow further. These include

  • Public R&D efforts have declined, and the private sector hasn’t been an adequate substitute. GM crops (largely the product of private companies) have some benefits, but haven’t yet been the panacea that is sometimes claim
  • Some agricultural systems (most fisheries, agriculture in sub-Saharan Africa, a lot of irrigation) have been operated on an unsustainable basis
  • Energy is a significant input (though not as important as is sometimes supposed) and energy costs are bound to rise
  • Efforts to mitigate climate change may reduce output and/or productivity
  • Climate change will have a net adverse effect on productivity, particularly if warming exceeds 2 degrees

India Cotton Seen Hitting Life High On Thin Supply -  Indian cotton prices are likely to hit a fresh lifetime high this week, tracking a rally overseas and as in local demand surpasses lower-than-expected arrivals, dealers said.  "Local mills and exporters were aggressively buying to fulfil their requirements, but arrivals were low. They were not improving despite record high prices," said a senior official at Gujarat State Co-operative Cotton Federation Ltd.  Domestic cotton arrivals at Indian spot markets till Feb. 6 in the 2010/11 season rose by just 5.7 per cent on year, the state-run Cotton Corp of India said.  India, the world's second-biggest producer, had permitted 5.5 million bales for exports from Oct. 1 but met with a poor response because rains hit harvest.

U.S. Cotton Acres to Rise by 14% After Price Surge, Group Says - Cotton farmers in the U.S., the world’s biggest exporter, will increase acreage by 14 percent this year after prices jumped to a record, the National Cotton Council said.  Planting will climb to 12.5 million acres in 2011, the Memphis, Tennessee-based group of producers and merchants said today in a report on its website.  Six analysts surveyed by Bloomberg News forecast an average of 12.6 million acres.  Cotton futures in New York have more than doubled in the past 12 months. The most-active contract rose to an all-time high of $1.8122 a pound on Feb. 3.

Cotton Rises to Record as USDA Cuts Global Production Forecast - Cotton futures climbed to a record for the second straight day after exports jumped from U.S., the world’s leading shipper.  In the week ended Feb. 3, export sales rose 26 percent from a week earlier, the U.S. Department of Agriculture said today. Global output will be 115.25 million bales in the year ending July 31, down 0.2 percent from a January forecast, with demand at 116.55 million, the USDA said yesterday. Prices have more than doubled in the past 12 months.  “The future prices are being pushed up by physical demand,” . “We could see usage being rationed because of scarcity and not because of prices, as China is consuming whatever they are able to buy.”  Cotton for March delivery advanced 6.76 cents, or 3.7 percent, to $1.8734 a pound. Earlier, the most-active contract jumped by the exchange limit of 7 cents to an all-time high of $1.8758. The price gained 7.6 percent in the previous three days.

The Revolution of Food  - Two years ago a hideous surge in food prices triggered spontaneous crowd scenes the MSM termed “food riots”. These stout writers and editors didn’t let us know how they think they’d fare if they and their families were being intentionally starved amid plenteous food, on account of purely artificial scarcity generated by purely political choices made by criminals. Today this food stagflation is upon us again, and this time it looks permanent.  We’ve long known the nature of these political decisions. It’s fundamental to capitalism that scarcity be generated amidst plenty. This is accomplished by stealing the vast majority of what the productive people grow and craft. In the case of agriculture, the basic mechanisms of this crime were land enclosure in the West and globalization for much of the global South. The result in both cases was to drive vast amounts of people off the land, generating mass migrations similar to the barbarian migrations into Europe in the first millennium. This migration headed to the shantytowns of the cities (and their ghetto and project and trailer park, and now tent city, equivalents in America). In the wake of globalization, in line with the new feudalism, the South is undergoing a new onslaught of land enclosures, as regional kleptocracies “sell” vast amounts of land in Kenya, Ethiopia, Tanzania, and elsewhere to corporations and conglomerates from places like Sweden, the UK, South Korea, Saudi Arabia, and of course Wall Street.

Giant locust swarms now serious threat to Australia’s crops - A RARE, giant breed of locusts has the potential to destroy crops in NSW overnight, the State Government says.  The spur-throated locusts is a mainly tropical species found in Queensland and the Northern Territory but warm and humid weather has drawn them into NSW.Primary Industries Minister Steve Whan says the Government has a plan of attack to help northwestern NSW farmers control the largest outbreak in 40 years. "The much larger spur-throated locust is a ferocious eater and can completely destroy a crop overnight," Mr Whan said in a statement.

Droughts, Floods and Food, by Paul Krugman -We’re in the midst of a global food crisis — the second in three years. World food prices hit a record in January, driven by huge increases in the prices of wheat, corn, sugar and oils. These soaring prices have had only a modest effect on U.S. inflation, which is still low by historical standards, but they’re having a brutal impact on the world’s poor, who spend much if not most of their income on basic foodstuffs. The consequences of this food crisis go far beyond economics. After all, the big question about uprisings against corrupt and oppressive regimes in the Middle East isn’t so much why they’re happening as why they’re happening now. And there’s little question that sky-high food prices have been an important trigger for popular rage. So what’s behind the price spike? American right-wingers (and the Chinese) blame easy-money policies at the Federal Reserve, with at least one commentator declaring that there is “blood on Bernanke’s hands.” Meanwhile, President Nicolas Sarkozy of France blames speculators, accusing them of “extortion and pillaging.”  But the evidence tells a different, much more ominous story. While several factors have contributed to soaring food prices, what really stands out is the extent to which severe weather events have disrupted agricultural production. And these severe weather events are exactly the kind of thing we’d expect to see as rising concentrations of greenhouse gases change our climate — which means that the current food price surge may be just the beginning.

Debunking Krugman: NYT's "Soaring Food Prices - Blame the Weather" by Kalpa - Krugman is on a roll. Over the weekend, he wrote "Soaring Food Prices - Blame the weather." As I was preparing to post a rebuttal to that poorly written article, another article appeared today which was much better written, "Droughts, Floods and Food." Today's article took into account some of the factors he overlooked in the first article in which he took a very small part of the global grain production story (wheat), region (FSU), and factor (weather) and drew a sweeping conclusion. Because the media in general fails to see the global food situation clearly and it's been so prominent in the news lately due to Egypt, the subject needed to be covered here. So thanks Paul for explaining it to us, but please allow me to point out a few flaws in your analysis.

Yes, world food prices are higher because of speculation - World food prices have become highly politicised. Two views are battling it out. First up; the supply-siders, such as Paul Krugman and Ben Bernanke, who claim that prices are up because of global warming, declining harvests and world population growth. Then, there is everyone else, who claim that it is the fault of speculators. Here is how Mr. Krugman put it: "What’s behind the surge in food prices? The usual suspects have made the usual claims — it’s all about the Fed, or it’s all about speculators. But I’ve been looking at the USDA World supply and demand estimates, and what stands out from the data is mainly that we’ve had a huge global harvest failure."" sure looks like climate change is a major culprit. And it’s not just the (Former Soviet Union): extreme weather elsewhere, which again is the sort of thing you should expect from climate change, has played a role in bad harvest around the world."

Speculation is the main driver behind higher world food prices – the evidence is there in the data -The supply shock story is about deviations around the trend in prices due to year-on-year climatic differences. It is also commodity specific. Different commodities are produced across the world under different conditions. One year, wheat supply is down, but banana supply is up. Read the next sentence carefully, because it is important. An aggregate food price index will smooth out commodity specific shocks. Supply shocks hardly show up in an aggregage index, and if they do, it is as comparatively small fluctuations around the trend, and only to the extent that climatic fluctations affect all commodities. Now we can define a bubble - it is a temporary deviation from the long run trend. Prices shoot up, and then crash. So, what do we see in the chart above? First, there has been a long run trend upwards in food prices. This trend started in 2003 and it is illustrated in the chart by the blue arrow. This, I venture to suggest, is the Asian demand story. However, there are two undeniable massive deviations from this trend. The first occurred in 2008. Food prices shot up, jumping massively away from the trend and then came crashing down and returned to trend. Hands up, please. is there anyone out there who does not think that this was a bubble?

Signatures of Speculation – Krugman - With food prices on the table again, we’re going to have another debate about the role of speculators. Yves Smith will no doubt be on the attack again, which is fine. But let me restate my basic position on all this. First of all, I don’t have any particular faith that markets necessarily get things right. Some readers may remember that I was almost all alone back in 2000-2001, declaring that the California energy crisis reflected market manipulation, not fundamental shortages; and I took a lot of heat back in 2005 for warning that we had a huge housing bubble.  So this isn’t about a priori belief in markets; it’s about whether we see the “signature” of a speculation-driven price surge. Many people on the “speculators did it” side like to point to financial data, especially large purchases of futures by various players. But food is a physical commodity, and plays in the financial markets can only move the price to the extent that they affect physical flows and stocks. Here’s my exotic model of the market for a physical commodity:

Krugman, Commodity Prices, and Speculators -  Yves Smith - Paul Krugman was gracious enough to acknowledge our past differences on the matter of commodities speculation, which was specifically about oil markets. It was the subject of a long running argument conversation between his blog and mine in spring 2008, which I recapped in ECONNED.  In brief, Krugman contended that the skyrocketing oil prices of early 2008 were the result of fundamental factors (and we pointed out that we were puzzled by his stance, since he, unlike the vast majority of Serious Economists, has been willing to call some past bubbles in their making). As he reiterates on his blog today, if the prices exceed the level dictated by supply and demand in the real economy, a standard microeconomic analysis would expect there to be inventory accumulation, aka hoarding. Krugman has maintained that those (like Mike Masters) who point to the volume of money flowing into commodity indexes just don’t get it. Since futures prices eventually converge to cash markets prices, you need to tell a story that involves the physical markets to make a case on speculative impact that sticks.  In oil, however, that is not how the futures markets work.

Why the Krugman “I See No Commodities Speculation” Analysis is Flawed -  Yves Smith - Paul Krugman correctly anticipated that I would be unable to resist taking issue with him again regarding his view that the recent increase in commodities prices are warranted by the fundamentals.  Note that I am not saying in this post that “commodities prices have increased as a result of speculation.” That takes more granular analysis of conditions in various markets; we’ll be looking at some that look suspect in the coming days and weeks. I intend to accomplish something much simpler in this post: to dispute the logic of Krugman’s overarching argument. He professes to be empirical, but as we will show, he is looking at dangerously incomplete data, so his conclusions rest on what comes close to a garbage in, garbage out analysis. And that’s been a source of frustration given his considerable reputation and reach.  Here is the guts of Krugman’s reasoning, from a recent post, “Signatures of Speculation“:

Food Prices Worldwide Hit Record Levels, Fueled by Uncertainty, U.N. Says Global food prices are moving ever higher, hitting record levels last month as a jittery market reacted to unpredictable weather and tight supplies, according to a United Nations report released Thursday.  It was the seventh month in a row of food price increases, according to the United Nations Food and Agriculture Organization, which put out the report. And with some basic food stocks low, prices will probably continue reaching new heights, at least until the results of the harvest next summer are known, analysts said.  “Uncertainty itself is a new factor in the market that pushes up prices and will not push them down,”

How big a threat are rising prices? - IN 2007 and 2008, before the world was swept by financial panic, the biggest global economic threat appeared to be a sharp and sustained rise in commodity prices. Soaring oil costs rattled rich world consumers while a spike in food prices battered the world's poor. Prices tumbled during the crisis but have crept up again in recovery. A new crisis may loom. Overheating emerging markets are boosting global demand at a time when supply is tight. Extreme weather events have led to poor harvests around the world. Some credit rising prices with a wave of political unrest, which has itself placed upward pressure on commodities, especially oil. This week, The Economist argues that some inflation concerns are overblown. Accelerating inflation is unlikely in weak developed economies, and emerging markets have plenty of tools available to fight rising prices. But the frequency with which commodity price spikes now seem to occur is worrying. And so this week, we asked members of the Economics by invitation network to discuss commodity inflation and talk about how central banks should respond.

What's Behind Egypt's Problems? - We have all been reading about Egypt in the newspapers, and wonder what is behind their problems. Let me offer a few insights.At least part of Egypt’s problem is the fact that in the past the government has threatened to reduce food subsidies. Now it is planning to hold food subsidies level and raise energy subsidies, but it is not clear that the dollar amount of subsidy will be enough. The government is taking steps to make food and energy affordable for most, but there is worry that the steps being taken will not be enough.There is a good reason why one might expect Egypt to s running into problems with energy and food subsidies. Its own financial situation is declining at the same time that the cost of food imports is soaring. If we look at a graph of Egyptian oil imports, exports, and consumption (using a graph from Energy Export Databrowser, which graphs BP Statistical Data), we find that Egypt’s oil use has been rising rapidly, at the same time the amount extracted each year is declining.

Ellen Brown: The Egyptian Tinderbox: How Banks and Investors Are Starving the Third World: Underlying the sudden, volatile uprising in Egypt and Tunisia is a growing global crisis sparked by soaring food prices and unemployment. The Associated Press reports that roughly 40 percent of Egyptians struggle along at the World Bank-set poverty level of under $2 per day. Analysts estimate that food price inflation in Egypt is currently at an unsustainable 17 percent yearly. In poorer countries, as much as 60 to 80 percent of people's incomes go for food, compared to just 10 to 20 percent in industrial countries. An increase of a dollar or so in the cost of a gallon of milk or a loaf of bread for Americans can mean starvation for people in Egypt and other poor countries.Follow the MoneyThe cause of the recent jump in global food prices remains a matter of debate. Some analysts blame the Federal Reserve's 'quantitative easing' program (increasing the money supply with credit created with accounting entries), which they warn is sparking hyperinflation. Too much money chasing too few goods is the classic explanation for rising prices.The problem with that theory is that the global money supply has actually shrunk since 2006, when food prices began their dramatic rise. Virtually all money today is created on the books of banks as 'credit' or 'debt,' and overall lending has shrunk. This has occurred in an accelerating process of deleveraging (paying down or writing off loans and not making new ones), as the subprime housing market has collapsed and bank capital requirements have been raised. Although it seems counterintuitive, the more debt there is, the more money there is in the system. As debt shrinks, the money supply shrinks in tandem.

Here's Who's Going Hungry In The Global Wheat Price Spike - The global wheat price spike is like a punch in the gut for the world's hungry. And while they were high as a result of last summer's Russian wildfires, they've now gone even higher based on rising demand and damaged crops around the world.  While wheat isn't the major source of sustenance in every country around the world, its a key part of the diet in many countries, and represents a huge share of some eaters diets. Those eaters may be able to swap out their wheat buys for other food items, but many may be strung up by the surge in prices, left to spend less on other products, and more on their daily bread. We've compiled the biggest wheat consumers per capita.

Hard to Argue About Mexico's Future »  Richard Proctor of Cassandra's Hypothesis asks: "Will Mexico Follow Egypt into Collapse?": Mexico seem likely follow Egypt into collapse within two years based on falling oil revenue and rising food prices:

  • Mexicans spend about 22% of their disposable income on food. In 2010 corn prices increased 52% and wheat 47%. With the floods in Australia, ethanol in the U.S. and higher fuel prices it seems likely food will consume 50% of disposable income within a year. That is an average. There will be a critical percent of the population where food costs will exceed their disposable income. Hunger will amplify risks.
  • Mexico's government gets about 40% of its revenues from oil. As noted in BP [Mexico-related] data complied at Energy Export Database, Mexico's domestic consumption (black line) will force its oil revenues (green area) to drop to zero within a few years. Egypt's oil revenues dropped to about zero in 2010.

BBC News - Bolivian President Evo Morales flees food price protest…Bolivian President Evo Morales has abandoned a public event in the face of an angry protests over food shortages and price rises.  Mr Morales was due to address a parade to commemorate a colonial-era uprising in the mining city of Oruro.  But he and his team left the city to avoid a violent demonstration by miners throwing dynamite.  There have also been protests in other Bolivian cities over the shortage of sugar and other basic foodstuffs.  Mr Morales cut short his visit and returned to La Paz after protesters set off explosions close to where he was preparing to give a speech in Oruro, the capital of his home province in western Bolivia.  "The government took the decision not to respond to shameful provocations of this kind,"

U.N. Food Agency Issues Warning on China Drought - The United Nations’ food agency issued an alert on Tuesday warning that a severe drought was threatening the wheat crop in China, the world’s largest wheat producer, and resulting in shortages of drinking water for people and livestock. China has been essentially self-sufficient in grain for decades for national security reasons. Any move by China to import large quantities of food in response to the drought could drive international prices even higher than the record levels recently reached.  “China’s grain situation is critical to the rest of the world — if they are forced to go out on the market to procure adequate supplies for their population, it could send huge shock waves through the world’s grain markets,”

Why Egypt Should Worry China - A strictly economic interpretation of events in Tunisia and Egypt would be too simplistic. That said, there is no question that the upheavals in both countries – and elsewhere in the Arab world – largely reflect their governments’ failure to share the wealth. The problem is not an inability to deliver economic growth. In both Tunisia and Egypt, the authorities have strengthened macroeconomic policy and moved to open the economy. Their reforms have produced strong results. Annual growth since 1999 has averaged 5.1% in Egypt, and 4.6% in Tunisia – not Chinese-style growth rates, to be sure, but comparable nonetheless to emerging-market countries like Brazil and Indonesia, which are now widely viewed as economic successes.  It may stretch credulity to think that a high-growth economy like China might soon be facing similar problems. But the warning signs are there. Given the lack of political freedoms, the Chinese government’s legitimacy rests on its ability to deliver improved living standards and increased economic opportunity to the masses. So far those masses have little to complain about. But that could change, and suddenly.

Famine the other F word !- The world is closer to a major famine today than it has been in decades. In the current era, there have been smaller cases of famine in the world such as Niger in ‘05 and again in 2010. The western African region is exposed to drought-based famines on a fairly regular basis. The changing weather patterns from El Nino to La Nina in the Pacific, however, have been the primary driver for this round as rain patterns change due to a cooling or heating of the mid Pacific. The rains occurring in normally dry Australia and droughts in locations like China were, in the past, linked to a La Nina phase. We have moved from a El Nino 2010 into a La Nina 2011. The current La Nina is a deep one with no sign of it ready to end yet. China has documented history of over 1,800 famines (nearly 1 per year) over the past 2000 years. The four famines of 1810, 1811, 1846 & 1849 are reported to have killed no fewer than 45 million people in China over a 39-year period. The largest famine in modern times was the Chinese famine of 1958 – 1961, during the “Great Leap Forward” period in China. The death total is estimated to have been between 36 to 45 million people with an estimated additional 30 million canceled or delayed births.

Water shortages to force Mideast cooperation: study - A report for the Swiss and Swedish governments warned on Thursday that water shortages in the Middle East were so alarming that opposing camps in the region would have little choice but to cooperate.Swiss Foreign Minister Micheline Calmy-Rey called for closer cooperation between Turkey, Iraq, Syria, Lebanon, Jordan, the Palestinians and Israel on managing increasingly scarce water resources, arguing that water could also be used to forge a "blue peace." "The report comes to an alarming conclusion; five of the seven countries are experiencing a structural shortage and debit of most of the big rivers has declined by 50 to 90 percent between 1960," she told journalists. "In the future the main geopolitical resource in the Middle East will be water more than oil," she added, warning that it was closely tied to peace efforts.

Southern Africa May Face Worst Flooding in Decades - Parts of southern Africa may experience the worst flooding in the last 20 or 30 years.  That’s the warning Monday from the U.N. Food and Agriculture Organization (FAO).It says the La Nina weather phenomenon has brought heavier than normal rainfall, destroying thousands of hectares of agricultural land and crops so far.  The seasonal rainy season is only half over and the cyclone season is expected to peak this month. FAO Senior Emergency Officer Jean Alexander Scaglia says parts of Botswana, Lesotho, Mozambique, Namibia, Zambia, Zimbabwe, South Africa and Madagascar are affected. “We are just right in the middle of the cropping season in many of these countries.  So the impact of the flood damage can be very high in terms of the future harvest,” he says.  It’s possible, he adds, that the entire season’s harvest could be lost.

Gradual Trends and Extreme Events - Krugman - I’ve spent a lot of the last several days reading about climate change, extreme weather events, food prices, and so on. And one thing that became clear to me is that there’s widespread misunderstanding of the relationship between the gradual trend of rising temperatures and the extreme weather events that have become so much more common. What I’m about to say may seem obvious, because it is obvious, at least if you approach it the right way; but I still think it needs saying. So, let’s start with an observation: weather varies. (Duh.) Heat waves and other stuff happens. Think of it in terms of a probability distribution for temperatures, with the area under the curve over some range representing the probability of temperatures in that range in a given place over a given period. And define an extreme event as a case in which the temperature exceeds some threshold

Food Prices: Blame the Weather or Blame Ben Bernanke? - To say that soaring food prices has nothing to do with the Fed or quantitative easing is awkward. But right, Paul Krugman pointed out that there’s a production shortfall because of crazy weather in former Soviet Union. Nevertheless, I am not particularly comfortable to say that bad harvest is the sole cause. No, I said to myself, it couldn’t be. It is true that if you look at money supply (monetary base, M1, and M2) vs. commodities prices, there is hardly any meaningful relationship. But I found it hard to believe that the Fed has nothing to do with any rise in prices in commodities (food included). Right, supply shortfall due to bad weather is a right cause for surge in food prices, but I can hardly think that it is the only cause.

The Economist: “The high cost of food is one reason that protesters took to the streets in Tunisia and Egypt.” - Nobelist Krugman: "It sure looks like climate change is a major culprit" in the extreme weather that has run up food prices - The expert consensus on the key role that high food prices have played in MidEast protests continues to grow (see my multi-part series on food insecurity).  Indeed, governments in the region themselves are so concerned about the threat of food insecurity to their stability, they are starting to stockpile grain, which, ironically, will further drive up prices, as The Economist explains in their February 3rd edition. Nobel Prize economist Paul Krugman also weighs in with a major NYT column, “Droughts, Floods and Food” (excerpted below), which also makes the connection I have been focusing on between extreme weather (driven in part by climate change) and food prices.  And don’t miss the UK Guardian’s new piece today, “Failure to act on crop shortages fuelling political instability, experts warn.” First though, the Wall Street Journal provided us some more insight into the role extreme weather is playing in the food-price run-up in their article last week

The IMF Confirms: It's Bad Weather, Not Bernanke, That's Driving Food Price Inflation - Ignore QE2, the main driver behind food price inflation around the world is weather and rising demand, according to the latest World Economic Outlook report from the IMF. The report suggests that while there was concern QE2 was what was driving emerging markets inflation, it's now clear, with the slowdown in capital flowing into those economies (out recently), that it's not the key. The IMF suggests it is a combination of rising demand and 'supply shocks.' But what's causing those supply shocks? From the IMF (emphasis ours): As for non-oil commodities, weather-related crop damage was greater than expected in late 2010, and price effects are expected to unwind only after the 2011 crop season. As a result, non-oil commodity prices are expected to increase by 11 percent in 2011. Near-term risks are now to the upside for most commodity classes. So the emerging markets inflation story has a lot more to do with rising demand, brought on by a growing middle class and changing consumption habits, coupled with a terrible year for crop related weather, than QE2.

CO2, birth & death rates by country, simulated real-time - Welcome to Breathing Earth. This real-time simulation displays the CO2 emissions of every country in the world, as well as their birth and death rates. Please remember that this is just a simulation. Although the CO2 emission, birth rate and death rate data used in Breathing Earth comes from reputable sources, data that measures things on such a massive scale can never be 100% accurate. Please note however that the CO2 emission levels shown here are much more likely to be too low than they are to be too high.

Is severe winter weather related to global warming? Melting Arctic ice causing instability in the polar vortex - Our region experienced record snowfall last winter, topping the charts dating at least as far back as the late 1800s. In all, more than six feet of snow fell at sites such as Baltimore-Washington International Marshall Airport. Extreme weather nailed other U.S. cities last winter, too, and swaths of Europe saw unprecedented snowfalls and record cold temperatures. This year, the nation's capital has suffered one unusually severe storm. Parts of the East Coast from Atlanta to Boston have been experiencing blizzard conditions. Last week, a vast swath of the country's midsection and East Coast got deluged with sleet and snow, paralyzing travel.What gives?Some weather scientists suspect that climate change -- the menace often called global warming -- is partly to blame. Although the link is far from definitive -- two years of lousy weather, after all, doesn't make much of a trend -- the meteorological dots are beginning to line up. But wait a second: global warming is about the world getting warmer, right?

The Arctic Oscillation  - The Arctic Oscillation refers to opposing atmospheric pressure patterns in northern middle and high latitudes. The oscillation exhibits a "negative phase" with relatively high pressure over the polar region and low pressure at midlatitudes (about 45 degrees North), and a "positive phase" in which the pattern is reversed. In the positive phase, higher pressure at midlatitudes drives ocean storms farther north, and changes in the circulation pattern bring wetter weather to Alaska, Scotland and Scandinavia, as well as drier conditions to the western United States and the Mediterranean. In the positive phase, frigid winter air does not extend as far into the middle of North America as it would during the negative phase of the oscillation. This keeps much of the United States east of the Rocky Mountains warmer than normal, but leaves Greenland and Newfoundland colder than usual. Weather patterns in the negative phase are in general "opposite" to those of the positive phase, as illustrated below.

Jeff Masters: Arctic sea ice at a record low again; a warmer February for the U.S. coming  - Arctic sea ice extent for January 2011 was the lowest on record for the month, and marked the second consecutive month a record low has been set, according to the National Snow and Ice Data Center. Most of the missing ice was concentrated along the shores of Northeast Canada and Western Greenland. Relative to the 1979-2000 average, the missing ice area was about twice the size of Texas, or about 60% of the size of the Mediterranean Sea. Hudson Bay in Canada did not freeze over until mid-January, the latest freeze-up date on record, and at least a month later than average. The late freeze-up contributed to record warm winter temperatures across much of the Canadian Arctic in December and January. Bob Henson of the National Center for Atmospheric Research has a very interesting post on this, noting that Coral Harbor on the shores of Hudson Bay had a low temperature on January 6 that was 30 °C (54 °F) above average -- a pretty ridiculous temperature anomaly. He quotes David Phillips, a senior climatologist with Environment Canada, who discussed the lack of ice near Canada's Baffin Island: "The Meteorological Service of Canada was still writing marine forecasts as of 7 January, well beyond anything we have ever done."

Eric Steig: West Antarctica: still warming. The temperature reconstruction of O’Donnell et al. (2010) confirms that West Antarctica is warming — but underestimates the rate  - At the end of my post last month on the history of Antarctic science I noted that I had an initial, generally favorable opinion of the paper by O’Donnell et al. in the Journal of Climate. O’Donnell et al. is the peer-reviewed outcome of a series of blog posts started two years ago, mostly aimed at criticizing the 2009 paper in Nature, of which I was the lead author. As one would expect of a peer-reviewed paper, those obviously unsupportable claims found in the original blog posts are absent, and in my view O’Donnell et al. is a perfectly acceptable addition to the literature. O’Donnell et al. suggest several improvements to the methodology we used, most of which I agree with in principle. Unfortunately, their actual implementation by O’Donnell et al. leaves something to be desired, and yield a result that is in disagreement with independent evidence for the magnitude of warming, at least in West Antarctica.

Sydney, Australia, heatwave breaks 150-year-old record - Sydney's heatwave has shattered a 150-year-old record, but the big sweat isn't over yet. In dozens of suburbs on Saturday the temperature soared into the mid to high 30s for the sixth day running and over much of NSW. As thousands flocked to beaches and the harbour foreshores to cool off, the mercury climbed above the 38-degree mark while Observatory Hill recorded a peak of 41.5 degrees. Bureau of Meteorology (BoM) senior forecaster Neale Fraser said that Saturday was officially the sixth successive day that the Sydney area had sweltered in 30-plus temperatures. Since records were first kept in 1858, Sydney had never experienced such consistently high temperatures. "We've had runs of hot weather for three or four days but you get a southerly change that keeps it below 30 then it warms up again," Mr Fraser told AAP.

Australia's recent extreme weather isn't so extreme anymore  - 2011 has not been a good year to live in Queensland, Australia. In the first fortnight, we experienced heavy downpours, culminating in the south-east floods which killed 22. While we were still mopping up the damage, one of the biggest cyclones in our history hit the north Queensland coast. Cyclone Yasi had grown to a category five by the time it hit landfall. All this and we were barely into February.You can understand if Queenslanders are feeling somewhat battered at the moment. But we're not the only part of Australia being afflicted by extreme weather.Flooding has spread to the southern states. To the west, Perth hasn't got off lightly either, threatened with a cyclone last week and currently suffering from bushfires. Sydney just went through a record-breaking heat wave, with temperatures soaring into the mid- to high-30s for seven days running. The longest heat wave since records began in 1858.. As an Australian, it can be somewhat disconcerting when climate bloggers from overseas hold up Australia as a harbinger of what's to come for their own countries. It's not fun being climate change's cautionary tale

Science: Second ‘100-year’ Amazon drought in 5 years caused huge CO2 emissions. If this pattern continues, the forest would become a warming source. - Lead author Simon Lewis: "Current emissions pathways risk playing Russian roulette with the world's largest rainforest." - New research shows that the 2010 Amazon drought may have been even more devastating to the region’s rainforests than the unusual 2005 drought, which was previously billed as a one-in-100 year event. Analyses of rainfall across 5.3 million square kilometres of Amazonia during the 2010 dry season, published in Science, shows that the drought was more widespread and severe than in 2005. The UK-Brazilian team also calculate that the carbon impact of the 2010 drought may eventually exceed the 5 billion tonnes of CO2 released following the 2005 event, as severe droughts kill rainforest trees. For context, the United States emitted 5.4 billion tonnes of CO2 from fossil fuel use in 2009. The authors suggest that if extreme droughts like these become more frequent, the days of the Amazon rainforest acting as a natural buffer to man-made carbon emissions may be numbered.

RUSSIAN ROULETTE WITH A RAINFOREST: Amazon Rainforest no longer a carbon sink - I reported in a November post that it appeared likely that the 2010 Amazon drought was even more severe than the 2005 drought, itself identified as a 1-in-100-year event. Now Simon Lewis of Leeds University and Paulo Brando of Brazil’s Amazon Environmental Research Institute (IPAM) and others have published a paper in Science with rainfall analysis showing that the 2010 drought was indeed more widespread and severe than that of 2005. The 2005 drought killed billions of trees within the rainforest. On the ground monitoring showed that these forests stopped absorbing CO2 from the atmosphere, and as the dead trees rotted they released CO2 to the atmosphere. The press release reports that this new research, co-led by Dr Lewis and Brazilian scientist Dr Paulo Brando, used the known relationship between drought intensity in 2005 and tree deaths to estimate the impact of the 2010 drought. They predict that Amazon forests will not absorb their usual 1.5 billion tonnes of CO2 from the atmosphere in both 2010 and 2011, and that a further 5 billion tonnes of CO2 will be released to the atmosphere over the coming years once the trees that are killed by the new drought rot. For context, the United States emitted 5.4 billion tonnes of CO2 from fossil fuel use in 2009.

Climate: A New Study Finds That Global Warming Could Dry Out the Southwest - It's not the heat that might get us with climate change—it's the humidity, so to speak. The risk of sea level rise due to melting land ice is one of the most recognized—if controversial and hard to predict—threats posed by global warming. Other potential impacts from global warming include increasingly powerful storms and floods of the sort that have ravaged Australia this past month and a half (while recognizing scientists can't yet fingerprint individual weather events as caused by warming). But as climate change create havoc from too much water, parts of the world could end up suffering from too little water. That's the conclusion of a new study released today by the Stockholm Environment Institute (SEI), an environmental research organization based, unsurprisingly, in Stockholm (Download a PDF of the report here.) The report found that the already dry states of the American Southwest—Arizona, California, Nevada, New Mexico and Utah—will face a major water shortfall over the next century just based on population and income growth alone. (The region has long been one of the fastest-growing in the U.S., in part because of the hot and dry weather.) But climate change could make the situation much, much worse. According to the SEI study, global warming could increase the long-term water shortfall by a quarter, adding an additional 282 million to 439 million acre feet of water to the 1.815 billion acre feet shortfall already expected.

"The Last Drop: Climate Change and the Southwest Water Crisis" - Water is already a major concern in the Southwest, where homes, businesses and farms use far more water than is produced by rain and snowfall, and groundwater reserves are shrinking. This study quantifies the impact of climate change on the problem. It finds that without prompt action to reduce water usage, Arizona, California, Nevada, New Mexico, and Utah will face a combined shortfall of 1,815 million acre feet from population and income growth alone, plus 282 million to 439 million more from climate change – at a combined cost of as much as $5 trillion. And that's if the shortfall can be made up at all. As conventional water sources dry up, the Southwest could find itself facing serious water crises in dry years, with unexpected disruptions that could devastate agriculture and affect homes and businesses as well.

Feds aim to spur wind energy industry off Va. Coast - Senior Obama administration officials will be in Norfolk on Monday to announce a coordinated effort by several federal agencies to more quickly develop wind energy off Virginia’s coast by streamlining regulations and timetables, according to a source familiar with the announcement. Energy Secretary Steven Chu and Interior Secretary Ken Salazar will be at the Half Moone Cruise and Celebration Center near Nauticus to explain new efforts to “accelerate the responsible siting and development of offshore wind energy projects,” according to a statement issued Friday by their departments. Chu and Salazar also are expected to announce the availability of $50 million in competitive funding for efforts related to wind energy, the source said. Virginia leaders and environmental officials have long supported exploring the development of wind power and have hoped that Hampton Roads could be a prime location for developing the industry.

Department of Energy seeks to cut solar costs by 75 percent - The U.S. Department of Energy said on Friday it will spend $27 million on a new effort to reduce the costs of solar power by 75 percent by the end of the decade in a bid to make the renewable power source as cheap as fossil fuels. Energy Secretary Steven Chu dubbed the program a “sun shot” that was patterned on President John F. Kennedy’s “moon shot” goal in the 1960s that called for the United States to land a man on the moon. Chu said cutting the cost of installed solar power by 75 percent would put the price at about $1 per watt, he said, or about 6 cents per kilowatt hour.“That would make solar energy cost-competitive with other forms of energy without subsidies of any kind,” he told a conference call. Costs for to install photovoltaic solar panels, which turn sunlight directly into electricity, currently run above 22 cents per kilowatt per hour, although federal grants and state incentives can trim that to below 15 cents for large projects

Business Groups’ Target: EPA - The Environmental Protection Agency, which enforces rules that affect the U.S. economy from factories to farms, is the No. 1 target of complaints from business groups collected by House Republican leaders. EPA rules were cited more than those from any other agency in more than 100 letters sent by trade associations, businesses and some conservative groups to House oversight committee chairman Darrell Issa (R., Calif.) in response to his call for businesses to identify regulations they deemed burdensome, according to documents reviewed by the Wall Street Journal. The letters are scheduled for release today. The letters will become fuel for a running debate between Republican lawmakers and the Obama Administration over what role, if any, increased federal regulation is playing in the sluggish pace of job creation. The EPA's rules to curb emissions of carbon dioxide and other greenhouse gases were cited as an impediment to growth by at least 30 organizations writing to Mr. Issa, including representatives of the agriculture, business, chemicals, energy, paper, manufacturing and steel and iron sectors.

Newt Gingrich calls for replacing the EPA - Former House speaker Newt Gingrich called for replacing the Environmental Protection Agency with an “environmental solutions agency” as part of a broader re-assessment of American energy policy in his address to the Conservative Political Action Conference today in Washington. “It’s time we passed an aggressively pro-American energy policy,” said Gingrich to a crowded room of conservative activists who greeted his proposals warmly if not with great fervor. “What you have from Obama Administration is a war against American energy.” Gingrich proposed eliminating the EPA, which he described as “top down” and “bureaucratic.” He also advocated what he argued was a centrist agenda that includes things like the repeal of President Obama’s health care, repeal of the estate tax and a “10th amendment implementation act”.

GOP Proposes $1.6 Billion Cut to EPA Budget, Defends $4 Billion in Oil Subsidies - Republicans unveiled a budget plan on Wednesday that proposed a $1.6 billion cut [1] to the Environmental Protection Agency, an agency whose authority they have sought to curtail, while business trade groups [2] have complained about the burden placed on them by agency regulations. Politico also reported that the GOP’s proposal would hit the Energy Department hard [3], with a proposal to cut energy efficiency and renewable energy programs in half. Rep. Fred Upton, chairman of the House Energy and Commerce Committee, has said he favors gutting EPA’s authority to regulate greenhouse gas emissions with a “legislative fix” rather than simply denying it funds. (See our overview [4] of Upton’s positions on energy.) He told the Wall Street Journal that his disagreement with the EPA is: “You don’t subsidize different forms of power [5] — you let the market run on its own.”

GOP Announces New Climate Strategy: Abandon Earth - Republicans have a new idea: instead of wasting time protecting this planet, let’s figure out how to escape it. Over a hundred years ago, scientists started warning that the unconstrained burning of fossil fuels could make planet Earth uninhabitable for human civilization. Since then, we have spewed billions of tons of greenhouse pollution into the atmosphere, acidifying the oceans, devastating ecosystems, and intensifying catastrophic weather. Fortunately, scientists have also found that the strategy of reducing pollution would unleash an economic revolution with clean energy and keep our planet friendly to the human race. Many of these scientists work for the National Aeronautics and Space Administration’s (NASA), which has a billion-dollar budget for studying the “natural and man-made changes in our environment” that “affect the habitability of our planet.” However, Republicans in Congress find the clean energy pathway unreasonable, arguing the costs of reducing our toxic dependence on coal and oil would be too great. Perhaps stung by accusations that they are simply the Party of No, a group of House Republicans have now put forward an alternate strategy to avoiding disastrous global warming: the first step being to scrap NASA’s world-leading climate science research funding, and direct it instead into sending people into unpolluted outer space:

Is climate regulation economically futile? - Inhofe and House Republicans on the subcommittee focused on what they consider the enormous costs of EPA’s efforts to regulate greenhouse emissions, the jobs that could be lost and the questions that, in their view, continue to surround climate change science. Science is mixed, Inhofe said, but the economic impact is not. “In other words, all pain for no climate gain,’’ he said in prepared remarks that he ignored so he could “ramble’’ through his testimony.  Even if one assumes the predictions of more droughts, floods, intense storms and cases of disease are true, Inhofe said, EPA’s expected regulations will not affect that.

Q: What would have happened without the Clean Air Act? - Today, EPA Administrator Lisa Jackson testified before the House Energy and Commerce Committee. In her testimony the Administrator highlighted the agency's ongoing efforts to develop sensible standards that update the Clean Air Act, while ensuring that the landmark law continues to provide Americans the protections from dangerous pollution that they deserve. These reasonable steps will ensure that the air our children breathe and the water they drink is safe, while also providing certainty to American businesses. Despite these pragmatic steps to implement long overdue updates, big polluters are trying to gut the Clean Air Act by asking Congress to carve out special loopholes from air pollution standards. 

A justification of the Clean Air Act doesn't require mention of jobs or GDP - Here is Gernot Wagner's take on the recent EPA analysis of the economic effects of the Clean Air Act (here is our take: [1] and [2]): I usually agree 100% with Gernot but this time I'm not as enthusiastic about the macroeconomic impacts. Here is the EPA's white paper that briefly describes the micro and macro analysis. My quick read suggests that the increased GDP conclusion is from an older study (August 2001*) that forecast the impact of the 1990 CAAAs out to 2010. This sort of study is important at the time of the analysis but using it to claim that the CAAAs actually increased GDP through 2010, without examining the actual macroeconomic data makes me wonder. I hate to pile on when the EPA is getting hammered in budget proposals, but the 30 to 1 benefit cost ratio of the CAAAs should be enough to justify air quality regulation. The macroeconomic claims aren't convincing and aren't necessary.

Still hope for Arctic sea ice — The substantial decline of Arctic sea ice in recent years has triggered some fears that the ice cover might be approaching a "tipping point" beyond which the loss of the remaining sea ice would become unstoppable. However, new research carried out at the Max Planck Institute for Meteorology in Hamburg/Germany now indicates that such tipping point is unlikely to exist for the loss of Arctic summer sea ice. The sea-ice cover reacts instead relatively directly to the climatic conditions at any given time. Hence, the ongoing loss of Arctic sea ice could be slowed down and eventually stopped if global warming were to be slowed down and eventually stopped.

Hudson Bay Still Not Frozen Solid… NSIDC:Arctic Sea Ice News & Analysis: Arctic sea ice extent averaged over January 2011 was 13.55 million square kilometers (5.23 million square miles). This was the lowest January ice extent recorded since satellite records began in 1979. It was 50,000 square kilometers (19,300 square miles) below the record low of 13.60 million square kilometers (5.25 million square miles), set in 2006, and 1.27 million square kilometers (490,000 square miles) below the 1979 to 2000 average.Ice extent in January 2011 remained unusually low in Hudson Bay, Hudson Strait (between southern Baffin Island and Labrador), and Davis Strait (between Baffin Island and Greenland). Normally, these areas freeze over by late November, but this year Hudson Bay did not completely freeze over until mid-January. The Labrador Sea remains largely ice-free

Climate change: rethinking a 'safe climate': have we already gone too far? - When James Hansen talks climate change, people listen. The head of climate studies at NASA, Hansen first gave evidence on the issue to the US Congress in 1988, and is now an eminent scientist and a prominent public advocate. In new research just out, Hansen concludes that at the current temperature, no “cushion” is left to avoid dangerous climate change, and that the Australian government target goals “… of limiting human-made warming to 2° and CO2 to 450 ppm are prescriptions for disaster”. The question Hansen raises is direct and brutal in its implications: is the planet already entering a zone of dangerous climate change? With Arctic sea-ice in a “death spiral”, Greenland in 2010 melting at an unprecedented rate, a seemingly extraordinary number of extreme climate events in the past year from the Russian fires to the Pakistan floods, and 18 countries setting temperature records, have we already gone too far for a safe climate? In a draft of a new research paper, Hansen and his collaborator Makiko Sato has opened a new debate about what might be the conditions for a safe climate; that is, one in which people and nations can continue to live where and as they have been, with secure food production, and in a bio-diverse environment.

The rising oceans - Today there are more than 140 million people and a trillion dollars in infrastructure in the first one metre above high tide level around the world. Coastal areas (people, infrastructure and the environment) are already affected by extreme events such as coastal flooding and coastal erosion. For example, Hurricane Katrina caused over $100 billion of damage and the loss of over 1,000 lives along the USA Gulf coast and cyclone Nargis resulted in the loss of well over 100,000 lives in Burma. And just last week, Cyclone Yasi caused widespread damage and storm surge flooding along north Queensland's coast. These events remind us that coastal societies in both developed and developing nations are vulnerable to extreme coastal sea levels. This vulnerability will increase with rising sea level as a result of anthropogenic climate change. With greenhouse gas emissions continuing to rise, it is becoming increasingly clear that modern coastal societies will need to adapt to rising sea levels. To cost effectively adapt, we need to know what to adapt to. How, why and where sea level has changed in the past, how it is changing now, and how it will change in the future.

Are economists erring on climate change? - IN AN interesting piece at the environmental publication Grist, David Roberts looks at the way in which climate scientists and economists often butt heads over policy recommendations. The scientists, he says, continue to pull in new data on the pace of change and suggest that catastrophe may loom if the world doesn't make drastic cuts to emissions by the middle of the century. Economists, on the other hand, tend to be more optimistic about humanity's ability to weather (pardon) change and adapt. The analyses of an economist like William Nordhaus indicate that climate change will only slightly reduce growth rates over the long run, and so only minimal steps are justified now to mitigate the impact of greenhouse has emissions.

Climate Change to Force Mass Migration, Study Warns - That weather-related catastrophes cause a lot of destruction is well known. But the prospect that increasing floods, droughts and storms will prompt many millions of people to migrate to safer areas is still poorly understood and anticipated, according to a forthcoming report from the Asian Development Bank.“In the past year alone, extreme weather in Malaysia, Pakistan, the People’s Republic of China, the Philippines and Sri Lanka has caused temporary or longer-term dislocation of millions,” the organization, which is based in Manila, said on Monday, citing the study, which is to be released in early March. “This process is set to accelerate in coming decades as climate change leads to more extreme weather.” No international cooperation mechanism has been set up to manage these migration flows, the bank warned, and protection and assistance plans remain “inadequate, poorly coordinated and scattered.” It urged national governments and the international community to urgently address this issue. Forecasts of global migration related to environmental factors range from 150 million to 300 million people by the middle of this century, the Asian Development Bank said Monday, and the Asia-Pacific region is expected to be at the epicenter of this trend.

Smackdown: Climate Science vs. Climate Economics - As I see it, there are two incommensurate stories being told about climate change. I'm not talking about the largely fake debate between those who say climate change is happening and human-driven (scientists) and those who say it isn't (the GOP). I'm talking about two different ways of envisioning what we can expect in a climate-changed future, both of which exist among people who take climate change seriously. Sometimes they take up residence in the same head! Like, er, mine. But they don't fit together very well. One comes to us from science, the other from economics. Eban Goodstein wrote a post on Grist about this last week. It was a bit wonky so it may have slipped through the cracks, but it's important, so I'm going to resurface and sensationalize it!

New Zealand scientists record ‘biodiversity breakdown’ - Scientists in New Zealand say they have linked the modern-day decline of a common forest shrub with the local extinction of two pollinating birds over a century ago. They say the disappearance of two birds - the bellbird and stitchbird - from the upper North Island of the country has lead to a slow decline in common plants, including the forest shrub New Zealand gloxinia. Ship rats and stoats imported into the country around the year 1870 are blamed for the birds' demise.  The researchers claim the study, published in the journal Science, offers rare experimental proof of a breakdown in a local ecosystem. New Zealand gloxinia or Rhabdothamnus solandri is a gangly forest shrub, which grows in the shade to about 2m high and produces an orange tubular flower. It depends on three birds for pollination - the bellbird, stitchbird and the tui.  While the latter now seems only to feed higher up in the forest canopy, the former two vanished from upper North Island in the late 19th century. It is thought they were killed off by rats brought in by ships or by stoats introduced to control the local rabbit population.

Nepal faces 14 hours of daily power cuts from Monday - Nepal’s state-run power distribution monopoly will enforce 14 hours of daily power cuts in the country from Monday, an official said Sunday. The Nepal Electricity Authority decided to raise power cuts from 12 hours daily after further drop in the water levels of rivers feeding the country’s hydropower projects. ‘‘Every household will face seven hours of power cuts twice a day from Monday,’’ Cheeranjeevi Sharma, chief of the authority’s Systems Operations Department, said. Sharma said current peak demand in the country is 935 megawatts, while generation is around 470 megawatts.

Electric-Car Owners Might Face $100 State Fee (Washington) — Electric-car owners not only don't buy gasoline, they also don't pay gas taxes. A bill introduced in the state Senate would try to get back some of that money for the state. Under the legislation, electric-car owners would pay a special $100 fee each year when registering their vehicles. "Electric cars will be driving on the highways right along with all the other cars. One of our biggest issues is preservation and maintenance of our existing highways. We believe they should be paying their fair share," Haugen, the lead sponsor, said Monday.

White House: Make the electric car credit a rebate -- In an effort to put 1 million electric cars on the road by 2015, the Obama administration has proposed a plan that would put up to $7,500 directly in the hands of car buyers without having them jump through any tax hoops.  Plug-in car advocates love the idea but dealers aren't so sure about it. Under the proposal, auto dealers and finance companies would take the tax credit for themselves and give customer's a simple on-the-spot discount.  A tax credit for plug-in vehicles already exists but, as it stands now, car buyers have to wait until tax time to get any money back. Consumers buying qualifying plug-in vehicles are eligible for a tax credit of between $2,500 and $7,500 depending on the size of the vehicle's battery pack. The administration hopes in-dealership discounts will encourage more car buyers to choose electric vehicles. Details are still being worked out, but car dealers, who remember all the problems associated with the "Cash for Clunkers" program, are worried that this system could cause them more headaches.

Climate readiness 'to boost economy' -  Early preparation for climate change impacts would bring economic benefits to the UK, say engineers in a report commissioned by the government. Engineering the Future - an alliance of professional engineering bodies - says companies will be more likely to invest in nations with secure infrastructure. It urges regulators to improve links between sectors for better planning. A climate-constrained future will bring more disruption to energy, transport, water and IT, it warns. This increases the risk of "cascade failures", where a breakdown in one system has knock-on effects on others - such as a flood that takes out the local electricity supply, which in turn affects the mobile phone network.Potential impacts of climate change covered by the report - Infrastructure, Engineering and Climate Change Adaptation - include:

  • damage to roads and railway tracks from prolonged high temperatures
  • flooding of drainage networks
  • increased damage to buildings from storms

New Drilling Method Opens Vast Oil Fields In U.S. - A new drilling technique is opening up vast fields of previously out-of-reach oil in the western United States, helping reverse a two-decade decline in domestic production of crude. Companies are investing billions of dollars to get at oil deposits scattered across North Dakota, Colorado, Texas and California. By 2015, oil executives and analysts say, the new fields could yield as much as 2 million barrels of oil a day -- more than the entire Gulf of Mexico produces now. This new drilling is expected to raise U.S. production by at least 20 percent over the next five years. And within 10 years, it could help reduce oil imports by more than half, advancing a goal that has long eluded policymakers.  Oil engineers are applying what critics say is an environmentally questionable method developed in recent years to tap natural gas trapped in underground shale. They drill down and horizontally into the rock, then pump water, sand and chemicals into the hole to crack the shale and allow gas to flow up.

Uranium Mining: Not Fair, They Say - ONE might not have too much sympathy for fossil fuel companies, currently enjoying all the benefits of high coal and oil prices. But they are crying foul in their competition with an (admittedly undersized) non-hydrocarbon fuel—uranium. According to America’s mining act of 1872, framed at a time when spurring development of the wide-open West was all the rage, no government agency can refuse a mining permit on federal land, or charge a royalty. And uranium is treated just like other hardrock minerals such as gold and copper. Oil, gas, coal and timber companies, by contrast, all have to pay substantial royalties, of up to 12.5% of gross income, when they extract from federal lands.

US not ready for Arctic oil drilling, say officials  – The United States is ill-equipped to deal with a major oil catastrophe in Alaska, the Coast Guard admiral who led the US response to the massive Gulf of Mexico oil spill and others have warned.  Only one of the US Coast Guard's three ice breakers is operational and would be available to respond to a disaster off Alaska's northern coast, which is icebound for much of the year, retired admiral Thad Allen told reporters this week.  Former Alaska lieutenant governor Fran Ulmer said that before drilling in the Arctic, the United States must "invest in the Coast Guard."

U.S. military purchases Gulf of Mexico seafood, boosting an industry battered by oil spill - Sales of Gulf of Mexico seafood are getting a boost from the military after being hammered by last year's BP oil spill, which left consumers fearing that the water's bounty had been tainted.  Ten products, including fish, shrimp, oysters, crab cakes, and packaged Cajun dishes such as jambalaya and shrimp etouffee are being promoted at 72 base commissaries along the East Coast, said Milt Ackerman, president of Military Solutions Inc., which is supplying seafood to the businesses.  Gulf seafood sales fell sharply after a BP gulf well blew out in April, spewing millions of gallons of oil into the sea. Consumers have long feared that fish, oysters and other products could be tainted by oil and chemicals used to fight the spill, although extensive testing has indicated the food is safe. The perception has lingered - along with the poor sales.

Unethical to Brand Oil Sands Ethical? - Critical debate is important because arguments that the oil sands contain almost half the world's total known oil reserves and will therefore ensure world peace, global food and energy supplies for the next half century are dangerously flawed. Current oil sand production of two million barrels a day is technically limited by water availability to approximately a maximum of five million barrels a day, a mere fraction of the world's daily consumption. This misrepresentation promises economic stability yet ignores global (peak) oil supply concerns, the technical upper limit of oil sand production, and climate change. Alberta's oil sands development will not deliver global economic stability in the face of these issues.

Brazil Set to Become a Top Oil Producer- Brazil has a sunken treasure off its shores… though not the type Jack Sparrow might seek. Instead, it is stashed beneath miles of water, rock and layers of salt beneath the ocean’s floor. And these so-called “pre-salt” oil fields make for the biggest oil discovery in the Americas since the 1970s. Brazil’s oil regulator estimates they contain about 50 billion barrels of oil equivalent. That’s more than enough to turn Brazil into one of the world’s top oil producers in this upcoming decade. Petrobras has ambitious capital expenditure plans set to grow it rapidly, especially compared to the larger economy. The company wants to invest $224 billion into developing these fields by 2014. That includes a huge amount of new equipment, such as 28 drilling ships, equal to a third of today’s global fleet. The project also requires 146 additional supply ships, 8 FPSOs and 72 large oil tankers. By the time it buys all of that, Petrobras will have more ships than most nations’ navies!

WTI-Brent price divergence hits record $16 - The price difference between the world’s top oil benchmarks reached an intraday record of more than $16 a barrel, doubling in three weeks, as West Texas Intermediate oil disconnects from top global oil references Brent and Dubai. The spread fell back to just above $14. The divergence, which is wreaking havoc among energy investors and traders, prompted Saudi Arabia two years ago to drop WTI as its benchmark for pricing oil to US customers. In the past, Saudi officials have highlighted technical problems with WTI, rather than the influence of speculative price swings, as the reason to drop the benchmark. The WTI-Brent price divergence meant that companies hedging their exposure to rising energy prices through WTI contracts were left exposed to losses, analysts said. WTI is the backbone of the New York Mercantile Ex­change’s flagship oil contract, the world’s most liquid oil futures contract, which is often cited as the “real” price of oil. But a surge in oil inventories in Cushing, Oklahoma, where WTI is delivered into America’s pipeline system, has depressed the value of the benchmark against other yardsticks. The International Energy Agency said on Thursday that with “few relief valves” to cut the stock overhang in Cushing, the price dislocation “may persist for months [or years] to come”.

Punk US Oil Demand and Export Confusion - The US is using spare refining capacity to export millions of barrels of oil products, while US domestic demand remains weak. One of the more common misunderstandings I see in energy circles right now is the idea that US oil demand has rebounded strongly since 2008. It hasn’t. The explanation can be found in the widening divergence between oil that’s imported for domestic usage, and oil that’s imported to convert into oil products for export. Let’s first take a look at the last 15 years of US petroleum consumption. This data  is now updated through October, 2010. | see: US Annual Petroleum Consumption Quadrillion BTU ’95 -’10.

Does Economics Explain The Current Arab Uprising? - I do see two clear areas where one can see economic factors. The first has to do with oil. No Arab country that is a major oil exporter (or earns the vast majority of its export earnings from oil) is seeing an uprising, or even any noticeable hints of one, unless one counts the continuing rumblings and instability in Iraq, and Algeria is a borderline case as a somewhat significant oil exporter that has had riots. Oil prices have risen, and it would appear that most of the leaders of the countries exporting lots of oil have been clever enough to sufficiently distribute the rising earnings from this so as to tamp down any incipient unhappiness about dictatorship or monarchy or excessive friendliness with the US. The other obvious shock has been the spike in food prices, with the massive drought due to an unprecedented heat wave in Russia, Ukraine, and Kazakhstan last summer playing the leading role in this, with something on the order of a 10% decline in world wheat production resulting. Egypt is the world's largest importer of wheat, and pretty much all the other Arab countries with demonstrations or riots are also importers of food to some extent, and almost all of wheat in particular. So, there we have a neat story. Those with rising foreign earnings from oil exports have not had political upheavals (except maybe Algeria), while those more strongly dependent on food imports and thus suffering shocks that especially impact the poorer parts of their populations have almost all had uprisings.

Egypt, Oil, and the Economy - Many people are wondering how the events in Egypt might impact the US economy. One of the better analyses I’ve seen on this so far is from Jim Hamilton at UC San Diego: Geopolitical unrest and world oil markets, by James Hamilton, Econbrowser. Professor Hamilton has spent considerable time investigating the link between oil prices and macroeconomic changes, and he is a world expert in this area. He begins by noting a series of popular uprising this month in Sudan (Jan 9-Jan15), Lebanon (Jan 12), Tunisia (Jan 14), Iraq (Jan 17-Jan 27), Egypt (Jan 29-?), and Yemen (Jan -?). Fortunately, as he notes, these are not major oil producing countries (see the table in his post for exact percentages produced by each country): …For the most part, the popular uprisings so far have been in the “have-nots” of the Arab world, with modest levels of oil production relative to the members of OPEC. Of the countries facing a likely immediate transition of power, the most important in terms of oil markets is Egypt, with 2/3 mb/d of its own production and another million barrels of oil being transported each day through the Suez Canal plus 1.1 mb/d crossing Egypt via the SUMED pipeline. He then reviews evidence from the Suez crisis in 1956-57 showing how severe the shock from oil flow disruptions can be:

Risks to the Suez Canal Set the Stage for Falsely Hyping the Price of Oil - Over the past days, the airwaves and talking heads have been frightening us with somber predictions of what would happen to the price of oil should current events in Egypt shutter the canal. The oil boys and their allies can barely contain themselves in their appearances of concern and like minded predictions of calamity, such as today's Reuters report quoting Imad al-Atiqi, member of Kuwait's Supreme Petroleum Council -- "I expect oil to reach $110 during the first half of 2011... A huge amount of oil passes through the Suez Canal..." thereby ever nudging oil prices skyward with Brent Crude already surpassing $100 a barrel. Yet has anyone stopped to determine what the closure of the Suez Canal would actually mean to the oil market in dollars and cents?  The typical deadweight of a Suezmax oil tanker is about 240,000 tonnes. Now, approximately 7.1 barrels of oil make up one metric tonne. Therefore, a 240,000 tonnes deadweight tanker carries some 1.7 million barrels of oil. According to the New York Times, "Taking cargo around Africa would add about 16 days time to delivering oil to world markets."

Tech Talk - Oil Tankers in the wake of the Egyptian Crisis - To begin with let’s look at the traffic along the Suez Canal itself. Note that there is no immediate port of access into the Mediterranean, and thus to Europe, from Saudi Arabia or the nations of the Gulf. The EIA, in writing about the Canal noted that  Almost 35,000 ships transited the Suez Canal in 2009, of which about 10 percent were petroleum tankers. With only 1,000 feet at its narrowest point, the Canal is unable to handle the VLCC (Very Large Crude Carriers) and ULCC (Ultra Large Crude Carriers) class crude oil tankers. The Suez Canal Authority is continuing enhancement and enlargement projects on the canal, and extended the depth to 66 ft in 2010 to allow over 60 percent of all tankers to use the Canal. There are restrictions on the tanker size that can fit through the canal. This is mainly based on draft, or the depth of the tanker underwater, which has to be less than the 66 ft depth of the Canal, but there is also a bridge over the canal that the tankers must pass under. Those that fit into this range are designated as Suezmax tankers. In terms of the classification of tanker sizes they lie in the mid-range of those available. In a typical day about 1.8 mbd of oil passes through the Canal, which is about 5% of the global oil tanker trade.

U.S.-Bound Supertanker Hijacked by Pirates Off Oman - A 1,100-foot supertanker carrying Kuwaiti oil to the U.S. was seized by pirates off eastern Oman today, the first hijacking of a vessel that size since April.  The Irene SL has 17 Filipinos, seven Greeks and a Georgian on board, according to a statement on the website of the European Union’s anti-piracy force. It is carrying 270,266 metric tons of oil destined for the Gulf of Mexico, Enesel SA, its owner, said in an e-mailed statement.  “The vessel was attacked by armed men in skiffs,” Enesel said in the statement. “For the moment there is no communication with the vessel.”  Pirates hijacked a record 53 ships and 1,181 crew members in 2010, most of them off Somalia, according to the London-based International Maritime Bureau. Average ransom payments rose to $5.4 million last year, compared with $150,000 in 2005, according to Louisville, Colorado-based One Earth Future Foundation, a non-profit group.

IEA Raises Oil Demand Forecast, OPEC Sees No Supply Shortage - The International Energy Agency raised its 2011 forecast for global crude oil demand for a fifth month, saying inventories in developed economies fell to their lowest level in two years.  Worldwide oil consumption will grow by 1.5 million barrels a day this year, or 1.7 percent, to 89.3 million a day, the agency said. That’s a gain of 140,000 barrels a day on last month, driven by developing nations in Asia and signs of recovery in North America. OPEC, which published its own monthly report today, said crude’s surge past $100 a barrel in London doesn’t reflect any deficit in supply.  “The inescapable conclusion from our market balances is that the physical market has tightened significantly,” the Paris-based IEA, an adviser to consuming nations, said today in its monthly Oil Market Report.

Peak Oil And A Changing Climate - The scientific community has long agreed that our dependence on fossil fuels inflicts massive damage on the environment and our health, while warming the globe in the process. But beyond the damage these fuels cause to us now, what will happen when the world's supply of oil runs out? Peak Oil is the point at which petroleum production reaches its greatest rate just before going into perpetual decline. In “Peak Oil and a Changing Climate,” a new video series from The Nation and On The Earth productions, radio host Thom Hartmann explains that the world will reach peak oil within the next year if it hasn’t already. As a nation, the United States reached peak oil in 1974, after which it became a net oil importer.Bill McKibben, Noam Chomsky, Nicole Foss, Richard Heinberg and the other scientists, researchers and writers interviewed throughout “Peak Oil and a Changing Climate” describe the diminishing returns our world can expect as it deals with the consequences of peak oil even as it continues to pretend it doesn’t exist.

Oil Prices: Talking Trash...or Truth? - "I expect oil prices to reach $110 during the first half of 2011, however, it could go above that level if Egypt's current crisis continues," says Imad al-Atiqi, a member of Kuwait's Supreme Petroleum Council, in an interview today with Reuters. "A huge amount of oil passes through the Suez Canal and the country's stability is essential for the Middle East's stability, particularly Israel." Kuwait, an OPEC member, holds about 9% of the world's known oil reserves, according to the CIA World Factbook. "Almost 16,500 ships transited the Suez Canal from January through November of 2010, of which about 20 percent were petroleum tankers and 5 percent were LNG tankers," according to the U.S. Energy Information Administration (EIA). Total petroleum shipments through the Suez in the first 11 months of last year amounted to nearly 2 million barrels a day. For comparison, the U.S. imports last November totaled a bit more than 11 million barrels a day, according to EIA.

OPEC Production - The above graph shows four different series for OPEC production. Note that during the period of this graph (since 2000), there have been membership changes.  The history is as follows: (OPEC) was founded in Baghdad, Iraq, with the signing of an agreement in September 1960 by five countries namely Islamic Republic of Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. They were to become the Founder Members of the Organization. These countries were later joined by Qatar (1961), Indonesia (1962), Socialist People’s Libyan Arab Jamahiriya (1962), the United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador (1973), Gabon (1975) and Angola (2007). From December 1992 until October 2007, Ecuador suspended its membership. Gabon terminated its membership in 1995. Indonesia suspended its membership effective January 2009.The IEA series reflects these changes, but the EIA series seems to have been reworked backwards to be the production of the current OPEC membership, rather than production of the membership at the time.

Latest Saudi Arabian Oil Production Statistics - I updated my graph (above) of Saudi oil production with the latest numbers (up to December from at least two sources).  The graph shows five different data sources, together with an average index (thick black line) which summarizes the various data sources into something that is hopefully within hailing distance of the truth. The interesting thing going on at the moment is the trend in the last six months for Saudi production to creep up.  The most recent data strengthen this impression.  It is only a few hundred thousand barrels/day at the moment - nothing like the events of early 20003 or early 2004 when Saudi Aramco just turned on the taps to the tune of a million bpd or a million and a half within a single month. Still, it's an interesting trend, and it will be even more interesting to see if they sustain it over the next six months as we go into the summer driving season in the northern hemisphere with oil prices already fairly high. 

Cable: Saudis exaggerated crude oil reserves; Output seen peaking in 2012 - State Department cables warned that the Saudi kingdom might have exaggerated its crude oil reserves by nearly 40 percent. In cables released by WikiLeaks, the department was told that Riyad could not reach its goal of reaching a crude oil production capacity of 12.5 million barrels per day.  One of the cables, dated November 2007, quoted a former senior executive of Saudi Aramco as saying that the Arab kingdom would peak in oil production as early as 2012.  The Saudi, former head of exploration at Aramco, Sadad Al Husseini, warned American diplomats that the kingdom could not ensure oil price stability. Al Husseini said Aramco overstated its oil reserves by 300 billion barrels.  "According to Al Husseini, the crux of the issue is twofold," the 2007 cable said. "First, it is possible that Saudi reserves are not as bountiful as sometimes described, and the timeline for their production not as unrestrained as Aramco and energy optimists would like to portray." 

WikiLeaks cables: Saudi Arabia cannot pump enough oil to keep a lid on prices - The US fears that Saudi Arabia, the world's largest crude oil exporter, may not have enough reserves to prevent oil prices escalating, confidential cables from its embassy in Riyadh show. The cables, released by WikiLeaks, urge Washington to take seriously a warning from a senior Saudi government oil executive that the kingdom's crude oil reserves may have been overstated by as much as 300bn barrels – nearly 40%. The revelation comes as the oil price has soared in recent weeks to more than $100 a barrel on global demand and tensions in the Middle East. Many analysts expect that the Saudis and their Opec cartel partners would pump more oil if rising prices threatened to choke off demand. However, Sadad al-Husseini, a geologist and former head of exploration at the Saudi oil monopoly Aramco, met the US consul general in Riyadh in November 2007 and told the US diplomat that Aramco's 12.5m barrel-a-day capacity needed to keep a lid on prices could not be reached. According to the cables, which date between 2007-09, Husseini said Saudi Arabia might reach an output of 12m barrels a day in 10 years but before then – possibly as early as 2012 – global oil production would have hit its highest point. This crunch point is known as 'peak oil'."

Saudi oil reserves may be overstated by 40% - Stuart Staniford calls attention to this story from the Guardian: The U.S. fears that Saudi Arabia, the world's largest crude oil exporter, may not have enough reserves to prevent oil prices escalating, confidential cables from its embassy in Riyadh show.  The cables, released by WikiLeaks, urge Washington to take seriously a warning from a senior Saudi government oil executive that the kingdom's crude oil reserves may have been overstated by as much as 300bn barrels-- nearly 40%.  Stuart also notes that in his own independent forensic analysis conducted in May 2007 (to which we called the attention of Econbrowser readers at the time), he estimated that remaining reserves in Ghawar (by far the Saudis' biggest and most important oil field) were overstated by 40%.

Gas pump prices highest ever for this time of year - U.S. gasoline prices have jumped to the highest levels ever for the middle of February. The national average hit $3.127 per gallon on Friday, about 50 cents above a year ago. The price is about 6 percent higher than on this date in 2008. The next day, pump prices began a string of 32 gains over 34 days. They rose 39 percent over five months, eventually hitting an all-time high of $4.11 per gallon in July. Although gas prices are expected to rise, most experts aren't expecting a reprise of 2008, when the price spike forced many drivers to join car pools and trade in gas-guzzling SUVs for fuel-efficient cars. "It would be a mistake to think we're going to have that all over again," He says oil demand will slide in the U.S. by May, as refineries slow fuel production while they switch to summer blends of gas. World oil consumption also may not rise as much as expected.

Oil ‘demand has met supply’ – Saudi Arabia (via Wikileaks) Wikileaks may have told us what we already knew – that Saudi oil reserves are greatly inflated – but the reports also portray leaders of the highly secretive petro-state feeling “under the gun” as they strive to move their economy away from dependence on oil. Four diplomatic cables made public earlier this week, reporting meetings between Saudi oil officials and representatives of the US between 2007 and 2009, have generated headlines that reserves have been overestimated by as much as 40 per cent. But taken as a whole, the documents are particularly interesting because they show leaders of both nations know “sufficient challenges” lie ahead. The Saudis appear increasingly fearful of the future – in turn, unsure of their ability to produce enough oil to maintain the price system, concerned about a runaway market for oil that does not follow the economics of supply and demand, and then worried about their own lack of diversification into other areas. Between the lines you can sense the growing dilemma: having to deal with the increasing costs of flushing oil out of mature fields just to keep in the game and the expenses of a ballooning, energy-hungry population, while all the while they would rather be investing in new industries – not to mention agriculture – that can take the kingdom into a sustainable future.

The Peak Oil Chronicles, Part 1: When The Giants Run Dry - If you live in the western world you never have to think about it. Flip a switch and the lights go on. Turn the faucet and the water flows freely for either your morning coffee or a shower. The grocery stores are filled with fruits and vegetables all year long. If the growing season ends here, the food is flown in from elsewhere around the world; fish and seafood from Asia, sugar and confections, fruits and vegetables from Latin America. We have everything we need. If we don’t produce it here we import it with little cost. Our abundant and rich lifestyle is all made possible from cheap and abundant energy. Our farmers use fertilizers made from natural gas. The tractors and combines burn diesel fuel as do the trucks that transport our food to either processing plants or the grocery store. Our stores are stocked with goods that are either made here or abroad. The goods arrive by planes, trains, boats or trucks that also burn fossil fuels. Everything we eat, consume, or enjoy is made possible through the production of energy. Liquid fuels have created new landscapes of concrete and asphalt highways, parking lots, shopping centers and endless urban sprawl. This is all made possible because of oil, the single most important source of primary energy in our world.

WikiLeaks: Saudi Oil May Have Peaked Already - The Guardian reports today on another WikiLeaks cable, this time about oil production in Saudi Arabia. Based on conversations with Sadad al-Husseini, a geologist and former head of exploration at Aramco, the Saudi state oil company, the U.S. consul general thinks the Saudis have been significantly overstating both the size of their reserves and their production capacity: The cables, released by WikiLeaks, urge Washington to take seriously a warning from a senior Saudi government oil executive that the kingdom's crude oil reserves may have been overstated by as much as 300bn barrels — nearly 40%....According to the cables, which date between 2007-09, Husseini said Saudi Arabia might reach an output of 12m barrels a day in 10 years but before then — possibly as early as 2012 — global oil production would have hit its highest point. This crunch point is known as "peak oil".

Wikileaks on Peak Oil - From today's GuardianWikiLeaks cables: Saudi Arabia cannot pump enough oil to keep a lid on prices The US fears that Saudi Arabia, the world's largest crude oil exporter, may not have enough reserves to prevent oil prices escalating, confidential cables from its embassy in Riyadh show.  The cables, released by WikiLeaks, urge Washington to take seriously a warning from a senior Saudi government oil executive that the kingdom's crude oil reserves may have been overstated by as much as 300bn barrels – nearly 40%. The "senior Saudi government oil executive" in question is Dr. Sadad Ibrahim al-Husseini, a familiar name to those following the peak oil issue. He has been speaking about oil depletion since at least 2002. In 2005, he warned of a looming oil shortage in a feature article by Peter Maass in the NY Times. Dr. al-Husseini's views on Saudi reserves and production are not a surprise. However, it is interesting that at least some in the U.S. government believed he might be right, and that the information was considered sensitive enough to be classified.

Did WikiLeaks Confirm "Peak Oil"? Saudi Said To Have Overstated Crude Oil Reserves By 300 Billion Barrels - In what can be the "Holy Grail" moment for the peak oil movement, Wikileaks has just released 4 cables that may confirm that as broadly speculated by the peak oil "fringe", the theories about an imminent crude crunch may be in fact true. As the Guardian reports on 4 just declassified cables, "The US fears that Saudi Arabia, the world's largest crude oil exporter, may not have enough reserves to prevent oil prices escalating, confidential cables from its embassy in Riyadh show. The cables, released by WikiLeaks, urge Washington to take seriously a warning from a senior Saudi government oil executive that the kingdom's crude oil reserves may have been overstated by as much as 300bn barrels – nearly 40%." Could the OPEC cartel's capacity for virtually unlimited supply expansion to keep up with demand have been nothing but a bluff? That is the case according to Sadad al-Husseini, a geologist and former head of exploration at the Saudi oil monopoly Aramco, who met with the US consul general in Riyadh in November 2007 and "told the US diplomat that Aramco's 12.5m barrel-a-day capacity needed to keep a lid on prices could not be reached."

Saturday Oil Report -- February 12, 2011 - The Nymex came in at $85.28 yesterday following a sell-off when Egypt's long-time dictator Hosni Mubarak finally resigned. I had predicted oil would be trading in the $86-$88 range. The bad news is that the Nymex price is totally out-of-sync with the price of oil in every other important world market. Brent is selling at $99.85, Tapis is at $104.75, the Urals blend goes for $97.42, and so on.  What's going on? Let's look at the evidence. I am not aware of any story (or even plausible rumor) providing solid evidence that the world oil markets are not well-supplied. OPEC nations have been exceeding their production quotas, and OPEC (Saudi Arabia) just boosted their output— Oil demand in the United States is stagnant, and inventories are well-above their average range.

Fighting over Big Oil's $4 billion a year windfall  -- The top five oil companies in the United States made nearly $1 trillion in profit since 2000.  The Obama administration is eying that huge pile of cash as it looks for ways to pay for its renewable energy and energy efficiency programs. But the oil industry wants the government to keep its hands off its cash, saying it already shoulders a massive tax burden. The industry says it has a tax rate of 48% -- one of the highest for any sector -- and pays nearly $100 million a day in state, local and federal taxes. That adds up to more than $36 billion a year.  The industry says that raising taxes on it would cost jobs and government revenue because drilling projects would get shelved or moved overseas.

Do I Hear $150? Oil Prices Could Go Up "Very, Very Fast," Says Stephen Leeb - The International Energy Agency raised its crude oil demand forecast this week; at the same time, the IEA noted inventories in the developed world are their lowest in two years. To deal with this imbalance, OPEC is promising to increase oil production by 400,000 barrels per day. Unfortunately, raising production might not be enough to stop prices from spiking this year, says Stephen Leeb, chairman of the Leeb Group and author of  The Coming Economic Collapse: How You Can Thrive When Oil Costs $200 a Barrel.  "What's really important for investors to realize is how sensitive oil prices are to changes in demand," he says in the accompanying video. The big issue is that OPEC might not have the capacity to keep up with rising demand for long, Leeb says.  "There's much less excess capacity in OPEC than people believe and that, I think, is exactly why you're seeing this incredible relationship between small increase in demand and large increase in oil prices."

Preface to a Prelude to Peak Oil - Many green groups and other science-based analysts criticized President Obama's recent State of the Union speech for failing to mention the imminent catastrophe of climate change. Instead, the President focused on a "clean energy and jobs" message. Yet perhaps he did the best he could, given our current political reality and the extreme irrationality that infects our Tea Party nation.   But the State of the Union address, while considerably more three-dimensional than many I have heard, still fell far short of the reality we find ourselves in. That reality includes more than just the threat of climate change. It also encompasses the phenomenon known as "peak oil." I don't know what it is about energy and our use of it that inspires so many euphemisms, but "peak oil" is a term rarely used in the mainstream, corporate media. You may hear about "energy security" or "commodity price super-cycles" but never peak oil. And yet most of us know that the world has either passed or is now approaching the maximum volume of oil we can pump from the ground -- aka peak oil.

An Export Land Model Analysis for the USA - Part 3 - In Part 1, I presented my best estimate Export Land Model analysis for the USA , based on my analysis of trends in petroleum production and consumption for the USA and its top ten import sources (“the top ten”). In Part 2, I examined pessimistic and optimistic Export Land Model scenarios based on alternative interpretations about the trends in petroleum production and consumption for the USA and the top ten. Here in Part 3, I look at some implicit assumptions that are part of the Export Land Model analysis—assumptions about the fungibility of the exportable global supply of oil, assumptions about the behaviors of the top ten facing peak oil, and, assumptions about the ERoEI of the remaining oil supply.

‘Advanced’ Civilization: The Long Party is Over - In 2010 we watched, aghast, as British Petroleum’ s Macondo Well in the Gulf of Mexico blew it’s top and leaked umpteen millions of gallons of raw crude oil into the Gulf, poisoning and killing much of the sealife, ruining gulf coast ecosystems, and destroying a way of life for millions of south coast people. We watched, as business and political leaders and mainstream media went into paroxysms of delusional denial to cover up the sheer unabashed criminality of the event, and tried to create a reality built of smoke and mirrors in which something approaching “normalcy” would once again reign and we could all just jump into our cars and drive off into the sunset as if nothing important or even noteworthy had happened, while those business and political “leaders” operate in the delusion that military might, invasions and occupations, and wholesale oppression and killing of millions of people in “other” parts of the world – as if there is more than “one” world – all done using a military that paradoxically is the single largest consumer of energy in the world – will somehow secure a never ending supply of the energy required to keep our “advanced civilization” operating forever. Remind you of a hampster wheel? Faster and faster to nowhere.

The Globe's Limitations: How Peak Oil Threatens Economic Growth - In the second video in the series “Peak Oil and a Changing Climate” from The Nation and On The Earth productions, Richard Heinberg, senior fellow with the Post Carbon Institute, discusses how depleting oil supplies threaten the future of global economic growth. According to Heinberg, historically there has been a close correlation between increased energy consumption and economic growth. If the economy starts to recover after the financial crisis and there is an increased demand for oil but not enough supply to keep up with that demand, we may hit a ceiling on what the economy can do. “What politician is going to be able to standup in front of the American people and tell them the truth?” Heinberg asks.

Lost and Gone Forever -Species die. It has become a catastrophic fact of modern life. On our present course, by E.O. Wilson’s estimate, half of all plant and animal species could be extinct by 2100 — that is, within the lifetime of a child born today. Kenya stands to lose its lions within 20 years. India is finishing off its tigers. Deforestation everywhere means that thousands of species too small or obscure to be kept on life support in a zoo simply vanish each year. So it’s startling to discover that the very idea of extinction was unthinkable, even heresy, only a few lifetimes ago. The terrible notion that a piece of God’s creation could be swept off the face of the Earth only became a reality on January 21, 1796, and it was a body blow to Western orthodoxy. It required “not only the rejection of some of the fondest beliefs of mankind,” paleontologist George Gaylord Simpson once wrote, “but also the development of fundamentally new ways of thinking.”

Endgame - The natural order of the world is growth. Real economic growth solves most problems and is the best antidote to high deficits, but the problems that we have now won’t be solved by growth. They’re simply too big. Unless we have another Industrial Revolution or another profound technological revolution like electrification in the 1920s or the IT revolution in the 1990s, we will not be able to grow enough to pull ourselves out of the debt hole we’re in. After the dot-com bust in 2000, the phrase “the muddle through economy” (a term coined by John) best described the U.S. economic situation.The muddle through economy would be more susceptible to recession. It would be an economy that would move forward burdened with the heavy baggage of old problems while facing the strong headwinds of new challenges. The description of the world was accurate then, and it is even more accurate now.  Compared with previous recoveries, growth does not look that great, and people don’t feel the recovery. This is unlikely to change.

Energy and Wealth Aren't *That* Proportional - Roger Pielke takes Energy Secretary Chu to task for supposedly having said "it’s a myth that the wealth of a country is proportional to its energy use." As evidence of the high degree of proportionately, Pielke presents the above Gapminder graph, showing the total GDP of a country (y-axis, measured at purchasing power parity) highly correlated with the total energy use (x-axis). However, Pielke has used a couple of not altogether legitimate graphing tricks to overstate his point.  Firstly, by using total GDP and total energy use, he spreads the points out further along the line, since very big countries will obviously, other things being equal, use much more energy and create much more GDP than very small countries.  But when we say that a country has "wealth", we don't usually mean that it's big, we mean instead that the inhabitants are well off on average.  So, sticking with Gapminder, if we switch to per-capita variables (GDP/capita on the y-axis, and CO emissions per person on the x-axis, since Gapminder won't do energy/capita) we get this:

Iran subsidy cut hits demand - Iranian gas demand is falling in response to subsidy cuts. The first utility bills with higher rates for gas are only now being distributed within the country, but consumption has already fallen sharply in anticipation of the price rises, said Hatef Haeri, a consultant with ICG Group of France, which has regional offices in Dubai and Tehran.  "Just the announcement of the new prices caused gas consumption to drop 14 per cent," Mr Haeri told the Gas Arabia conference in Abu Dhabi last week. "Power consumption has fallen by 6.2 per cent since the subsidy removals were announced."

In China, tentative steps toward global currency - Now that it has passed Japan to become the world’s second-largest economy after the United States, China is considering the next step as a world power: making its money a global currency.  No one expects that to happen immediately. And even the Chinese government is wary of making some of the free-market moves that would enable the renminbi to take its place alongside the dollar, euro and Japanese yen as a fully convertible reserve currency.  Still, over the last year Beijing has begun to gradually loosen its tight currency controls. For the first time, for example, American companies like McDonald’s and Caterpillar have been allowed to finance their China projects by selling renminbi-denominated bonds in Hong Kong.  Meanwhile, in Russia, Vietnam and Thailand, some cross-border trades with China can now be settled in renminbi, so that trading partners do not have to convert in and out of dollars.

Selling Stuff to China - Today the BEA released data on the US’s international trade for December 2010. This is a happy coincidence for me, because I’ve just been playing around with various data to get a better sense for the ways in which international trade is contributing to the relatively good performance of the US manufacturing sector. The big story regarding US exports over the past couple of years has been the tremendous shift in their geographical destination. Rich countries (i.e. Western Europe, Canada, Japan, and Australia) substantially reduced their purchases of goods from the US during the Great Recession of 2008-09, and have yet to fully recover. On the other hand, less developed countries such as Mexico and China have been sucking in US-made products at a growing rate. The following picture illustrates. If we look at the dollar value of US merchandise exports by country, we see the shift in demand for US-made goods even more clearly. The overall level of US exports in 2010 was about the same as in 2007. But they were distributed very differently around the globe, with a dramatically larger share going to China (and to a lesser extent, Mexico).

BBC News - US trade deficit widened by 33% in 2010 - The US trade deficit ballooned in 2010 by the largest amount seen in a decade, Commerce Department figures have shown. The trade deficit - the difference between imports and exports - hit $497.8bn (£311bn) last year, up 32.8% on the year before, the biggest annual percentage gain since 2000. Imports from China hit record levels, totalling $364.9bn for the year. For the month of December, the deficit widened by 5.9% to $40.6bn, after a rise in the price for imported oil. This rise was also a factor in the widening annual deficit, with the average price of imported oil increasing from $56.93 a barrel in 2009 to $74.66 in 2010

The New Politics of Trade in the United States -For many years the U.S. debate over trade has been a little like a sixth grade dance. Proponents from business, academia, and government squirm on one side of the room.  Meanwhile, opponents who include members of labor unions, civil society groups, academics, and local government officials, refuse to move. But on December 6, 2010, two unions joined the dance.  The United Autoworkers and the United Food and Commercial Workers expressed support for the US-Korea Free Trade Agreement (KORUS), arguing that the agreement will not only “protect” but according to the UAW “grow more jobs.” These unions became the first U.S. unions to publicly support a free trade agreement since the U.S.-Canada free trade agreement (FTA) of 1988.  Meanwhile, several other prominent unions including the AFL-CIO umbrella organization continued to signal their opposition to the KORUS and other trade agreements.

China Raises Key Interest Rates to Counter Inflation - China raised interest rates for the third time since mid-October ahead of a report forecast to show inflation accelerated to the fastest pace in 30 months.  The benchmark one-year lending rate will increase to 6.06 percent from 5.81 percent, effective tomorrow, the People’s Bank of China said on its website today. The one-year deposit rate will rise to 3 percent from 2.75 percent.  Oil and copper fell and emerging-market stocks extended losses on concern Premier Wen Jiabao’s campaign to contain consumer prices will slow the fastest-growing major economy. China joined India, Indonesia, Thailand and South Korea in boosting rates this year as Asian policy makers seek to avert economic overheating in the region leading the global rebound.

Banks, Local Governments Feel Credit Pinch - China’s 12th Five-Year Plan period had only just begun, but already in early January some local governments were rolling out ambitious plans for major, costly construction projects and fast-paced economic growth. Banks quickly responded by opening credit windows wide, apparently offering to finance those local governments that were quick out of the gate with construction projects for the new year. But regulators who track bank loans had a different response: They decided the fast-lending trend clashed with monetary policy, which had tightened last year after more than a year of “moderately loose” direction aimed at helping China’s economy recover from the global financial crisis.

Russia Follows China in Using Reserve Ratios to Curtail Inflation Threat - Russia, the only one of the so-called BRIC countries without capital controls, is following China and Turkey in relying on reserve requirements to drain cash from the economy and avoid luring more speculative investment.  “We stand ready to continue increasing mandatory requirements, if needed,” Bank Rossii Chairman Sergey Ignatiev said in Frankfurt on Feb. 4. Policy makers will “act decisively to meet the forecast” for 2011 annual inflation of between 6 percent and 7 percent, he said.  The central bank on Jan. 31 increased the mandatory reserve ratio while unexpectedly leaving its deposit rates unchanged after inflation in January accelerated to the fastest in 15 months. Policy makers cited the threat of rising capital inflows driven by higher oil prices.  Emerging economies are weighing the need to curb inflation against the risk of attracting speculative capital from near- zero interest rates in the U.S. and Europe.

Russian Debt May Reach 585% of GDP on Demographic Woes, S&P Says - Russia’s debt may surge to 585 percent of gross domestic product by 2050 as the population declines and the government ramps up spending, pushing the credit rating below investment grade, Standard & Poor’s said.  The population will probably shrink to 116 million by 2050 from 140 million last year, forcing the government’s age-related expenditures to rise to 25.5 percent of GDP from 13 percent in 2010 in the rating agency’s “base-case scenario,” S&P credit analysts led by Frank Gill in London said in a research note e- mailed today and dated Feb. 8.  The demographic decline will lead to “prolonged fiscal imbalances,” putting Russia’s credit rating under “rising pressure” after 2015, according to S&P. Russian government debt is rated BBB at Standard & Poor’s, two notches above junk. The country’s state debt made up 9.5 percent of GDP, Finance Minister Alexei Kudrin said on Feb. 2. “Russia’s aging population will likely place substantial pressure on economic growth performance and public finances,”

Inflation lessons from the Asian crisis - FOR those convinced that America is on the verge of becoming Weimar Germany, the high price of oil and gold are exhibits one and two. Often forgotten is the fact that both are traded in global markets and reflect global, not American, demand. Failing to appreciate the distinction can lead to policy mistakes. Just look at 1998. A financial crisis tipped east Asia into a deep recession in 1997-98, which spread to Russia and then the United States via Long Term Capital Management. To cushion the spillover to America, the Fed first aborted a nascent monetary tightening cycle, then actually cut interest rates. It could do so in part because collapsing Asian demand crushed the price of oil, sending headline inflation below 2%. We now know that between cheaper oil and the Fed’s rate cuts, the Asian crisis was ultimately a positive for an economy already operating below 5% unemployment. Growth, and with it the stock market, went into overdrive. The result was the Nasdaq bubble. Today, we have the mirror image.

Providing social protection to informal laborers - The coverage of contributory social protection schemes in Latin America is low. As highlighted by the World Bank, in the case of old-age pensions, coverage remains under 50% of the economically active population for all but three countries – Chile, Costa Rica and Uruguay – despite the reforms introduced since the 1990s Informal employment remains pervasive in Latin America and the Caribbean. Many workers, not just the disadvantaged, are informal and contribute irregularly, if at all, to a pension plan. This column argues that governments should consider extending social pensions and stimulating individual saving.

Egypt Raises Treasury Bills Sales 82% as Yields Rise - Egypt, rocked by the worst political turmoil in 30 years, increased the size of Treasury bills at auctions today and Feb. 13 by 82 percent as it struggles to fund a deficit and rebuild an economy hurt by two weeks of protests.  The finance ministry plans to sell a combined 10 billion pounds ($1.7 billion) of 91-day, 182-day and 266-day bills compared with a previous 5.5 billion pounds, according to central bank data on Bloomberg. It will auction 3.5 billion pounds of the six-month notes today.  “Given that appetite from local banks was pretty strong for the previous auction, now they want to increase the offer to test the market again,”The central bank’s purchases of pounds this week has helped currency markets return to an “orderly” state, Deputy Central Bank Governor Hisham Ramez said yesterday.

Japan Government Debt Hits Record Y919 Trillion --Japan's outstanding public debt hit a record Y919.151 trillion at the end of last year, the Finance Ministry said Thursday, likely fueling concerns over the nation's fiscal health and adding to a sense of urgency within the government to quickly formulate a tax hike plan.  The ministry's quarterly data showed public debt rose 1.1% from the end of September, reaching a level equivalent to 194% of Japan's nominal gross domestic product for the fiscal year ended March 2010.

Pension funds: Catching up - Global pension fund assets grew by 12% last year, to US$26trn, an all-time high, according to a new study from consultancy Towers Watson. Despite this performance, pension fund balance sheets improved only marginally. The asset/liability indicator constructed by the consultancy improved by 2% in 2010, but remains some 25% lower than it was in 1998. This is because liabilities have grown more than twice as fast as assets over the past 12 years, opening a hole that may take many more trillions of dollars to fill.

Is the euro rescue succeeding? - The New Year has been kind to the Eurozone. The euro has strengthened and bond spreads between Germany and Europe’s troubled economies have narrowed. Evidence that countries are dealing adequately with the underlying causes of the crisis, however, remains scarce. The fiscal problems in Greece, Ireland, Italy, Portugal, and Spain (the periphery) – which are the focus of efforts in national capitals and in Brussels – are only part of the problem. Until leaders deal with the core issues – the periphery’s lost competitiveness and misaligned economic structures – Europe’s disease will continue to fester.

Europe planning to solve the wrong crisis - So you think the crisis is over? Some of Europe’s political leaders have always framed the eurozone’s year-long upheaval as an attack by Anglo-Saxon speculators. If that is your view, you can relax. The speculators are moving in the opposite direction. The markets have calmed down. The crisis is over by definition. That is, of course, intellectually lazy. Equally lazy is the attempt to frame it purely as a fiscal crisis. It was only ever a straightforward fiscal crisis in Greece. Nowhere else. Fiscal regime change is thus logically no solution.  Any serious discussion about a permanent crisis resolution mechanism would have to start with a more precise definition. I would describe it as a crisis of contingent liabilities that arise from undercapitalised and nationally fragmented banking systems, aggravated by a competitiveness gap. On its own, the competitiveness component would be in the “hopeless but not serious” category. But a joint debt and competitiveness problem is serious.

Axel Weber’s latest rhetorical accident (perhaps not an accident after all) - Bundesbank president says “we have to put into the constitution of member states a balanced budget rule”; Greece rejects Germany’s proposals as unacceptable interference; Austria’s chancellor also uses the term “interference”; Merkel said negotiations will be tough, but insists that she wants an agreement no matter what; the FT says Germany is clearly pulling its muscles, and is likely to get what it wants - but it is a bad policy for the eurozone; the Irish Emergency Lending Facility is granting loans to Irish banks at 3%; Portugal issues a 5y bond at 6.45%; Spain is fighting the black economy to raise tax revenues; Greece is going after Swiss bank deposits by Greece citizens; Yves Mersh says the ECB can raise interest rates while nonconventional policy measures are still ongoing; Jean Pisani-Ferry, meanwhile, is also sceptical about Germany’s pact. [more]

Berlusconi: Sex probe against him is 'disgusting': "Italian Premier Silvio Berlusconi has called the sex probe targeting him 'disgusting,' saying it was aimed at damaging his government. The premier spoke to reporters in Rome on Wednesday shortly after prosecutors in Milan filed a request for his indictment on charges he paid for sex with a 17-year-old girl and then used his influence to try to cover it up. Berlusconi said Wednesday the accusations against him are groundless and insisted the Milan prosecutors were violating the law by overstepping their jurisdiction. His defense has insisted the case should be handled by a special tribunal set up to deal with alleged offenses committed by public officials.

Aftermath of a “surreal” summit -  Merkel and Sarkozy’s proposals are met with outright hostility in the European Council, as other EU leaders express disagreement on style and substance; Yves Leterme called it a “surreal” summit, as 18 or 19 leaders spoke in opposition to the deal; final communiqué does not include any reference to a more flexible EFSF, which suggests that Merkel is playing hardball; Wolfgang Münchau says the competitiveness pact is an attempt to solve the wrong crisis – and an unashamed attempt by Germany to foist its system on the rest of Europe; Jean Quatremer points out that there are differences between the French and German positions; Ewald Nowotny says the ECB expects inflation to rise by 1.8% in 2012 (was he spilling the beans on the ECB’s next forecast?), Sinn Fein rises further in the polls, and may yet emerge as the largest opposition party in Ireland; the leader of the Irish Labour Party calls Trichet a civil servant, who would end up do whatever he is told; Karl Whelan says Ireland will need to go back to the EU/IMF to ask for a bigger loan, to cover a funding gap of €11.5bn; Portugal’s opposition is way ahead of the government in the opinion polls, Spanish subprime mortgages are over €100bn; inflation expectations, meanwhile, have risen above 2% for all maturities. [more]

Ireland 'may need further EU help' - Ireland may need further EU help after 2013 to raise funds, a new report has claimed.The report from NCB stockbrokers said sovereign debt restructuring cannot be ruled out, although it is seen as a last resort. "In the low growth scenario, and even in our base case scenario, it is difficult to see how Ireland would be able to wean itself completely off EU aid post 2013. As such, our central view is that Ireland will need EU help to raise funds and as a result be rolled into the permanent European Stability Mechanism," the report said. A lowering of the interest rate on the EU loans would give the economy a better chance of weaning itself off aid, NCB said.. "We see the markets implied probability of default on Irish bonds maturing post June 2013 as being too high," it said. "

Anglo Irish Bank Chairman: Irish Banks Need Another €50 Billion! - Irish banks need another 50 billion euro to clean up their balance sheets, according to Anglo Irish Bank Chairman Alan Duke. What makes the 50 billion euro number so staggering is this: The additional capital number just named by Dukes exceeds the total 46 billion euros that banks have already received. Based on the current exchange rate, 50 billion euros equals about $68 billion dollars. That's a sobering thought: Because on its face it would seem to represent an accelerating demand for additional capital. According to Joe Brennan's Bloomberg article linked above, Dukes said in a speech today: "A clean banking restructuring implies the acceptance of irrecoverable losses." Anglo Irish—which has been nationalized by the Irish government—has already received 29.3 billion in funding.

Irish banks need another $68 billion to stay solvent - The Chairman of Anglo Irish Bank, Alan Dukes, has announced that Irish banks will need another $68.2 billion (€50 billion) of capital on top of the previous Irish Government bailout. The Irish Government has already pumped $61.4 billion (€46 billion) into the Irish banks. Under the bailout agreement made with the International Monetary Fund (IMF) and the European Central Bank (ECB), made last year, they also have access to another $47.7 billion in extra capital. Today Dukes emailed a copy of his speech which read "A clean banking core will require something in the region of €50 billion …A clean banking restructuring implies the acceptance of irrecoverable losses.” So far the Irish state has injected $39.9 billion (€29.3 billion) into Anglo Irish Bank. Dukes has said that the "black hole" in the Irish financial system may amount to €20 billion to €40 billion.

It looks as though the Irish crisis is about to erupt again - More bad news out of Ireland, as Anglo-Irish chairman warns that banking rescue will be much higher than previously estimated; his claims sparked angry reaction from the Irish finance ministry (but who believes the Irish finance ministry?); ECB would take a large hit in the case of an Irish default; FT Alphaville says the interest rate on the emergence lending assistance to Irish banks has been unbelievably cheap; Merkel’s comprehensive anti-crisis package is currently being transformed into another European fudge – a set of loose principles; Guy Verhofstadt criticises French and German diplomacy; Wolfgang Münchau argues that circumventing the EU’s institutions in economic policy co-ordination is not in Germany’s best interest; Dominique Seux says the introduction of a debt brake in France would be a problem for the Socialists; Merkel rejects a position paper of her own party, on the grounds that it did not specifically rule out EFSF bond purchases; the EU is nearing agreement to extend the loan to Greece to 30 years; Jacques Delpla argues that debt buy back is not the answer to the Greek problem, and calls for a debt restructuring; the Spanish government seeks political control over the savings bank sector; Silvio Berlusconi, meanwhile, is trying to detract from his legal problem through a stimulus programme. [more]

Unemployment rate in Greece hits a new high — Unemployment in Greece hit a new seven-year record and inflation was stuck above 5 percent, as protests continued against the harsh spending cuts and tax increases the government is using to drag the country out of its financial crisis. The Greek Statistical Authority said Thursday that the jobless rate rose to 13.9 percent in November, the highest since monthly figures were first released in 2004 and up from 13.5 percent in October. The agency also said inflation remained at an annual rate of 5.2 percent in January, the same as in December and more than twice the official target for the overall eurozone. After years of budget overspending, Greece was saved from bankruptcy last year by a $150 billion loan package from its European partners and the International Monetary Fund that will keep it solvent through mid-2013. In return, the governing Socialists took swift shock measures, cutting pensions and salaries while raising taxes and retirement ages.

Rising bond yield sounds alarm for Portugal - Uncertainty over Portugal's financial future flared again Thursday when its borrowing rates hit new euro-era records, signaling the government and fellow European leaders have been unable to check the spread of the continent's debt crisis. The rise in Portugal's 10-year bond yield came as investors were disappointed with the slow pace of progress in EU efforts to coordinate measures against a crisis that is more than a year old. Government leaders came up with no concrete plan at a summit last week, delaying decisions to a March 11 meeting in Brussels. But a binding resolution on a comprehensive package likely won't come till another summit on March 24-25. In the absence of a comprehensive eurozone debt strategy investors continue to fret about whether Portugal will be able to ride out the storm or will be forced to follow Greece and Ireland in taking a bailout, adding fresh momentum to the crisis.

ECB Said to Buy Five-Year Portuguese Bonds After Yields Advance to Record - The European Central Bank bought Portuguese government bonds, driving 10-year yields down from the most since 1999, according to three people with knowledge of the transactions.  The central bank bought Portuguese debt maturing in five years, two of the people said, declining to be identified because the deals are confidential. An ECB spokesman in Frankfurt didn’t comment.  Portuguese bonds rebounded from earlier losses, with the 10-year yield falling three basis points to 7.33 percent as of 1:42 p.m. in London. The yield reached 7.64 percent earlier, the most since the introduction of the euro in 1999, according to data compiled by Bloomberg.  The ECB, which buys bonds via its Securities Market Program, didn’t purchase debt in the two weeks through Feb. 4, according to data from the central bank.

It's Confirmed: ECB "Forced" To Buy Portuguese Bonds - Earlier today we speculated that due to central planning goldilocks breaking down, and the corresponding downtick in the EURUSD, the minions of the ECB's royal palace in Frankfurt will be scrambling to pretend things are under control, and gobbling up Portuguese bonds. Sure enough, this has been confirmed. But even we had no clue to what degree the spin to "explain" the situtation would reach. According to the FT, the ECB was "forced" to buy Portugal bonds. FORCED. Because unless the ECB did what was expected of it (see global moral hazard), the convergence trade between reality and central planning may have finally generated record daily P&L. Luckily for all those who still have their heads shoved deep in the sand, the bank that Weber prudently told to go and do some anatomically impossible things to itself, was FORCED to bail out Portugal from the rough sea of reality yet again. Also, after an untarnished two week record of non-monetization, widely publicized by the ECB's favorite news rag, the ECB's SMP will once again be burdened with exposing that the beautiful dream of prancing European unicorns, purple skittles and rainbows is once again coming to an abrupt end.

Moody’s Says Debt Restructuring Risk Has Risen on Euro Periphery - The risk of debt restructuring in the euro region’s peripheral countries has increased in the past year, Dietmar Hornung of Moody’s Investors Service said.  “Our assessment for risks of restructuring has increased in the last 12 months,” Hornung, a Frankfurt-based analyst with Moody’s, told a conference in Budapest today. “At the end for a sovereign to default or not to default is the result of a cost- benefit analysis, whether it’s beneficial to default or to service the debt.”  Even so, any debt restructuring in the euro area is “more unlikely” than it is for an emerging-market economy because of the effects it would have on the European financial system, Hornung said.

Spain orders drastic caja clean-up to win confidence and fight off EMU debt contagion - Spain has imposed draconian rules on its saving banks and is preparing for part-nationalisation of the industry to restore confidence and boost the country’s defences against contagion from the debt crisis in Portugal. The weaker banks, or "cajas", must raise Tier 1 core capital to 10pc by September if they depend on wholesale capital markets for more than a fifth of their funding or if less than a fifth of their shares are in private hands. If they fail to do so, the government will seize control through the state bailout fund (FROB).  The demands are even tougher than the broad-brush plans unveiled last month and shows the determination of the authorites to cut out any cancers rather than allowing the sort of drift that bedevilled Japan in the 1990s.  The move comes after yields on Portuguese 10-year bonds punched to a post-EMU high of 7.66pc, renewing fears of a spill-over into Spain. The European Central Bank intervened on Thursday to restore calm but it is clear that Euroland euphoria over Chinese purchases of Portuguese debt has not lasted long.

Gauging the Chances of Euro Zone Defaults - Concerns that a European country will default on its debt have eased for now as politicians work to shore up the euro monetary union. Much of their energy is being poured into creating a permanent system to handle sovereign debt troubles that occur after 2013. Yet few believe that the countries hit hardest by the financial crisis will be able to avoid what is politely being called a debt restructuring.  A recent paper from the Organization for Economic Cooperation and Development examined market expectations and found that as 2013 nears, investors put the chance that Greece’s debt will need restructuring at about 40 percent and Ireland’s at about 30 percent. The timing would be just before the European Union’s new debt crisis mechanism kicked in, and when bailout packages for the two countries are set to expire.

Debt reduction without default? - It is almost a year since commentators began suggesting the idea of a European Monetary Fund. This column, by two of the main proponents, argues that since then the Eurozone has created an emergency funding mechanism, but no a Fund. It says that Europe’s leaders urgently need to take steps towards creating a credible mechanism that can deal with overly indebted countries. This column proposes a two-step market-based approach to debt reduction. The step by step is presented for readers in a hurry; justification and discussion follow.

The next President of the ECB - The strange way in which Axel Weber pulled out of the race to succeed Jean-Claude Trichet as head of the ECB, tells us a lot about the man, and his judgement. The obvious question is now: who else? Merkel  is reported to have said yesterday that there will be no German candidate, which would rule out Klaus Regling. Anyway, the EU needs Regling right where he is.  The conventional wisdom is that Mr Trichet’s successor has to be a Germanic hardliner fails to recognise that such an appointment might have unintended consequences. After the negative reaction to Herman van Rompuy as president of the European Council and Baroness Ashton to the job of High Representative, the last thing the EU needs now is a similar debate about 2nd tier compromise candidates. Not for the most important institution during this crisis. There is a clear bias in the EU recently towards weak candidates– witness the appointments to the three new financial supervisory authorities -and their catastrophic hearings in the European Parliament. 

Weber’s withdrawal triggers another speculative attack - Another fine mess, and another occasion where the timetable of EU leaders does not coincide with those of the markets. El Pais had it spot with this morning’s headline “The slowness of the EU’s decision-making hurts Portugal.” Portugal is now subject to a full-frontal speculative attack – or rather investors are withdrewing en masse from the Portuguese bond market, triggering a need for ECB intervention according to Jornal de Negocios. FT Deutschland adds that there is no progress in the negotiations in the extension of the EFSF, and the situation was becoming reminiscent of last year’s crisis ahead of the packages negotiated in May. The Axel Weber job search farce is not an underlying cause of the latest outbreak of the crisis, but quite possibly a trigger, as the world is once again losing faith in the ability of Europe’s leadership to get ahead of this crisis.  The idea that Portugal could sail through this crisis despite the success of a couple of well-managed bond auctions always seemed absurd. Yesterday the yield spread to German bunds hit a record of over 7.6%, but this came down later after ECB buying.

Seventeen characters in search of a central banker - FOR almost eight years Jean-Claude Trichet has been the public face of the euro and a reassuring presence to steady nerves, both during the financial crisis of 2007-09 and the euro area’s sovereign-debt tribulations over the past year. But the French president of the European Central Bank (ECB) will step down at the end of October. A behind-the-scenes struggle between the 17 euro-area states over who will succeed him in the world’s second most important central-banking job burst into the open this week as the German front-runner ruled himself out as a candidate in surreal fashion.  Mr Weber’s non-announcement was greeted with consternation in Germany and seen as a big setback for Angela Merkel. With politicians’ postbags bulging with letters from constituents worried that they will have to foot the bill for bailing out Greece and Ireland—and maybe Portugal soon—the chancellor had hoped to be able to reassure the public that at least the ECB is in safe hands by getting a German into the top job. The mass circulation daily, Bild, said: “What a blow. For the chancellor. For the euro.”

Like Merkel, Cameron Doesn't Get Multiculturalism - Why oh why do Benetton ads make more sense than some of our leaders? Politicians are not usually the most discerning observers of social dynamics. George W. Bush simplifies matters of anti-Americanism into "either you're with us or against us." In similar fashion, public dialogue concerning multiculturalism is quite poor in Western Europe. Angela Merkel has famously declared multiculturalism a failed concept without fully understanding what it means. Over the weekend, David Cameron made a similar proclamation that multiculturalism has failed. As I explained with the Merkel incident, however, Cameron too has a rather narrow and misleading view of multiculturalism. In calling for a "shared national identity," he derides multiculturalism thusly: “Under the doctrine of state multiculturalism, we have encouraged different cultures to live separate lives, apart from each other and the mainstream. We have failed to provide a vision of society to which they feel they want to belong. We have even tolerated these segregated communities behaving in ways that run counter to our values.

UK consumer confidence suffers 'astonishing collapse' - Britons' confidence in the economy and their finances has suffered its biggest drop in close to 20 years, raising fears that the Government's austerity onslaught will set off a self-feeding downward spiral.  The most closely-watched barometer of consumer confidence revealed an "astonishing collapse" in January as the VAT rise took effect, according to market research group GfK NOP.  The first taste of the fiscal tightening to have a widespread impact on consumers appeared to have hit sentiment hard, researchers said, even before the full impact of the public spending cuts is felt.  "In the 35 years since the index began, confidence has only slumped this much on six occasions, the last being in the midst of the 1992 recession,". "Today's figures, when combined with the bleak economic forecast, will make talk of a double-dip recession unavoidable."

UK About to Implement Massive Tax Break for Banks; Is the US Far Behind? - Yves Smith - The UK is about to implement a tax code change that amounts to a massive subsidy for large corporations, most of all big banks. The remarkable bit is that this is taking place when the UK is projected to fall short of its budget targets, at a time when the government professes to take that sort of thing seriously. Although we don’t hew to the logic of austerity in the wake of a financial crisis (the better course of action is to encourage debt renegotiations/writedowns, and offset the contractionary impact with fiscal stimulus), a big tax break is contrary to the official policy stance.  For those in the US who have steered clear of the budget drama on the other side of the pond, a story from from the Financial Times just over a week ago will give you a sense of the state of play: George Osborne says he has little option but to push on with the harshest public spending cuts in living memory because a reversal would alarm the bond markets and plunge Britain into “financial turmoil”.

The Great British Corporate Tax Giveaway - For five months now, ordinary British citizens have been protesting tax dodging by British multinational corporations and rich British citizens. Let’s look at what prompted this citizen action and the likelihood of anything similar happening in this former colony.The spontaneous citizens’ campaign, called Uncut UK, is extraordinary. People have temporarily closed shops and disrupted retail commerce in the country’s busiest retail districts. They have blockaded Vodaphone cellphone service outlets and Boots drugstores. They have occupied Topshop trendy clothing stores. They are now targeting banks, which recently made a symbolic pact with the government to make a few loans and disclose some bankers’ bonuses.The protests have hit multinationals where they live, so that the campaign has been much more effective than the bog-standard one-day picketing of the Whitehall government offices in London. But Whitehall is to blame. A lot of the objectionable nonpayment of tax by British multinationals is completely legal, and approved by both major political parties.

The Future of Public Debt? (Sexy!) - Our argument in Endgame is that while the debt supercycle is still growing on the back of increasing government debt, there is an end to that process, and we are fast approaching it. It is a world where not only will expanding government spending have to be brought under control but also it will actually have to be reduced. In this chapter, we will look at a crucial report, “The Future of Public Debt: Prospects and Implications,” by Stephen G. Cecchetti, M. S. Mohanty, and Fabrizio Zampolli, published by the Bank of International Settlements (BIS). The BIS is often thought of as the central banker to central banks. It does not have much formal power, but it is highly influential and has an esteemed track record; after all, it was one of the few international bodies that consistently warned about the dangers of excessive leverage and extremes in credit growth.

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