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

Saturday, February 26, 2011

week ending Feb 26

Fed Balance Sheet Rises To $2.537 Trillion - The U.S. Federal Reserve's balance sheet held more than $2.5 trillion in assets for the third straight week as the central bank bought more government debt in an effort to spur economic growth.  The Fed's asset holdings in the week ended Feb. 23 climbed to $2.537 trillion, from $2.513 trillion a week earlier, it said in a weekly report released Thursday.  The Fed's holdings of U.S. Treasury securities rose to $1.213 trillion on Wednesday from $1.190 trillion the previous week.  Meanwhile, Thursday's report showed total borrowing from the Fed's discount window edged down to $21.03 billion Wednesday from $22.08 billion a week earlier. Borrowing by commercial banks rose to $24 million Wednesday from $21 million a week earlier.  Thursday's report showed U.S. government securities held in custody on behalf of foreign official accounts dipped to $3.391 trillion, from $3.393 trillion in the previous week.  U.S. Treasurys held in custody on behalf of foreign official accounts decreased to $2.629 trillion from $2.632 trillion in the previous week.

US Fed balance sheet grows to record in latest week   (Reuters) - The U.S. Federal Reserve's balance sheet expanded to a new record size in the latest week, even as the Fed shed some agency debt and mortgage-backed securities, Fed data released on Thursday showed. The increase came as the central bank bought U.S. Treasuries as a part of its $600 billion program in an effort to help the economy.The balance sheet expanded to $2.516 trillion in the week ended Feb. 23 from $2.492 trillion the prior week. The central bank's holding of U.S. government securities jumped to $1.213 trillion on Wednesday from last week's $1.190 trillion total. ^ For graphic of Fed balance sheet: The Fed's ownership of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and the Government National Mortgage Association (Ginnie Mae) fell to $958.20 billion in the latest week from $958.44 billion. The Fed's holdings of debt issued by Fannie, Freddie and the Federal Home Loan Bank system totaled $144.12 billion, compared with $144.37 billion a week earlier. The Fed's overnight direct loans to credit-worthy banks via its discount window averaged $18 million a day in the week ended Wednesday, below the $21 million average last week.

Fed Assets Rise to Record $2.54 Trillion on Treasury Purchases - The Federal Reserve’s total assets rose by $24.5 billion to $2.54 trillion, the fourth record in as many weeks, as the central bank bought Treasury securities in a second round of quantitative easing aimed at spurring economic growth and reducing unemployment.  Treasuries held by the Fed rose by $23.1 billion to $1.21 trillion as of yesterday. The Fed’s holdings of mortgage-backed securities fell by $243 million to $958.2 billion and federal agency debt fell by $246 million to $144.1 billion, according to a weekly release by the central bank today.  The central bank has purchased $366.3 billion in Treasuries since Nov. 12 under plans to purchase $600 billion of government debt through June and reinvest proceeds from maturing mortgage debt. The unconventional monetary easing is aimed at spurring economic growth and preventing inflation from falling too low.  M2 money supply rose by $8.4 billion in the week ended Feb. 14, according to the Fed. That left M2 growing at an annual rate of 3.8 percent for the past 52 weeks, below the target of 5 percent the Fed once set for maximum growth

FRB: H.4.1 Release--Factors Affecting Reserve Balances--Release Date: February 24, 2011

FRB: H.3 Release--Aggregate Reserves of Depository Institutions and the Monetary Base ...Release Date: February 24, 2011

How the Fed prints money without any ink - I wanted to offer some clarification on stories about all the money that the Federal Reserve is supposedly printing. It depends, I guess, on your definition of "money." And your definition of "printing."When people talk about "printing money," your first thought might be that they're referring to green pieces of paper with pictures of dead presidents on them. The graph below plots the growth rate for currency in circulation over the last decade. I've calculated the growth rate over 2-year rather than 1-year intervals to smooth a little the impact of the abrupt downturn in money growth in 2008. Another reason to use 2-year rates is that when we're thinking about money growth rates as a potential inflation indicator, both economic theory and the empirical evidence suggest that it's better to average growth rates over longer intervals.Currency in circulation has increased by 5.2% per year over the last two years, a bit below the average for the last decade. If you took a very simple-minded monetarist view of inflation (inflation = money growth minus real output growth), and expected (as many observers do) better than 3% real GDP growth for the next two years, you'd conclude that recent money growth rates are consistent with extremely low rates of inflation.

When will the Fed raise rates? - Short answer: it is very unlikely that the Fed will increase the Fed funds rate this year. There are a series of steps the Fed will most likely take before raising rates1:

  • •    First the Fed needs to complete the $600 billion “QE2” large-scale asset purchase program. This is currently scheduled to be completed at the end of June, however, to “promote a smooth transition in markets”, it is possible the Fed will decide to "gradually slow the pace" of the purchases like they did with QE1
  • • Next the Fed will end the reinvestment of maturing MBS and Treasury Securities. This could be concurrent with the end of QE2, or the Fed might wait a few more months before halting reinvestment.
  • • Then the Fed will need to remove or change the extended period FOMC statement

How Long Will It Be Until the Fed Raises Interest Rates? - How long will it be until the Fed begins increasing the federal funds rate? Calculated Risk says: Short answer: it is very unlikely that the Fed will increase the Fed funds rate this year. … [E]arly 2012 … is probably the earliest the Fed will raise rates - and it could be later in 2012 or even later … Glenn Rudebusch, senior vice president and associate director of research at the Federal Reserve Bank of San Francisco, also believes it will be some time before the federal funds rate target is increased. This might be surprising because, as he notes, there are signals that the recovery is picking up: I agree with the forecasts given above, though I’m probably more worried than they are about a wave of hawkishness coming over the Fed at the slightest hint of positive data. But my best guess it that the Fed will keep the federal funds rate at its present level through the end of the year and perhaps a bit longer. I also believe this is the correct policy. The economy has just started to recover from a very large decline, and there’s still a long, long road back to full employment — much could go wrong along the way. The need to keep the recovery going and the uncertainties ahead justify keeping interest rates low for an extended period of time.

Chicago Fed chief casts doubt on US tightening - The US Federal Reserve should be in no hurry to tighten monetary policy despite better growth prospects, a leading Fed policymaker has told the Financial Times. “While I’m very pleased at the improvements in the economy I think it’s going to continue to be a while before we’re safely past these conditions,” said Charles Evans, president of the Chicago Fed. Stronger data on growth and rising commodity prices have led markets to speculate that the Fed will quickly switch from quantitative easing – its second $600bn “QE2” round of asset purchases is due to end in June – to tightening policy again.But Mr Evans, a supporter of QE2 who argued last autumn that the US was caught in a “liquidity trap”, said inflation was still very low and monetary policy should stay loose until the risks of the liquidity trap abated.“The message that comes out of what I think of as high-quality research on this subject is that policy ought to remain accommodative for really quite a while, even a while after conditions start to improve,” he said. Mr Evans said that he would look for robust growth in demand, led by consumer spending and business investment, and evidence of businesses hiring in order to scale up output as signals that it was time to tighten policy.

Only Two Regional Fed Banks Vote To Raise Discount Rate - Ten of the Federal Reserve‘s 12 regional banks last month voted to keep emergency borrowing cheap for banks, judging the economy remains fragile and that there’s no inflation threat. Pointing to sluggish jobs growth and low consumer prices, the majority of the Fed’s district banks voted to keep the discount rate unchanged at 0.75%, according to minutes released Tuesday. Only directors from the Kansas City Fed and Dallas Fed renewed their call to increase the rate to 1%. The Fed Board in Washington–which has the final say on the rate charged to banks on short-term emergency loans–voted to keep the discount rate steady. At their last policy-setting meeting Jan. 24-25, Fed officials upgraded their forecasts for economic growth slightly. However, they voted unanimously to keep in place the Fed’s record-low short-term interest rates and the government bond purchases that are aimed at keeping long-term rates low because of low inflation and stubbornly high unemployment.

Experts: U.S. Fed Mishandled International Dimensions Of QE2 - The Federal Reserve initially mishandled its controversial effort to boost the U.S. economy with government bond purchases, but has since taken some smart steps to make up for the mishap, according to senior economists. The Fed was slow to recognize the international dimension of its purchases of $600 billion U.S. Treasurys, the second round of its quantitative-easing efforts dubbed QE2, said Edwin Truman, senior researcher at the Peterson Institute and former official at the U.S. Treasury Department and the Fed.“When the Fed rolled out QE2, they didn’t approach talking about the international dimensions of QE2 as much as they should have,” said Truman.In November, the Fed said it would buy more bonds to try to boost a weak U.S. economy by keeping borrowing rates low and driving investors to riskier assets such as stocks. Foreign countries ranging from China to Brazil and Germany, which rely on exports to grow their economies, attacked the policy because it helped to keep the value of the U.S. dollar low.

Plosser Would Consider Early QE2 End If Economy Accelerates - One of the Federal Reserve‘s leading hawks warned Wednesday of the risks of maintaining easy monetary policy in the face of rising commodity prices and said if the recovery continues to pick up speed, he’d support curtailing the bond-buying program widely known as QE2.  “Should economic prospects continue to strengthen, I would not rule out changing the policy stance to bring QE2 to an early close,” Federal Reserve Bank of Philadelphia President Charles Plosser said. “If the growth rates of employment and output begin to accelerate or if inflation or inflation expectations begin to rise, then it may be time to begin taking our foot off the accelerator,” he said.  Many had thought Plosser would dissent against the QE2 policy favored by most central bankers, but the official has said he would stay his hand for now, believing continuity of action is important for the Fed’s credibility. In his remarks Wednesday, Plosser said he still favors that view, but added he takes “seriously” the FOMC’s pledge to subject the program to regular review.

Fed’s Bullard Would Adjust Bond-Buying Program In Response To Economy - St. Louis Federal Reserve President James Bullard said Thursday that he supports adjusting the Fed’s current bond-buying program, dubbed as QE2, depending on developments in the U.S. economy. Bullard said the Fed could send small signals that the economy is doing better by adjusting the program. He said there are many ways to adjust QE2, including stretching out purchases to the third quarter by buying at a slower pace. He was responding to questions from reporters after speaking at an event in Bowling Green, Ky. The Fed kicked off its second bond-buying program late last year, committing to buying $600 billion Treasurys to help the economy by combating deflation. The program is expected to end in June. But while Bullard, a non-voting Fed member this year, said QE2 could be adjusted, he still said a third bond-buying effort is not totally off the table, given tensions in the Middle East and rising oil prices and ongoing concerns about the euro-zone debt crisis.

Two fascinating scenarios from Janet Yellen - Janet Yellen prefaces her speech today by saying that “it is not my intention to provide new information about the outlook for the US economy or monetary policy” but it is extremely tempting to read two scenarios that she sets out (as illustrations of the effects of Fed communications) as primary policy options for the next couple of years. Scenario 1 – Delayed tightening “If financial market participants appeared to be expecting policy firming to begin somewhat sooner than policymakers considered desirable or appropriate under such circumstances, the language of the forward guidance could be adjusted to shift expectations toward the somewhat longer horizon over which the Committee expected the federal funds rate to remain extraordinarily low.” Ms Yellen provides a chart that gives an FRB/US simulation of a one year delay in raising the Fed Funds rate.  Scenario 2 – Faster asset sales In particular, financial conditions depend on market expectations not only concerning the amount of the FOMC’s purchases but also concerning the anticipated timing and pace of the eventual unwinding of those holdings. For example, financial conditions would likely tighten immediately if market participants came to expect a more rapid renormalization of the Federal Reserve’s balance sheet. In contrast, if market participants were to anticipate a more gradual renormalization, financial conditions would likely become more stimulative.

Fed's Yellen on Unconventional Monetary Policy and Communications - This speech from Fed Vice Chair Janet Yellen provides the Fed's view of the impact of QE2: Unconventional Monetary Policy and Central Bank Communications (see Effectiveness of Asset Purchases and the associated graphs). Yellen also commented on forward guidance: Down the road, once the recovery is well established and the appropriate time for beginning to firm the stance of policy appears to be drawing near, the FOMC will naturally need to adjust its "extended period" guidance and develop an alternative communications strategy to shape market expectations about the policy outlook. This is part of the timeline I outlined earlier this week: When will the Fed raise rates? My view is the Fed will complete the $600 billion “QE2” large-scale asset purchase program (probably in June, but they may taper it off), then they will stop the reinvestment of maturing MBS and Treasury Securities (could be concurrent with the end of QE2), and then the FOMC will change the "extended period" language. That suggests the Fed will not raise until 2012 at the earliest.

Fed’s Yellen: Rise in Bond Yields After QE2 Due to Market Expectations - A top Federal Reserve official said Friday long-term bond yields may have risen in the wake of the launch of the central bank’s bond-buying program because market participants expected more purchases than were ultimately announced. Fed Vice Chairman Janet Yellen was addressing the view held by some that the rising bond yields seen in the wake of the Fed’s decision late last year to restart Treasury bond purchases show the policy as a failure. Central bankers have for the most part seen the effort as a success. While it was an aim of the $600 billion program to lower borrowing costs to stimulate growth, drive down unemployment and bump up inflation levels that are too low, long-term Treasury yields have instead unexpectedly risen.

Monetary easing and the need for macroprudential monitoring - I had previously thought QE’s main goal was to help inflate away debt. But by its very nature, it is also designed to inflate the price of assets. I had thought proponents wanted monetary easing because it helps ensure there is adequate money going around to address the needs of illiquid people/entities. But it seems proponents advocate it just as much to increase inflation expectations. I had previously thought of monetary easing in defensive terms, and even then, I had thought it to be destructive because of the way it encouraged asset speculation as a side effect. But now I see that asset speculation is in fact a primary transmission mechanism of monetary easing. A central bank undertaking it wants real assets to appreciate because the increase in assets makes people feel they are wealthier, and therefore more open towards purchasing more. A rising monetary base increases inflation expectations among the people, such that they begin to purchase things now rather than later. Noble though monetary easing's objective is in alleviating the economy, realizing that the ugly side effect of blowing asset bubbles is in fact front and center in its transmission mechanism does color my perspective on it. Monetary easing then is akin to waving the red cape to the bull, to induce the bull to attack you. Given this, what exactly are your defensive mechanisms against a charging bull?

Is the modern central bank in need of reform? - The Economist - WHAT should central banks be doing these days? The recent financial crisis and recession placed central bankers in a central role in economic management, leading to interventions unprecedented in recent memory. The prominence of central banks in policymaking is easy to explain. Major interventions were necessary because of the scale of the crisis—a once-in-a-lifetime meltdown. And central banks were given an abnormally large role in these interventions because they, as semi-independent technocratic institutions, were more responsive than political institutions. But having played an instrumental role is keeping the global economy afloat, central banks are now coming under intense scrutiny. Critics are uncomfortable with monetary policy decisions, with bank bail-outs, and with pre-crisis central bank behaviour. Some have challenged central bank independence; others, the idea of discretionary monetary policy.

Federal Reserve ultimate protector of the banking class – Fed Reserve sends a thank you to American middle class and world for bailing out the banks with a gift of inflation. MIT chart tracking millions of items shows much higher inflation than CPI. The Federal Reserve has one clear mandate.  That mandate involves protecting the biggest investment and commercial banks on Wall Street at the expense of the American people.  This deflation of quality of life is being felt in the most clandestine and subtle ways like a shift in the wind.  The Federal Reserve through archaic money operations has bailed out the too big to fail and has passed on the bill to millions of Americans.  We are now seeing this through the rising cost of goods outside of housing.  As noted before manufacturers unable to charge Americans with an average annual income of $25,000 anymore on goods for fear of losing customers, many producers are simply shrinking the package of items hoping customers do not notice.  Aside from this hidden cost since the US dollar is being devalued by virtual money printing, the CPI which is heavily weighted by housing is also showing increases in inflation.  As expected it looks like the Fed is only concerned with protecting one sector of our economy.

Bernanke says foreign investors fuelled crisis - Foreign investors’ hunger for safe US assets helped to cause the 2007-2009 crisis by encouraging banks to turn risky mortgages into AAA rated bonds, Ben Bernanke, US Federal Reserve chairman, argued in Paris on Friday. “The preference by so many investors for perceived safety created strong incentives for US financial engineers to develop investment products that ‘transformed’ risky loans into highly rated securities,” said Mr Bernanke, presenting a new research paper that he co-wrote with other Fed economists. Mr Bernanke has previously argued that a “global savings glut” led emerging markets to send large amounts of capital to the US in the 2000s, pushing down US interest rates. His new paper says that those emerging markets wanted safe assets – and US regulators failed to keep the financial system from creating them. “In analogy to the Asian crisis, the primary cause of the breakdown was the poor performance of the financial system and financial regulation in the country receiving the capital inflows, not the inflows themselves,” Mr Bernanke said, adding that the US crisis had given him new sympathy for developing countries that have to manage large capital inflows.

Four Questions for Ben Bernanke - Ben Bernanke delivered a speech Friday where he further developed his global saving glut (GSG) hypothesis.  This view holds that the reason for the low long-term interest rates in the United States during the early-to-mid 2000s was that desired saving vastly exceeded desired investment in emerging economies.  Consequently, capital flowed from these countries to the U.S. economy and pushed down long-term interest rates.  The cheaper credit in turn fueled the U.S. housing boom.   Based on  a new research paper, Bernanke extends his GSG hypothesis by considering the type of assets desired by these emerging economies as they invested in the U.S. economy.  He shows that investors from these countries, as well as  from Europe, had a strong appetite for AAA-rated assets which were in short supply elsewhere.  The U.S. financial system responded by transforming risky assets into safe assets.    And so, we have a theory that nicely ties together global economic imbalances, developments in structured finance, and the U.S. housing boom.  Note, though, that the GSG hypothesis places no culpability on the Fed.  Instead, blame is placed on the  failings of the U.S. private sector and foreigners who save too much.  How convenient for Ben Benanke and the Fed. 

QE II: The Road To A Gold Standard - What an incredible few weeks with global uprisings! It is not all too surprising that social eruptions over food prices come from the Arab world, since they spend up to 75% to 80% of income on food for basic needs. What proof that the global economy is not a closed system! The QE and QE2 initiatives have spread like a powerful virus, leading to global commodity prices heading upward and quickly. Even cotton is up 170% in price. The USFed has suffered even more credibility blows, calling the global food price inflation unrelated to its QE2 policy. It is obviously connected. What we have is the Western Big Banks protected from fraud prosecution, redeemed for their broken toxic balance sheets at government expense, leading to a global price tag in the form of foodstuffs and commodities. Worse, the USGovt and USFed continue to be run by fraud kings, who continue to maintain a tight strangehold on the purse of the state and the Printing Pre$$ itself that produce deficit spending and fresh phony money. Ironically, the punishment for the US banking system is chronic unending insolvency. Despite the largesse to prop them up, fund their channels, redeem their toxic debt, enrich their executive packages, they remain the same Zombie banks from late 2008. Tragically, the USGovt will continue to fund their black holes instead of restructuring like Iceland, which is back on its feet. The battle cry of Too Big To Fail for the Big US Banks is a call to sustain the corruption and to ensure no recovery ever!!

Kohn: Commodity Prices Have Complicated Inflation, Policy Picture - The global rise in commodity prices is a negative for the U.S. economy, but as long as inflation expectations remain anchored, further policy action to combat it may not be needed, former Federal Reserve Vice Chairman Donald Kohn said Friday. A global increase in commodity prices is “an adverse thing for the economy,” Kohn said. “It makes the monetary policy process more difficult.” However, “if those inflation expectations can remain anchored, it doesn’t really require the kind of response that some people are calling for,” he said. Kohn said that while the Federal Reserve’s second economic stimulus effort, its $600 billion bond-buying program, has played a small role in higher prices globally, the real reason for the price rise has to do more with supply and demand, with demand rising in emerging market economies.

Mauldin: A Random Walk Around The Frontlines - Bernanke tells us that rates are going to be low until we see stronger job creation. But with QE2 and rising inflation, there is the risk that the Fed's two mandates may come into conflict. It takes at least 12 months (or longer) for monetary policy to work its way into the economy. The current small rise in inflation is not due to QE2. That will show up later. It appears to me the deflation war, at least for the time being, is won (the next recession will bring that worry back). But now, it is time for the adults at the FOMC to stand up and say stop the printing presses. We as a nation need to understand that the problems we face are not ones that can be dealt with by business as usual. Keynesian stimulus is precisely the wrong medicine. The problem is one of too much debt. We were promised by Bernanke in 2002 that if the Fed moved out the yield curve, long rates would come down. The opposite has happened. Since the beginning of QE2 mortgage rates have risen by 1%. The yield on the ten-year bond is up over 1% since the announcement of QE2. It's time for the Fed to declare victory and go home.

New indications of inflation - Where are the inflationary pressures? The BLS reported on Thursday that the inflation rate as measured by the headline CPI has been 1.6% over the last year. Excluding food and energy, the inflation rate would be 1.0%. The MIT Billion Prices Project is recording a slightly higher inflation rate for the U.S. of about 2.5%. As Paul Krugman explains, the discrepancy between the indexes arises from the fact that the BPP excludes the cost of services, which have been experiencing more modest price increases than goods. The Wall Street Journal has more on the different inflation rates for goods and services. The BLS CPI does register a modest tick up from recent values. If the increase in the CPI for the months of December and January alone were to be repeated for the next year, we'd be looking at annual inflation rate of 5% for the headline CPI and 1.4% for core CPI. Should we be concerned that this is the first move toward a higher inflation environment?

What the renminbi means for US inflation - China’s recent inflation is turning heads (Raede and Volz 2011, Cavallo and Díaz 2011). At first thought, the recent rise of inflation in China seems to be reassuring news for US policymakers concerned with the trade deficit. On the one hand, price increases in China make US firms more competitive, and on the other, high inflation may also goad China into letting the renminbi appreciate at an accelerated pace to lower the cost of imported goods. Thoughts along these lines have lead treasury secretary Timothy Geithner to note that current economic developments “will bring about the necessary adjustment in exchange rates” without any need for further intervention by policymakers. This column says that low US inflation over the last 15 years is partly attributable to cheap Chinese imports. It argues that if the US trade deficit is reduced – via either Chinese inflation or a nominal appreciation of the renminbi – this disinflationary effect will be reduced. It says that the resulting inflationary impulse could be severe.

Is the Fed blowing bubbles in structured finance and insurance? - A number of commentators have raised the question of whether the low-interest rate policies of the Federal Reserve are stoking global inflation in commodities, food and energy. The answer to that question seems to be yes, but the inflationary pressure caused by the Fed’s purchases of US Treasury debt and zero short term interest rates is being manifested in many sectors and features the appearance of new “special purpose vehicles” in the insurance sector. The reckless practices and financial transactions that led to the collapse of first Enron, then WorldCom and later American International Group (”AIG”) are alive and well, in large part due to the low-interest rate policies of the Fed and a good bit of credulity on the part of state legislators and insurance regulators.

Equities Rising On "Rivers Of Blood" -- The inflation that Ben Bernanke is shoving down the throats of the World (in place of food) is more than any government that can't print money can handle.  Take poor Hosni Mubarack, for example.  It is reported he stole $70Bn from the Egyptian people over 30 years - that's $2.3Bn per year or what Lloyd Blankfein would call "Mid-year bonuses" but, rather than getting invited to the White House to set economic policy, poor Mubarack is shown the door by his people.  Even if Mubarack wanted to stay in power and even if he wanted to give back all $70Bn to Egypt's 80 Million people, that would only work out to $875 per person or 13% of their $6,347 per capita GDP.  That does not really help much when food inflation is running close to 40% - does it?  That would make it irrational for Hosni to do anything but take the money and run because what's broken in Egypt can't be fixed - even if he wanted to.  Libya is in the same predicament, as is Sudan, Algeria, Nigeria, Angola...  What happens when people are starving while they see their leaders living lives of luxury?  They get pissed! 

Global inflation and the Fed: One more time - Atlanta Fed's macroblog - George Melloan is unhappy with U.S. monetary policy, and he repeats what has become by some a criticism of Federal Reserve policy:"In accounts of the political unrest sweeping through the Middle East, one factor, inflation, deserves more attention…"Probably few of the protesters in the streets connect their economic travail to Washington. But central bankers do. They complain, most recently at last week's G-20 meeting in Paris, that the U.S. is exporting inflation… I would simply repeat my argument from our previous macroblog post, but I don't really have to. Mr. Melloan makes the point for me [with my emphasis added in italics]:"Consider, for example, that much of world trade, particularly in basic commodities like food grains and oil, is denominated in U.S. dollars. When the Fed floods the world with dollars, the dollar price of commodities goes up, and this affects market prices generally, particularly in poor countries that are heavily import-dependent. Export-dependent nations like China try to maintain exchange-rate stability by inflating their own currencies to buy up dollars."  The only way inflation gets exported to these other countries is if they attempt to maintain the values of their currencies below the levels that markets would otherwise take them. That inflation is purely homegrown.

Inflation Expectations & Rising Oil Prices - The political upheaval in Libya has pushed oil prices to a 28-month high. Whenever crude runs skyward, fears of higher inflation usually follow, and this time is no different.  But one closely watched measure of inflation expectations in the U.S. is holding steady. The yield spread on the conventional 10-year Treasury less its inflation-indexed counterpart remains in the 2%-to-2.5% range that's prevailed for months. Higher oil and commodity prices could elevate inflation, of course. It's happened before. "The 68 percent increase in the price of oil in 1974 was an adverse supply shock of major proportions," writes economist Greg Mankiw in Macroeconomics. "As one would have expected, it led to both higher inflation and higher unemployment." But that was then. The Treasury market these days seems to be saying that the inflationary effect of rising oil prices will be mild. What's different in 2011? The blowback from the Great Recession, of course. But there are opposing forces too. The Fed's exit strategy for unwinding zero interest rates may stoke inflation down the road--if the monetary adjustment is executed poorly. But none of this seems to be worrying the Treasury market, at least at the moment.

Calibrating the Macro Effects of Higher Oil Prices - Recent turmoil in North Africa and the Middle East has contributed to a sharp rise in oil prices and raised uncertainty about where they are headed.

  • Since completing our last forecast (February 4), nearby oil futures, specifically their average for the second quarter of this year, have risen roughly $7 per barrel.
  • With the possibility that the political turmoil could spread to other key oil-producing nations, the range of outcomes with respect to oil prices is now very wide.
  • More extreme geopolitical angst in the region would also generate adverse spillovers to financial markets, some of which are already evident. The Alternative Scenarios that we produced last summer and which explored surging oil prices and financial market spillovers (related to tightening sanctions and potential conflict involving Iran) may also shed light on the evolving situation, especially if it spins further out of control.

Rising Oil Prices Pose the Latest Threat To U.S. Economy -The American economy just can’t catch a break.  Last year, as things started looking up, the European debt crisis flustered the fragile recovery. Now, under similar economic circumstances, comes the turmoil in the Middle East. Energy prices have surged in recent days, as a result of the political violence in Libya that has disrupted oil production there. Prices are also climbing because of fears the unrest may continue to spread to other oil-producing countries. If the recent rise in oil prices sticks, it will most likely slow a growth rate that is already too sluggish to produce many jobs in this country. Some economists are predicting that oil prices, just above $97 a barrel on Thursday, could be sustained well above $100 a barrel, a benchmark.  Even if energy costs don’t rise higher, lingering uncertainty over the stability of the Middle East could drag down growth, not just in the United States but around the world.

Oil surge puts fragile US recovery at risk - (FT video) This is not the 1970s: a jump in the price of oil is now far less likely to cause economic stagnation and high inflation in advanced economies. But the sharp rise in oil prices does create a series of economic risks and, once again, threatens the US economic recovery just as it seemed to be getting back on track. The biggest change since the 1970s is that the US can now produce a lot more per barrel of crude and so output is less sensitive to the oil price. According to the US Energy Information Administration, energy consumption per dollar of real output has more than halved. That reflects both greater energy efficiency and changes in the make-up of the economy: it takes less energy to make lattes and financial services than it did to make steel and cars. Some emerging countries, where energy is a greater share of overall consumption, are more vulnerable

Fed officials play down oil price risks - The Federal Reserve would react to higher oil prices only if the increases spilled over into broader areas, officials of the U.S. central bank said on Friday, with one policy maker calling the risks "manageable." In a similar vein, an official of the European Central Bank said policy makers should be wary of responding too soon to the recent jump in oil prices as it may be fleeting. The president of the Richmond Federal Reserve Bank, Jeffrey Lacker, took a calm view of the potential threats to the U.S. economy from the higher oil prices, though he said they could prove nettlesome if they jump much more or create an inflationary psychology. "I think the oil price rises we've seen so far don't pose a risk to the recovery," he told reporters after a speech on regulation.

Wintry Weather May Chill Economic Growth - The cold weather put a chill on the economy this quarter, according to Macroeconomic Advisers. On its blog, the forecasting firm reports that degree day data – figures the National Weather Service puts together to measure cooling and heating demand – show that U.S. temperatures were one-and-a-half standard deviations below normal in December and January. Plugging the degree day data into a model that links unusual temperatures to economic output, Macroeconomic Advisers’ economists found that GDP growth in the first quarter will be an annualized 0.6 percentage points lower than it would have been if temperatures were normal. And while they haven’t found a way to gauge it, they reckon this winter’s heavy snows further damped growth.But as the sap starts running again, the economy could run a little quicker. “If temperatures return to and stay at normal, GDP growth will be boosted in the second quarter by about 0.8 percentage point!” Macroeconomic Advisers reports.

U.S. Growth Revised Lower in Fourth Quarter - Amid fears of an oil shock and a further slide in housing comes news that America’s economic recovery is weaker than previously thought. Growth in the fourth quarter of 2010 was slower than initially reported, at an annual pace of 2.8 percent rather than the previous estimate of 3.2 percent, according to data1 released on Friday by the Commerce Department. Economists had been predicting an upward revision, to about 3.3 percent. The latest number is particularly disappointing because it is so far below what the country needs to put a significant dent in the unemployment rate, now at 9 percent. In fact, the latest growth rate is lower than the average of the last 80 years, which was 3.4 percent.  Given how quickly the economy shrank during the recession2, and how much the population has grown since then, the country desperately needs faster growth to help the millions of people who have lost their jobs.

Fourth-quarter growth revised down to 2.8 percent (Reuters) - The economy grew slower than initially estimated in the fourth quarter as government spending contracted more sharply and consumer spending was less robust, a government report showed on Friday.Gross domestic product grew at annualized rate of 2.8 percent, the Commerce Department said in its second estimate, marking a downward revision from its initial 3.2 percent estimate.Economists had expected GDP growth, which measures total goods and services output within U.S. borders, to be revised up to a 3.3 percent pace. The economy expanded at a 2.6 percent rate in the third quarter. For the whole of 2010, the economy grew 2.8 percent instead of 2.9 percent.The pace of growth was too slow to do much to lower the unemployment rate, which fell during the quarter from 9.6 percent to 9.4 percent. It fell again in January to reach 9 percent.

A disappointing day - Let me draw your attention to two stories. First, America's fourth quarter GDP growth has been revised down: Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.8 percent in the fourth quarter of 2010, (that is, from the third quarter to the fourth quarter), according to the "second" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 2.6 percent... The downward revision to the percent change in real GDP primarily reflected an upward revision to imports and downward revisions to state and local government spending and to personal consumption expenditures (PCE) that were partly offset by an upward revision to exports.And Britain's economy shrank by more than initially thought: Britain’s economy shrank more than initially estimated in the fourth quarter, complicating the task of the Bank of England as a split deepens among policy makers on whether to withdraw stimulus.

Smaller Government Can Be a Drag (on Growth) My colleagues and I had an article today focusing on how rising oil prices are threatening America’s fragile economic recovery. But we could just have easily written another 1,000 words on the perils shrinking governments now present to the economy.Item No. 1 is today’s revised report on gross domestic product for the last quarter of 2010.Output last quarter grew more slowly than initially reported, according to the Bureau of Economic Analysis: an annual rate of 2.8 percent rather than 3.2 percent. One of the main reasons for the downward revision was that state and local governments cut their spending at a 2.4 percent annual pace. That was a much sharper decline than the 0.9 percent first estimated. The drop was also faster than what the country had experienced in the previous two quarters, reflecting the fact that state and local budgets are in more trouble than ever.A decline in state and local spending — and the layoffs that are likely to be involved — can have dangerous reverberations throughout the economy.

Quantitative Easing and America’s Economic Rebound - There is no doubt that the American economy rallied strongly at the end of 2010. But how much of that was due to the United States Federal Reserve’s temporary policy of so-called “quantitative easing”? And what does the answer mean for the US economy in 2011? Until the fourth quarter of last year, the US economic recovery that began in the summer of 2009 was decidedly anemic. Annual GDP growth in the first three quarters of 2010 averaged only about 2.6% – and most of that was just inventory building. Without the inventory investment, the growth rate of final sales averaged less than 1%. But the fourth quarter was very different. Annual GDP rose by 3.2% and growth of final sales jumped to a remarkable 7.1% year-on-year rate. True, much of that was due to a sharp decline in imports; but even the growth rate of final sales to domestic purchasers rose at a healthy 3.4% pace. The key driver of the increase in final sales was a strong rise in consumer spending.

Can the Economy Recover Without Housing? - You sometimes hear the claim that the economy cannot  recover before the housing market recovers. I think that’s wrong. Just because real estate led the economy into the recession does not mean it must lead the economy out. Other sectors can accomplish that. It’s more likely that the economy will need to recover — with unemployment falling and income rising — first and then housing will begin a very slow recovery. Today’s new reports, on jobless claims and new-home sales, illustrate the point. If you look back to 2009 on home sales, you can’t find any sign of a recovery: With jobless claims — which, of course, we want to be falling — there is some reason for optimism:

Geithner Says US Financial System Is Stronger Than Before the Recession - The U.S. financial system is in better shape than it was before the recession and is well placed to provide the funding needed for the economic expansion, Treasury Secretary Timothy F. Geithner said.  “The core of the American financial system is in a much stronger position than it was before the crisis,” Geithner said today during a Bloomberg Breakfast with reporters in Washington.  U.S. banks had net income of $87.5 billion in 2010, the highest since 2007, the Federal Deposit Insurance Corp. said today. The Standard & Poor’s 500 index has jumped 64 percent since March 2009, and corporate bond spreads have narrowed.  “We can say with much more confidence now that the U.S. banking system and the U.S. capital market are much more likely to be in a position to finance the capital needs that come with a recovery,” Geithner said.

Commission-Eyed Optimists - In Sunday’s Washington Post, the “Topic A” question (at the back of the A section) asked about the (my italics) “prospects that the president and congressional Republicans would reach a serious budget deal this year.”  My answer was “basically nil” because politicians still view putting things on the table as admitting fault.  Bill Gale’s answer was “small” because the Republicans are still too entrenched in their “no new taxes” fantasy world.  Maya MacGuineas sounded a bit more optimistic that policymakers might actually try doing the right thing but only after they try all the wrong things first!  But Alice Rivlin, the only person who was on both President Obama’s fiscal commission as well as (co-chair of) the Bipartisan Policy Center’s version, was clearly the most optimistic of us all.

The Outlook for the Economy and the Budget - CBO Director's Blog

Obama’s Lesser Evil by Jeff Madrick - President Obama’s budget proposal this week shows just how thoroughly austerity economics now dominates the policy debate for both Democrats and Republicans. This emphasis is not new: Obama had already signaled he was giving special priority to cutting the deficit well before the November elections, when he named a bipartisan panel to make recommendations on how to deal with future deficits. It was hardly an objective panel, headed by two deficit hawks, former Clinton White House Chief of Staff Erskine Bowles and retired Wyoming Republican Senator Alan Simpson.  Not so very long ago, some economists feared Obama’s stimulus plan was not doing enough, quickly enough to rescue the economy. With US government spending now surpassing revenues by about 10 percent of GDP, those voices have been muffled. Conditions are now ideal for the growing number of deficit hawks in Congress and well-financed think tanks, mostly long-time small-government proponents like the American Enterprise Institute and the Peterson-Pew Commission on Budget Reform, to control the discussion again.

Your share of the budget: about $12000 - President Obama's proposed federal budget of $3.73 trillion amounts to $11,952 for every U.S. citizen — or $118,381 every second of the year. The numbers were mashed by Randolph-Macon College physics professors Bill Franz and George Spagna, who Tuesday released their ninth consecutive budget analysis. Political commentators immediately branded the budget as astronomical, the professors said. With all due respect, astronomers have much greater control over their budgets than the government, they said. The more appropriate description is governmental. "It's not astronomical, it's governmental," Spagna said. "That has been my whine for years." A $3.73 trillion budget amounts to $272 every year since the big bang some 13.7 billion years ago, according to their numbers.

Federal Spending Growth - David Wessel shows us the federal fiscal issue in one chart. The chart depicts an estimate of what the Obama administration's budget proposal would mean for spending in each major category over the next five years. "The bottom line: Spending on interest, Medicare and Medicaid and Social Security go up – a lot. Spending on nearly everything else goes down."I prefer looking at it slightly differently. I think that when trying to understand the federal government's fiscal situation, at least on the spending side, it is more informative to see how we got to where we are.  We now have an on-budget (i.e. excluding the Social Security program, which continued to run a surplus in 2010) deficit of about 9% of GDP. In the early 2000s, the budget deficit was about 4-5% of GDP. That's deterioration in the on-budget deficit of about 4-5% of GDP between 2003 and 2010. Now take a look at the following chart, which shows federal spending on actual goods and services broken into two pieces: spending related to defense, and spending related to everything else. Then I've added federal spending on the two Meds: Medicare and Medicaid.

House passes Republican budget for FY 2011 in 235-189 vote‎ - Republicans passed a $1.2 trillion dollar budget for the remainder of fiscal year 2011 at 4:39 a.m. Saturday, after having debated scores of amendments the last week, often late into the night.The bill passed in a 235-189 party line vote. Three Republicans voted against and no Democrats voted for the bill, which would cut $62 billion in non-defense discretionary spending compared to the budget bill that the government is currently operating under.As debate on the budget wore on, it became clear that Republicans were using the bill for more than just cutting spending. Many members used their amendments to deliver a rebuke to the Obama administration's greatest legislative victories and as a referendum on a government and its regulations that they believe have become to large and powerful.

GOP spending cuts would hit economy hard - The more federal spending Congress slashes this year, the greater the potential drag on economic growth, according to a new analysis from Goldman Sachs. In a research note, economists at the Wall Street bank estimate that the House GOP's spending bill -- which would cut $61 billion between March and Sept. 30 -- could reduce economic growth by 1.5 percentage points to 2 percentage points in the second and third quarters.  Last week, the Federal Reserve forecast the economy would grow between 3.4% and 3.9% this year.The drag would be less if lawmakers decide to cut only $25 billion, which Goldman believes is more likely.

Goldman Sachs Says GOP Budget Plan Will Hurt Economy  - The GOP spending cuts have been criticized again. A Goldman Sachs economist has warned that the $60 billion package of spending cuts proposed by the Republicans to counter President Obama's proposal could slow economic growth. And if budget wrangling between the Obama administration and the Republican-dominated House of Representatives led to a shutdown? That, according to Goldman, could cost $8 billion a week, the Financial Times reported. Goldman's warning follows Treasury secretary Timothy Geithner's recent claims that the Republican plan would cost jobs. In the confidential report, obtained by ABC News, among other news outlets, Goldman Sachs economic forecaster Alec Phillips said the GOP plan could slow economic growth by up to 2 percent. Even a compromise deal, with $25 billion in cuts could slow growth by 1 percent.

Goldman sees danger in US budget cuts - The Republican plan to slash government spending by $61bn in 2011 could reduce US economic growth by 1.5 to 2 percentage points in the second and third quarters of the year, a Goldman Sachs economist has warned. The note from Alec Phillips, a forecaster based in Washington, was seized in the ongoing US budget fight by Democrats as validating their argument that the legislation approved by the Republican-led House of Representatives last Saturday would do significant damage to the US recovery. Chuck Schumer, the Democratic senator from New York, said: “This nonpartisan study proves that the House Republicans’ proposal is a recipe for a double-dip recession. Just as the economy is beginning to pick up a little steam, the Republican budget would snuff out any chance of recovery. This analysis puts a dagger through the heart of their ‘cut-and-grow’ fantasy”. The Goldman analysis also points out that a potential compromise deal with $25bn in spending reductions this year – a more likely scenario – would lead to a smaller drag on growth of 1 percentage point in the second quarter. 

GOP deficit-reduction hype used in ideological "values" war? - There is concerted effort to portray Social Security as ruining the country by being a significant cause of the current deficit , and this is not accidental.  Social Security has been funded by payroll taxes that are supposed to be dedicated to the payouts.  But the GOP since Reagan has worked to cut income taxes and increase military funding (especially with the Bush "pre-emptive" wars of choice that Stiglitz now says will cost us a minimum of FIVE TRILLION), and has borrowed from those Social Security pension funds to pay for those tax cuts and military excesses. It's the tax cuts and runaway military spending that are choking this country's economy, not Social Security.  That fact gets lost unless Social Security's income and outflows are portrayed fully.  It's a fact that the GOP wants to be lost, I think, along with the overall amount of military and related spending in our budget.

The Human Cost of Budget Cutting - Community action agencies like ABCD are not generally well known but they serve as a lifeline, all across the country, to poor individuals and families who desperately need the assistance provided by food pantries, homeless shelters, workers who visit the homebound elderly, and so forth. They offer summer jobs for young people and try to ward off the eviction of the jobless and their dependents.  More than 20 million people receive some kind of assistance from community action agencies over the course of a year. This winter an elderly man in Boston was found during a routine visit to be suffering in his home from frostbite of the hands and feet. The visit most likely saved his life.  We should keep in mind the current extent of economic suffering in the U.S. as we consider President Obama’s misguided plan to impose a crippling 50 percent reduction in the community service block grants that serve as the crucial foundation for community action agencies. The cuts will undoubtedly doom many of the programs. (The Republicans in the House would eliminate the block grants entirely.)

Senate plan to cut Social Security and Medicare is based on imaginary theory of legislation - For a little while, there was good reason to be nervous about reports of a new bipartisan Gang of Six Senators that was looking into resurrecting the deficit commission in legislative form. Fortunately, it has now been revealed that this gang is just working on imaginary legislation. Here’s the first paragraph in the Wall Street Journal article describing the effort: A bipartisan group of senators is considering legislation that would trigger new taxes and budget cuts if Congress fails to meet a set of mandatory spending targets and other fiscal goals aimed at reducing federal deficits. There are about 30 paragraphs in this article, but let’s pause right there. In just one sentence, we have already entered the territory of imaginary legislation. Current Congresses cannot force future Congresses to do anything. Every year, Congress can pass whatever spending and tax levels that have enough support to pass the House, the Senate and the White House. A sitting Congress does not have to do what members of Congress told them to do last year, five years ago, or 200 years ago.

Blaming Social Security For Deficits Is Like Blaming Iraq For 9/11  - Isn't it funny how the corporate conservatives always offer the same solutions to every problem? Even when the solution doesn't really have much to do with the problem? Iraq didn't attack us, and Social Security doesn't have anything to do with deficits. But the 'solution' to 9/11 was to attack Iraq, and the proposed 'solution' to deficits is to 'fix' Social Security. And the 'solution' to state budget crises is to get rid of public employee unions. Why? Got a crisis? A tax cut will fix it. Getting rid of unions will fix it. Privatizing Social Security will fix it. And gutting government solves everything. Doesn't even matter what the problem is! 'Nothing is more important in the face of war than cutting taxes' - Tom DeLay, 2003

US Budget: Entitlement Funding Inflection Points - A few years ago, I shared my concerns about Social Security and other entitlement program funding (see above and A New Head: Imagine there's no Social Security Fund).  Mine was no voice crying in the wilderness (I'm not that clever), but one of a chorus singing to an audience of deaf policy makers (perhaps my off-key voice was disturbing).  These underfunded entitlement programs, according to those in charge at the time, wouldn't be an issue for 10 or more years. While it has only been 3 years and 4 months since I shared my concerns, the underfunding, in my view, is likely to become a big issue, not just amongst TV's talking heads, but in trading rooms around the world, this year- we are near to reaching an entitlement funding inflection point- mainly due to the sharp rise and long duration of unemployment, which will have, I believe, a profound effect on the US bond market.   The inflection point- when the lack of surplus entitlement funds forces the Treasury to fund the entire deficit in the open market- will force bond investors, if they haven't already, to take a fresh look as US Federal finance at the worst time- a look that will include concerns like the following:

Why Obama Punted on Deficit Reduction - The latest Republican talking point is that President Obama is “punting” on his fiscal responsibilities by not proposing deep cuts in Medicare and Social Security. It is true that Obama’s 2012 budget was exceedingly timid when it came to deficit reduction. But Obama’s GOP critics ooze hypocrisy when they accuse him of fiscal irresponsibility.This, after all, is the party that just last year, in its zeal to defeat “Obamacare,” demonized as “death panels” the president’s modest effort to constrain future cost growth in Medicare. And it is the party that continues to demand the 2001 and 2003 tax cuts be made permanent for all.  As usual, Republican message discipline is impressive: “We got a punt,” said House Budget Chairman Paul Ryan (R-WI) of the Obama fiscal plan. “When it comes to the real issues facing our country, he just punted,” said House Speaker John Boehner. “Obama Punts the Debt to the GOP” read a headline in the GOP mouthpiece The Weekly Standard. And so on.

The economic silly season is upon us -The silliness comes in at least four parts. The first is the debate over raising the national debt ceiling, which flies in the face of the laws of arithmetic. The increase in the debt each year is simply the difference between total expenditures and total receipts, both of which come from the annual budget. If Congress wants a smaller national debt, it must either spend less or tax more. Like King Canute, it cannot just command the tides.  The second element of silliness is the belief that the American public stands solidly behind rapid and large budget cuts. The necessity to choose among various spending cuts and tax increases brings me to the third element of silliness—the one that seems to afflict only Republicans. How many times have you heard Speaker of the House John Boehner (and others) refer to "job-killing government spending"? That phrase has become an official GOP mantra, on a par with "death taxes" and "death panels"—and it's just about as truthful. The final element of silliness is the only one that requires some subtlety of thought and is at least debatable. It's the popular notion that we need deficit reduction urgently, right now, even though the unemployment rate is still 9%.

Treasury Tools Less Effective as Debt Limit Nears - The Treasury Department's ability to take "extraordinary measures" to avoid tripping up against the federal debt limit may not be as effective as in the past because of ballooning federal debt levels, a congressional watchdog warned Tuesday.  As a result, Congress will have much less time to debate increasing the debt limit to prevent the federal government from hitting the fast-approaching $14.294 trillion debt cap, the Government Accountability Office said.  "Treasury's past success at managing cash and debt when near or at the debt limit is no guarantee that it can continue to manage successfully in the future"

Debt Limit, Or Is It? - This afternoon, the Government Accountability Office issued a detailed report of what happened when the debt limit was not increased in time to avoid Treasury market disruptions between 1995 and 2010 and on what Treasury can do once it reaches the limit to avoid default. "After controlling for other factors that could have affected the yield spread, such as economic uncertainty and liquidity in the bill market, we estimated that the debt limit added a premium of about 4 basis points during the debt limit event period in 2009–2010. Applying this premium to all 3-month Treasury bills issued during this period, we estimate that Treasury paid $78 million in additional borrowing costs as a result of the debt limit." [Page 24] On January 6, Treasury announced it would hit the debt limit no later than May 16, but it modified that to May 31, 2011 on February 2.  It will issue another update during the first week of March.

Government shutdown threat looms over US budget fight - Senior Senate Democrats slammed Republicans on Sunday for a "reckless" threat to shut down the government amid deepening political posturing on both sides over federal spending and the budget deficit. The House of Representatives voted on Saturday to cut federal spending by $61 billion through September. But the Republican measure will likely die because Democrats who control the Senate oppose it and President Barack Obama vowed to veto it.Obama has outlined his own plan for less-severe spending cuts in 2012, and has warned that tightening the belt too much too soon could harm the slow economic recovery.Democratic Senator Charles Schumer criticized House Speaker John Boehner and Senate Republican Leader Mitch McConnell over talk among some Republicans that they would rather shut down the government than relent on their spending cut demands

U.S. Shutdown Looms As Budget War Rages - Fears over the strength of the US economic recovery were growing last night after a highly unusual all-night session of the Republican House of Representatives agreed to slash the federal budget by $61bn by the end of September.  The deal, thrashed out in the early hours, was immediately condemned by US Treasury Secretary Tim Geithner, who said the cuts would hit the fragile economy. It now appears there will be a potentially damaging stand-off between President Barack Obama and Republican leaders with a possible shut-down of the federal government if agreement cannot be reached in the next fortnight.  "The continuing resolution as passed by the House would undermine and damage our capacity to create jobs and expand the economy," Mr Geithner said.

Congress, Obama brace for showdown as government shutdown looms - The prospect of a government shutdown appeared more possible Saturday after the House passed a budget measure in the pre-dawn hours that cuts $61 billion - and was immediately rejected by Senate Democrats and President Obama.  The House plan, which was approved on a party-line vote at 4:40 a.m. after five days of debate, eliminates dozens of programs and offices while slashing agency budgets by as much as 40 percent. Federal funding for AmeriCorps and PBS would cease. Hundreds of millions would be cut from border security, and tens of millions would be withheld from funding for the District of Columbia.  The debate over the size and scope of the government now moves to the Senate, where leaders have already said that the House plan cuts way too deep and that they are planning a far more modest proposal. But with the Senate out of session all next week, senators have left themselves just a few days to take up a bill before March 4, when the stop-gap measure that is currently funding the government expires.

The Coming Shutdowns and Showdowns: What's at Stake - Wisconsin is in a showdown. Washington is headed for a government shutdown. In DC, House Republicans won’t budge on the $61 billion cut they pushed through last week, saying they’ll okay a temporary resolution to keep things running in Washington beyond March 4 only if it includes many of their steep cuts — among which are several that the middle class and poor depend on.  Republicans say “we’ve” been spending too much, and they’re determined to end the spending with a scorched-earth policies in the states (Republican governors in Ohio, Indiana, and New Jersey are reading similar plans to decimate public unions) and shutdowns in Washington.There’s no doubt that government budgets are in trouble. The big lie is that the reason is excessive spending.  Public budgets are in trouble because revenues plummeted over the last two years of the Great Recession. They’re also in trouble because of tax giveaways to the rich.

What will happen if the federal government stops funding itself and has to close its doors? - Unlike most state governments, the federal government is not required to balance its budget—nor does it even need to pass one. But it does need to OK money periodically in order to keep the lights on. As of March 4, the temporary bill keeping government workers paid and federal agencies going will expire. Congressional leaders and the White House have worked to bring the two parties together, but the impasse threatens to shut the federal government down.  On Saturday morning, House Republicans passed a "continuing resolution," a budgetary stopgap, after an all-night session. It slashes about $61 billion from current levels of spending between now and September, taking money from the Environmental Protection Agency and banking regulators, among others. President Obama has said he would veto the bill, and the Senate has refused to take it up in its current condition. With the Senate gone until Monday, the full Congress will have just four working days to get its fiscal house in order.

Government Shutdown Looming: What Does it Mean to You? - With Democrats and Republicans at a stalemate over how to fund the government, just two weeks shy of the deadline, there's a real threat that the federal government could shut down for the first time in 15 years, affecting thousands of Americans.  The last time the federal government closed its doors was in 1995, when then-President Bill Clinton and the Republican-majority Congress failed to come to a compromise on the budget -- twice.  "A shutdown can be, depending on whose exempted or not, pretty significant to all of our lives, absolutely," said Howard Gleckman, a resident fellow at the Urban Institute. "People don't think about how much it is that the government does for them. There would be no planes if it weren't for TSA and air traffic controllers. And as far as Social Security, somebody actually has to run computers to make sure checks run."  The five-day government stoppage in 1995 caused delays in processing of Social Security, Medicare and veterans' checks.

The reality of a government shutdown - Social Security checks would still go out. Troops would remain at their posts. Furloughed federal workers probably would get paid, though not until later. And virtually every essential government agency, like the FBI, the Border Patrol and the Coast Guard, would remain open. That's the little-known truth about a government shutdown. The government doesn't shut down. And it won't on March 5, even if the combatants on Capitol Hill can't resolve enough differences to pass a stopgap spending bill to fund the government while they hash out legislation to cover the last seven months of the budget year.Fewer than half of the 2.1 million federal workers subject to a shutdown would be forced off the job if the Obama administration followed the path taken by presidents Ronald Reagan, George H.W. Bush and Bill Clinton. And that's not counting 600,000 Postal Service employees or 1.6 million uniformed military personnel exempt from a shutdown.So we're talking fewer than one in four federal workers staying at home. Many federal workers get paid on March 4, so it would take a two-week shutdown for them to see a delay in their paychecks.

Federal shutdown: Social Security checks won't stop - What happens to Social Security if the government shuts down? "People don't get their Social Security checks." That was President Obama at a press conference last week. And this is Harry Reid, the top Democrat in the Senate, in a statement on Tuesday: "A shutdown could ... mean no Social Security checks for seniors." The Democrats are saber rattling, hoping to portray Republicans as irresponsible for threatening a shutdown. And the claim has been repeated by other top Democrats. Here's the rub: It doesn't appear to be true. During the last major shutdown, which lasted about a month starting in late 1995, the Social Security Administration mailed checks throughout the crisis, and a close reading of established law makes clear the agency has the legal authority to do so again.

IPE Zone Fully Endorses US Gov't Shutdown - It was quite an easy decision. After all, I am the sole author of the IPE Zone ;-) But seriously, I gather that one of the most popular video game series in the United States is called Unreal Tournament. In fact, I get the same feeling of unreality with budgetary discussions in the country that spawned Unreal Tournament. States alike Wisconsin, Indiana, and Ohio are becoming battlegrounds for the mother of all showdowns in Washington. That is, the looming March 4 cut-off point at the federal level. The combatants in the American arena line up thusly: Republicans do not understand that revenue generation can be part of the solution, preferring to keep Bush II-era tax cuts that have quite obviously resulted in epic trillion dollar-plus deficits. Democrats on the other hand have no wish to offend traditional constituencies--organized labour, public sector workers, and so forth. With starting points that are difficult to square with reality, you end up with paralysis. At the federal level as well as in various states, there is discussion of shutting down governments at various levels given the inability to pass budgets. While I am equally appalled by Republicans and Democrats alike, I am naturally very curious about the prospect of having major chunks of the American government shut down.

The Coming Shutdown - I think it’s pretty clear that we’re looking toward a scenario in which John Boehner shuts the government down in the near future. There’ll be a lot of moves between now and then and a lot of reporting on the details, but I think the basic dynamic is pretty clear and abstract. You can compromise about numbers—$10 billion or $5 billion. And you can compromise across modes—cut that instead of this. But you can’t compromise between Congressional Republicans desire to force the White House into a humiliating defeat and the White House’s desire to not be humiliated and defeated. A compromise acceptable to the President would, by definition, fail to meet the objective of halting the march toward socialism.  The fact that a president (with his nationwide constituency) and a House Speaker flush with midterm victory (having won most recently) both have plausible claims to popular legitimacy makes these kind of clashes difficult to resolve. If Obama were the King of England, then what would happen is that over time his legitimacy would erode and power would pass to the Speaker.

Senate Democrats draft spending cuts - With a political standoff over spending threatening to trigger a federal shutdown next week, Senate Democrats began drafting a plan Thursday to slice billions of dollars from domestic agency budgets over the next seven months, yielding to Republican demands to reduce the size of government this year.  The plan will involve accelerating some of the $33 billion in program terminations and reductions included in President Obama's proposed budget for next year, a senior Senate Democratic aide said Thursday. Democrats are also looking at cuts that have been adopted by the Republican-controlled House, such as a plan to strip $8.5 billion for pet projects known as earmarks out of a measure aimed at keeping the government running through Sept. 30.  "This would be a compromise," the aide said, "accepting something that they've already asked for."

Democrats should not rise to the bait of “fiscal conservatives" - I never cease to be frustrated that the current public policy debate is described as a contest of ideas: fiscal conservatives versus liberals. It is not just Republicans or Tea Partiers who believe that they are fiscal conservatives... Democrats and liberals seem to accept this characterization at face value, as does most of the media. The problem is that a heavy majority of the supposed fiscally conservative congressmen, although passionate about cutting government spending in the abstract, are in truth no better able to find specific dollars of budget cuts that they can support or defend to their constituents than are the Democrats. Factoring in their immutable desire to cut taxes, I believe that if the Republicans were in full control, we would have larger budget deficits in the coming years than if the Obama crowd retained power. This is what happened in a big way when Presidents Reagan and GW Bush took office promising to cut the debt while also cutting taxes. Spending, deficits, and debt soared during their terms, relative to their respective Democratic predecessors. There is no reason to think anything has changed.

Austerity’s inauspicious historical precedents - If you look at the history of countries trying to cut and deflate their way to prosperity while keeping their currencies pegged, it’s pretty grim — all the way back to Napoleonic times. Sometimes, the peg is gold. For a good example of the destructive abilities of that particular peg, look at the UK in the 1920s, which Macdonald says was arguably worse than the US in the 1930s: shallower, to be sure, but substantially longer. The devaluation of the pound, when it finally came, was very long overdue. At other times, the peg is simply political: So from a historical perspective, the prospects for countries like Portugal, Ireland and Greece are pretty grim. They can cut their budgets drastically and stay pegged to the euro, but most of them would be better off in the position of Iceland, which can and did devalue in a crisis (and allowed its banks to default, too). So far, the Baltic states have stuck to their deflationary guns with the most determination and discipline, but such things work until they don’t: at some point it’s entirely possible that Latvia or Estonia could pull an Argentina and kickstart growth by devaluing. All of this is relevant for the US states, of course, which are also locked into a currency union and facing very tough fiscal cuts, as Steven Pearlstein says today:

Obama (and Congress) Can’t Cut the Budget Deficit - The terrific hoo-ha around the US Budget Deficit is just that: hot air – predicated on the fallacy that President Obama and an ideologically-driven Republican Congress can cut the deficit. They can’t. It’s a delusion that arises because economists insist on applying microeconomic reasoning to macroeconomic conditions.  It’s a delusion that leads to broader misunderstanding as voters wrongly make the link between their own individual budgets and the government’s budget.It’s an error because economists (like Christine Romer in Lessons from the New Deal’ 2009) confuse and merge outcomes (the budget deficit) with the fiscal stance of government (increased or lower spending). It’s a mistake because while you and I can cut our budget deficit by reining in our spending and generating new income – the US government can’t. That’s because the government can only cut spending – but can’t cut the deficit. The size of the deficit is an outcome – and depends on the reaction of the whole economy to cuts in government spending. Since government can’t control the deficit, trying to reduce the deficit is like looking through a telescope the wrong way around….

Common Ground with Republicans: Nix NSF Funding for Economics - One of the items on cut list for House Republicans is the National Science Foundation (NSF). They want to cut $150 million, or 2.2 percent, from its 2010 budget for the current fiscal year.  This should be a place where progressives can find common ground with Republicans. Virtually no economists could see the $8 trillion housing bubble whose collapse wrecked the economy. Recognizing the bubble required nothing more than knowledge of the basic arithmetic that most of us learned in the third grade. There was no excuse for someone who does economics for a living to have failed to see the bubble and recognize its danger. This is a profession that is hopelessly corrupt and incapable of change.

More on Defense - Krugman - A few followup points to my earlier note:

  • 1. If you don’t like looking at defense as a share of the overall federal budget, you can use share of GDP instead, as above. It’s still much lower than it was in the 50s and 60s.
  • 2. These numbers do include the wars, and a bunch of other things that don’t appear in the headline Pentagon budget. They seem to correspond pretty closely to Fred Kaplan’s estimates of overall military spending, so I don’t think much is missed here.
  • 3. I’m baffled by commenters who read my earlier note as an endorsement of current levels of defense spending. As I said, the defense budget is full of waste, we’ve been fighting wars that we shouldn’t, and we’re defending against threats that no longer exist. That defense buildup after 9/11 was outrageous: we were attacked by a handful of terrorists wielding box-cutters (or something like that — I’m aware that’s not certain), and we responded by (a) buying a lot of heavy tanks (b) invading a country that had nothing to do with the attack.

The Tea Party is winning - Take five steps back and consider the nature of the political conversation in our nation's capital. You would never know that it's taking place at a moment when unemployment is still at 9 percent, when wages for so many people are stagnating at best and when the United States faces unprecedented challenges to its economic dominance.  No, Washington is acting as if the only real problem the United States confronts is the budget deficit; the only test of leadership is whether the president is willing to make big cuts in programs that protect the elderly; and the largest threat to our prosperity comes from public employees. Take five more steps back and you realize how successful the Tea Party has been. No matter how much liberals may poke fun at them, Tea Party partisans can claim victory in fundamentally altering the country's dialogue.

From the Pentagon, a Buy Rating on Contractors - At the Cowen & Company military industry investment conference on Wednesday, the breakfast speaker was a man named Ashton B. Carter. A former academic and industry consultant, Dr. Carter, as he likes to call himself — he has a doctorate in theoretical physics, in case you were wondering — is the Defense Department’s under secretary for acquisitions, technology and logistics. That is, he’s the Pentagon’s chief weapons buyer.  Big institutional investors like T. Rowe Price were out in force.  As was the Defense Department. In addition to Mr. Carter, a top Naval official was scheduled to present the next afternoon.  If you’re wondering what high-ranking Pentagon officials were doing at an investment conference, well, suffice to say that this was not a question on the minds of the people in this room. Their main message, to put it bluntly, is that even in an era of tighter budgets, the Pentagon is going to make sure the military industry remains profitable. “Taxpayers and shareholders are aligned,” Mr. Carter intoned on Wednesday. Then he laid out a series of reforms that he said would both increase competition and maintain, as he put it, “profitability over the long term” — a phrase he repeated for emphasis.

FedEx's Inconvenient Truth - FedEx Chief Executive Officer Fred Smith and Gen. Charles Wald, who helped plan the 1986 attack on Libya, used growing Middle East unrest to push the Obama administration and Congress to forge ahead on legislation to reduce U.S. dependence on foreign oil. But an inconvenient fact emerged during a conference call with reporters: Of the 75,000 trucks in the FedEx fleet, only 20 are electric and 350 are hybrids, Mr. Smith said. The company, he went on to explain, passes on increases in fuel costs through surcharges, and doesn’t hedge on oil prices, so fuel costs are not a big weight on its balance sheet. Gen. Wald had some interesting statistics of his own: The 2008 hike in the price of oil cost the Pentagon—which consumes 2% of all U.S. oil supplies–$11 billion. The war in Afghanistan consumes 22 gallons of fuel per soldier per day, at a price of $400, due to the cost of security. Every $10 increase on the price of a barrel of oil, he said, will add $1.3 billion to the Pentagon’s budget.

Does Koo's Statement That "Sustaining Fiscal Stimulus In Democracy During Peacetime Is Difficult" Mean War Is Coming? - With the recent surge in geopolitical volatility (which nobody could have foreseen of course), it is easy to forget that the US economy is still deep in the abyss of a transfer process that sees trillions in capital needed to be funded by the government and plug holes in the private sector. This is not news and anyone who has followed Richard Koo over the past two years is fully aware of this: all of this is fully recreated in his latest presentation reproduced below. What is interesting is the addition of exhibit 23, which notes something very important: namely reality. Koo observes, very keenly, that 'sustaining fiscal stimulus in democracy during peacetime is difficult' (of course, in authoritarian regimes nobody cares about stimulus until inflation surges to the point where the bulk of the population, which knows it has no other recourse, sees no other option than to revolt). Which leads to the question: so what? If fiscal stimulus is difficult (and virtually impossible after trillions have already been spent with little/no effect) in peacetime, does this mean that democracies are forced to turn to war as the only possible recourse (it worked with the Great Depression)? Or, alternatively, continue relying on the Fed for monetary stimulus, which however as we have all too vividly seen, is the bluntest instrument available, and tends to lead to the very same regime destabilizing revolutions that one may say are pursued by the abovementioned 'democracies.'

Eisenhower as a lefty politico - The following is a shortened version of Rachel Maddow's opening monologue from her show on Wednesday on MSNBC:
For the next hour, we begin with the president of the United States addressing the nation and calling for a massive investment in this country's infrastructure, rebuffing the idea of giant tax breaks for the richest Americans, and warning anyone who would dare touch Social Security to keep their hands off. You want to talk about red meat for the base? Listen to some of the language the president used. "Workers have a right to organize into unions and to bargain collectively with their employers. And a strong, free labor movement is an invigorating and necessary part of our industrial society." Wow.How about this one? "Only a fool would try to deprive working men and women of their right to join the union of their choice." Listen to the way he goes after the right here. "Should any political party attempt to abolish Social Security, unemployment insurance, and eliminate labor laws and farm programs, you would not hear of that party again in our political history. There is a tiny splinter group, of course, that believes you can do these things, but their number is negligible and"--and the president says--"their number is negligible and they are stupid." That is not what Barack Obama said last night. That is way to the left of any national Democrat at this point. That was all Republican President Dwight David Eisenhower. That was all the stuff he said when he was president. Republican President Dwight Eisenhower, president when the top tax bracket for the richest people in this country was 92 percent. President Eisenhower defended that tax bracket. He said we cannot afford to reduce taxes until, quote, "the factors of income and outgo will be balanced." Eisenhower insisting there must be a balanced budget and that taxes on the rich are the way to balance it. Dwight Eisenhower, you know, noted leftist.

Estimated Impact of ARRA - CBO Director's Blog - Under the American Recovery and Reinvestment Act of 2009 (ARRA), also known as the economic stimulus package, certain recipients of funds appropriated in ARRA (most grant and loan recipients, contractors, and subcontractors) are required to report the number of jobs funded through the law after the end of each calendar quarter. ARRA also requires CBO to comment on those reported numbers. In its latest report, issued today, CBO provides estimates of ARRA’s overall impact on employment and economic output in the fourth quarter of calendar year 2010. (CBO’s most recent previous report was issued in November 2010.) CBO now estimates that ARRA will increase budget deficits over the 2009–2019 period by $821 billion—$7 billion more than what we estimated in our November report. By CBO’s estimate, close to half of that total impact occurred in fiscal year 2010, and about 70 percent of ARRA’s budgetary impact was realized by the close of that fiscal year. (When ARRA was being considered, CBO and the staff of the Joint Committee on Taxation estimated that it would increase budget deficits by $787 billion between fiscal years 2009 and 2019.)

Washington Wrecks the Economy: More Evidence - We now have even more evidence that inept policies from Washington are causing enormous suffering across the country. It is not quite the line that the right-wingers are pushing. The new evidence is that the stimulus worked and was in fact more effective than had been predicted.The new evidence comes in the form of a study by two Dartmouth professors, James Feyrer and Bruce Sacerdote. Past estimates of the impact of the stimulus on jobs and the economy relied on simply plugging the tax breaks and spending into standard macro models and reporting the predicted effect. In this sense, the impact of the stimulus was actually built into the model. However this new study directly measures the impact of stimulus spending on employment across states, comparing the number of jobs created to the amount of spending. The study consistently finds significant results over a wide range of specifications. This means that states that got more stimulus money had more jobs. The multipliers varied across specifications and types of spending but the range was 0.5 to 2.0.  While the authors view their multiplier estimates as being somewhat below those predicted by the standard macro models, given the nature of their study their estimates are almost certainly higher than would be expected.

Small Is Beautiful - Krugman - Dean Baker points us to Feyrer and Sacerdote, who use cross-state variation in stimulus spending per capita to estimate the employment effects of the stimulus. They find a clear positive effect: states that got more money per person did better on jobs. And as Baker points out, the national effects must have been larger, since some money spent in New Jersey presumably creates jobs in New York and vice versa. One thing I might point out, by the way, is that this is something of a “Well, duh” result. Of course more federal spending in a given state or county creates more jobs. And the burden of proof should always have been on stimulus critics to explain why this doesn’t mean that stimulus spending creates jobs at the national level too. In normal times you can argue that the positive job effect of higher spending is washed out by higher interest rates — that fiscal expansion will be offset by contraction on the part of the Fed. But with interest rates up against the zero lower bound, that argument doesn’t apply.

Germany’s Cuts vs. America’s Stimulus - Remember the German economic boom of 2010?  Germany’s economic growth surged in the middle of last year, causing commentators both there and here to proclaim that American stimulus had failed and German austerity had worked. Germany’s announced budget cuts, the commentators said, had given private companies enough confidence in the government to begin spending their own money again.  Well, it turns out the German boom didn’t last long. With its modest stimulus winding down, Germany’s growth slowed sharply late last year, and its economic output still has not recovered to its prerecession peak. Output in the United States — where the stimulus program has been bigger and longer lasting — has recovered. This country would now need to suffer through a double-dip recession for its gross domestic product to be in the same condition as Germany’s.  Yet many members of Congress continue to insist that budget cuts are the path to prosperity. The only question in Washington seems to be how deeply to cut federal spending this year.

Sale of the Century to Balance the Books - In the post-crisis economic order, there are likewise two kinds of economies. Those with vast accumulations of assets, including sovereign wealth funds (currently in excess of $4 trillion) and hard-currency reserves ($5.5 trillion for emerging markets alone), are the ones with loaded guns. The economies with huge public debts, by contrast, are the ones that have to dig. The question is, just how will they dig their way out? The conventional wisdom holds that, aside from resorting to inflation or default, debts can be reduced only through belt-tightening austerity measures—some mixture of higher taxes and spending cuts. And yet politicians are notoriously leery of proposing hikes or cuts big enough to make a real dent in the debt. President Obama’s latest budget proposal includes a five-year freeze on non-defense discretionary spending and tax increases on higher earners. But even if all goes according to plan, the gross debt will still rise above 105 percent of gross domestic product—and stay there. Yet there is another fiscal option that neither party seems to be considering. The U.S. needs to do exactly what it would if it were a severely indebted company: sell off assets to balance its books.

Migrants’ Remittances and Related Economic Flows - CBO Director's Blog - Migrants’ remittances—payments sent by foreign-born workers back to their home country—have become a significant source of monetary inflows for many countries. As one of the most important destinations of global migration, the United States is the single largest national source of remittances. The flow of remittances can affect economic growth, labor markets, poverty rates, and future migration rates in the United States as well as in recipient countries. Today’s publication—a collection of tables and figures with descriptive text (shown below)—updates and expands upon CBO’s May 2005 publication Remittances: International Payments by Migrants. That paper included data through 2003; this document includes data through 2009. The existing data on global remittances are not of very high quality, and the comparisons and trends reported here should be viewed only as approximations.

The CBO's Budget Fantasies - By now everybody knows the size of America's public debt—it's really, really Big—and perhaps you also know that the 2011 deficit is expected to come in at 1.5 trillion dollars (1,500,000,000,000). Obama's proposed budget, if passed intact, would create a deficit of $1.6 trillion in fiscal year 2012. That's hardly likely in the current political atmosphere. Among other significant money savers, cutting heating subsidies for the poor and taking Sesame Street off the air will surely allow the Congress to pare down the 2012 deficit to $1,553,000,000,000 and pocket change. I don't know about you, but I'm feeling much better already knowing Big Bird won't be out there poisoning impressionable young minds. This belt-tightening stuff is intoxicating. It's a lot like sniffing glue, and not just any old glue—I'm talking about the good stuff! I thought it might be entertaining to cruise over to the non-partisan Congressional Budget Office (CBO) to see what they have to say about current and future deficits. It turns out the CBO has been sniffing glue, too.

Does The U.S. Really Have A Fiscal Crisis? - Simon Johnson - The United States faces some serious medium-term fiscal issues, but by any standard measure it does not face an immediate fiscal crisis.  Overindebted countries typically have a hard time financing themselves when the world becomes riskier – yet turmoil in the Middle East is pushing down the interest rates on US government debt.  We are still seen as a safe haven. Yet leading commentators and politicians today repeat the line “we’re broke” and argue there is no alternative other than immediate spending cuts at the national and state level. Which view is correct?  And what does this tell us about where our political system is heading? Our main fiscal issues are three (see my testimony to the Senate Budget Committee earlier this month). 

Pump It Up - Obama, Wall Street, and the corporate mouthpieces in the mainstream media have been pumping up the American people for months with false data, unwarranted optimism, bank profits created out of thin air by accounting fraud, and attempting to create an economic recovery built on a foundation of sand, supported only by lies. The Obama budget is worse than a joke. It is a tragic joke. It amazes me that he can stand in front of the American people and present such a lie. The liberal media then unquestioningly presents the budget as a frugal cost cutting proposal that will reduce deficits and inflict painful cuts upon the poor American people. It would be laughable, if it wasn’t so sad. One look at Obama’s deficit projections for FY11 and FY12, presented one year ago, should be enough to convince you that no one in Washington DC has a clue what they are doing.

Consumer Stress Continues to Rise While DC Goes into “Mission Enough Accomplished” Mode -- Yves Smith - The officialdom has moved on to a new form of theater, namely legislative mud wrestling, which serves as a useful distraction from the failure to deliver on what ought to have been the first order of business, namely reining in the financiers. As we’ve said repeatedly, cleaning up the banking system is a necessary precursor for recovery from a serious financial crisis. Instead, whether by dumb luck or design, enough Americans have become fixated with various forms of jealousy over advantages they believe their neighbors have (whether accurate or not) that it is providing a great smokescreen for the oligarchs to continue their looting.The fact that the economy has moved up up from a serious trough is hailed as a recovery. But to the vast majority of Americans, the talk of better times rings hollow. The top echelons are back to spending smartly, and Wall Street bonuses for 2009 and 2010 were lavish. But even though spending economy-wide perked up in December, some question whether it was savings fatigue rather than a return of consumerism. And while some have argued that the economy had entered sustainable recovery, federal fiscal stimulus is likely to be met if not exceeded by state and local budget cuts. And that’s before we see the impact of Eurozone wobbles and rising commodity prices, particularly if oil continues to rise thanks to widening turmoil in the Middle East.  Dave Dayen provides an apt description of the parallel universe in which policy decisions are being made:

Business As Usual - The economy teetered on the brink but did not fall into the abyss. The bailouts, the stimulus, and adequate international political comity —each imperfect, even ugly—nevertheless prevented what was otherwise very likely: another Great Depression. But the collective sigh of relief and overconfident pronouncements emanating from Wall Street and Washington obscure the fact that we have done little to avert an even worse crisis in the future. We may have stanched the bleeding, but the underlying disease—a culture, ideology, and political economy of uninhibited finance—remains. Indeed, by tiptoeing around the real issues we may ultimately make things worse. 

Politics Is Undermining Our Economy - Dean Baker justly complains that I have misread him. He does not think that it would have been economically impossible to maintain near-full employment after the collapse of the housing bubble, just that it was politically difficult.When he writes:The Right Prescription for an Ailing Econom: As much as economists like to pretend to be sorcerers, they have no easy way to replace $1 trillion in annual demand. The Obama Administration's 2009 stimulus package went perhaps one-third of the way, but it was nowhere near large enough... and: The Bursting of the Housing Bubble and the Coming Recession: If housing construction and sales fall back to trend levels, it would mean a loss of more than 2 million jobs. The decline in consumption that will result because people can no longer borrow against their homes will have an even more dramatic impact on the economy. and: Beating Up On Brad DeLong | TPMCafe: There is nothing in our economist's bag of tricks that gives us an easy mechanism for replacing 9 percent of GDP quickly, which leaves me wondering what the reality grasping Mr. DeLong been smoking?... Exactly what mechanism do we have in the private economy for replacing $1.2 trillion in private demand in a short period of time? he is not throwing up his hands in despair, but rather calling for a boost to total government purchases on the order of four times as great as the boost to federal government purchases in the Recovery Act.

How we can get America working again - Long-term trends are depressing job growth. There is more outsourcing abroad, more automation, more conversion of full-time jobs to temps and contracts, and a stagnant median wage. Information technologies are advancing dramatically and increasingly being employed to eliminate jobs of all types, especially those that are fundamentally routine and repetitive in nature. There are no short-term solutions. The best longer-term solution, widely understood to reflect a national need, is reinvestment in America’s infrastructure, which would not only create hundreds of thousands of jobs but would also safeguard private sector growth. These projects would have to be managed by an independent public/private commission based on a minimum calculated rate of return and would also have to be tolled so that, over the long run, they would be paid for by their users. The costs would therefore be seen as an investment and not as an addition to our debt, which would spook the bond market. This would enjoy bipartisan support, since Americans can see with their own eyes that the country’s infrastructure is crumbling and because these kinds of investments have a much larger multiplier effect on the job market than any other kind of spending. Generating new jobs for a growing population is a challenge for the left, right and centre of our political parties and their entrenched positions on economic issues. Millions of men and women are willing and eager to work but their skills and energies are being wasted. It doesn’t make sense.

RomneyWorld vs. ObamaWorld, by Brad DeLong: Somewhere out there in the multiverse, beyond space and time ... is a place in which President Mitt Romney won the 2008 presidential election. ... What do the American economy and economic policy look like right now along that President Romney branch of the multiverse? Well, they look a lot like they look right here on earth. President Romney would have provided support to troubled banks–capital injections and stress tests–but he would have avoided even a few targeted nationalizations of the banking system: he is, after all, a Republican.He ... would most likely have reappointed Ben Bernanke and let the Federal Reserve proceed as it wished. On fiscal policy, Romney’s Chairman of the Council of Economic Advisers, Mark Zandi, and his National Economic Council Director Douglas Holtz-Eakin would have proposed a fiscal stimulus package that was 60 percent tax cuts and 40 percent spending increases. The Democratic Congress would then have bargained ... to produce a stimulus that was 40 percent tax cuts and 60 percent spending.But, of course, all these policies are exactly what Obama and the Democratic Congress actually enacted. On healthcare, Romney would have taken his signature Massachusetts health care reform and expanded it nationwide: we would have RomneyCare. But that is precisely what we do have.

Going Galt in 2011 – I Guess Atlas Shrugs Was Right - A couple years ago, there was a small spate of commentary of folks by conservatives and libertarians about how, if the Bush tax cuts weren’t renewed, we’d see a bunch of highly productive people going Galt. In other words, a whole bunch of people on whom society depends, seeing the parasites started sucking even more of their lifeblood, would simply withdraw from society… and the rest of us would suffer. It turns out that those who gave us these warnings were partly right. It seems there are a lot of people – schoolteachers, firefighters, police officers and the like – threatening to go Galt in Wisconsin these days. Its just that the rest of the story isn’t playing quite the way the promoters of going Galt predicted. Nevertheless, I’m sure they must be absolutely ecstatic that some people have finally stood up to the government and said: “enough is enough.”

Norquist Tries to Nix Deficit-Reduction Talks - Americans for Tax Reform President Grover Norquist is trying to nip bipartisan deficit reduction talks on Capitol Hill in the bud. In a letter fired off to Republican negotiators Thursday, the keeper of the “No New Taxes” pledge taken by virtually every Republican declared a deficit reduction framework taking shape in the Senate would be a no-no – a “transparent attempt to hike taxes.” The plan, being considered by six Senate negotiators, would set firm spending targets, both in discretionary and entitlement programs, with the threat that it Congress violated those targets, automatic, across-the-board cuts would take care of them.But the possible deal would also give tax-writing committees two years to come up with an overhaul of the tax code that simplifies or eliminates many tax breaks and deductions, lowers tax rates, and raises revenue. The bipartisan presidential debt commission, which inspired the talks, envisioned such a tax code overhaul raising $785 billion for deficit reduction through 2020.

Can Tax and Social Security Heresy Lead to a Budget Deal? - The latest whiff of hopeful heterodoxy comes from three Republican senators– Saxby Chambliss of Georgia, Mike Crapo of Idaho, and Tom Coburn of Oklahoma. In quiet backroom negotiations and in a remarkable public exchange of letters with Grover Norquist of American for Tax Reform, the three lawmakers suggest that they might—might—support revenue-raising tax reform as part of a broader deficit reduction deal. All of this is happening in code, and with classic Washington indirection. The three lawmakers—none of whom would ever be confused with a Rockefeller Republican—are the GOP half of a small bipartisan group of senators that is trying to develop a compromise deficit reduction plan. As members of President Obama’s deficit commission, Crapo and Coburn endorsed the proposal offered late last year by panel chairs Erskine Bowles and Alan Simpson. That plan included a call for a broad-based tax reform that would lower rates, eliminate most tax preferences, and raise about $800 billion in revenues from 2015 thr0ugh 2020.

Reagan's Forgotten Tax Record - Reagan’s record on raising taxes began almost the moment he entered politics. Elected governor of California in 1966, he inherited a large budget deficit from his predecessor, Pat Brown. Although a conservative, dedicated to shrinking government, Reagan nevertheless found the magnitude of spending cuts that would have been necessary in 1967 to be beyond reach. This led him to endorse a $1 billion per year tax increase, equivalent to a $17 billion tax increase today – an enormous sum equal to a third of state revenues at that time. In 1970, Reagan proposed yet another big tax increase of $1.1 billion, which would have been used to finance property tax relief. Incomes above $32,000 would have been subject to a new 11 percent tax rate, and three years later a new 13 percent bracket would have applied to those with incomes above $36,000. The bill would have also instituted tax withholding, which ironically led to its defeat in the Senate by a single vote. Conservative activists were appalled that Reagan would even consider such a thing, but he eventually endorsed the Tax Equity and Fiscal Responsibility Act of 1982. According to a Treasury Department analysis, it raised taxes by close to one percent of GDP, equivalent to $150 billion per year today, and was probably the largest peacetime tax increase in American history.[11]

Under Obama, Taxes Are Lower Than Ever - The AP reports that since President Obama took office, pretty much everyone has been paying fewer federal taxes. And for the third straight year, American families and businesses will pay less in federal taxes than they did under former President George W. Bush, thanks to a weak economy and a growing number of tax breaks for the wealthy and poor alike. Income tax payments this year will be nearly 13 percent lower than they were in 2008, the last full year of the Bush presidency. Corporate taxes will be lower by a third, according to projections by the nonpartisan Congressional Budget Office. The poor economy is largely to blame, with corporate profits down and unemployment up. But so is a tax code that grows each year with new deductions, credits and exemptions. The result is that families making as much as $50,000 can avoid paying federal income taxes, if they have at least two dependent children. Low-income families can actually make a profit from the income tax, and the wealthy can significantly cut their payments. In an era of trillion dollar deficits, this is insane.

The Little People Pay Taxes - Over at, Martin A. Sullivan, an economist and contributing editor to Tax Analysts, has a fascinating post on the tax rates paid by the residents of the Helmsley Building. The building’s tax-evading billionaire namesake, as you may recall, supposedly once said, “Only the little people pay taxes.”Mr. Sullivan shows that she was mostly right. The building has its own ZIP code, and so Mr. Sullivan was able to use Internal Revenue Service ZIP code records to find data on the 130 individual tax returns filed by residents of the building in 2007. He then compared their tax liabilities to the estimated tax liabilities of the blue-collar workers employed by the building. He found that the average adjusted gross income in the tax returns of people filing from the building was $1.17 million. Which is of course impressive. More impressive, though, is the tax rates this group pays. The table below shows the total income and payroll tax liability of a typical resident of the Helmsley building, alongside the same tax liabilities of janitors and security guards earning the average wages for the jobs in the New York area.

Corporate Taxes from the AEI perspective--the AEI report gets an F - Kevin Hassett, an economic grunt at the American Enterprise Institute and frequent contributor to the Wall Street Journal op-ed pages, prepared a report for the institute on corporate taxation. Guess what--it claims that the US overtaxes its corporations and that is the reason that we are losing jobs. There are all sorts of things wrong with this report. 1) it disregards the impact of globalization on corporate decisions to move enterprises, and the fungibility of operations if jurisidictions left don't make the exit a highly taxing moment.
2) It first spends a lot of ink on the US statutory rate, complaining that it is higher than that of most other OECD countries. That is true, but really meaningless in itself.
3) It notes that corporate taxes raise much less in revenue as a percent of GDP in the US than in other OECD countries. Somehow, the report intends this to be an indictment of the US corporate tax system as overtaxing corporations. I suppose the authors reach that by implying that corporations have fled the system and that's why. But it is really an indication that the thesis in the title of the report--that the US gets an F for bad taxes that are making US corporations uncompetitive--is wrong.

GM tax deal costs $14 billion - The U.S. Treasury is giving up $14 billion in tax revenue because of a sweetheart deal it's giving General Motors.The automaker is expected to post its first profitable year since 2004 when it reports fourth-quarter results on Thursday. But GM (GM) won't have to worry about being hit with a big tax bill because billions in previous losses will provide shelter for years to come.That break will reduce GM's U.S. tax bill by an estimated $14 billion in the coming years, and its global taxes by close to $19 billion, according to a company filing.Companies typically get a break on future taxes because of past losses. But in most cases they lose that tax break during bankruptcy, because the losses are offset by the "income" the company receives from shedding its debt.

Letterman and Rand Paul: A Painful 12 Minutes - For a while last night, CBS’s The Late Show looked a little more like a cable news political debate as host David Letterman lambasted his guest, Sen. Rand Paul (R., Ky.). During the 12-minute interview, Mr. Letterman criticized the tea party favorite for his positions on taxes, education and choice of pants . The jokes were few. “I notice you’re wearing jeans,” the late night host said to laughs. “Is that typical Kentucky senatorial garb?”  “My wife told me it was kind of ’80s,” said Mr. Paul, who still wore his usual dark suit coat, white shirt and red tie. “I didn’t listen of course.” After that, the two spent much of the time debating whether it makes more sense to tax the rich or cut government spending to close the country’s budget gaps. Mr. Paul, promoting his new book “The Tea Party Goes to Washington,” says cut spending. Mr. Letterman says tax him and the corporations.

Small Firms Become Flashpoint in Tax Debate - Does a small business have to be small? That question is emerging as one of the early flashpoints in the debate over revamping the U.S. tax code. The distinction between big businesses and small businesses is an important one for tax purposes. But it can be surprisingly tricky.  Large businesses tend to be organized as taxable entities. Small businesses, by contrast, usually are organized as “pass-through” entities, meaning their owners pay taxes on them through their individual tax returns. But in the last 20 years, some very large enterprises have taken advantage of the pass-through rules to organize as small businesses and avoid corporate-level taxation. In recent days, top Treasury officials have suggested that some small businesses – probably the largest ones – might be forced to switch to taxable form as part of a tax overhaul.

Find the Taxes That Do Double Duty - THE nonpartisan Congressional Budget Office projects a cumulative federal deficit of nearly $3.8 trillion over the next four years. So the $100 billion in annual spending cuts advocated by House Republicans will have a negligible impact on that total.  Clearly, reduced spending alone can’t solve our deficit problem. With baby-boomer retirements looming and the electorate unwilling to embrace large cuts in Social Security and Medicare, we must also raise additional revenue. The good news is that doing so will not require difficult sacrifices from anyone. But it will require a Congress that is willing to redesign tax policy from the ground up. Although Tea Partiers and others decry taxes of all kinds, many levies actually make the country richer, not poorer. The way forward lies in greater reliance on these kinds of taxes.

Fed's Hoenig: Easy Money and 'Too Big to Fail' Must End - A top Federal Reserve official said that the central bank was risking a new financial crisis with its easy-money policies and that the U.S. must end its implicit "too-big-to-fail" guarantee for the biggest financial institutions.  Kansas City Fed President Thomas Hoenig, one of the Fed's most outspoken internal critics, warned that monetary policy should be tailored "so you don't overshoot and cause the next crisis."  Mr. Hoenig voted against the Fed's easy-money policies throughout 2010. He is concerned that very low interest rates will harm the economy by causing prices to rise suddenly or by creating speculative asset bubbles, like the housing one behind the 2008 financial crisis.

Federal Reserve president breaks rank: This is the greatest risk to the U.S. economy - Federal Reserve Bank of Kansas City President Thomas Hoenig said U.S. regulators should avert another crisis by breaking up large financial institutions that pose a threat "to our capitalistic system."  "I am convinced that the existence of too-big-to-fail financial institutions poses the greatest risk to the U.S. economy," Hoenig said today in a speech in Washington. "They must be broken up. We must not allow organizations operating under the safety net to pursue high-risk activities and we cannot let large organizations put our financial system at risk." Hoenig, the lone dissenter from every Fed meeting in 2010, has argued that the most sweeping overhaul of U.S. financial regulation since the Great Depression won't prevent the largest banks from taking excessive risks and increasing market share. Regulators, including the Fed, are implementing the law.  "In my view, it is even worse than before the crisis," Hoenig said

A Virtuous Circle: Breaking Government Power By Limiting Government’s Pro-Corporate Power - Government and corporate power can always be simultaneously eroded or broken by the simple step of limiting government’s ability to undertake pro-corporate actions. The most obvious example is stripping government’s power to charter corporations. This would abolish corporations completely, and at the same time greatly lessen government power, much of which is laundered through corporations. Just to give one example, how much social and political control is actually enforced through the banks’ tyranny over personal finance, exerted via credit scores and the like? I look in vain in the Constitution for the place of the credit agencies. I think if such dossiers and such a control mechanism are to exist at all, shouldn’t it have to be starkly in the form of an official government credit score? Wouldn’t this greatly clarify the power issue and Constitutional issue in the eyes of many whose sightlines are currently befogged by the power dispersal through the corporate-government nexus?

Geithner’s Gamble - Simon Johnson - In a recent interview, United States Treasury Secretary Tim Geithner laid out his view of the nature of world economic growth and the role of the US financial sector. It is a deeply disturbing vision, one that amounts to a huge, uninformed gamble with the future of the American economy – and that suggests that Geithner remains the senior public official worldwide who is most in thrall to the self-serving ideology of big banks. Geithner argues that the world will now experience a major “financial deepening,” owing to growing demand in emerging markets for financial products and services. He is thinking, of course, of “middle-income” countries like India, China, and Brazil. And he is right to emphasize that all have made terrific progress and now offer great opportunities for the rising middle class, which wants to accumulate savings, borrow more easily (for productive investment, home purchases, education, etc), and, more generally, smooth out consumption. But then Geithner takes a leap. He wants US banks to take the lead in these countries’ financial development. His words are worth quoting at length:

How the Servant Became a Predator: Finance’s Five Fatal Flaws - What exactly is the function of the financial sector in our society? Simply this: Its sole function is supplying capital efficiently to aid the real economy. The financial sector is a tool to help those that make real tools, not an end in itself. But five fatal flaws in the financial sector’s current structure have created a monster that drains the real economy, promotes fraud and corruption, threatens democracy, and causes recurrent, intensifying crises.

  • 1. The financial sector harms the real economy.
  • 2. The financial sector produces recurrent, intensifying economic crises here and abroad.
  • 3. The financial sector’s predation is so extraordinary that it now drives the upper one percent of our nation’s income distribution and has driven much of the increase in our grotesque income inequality.
  • 4. The financial sector’s predation and its leading role in committing and aiding and abetting accounting control fraud combine to:
  • 5. The CEOs of the largest financial firms are so powerful that they pose a critical risk to the financial sector, the real economy, and our democracy.

Davidoff on TBTF - Steven Davidoff (a.k.a. "The Deal Professor" on Dealbook) is one of my favorite commentators, but I thought his recent piece on "systemically important" financial institutions was an unusually poor effort. He starts the article with a rather brazen assertion: The Dodd-Frank Act deliberately did not end the era of too-big-to-fail institutions. ... Dodd-Frank instead set up a structure that would let the behemoths live, but they would be caged with a monitoring approach. Too-big-to-fail institutions are to be named and subject to extra regulation. Well, did Dodd-Frank end "too big to fail"? That's a very complicated question, and one which no serious commentator can answer with any degree of certainty right now.

The birds and the bees, and the big banks - Regulators want big, complex banks to hold larger buffers of capital to protect the financial system. Big banks argue this is unnecessary because risk is diversified across their larger balance sheets. Who is right? Natural sciences – especially epidemiology, ecology and genetics – provide clues. Are big banks less prone to failure? The traditional economics of diversification suggest so. By scaling up balance sheets across different classes of asset, risks to portfolios will tend, on average, to cancel each other out. Aggregate balance sheet risk is dampened the bigger the balance sheet. Big banks thus benefit from a law of large numbers.  Complex systems – those found in nature, but also in finance – tell a different tale. Here, scaling up risks may cause them to cascade rather than cancel out. The bigger and more complex the structure, the greater this risk.Why? Because size and complexity increase the chances of cross-contamination of the whole barrel, even if there is only one bad apple. Errors do not cancel; they cascade. There is a flaw of large numbers.

How the financial sector sees technology as its saviour - The new Jeopardy! champ has no legs, only a mechanical arm to press the buzzer. But be afraid. Be very afraid. Watson and his brethren will soon be arriving at a bank near you. Reeling from a crisis that wiped out some of its most lucrative products and a regulatory overhaul that will curb high margin activities, the financial sector sees information technology as its saviour. When, a few months ago, I asked Jes Staley, head of JPMorgan Chase’s investment bank, how his industry would survive in an era of lower returns, he answered with two words: “technology” and “revolution”. Last week, Mr Staley put his servers where his mouth was. Speaking to a roomful of investors, he revealed that JPMorgan was midway through a five-year plan to reduce its foreign exchange trading platforms from 10 to 2 by using more efficient IT systems.The upshot: annual cost savings of $300m by 2014 and the elimination or redeployment of up to 3,000 jobs. What did I say about being afraid?

CBOE to Relaunch Credit Event Binary Options (CEBOs) Contracts on March 8 - Credit Event Binary Options contracts allow investors to express an opinion on whether a company will experience a "credit event" (bankruptcy).   Due to inverse correlations between credit and equity markets, CEBO® contracts can be used as a hedging tool for individual stocks. The contracts also provide the advantages of price transparency available through a regulated exchange, currently unavailable in over-the-counter credit default swaps markets.  A CEBO contract has just two possible outcomes - a payout of a fixed amount if a credit event occurs or nothing if a credit event does not occur. The CBOE, which first began trading single-name and basket Credit Event Binary Options in 2007, recently received SEC approval to amend the Credit Event Binary Options rules.  One change simplifies the terms of a payout for CEBO contracts, allowing CBOE to list CEBO contracts that specify bankruptcy as the only trigger for a payout.

The US Today: What Happens When You Let Investment Bankers Run a Country - If you’re like me, you’ve probably looked at the US recently and wondered what has happened to your country. I’m not talking about the GOP/ Obama situation nor am I referring to capitalism vs. socialism… I’m simply talking about basic common sense items like: stay out of debt, don’t do anything if it doesn’t make sense, do you homework before signing a contract, etc. Indeed, the American government (I’m including the Federal Reserve in this category) began charting a strange course as a country when the Financial Crisis first accelerated with Bear Stearns’ collapse in February ‘08. Granted we’d flirted with government intervention several times before (Chrysler in the ‘70s, Long-Term Capital Management, etc.). But we’ve since taken it to a whole new level. The basic risk of capitalism (failure) has been removed from the equation for most major US businesses. However, this risk was removed at the expense of increasing the US’s debt load and putting the dollar at risk. Pushing to remove risks so you can pursue insane business practices? Crazy deals that offer little benefit to the parties? Doing things quickly without actually considering the consequences? Sounds a lot like investment banking doesn’t it?

Bill Fleckenstein and Dylan Ratigan Discuss Commodities and “Individually Smart, Collectively Stupid” Regulators - This is a particularly crisp and straightforward discussion between money manager Bill Fleckenstein and Dylan Ratigan about central bank actions and commodities inflation. Enjoy!

Transmission Channels - The BIS folks have just released a literature review about the transmission channels between the financial and real sectors of the economy. This is a pretty comprehensive literature review (which also means that it is a tad dry), but there are interesting bits in their identification of gaps in the literature. One of the observations in the paper led me to consider a question: is cash-flow based lending or collateral-based lending more susceptible to systemic risk? Which of them serves as a stronger transmission channel for risk between the financial and real sectors? The answer might point the way to better regulation of the financial industry. As the BIS working group observed, “[b]orrower balance sheet positions (even without defaults and delinquencies) are relevant to the perceived creditworthiness of borrowers, which in turn influences borrowers’ access to credit and their terms on credit, which in turn affects their borrowing and ultimately economic activity.”

Elizabeth Warren’s New Consumer Financial Protection Bureau Opens for Business Amidst great controversy (the Senate really prefers to confirm these things), President Obama last fall appointed Elizabeth Warren to forge ahead with building an independent organization within the Federal Reserve System that will “help empower consumers with the information they need to make financial decisions that are best for them and their families.”  According to the Department of Treasury, the CFPB, which was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act, will work to promote fairness and transparency for mortgages, credit cards, and other consumer financial products and services.  The CFPB will set and enforce clear, consistent rules that allow banks and other consumer financial services providers to compete on a level playing field and that let consumers see clearly the costs and features of products and services.    Fairness and transparency would be great for all of us little guys.  Would it have prevented the financial crisis?  Would people have said “no” to new houses and the stuff they bought with all those credit cards if there had been a “level playing field” and “clear costs and features”?  I wonder. Still, we have to try something, and I do like the early attempts at communicating with the public.  Take a look at the site,  It’s not your father’s government website.  I’ll point out four things I like.

Of Lehman and Goats - As Stephen Lubben has remarked on this blog, the litigation filed by Lehman against JPMorgan regarding JPMorgan’s alleged role in Lehman’s demise is heating up. Late last week, JPMorgan filed a colorful amended counterclaim, citing how Lehman had described the collateral it had given JPMorgan as "goat poo" internally and other things besides. The issue of Lehman’s collateral underlying its funding arrangements is a highly interesting one, not least because it ought to provoke some thought about how far we have come in managing and regulating liquidity risk.Clearly, Lehman, then the fourth-largest investment bank, was playing with fire in trying to fund its daily business activities by putting down “goat poo” as collateral, and not just that, putting the system at risk by doing so. Lehman’s access to liquidity in its last days was highly dependent on its access to secured credit, and when lenders belatedly asked for more and better collateral, fell days later.What have regulators done since then?

US economics: One big Ponzi scheme - Aljazeera - What is clear is that ripping off the rich is punished far more severely than ripping off the poor. The lengthy sentence you were given spared countless other greedsters and goniffs from facing the music - what music there is.In an interview - with a reporter from The New York Times who is writing a book to cash in on a man who has already cashed out - we learn, in the vaguest terms, that Mr M believes the banks he did his crooked business with "should have known" his figures did not figure. Keeping with the deceit that has served him well over the years, he names no names.That said, how right he may be. There were many who should have known and done something about it. The Securities and Exchange Commission (SEC) and other regulators for one. Perhaps The New York Times for another. Remember, it was Madoff's confession to his sons that started him on his way to his new 12' x 12' home from home - in a federal correctional institute, where he may dream of his seized penthouse, homes and yachts - rather than any press expose. For years, he went undetected by business journalists, who knew - or should have known - what he was up to. There are even questions about the speed with which he was sentenced, preventing him from being tried - a process which, through diligent cross-examination, would have brought us more information on the details of his dirty deals.

SEC Expert on Why It is a Wuss at Litigation – Yves Smith - As readers may have noticed, I grumbled over the weekend about the decision by federal prosecutors not to bring charges against Countrywide’s Angelo Mozilo. I attributed it to two causes: extreme deregulation (you can’t prosecute if virtually nothing is a crime) and timid prosecutors. A lively debate arose in comments, with our Richard Kline contending that the real reason no Big Name had been brought to justice is that a trial would make it all too evident that there were plenty of other powerful people who had committed equally heinous acts. Can’t expose how widespread corruption is, now can we? Other readers argued the revolving door issue, which was (in essence) don’t ruffle the law firms that will be your prospective employers. I begged to differ, in that tough, effective prosecutors were magnets for new law school grads precisely because they were great training grounds. Someone who came out of those boot camps would be more valuable than a largely untested staff member at a regulatory agency.  I got this e-mail from someone who has seen the SEC from the inside:

The SEC, Tangled Up in Madoff - How about that Irving Picard? The lawyer trying to recover cash for Bernie Madoff’s victims had the nerve to sue Jamie Dimon’s JPMorgan Chase for $6.4 billion, saying the bank was at the “very center” of Madoff’s fraud and knew—or should have known—what was going on (it’s worth revisiting a New York Times/Il Sole 24 Ore report from early 2009 on JPM yanking its money from Madoff just months before the Ponzi unraveled). Now Picard is going after the SEC’s top lawyer, David M. Becker, to recover $1.5 million in “ill-gotten” gains his late mother made with Madoff. That’s according to a nice New York Daily News scoop this morning. Becker denies knowing anything about his mother’s Madoff money, but it’s another black eye for the SEC, which did its best to look the other way despite repeated warnings that Madoff was operating Ponzi scheme.

A Blank Check For Cleaning Up Madoff’s Mess - Financial frauds tend to follow predictable paths after they are uncovered. At first, there is outrage and a determination to find and punish the villains. But passions fade and investigations run into ambiguities.   Settlements are reached on terms defendants can live with.  But the Bernard L. Madoff fraud is proving to be different, and not just because Mr. Madoff ran by far the largest Ponzi scheme ever encountered. This time those pursuing the investigation have no other case to move on to, and no need to worry about costs. They can spend what they want, with the cost ultimately borne by some of the same Wall Street firms they are suing.  That spending has risen to levels that would be unthinkable if this were a normal case. Through the end of last year, the trustee appointed by the Securities Investor Protection Corporation had spent $228.3 million — and that does not count the money that has gone to victims. Baker Hostetler, the law firm representing the trustee, received most of the money.  SIPC (pronounced SIP-ick), a Congressionally chartered company that finances itself from assessments levied against brokerage industry revenue, estimates that it will spend a further $1.1 billion on the case. That is equal to the entire annual budget of the Securities and Exchange Commission.

Market Ecology - As I have argued on a couple of earlier occasions, the stability of a market depends on the composition of trading strategies, which in turn evolves over time under pressure of differential performance. Since performance itself depends on market stability, and destabilizing strategies prosper most when they are rare, this process can give rise to switching regimes: the market alternates between periods of stability and instability, giving rise to empirical patterns such as fat tails and clustered volatility in asset returns.But the underlying strategies that are at the heart of this evolutionary process are generally unobservable. Since traders have no incentive to reveal successful strategies, these can only be inferred if individual orders can be traced to specific accounts. This is what Kirilenko and his co-authors have been able to do in their paper, on the basis of “audit-trail, transaction-level data for all regular transactions in the June 2010 E-mini S&P 500 futures contract (E-mini) during May 3-6, 2010 between 8:30 a.m. CT and 3:15 p.m. CT.”

NYT’s Joe Nocera Defends Failure to Bring Wall Street Execs to Justice -- Yves Smith  -Aargh, it is frustrating to see how quickly establishment-serving shallow arguments become conventional wisdom. We get a big dose of this line of thinking from the New York Times’ Joe Nocera in an article titled, “Biggest Fish Face Little Risk of Being Caught.” Now you can’t disagree with the conclusion: no major banking industry figure is going to be brought to justice. But the explanation he offers is incomplete and misleading, and serves to misdirect the public from more fundamental and more troubling causes. At the start of the piece, Nocera recounts some of the unsavory acts of Countrywide’s Angelo Mozilo, and mentions in passing two other prime suspects, AIG’s Joe Cassano and Lehman’s Richard Fuld. Then he points to the decisions not to pursue criminal prosecutions of Mozilo and Cassano, and recites oft-repeated arguments. First, it’s too costly. The S&L crisis required a huge commitment of resources by the FBI, that ain’t happening now. Second, it’s too hard. Look at how the prosecution of two hedge fund managers at Bear Stearns failed. Third, the top brass has successfully insulated itself from the really bad actions at their firms.

Covenant-lite: The default crisis that never happened. Will it now? - When most of us think about the credit bubble that burst in 2008, we think about the lax terms of mortgage loans. But many corporations, particularly those that were bought out by private equity firms, also got debt on lax terms. This debt was known as "covenant-lite," because the normal terms of corporate credit—such as a requirement that a company, say, maintain a certain level of profits—were waived by deal-hungry lenders. After it all went pop, banks regretted the cov-lite loans almost as much as mortgage originators regretted their "no documentation" loans to home buyers. Cov-lite loans plunged in price. At his retirement dinner in May 2007, Anthony Bolton, Fidelity's investment guru, said, "Covenant-lite borrowing … will come back at some stage to haunt the banks." Indeed, Goldman Sachs and other big firms took massive losses when they sold or marked down the price of the bonds they were stuck holding. One person involved in negotiating these deals says his banking clients swore, "Never again."  But less than three years later, cov-lite loans are back. "With a vengeance," Has the world of finance gone insane? Not necessarily. The return of cov-lite loans makes a certain sense in the current financial environment. But I find myself wondering what that says about the current financial environment.

The Most Dangerous Union in the World,- Several commentators have remarked about the sudden outbreak of class struggle in the United States. I see the brutal behavior of the state and federal governments as an indication of the failure of class struggle.Using its almost unlimited source of funding, wealthy businesspeople and corporations began to create a solid network of organizations to remake the country by undoing the gains made during the and New Deal, and even emulating the political landscape of the late 19th century. The Cato Foundation, the Heritage Foundation, right wing legal offices, and a host of other activist operations led a systematic assault on anything and anybody who seem to know represent a barrier to profit maximization.This movement was extraordinarily successful, so much so that they even co-opted the Democratic Party, which had previously offered a meek resistance to business demands. Private-sector unions became virtually powerless on the national scene. In this environment, jobs disappeared. Disappointed union members would be vulnerable to the relative prosperity of public sector workers, who had pensions and medical coverage. Similarly, people who had lost their pensions to fraudulent banking schemes often became more upset with the relatively comfortable conditions of public sector workers.  One union stood out by its successes. It is not generally called a union, but so long as we can abuse reality by calling corporations people, we can call the Chamber of Commerce a union. This union is so powerful that the present United States must come before it as a humble supplicant. This union was at the forefront of the deconstruction of the New Deal.

JP Morgan Rakes in Profits from U. S. Food Stamp Program -  JP Morgan is handsomely profiting from the food stamp program in this country--and is looking forward to keeping things that way. Their projection numbers are lookin' really, really good!  Let that sink in a bit. JP Morgan is profiting from people on food stamps. According to company exec Christopher Paton, with a record high 37 million people now on food stamps, that's an increase of 40% over the past two years. High five, JP Morgan investors!! According to JP Morgan is the largest processor of food stamp benefits in the United States. JP Morgan has contracted to provide food stamp debit cards in 26 U.S. states and the District of Columbia. JP Morgan is paid for each case that it handles, so that means that the more Americans that go on food stamps, the more profits JP Morgan makes. Yes, you read that correctly. When the number of Americans on food stamps goes up, JP Morgan makes more money.

BlackRock Buys 25% Stake in Ex-Treasury Aide’s Bank Venture -- BlackRock Inc., the world’s biggest money manager, acquired a 25 percent stake in a community banking cooperative started by Lee Sachs, a former aide to Treasury Secretary Timothy Geithner. Terms weren’t disclosed.  Alliance Partners, based in Chevy Chase, Maryland, has assembled a cooperative network of banks called BancAlliance, the company said in a statement. BancAlliance seeks to provide its members with more lending opportunities to reduce their reliance on real estate loans and assets.  Sachs last month started Alliance Partners, aimed at helping smaller regional banks lend to a wider base of borrowers. Lenders that join BancAlliance’s network will be able to elect the partnership’s board of directors.

Troubled banks rise to highest level in 18 years - The number of banks at risk of failing made up nearly 12 percent of all federally insured banks in the final three months of 2010, the highest level in 18 years. The Federal Deposit Insurance Corp said Wednesday that the number of banks on its confidential "problem" list rose to 884 in the October-December quarter, up from 860 in the previous quarter. Those are banks rated by examiners as having very low capital cushions against risk. Twenty-two banks have failed so far this year. And more banks are at risk, even as the FDIC reported the industry's highest earnings as a group since the financial crisis hit three years ago. Only a small fraction of the 7,657 federally insured banks -- about 1.4 percent with assets of more than $10 billion -- are driving the bulk of the earnings growth. They are the largest banks, including Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. The big banks accounted for about $20.6 billion of the industry earnings of $21.7 billion in the fourth quarter.

Bank Branch Closings Tilt Toward Poorer Areas - In 2010, for the first time in 15 years, more bank branches closed than opened across the United States. An analysis of government data shows, however, that even as banks shut branches in poorer areas, they continued to expand in wealthier ones, despite decades of government regulations requiring financial institutions to meet the credit needs of poor and middle-class neighborhoods.  The number of bank branches fell to 98,517 in 2010, from 99,550 the previous year, a loss of nearly 1,000 locations, according to data compiled by the Federal Deposit Insurance Corporation.

Bonuses on Wall Street Declined 8% in 2010, N.Y.'s DiNapoli Says…Cash bonuses on Wall Street declined 8 percent last year as financial firms raised base salaries and deferred some earnings, according to New York State Comptroller Thomas DiNapoli.  Financial companies disbursed $20.8 billion in 2010, compared with $22.5 billion a year earlier, DiNapoli’s office calculated in a report based on personal income-tax collections. It doesn’t include stock options or other types of deferred pay. The average Wall Street employee took home a cash bonus of $128,530 in 2010, a drop of 9 percent that was greater than the total decline because the pool was shared among more workers. New York City’s securities industry added 3,600 people from August to December, the report said. The size of the bonus pool has shifted as more firms pay a larger percentage in stock and deferred compensation.

Another Reminder That Crime Pays: No Charges Filed Against Countrywide’s Mozilo -- Yves Smith - The New York Times’ Gretchen Morgenson dutifully tells us, based on a Los Angeles Times sighting, that federal prosecutors will not be filing charges against the Tanned One, Angelo Mozilo of Countrywide. This follows the failure of investigations to lead to a criminal prosecution of another major perp in the financial crisis, one Joseph Cassano, the head of AIG’s Financial Products unit.  There has been far too little discussion of why no legal action has been taken.Readers can no doubt come up with additional reasons, but I see at least two. The first is that the deregulation of financial services in the 1980s and 1990s, along with some very questionable court decisions (as in ones that reversed decades of precedents), have rendered many activities that would have been impermissible perfectly kosher. Yet the very fact that that people who oversaw businesses that were clearly engaged in reckless behavior and at a minimum serious omissions and misrepresentations to investors have gotten off scott free.

BofA Doubles Writedown for Credit-Card Unit to $20.3 Billion -- Bank of America Corp., the biggest U.S. lender by assets, almost doubled a goodwill impairment for its credit-card unit to $20.3 billion to reflect increased defaults and an almost two-year-old change in rules.  The bank restated federal regulatory filings to record the writedown to its FIA Card Services unit in 2009’s first half, the firm said yesterday in a statement. The non-cash charge, which replaced a $10.4 billion impairment booked on the unit last year, doesn’t affect “the financial results, safety and soundness or the capital position” of the Charlotte, North Carolina-based parent company, said Robert Stickler, a spokesman.  The writedown shows the credit-card unit’s prospects may have deteriorated more than initially disclosed after the U.S. passed legislation, known as the Card Act, in May 2009 to curb fees and interest-rate increases. In November, the bank said some measures would cut annual revenue by $1 billion, undermining efforts by Chief Executive Officer Brian T. Moynihan, 51, to improve returns for investors. The firm yesterday said the act and “deteriorating credit quality” caused the revision.

Unofficial Problem Bank list increases to 960 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Feb 25, 2011. Changes and comments from surferdude808:  As anticipated, the FDIC released its enforcement actions for January 2011, which contributed to many changes for the Unofficial Problem Bank List. This week, there are three removals and 12 additions leaving the Unofficial Problem Bank List at 960 institutions. The net changes added $8.9 billion in assets, which is the largest weekly asset increase since June 18, 2010 when $19 billion was added. The average net weekly change has been about seven additions and $1.7 billion in assets. However, the aggregate assets on the list declined this week by $4.7 billion to $413.8 billion from $418.9 billion as 2010q3 financials were replaced by year-end figures. Positively, the change in financials caused a $13.6 billion decline in assets.

Moody's finds commercial real estate eluding recovery - After three consecutive months of increases, commercial real estate prices fell 0.9% in December, according to Moody's Investors Service. This up and down activity is leading analysts to say any recovery in the space is hard to pin down. According to the latest commercial property price index from the rating agency, prices at the end of December slumped 42.1% below their peak hit in October 2007. Prices throughout last year also fell 2.1% compared a year earlier. Moody's Managing Director Nick Levidy said although prices in the commercial space haven't properly recovered, economic indicators point toward positive growth. "A robust, broad-based recovery in commercial real estate prices has remained elusive, although some major markets, particularly capital-attracting gateway cities, continue to show signs of strength," Levidy commented. "However, we expect that an improving macro economy will mean fewer distressed sales as a percent of overall sales and higher transaction volumes, resulting in the emergence of positive market trends without the degree of choppiness seen in the index over the last year."

The financial disaster of continuing to bailout commercial real estate through the shadows of Federal Reserve jargon. Why you haven’t heard of this trillion dollar bailout.- The media has done a fantastic job painting over the enormous sinkhole of a problem that is commercial real estate (CRE).  U.S. banks hold over $3 trillion in commercial real estate loans on properties that were once valued at over $6 trillion.  Today those values are down to roughly $3 to $3.5 trillion depending on what metric you believe.  How is it possible for a market that has lost $2.5 to $3 trillion to become largely hidden in the dark from the mainstream media?  We constantly hear about $3 billion deficits or other issues but is the trillion dollar figure just so enormous that they don’t even bother investigating?  It is probably more likely that the Federal Reserve has concealed massive failures in CRE by allowing banks to play a game of extend and pretend that continues today.  The shadowy problems of empty shopping centers, vacant car dealership lots, and misplaced strip malls is largely a taxpayer problem now.  Banks made these irresponsible loans but had the Fed hand over taxpayer loot in exchange for worthless real estate.

In China, Another Bout of Fannie-Freddie Fear - When the U.S. government recently announced plans to wind down its monolithic mortgage institutions Fannie Mae and Freddie Mac, fresh shock waves rippled through some of China's largest, state-backed foreign investors. And for good reason: Fannie and Freddie owe hundreds of billions of dollars – about US$ 454 billion combined as of June 2009 – to a wide range of Chinese investors, including the central government's State Administration of Foreign Exchange (SAFE) and some of the country's largest banks. For years, these U.S. government-backed pillars of the American mortgage industry served as a symbolic backbone for China's foreign holdings. They also offered relatively solid yields with little or no risk.At the same time, though, China's institutional support of Fannie and Freddie drew criticism in some domestic circles. And big investors including SAFE have had to endure shock waves and even panic since a 2008 global financial crunch dramatically altered U.S. markets for housing and mortgage-backed securities.

Freddie Mac reports smaller loss, Expects falling house prices, Requests $500 Million from Treasury - From Freddie Mac: Freddie Mac Fourth Quarter 2010 Financial Results - Freddie Mac today reported a net loss of $113 million for the quarter ended December 31, 2010, compared to a net loss of $2.5 billion for the quarter ended September 30, 2010. For the full-year 2010, the company reported a net loss of $14.0 billion, compared to a net loss of $21.6 billion for the full-year 2009. The FHFA as Conservator, will submit a $500 million draw request to Treasury .“As we begin 2011, the housing recovery remains vulnerable to high levels of unemployment, delinquencies and foreclosures,” [Freddie Mac Chief Executive Officer Charles E. Haldeman, Jr.] said. “Nevertheless, certain economic indicators showed improvement in late 2010. While this trend offers some encouragement, we expect national home prices to decline this year as housing will continue to take some time to recover." Freddie Mac reported that REO inventory was at 72,079 at the end of Q4, up 60% from Q4 2009 (45,047), but down slightly from Q3 2010.

Fannie, Freddie, FHA combined REO Inventory at Record Level - The combined REO (Real Estate Owned) inventory for Fannie, Freddie and the FHA increased to a record 295,307 units at the end of Q4, although REO inventory decreased slightly for both Fannie Mae and Freddie Mac in Q4 (compared to Q3). The REO inventory increased 71% compared to Q4 2009 (year-over-year comparison). This graph shows the REO inventory for Fannie, Freddie and FHA through Q4 2010. The REO inventory for the "Fs" has increased sharply over the last year, from 172,368 at the end of 2009 to a record 295,307 at the end of 2010. From Fannie Mae: Fannie Mae Reports Fourth-Quarter and Full-Year 2010 Results Given the large number of seriously delinquent loans in our single-family guaranty book of business and the large current and anticipated supply of single-family homes in the market, we expect it will take years before our REO inventory approaches pre-2008 levels. Also, this is just a portion of the total REO inventory. Private label securities and banks and thrifts also hold a substantial number of REOs.

Mortgage Deal Takes Shape - The Obama administration is trying to push through a settlement over mortgage-servicing breakdowns that could force America's largest banks to pay for reductions in loan principal worth billions of dollars. Terms of the administration's proposal include a commitment from mortgage servicers to reduce the loan balances of troubled borrowers who owe more than their homes are worth, people familiar with the matter said. The cost of those writedowns won't be borne by investors who purchased mortgage-backed securities, these people said.  If a unified settlement can be reached, some state attorneys general and federal agencies are pushing for banks to pay more than $20 billion in civil fines or to fund a comparable amount of loan modifications for distressed borrowers, these people said.

Mortgage Fraud Whitewash: $20 Billion “Get Out of Jail Free” Settlement Floated - Yves Smith  - American leadership is reliable in one respect: it consistently undershoots my already low expectations.  Or maybe I have it backwards because I keep forgetting who the authorities are really serving, and it clearly isn’t you and me. As we will discuss below, the latest scam is that the banking regulators are finalizing a mortgage “breakdown” settlement, and they’ve evidently decided to let the industry off the hook for a mere $20 billion. Most observers, yours truly included, had expected very little from the multi-regulator “foreclosure task force” announced last year. It was clearly designed to be an even more cosmetic exercise than the stress test charade, which does take a certain amount of brazenness (or more likely, confidence in the public’s inability to follow the three card monte). But a bad situation devolved; the Treasury had appeared to be in charge, and that department at least tries to put a minimum level of professional spit and polish into its charades. When OCC acting chair and chief bank enabler John Walsh got up to speak in an official capacity about the process in last week’s Senate Banking Committee hearings, it was evident there was not even going to be an effort to pretend that this was a serious undertaking. Even so, the mortgage “settlement” trial balloon floated in the Wall Street Journal this evening is an offense to common sense and decency. Notice how the word “fraud” is pretty much verboten in the MSM; the latest code word for what went awry is “breakdown”. This implies a benign sort of neglect, simply of not doing sufficient maintenance which led fussy machinery to quit working. It is mean to avoid contemplating, let along uncovering, Pinto-type decisions of weighing the costs of making the vehicle safer versus the litigation losses resulting from incineration by exploding gas tanks.

Banks Pushing Back Hard on Inadequate Mortgage “Settlement” Trial Balloon - Yves Smith - No sooner have the preliminary outlines of an inadequate settlement of mortgage servicing abuses been leaked, but the banking industry is engaged in a full court press to stop it. The astonishing part is that the banking industry continues to maintain that it really didn’t do anything wrong, all it did was make some technical errors. That so grossly understates the degree of its recklessness and malfeasance as to be beyond relief. It’s no surprise that the so-called Foreclosure Task Force which spent a mere eight weeks reviewing servicer activities and didn’t find much. The timeframe of its exam assured that it would not verify servicer records and accounts against borrower experience and records. It is almost certain that they also did not look at how servicer software credited payments and charges, when there is widespread evidence of violations of agreements with borrowers and RESPA.  And to the extent they looked at “improprieties” in foreclosure documents, it’s a given that they did not go beyond robosigning, when that is arguably the least significant form of malfeasance. There is ample evidence of fraud to cover for the failure to convey notes to securitization trusts, ranging from the misuse of lost note affidavits to document fabrication (bogus allonges being the most common fix).

3 Banks Warn of Big Penalties in Mortgage Inquiries - Several big banks warned investors on Friday that they could face sizable financial penalties as a result of state and federal investigations into abusive mortgage practices. The state and federal inquiries “could result in material fines, penalties, equitable remedies (including requiring default servicing or other process changes), or other enforcement actions, and result in significant legal costs,” Bank of America said. Wells Fargo said in its filing that it was “likely that one or more of the government agencies will initiate some type of enforcement action,” including possible “civil money penalties.” Citigroup acknowledged that federal and state regulators were investigating its foreclosure processes, which could result in increased expenses, fines and other legal remedies .

Don't Believe Everything You Read: The Real Skinny on Servicer Settlement Talks - Bank regulators, law enforcement and various other federal and state officials continue to negotiate the proper punishment for more than a dozen large servicers that have mistreated mortgage borrowers. While some reports claim an agreement is imminent — along with an enormous $20 billion fine — the truth is nothing is yet set in stone, and the situation is changing daily. We offer the following frequently asked questions to help sort fact from hyperbole. Regulators have not agreed on a dollar figure, and $20 billion is in the words of one source involved in the negotiations "a crazy figure." Some banking regulators are arguing against an amount that high; it seems the big force behind a huge number is the Consumer Financial Protection Bureau and the state attorneys general.A monetary penalty will no doubt be levied, but government officials disagree over what the fine should cover. Bank regulators see it as a penalty for being sloppy while other officials see the money as a way to repay wronged borrowers. On Thursday, regulators on both sides said an agreement has not been met.

Sanctimonious Wells Fargo ‘Fesses Up That it Will Probably Pay Fines in Enforcement Actions - Yves Smith  - Although banks are having to pay fines or make settlements now and again that are grossly inadequate relative to the damage they’ve inflicted on consumers and communities, I thought I’d single out this example. The reason is simple. Wells Fargo has annoyingly tried to maintain that it is as pure as the driven snow, and has gone as making easily proven misrepresentations in meetings with Congressional staffers in doing so (which makes one wonder how much truth-stretching it has engaged in in communications with investors). So I must confess to a bit of schadenfreude in reading this Bloomberg story: “It is likely that one or more of the government agencies will initiate some type of enforcement action against Wells Fargo, which may include civil money penalties,” the San Francisco-based lender said in its annual report. “Although the story also mentioned the rumored $20 billion settlement with bank servicers, the language of this disclosure does not necessarily mean that Wells is talking about the same matter (you would probably not call something a “penalty” if it was the result of a settlement.

How to end housing mess - Today, about one home in three carries a mortgage worth more than the underlying property, and some 7 million homeowners are at risk of foreclosure. The banking system is reeling under the weight of non-performing loans and depressed mortgage-backed securities. To complicate the mess, during the bubble phase when lenders were on steroids, many banks neglected to do the paperwork properly. When a note (the promise to pay) or lien (the right to take the house if the loan defaults) is sold to a third party, the transfer must be fully documented. But adrenalized banks got careless with paperwork as they sold off the loans. Today it’s not clear who, if anyone, has the right to foreclose. More and more foreclosures are tied up in court, and the average duration of a foreclosure case is now close to two years. All of this adds up to a horrible downward spiral. But it’s not as if we are without solutions. For starters, we could use a true refinancing program that reduces principal and interest owed, so that homeowners who took out mortgages in good faith could afford to keep their homes. The banks would take a financial hit, but they will take one anyway. It’s better to get it over with, and stabilize housing prices.

MERS Knew of Their Own Foreclosure Defects in 2006 - Evidence shows that as far back as 2006, Mortgage Electronic Registration System (“MERS”) knew the legality regarding foreclosures was at best tenuous. As you can see, the First American Agent Bulletin memo informed agents and lawyers that MERS. I posted the full memo in the Think Tank, but the short version is:

    • •  MERs admits it is not the Owner & Holder of the Note
    • • The Note must be in members’ possession to foreclose in MERs name
    • • Members could not conduct foreclosures in the name of MERS in Florida.

MERS Endgame Nearing? One County Seeks Over $22 Million for Unpaid Recording Fees - Yves Smith - MERS has repeatedly insisted that its operations are legal. It would be more accurate to say that insufficient attention was paid to legal issues when the firm was created and the permissibility of its operations were under the radar and hence in a legal grey area for many years. Now that they have been challenged in court, MERS has had to retreat from many positions it took in public. Despite its protestations that everything it did was kosher, the database firm has now retreated from one of its widespread practices, of allowing foreclosures to be made in the name of MERS, after a number of state supreme courts and Federal bankruptcy courts issued rulings to the contrary.  Not surprisingly, MERS has the look of a company in trouble. Not only did its president R.K. Arnold resign in early January, but its corporate secretary, Bill Hultman, who among other things supervised its legal department, was demoted a few days ago. Having read a few of Arnold’s and Hultman’s evasive and damaging depositions, I have to wonder where the board has been all these years. This move is long overdue. The week before, MERS suffered a major blow in a bankruptcy (Federal) court ruling in New York state, (in Re Ferrel R. Agard). The judge effectively found the MERS system to be evidence of…..precisely nothing. We’ve noted before the numerous flaws, troubling signs of a lack of standard database/data entry/data integrity protocols. Updating the records is strictly voluntary, and accuracy of changes to the database is the members’ responsibility. Given that the people who have access to the system are low level staff who are trained minimally if at all and subject to high levels of turnover, this “system” is a prescription for a record keeping mess

Daniel Pennell: MERS Counsel Calls Me - Given that I am a vocal MERS critic, though testimony I have given, opinion pieces I have written and the work on legislation I have done over the last year decrying the legal standing and operational sloppiness of MERS, I was more than a little taken aback to get a call from Richard Anderson of the MERS legal team yesterday. Our conversation cast some light on the thinking and culture of MERS as it fights for its life against a barrage of legal challenges.Mr. Anderson was in fact calling in response to an email I had sent to MERS last week (see below) asking how MERS intended to manage its response to the Agard case in N.Y. where judge Grossman clearly said (or in Mr. Anderson’s words “opined from the bench”) that MERS did not have the legal standing to assign mortgages. Our conversation covered three areas of interest to those of us who have followed the foreclosure crisis and MERS saga, the effect of the Agard case, the MERS announced changes to their membership agreements and the ongoing OCC investigation. As regards the Agard case in N.Y, Mr. Anderson first pointed out that MERS has 300 plus cases that support its legal position. He then went on to tell me that Judge Grossman did not understand or chose to ignore the laws of N.Y. and that his comments regarding MERS were nothing more than his “opining from the bench” and therefore had no legal relevance and because it was nothing more than an “opining” that there was nothing for MERS to appeal.When I pointed out that the MERS announced changes to its membership agreements that followed so quickly on the heels of the Agard decision seemed to align almost exactly with the comments made by Judge Grossman, Mr. Anderson said that it was just a “coincidence of timing” and that the changes were just intended to avoid any potential legal issues and to improve and secure the MERS business process. It’s interesting in light of Mr. Anderson’s remarks that a Naked Capitalism reader reported yesterday that banks have been settling cases where MERS is at risk of getting an unfavorable judgment. As he wrote:

 More on the Mortgage Mess - As our banking giants engaged more and more in speculation, and as the shadow banking system saw a way to make money off of people's bad financial decisions by betting against subprime loans, the financial crisis took off.  So redressing the problems that caused the crisis shouldn't overlook mortgages. The Treasury has now come out with a "plan" for addressing the government sponsored enterprises Fannie and Freddie, which played a role in the crisis though were not the drivers of the subprime origination mess.  The plan, Reforming America's Housing Finance Market: A Report to Congress (Treasury and Housing and Urban Development, Feb. 2011), claims that it will "reform America's housing finance market to better serve families and function more safely in a world that has changed dramatically."  It also claims that it is intended to limit the government's primary role to "robust oversight and consumer protection, targeted assistance for low-and moderate-income homeowners and renters, and carefully designed support for market stability and crisis response." Both of those claims are worrisome.  First, the alternatives proposed seem better designed to serve the financial services industry than famililes.  Not only is there still no provision for mortgage modification in bankruptcy, but securitization is intended to "continue to play a major role in housing finance", even though the securitization process has brought a nightmare of foreclosure mills and uncertainties about who owns debt and has the right to foreclose.

Arizona Bill Would Void Foreclosures Without Full Title History… Arizona may become the first state to require lenders to prove they have the right to foreclose by providing a complete list of any previous owners of the mortgage, under a bill passed yesterday by its Senate.  The legislation, which is headed to the House after being approved 28-2 in the Republican-dominated Senate, would allow foreclosure sales to be voided if lenders that didn’t originate the loan can’t produce the full chain of title. Arizona permits nonjudicial foreclosures, meaning property can be seized from the homeowner without a court order.  Lawmakers in states including New York, Oregon and Virginia also have proposed legislation to address concerns among consumer advocates that lenders or mortgage servicers are using incomplete or false paperwork to repossess properties in default. The attorneys general of all 50 states are jointly investigating how the mortgage-servicing industry operates.  “If you foreclose on somebody you should have to tell them who owns the property,

Bankers Apoplectic Over Arizona’s Republican Dominated Senate Passing Chain of Title Bill, 28-2 - Frankly, I don’t know where to begin. There’s just so much to say. It’s like a cornucopia of… well, lots of stuff to say. Bankers everywhere must be walking in circles, muttering to themselves, perhaps breaking out in hives. And I have to imagine that banking industry lobbyists are in some kind of trouble with their masters today, with phones being slammed down after CEOs have screamed:  You see, the Arizona State Senate has passed Senate Bill 1259, sponsored by Michele Reagan, which would require the lenders that didn’t originate a loan to produce the full chain of title, or risk the foreclosure sale being voided. The bill now goes to the House for a vote, but with the Senate having passed it by an overwhelming margin of 28-2, it would seem that its passage is a fait accompli.

How to Foreclose on Your Bank - Yves Smith - Various Philadelphia media outlets have told the tale of one Patrick Rogers, who was increasingly unhappy over his inability to get satisfaction from Wells Fargo over fees related to his mortgage, and initiated foreclosure proceedings as a way to get their attention.Now how exactly could he do that? And is his action a possible template for other frustrated homeowners? Rogers had a legitimate beef. The California bank had doubled his insurance costs, putting him in a policy that had him carrying $1 million of insurance on a property he bought for $180,000 in 2002. Note that this looks an awful lot like a forced place insurance scam; servicers find creative ways to overcharge for insurance and then get kickbacks. When the bank refused to answer questions about the charges, including ones sent in writing, Rogers looked into ways to force the bank to respond. As the Consumerist explains: Patrick boned up and learned about a law called the Real Estate Settlement Procedures Act (RESPA). The law was enacted to safeguard homebuyers from anti-competitive and collusive behavior among the companies and agents involved with buying and selling real estate. One of the protections involves the “Qualified Written Request,” or QWR.

Problem: Paying off mortgage results in default - Nancy Schweitzer pays for her cars in cash, has never been late on a payment, and waited until she was 55 to buy her first house. By then, she had saved enough to pay off half the mortgage. It was with great pride that she paid off her mortgage in November, 24 years early. The monthly payments, she said, were leaving her too little spending money. With the mortgage gone, she would also avoid decades of interest payments. Her lender, Bank of America, had given her the payoff amount and reminded her she also had money in her escrow account for taxes. The Bank of America representative told her not to worry — when she paid off the mortgage, the $2,776.13 in escrow would be applied to the principal. On Nov. 13, Schweitzer went to her bank and obtained a cashier's check for $61,385.44 which, combined with the escrow money, equaled the $64,161.57 payoff. A month later, Schweitzer became concerned when she hadn't received any documents that showed she owned her house free and clear. A subsequent mailing told Schweitzer her loan was in default. Supposedly, she owed $63,999.26. To add insult to injury, Bank of America began tacking on late charges and fees. The final straw, she said, was when Bank of America notified the credit agencies that she was in default.

MBA panel: Tread carefully when going after strategic defaulters - While it is no easy feat to determine if a homeowner defaulting on a mortgage is a strategic defaulter, it’s also no simple decision for servicers to decide whether to pursue a deficiency judgment against the homeowner. Panelists on a strategic default session at the Mortgage Bankers Association’s National Mortgage Servicing Conference & Expo warned the audience to tread carefully. Howard Crane, managing attorney for Fein, Such and Crane in New York, said the more financial information that a servicer has, the better equipped the company will be to determine whether it should seek a deficiency judgment — and whether it might be successful. Servicers will also have to prove — or assert — the fair market value of the property, depending on the state, to pursue a deficiency judgment, he said. This can become a battle of appraisals in the courtroom, and servicers will need to be sure they hire an appraiser who has the ability to testify successfully on the witness stand, Crane said.

Survey: Sales of Distressed Homes increased in January - From Campbell/Inside Mortgage Finance HousingPulse: HousingPulse Distressed Property Index Hits 49.6% in January Perhaps the biggest news in the January data was a sharp rise in the HousingPulse Distressed Property Index or DPI, a key indicator of the health of the housing market. The DPI, or share of total transactions involving distressed properties, climbed from 47.2% in December to 49.6% in January. The increase was a continuation of a trend as the DPI registered just 44.5% back in November....Already, in the key state of California, distressed property transactions account for 66% of the market. In Florida, distressed property transactions account for 63% of the market. And in the combined area of Arizona and Nevada, distressed property transactions are a stunning 72% of home sales.This fits with other recent reports suggesting the percent of distressed sales was very high in January.

The “Curse of Negative Equity” We will be discussing the impact of negative equity for years. The Miami Herald has an anecdote: The curse of negative home equity Wesley Ulloa bought her first condo for $230,000 in 2007, and watched helplessly as it lost two-thirds of its value [to about $80,000 today] ... She’s one of hundreds of thousands of South Floridians coping with the reality of being underwater on their mortgages—one of the most widespread side effects of the real estate market collapse.  “I get a little angry. I think ‘Man I bought this for $230,000 and for what I’m paying, I could be in a house’,” she said. The choices are to tough it out, try for a modification or short sale, or just default. All bad choices - and this will limit her choices in the future too. "More than 300,000 South Florida mortgages—or 43 percent of them—are currently underwater ..." That percentage comes from CoreLogic's Q3 2010 negative equity report (Q4 will be released in a few weeks). This graph shows the break down of equity by state (for home with a mortgage). Florida is bad, but Nevada and Arizona are in worse shape. And with house prices falling again, the number of homeowners with negative increase some more (depending on the number of modifications and foreclosures).

Homeownership loses its luster - Skittish after seeing home prices crater and eager to put money aside for a retirement that won't include pensions, working-age people are increasingly skeptical about buying a home.Surveys tend to support the premise. Two-thirds of Americans still see a home purchase as a safe investment, but that's down from 83% in 2003, according to a study by Fannie Mae. Homeownership has fallen to 66.5% of the adult population, down from down 69.2% in 2004. A Harris Interactive polls says 70% of Americans aspire to homeownership, down from 77% a year ago.The economic downturn and stricter mortgage standards are driving much of that decline, but economists say there's also a growing belief among many that they can live better by renting rather than straining their finances to buy a house. Adding to that is a sense among many younger adults that they will need to move for their careers, making them hesitant to buy lest they be forced to sell at a loss.

Moving away from homeownership - After I appeared on All Things Considered this weekend, I got an incredibly gratifying email from a listener in McLean, Virginia, who’s moving to Jupiter, Florida: You were talking about the fact that taking your money out of one house and putting it into another means you’re still stuck in one place – just a different one – and trapped into an economic nightmare in which you work and work just to sustain a lifestyle you’ve faked yourself into because you now own a house. You’re so right, and something else that struck me was that I’ll never have cash to do the kinds of things I enjoy – It’s easy to glorify the wonders of homeownership because of all the psychological reasons for wanting it — the place to call one’s own, the nesting instinct, the desire for stability, the feeling that it’s silly to put lots of work and love into a place if it ultimately just ends up benefiting the landlord. But at the same time, the downside of homeownership can be truly enormous and devastating, and renting carries with it a very American sense of freedom, I think, and a world of opportunities.

FHA: REO inventory up 47% over last year - The FHA released the December Monthly Report today. The report shows the FHA REO inventory was at 60,739 at the end of December, up 9.5% from 55,488 in November, and up 47.5% from December 2009. The combined REO inventory for the "Fs" (Fannie, Freddie and FHA) was at a record 293,171 at the end of Q3 2010. Fannie and Freddie will report for Q4 soon, and based on the increase at the FHA, REO inventory will be well over 300,000 at year end.Here is the graph of Fannie, Freddie and FHA inventory over the last three years through Q3 2010.

Total REO: Private Label, Banks, and "Fs" - Yesterday I noted that the combined REO (Real Estate Owned) inventory for Fannie, Freddie and the FHA increased 71% compared to Q4 2009 (year-over-year comparison). As I noted, this is just a portion of the total REO inventory. Private label securities and banks and thrifts also hold a substantial number of REOs.  This graph from economist Tom Lawler shows an estimate of all the REO inventory. Lawler writes:  Based on the FDIC’s QBP report, as well as preliminary data on REO for private-label securities (using Barclay’s Capital data, as I don’t have data from my other source yet), REO inventory at “the F’s,” FDIC-insured institutions, and PLS would look as follows [see graph] From CR: REO inventory is still below the levels in 2008 - but not much - and that was when prices were falling quickly. I think the various lenders are a little more careful disposing of REOs now, but the level of REOs suggest downward house price pressure. The 2nd graph (repeated from yesterday) just shows the REO inventory for Fannie, Freddie and FHA through Q4 2010.

Land Scandal Community Education: Ideas Toward An Outline - A few days ago I broached the idea of community lectures on the Land Scandal, to describe it in detail and placing it in the broad context of Wall Street’s crimes, the Bailout, and the destruction of democracy and the real economy. These lectures could be for the benefit of mortgage holders, the community at large, and local governments. I haven’t yet worked out the exact details for such a presentation, and since I’m not a tech guy I don’t personally know how to give it the whole powerpoint-type treatment, although I assume that would be more effective. I’ve compiled hundreds of links on every aspect of the subject, mostly from Naked Capitalism. I’ve been in the process of arranging them by subject and chronology as if into a book. (There’s also the many posts I’ve written on the subject.) My basic idea would be to distill an accessible, popularized presentation from all this material. It should be comprehensive and easy to understand. The lecturer must also master sufficient detail to be able to answer most questions. We’d have to try to anticipate what the most common questions (both sincere and phony/hostile) would be. Looking at comment threads, perhaps at MSM outlets, seems like the obvious place to do such research.

Case-Shiller: National Home Prices Are Close to the 2009Q1 Trough - The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000). The Composite 10 index is off 31.2% from the peak, and down 0.4% in December(SA). The Composite 10 is still 2.4% above the May 2009 post-bubble bottom. The Composite 20 index is also off 31.2% from the peak, and down 0.4% in December (SA). The Composite 20 is only 0.8% above the May 2009 post-bubble bottom and will probably be at a new post-bubble low in January. The second graph shows the Year over year change in both indices. The Composite 10 SA is down 1.2% compared to December 2009.  The Composite 20 SA is down 2.4% compared to December 2009.  The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.  Prices increased (SA) in only 7 of the 20 Case-Shiller cities in December seasonally adjusted. Prices in Las Vegas are off 58% from the peak, and prices in Dallas only off 8% from the peak.Prices are now falling just about everywhere, and more cities are hitting new post-bubble lows. Both composite indices are still slightly above the post-bubble low, but the indexes will probably be at new lows in early 2011.

The median price of home sales fell 3.7% from last year to $158,800, the lowest since April 2002 - Sales of existing homes rose a seasonally-adjusted 2.7% in January for the fifth monthly rise in six, a trade group said Wednesday as it also announced a major review into the quality of its data. The National Association of Realtors said sales of existing homes were at a seasonally-adjusted annualized rate of 5.36 million from a downwardly revised 5.22 million in December. Economists polled by MarketWatch expected a 5.22 million pace for January. On a year-over-year basis, sales rose 5.3%, and activity is now above the level when a now-expired tax credit existed. The realtors group also, as planned, revised monthly figures from 2008 to 2010 ahead of a bigger review that's due in the summer. The trade group's data has been called overstated by as much as 20% though the NAR's chief economist said he hoped the revision would be in "single digits." The median price of home sales - which weren't affected by this revision and aren't expected to be by the summer review - fell 3.7% from last year to $158,800, the lowest since April 2002.

Home Prices Slid in December in Most U.S. Cities, Index Shows - Real estate prices slid in just about every part of the country in December, pushing a housing market that once seemed to be rebounding nearly back to its lowest level since the crash began.  At this dismal point, some economists and analysts say that the damage has been done, and there is nowhere to go but up. Many others argue that the market has still not finished falling.  And then there are those who maintain that, possibly, things are about to get a whole lot worse.  Robert J. Shiller, the Yale economist who helped develop the Standard & Poor’s/Case-Shiller Home Price Index, put himself in this last group. Mr. Shiller said in a conference call on Tuesday that he saw “a substantial risk” of the market falling another 15, 20 or even 25 percent.  The 20-city Case-Shiller composite is already off 31.2 percent from its peak, according to data released Tuesday. Average home prices in Atlanta, Cleveland, Las Vegas and Detroit are below the levels of 11 years ago. A drop the size that Mr. Shiller says he thinks could happen would put Chicago, Dallas, Charlotte and Minneapolis there, too. It would create a lost decade for housing in much of the country even before the effects of inflation.

Home Prices in 20 U.S. Cities Declined 2.4% From Year Earlier - Residential real-estate prices dropped in the 12 months to December by the most in a year, a sign the U.S. housing market is struggling even as the rest of the economy recovers.  The S&P/Case-Shiller index of home values in 20 cities fell 2.4 percent, the biggest year-over-year decrease since December 2009, the group said today in New York. The median forecast of economists surveyed by Bloomberg News projected a 2.3 percent decrease.  A predicted increase in foreclosures this year as banks resume seizures may depress home values further, prompting would-be buyers to hold off on purchases. Unemployment at 9 percent and declines in housing are among reasons the Federal Reserve has signaled it will proceed with its unconventional monetary stimulus.  Home prices are still declining amid excess supply,” . “Although transactions have started to pickup, buyers are looking for very low prices. There is a backlog of distressed properties and it will flow into the market this year. We expect to see a gradual drop in prices.”

Case-Shiller: Home Prices Hit Post-Bust Lows In Most Big Cities -- Home prices in a majority of major U.S. cities tracked by a private trade group have fallen to their lowest levels since the housing bubble burst. The Standard & Poor's/Case-Shiller index fell in December from November in all but one of the 20 cities it tracks. The 20-city index declined 1 percent. The only market to see a gain was Washington, D.C. Eleven of the markets hit their lowest point since the housing bust, in 2006 and 2007: Atlanta, Charlotte, N.C., Chicago, Detroit, Las Vegas, Miami, New York, Phoenix, Portland, Ore., Seattle and Tampa, Fla. The damage from the real estate bubble now spreads well beyond Las Vegas, Phoenix and Miami, which built frantically during the mid-2000s. In many places, prices are expected to keep falling for at least the next six months.

House Prices: Price-to-rent, Price-to-median Household Income - There is no perfect gauge of "normal" house prices. Changes in house prices depend on local supply and demand. However I've found the three most useful measures of house prices are 1) real house prices, 2) the house price-to-rent ratio, and 3) the house price-to-median household income ratio. These are just general guides, but they are still useful (these are national numbers, and it is better to use local numbers when possible). In October 2004, Fed economists letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS. Here is a similar graph through December 2010 using the Case-Shiller Composite 20 and CoreLogic House Price Index. This graph shows the price to rent ratio (January 1998 = 1.0).  This ratio could decline another 10% to 15%, and possibly more if prices overshoot to the downside. Earlier I posted real house prices using the Case-Shiller National Index, the Case-Shiller Composite 20 index, and the CoreLogic House Price Index in real terms (adjusted for inflation using CPI less shelter). Note: some people use other inflation measures to adjust for real prices. Here is a repeat of that graph:

Real House Prices fall to 2000 Levels, Update on NAR Overstating Sales - This morning S&P/Case-Shiller released the monthly Home Price indexes for December (a three month average) and the Q4 National quarterly index. The following graph shows the Case-Shiller National Index, the Case-Shiller Composite 20 index, and the CoreLogic House Price Index in real terms (adjusted for inflation using CPI less shelter). Note: some people use other inflation measures to adjust for real prices. In real terms, the National index is back to Q1 2000 levels, the Composite 20 index is back to January 2001, and the CoreLogic index back to October 2000. A few key points:
• The real price indexes are at post-bubble lows. The National index is at a post-bubble low in nominal terms too (not inflation adjusted), and is now back to Q1 2003 prices. Those who argued prices bottomed some time ago are already wrong - and prices are still falling.
• I don't expect real prices to fall to '98 levels. In many areas - if the population is increasing - house prices increase slightly faster than inflation over time, so there is an upward slope in real prices.
• Real prices are still too high, but they are much closer to the eventual bottom than the top in 2005. This isn't like in 2005 when prices were way out of the normal range.
• Prices will probably fall some more and my forecast is for a decline of 5% to 10% from the October 2010 levels for the national price indexes. However we need to watch inventory (and months-of-supply) closely over the next few months - and it doesn't help that the NAR data is questionable.

Does a 13 Percent Drop in Homes Prices Since June “Reflect an Improved Economy” - According to the Washington Post it does. The Post reported on the modest rise in existing home sales in January reported by the National Association of Realtors. The increase in sales was accompanied by a sharp plunge in prices with the median sale price now 13.1 percent below the recent high set in June.As the article suggests, it appears that many investors were buying up foreclosed properties at low prices. This is a necessary part of the return to normal in the housing market, but it is a bit misleading to describe this story as reflecting an improved economy.

Foreclosure sales made up 26% of 2010 home sales - Foreclosure sales continued to account for more than 20% of all U.S. home sales in the fourth quarter and fiscal year 2010, foreclosure data firm RealtyTrac said Thursday. The Irvine, Calif.-based data firm said foreclosure sales made up 26% of all home sales last year, down from 29% in 2009, but still higher than 2008 levels when foreclosures accounted for roughly 23% of all home sales. Buyers who acquired foreclosures in 2010 also benefited from a steep discount, with foreclosed homes selling 28% below the average price of non-distressed properties. Foreclosure sales a year earlier were selling 27% below the average sales price. At the same time, the actual sales volume of properties not in distress declined 19% between 2009 and 2010 and 27% from 2008.

Foreclosure Homes Sold at 28% Discount Last Year as Supply Grew - Homes in the foreclosure process sold at an average 28 percent discount last year and may continue to drive down U.S. housing prices as the supply of distressed properties grows, according to RealtyTrac Inc.  A total of 831,574 homes that sold in 2010 had received notices of default, auction or repossession, the Irvine, California-based data seller said today in a statement. Properties in distress accounted for almost 26 percent of all home sales last year, down from 29 percent in 2009. A “bloated supply of foreclosures and weak demand from homebuyers” are depressing the market, James J. Saccacio, RealtyTrac’s chief executive officer, said in the statement. Residential real-estate prices dropped 4.1 percent in the fourth quarter from a year a earlier, according to the S&P/Case-Shiller index of home values in 20 cities.  “While accelerating foreclosure sales will help clear the oversupply of distressed properties and return balance to the market in the long run, in the short term a high percentage of foreclosure sales will continue to weigh down home prices,” Saccacio said.

Foreclosures, cash deals push up home sales - Home sales are starting to tick up after the worst year in more than a decade. But the momentum is coming from cash-rich investors who are scooping up foreclosed properties at bargain prices, not first-time home-buyers who are critical for a housing recovery.  The number of first-time buyers fell last month to the lowest percentage in nearly two years, while all-cash deals have doubled and now account for one-third of sales. A record number of foreclosures have forced home prices down in most markets. The median sales price for a home fell last month to its lowest level in nearly nine years, according to the National Association of Realtors. Lower prices would normally be good for first-time home-buyers. But tighter lending standards have kept many from taking advantage of them. With fewer new buyers shopping, potential repeat buyers are hesitant to put their homes on the market and upgrade.  Cash-only investors are most interested in properties at risk of foreclosure. They can get those at bargain-basement prices.

Why home prices could fall even more - Home prices took a big hit at the end of 2010, even as the rest of the economy gained steam. National home prices fell 4.1% during the last three months of 2010, compared with 12 months earlier, according to the latest report from the S&P/Case-Shiller home price index, a closely watched indicator of market trends. They were down 1.9% compared with three months earlier. "Despite improvements in the overall economy, housing continues to drift lower and weaker," said David Blitzer, spokesman for S&P. And things may get a lot worse, said Robert Shiller, a Yale economist and half of the Case-Shiller team, in a web conference after the report's release. "There's a substantial risk of home prices falling another 15%, 20% or 25% more," he said. Shiller cited a few reasons for his bearish stance. The government is expected to reduce the presence of Fannie Mae and Freddie Mac in the housing market. These agencies currently provide loan guarantees for about two-thirds of mortgages. If they fade away, private mortgage money will have to fill the gap and the cost of mortgage borrowing will surely rise. That will hurt home prices.

January Existing Home Sales: 5.36 million SAAR, 7.6 months of supply - The NAR reports: January Existing-Home Sales Existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, increased 2.7 percent to a seasonally adjusted annual rate of 5.36 million in January from a downwardly revised 5.22 million in December, and are 5.3 percent above the 5.09 million level in January 2010. This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.  The second graph shows nationwide inventory for existing homes. According to the NAR, inventory decreased to 3.38 million in January from 3.56 million in December.  Inventory is not seasonally adjusted and there is a clear seasonal pattern with inventory peaking in the summer and declining in the fall - and then really declining during the holidays. So this decline was expected. Inventory should start to increase again in February.The last graph shows the 'months of supply' metric. Months of supply decreased to 7.6 months in January from 8.2 months in December. The months of supply will probably increase over the next few months as sales slow a little, and inventory increases. This is still higher than normal.

Existing Home Inventory increases 3.1% Year over Year - Earlier the NAR released the existing home sales data for January; here are a couple more graphs ... The first graph shows the year-over-year (YoY) change in reported existing home inventory and months-of-supply. Inventory is not seasonally adjusted, so it really helps to look at the YoY change.  IMPORTANT: On a seasonal basis, inventory usually bottoms in December and January, and then will start increasing again in February and March. Since the NAR "months-of-supply" metric uses Seasonally Adjusted (SA) sales, but Not Seasonally Adjusted (NSA) inventory, this seasonal decline in inventory leads to a lower "months-of-supply" in December and January. Although inventory decreased from December to January, inventory increased 3.1% YoY in January. This is the sixth consecutive month of year-over-year increases in inventory, although the increase in January was lower than the previous months. But any increase is bad news with the high level of inventory.  By request - the second graph shows existing home sales Not Seasonally Adjusted (NSA). The red column in January is for 2011.  Sales NSA were about the same level as the last three years. January is usually the weakest month of the year for existing home sales (followed by February). The real key is what happens in the spring and summer.

New Home Sales decrease in January - The Census Bureau reports New Home Sales in January were at a seasonally adjusted annual rate (SAAR) of 284 thousand. This is down from a revised 325 thousand in December. The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate. And a long term graph for New Home Months of Supply: Months of supply increased to 7.9 in January from 7.0 months in December. The all time record was 12.1 months of supply in January 2009. This is still high (less than 6 months supply is normal). On inventory, according to the Census Bureau: "A house is considered for sale when a permit to build has been issued in permit-issuing places or work has begun on the footings or foundation in nonpermit areas and a sales contract has not been signed nor a deposit accepted." Starting in 1973 the Census Bureau broke this down into three categories: Not Started, Under Construction, and Completed.This graph shows the three categories of inventory starting in 1973. The last graph shows sales NSA (monthly sales, not seasonally adjusted annual rate). In January 2010 (red column), 19 thousand new homes were sold (NSA). This is a new record low for the month of January.

New Home Sales Lowest Since 1967 - New home sales are dismally low.

You could blame the weather, but the truth is that when you can’t find a job or your income down, banks aren’t very excited about loaning money to you, and you don’t have much faith that things will pick up soon, you don’t buy yourself a new home. You rent or pick up one of the many foreclosures on the market. NPR has more: New-home sales dropped to a seasonally adjusted rate of 284,000 homes last month, the Commerce Department said Thursday. That’s down from 325,000 in December and less than half the 600,000-a-year pace that economists view as healthy. Last year was the fifth consecutive year that new-home sales have declined after hitting record highs during the housing boom. Buyers purchased 322,000 new homes last year, the fewest annual total on records going back 47 years….The median sales price of a new home sold in January was $230,600, down 1.9 percent from the month before….About 188,000 new homes were for sale at the end of January, the lowest level since 1967.

Home Sales: Distressing Gap - The National Association of Realtors (NAR) is working on a benchmark revision for existing home sales numbers. As I noted in January, this benchmarking is expected to result in significant downward revisions to sales estimates for the last few years - perhaps as much as 10% to 15% for 2009 and 2010. Even with these revisions, most of the following "distressing gap" will remain. This graph shows existing home sales (left axis) and new home sales (right axis) through January. This graph starts in 1994, but the relationship has been fairly steady back to the '60s. Then along came the housing bubble and bust, and the "distressing gap" appeared (due mostly to distressed sales). Initially the gap was caused by the flood of distressed sales. This kept existing home sales elevated, and depressed new home sales since builders couldn't compete with the low prices of all the foreclosed properties.  The two spikes in existing home sales were due primarily to the homebuyer tax credits (the initial credit in 2009, followed by the 2nd credit in 2010). There were also two smaller bumps for new home sales related to the tax credits. The recent increase in existing home sales (before downward revisions) appears to be due to a combination of lower prices and investors buying low end properties.

Half of January Home Sales were Distressed Properties - Almost half of the homes sold in January were foreclosures or short sales, the highest level of distressed sales in nearly a year, according to the latest Campbell/Inside Mortgage Finance HousingPulse Tracking Survey. The survey also found that fewer homes where purchased by first-time buyers during the month- the result of more expensive financing options and tightened mortgage underwriting standards. The survey’s HousingPulse Distressed Property Index or DPI, a key indicator of the health of the housing market. rose sharply.  The share of total transactions involving distressed properties climbed from 47.2 percent in December to 49.6 percent in January. The increase was a continuation of a trend as the DPI registered just 44.5 perdent back in November.At the current rate of increase, distressed property transactions could account for the majority of home sales within just a few months. Already, in the key state of California, distressed property transactions account for 66 percent of the market. In Florida, distressed property transactions account for 63 percent of the market. And in the combined area of Arizona and Nevada, distressed property transactions are a stunning 72 percent of home sales.

Buffett on Housing - A few excerpts from Warren Buffett's annual letter to shareholders. On Housing:  A housing recovery will probably begin within a year or so. In any event, it is certain to occur at some point. He wrote the same thing last year:  [W]ithin a year or so residential housing problems should largely be behind us, the exceptions being only high-value houses and those in certain localities where overbuilding was particularly egregious.Last year I disagreed, but now I think a recovery will probably "begin" within "a year or so". On Clayton (manufactured homes):  At Clayton, we produced 23,343 homes, 47% of the industry’s total of 50,046. Contrast this to the peak year of 1998, when 372,843 homes were manufactured. (We then had an industry share of 8%.) CR Note: This is close to the record low for manufacturing homes set in 2009 of 49.8 thousand units.

Home Sales Data Doubted - The housing crash may have been more severe than initial estimates have shown.  The National Association of Realtors, which produces a widely watched monthly estimate of sales of previously owned homes, is examining the possibility that it over-counted U.S. home sales dating back as far as 2007. The data, used by economists, investors and the real-estate industry, could be revised downward this summer.The group reported that there were 4.9 million sales of previously owned homes in 2010, down 5.7% from 5.2 million in 2009. But CoreLogic, a real-estate analytics firm based in Santa Ana, Calif., counted just 3.3 million homes sales last year, a drop of 10.8% from 3.7 million in 2009. CoreLogic says NAR could have overstated home sales by as much as 20%.  While revisions wouldn't affect reported home-price numbers, they could show that the housing market faces a bigger overhang in inventory, given the weaker demand.

Did Realtors Inflate Home Sales by 1.6 million in 2010? - The National Association of Realtors, which publishes the most popular measure of existing home sales, may have included as many as 1.6 million fictitious transactions in its data for 2010. And it wasn't just last year. According to a new report by CoreLogic, a real-estate analytics firm, NAR has long overstated housing sales. But those overstatements appear to have widened starting in 2006, just as the housing market was starting to crack. The question is just how much did NAR's inflated counts mask the severity of the real estate downturn. More importantly, the NAR misstatement may mean that it will be longer before housing recovers than we thought. Here's why: By NAR's numbers, there were 4.9 million previously owned homes sold last year, down 5.7% from 5.2 million in 2009. But CoreLogic says the trade group's numbers understate the severity of the drop in housing by about nearly half. By CoreLogic's numbers, sales of previously sold homes fell 10.8% to 3.3 million homes in 2010, from 3.7 million the year before.

When Will the Mainstream Media Be Ready To Call The NAR The Sham That It Really Is? -  The Wall Street Journal reports: US housing data may have understated extend of collapse. I can do naught but laugh. Are they serious? Don’t they even bother to read BoomBustBlog? The WSJ story goes on to read…The housing crash may have been more severe than initial estimates have shown. The National Association of Realtors, which produces a widely watched monthly estimate of sales of previously owned homes, is examining the possibility that it over-counted U.S. home sales dating back as far as 2007.  I’m willing to go on record saying that the NAR’s economic tallies and their forecasts are simply jokes. Their “so-called” economists are shills and paid for marketing figures, nothing more. I have clearly stated this in the past. In absolute fairness to the MSM, I have been getting more airtime to espouse my decidedly contrarian views - including multiple spots on Bloomberg and CNBC. I will be a guest on CNBC's Fast Money tomorrow (Thursday the 24th) for a full hour. It should be quite fun for I do plan to spread a lot of the anti-NAR disinformation-bust juice around! Tune in to join the fun.

Real House Prices and the Unemployment Rate - Back in 2009, when the house price bottom callers were out in force, I pointed out that real house prices usually bottom after the unemployment rate peaks - and sometimes several years after the peak (like in the '90s).  Below is a comparison of real house prices and the unemployment rate using the Corelogic house price index (starts in 1976) and the Case-Shiller Composite 10 index (starts in 1987). Both indexes are adjusted by CPI less shelter.  The two previous national declines in real house prices are evident on the graph (early '80s and early '90s). The dashed green lines are drawn at the peak of the unemployment rate following the peak in house prices.  In the early '80s, real house prices declined until the unemployment rate peaked, and then increased sluggishly for a few years. Following the late 1980s housing bubble, real house prices declined for several years after the unemployment rate peaked.

Mixed Messages In January Durable Goods Report - January may have been harsh on the labor market and other sectors of the economy, but there's no sign of a winter chill in today's durable goods report for last month. New orders for manufactured durable goods surged 2.7% on a seasonally adjusted basis in January, the highest monthly gain since last September. But the robust advance in the top-line number for new orders comes with some messy details. A large gain for transportation equipment last month (+27.6%) was a key source of the rise. Excluding this volatile transport sector leaves new orders off by 3.6%. Even worse, new orders for capital goods excluding defense and aircraft tumbled nearly 7%. Demand for these products, such as computers, is closely watched as a leading indicator of future economic activity. Orders for civilian aircraft occur in periodic bursts and are hugely expensive. When a large order is received, it swells the total value of new orders for a brief period, greatly exaggerating the underlying pace of demand for durable goods, only to plummet the next month when it returns to a more normal level. To eliminate these erratic movements, it’s better to study the behavior of durable goods orders without transportation.

ATA Truck Tonnage Index increased in January - From the American Trucking Association: ATA Truck Tonnage Index Surged 3.8 Percent in JanuaryThe American Trucking Associations’ advance seasonally adjusted (SA) For-Hire Truck Tonnage Index increased 3.8 percent in January after rising a revised 2.5 percent in December 2010. The latest jump put the SA index at 117.1 (2000=100) in January, which was the highest level since January 2008. In December, the SA index equaled 112.7.  ATA Chief Economist Bob Costello said ““At this point, the biggest threat is the recent run-up in oil prices, which could dampen consumer spending.”  This graph from the ATA shows the Truck Tonnage Index since Jan 2007.  This is the highest level since January 2008 - and truck tonnage is increasing again after stalling out last spring and summer. I agree with Costello that the biggest short term threat to the economy is high oil prices.

Wal-Mart’s U.S. Sales Fall, Missing Projections - As the Christmas season approached, Wal-Mart Stores said it was fixing the problems in its United States division. It hired new executives, added merchandise that it had cut, and fought with Target and other competitors to provide the lowest prices over the holidays.  But for Wal-Mart, the world’s largest retailer, the fourth quarter was the seventh consecutive quarter of declining sales at stores open at least a year in the United States, a measure known as same-store sales.  The decline of 1.8 percent missed the company projection. In November, it said that same-store sales for the fourth quarter would range from a decline of 1 percent to a gain of 2 percent. Same-store sales are an important indicator of a retailer’s health, as they tend to reflect whether in-store changes are working or not

Retail Sales have not Recovered Normalized to Population - The chart below shows the complete data series from 1992, when the U.S. Census Bureau began tracking the data. I’ve highlighted recessions and the approximate range of two major economic episodes that have impacted consumer attitudes. The Tech Crash that began in the spring of 2000 had little impact on consumption. The Financial Crisis of 2008 has had a major impact. The January retail sales take us in nominal terms a mere 0.4% above the previous high of November 2007.  We normally evaluate monthly data on a month-over-month or year-over-year basis. The January 0.3% increase over December and 7.8% over January 2010 look reasonable, if somewhat disappointing. But a snapshot of the larger historical context illustrates the devastating impact of the Financial Crisis on the U.S. economy. The chart below is the one that tells us the most about the U.S. retail economy and the long-term behavior of the consumer. The sales numbers are adjusted for population growth and inflation.

Consumers Hold On to Products Longer - Consumer spending has picked up, but for some Americans the recession has left something behind: a greater interest in making stuff last.  For a number of products — cars, phones, computers, even shampoo and toothpaste — the data shows a slowing of product life cycles and consumption. In many cases the difference is mere months, but economists and consumers say the approach just may outlast a full recovery and the return of easy credit, because of the strong impression the downturn made on consumers.  It is hardly the stuff of generations past, those stung by the Great Depression1, who held onto antediluvian dishware and stored canned goods until rust formed on the lids. But for the moment, many citizens of a throwaway society are making fewer visits to the trash and recycling bins.

Number of the Week: Gasoline Prices Bite - 10.34% — Gasoline as a share of retail sales. Could rising oil prices derail the U.S. recovery? We’re more resilient to high energy prices than we used to be, but it’s certainly a danger.  The price of oil broke through $100 a barrel this week, and U.S. gas prices neared $3.25 a gallon, as turmoil in the Middle East bred concerns about supply. Those rising prices are already taking a bigger bite out of U.S. consumers’ budgets. In January, sales at gas stations accounted for 10.34% of all retail sales, according to the Commerce Department. That’s the highest level since October 2008.  To be sure, we have a way to go to reach the peak of July 2008, when gasoline prices exceeded $4.15 a gallon and gas-station sales accounted for 12.47% of retail sales. Some economists see reason to believe we’re less likely to experience a similar spike this time around. For one, oil inventories are significantly higher than they were in 2008, providing more of a buffer in the event of any disruptions in supply from the Middle East.

 Oil prices and consumer spending - With the recent surge in oil prices I thought it would be useful to look at the potential impact with one set of data I watch. It is energy as a share of personal consumption expenditures or consumer spending. In the 1970s energy consumption rose from about 6% to 9% of spending, or about 50%. In the early 2000s energy rose from about 4% to 7% of consumer spending before it collapsed. As of December energy's share of consumer spending was already back to 6% of spending, about the level it peaked at in the last cycle before the financial panic generated a drop in other consumer spending. If you look at energy consumption this way it appears that oil consumption was already at the point where futher oil price increases would rapidly impact consumer spending on other items.One area where higher oil prices clearly impacts consumer spending is autos, as consumer spending on new and used autos and energy have a very strong negative correlation. If rising oil prices generate a drop in real income or standard of living one of the easiest way to compensate is to delay buying a new,or used car. What would have been new monthly auto payments can be used to sustain consumption of other items. In this chart you can clearly see that this happened in both the 1970s and the 2000s.

Oil & unemployment -One thing that peeves me about reporting on oil prices is the tendency to see them only in terms of the “misery” they cause motorists. But history suggests that oil matters more than this. My chart - stolen and adapted from Andrew Oswald (pdf) - shows the point for the UK. It shows that oil prices predict unemployment, with a lag of around 18 months. Rises in oil prices in 1973-74, 1979-80 and in the mid-00s led to rising unemployment. And falling oil prices in 1986, 1998 and 2003 led to falling unemployment.  The reason for this is simple. Higher oil prices hurt companies as well as motorists. One reason for this is that if people are spending more on petrol they’ve less cash to spend on other things, so retailers suffer. But also - obviously - higher oil prices raise firms’ energy and transport bills. At the margin, this causes them to shrink production and lay off workers or even go out of business altogether.So far, so simple. But four things complicate the relationship:

Cost Of ... Everything ... About To Go Up -You paid more last month for practically everything you bought. From food to gas to airfare tickets - even clothing. And now the price of everything is about to go up again. A new report from The Labor Department indicates its concern about inflation, and businesses are claiming they can't absorb the rising cost of commodities alone. Many say they'll have no choice but to raise prices and shrink packages. Frustrating stuff for an economy that's supposed to be recovering."Things are just not going well," . "You have to eat, but you can only have what you can afford, and now it's getting scary.What things should you stock up on now? What things can you do without? Take bottled water. Every time you purchase one of these, you already pay a 4,000% markup. Time to reevaluate your tap.

Gallup Economic Confidence Index Stuck at -26 Since February 2009 - After a quick jump from -60 in February 2009 to -26 in June 2009, the Gallup Weekly Confidence Index has been range-bound between -20 and -30 ever since. The confidence index now sits at -26, where it was two years ago. Gallup's Economic Confidence Index is based on the combined responses to two questions, the first asking Americans to rate economic conditions in this country today, and second, whether they think economic conditions in the country as a whole are getting better or getting worse. Results are based on telephone interviews with approximately 3,500 national adults; margin of error is ±2 percentage points. This is just further evidence of what most know. There was a recovery in financial assets but no recovery in the real world.

Gallup poll shows underemployment at 20% - Gallup's U.S. employment measures report the percentage of U.S. adults in the workforce, ages 18 and older, who are underemployed and unemployed, without seasonal adjustment. "Underemployed" respondents are employed part time, but want to work full time, or they are unemployed. "Unemployed" respondents are those within the underemployed group who are not employed, even for one hour a week, but are available and looking for work. Results for each 30-day rolling average are based on telephone interviews with approximately 30,000 adults. Because results are not seasonally adjusted, they are not directly comparable to numbers reported by the U.S. Bureau of Labor Statistics, which are based on workers 16 and older. Margin of error is ± 0.7 percentage points.

Corporate Profits Soaring Thanks to Record Unemployment - An annual study by USA Today found that private sector paychecks as a share of Americans’ total income fell to 41.9 percent earlier this year, a record low. (12) Conservative analysts seized on the report as proof of President Obama’s agenda to redistribute wealth from, in their words, those ‘pulling the cart’ to those ‘simply riding in it’. Their accusation withstands the evidence—only it’s corporate executives and wealthy investors enjoying the free ride. Corporate executives have found a simple formula: the less they contribute to the economy, the more they keep for themselves and shareholders. The Fed’s Flow of Funds reveals corporate profits represented a near record 11.2% of national income in the second quarter. (13)Non-financial companies have amassed nearly two-trillion in cash, representing 11% of total assets, a sixty year high. Companies have not deployed the cash on hiring as weak demand and excess capacity plague most industries. Companies have found better use for the cash, as Robert Doll explains, “high cash levels are already generating dividend increases, share buybacks, capital investments and M&A activity—all extremely shareholder friendly.” (5)

The distressing distribution of unemployment - We know that unemployment is still very high, around 9% of the labor force. Initial jobless claims fell last week to below 400,000, but the 4 week moving average is still right at 400,000. Historically, in a healthy economy this number should be somewhere between 300,000 and 350,000. However, the way unemployment is currently distributed across the population makes me fear that, without some type of effective intervention, the new equilibrium unemployment rate will be higher than what we've seen in the past.The share of unemployment that is long term (more than 27 weeks) is very high (almost half of the currently unemployed have been so for more than 27 weeks!), and the unemployment rate for uneducated workers aged 25 or greater is also very high (around 14% compared to around 5% for workers with at least a BA).Long term unemployment always rises in recessions, but this case is exceptional as can be seen in the following graph (clik the pic for a more depressing image): Today, Tyler links to an article where employers at a job fair are discouraging currently unemployed workers from filling out applications! Here's a graph of unemployment broken out by education level (clik the pic for a more depressing image):

Air Force tanker decision will support tens of thousands of U.S. jobs - The U.S. Air Force today announced that it will award a $35 billion contract to U.S.-based Boeing Company to supply 179 air refueling tankers.  Construction of these tankers will support tens of thousands of U.S. jobs.  This contract is the first installment on a plan to replace the aging fleet of 500 KC-135 tankers, which first entered service in the 1950s. The Air Force expects to replace its entire fleet of tankers with 400 new tankers, at an estimated cost of up to $100 billion, making it the Air Force’s third largest contract ever. The Air Force has awarded the contract to Boeing, an American company that won the contract, fair and square.  The Air Force decision ensures that tens of thousands of high-quality aerospace jobs will be created in the United States. The World Trade Organization recently found that the European firm Airbus, and its parent company EADS, the major competitor for this contract, had received $178 billion in illegal subsidies, including $5 billion for the Airbus A330 airframe, which was used to offer their competing tanker to the Air Force at a below-market price.

Should losers from free trade be compensated? - Suffice to say that my day job has been keeping me very busy this year and has made blogging difficult.  I want to rectify that, but it may be tough going for a while yet. This, however, was enough to bring me back. In their work, economists are typically are not nationalistic. National boundaries mean little to them, other than that much data happen to be collected on a national basis. Whether a fellow American gains from a trade or someone in Shanghai does not make any difference to most economists, nor does it matter to them where the losers from global competition live, in America or elsewhere. I say most economists, because here and there one can find some who do seem to worry about how fellow Americans fare in the matter of free trade.

Compensating the Losers from Trade - Uwe Reinhardt's post the other day, "How Convincing is the Case for Free Trade?", helped to kick-start a fair bit of discussion recently about the impact of international trade on the US economy. Mark Thoma and William Polley have shared their thoughts about the importance of compensating the losers from trade, while others (e.g. Tim Worstall) have questioned that need. I'd like to add 3 points to this discusssion.
1. International trade is not substantially different from trade between two people within the same country. The main difference is simply that with international trade, the transaction happens to cross an international boundary.
2. Just because trade leads to an efficient outcome, that doesn't mean it's a good outcome. I think that a parable about a punch in the nose helps make that point. 3. I see the problem of adequately compensating the losers from international trade as just a part of the larger question of how we treat people in our society who, through no fault of their own, have fallen on hard times. International trade is just one of the many enormous, inexorable forces that constantly reshape our economy. Technological change, demographic change, or the fluctuations of the macroeconomic business cycle may devastate millions of families each year just as surely as international trade. .

Free Trade, Efficiency, and a Punch in the Nose - Mark Thoma brings us the good news that William Polley is blogging again (I know how you feel, William!), and directs us to "Should Losers from Free Trade be Compensated?" Following this discussion, and particularly after reading Uwe Reinhardt's contribution from the other day ("How Convincing is the Economists' Case for Free Trade?") I am reminded of a parable that one of my graduate school professors would tell to his Econ 101 students. That professor, by the way, was named Uwe Reinhardt. Anyway, here's my retelling of Uwe's parable: Economic Efficiency and a Punch in the Nose Suppose that there is a guy who used to be a competitive boxer. He was very good and very successful, but probably took one too many knock-out blows during his career. At any rate, after he retired from boxing he missed the thrill of the fight, and in particular he really missed punching people in the nose. (Don't ask me why, but for some reason, he really liked punching people in the nose. Which probably had something to do with why he was such a good boxer.)

David Autor on Trade, Unemployment, Redistribution - Via Mark Thoma, there’s been a round of debate about the winners and losers from free trade, particularly trade with China. See William Polley for a roundup on the question and his summary of the liberal position: “There are winners and losers [from free trade]. But the winners gain more than the losers lose. So effect a transfer from the winners to the losers that still allows the winners to gain but compensates the losers for what they lost. Only then can you really say that free trade (with the compensating side payment) benefits everyone.” According to the latest cutting-edge econometrics on the topic, the deadweight losses of how we currently compensate the losers from trade with China, a compensation that probably doesn’t balance out the losses, outweigh the gains from trade with China.David Autor, David Dorn and Gordon H. Hanson have a new paper out, The China Syndrome: Local Labor Market Effects of Import Competition in the United States, and I think it is a blockbuster. It certainly needs to move to the front of the debate over the implications and consequences of trade with China.  David Autor is behind much of the discussion in labor markets recently, particularly the topic of job polarization.   He’s a serious intellect in this area, and this is a paper that deserves the econoblogosphere’s attention.

If truth is what your students let you get away with… What do we owe the status quo? Uwe Reinhardt, Economix, asks “How convincing is the case for free trade?” In his column, Reinhardt takes note of a few discussions of free trade without taking a stand himself. But he ends with a provocative quote from Alan Blinder: “If we economists stubbornly insist on chanting ‘free trade is good for you’ to people who know that it is not, we will quickly become irrelevant to the public debate.”Mark Thoma responds, “If we are going to make the argument that trade is good because everyone could potentially be made better off, we should do much more than we have to ensure that this potential is realized, i.e. that the gains from trade are distributed widely across the population rather than concentrated among a smaller set of winners.” Thoma’s response triggers Tim Worstall: “this argument then generally morphs into an insistence that we should not have free trade until that compensatory mechanism is put in place, so that, say, I, who will be gaining from that free trade will be compensating those who will lose from that free trade.” He continues, “This is obvious: if free trade benefits me and disbenefits you, then not free trade must disbenefit me and benefit you. Which leads to the question: are you compensating me for those benefits you are getting and the disbenefits I am getting from the absence of free trade?”

Is free trade efficient and/or good? - Greg Mankiw's recent column in the NYT praising international trade, where he urged Americans to see emerging economies as trade partners and not competitors, has generated an interesting debate about the costs and benefits of international trade. Uwe Reinhardt highlighted the difference between the way non-nationalistic economists and nationalistic citizens view the issue of gains and losses from trade, "Many Americans might balk at the lower-priced scarf if it were offered not by an American but by a low-cost manufacturer in Shanghai or Bangladesh." He also points to the controversial work of Alan Blinder (see pdf here and here), where he questioned the wisdom of the theory that "every country gains by unfettered international trade" in the context of the threat to American jobs posed by off-shoring of services to emerging economies. Prof Blinder had estimated that 30-40 million jobs in the US are potentially off-shorable and this "may pose major problems for tens of millions of Americans over the coming decades". He also raised the concerns about how America would be able to cope up with its impact, especially given its tattered social safety net.

Is trade really always efficient? - I'm a bit late to the party on Greg Mankiw's column about trade. But better late than never, right? Mankiw's case for trade is the textbook one (and not just because Mankiw wrote the textbook): Trade is good because it is a voluntary exchange, and voluntary exchanges benefit the people who do them. Hence, trade liberalization is always good, Q.E.D. There have been quite a lot of rebuttals to Mankiw's idea popping up over the blogosphere. So far, all the ones I have seen involve some version of the "winners and losers" idea. Briefly: Trade is always efficient, for the reason Mankiw gives. But trade creates inequality in trading countries, and it's often difficult for the "winners" from trade to compensate the "losers". In other words, though a country benefits overall from trade, some people in a country may be hurt. For good discussions of this argument, and related research, see Uwe Reinhardt, Ryan Avent, Mike Konczal, Ryan Avent again, and Angus of Kids Prefer Cheese. All of these people seem to agree (and agree with Mankiw) on one basic point: The efficiency of trade is not in question. Only the distributional effects of trade are in question.  But to me, this seems highly non-obvious

Putting the free in free trade - THE economics commentariat has been seized this week with a debate over the value of trade liberalisation, of all things, sparked by a Greg Mankiw column in the New York Times, but really by Uwe Reinhardt's response to it, in which he cites Alan Blinder:“That is why I am going public with my concerns now,” he concludes. “If we economists stubbornly insist on chanting ‘free trade is good for you’ to people who know that it is not, we will quickly become irrelevant to the public debate.It's an uncomfortable truth for economists; perhaps all of whom have heard, at some point in their lives, the remark that "free trade is great in theory, but in practice...". Mark Thoma muses on the question and observes that just because trade can make everyone better off doesn't mean that it will. Trade liberalisation generally produces net benefits, such that some of the winners' gains can be redistributed to losers, leaving all in better shape than before. But this is not how policy functions in the real world. Should we support free trade if its Pareto improvements aren't actually realised?

Winners & Losers from Free Trade: the Boxer, the Economist & the Hot Girlfriend - Welcome back Kash Mansori and thanks for making me laugh at the Uwe Reinhardt story about the boxer and the economist , which reminds us that not everyone necessarily gains from a movement towards free trade. But let me humbly suggests that this story needs something – a third player.  The usual economist parable as to why there are both winners and losers from free trade might go something like this. As we removed the trade restrictions from importing apparel from China, American households were able to buy quality clothing at lower prices. Chinese apparel workers also benefited from higher wages. But American apparel workers suffered reductions in their real income from the increase in competition from Chinese workers. While aggregate American income rises, some Americans suffer losses. The compensation principle suggests that it ispossible for the winners from free trade to compensate the losers in such a way that everyone is left better off. Of course in the real world this compensation is rarely executed. 

Thoughts on International Trade - There has been a great round robin discussion on international trade in the economic blogsphere over the last week or so. I believe it started with this article from William Polley and was followed up on by Mark Thoma and Kash over at Angry Bear. I wanted to throw my two cents into the discussion as it were, especially as it relates to manufacturing jobs and the overall benefits of international trade. Let me first make what I believe are two very important points regarding this discussion. There seems to be a desire to return to the "glory days" of US manufacturing in the 1950s and 1960s when a manufacturing job could provide a middle class wage etc.. There is one problem with this argument: there is no way that will happen again. The glory days of US manufacturing were great, but were also characterized by a massive lack of competition. After WWII Japan and Europe were literally in ruins; Russia and Eastern Europe were behind the Iron Curtain, China was under Mao and India was an economic basket case. In short, the US was the only game in town.

Countries compete for the gains from trade - As a follow-up to my last post, I think there is yet another big problem with Greg Mankiw's column on trade and competition. His argument about trade, whether you believe it or not, doesn't really support his basic thesis - that "other nations are best viewed not as our competitors but as our trading partners." Why not? Because as soon as there are gains from trade to be had, countries can compete for those gains. Let me elaborate. Suppose we grant Dr. Mankiw that each country really can be treated as a single person. Now let's examine what trade looks like when there are a bunch of countries. Mankiw uses the example of a kid (country 1) offering to shovel snow for his neighbor (country 2), so let's run with that example. If the world is just the kid and the neighbor, then yes, there's no rivalry or competition going on. But as soon as we bring in a third person/country, things look a little different, as Uwe Reinhardt explains:

'Pillar of the American Economy'?: "One thing I found hard to grasp in the lead-up to the financial crisis was the widespread and seemingly nonchalant acceptance of economic imbalances, financial excesses, and patterns of behavior that were out of whack with economic reality and which were clearly unsustainable in the long run. Whether you were talking about overall indebtedness, the trajectory of house prices, the proportion of the economy devoted to finance, insurance and real estate (FIRE), the low levels of risk spreads, assumptions about markets, liquidity, and worst-case scenarios, etc., etc., people seemed to think that things could somehow carry on as they were with no real reason for concern. In the end, of course, that confidence proved horribly misplaced, and what couldn't possibly last, didn't. Well, I'm not sure if it's quite the same thing, but I must admit I had similar feelings of incomprehension when I read the following Atlanta Journal-Constitution report, "Non-Employee Labor a Growing Trend in Work Force,"  which more or less implies that people are going to quietly acquiesce to corporate America's relentless efforts to strip them of everything but a basic paycheck in the name of profit.

The compensation-productivity gap - Growth of productivity and real hourly compensation in the nonfarm business sector (which accounts for three-fourths of output and employment in the total U.S. economy) was robust until 1973, at which time growth slowed in both measures. During the 1947–73 period, the annual change in productivity averaged 2.8 percent, while real hourly compensation growth averaged 2.6 percent. Over the 1973–79 period, the averages were 1.1 and 0.9 percent, respectively.  Real hourly compensation growth failed to keep pace with accelerating productivity growth over the past three decades, and the gap between productivity growth and compensation growth widened. Over the 2000–09 period, growth in productivity averaged 2.5 percent; growth in real compensation averaged 1.1 percent over the same period.

Sexual Harassment Pay - Economist Joni Hersch applies the theory of compensating differentials to sexual harassment: Workplace sexual harassment is illegal, but many workers report that they have been sexually harassed. Exposure to the risk of sexual harassment may decrease productivity, which would reduce wages. Alternatively, workers may receive a compensating differential for exposure to sexual harassment, which would increase wages. Data on claims of sexual harassment filed with the Equal Employment Opportunity Commission are used to calculate the first measures of sexual harassment risks by industry, age group, and sex. Female workers face far higher sexual harassment risks. On balance, workers receive a compensating wage differential for exposure to the risk of sexual harassment. And how much do you get for the risk of a grope? About 25 cents an hour for women and 50 cents an hour for men.

Want A Job: Give Us Your Facebook Password -- Atlantic senior editor Alexis Madrigal asks, “Should Employers Be Allowed to Ask for Your Facebook Login?” He’s not being hypothetical:The American Civil Liberties Union has taken up the cause of a Maryland man who was forced to cough up his Facebook password during a job interview with the Department of Corrections in that state.According to an ACLU letter sent to the Maryland Department of Corrections, the organization requires that new applicants and those applying for recertifications give the government “their social media account usernames and personal passwords for use in employee background checks.”The ACLU calls this policy “a frightening and illegal invasion of privacy” and I can’t say that I disagree. Keep in mind that this isn’t looking at what you’ve posted to a public Twitter account; the government agency here could look through private Facebook messages, which seems a lot like reading through your mail, paper or digital.

Higher-Paying Jobs Lost, Lower-Paying Jobs Gained -While the country’s recessionary job losses skewed to middle- and higher-paying jobs, its job gains since then have skewed to lower-paying jobs. That is the conclusion of an unsettling  report from the National Employment Law Project. America’s private payrolls shrank from January 2008 through February 2010, losing 8.84 million jobs on net. They have been growing every month since that nadir, adding 1.26 million jobs on net. (Public payrolls are another story — they’ve been falling over the last year.) All this means, of course, that the private sector job market still has a long way to go before it returns to its previous peak. Worse, those jobs that have been created in the last year typically pay less than the jobs they’re replaced. According to NELP:

  • Lower-wage industries (those paying $9.03 -$12.91 per hour) accounted for just 23 percent of job losses, but fully 49 percent of recent growth.
  • Midwage industries ($12.92 -$19.04 per hour) accounted for 36 percent of job losses, and 37 percent of recent growth.
  • Higher-wage industries ($19.05 -$31.40 per hour) accounted for 40 percent of job loss, but only 14 percent of recent growth.

Non-Employee Labor a Growing Trend in Work Force - Recovering from the Great Recession won't mean a return to business as usual. Fundamental changes are taking place in the American work force. “Staffing companies have traditionally been the shock absorbers of the economy,” said Dan Campbell, CEO and founder of Hire Dynamics, an industry leader in staffing and recruitment with offices in Atlanta and Reno, Nev. “They take the first hits at the start of a recession, but they are also the first to benefit in a recovery.”  Normally, Campbell would see his temporary job postings level off as companies increased their permanent hiring of employees, but after this recession, things have been different. “We’re seeing a new reality in the work force. Just-in-time labor is a growing trend,” he said. According to Yoh’s 2010 Annual Workforce Trends Study, 80 percent of employers said that they expected the size of their non-employee work force (consultants, independent contractors, temporary employees and project teams) to stay the same or increase in the next year. Sixty-three percent of business leaders reported working on better ways to manage their non-employee work-force segment.

Waiting for Change: The $2.13 Federal Subminimum Wage - The minimum wage has been one of the most investigated and debated labor market topics among economists, politicians, business entities, and the public. Much less attention has been paid to the subminimum wage received by tipped workers (referred to as the “tipped minimum wage”). The two-tiered minimum wage system is unknown to many and the existence of the subminimum wage is often a surprise. Did you know that a waiter at a restaurant in Indiana probably earns a base wage of $2.13 per hour; $4.34 for a server in the Colorado Rockies; and $8.67 for wait staff near Olympia National Park in the state of Washington? These pay disparities are created by an obscure and often misunderstood federal provision called a ‘tip credit,’ which allows employers to pay tipped workers below the binding federal or state minimum wage.  Read Briefing Paper

“The real risk is ... poverty rather than inflation...” With all the crap coming down on the working class, one Wall Street Journal columnist at least has the sensitivity to see that a little inflation might be enough to push many people into poverty.  At least that is better than ranting about all of the overpaid greedy workers. Writing about the build up in inflation: “The real risk is that the U.S. faces a poverty cycle rather than an inflationary one.” Evans, Kelly. 2011. “A Standard-of-Living Shock Is the Danger.” Wall Street Journal (17 February). Writing about the build up in inflation: “The real risk is that the U.S. faces a poverty cycle rather than an inflationary one.”

Income inequality in America How the rich became the über rich - There's a growing income gap in America, but it's not necessarily between the rich and the poor. It's between the super rich and everyone else. Or as George W. Bush once quipped at a swanky campaign dinner, "the haves and the have-mores." Income trends among 90% of Americans are relatively unchanged over the last decade. Nearly all segments of the population are moving relatively in proportion. Which is to say, they're barely moving at all. But look at the top 10th percentile and a different story begins to emerge. The super wealthy are getting much richer, as everyone else's incomes are practically stagnant. In 2009, the richest 10% of Americans accounted for about half the nation's wealth. Narrow that focus a bit further, and the trend is even more alarming. The top 0.1% -- those who make at least $2 million each year -- controlled 10% of the economy.

Backward Mobility - The black bourgeoisie has long held a contradictory place in the American psyche, balancing the discomfiting fact that a quarter of black people live in poverty. If a once enslaved people can now fill suburban tracts, the thinking goes, then surely we have overcome our racist history. The opposite is true: The insecurity and often backward mobility of would-be middle-class African Americans like Hart reveal how unjust our economy remains, and not only for black folks.  The American middle class as a whole is collapsing as poverty reaches record highs. But that collapse is most apparent in black communities. The median income for blacks fell by more than 4 percent in 2009, putting it more than $17,000 behind the national median. Joblessness is now at least 15.8 percent among African Americans, not counting the untold numbers who are working longer hours for less pay or taking jobs that set back both their salary and career. The most striking of the bleak numbers, though, comes when considering young people.

It's the Inequality, Stupid - Eight charts that explain everything that's wrong with America. A huge share of the nation's economic growth over the past 30 years has gone to the top one-hundredth of one percent, who now make an average of $27 million per household. The average income for the bottom 90 percent of us? $31,244. Note: The 2007 data (the most current) doesn't reflect the impact of the housing market crash. In 2007, the bottom 60% of Americans had 65% of their net worth tied up in their homes. The top 1%, in contrast, had just 10%. The housing crisis has no doubt further swelled the share of total net worth held by the superrich. Winners take all. The superrich have grabbed the bulk of the past three decades' gains.

A Visual Reminder Of U.S. Social Stratification - While many watch the revolutions starting virtually on a daily basis in the "developing world", few are concerned that these have any chance of occurring in the United States: "our society is far more cohesive and far less stratified" the rebuttal logic goes. Is it? Over the past two years, the one social class that has received the most voluminous amount of opprobrium is the ubiquitously derogatory "bankster" which represents far more a wealth and income qualification, that a job description. Americans it appears are becoming increasingly sensitive to the stratification within our own society, even if on a subliminal level. And while we have repeatedly shown before in visual terms just how polarized US society is, it worth reminding every few months or so, that the US is rapidly becoming a banana republic not only in its approach to legislative and judicial matters (not to mention regulatory), but toward the distribution of income and wealth. Not that there is anything wrong with a stratified society: after all, that is the purest hallmark of a capitalist society. However when one introduces the basest elements of socialism (and, ostensibly, communism and fascism according to some) in its midst, then things get far more transparent and subjective. Below we once again bring to our readers attention, in easily digestible format, the dramatic schisms that continue to tear through the fabric of US society. And if there is anything that the revolutions in the Maghreb should have taught us by now is that extreme social polarization can only last for so long before a violent snapback restores equilibrium, usually through bloodshed and death.

Cities, Inequality and Wages - Economic inequality has been mounting in the United States, hitting levels not seen since the Gilded Age.  There are numerous explanations for this phenomenon, ranging from the decline of unions and high-paid manufacturing jobs to the rise of globalization, of new technology, and knowledge-based work (what economists call “skill-based technical change”) and the bifurcation of the labor market into high-skill and low-skill jobs. But do our cities and changing economic landscape play a role as well?  There are good reasons to suspect that they do.  For one, the past decade or so has seen a sorting of population by skill, occupation and human capital, (see my 2006 article “Where the Brains Are”).  For another, it is well known that both highly skilled and talented people and productive firms and high-tech industries tend to cluster and agglomerate together to create powerful economic advantages. An important study entitled “Inequality and City Size” by Ronni Pavan of the University of Rochester and Nathaniel Baum-Snow of Brown University and the National Bureau of Economic Research takes a close look at this issue

Exploring urban economic bases: Which types of people and industries are drawn to central cities? - This year the 2010 U.S. Census findings have started to become public. Thus far, these findings show that central cities of Midwest metropolitan areas, like Chicago and Detroit, experienced a rough decade. For example, the city of Chicago lost almost 7 percent of its population over the 2000s, although it had gained 4 percent during the 1990s. Indianapolis’s population continued to grow in the 2000s, but by 4.8 percent, down from 8.3 percent during the 1990s. Weakness in the general U.S. and Midwest economies over the decade explains much of the weakness. In addition, the housing boom through 2006 dampened cities in comparison to their suburbs. Although redevelopment and resettlement took place in some central cities, the housing boom generally propelled new construction in the urban fringe during the past decade.  Since most major housing markets remain depressed, decentralization of the metro area population from the central cities to their suburbs will likely abate. Still, the previous decade’s losses of population (and jobs) have left some city governments and schools systems, including those in Chicago and Detroit, with yawning fiscal deficits, which make it very difficult to sustain essential services. At the same time, fewer households do not always translate into fewer public service burdens because physical infrastructure (schools, roads, bridges, and sewers) must be maintained; indeed, the delivery networks of public services do not easily or quickly scale down dollar for dollar.

States Ignored Warnings On Unemployment Insurance - State officials had plenty of warning. During the past three decades, two national commissions and a series of government audits sounded alarms about the dwindling amount of money states were setting aside to pay unemployment insurance to laid-off workers. “Trust Fund Reserves Inadequate,” federal auditors said in a 1988 report. It’s clear now the warnings were pretty much ignored. Instead, states kept whittling away at the trust funds, mostly by cutting unemployment insurance taxes at the behest of the business community. The low balances hastened insolvency when the recession hit, leading about 30 states to borrow $41.5 billion from the federal government to pay unemployment benefits to their growing population of jobless. The ramifications will be felt for years. In the short term, states must find the money to pay interest on the loans. Generally, that involves a special tax on businesses until the loan is repaid. Some states could tap general revenues, making it harder to pay for schools, roads and other services.

State tax revenue fact of the day, or "the new normal" - GDP has now recovered to pre-crash levels, but how about state revenue? On average it has returned to 89% of peak levels.  In Louisiana it is about 72 percent of peak levels, the lowest figure in the group.  In North Dakota it is over 110 percent.  Only New Hampshire and North Dakota are above 100 percent of peak levels. I take these numbers to be one measure (not the only measure) of how much we had been overvaluing our actual wealth, pre-crisis. Here is the on-line version of the WSJ article, it does not reproduce all of the information in the paper edition, pp.A6-7.

State and Local Tax Burdens Fall as Revenues Shrink Faster than Income - Combined state and local tax burdens fell slightly in fiscal year 2009, as taxes shrank faster than income due largely to a slower economy, according to our new State-Local Tax Burdens report released this morning. The nation as a whole paid 9.8% of its income in state and local taxes, down slightly from 9.9% in 2008 and down significantly from 10.4% in 1977, the earliest year for which the Tax Foundation has done such measurements. While it is useful and informative to look at the national trend, burdens among the states can vary widely. Taxpayers in high-tax New Jersey, for example, pay almost twice the state-local tax rate as those in Alaska, the state with the lowest burden. See how your state ranks.

States on the Verge of Bankruptcy -Should states in fiscal crisis be able to declare bankruptcy? As states like California and Illinois hike taxes and slash spending to avert disaster, Congress is faced with growing pressure to rescue ailing state governments. Last week, e21 and the Manhattan Institute hosted a discussion to hear leading scholars debate the political, policy, and legal concerns surrounding the danger of state bailouts. To watch the video from the event, click here. In addition, we asked the panelists to reflect on the discussion and offer some concluding comments. Did their views change on the question of whether a state should be able to declare bankruptcy? What were the big takeaways from the debate?

The Housing Bubble and Negative Equity are a Major Predictor of State Budget Gaps, Not Unions - Amidst all the public debate about how states are being bled dry by militant public unions, you wouldn’t know that we just had a major housing bubble across the country followed by a financial system near-collapse and the most prolonged downturn since the Great Depression. Chris Hayes addressed this opportunism, the ignoring of the housing crisis to push long-standing right-wing priorities, in the opening segment of the Rachel Maddow show last night, and I think it’s worth throwing a graph together. John Side posts some graphs of state budget shortfalls against public union density on his site The Monkey Cage:

Private Hiring and Government Layoffs - In my column this week, I mention that government employment and private sector employment have both fallen during the last two years. Over just the last year, private employment has risen — though more slowly than the population has been growing — while government employment has continued falling. These numbers make clear that a surge of government hiring can’t be the economy’s problem right now — because there has been no surge.Here are the changes in government and private employment since January 2009, stated in thousands: The mid-2010 spike in government employment is the temporary hiring — and then letting go — of Census workers. Ignore those temporary Census jobs, and government employment has been falling gradually and fairly steadily over the last two years. State and local cuts have more than made up for a modest amount of net federal hiring, mostly for national security jobs.It’s hard to look at these numbers and believe that the laying off of more government workers will somehow cure the economy’s troubles.

Fix It and They Will Come - On Friday morning, the Hamilton Project will release a few new proposals for helping fiscally struggling state and local governments keep their roads, bridges and other infrastructure in decent shape. One of the proposals fits a theme I’ve been writing about recently: making government programs less wasteful.  . The title summarizes it: “Fix It First, Expand It Second, Reward It Third.” Mr. Kahn and Mr. Levinson call on the federal government to devote its current funding for highways to repair, rather than to the construction of new highways. As they note, the reverse happens all too often:  Federal highway infrastructure spending is allocated based on a series of subjective criteria that typically do not require any stringent analysis of expected benefits versus costs. Because there is often public pressure to build new projects using scarce funds, adding capacity often comes at the expense of supporting and enhancing existing infrastructure. We build roads we don’t need instead of fixing aging roads that we do need. The Kahn-Levinson solution would force state and local governments to spend their federal dollars on repair.

The Sunday Morning Shutout - A couple of years ago Pew Research surveyed news coverage of the economy during the first half of 2009. Who drove stories? Who got quoted in stories? The answer was pretty much what you'd expect: the president, the White House, business leaders, academics, politicians, and ordinary citizens. Do you notice anyone missing from this list? Pew did:One subset of the American workforce was virtually shut out of the coverage entirely. Representatives of organized labor unions were sources in a mere 2% of all the economy stories studied.But that was reporting about a financial crisis. Surely things would be different if the story dominating the news was specifically about a state governor's attempt to gut a union and the union's attempt to fight back? Eddie Vale, AFL-CIO political communications director, sets us straight: While we appreciate coverage of this impt issue quite odd not a single union member or officer invited on any of the Sunday shows.  Actually, not so odd at all. In fact, it's par for the course. Unless it's a story about how unions are ruining American education or destroying state pension funds, today's press isn't much interested in what they have to say.

My union connection - Ezra Klein asks Have you or anyone close to you belonged to a union? How did that change your impressions of organized labor in general? For 17 years or so my mother was a shop steward for the Amalgamated Clothing and Textile Workers Union. She was a weaver in at Cone Mill’s White Oak plant in Greensboro, North Carolina. She eventually left that job to become a full time union organizer. I grew up in the Union, so my impressions were formed by it. Those impressions evolved considerably as I grew older, both because of observations about the union and the world around it.  As a small child I thought that unions were the only way that workers could receive anything above subsistence wages. I also thought that there were intentional erected barriers in society that prevented people, particularly black people, from changing their class. If you were born working class then by-and-large you were destined to stay working class.

What is the state employee union wage premium? -How much does collective bargaining matter?  On Twitter, Will Wilkinson asks for data.  I find this web site specifying the average Virginia state employee to be earning $50,298.  Rortybomb says that for Wisconsin the comparable number is $48,267. Yet Wisconsin had collective bargaining for state employees and Virginia does not.  Of course this comparison is a gross one and it is not holding constant the composition of each work force, seniority, cost of living differences, and it also does not seem to pick up possible differences in benefits.  Furthermore it does not consider the 48 other states.  Yet, crude as this one-to-one comparison may be, it is more empirically sophisticated than most (all?) other discussions I have seen.

Getting the facts straight about state and local pay - State and local workers have not seen their wages and compensation (including all benefits) grow any faster than that of private-sector workers. According to the data, the wages of state and local employees grew 0.6% annually from 1990 to 2010 (after adjusting for inflation), which was actually slightly slower than the 0.7% rate for private-sector workers.1 Both groups saw their inflation-adjusted hourly compensation grow at an identical 0.9% annual rate. Claims that state and local workers make exorbitant wages and compensation almost always fail to consider the occupation or education levels of the workers being compared. Studies which make an apple-to-apple comparison (controlling for education and other worker characteristics) show that state and local workers are not overpaid.

Yes, America Still Needs Unions - “There was once a need for unions, but they’ve outlived their purpose,” said a nice lady interviewed on the radio in Tennessee just the other day. Annoyed by the spectacle of tens of thousands of teachers, firefighters, cops and other public employees rallying to protect their rights in Wisconsin, she was saying what more than a few Americans think about the labor movement.  They ought to think again—unless they want their children and grandchildren to become the peons of a corporate oligarchy.  Behind the vague notion that unions are somehow obsolete is the suggestion that workers—and their families—are amply protected by the law’s provisions prohibiting child labor and mandating minimum wages, safe working conditions, overtime pay and all the other standards that we now take for granted.

David Brooks on Wisconsin: Flaunting Ignorance of Economics - Let's all have a hearty round of laughter at David Brooks' expense. He doesn't know that employer side payments for benefits like pensions and health care come out of workers' wages. In his column today, he tells his readers that public employees in Wisconsin should have to pay for these benefits just like private sector. Apparently he doesn't know that they already do. Go into any economics department and tell the faculty that you think employers should have to pay more for workers' Social Security benefits. The ridicule with which which that suggestion will be greeted should be heaped on Mr. Brooks for failing to understand basic economics. And of course, we actually have data that show that the higher benefits received by public sector workers in Wisconsin are more than fully offset by lower pay. Of course the bigger mistake in Brooks' column is the assertion that we are looking at a decade of austerity. This may prove true, but this is a policy choice. We had unbelievably incompetent economic policy in the last decade.

Five Things You Might Not Know About Public Employees - Our brief new report on state and local workers includes some basic facts worth keeping in mind in the heated current debate over public employees.

  • 1. Education is by far the largest category of state and local government employment. Nearly 7 million teachers, aides, and support staff work in the nation’s public elementary and secondary schools, more than twice as many as in the next largest job category (protective services, which includes police officers, fire fighters, and correctional officers).
  • 2. Outside of education, the public workforce has shrunk as a share of the population over the last three decades.
  • 3. Public-sector workers earn less than their private-sector counterparts.  (see graph).
  • 4. Public-sector workers also earn less than their private-sector counterparts when one counts both wages and benefits.
  • 5. Labor costs make up a significant share of state and local spending.

Wisconsin Governor warns 12000 State Workers could be fired - Wisconsin Governor Scott Walker warned state employees that if changes aren’t made to benefit contributions, 10-12,000 workers will be without work. Protesters have taken their concerns to the streets in the past week. The Republican governor's plans to cut the state’s budget and contributions to pensions and healthcare have been the concerns of the demonstrators. Walker stated that “while the state enjoys a lower-than-average unemployment rate, 7.5” approximately 5-6,000 state workers and 5-6000 local government workers could be without a job if they (the workers) don’t accept changes to their benefits plan.“I don’t want a single person laid off in the public nor the in the private sector and that’s why this a a much better alternative than losing jobs,” Walker stated. A budget vote was delayed when state Senate Democrats fled to Illinois to avoid having to vote on the plan. The proposed plan would cost the public sector employees about $300 million over two years, or less than 10% of the deficit total.

12K State Workers Could Be Fired Without Budget Deal, Wisconsin Governor Warns - If changes aren't made to the benefit contributions paid by Wisconsin's nearly 300,000 public sector employees, about 10,000-12,000 workers will lose their jobs, Wisconsin Gov. Scott Walker warned Sunday. "I don't want a single person laid off in the public nor in the private sector and that's why this is a much better alternative than losing jobs," Walker told "Fox News Sunday." "If we're going to be in this together, (cut) our $3.6 billion budget deficit, it's going to take a whole lot more than just employee contributions when it comes to pensions and health care," Walker said. "But it's got to be a piece of the puzzle because as I saw at the local level, it's like a virus that eats up more and more of the budget if you don't get it under control." President Obama, whose group Organizing for America, has bused in some of the nearly 70,000 protesters outside the state capitol on Saturday, last week called the bill "an assault on unions."

May 1933: Hitler Abolishes Unions - On May 2nd, 1933, the day after Labor day, Nazi groups occupied union halls and labor leaders were arrested.  Trade Unions were outlawed by Adolf Hitler, while collective bargaining and the right to strike was abolished.  This was the beginning of a consolidation of power by the fascist regime which systematically wiped out all opposition groups, starting with unions, liberals, socialists, and communists using Himmler’s state police. Fast forward to America today, particularly Wisconsin.  Governor Walker and the Republican/Tea Party members of the state legislature are attempting to pass a bill that would not only severely punish public unions (with exception for the police, fire, and state trooper unions that supported his campaign), but it would effectively end 50 years to the right of these workers to collectively bargain.

Wisconsin Union Battle: A Convenient Distraction From the Real Culprit in State Budget Woes - Yves Smith - It is a tribute to the messaging skills of the American corpocracy that a phony budget crisis in Wisconsin has been used to scapegoat unions. This row serves as a very convenient way to shift attention from the real cause of fiscal stress in states that have serious budget gaps (yes, there are a very few states like New Jersey that have gaping pension shortfalls, thanks to years of government use of wildly optimistic return assumptions as an excuse to underfund them, but contrary to the railing of Chris Christie, his state’s problem is an outliers). First, let’s debunk a couple of issues thrown out by Wisconsin governor Walker’s camp before turning to the real culprit in state budget’s supposed tsuris. The state budget is not in any kind of real peril. The Wisconsin Legislative Fiscal Bureau estimated that the state would end fiscal year 2011 with a gross positive balance of $121. 4 million and a net balance (after mandated reserves) of $56.4 million. Walker asserts there is actually a $137 million deficit. But where did that change come from? Lee Sheppard of Forbes estimated that Walker’s tax cuts for businesses would cost at the bare minimum $100 million over the state’s biennial budget cycle. Other sources put a firmer stake in the ground and estimate the costs at at $140 million. Viola! Being nice to your best buddies means you need to go after someone else.  The second major canard is that Wisconsin state employees are overpaid. If any are, it sure isn’t the teachers, nurses, or white collar worker. Note this chart for Wisconsin workers by Menzie Chinn at Econbrowser (hat tip Mike Konczal) is of data on total compensation, meaning it includes benefits such as pensions and health care. And as Chinn notes in comments to the post, the disparity in the 1990s and last decade would have been more skewed in favor of private sector workers:

Biggest protests yet as pro-Walker side, larger union crowd meet peacefully - With no political compromise in sight on Gov. Scott Walker's budget-repair bill, tens of thousands of demonstrators with strong opinions of their own converged Saturday inside and outside the state Capitol to chant, sing, wave signs, beat drums and march for their causes. The march, believed to be the largest gathering at the Capitol since protesters began showing up last week, was huge but peaceful. There were no arrests, according to state officials. The protesters descended on Madison as Walker, through a spokesman, rejected an overture from a Democratic state senator who said public employee unions had agreed to make financial sacrifices contained in the bill in return for the right to bargain collectively.

For Wisconsin Governor, Battle Was Long Coming - Just last fall, people here were waving campaign signs. But the blocks around the State Capitol have been filled for the past week with protesters brandishing signs with a different message — demanding a recall of Gov. Scott Walker, calling him a bully and likening him to Scrooge, Hosni Mubarak, even Hitler.  Seemingly overnight, Mr. Walker, a Republican, has become a national figure, the man who set off a storm of protest, now spreading to other states, with his blunt, unvarnished call for shrinking collective bargaining rights and benefits for public workers to help the state repair its budget.  Wisconsin may seem to the rest of the country like an unlikely catalyst, but to people who have watched the governor’s political rise through the years, the events of the week feel like a Scott Walker rerun, though on a much larger screen and with a much bigger audience.

Wisconsin’s Walker Joins Government Asset Giveaway Club (and is Rahm Soon to Follow?) - - Yves Smith - Mike Konczal (thanks to ed at ginandtacos) reported earlier today on the latest release of a movie coming to states and cities all over the US, namely the sale of state and local government assets to alleviate pressures on strained budgets.  For those new to this concept, the term of art is the anodyne “infrastructure sales” and the company that more or less invented this lucrative business is Macquarie Bank of Australia (known down under as “the millionaires factory”), although US firms clearly intend to exploit the once in a lifetime opportunity presented by widespread state and municipal budget distress and downgrades.  The problem, of course, is that these deals put important public resources paid for by taxes (or even worse, financed by bonds and thus potentially not even yet fully paid for) in the hands of private investors. They then earn their returns by charging user fees of various sorts. The public must rely on the new owners for reinvestment and maintenance, and depending on how the deal is negotiated, may have ceded control as far as fee increases are concerned. This is tantamount to selling the family china only to have to rent it back in order to eat dinner.

Moderate Wisconsin Republicans Offer Compromise - With Wisconsin Gov. Scott Walker maintaining a hard line on his budget bill and Democratic senators refusing to return to Madison to vote, attention is turning to a group of moderate Republican senators to negotiate a compromise to the stalemate that has drawn thousands of protesters to the state capital for a sixth straight day. The proposal, written by Sen. Dale Schultz and first floated in the Republican caucus early last week, calls for most collective bargaining rights of public-employee unions to be eliminated—per Mr. Walker's bill—but then reinstated in 2013, said Mr. Schultz's chief of staff Todd Allbaugh. "Dale is committed to find a way to preserve collective bargaining in the future," said Mr. Allbaugh in a telephone interview.On Sunday, Mr. Walker reiterated his confidence that Republicans would pass their proposal intact. "We're willing to take this as long as it takes because in the end we're doing the right thing for Wisconsin,"

The real Republican strategy - The Republican strategy is to split the vast middle and working class -- pitting unionized workers against non-unionized, public-sector workers against non-public, older workers within sight of Medicare and Social Security against younger workers who don't believe these programs will be there for them, and the poor against the working middle class. By splitting working America along these lines, Republicans hope to deflect attention from the big story. That's the increasing share of total income and wealth going to the richest 1 percent while the jobs and wages of everyone else languish.Republicans would rather no one notice their campaign to generate further tax cuts for the rich -- making the Bush tax cuts permanent, further reducing the estate tax, and allowing the wealthy to shift ever more of their income into capital gains taxed at 15 percent.

Wisconsin Power Play – Krugman - Last week, in the face of protest demonstrations against Wisconsin’s new union-busting governor, Scott Walker — demonstrations that continued through the weekend, with huge crowds on Saturday — Representative Paul Ryan made an unintentionally apt comparison: “It’s like Cairo has moved to Madison.”  It wasn’t the smartest thing for Mr. Ryan to say, since he probably didn’t mean to compare Mr. Walker, a fellow Republican, to Hosni Mubarak. Or maybe he did — after all, quite a few prominent conservatives, including Glenn Beck, Rush Limbaugh and Rick Santorum, denounced the uprising in Egypt and insist that President Obama should have helped the Mubarak regime suppress it.  In any case, however, Mr. Ryan was more right than he knew. For what’s happening in Wisconsin isn’t about the state budget, despite Mr. Walker’s pretense that he’s just trying to be fiscally responsible. It is, instead, about power. What Mr. Walker and his backers are trying to do is to make Wisconsin — and eventually, America — less of a functioning democracy and more of a third-world-style oligarchy. And that’s why anyone who believes that we need some counterweight to the political power of big money should be on the demonstrators’ side.

Billionaire Brothers’ Money Plays Role in Wisconsin Dispute - Among the thousands of demonstrators who jammed the Wisconsin State Capitol grounds this weekend was a well-financed advocate from Washington, Tim Phillips, the president of Americans for Prosperity, who told a large group of counterprotesters who had gathered Saturday at one edge of what otherwise was a mostly union crowd that the cuts were not only necessary, but they also represented the start of a much-needed nationwide move to slash public-sector union benefits.  “We are going to bring fiscal sanity back to this great nation,” he said.  What Mr. Phillips did not mention was that his Virginia-based nonprofit group, whose budget surged to $40 million in 2010 from $7 million three years ago, was created and financed in part by the secretive billionaire brothers Charles G. and David H. Koch. State records also show that Koch Industries, their energy and consumer products conglomerate based in Wichita, Kan., was one of the biggest contributors to the election campaign of Gov. Scott Walker of Wisconsin, a Republican who has championed the proposed cuts.

We Are All Wisconsin Workers - By carpool and caravan, populists are crowing the capitol to stand up for working people. Millions of Americans are standing together today saying "we are all Wisconsin workers." All eyes are on Madison, watching to see whether America's public service workers will continue to have a voice on the job and whether -- by extension -- any of us will.  The outpouring in Wisconsin erupted after years of downward pressure on wages and benefits that public employees have been feeling for years. Benefits negotiated when private sector jobs were flush are resented now that recession takes its toll. Last September, as I blogged here at HuffPost, I participated in an American Federation of State County and Municipal Employees (AFSCME) training where workers told me about over 100,000 jobs mowed down by the 2008 market crash and some seedlings growing from new business expansions.

Union Bonds in Wisconsin Begin to Fray - Among the top five employers here are the county, the schools and the city. And that was enough to make Mr. Hahan, a union man from a union town, a supporter of Gov. Scott Walker’s sweeping proposal to cut the benefits and collective-bargaining rights of public workers in Wisconsin, a plan that has set off a firestorm of debate and protests at the state Capitol. He says he still believes in unions, but thinks those in the public sector lead to wasteful spending because of what he sees as lavish benefits and endless negotiations. .Across Wisconsin, residents like Mr. Hahan have fumed in recent years as tens of thousands of manufacturing jobs have vanished, and as some of the state’s best-known corporations have pressured workers to accept benefit cuts.  Wisconsin’s financial problems are not as dire as those of many other states. But a simmering resentment over those lost jobs and lost benefits in private industry — combined with the state’s history of highly polarized politics — may explain why Wisconsin, once a pioneer in supporting organized labor, has set off a debate that is spreading to other states over public workers, unions and budget woes.

Political Fight Over Unions Escalates -The clash between Republicans and unions that caught fire in Wisconsin last week escalated Monday: Labor leaders planned to take their protests to dozens of other capitals and Democrats in a second state considered a walkout to stall bills that would limit union power. The protests have ignited a wider national debate over the role of labor unions and who should shoulder sacrifices as states scramble to tackle yawning budget deficits. Governors in both political parties are looking for union concessions as they struggle to balance budgets. Some are pushing aggressively to curtail the power of unions to organize or collect dues. On Monday, thousands of steelworkers, autoworkers and other labor activists surrounded the Indiana state capitol to protest a bill before the legislature to dramatically weaken the clout of private-sector unions. This is in contrast to Wisconsin, where a newly elected Republican governor is in a standoff with public-sector unions and their allies. In Ohio, union officials are expecting 5,000 or more protesters Tuesday at the state house, where a legislative panel is considering a Republican-backed bill that would restrict collective-bargaining rights for about 400,000 public employees. Republican Gov. John Kasich supports the bill, a spokesman said.

Labor's Last Stand - IN 2008, A LIBERAL Democrat was elected president. Landslide votes gave Democrats huge congressional majorities. Eight years of war and scandal and George W. Bush had stigmatized the Republican Party almost beyond redemption. A global financial crisis had discredited the disciples of free-market fundamentalism, and Americans were ready for serious change.Or so it seemed. But two years later, Wall Street is back to earning record profits, and conservatives are triumphant. To understand why this happened, it's not enough to examine polls and tea parties and the makeup of Barack Obama's economic team. You have to understand how we fell so short, and what we rightfully should have expected from Obama's election. And you have to understand two crucial things about American politics.

Plutocracy Now: What Wisconsin Is Really About - Emboldened by November’s election results, corporations and their right-wing allies have launched what they hope will be their final offensive against America’s unions. Their immediate target is government workers’ unions. While New Jersey’s Republican Governor Chris Christie has gained national fame by beating up on public school teachers, the threat to unionized workers is playing out in all fifty states, to the drumbeat in the media about states going broke because of government workers’ wages, pensions and benefits. By late January, with the swearing-in ceremonies complete in the twenty-one states where Republicans have a “trifecta,” controlling the governor’s office and both statehouses, hundreds of bills had been introduced seeking to hem in unions if not ban them altogether. On February 11, Wisconsin’s new Republican Governor Scott Walker made what amounts to a declaration of all-out war on public sector workers in his historically progressive state, moving to deprive them of the very right to bargain collectively on matters essential to their economic security.

Madison Area AFL CIO Votes to Prepare For General Strike -  This evening in a press release from IBEW Local 2304 President Dave Pokilinski, I received word that the 45,000 member Southern Central Federation of Labor, the local chapter of the AFL-CIO for the Madison and Southern Central Wisconsin area, has voted to make preparations for a general strike.The press release reads as follows: Around 10:50PM Wisconsin Time on February 21st the South Central Federation of Labor endorsed the following motions:

    • Motion 1: The SCFL endorses a general strike, possibly for the day Walker signs his “budget repair bill,” and requests the Education Committee immediately begin educating affiliates and members on the organization and function of a general strike.
    • Motion 2:  The SCFL goes on record as opposing all provisions contained in Walker’s “budget repair bill,” including but not limited to, curtailed bargaining rights and reduced wages, benefits, pensions, funding for public education, changes to medical assistance programs, and politicization of state government agencies.

Michael Gerson Makes It Up To Go After Unions - On the Washington Post opinion pages you can make up anything you like as long as you are using it in an argument against working people. Therefore we get columnist Michael Gerson telling readers that: "public employee unions have the unique power to help pick pliant negotiating partners - by using compulsory dues to elect friendly politicians." Nope, that is not true in this country. Unions are prohibited from using dues to pay for campaign contributions. (If Mr. Gerson knows of any violations of the law, I'm sure that there are many ambitious prosecutors who would be happy to hear his evidence.) Unions do make contributions to political campaigns, but these are from voluntary contributions that workers make to their union's PAC. They are not from their union dues. As Barry Goldwater once said, "making things up in the service of the wealthy is no vice," or something like that.

Privatizing Wisconsin - Ed at Gin and Tacos picked up on a particularly audacious section of the Wisconsin budget-repair bill yesterday: the governor can sell off any state-owned heating, cooling, and power plants he likes, at any price, to anybody he wants, without any kind of auction or bid-solicitation process, and such a sale would be defined as being in the best interest of the state and to comply with criteria for certifying such a transaction. Ed calls this “a highlight reel of all of the high-flying slam dunks of neo-Gilded Age corporatism: privatization, no-bid contracts, deregulation, and naked cronyism” — but as Yves Smith notes, the sad fact is that all this language is gratuitous: if you’re a state, there are essentially no legal restrictions on how to privatize state-owned industries and franchises if you’re so inclined.

Wisconsin, fiscal responsibility, and power (plants?) - Have you heard about 16.896?  "...with or without solicitation of bids, for any amount that the department determines to be in the best interest of the state." Who knew behind the scenes it was also power plants? From rortybomb at the link above: The fight in Wisconsin is over Governor Walker’s 144-page Budget Repair Bill. The parts everyone is focusing on have to do with the right to collectively bargain being stripped from public sector unions (except for the unions that supported Walker running for Governor). Focusing on this misses a large part of what the bill would do. Check out this language, from the same bill (my bold): 16.896 Sale or contractual operation of state−owned heating, cooling, and power plants. (1) Notwithstanding ss. 13.48 (14) (am) and 16.705 (1), the department may sell any state−owned heating, cooling, and power plant or may contract with a private entity for the operation of any such plant, with or without solicitation of bids, for any amount that the department determines to be in the best interest of the state. Notwithstanding ss. 196.49 and 196.80, no approval or certification of the public service commission is necessary for a public utility to purchase, or contract for the operation of, such a plant, and any such purchase is considered to be in the public interest and to comply with the criteria for certification of a project under s. 196.49 (3) (b). (Update: Dan here...see also Linda Beale's post on the same issue via Mark Thoma. Yves Smith adds her comments.)

More Reasons to Be Leery of Infrastructure Sales: Abuses of Rights for Fun and Profit - Yves Smith - Yesterday, we discussed a mundane reason to be leery of the sale of assets owned by the public to private parties: the outcome, almost without exception, is a ripoff. Even if the owners manage to orchestrate the bidding well enough to assure that the entity fetches a decent price, the cost of doing the deal and the investors’ return requirements assure that charges to the public will rise faster than if the property was left in government hands (and this does not preclude the owner scrimping on maintenance and service levels). Macquarie Bank has been the world leader in this business, and reader Crocodile Chuck gave some useful examples:Ah, the Macquarie model! Clipping the ticket, at each step, and all the way through the route map from public good to ‘privatised entity’. The Sydney Airport (a Macquarie Airports asset), boasts the second highest parking rates on Earth (not inherited with the operation; they levied this themselves). About $100 for eight hours Highest: Budapest Ferihegy in Hungary. Owner: Macquarie Airports. I happen to have flown out of Budapest last summer. The lavish fees most assuredly have not been reinvested in the physical plant; the airport looks dated and worn. But there are even bigger reasons to worry about public infrastructure sales.

The Walker privatization/deregulation/tax cut agenda and Krugman on Union-Busting » - Paul Krugman's op-ed on the "Wisconsin Power Play" (New York Times, Feb. 20, 2011) is worth reading.   As he notes, it isn't about the deficit (not much is that the GOP claims to be these days).  It's about power--the power to bust public employee unions (before private workers get dangerous ideas about the benefits of collective bargaining). You might also want to catch the comments on Thoma's post of same at Economist's View, including this one from E Michael who notes that in Wisconsin Governor Walker's budget bill is a proviso for the sale of state-owned heating, cooling and power plants:"The bill would allow for the selling of state-owned heating/cooling/power plants without bids.  And E Michael quotes another blogger who notes that this is "like a highlight reel of all of the tomahawk dunks of neo-Gilded Age corporatism: privatization, no-bid contracts, deregulation, and naked cronyism. Extra bonus points for the explicit effort to legally redefine the term “public interest” as “whatever the energy industry lobbyists we appoint to these unelected bureaucratic positions say it is.”

The Koch Brothers' End Game in Wisconsin: take over state-owned power plants for pennies - Oh my, we got ourselves quite a tail-wagging going on in Wisconsin. You are thinking, what? This is about collective bargaining and workers' rights! Bullshit. You are being wagged.As always this has to do with money, and the union "compromise" coming down the pipe was set up to be the "booby" prize while the Koch Brothers get their "booty" prize. This is all being well-orchestrated with an end game that has absolutely nothing to do with unions. As I said in comments before, to much bewilderment, this is about power plants and a vertical monopoly the Kock Brothers have their eye on in Wisconsin.

Changes to Medicare criticized; up to 70000 could lose coverage - Overshadowed in Gov. Scott Walker’s controversial budget repair bill is a provision that could lead to some 70,000 people losing health insurance. The measure would give the state Department of Health Services the authority to restrict eligibility, modify benefits and make other changes to Medicaid with less legislative review than required now. The proposal has drawn the criticism of health care advocates and Democratic lawmakers upset by what they see as unchecked power for the administration. Walker spokesman Cullen Werwie said changes and flexibility are needed to plug the $1.8 billion hole in the state’s Medicaid budget over the next two years. The program, which includes BadgerCare Plus, Family Care, SeniorCare and other health plans, accounts for half of the state’s estimated $3.6 billion budget gap. Under current rules, people earning up to twice the federal poverty level can participate in the programs. Walker’s bill would allow the state to disqualify those earning more than 133 percent of the poverty level; that includes about 63,200 parents and another 6,800 adults, according to the Legislative Fiscal Bureau.

Just Price in the Public Sector - Allison Schrager writes. . . people must rethink the social contract between state workers and taxpayers. As health care gets more expensive and people live longer, the old model simply isn’t sustainable. This means that either benefits must be cut (which, given legal hurdles, is unlikely) or state residents must pay more taxes. An issue I have with the popular discussion of public sector pay and unionization is that on all sides there is a temptation to frame this as a moral question. What are worker’s rights? What are tax payer’s rights. What is the social contract and is one group cheating the other. Some of this is unavoidable since public sector pay is influenced by the democratic process. Still we should not encourage it.  The public sector isn’t a stage on which to air our perceptions of the just society, either from the point of view of workers or tax payers. The public sector is a labor market.  In a labor market the greater the total value of the compensation offered the greater the size of the applicant pool. The question facing policy makers is at its heart, do we have too many applicants or not enough? Are our best applicants over qualified or under qualified?

What Does It Mean To Have An Overpaid Public Sector? - In the wake of yet another study comparing private sector and public sector compensation, I continue to think the question of is a bit ill-posed. You need some kind of concept of an alternative. Carmelo Anthony is “overpaid” in the sense that other players making identical salaries are clearly superior, to wit LeBron James. But viewed in another light, James and Anthony are both underpaid relative to what they could command on an open market unconstrained by salary caps and the details of the collective bargaining agreement.  What does this have to do with the public sector? Think about your community. Or, rather, I’ll think about my community. It seems to me that if we cut MPDC officers’ compensation by ten percent, that this would end up having a deleterious impact on the crime situation. So I don’t think the cops are overpaid. By contrast, though I have absolutely no idea what the eight manicure licensing enforcement officers employed by the state of Kentucky are paid, I’m certain that it’s too much. What bad consequences will flow from cutting their pay? Nothing. But the issue here isn’t “overpaid” manicure inspectors, it’s that Kentucky doesn’t need to be employing these people at all.

Are Wisconsin Public Employees Over-Compensated? - Conclusion: Wisconsin public employees are not overpaid: The earnings equation estimates indicate that state and local government employees in Wisconsin are not overpaid. Rather, local and state public employees are undercompensated. When we make comparisons controlling for education, experience, hours of work, organizational size, gender, race, ethnicity, citizenship, and disability, both state and local public employees earn lower wages and receive less in compensation (including all benefits) than comparable private sector employees. A standard earnings equation produces what some may consider a surprising result: full-time state and local employees are undercompensated by 8.2%. We observed, however, that public employees work fewer hours, particularly employees with bachelor’s, master’s, and professional degrees. An earnings equation controlling for work hours of full-time employees demonstrates that Wisconsin public employees earn 4.8% less than comparable private sector workers working comparable annual hours. EPI

The worst solution except for all the others? - HAVING said my piece for labour unions, let me now offer a different perspective. I have a difficult time seeing how labour unions play a role that's beneficial, on net, for society. The idealised conception of the labour union is as an institution that fights to protect workers. Reality is somewhat different. As Adam Ozimek puts it: Kevin Drum responded that a single incidence of union political malfeasance doesn’t make them bad overall. Well that would indeed be a silly argument to make, and were this the only example of unions being on the wrong side of educational reform then that clearly would be the argument I was making. But do I really have to run down the litany of bad policies unions have fought to keep, and good policies they’ve fought against in education reform? A clear indicator of how bad they’ve been is that the most anyone will say in their defense on education reform is that “well, some unions are embracing reform now in some places!”. That’s some defense. As Megan McArdle sarcastically pointed out on twitter “to be fair, it DID only take thirty years”.

Americans favor union bargaining rights by 2-1 margin - Americans decisively support laws ensuring the collective bargaining rights of public employee unions by a nearly two-to-one margin, according to a new USA Today/Gallup poll. Sixty-one percent said they oppose legislation stripping those rights in their states, as compared to only 33 percent who said they favor such laws, a striking discrepancy that shows public opinion firmly on one side of a growing national fight. Six percent had no opinion.The wide margin could influence the outcome of a now high-profile skirmish over Wisconsin Republican Gov. Scott Walker's new budget measure curtailing the ability of public employee unions to collectively bargain for salaries and benefits.

Glenn Beck: Wisconsin Unions, Muslim Brotherhood All Just Want New World Order (VIDEO) - Glenn Beck told viewers of his Fox News program today that the U.N., unions and the Muslim Brotherhood were all just working towards a New World Order and that protesters in Wisconsin were 'looking to create chaos on the backs of the worker when the world's focus is on Egypt.' 'Unions claim the cuts will affect teachers but it's not the everyday teacher that this story is really all about,' Beck said. 'There are three groups of people,' Beck explained. 'They want a new world order. This is your choice. One world government. This is open society. This is United Nations, whatever you want to call it. One world government. They have lots of money and lots of power and they have NGOs, non-governmental organizations.'

Wisconsin - it's about democracy - As demonstrators in the tens of thousands flooded the Capitol in Madison, Wis., a sign captured the spirit: "I didn't think Cairo would be this cold." Even conservative Republican Rep. Paul Ryan saw the parallel: "It's like Cairo moved to Madison."  Got that right. As the demonstrations for workers' rights head into their second week, Madison has become ground zero in the battle for democracy in this country.  Don't fall for the dodge that this is about money, the pay and perks of public employees. This is about basic democratic rights, and the balance of power in America. This is a fight in which every U.S. worker has a direct stake.

Ezra Klein - Jamie Galbraith: ‘The government is not, by any means, a pure representative of the working population.’ - The events in Wisconsin are bringing the idea of "countervailing powers" back into the discussion. The concept comes by way of economist John Kenneth Galbraith, who was trying to understand an economy where the competition was not between lots of small companies, as the early neoclassical models had assumed, but a smaller number of large institutions. Organized labor was one of these forces -- they were in competition with producers and retailers and distributors and the government, representing some portion of the American working class. I spoke this morning with Jamie Galbraith, John Kenneth Galbraith's son, and an economist at the University of Texas at Austin. An edited transcript of our conversation follows.

Gov. Walker Informed That Bill Targeting Unions May Cost State $46 Million In Federal Funds - Budget referees and transportation officials in Wisconsin have informed Gov. Scott Walker (R) that if he were to pass his controversial anti-union legislation into law, he could be forfeiting tens of millions of dollars in federal funds for transportation. Under an obscure provision of federal labor law, states risk losing federal funds should they eliminate "collective bargaining rights" that existed at the time when federal assistance was first granted. The provision, known as "protective arrangements" or "Section 13C arrangements," is meant as a means of cushioning union (and even some non-union) members who, while working on local projects, are affected by federal grants.  It also could potentially hamstring governors like Walker who want dramatic changes to labor laws in their states. Wisconsin received $74 million in federal transit funds this fiscal year. Of that, $46.6 million would be put at risk should the collective-bargaining bill come to pass -- in the process creating an even more difficult fiscal situation than the one that, ostensibly, compelled Walker to push the legislation in the first place.

Is Scott Walker Cutting Off Internet Access To Thwart Protesters? - According to pro-labor protesters in Wisconsin, Gov. Scott Walker (R) may be taking a page from former Egyptian Dictator Hosni Mubarak and cutting off internet access to key protest organizers within the state Capitol building.If you are in the Capitol attempting to access the internet from a free wifi connection labeled “guest,” you cannot access the site The site has been used to provide updates on what is happening, where you can volunteer, and where supplies and goods are needed to support protesters. Administrators of the website were notified on Monday that the page is being blocked. Wisconsin Democratic Party Chairman Mike Tate says that the site was put on a blacklist typically used to filter out pornography sites so that protestors inside the Capitol could not access this key site.

Wisconsin’s Walker Signs Bill Requiring 2/3 Majority for Tax Increases - I got a sense from Sen. Chris Larson and some others in Wisconsin that the Governor and his Republican allies had run amok in the Capitol before attention was paid to their machinations due to the assault on public workers. But I didn’t realize how bad it was until I saw this come across the transom: Madison – Today, Governor Scott Walker signed Special Session Assembly Bill 5 which requires a 2/3s vote to pass tax rate increases on the income, sales or franchise taxes. That’s hilarious framing on that one, that the bill makes sure that long-term solutions aren’t ushered in under the guise of a short-term budget fix. Wherever have I heard that one before? This permanent restriction on revenues was put through in a special session on the budget, not the regular legislative cycle. Being from California, I’m pretty clear what the implications of a Prop 13-style supermajority requirement for taxes will do. It will basically destroy government as they know it in Wisconsin, ratcheting down the ability for the state to collect the revenue needed to provide a basic level of services. If you liked the efficient, responsive government we’ve seen over the last three decades in California, you’re going to love it in Wisconsin.

The Beast’s “David Koch” Speaks to Wisconsin Governor Walker - Yves Smith  - I was alerted about and listened to this recorded phone conversation between a caller claiming to be David Koch and Walker a couple hours ago and did not post it then over concern that might not be real. However, the governor’s office has issued a press release attempting to defend the governor’s half of the conversation. Per reader Doug Smith, who pinged me about the official statement: I listened to the full tape. Walker said nothing at all that would indicate his appreciation for civil discourse. For example, at one point he describes a gambit under consideration where he’d invite the 14 Senators to join him in a conversation. Walker says ‘not a negotiation, a conversation’. Then he goes on to describe the purpose of this conversation: if they can get the 14 into a room, the law may support the notion that the session has officially begun — at which point, even if the 14 leave again, the quorum for the session would be there and the Republicans can move forward with votes even in the absence of the 14 Dems. Walker says, he’d be happy to have the 14 ’scream at him for an hour’ if he could accomplish this legal tactic.

Fake ‘Koch’ call to Walker uses HR 3 arguments against unions - So, how about that call from "David Koch" to Wisconsin Governor Scott Walker (R), eh? Pretty funny! But I found something in the fake Koch call to Walker that's of still greater interest, though it's not as neat and funny a storyline as just being a basic jackass. At one point in the call—about eight and a half minutes into the conversation—Walker rationalizes his fight against the public sector unions by saying that what they were doing was particularly egregious because "essentially, you're having taxpayers' money being used to pay to lobby for spending more of [the] taxpayers' money." That's a straight-up Istook amendment fungibility argument, and it's come back into vogue with Republicans thanks to H.R. 3. Yes, the bill most people still think of as an abortion measure also hides the key to this attack on collective bargaining rights.

Shock Doctrine, U.S.A., by Paul Krugman - Here’s a thought: maybe Madison, Wis., isn’t Cairo after all. Maybe it’s Baghdad — specifically, Baghdad in 2003, when the Bush administration put Iraq under the rule of officials chosen for loyalty and political reliability rather than experience and competence. Instead of focusing on the urgent problems of a shattered economy and society, which would soon descend into a murderous civil war, those Bush appointees were obsessed with imposing a conservative ideological vision.  L. Paul Bremer, the American viceroy, told a Washington Post reporter that one of his top priorities was to “corporatize and privatize state-owned enterprises” — Mr. Bremer’s words, not the reporter’s — and to “wean people from the idea the state supports everything.”  The story of the privatization-obsessed Coalition Provisional Authority was the centerpiece of Naomi Klein’s best-selling book “The Shock Doctrine,” which argued that it was part of a broader pattern. From Chile in the 1970s onward, she suggested, right-wing ideologues have exploited crises to push through an agenda that has nothing to do with resolving those crises, and everything to do with imposing their vision of a harsher, more unequal, less democratic society.  Which brings us to Wisconsin 2011, where the shock doctrine is on full display.

Really Bad Reporting in Wisconsin: Who 'Contributes' to Public Workers' Pensions? - When it comes to improving public understanding of tax policy, nothing has been more troubling than the deeply flawed coverage of the Wisconsin state employees' fight over collective bargaining. Economic nonsense is being reported as fact in most of the news reports on the Wisconsin dispute, the product of a breakdown of skepticism among journalists multiplied by their lack of understanding of basic economic principles. Gov. Scott Walker says he wants state workers covered by collective bargaining agreements to "contribute more" to their pension and health insurance plans.Accepting Gov. Walker' s assertions as fact, and failing to check, created the impression that somehow the workers are getting something extra, a gift from taxpayers. They are not.  Out of every dollar that funds Wisconsin' s pension and health insurance plans for state workers, 100 cents comes from the state workers.

Walker’s Budget Plan is a Three-Part Roadmap for Conservative State Governance - Tim Fernholz wrote an excellent article in the National Journal about the “bait and switch” of Governor Walker’s Wisconsin plan. Fernholz points out that the short-term deficit problem can be covered by debt restructuring, and that the big pieces of the bill that relate to dismantling public sector unions, control over Medicaid and creating a no-bid energy asset sale process are not directly budget related. There’s a three-prong approach in Governor Walker’s plan that highlights a blueprint for conservative governorship after the 2010 election. The first is breaking public sector unions and public sector workers generally. The second is streamlining benefits away from legislative authority, especially for health care and in fighting the Health Care Reform Act. The third is the selling of public assets to private interests under firesale and crony capitalist situations.

The High Stakes Union Stare-Down - When five different statehouses take up similar pieces of contentious legislation at the same time, it suggests either a conspiracy or a crisis. Bills pending in Wisconsin, Ohio, Michigan, Tennessee, and Idaho would limit the right of ­public-sector unions—teachers, nurses, sanitation workers, firefighters—to bargain collectively. Wisconsin's has come to a vote first. In protest, the state's Democratic senators moved to Illinois and the state's union members moved into the capitol. Scott Walker, Wisconsin's governor and the bill's chief proponent, went on television to warn against outside agitators. "We're not going to be intimidated by people coming in from outside of Wisconsin trying to tell us what to do to balance our budget." One of those outsiders was President Barack Obama, who called Walker's bill "an assault on unions." Another was Gerald W. McEntee, president of the 1.6 million-member American Federation of State, County and Municipal Employees, who wrote in the Huffington Post on Feb. 16 that "newly elected politicians are working tirelessly to pay back their debt to the corporate CEOs who funded their campaigns."

Troopers Hunt for Wisconsin Senators - Wisconsin Republican lawmakers dispatched state troopers to the homes of absent Democratic senators in search of a quorum Thursday but came up empty as the state's legislative standoff continued.  Assembly Democrats, meanwhile, sent Republican Gov. Scott Walker an alternative to his budget proposal that includes economizing measures of his bill but strips provisions that would eliminate most collective-bargaining rights of the state's 170,000 public workers. Mr. Walker, in a news conference Thursday evening, said the proposal was very similar to ideas that Democratic legislative leaders suggested to him before his bill was introduced. "These aren't new things," the governor said, adding that he believed his budget plan "is what we have to pass."

Wisconsin State Senate Makes Budget Repair Bill Unamendable - The Wisconsin State Senate “engrossed” the budget repair bill today, which includes the provision to strip the collective bargaining rights for public employees. This means that the bill, which came from the Assembly, can no longer be amended. Sen. Dale Schultz (R), who comes from a swing district, planned to introduce an amendment that would sunset the collective bargaining restrictions after two years. He publicly announced he would do this. When push came to shove, he didn’t offer the amendment, and blamed Democrats for this failure. “Where I come from, compromise is not a dirty word. It’s something we do every day to survive,” Schultz said. Except he did not offer the compromise, he got bullied by his caucus into basically staying silent. Governor Walker, meanwhile, has been flying around the state to the districts of the Democratic Senators, in places like Kenosha, Rhinelander and Green Bay, criticizing them for staying in Illinois and denying a quorum on the bill. Not sure who footed the bill for the private jet Walker is using to fly around. Walker has stayed on message despite a battering in the local and national press, and mass protests in Madison and throughout Wisconsin. Over 270 state legislators from across the nation, from 44 states, have declared their support for the protests as well. In many of those states, these anti-union measures could be coming next.

Indiana Official: "Use Live Ammunition" Against Wisconsin Protesters - On Saturday night, when Mother Jones staffers tweeted a report that riot police might soon sweep demonstrators out of the Wisconsin capitol building—something that didn't end up happening—one Twitter user sent out a chilling public response: "Use live ammunition." From my own Twitter account, I confronted the user, JCCentCom. He tweeted back that the demonstrators were "political enemies" and "thugs" who were "physically threatening legally elected officials." In response to such behavior, he said, "You're damned right I advocate deadly force." He later called me a "typical leftist," adding, "liberals hate police." Only later did we realize that JCCentCom was a deputy attorney general for the state of Indiana.

Democrat urges unions to 'get a little bloody when necessary - Sometimes it's necessary to get out on the streets and "get a little bloody," a Massachusetts Democrat said Tuesday in reference to labor battles in Wisconsin. Rep. Michael Capuano (D-Mass.) fired up a group of union members in Boston with a speech urging them to work down in the trenches to fend off limits to workers' rights like those proposed in Wisconsin. "I’m proud to be here with people who understand that it’s more than just sending an email to get you going," Capuano said, according to the Statehouse News. "Every once and awhile you need to get out on the streets and get a little bloody when necessary."Political observers have been the lookout for potentially incendiary rhetoric in the wake of January's shooting in Tucson, Ariz., where Rep. Gabrielle Giffords (D) survived an assassination attempt, six were killed, and 12 others were injured.

Workers' Rights Battle Goes National at Pivotal Time for Labor… Unions and their allies are planning rallies, vigils and press conferences in at least 27 states this week against what they see as a national attack on government employees that is a seminal moment for organized labor. Demonstrations are spreading from Wisconsin and Ohio, where bills from Republican governors to curtail collective-bargaining rights have attracted thousands of protesters. Efforts include lobbying all week against measures in Indiana and a Feb. 25 AFL- CIO rally to warn New Jersey Governor Chris Christie “not to balance the budget on the backs of middle-class families.”  U.S. states face deficits that may total $125 billion nationwide in the next fiscal year. Labor leaders say legislative battles over curbs on government employees’ power and pay are an assault on unions and their support of the Democratic Party. The state collective-bargaining bills and the Washington showdown over federal spending, may answer fundamental questions about government’s role and the future of the U.S. worker, they say.  “The Republican Party’s strategy is to turn working Americans against one another -- unionized versus non-unionized, public versus private, older workers close to retirement age against younger ones who don’t believe Social Security will be there for them,” Robert B. Reich said in an e-mail.

Wisconsin Labor Fight Spreads to Ohio, Oklahoma and Indiana -  With states like Wisconsin facing multi-billion dollar budget shortfalls, it is easy to see that something has got to give. It is even clear to public employees in Wisconsin who agreed to work with Gov. Walker in closing that state’s $3.6 billion budget gap by paying more for pension and healthcare benefits.   But, the labor fight in Wisconsin is far from over and it’s spreading to states like Ohio, Oklahoma and Indiana where protests protecting public -- and private -- sector employee unions have erupted.  The labor disputes have become less about money, and more about the rights of employees to unionize. Ohio Gov. John Kasich's plan to eliminate the collective bargaining rights of public workers fueled protests in the Columbus statehouse yesterday and will likely do so again today. In Oklahoma, state workers are on the offensive as lawmakers there have made pension reform a top priority, but have made no formal proposals. And in Indiana, the labor fight is over bill in the state legislature that would end a law requiring private-sector workers to pay dues and belong to a union that bargains on their behalf.

Exodus: Dems trigger Statehouse showdown - Seats on one side of the Indiana House were nearly empty today as House Democrats departed the the state rather than vote on anti-union legislation. A source tells The Indianapolis Star that Democrats are headed to Illinois, though it was possible some also might go to Kentucky. They need to go to a state with a Democratic governor to avoid being taken into police custody and returned to Indiana. The House came into session twice this morning, with only three of the 40 Democrats present. Those were needed to make a motion, and a seconding motion, for any procedural steps Democrats would want to take to ensure Republicans don’t do anything official without quorum. With only 58 legislators present, there was no quorum present to do business. The House needs 67 of its members to be present.

Indiana Democrats Walk Out to Protest Union-Busting Bill, Deny Quorum - For the second time in a week, a group of legislative Democrats from a Midwestern state has bolted to protest an anti-union bill. We know about Wisconsin, but now Indiana Democrats have walked out: There are differences between the proposed Wisconsin and Indiana measures: the Indiana ones are actually quite worse. Governor Mitch Daniels de-certified the state’s public employee unions on his first day in office back in 2007. It got little response at the time. This new bill would essentially make Indiana into an anti-union “right to work” state. It would prohibit employers from requiring an employee to join a union or to collect union dues to work at their establishment. It would also give private-sector union members the right to drop out of their unions and stop paying dues. Basically it would turn the work environment in Indiana like much of the deep South. And it can be seen as the second of a two-step which Wisconsin is just embarking upon: first, bust the public unions, then bust the private ones. Overall this reduces leverage for the working man and woman. Studies have shown that workers in right to work states make $5,500 less for the same job than workers in states without those restrictions.

The War Against the Republic: The Battle Of Madison - Sometimes it's worth looking at current events through the eyes of a historian chronicling the end of an age, or those of a district attorney in a time of corruption. Come to think of it, the two perspectives aren't all that different.  However you look at it, calling the Wisconsin struggle a "labor dispute" is like calling the Battle of Normandy "a fight over a beach." There's a war going on, one that's best understand by using an Latin expression popular among prosecutors: Cui bono? Who benefits? Gov. Scott Walker's union-busting budget contains buried goodies for somebody, including possibly the Koch Brothers who paid to have it drafted. More importantly, it's another step toward replacing the American dream of prosperity for all with imperial visions of massive wealth for the few.  The heavily-financed army behind Scott Walker has as its ambition the death of the American Republic. If that sounds like rhetorical overkill, then it's worth remembering the words of someone who watched a republic fall. "The enemy is within the gates," said Cicero. "It is with our own opulence, our own folly, our own criminality that we have to contend."

The Contribution Scam - Krugman - - David Cay Johnston has a terrific piece up about the nonsense of comparing government workers to private-sector counterparts by claiming that the government pays for more of their benefits. As he says, Out of every dollar that funds Wisconsin’ s pension and health insurance plans for state workers, 100 cents comes from the state workers. How can that be? Because the “contributions” consist of money that employees chose to take as deferred wages – as pensions when they retire – rather than take immediately in cash. The same is true with the health care plan. If this were not so a serious crime would be taking place, the gift of public funds rather than payment for services. So the right question — the only question — is whether government workers are getting an overall good deal compared with private-sector workers. Why, then, are we hearing so much about the meaningless contribution comparison? The answer is simple: it’s because doing the comparison right doesn’t yield the desired answer. The new report by the Times gets the same answer as other studies: low-paid government workers do a bit better than their private-sector counterparts, but others if anything do worse.

A Clarification On Public Workers - Krugman - I see that a number of commenters failed to click on my link in this post. Um, it’s true that the Times article did not include data on benefits as opposed to wages. But other studies have — notably the big EPI study (pdf). The Times results match what those studies say about wages — and those studies find that the lack of evidence for overpayment remains once you take benefits into account. Public sector workers are not, on average, grossly overpaid compared with the private sector — period. You can fiddle at the edges of this conclusion, but it’s just not possible to conclude, based on any honest assessment of the data, that schoolteachers are the new welfare queens.

The Cheesehead Standoff and States’ Budget Crises - Wisconsin’s ongoing battle over the future of public sector unions has put the question in stark relief:   Is public employee compensation causing the states’ current budget shortfalls and must it play a role in future fiscal decisions? The answer to the first question is, “no.”   The projected budget short-term deficits in Wisconsin and 45 other states is largely a function of tax revenues that remain below their pre-recession peak levels, despite an improving economy. In Wisconsin, Governor Scott Walker’s decision to pass tax cuts that benefit small business and encourage health savings accounts will deepen future revenue shortfalls   However, public employee worker discussions do need to be part of any long-term budget fix. To start, it will be years before states return to a level of tax revenues they enjoyed in the days of the Internet and housing bubbles.  And wage and benefit costs are a large part of state budgets.

The Republican Shakedown - Robert Reich -You can’t fight something with nothing. But as long as Democrats refuse to talk about the almost unprecedented buildup of income, wealth, and power at the top – and the refusal of the super-rich to pay their fair share of the nation’s bills – Republicans will convince people it’s all about government and unions. Republicans claim to have a mandate from voters for the showdowns and shutdowns they’re launching. Governors say they’re not against unions but voters have told them to cut costs, and unions are in the way. House Republicans say they’re not seeking a government shutdown but standing on principle.   The Republican message is bloated government is responsible for the lousy economy that most people continue to experience. Cut the bloat and jobs and wages will return.  Nothing could be further from the truth, but for some reason Obama and the Democrats aren’t responding with the truth. Their response is: We agree but you’re going too far. Government employees should give up some more wages and benefits but don’t take away their bargaining rights. Private-sector unionized workers should make more concessions but don’t bust the unions. Non-defense discretionary spending should be cut but don’t cut so much.

What conservatives really want - The central issue in our political life is not being discussed. At stake is the moral basis of American democracy.The individual issues are all too real: assaults on unions, public employees, women’s rights, immigrants, the environment, health care, voting rights, food safety, pensions, prenatal care, science, public broadcasting, and on and on.Budget deficits are a ruse, as we’ve seen in Wisconsin, where the Governor turned a surplus into a deficit by providing corporate tax breaks, and then used the deficit as a ploy to break the unions, not just in Wisconsin, but seeking to be the first domino in a nationwide conservative movement.Deficits can be addressed by raising revenue, plugging tax loopholes, putting people to work, and developing the economy long-term in all the ways the President has discussed. But deficits are not what really matters to conservatives. Conservatives really want to change the basis of American life, to make America run according to the conservative moral worldview in all areas of life.

More Guns, Less Crime, More Violence Conditional on Crime - The Texas legislature is on the verge of passing a law permitting concealed weapons on University campuses, including the University of Texas where just this Fall my co-author Marcin Peski was holed up in his office waiting out a student who was roaming campus with an assault rifle. This post won’t come to any conclusions, but I will try to lay out the arguments as I see them.  More guns, less crime requires two assumptions.  First, people will carry guns to protect themselves and second, gun-related crime will be reduced as a result. There are two reasons that crime will be reduced: crime pays off less often, and sometimes it leads to shooting. In a perfect world, a gun-toting victim of a crime simply brandishes his gun and the criminal walks away or is apprehended and nobody gets hurt.  In that perfect world the decision to carry a gun is simple.  If there is any crime at all you should carry a gun becuase there are no costs and only benefits.  And then the decision of criminals is simple too:  crime doesn’t pay because everyone is carrying a gun. But the world is not perfect like that and when a gun-carrying criminal picks on a gun-carrying victim, there is a chance that either of them will be shot.  This changes the incentives.  Now your decision to carry a gun is a trade-off between the chance of being shot versus the cost of being the victim of a crime. 

No guard layoffs as Texas prisons to cut 555 jobs -  The Texas Department of Criminal Justice plans to save money by eliminating 555 non-guard jobs and changing the menu for inmates, cutting back on dessert and substituting powdered milk. The layoffs, effective April 15, come as states agencies trim their current spending while lawmakers face the prospect of a shortfall of $15 billion dollars in the next two-year budget period. The workforce reduction involves some vacant positions, prison system spokeswoman Michelle Lyons told The Dallas Morning News. Mike Gross of the Texas State Employees Union on Wednesday warned that some of the cuts would have a big impact on public safety. If more released felons can't find work, they'll commit new crimes, Gross said. In a memo Friday, executive director Brad Livingston said 400 administrative and support jobs would be eliminated, as well as 155 positions at Project RIO, which stands for Re-Integration of Offenders.

Michigan public‐sector workers underpaid - Full‐time state and local government employees in Michigan are undercompensated by 5.3%, when compared with otherwise similar private‐sector workers.1 A rigorous analysis using a comprehensive monthly database2 that includes the necessary variables—education, experience, hours of work, organizational size, gender, race, ethnicity, experience, citizenship, and disability—provides the most accurate comparison of public‐ and private‐sector compensation. Previous studies of Michigan used incomplete earnings data and failed to control for education levels and years of experience.

Allen Park to lay off entire fire department - Blaming budget woes on a failed movie studio arrangement, the Allen Park City Council voted Tuesday night to issue layoff notices to its firefighters. The notices are to be issued this morning and would take effect in 30 days, although Mayor Gary Burtka said he’s “hoping to negotiate to avoid that.”  The layoffs affect all 27 firefighters except for the chief, who is appointed. City officials could not say how much they need to save to avoid following through with the layoffs or how deep the city financial troubles are in the city. They also did not say whether they have a backup plan if the firefighters are laid off. The decision to issue the layoff notices was attributed to financial problems caused by the decision announced last year by Unity Studios to leave the city for Detroit.

Detroit Ordered to Close Half Its Public Schools Amid Budget Crisis - The Detroit public school system has been ordered to close half its schools to make up for a $327 million deficit. The schools will be shuttered over the next four years, causing class sizes to bulge to 60. The plan, mandated by state education officials, will reduce the number of schools in the district from 142 to 72. Robert Bobb, the district's emergency financial manager, said he was preparing a list of recommended school closures and that layoffs would be announced closer to April, according to The Detroit News. But Bobb said he doesn't think the plan will be effective because it's likely to drive students out of the district, making the fiscal crisis worse. He expects the district's 74,000 students will have been reduced to 58,570 by 2014. The Detroit school budget is weighed down with $53 million in pension costs, $45 million for health care and $27 million for utilities. The district has lost 83,336 students in the past 10 years, which translates to a loss of more than $573 million in funding, UPI reports.

Michigan orders DPS to make huge cuts - Swift and severe changes are coming to Detroit Public Schools.  State education officials have ordered Robert Bobb to immediately implement a financial restructuring plan that balances the district's books by closing half of its schools, swelling high school class sizes to 60 students and consolidating operations. This week, Bobb, the district's emergency financial manager, said he is meeting with Detroit city officials and will set up a meeting with Wayne County Regional Educational Service Agency to discuss consolidation opportunities in areas such as finance, public safety, transportation and other areas. Bobb also is preparing a list of recommended school closures and Friday said layoff discussions are under way and would be announced closer to April, when notices would be issued. "We are moving forward with the plan," he said "Right now my focus is on my transition plan and the DEP (deficit elimination plan)."

That Plan to Close Half of Detroit’s Schools? It’s Really HappeningEminem's acclaimed Super Bowl advertisement for Chrysler told the world that despite what you've heard, Detroit is making a comeback. Tell that to the city's children, because the State of Michigan has sounded the death knell for Detroit Public Schools. DPS's Emergency Financial Manager (EFM), Robert Bobb, has received approval for his plan to shut down half of the city's public schools over the next two years, raising remaining school class sizes to 60 students. The decision could be the tipping point that pushes Michigan into Wisconsin-style protesting. Bobb's solution addresses a $327 million budget deficit and will reduce the current 142 schools in the district down to 72 by the 2012-13 school year. The plan will likely drive more families out of the Detroit, setting up a domino effect of even more financial problems for the schools.

Elk Grove schools face massive budget cuts, layoffs -  More than 400 jobs are on the chopping block as the Elk Grove Unified School District wrangles with a $40 million budget deficit, according to a list of cuts scheduled to be considered by the school board Tuesday evening.  Teachers and parents said they plan to pack the board meeting on Tuesday as trustees deal with the issue.  "Morale is low. We've been fending off cuts for a number of years" explained Tom Gardner, a first grade teacher and president of the Elk Grove Education Association.  Last September, for the first time in ten years, the number of students in elementary classrooms was increased from 20 to 24, Gardner said. The district is recommending increasing class sizes to 30 next year. "With just four extra students, I can tell the difference. Now the expectation of teachers is that we continue to teach as if we still had just 20,"

Pennsylvania school districts brace for severe cutbacks - Nearly three of every four Pennsylvania school districts spend more than they take in, a problem likely to worsen next year when $1.4 billion in federal stimulus money ends, according to state data. More than 370 school districts will spend a total of about $450 million more than they collect in taxes this year, data show. The districts balance budgets by relying on savings accounts. With the state facing a $4 billion deficit, school officials worry lawmakers and the governor won't replace the lost federal dollars, which they say could lead to severe budget cuts. Greater Latrobe School District faces a $3 million deficit next year when stimulus money runs out, Superintendent Judith Swigert said. Replacing that would require a 9-mill property tax increase. Even if state law allowed such a colossal raise -- 12.2 percent from the 2010-11 rate of 73.5 mills -- "we would never support, nor would we ask taxpayers to raise, that kind of funding," Swigert said.More than 100 school districts in Pennsylvania have not saved enough to absorb the loss of stimulus money, data show. The School District of Philadelphia, with an operating budget of about $3 billion, will lose the most stimulus money -- $246 million.

'Draconian' Cuts Considered For Schools (Jacksonville) At a special board meeting Tuesday, members went through a 25-page list of suggestions from staff of ways to trim the budget.  In addition to cutting art, music and PE in primary schools, other money-saving ideas being considered include making the school week four 10-hour days, consolidating smaller schools, reducing bus routes to some magnet and alternative schools, limiting middle school athletics to four days a week, and cutting field trips to the Marine Science Education Center.  Gentry and the other board members made it clear they don't like any of the ideas, but that doesn't mean they won't happen. The cuts discussed so far only amount to $17 million -- less than one-quarter of what may be needed.  "The only way we're going to be able to deal with it is make draconian changes," Gentry said. "If the governor's cuts go through, it will absolutely devastate our school district."

Providence plans to pink slip all teachers.  The school district plans to send out dismissal notices to every one of its 1,926 teachers, an unprecedented move that has union leaders up in arms. In a letter sent to all teachers Tuesday, Supt. Tom Brady wrote that the Providence School Board on Thursday will vote on a resolution to dismiss every teacher, effective the last day of school. In an e-mail sent to all teachers and School Department staff, Brady said, “We are forced to take this precautionary action by the March 1 deadline given the dire budget outline for the 2011-2012 school year in which we are projecting a near $40 million deficit for the district,” Brady wrote. “Since the full extent of the potential cuts to the school budget have yet to be determined, issuing a dismissal letter to all teachers was necessary to give the mayor, the School Board and the district maximum flexibility to consider every cost savings option, including reductions in staff.” State law requires that teachers be notified about potential changes to their employment status by March 1. This is beyond insane,” Providence Teachers Union President Steve Smith said Tuesday night. “Let’s create the most chaos and the highest level of anxiety in a district where teachers are already under unbelievable stress..”

Matt Stoller: The Liquidation of Society versus the Global Labor Revival - Today, the city of Providence, Rhode Island sent out layoff notices to every single teacher in the city. Every single one of them. If you want to understand why this is happening, why wages in the US keep getting cut, this chart tells the story. That’s the number of strikes since 1947. What you’ll notice is that people in America just don’t strike anymore. Why? Well, their jobs have been shipped off to factory countries, their unions have been broken, and their salaries until recently have been supplemented by credit. It’s part of a giant labor arbitrage game, that the Federal Reserve and elites in both parties are happy to play. Strike, and you’re fired. Don’t strike, and your pay is probably going to be cut. Don’t like it? Sorry, we can open a plant abroad. And we have institutions, like the IMF, to make sure that we get goods from those factory-countries, and get them cheap. But it’s not cheaper, or better, or more efficient. Firing your teachers isn’t exactly “winning the future”. And outsourcing manufacturing, as Boeing found out, is often a good way to increase coordination costs, create more operational risk, and destroy value. However, the system is good at maintaining the power of oligarch-style control of cultural institutions. If no one but the kids of rich people can read, only the kids of rich people will be able to organize society’s resources.

At Grave Risk - A 46-year-old teacher in Charlotte, Vt., who has been unable to find a full-time job and is weighed down with debt, wrote to his U.S. senator, Bernie Sanders: “I am financially ruined. I find myself depressed and demoralized and my confidence is shattered. Worst of all, as I hear more and more talk about deficit reduction and further layoffs, I have the agonizing feeling that the worst may not be behind us.” Similar stories of hardship and desolation can be found throughout Vermont and the rest of the nation. The true extent of the economic devastation, and the enormous size of that portion of the population that is being left behind, has not yet been properly acknowledged. What is being allowed to happen to those being pushed out or left out of the American mainstream is the most important and potentially most dangerous issue facing the country.

Wisconsin Teachers and Average Pay - The standoff in Wisconsin between the Republican governor and legislature against the public sector labor unions and their analogues in the Democratic Party has divided the OTB bloggers. That’s a good thing, probably, given that there are a whole series of complicated issues at play.One particular point of contention–mirroring the national debate–is how well paid the state’s public employees are. Alex Knapp asks, “Are Wisconsin Public Servants Overpaid?” He shows that, when controlling for education and hours worked, they actually make 5% less than their private sector counterparts. Doug Mataconis, on the other hand, charges “Wisconsin Teachers Not Being Honest About What They Earn” and notes that, when factoring in both salaries and benefits, they actually make much more than the people paying their salaries. These debates are always rather weird, in that they invite apples-to-oranges comparisons and one can easily rationalize to arrive at the answer that supports one’s preconceived notions.

As Madison impasse continues, schools eye layoffs - Wisconsin school districts are warning teachers, each one on the payroll in some cases, that their contracts might not be renewed as Gov. Scott Walker's plan to cut nearly all public employees' collective bargaining rights remains in limbo. The proposal took a concrete step forward Friday when Republicans in the state Assembly abruptly approved the bill and sent it to the Senate after three straight days of punishing debate and amid confusion among Democrats. But with all 14 Democratic state senators still out of state, another stalemate awaits the measure that Walker insists will help solve a looming budget deficit and avoid mass layoffs. The legislative gridlock prompted the Wisconsin Association of Schools Boards to warn districts that they have until Monday to warn teachers of possible nonrenewal of contracts. That's because if Walker's bill becomes law, it would void current teacher collective bargaining agreements that lay out protocol and deadlines for conducting layoffs

So Do Teacher Unions Hurt Education? That Would Be A ‘No.’ - From a recent edition of the Economist. “SCOTT LEMIEUX passes along a pretty useful point to keep in mind, courtesy of his friend Ken Sherrill. Only 5 states do not have collective bargaining for educators and have deemed it illegal. Those states and their ranking on ACT/SAT scores are as follows:

  • South Carolina – 50th
    North Carolina – 49th
    Georgia – 48th
    Texas – 47th
    Virginia – 44th
  • If you are wondering, Wisconsin, with its collective bargaining for teachers, is ranked 2nd in the country.

Contractortopia - People claiming to be shocked to discover special interest politicking in the administration of the public school system might be interested to learn that military procurement decisions aren’t immune to political influence. Or that the orthodox conservative opinion has become that for-profit colleges are entitled to federal subsidies irrespective of the quality of services provided. Similarly, the orthodox conservative opinion was that federally subsidized student loans should be required to pass through the hands of bankers who take a cut along the way. Whatever cynical and pernicious things teachers’ union leaders can do can also be done by charter school leaders, and for the exact same reasons. Indeed, thanks to Citizens’ United, government contractors will be able to engage in unlimited anonymous campaign spending. Any government empowered to collect taxes and spend money will be subject to possible interest group capture. Capture by the workforce of a public agency is no better or worse than capture by a private firm. If you look around the world at the best examples of efficient provision of public services (oftentimes through privatization) what you find is a list dominated by Nordic countries with extremely high levels of unionization.

The Obama Administration’s Perpetual Motion Machine: A New Student Loan Program - How does the Obama Administration freeze non-security discretionary spending in its fiscal year 2012 budget yet manage to boost spending on key priorities like education programs? In the case of the Pell Grant program for needy college students, the Administration would “pay for” a share of the program’s ballooning $37 billion budget by creating a new subsidized student loan program that appears to generate new profits for the government. But can supposed profits from one government program really pay for another? Has the Obama Administration discovered the budgeting equivalent of a perpetual motion machine where one government program’s “free lunch” is shared with another program and taxpayers don’t have to pony up a dime? Hardly

College important, but not magic bullet - In his State of the Union address, President Obama drew applause by declaring that the United States needs to “out-innovate, out-educate, and out-build the rest of the world.” In that speech, and in a December address at a technical college in North Carolina where he outlined his economic vision, Obama repeated a pledge that he made upon taking office: by 2020, America will again have the highest proportion of college graduates in the world. With these goals, Obama is taking up a “competitiveness agenda” that has been embraced, to varying degrees, by every American president since at least Ronald Reagan — in other words, since the twin pressures of technology and globalization began to reshape the economy. And it’s not only politicians who emphasize the importance of schooling: a recent National Journal article exploring the roots of the country’s current job shortage reported that nearly every economist interviewed for the story “called education a key piece of any solution.”

College Costs Aren't the Main Problem - What are the main problems?  The complexity of the financial-aid process is one, because it scares away many poor students; in the ideal system, up-front tuition costs would remain low, and students would pay back colleges with a percentage of their income. The patchy — and often shoddy — quality of education at many high schools and colleges is a major problem.  It’s also a problem that we don’t know which colleges are doing a good job and which are not.  Finally, it’s a problem that Washington and the states spend billions of dollars subsidizing higher education but do not demand accountability. See this Daniel de Vise article in The Washington Post for more.If policy makers began to tie funding to performance — both graduation rates and measures of actual learning — we might not drive down the cost of the good colleges. But I bet we’d stop wasting so much money on colleges that are doing their students a disservice. And I bet there are more of these colleges than we care to admit. With better data on learning, we could also figure out how to evaluate new kinds of schools that may indeed be cheaper than traditional colleges are. It will be hard to improve higher education significantly — which is crucial to a faster-growing economy — until we have better information about what students learn and where they learn it.

The Merits of For-Profit Colleges - Are there any merits to for-profit colleges? Those following the news for the last several months could be forgiven for thinking the answer is “no.” The sustained flurry of bad press has included a federal report on deceptive recruitment practices at for-profit colleges, Congressional investigations juxtaposing the colleges’ rising profits against their low completion rates and new federal student loan data showing that students at these schools borrow more and default more frequently than those at public institutions. These reports are rightfully alarming, to the point that reasonable people might wonder whether for-profit institutions have any legitimate place in our higher education landscape. To bring some balance to the conversation, however, I want to raise the possibility that at least some of these schools may be doing at least some things from which the traditional sector could learn.

Clive Thompson on How More Info Leads to Less Knowledge - Is global warming caused by humans? Is Barack Obama a Christian? Is evolution a well-supported theory? You might think these questions have been incontrovertibly answered in the affirmative, proven by settled facts. But for a lot of Americans, they haven't. Among Republicans, belief in anthropogenic global warming declined from 52 percent to 42 percent between 2003 and 2008. Just days before the election, nearly a quarter of respondents in one Texas poll were convinced that Obama is a Muslim. And the proportion of Americans who believe God did not guide evolution? It's 14 percent today, a two-point decline since the '90s, according to Gallup. What's going on? Normally, we expect society to progress, amassing deeper scientific understanding and basic facts every year. Knowledge only increases, right? Robert Proctor doesn't think so. A historian of science at Stanford, Proctor points out that when it comes to many contentious subjects, our usual relationship to information is reversed: Ignorance increases.

California teachers' pension system headed toward insolvency - As California school districts anticipate possibly the worst budget crisis in a generation, many will try to lighten their burden by enticing older teachers into retirement. But as more and more teachers retire -- with a pension averaging 55 percent to 60 percent of salary -- they will be straining a system that already can't meet its obligations. The California State Teachers' Retirement System is sliding down a steep slope toward insolvency. The threat isn't to teachers who have retired or plan to, but to the people of California. Taxpayers, who already pick up 23 percent of CalSTRS expenses, will be increasingly burdened as the giant pension system fails to meet its obligations. "We're on a path of destruction,"  And merely rejiggering formulas for new employees won't rescue the system, she said. Simply put: "We overpromised."

Commission: Freeze pensions for Calif. workers —A California watchdog agency on Thursday called on the governor and Legislature to freeze pension benefits for current state and local government workers and overhaul the existing system, as the debate over retirement benefits for public employees has exploded nationwide. As the Little Hoover Commission unanimously approved its report, it also recommended the state move from a defined benefits plan to a hybrid model that would include something similar to the 401(k) plans offered to most private-sector employees.  The commission, which includes lawmakers and political appointees, agreed that California's 85 public pension systems need more flexibility and oversight because retirement costs have been growing as tax revenues have plunged. Pension costs for retired public workers now account for about 7 percent of the state's general fund expenditures, according to the nonpartisan Legislative Analyst's Office, which also recommended the state convert to a hybrid plan.

NJ gov says pension system could go broke by 2020 - New Jersey Gov. Chris Christie says that if changes aren't made to the state pension system it will go broke by 2020. Christie's $29.4 billion budget proposal calls for the Democratic-controlled Legislature to enact major changes to public employees' pension and health benefits. Christie told a crowd of more than 400 at a West Deptford town hall meeting Thursday that his reforms are necessary if they want to see their property taxes stay level or go down. In his budget message earlier this week, the governor said he'll make an early contribution to the underfunded pension system if the Democratic Legislature agrees to his pension reform plan. He also said he'll double property tax rebates for some New Jerseyans if the Legislature adopts his health benefit reforms.

Illinois seeks to borrow $3.7 billion to shore up pension shortfall - Having fallen behind in funding its state pensions, Illinois is seeking to raise $3.7 billion through a bond issue this week, as the debate over government budget shortfalls roils state capitols. The Illinois bond sale is viewed as a sign of how investors see the fiscal troubles in some overburdened states, where budget controversies have led to unrest and protests in places such as Wisconsin. If investors shy away from the bonds, other states, too, may have to pay higher rates when borrowing, making it harder for them to raise money.  The bond sale comes as several states are suffering fiscal shortfalls precipitated by the economic crisis. Moves by governors and Republican legislators to cut spending have drawn protesters to state capitals in Wisconsin and Indiana - where Democratic lawmakers have staged walkouts - and Ohio. In New Jersey on Tuesday, Gov. Chris Christie (R) unveiled a budget plan that would give property-tax credits to homeowners if government workers pay more than triple what they do now for health insurance. Christie is also urging legislators to enact his proposal to reduce state employee pension benefits.

Illinois may seek federal guarantee of pension bonds - Illinois, which plans to sell $3.7bn of pension bonds next week, may seek a federal guarantee on retirement-system debts if its unfunded liabilities can’t be eliminated, according to budget documents.  Illinois's pension plans have an unfunded liability estimated at over 60%, the documents show. Governor Pat Quinn disclosed the potential need for a federal guarantee of pension debt in his $35.3bn general-fund budget on February 16, without going into specifics. "Significant long-term improvements will come only from additional pension reforms, refinancing the liability and seeking a federal guarantee of the debt," the document said. Or the state may raise its annual contributions, it said.

Illinois Bond Sale Gets Done at a Cost - Illinois enticed hedge funds, mutual funds and non-U.S. buyers to purchase $3.7 billion in new pension bonds, but the cash-strapped state had to pay dearly to get the deal done. Illinois officials were forced to promise a yield that is about two percentage points higher than was paid by companies with similar credit ratings in recent bond offerings. The state's bond rating is one of the lowest among the 50 states. The bond sale is likely to soothe some fears about whether Illinois and other especially troubled governments will be able to tap the capital markets while their budgets are strained by sluggish tax revenue and daunting expenses for health care and pensions. But the fact that Illinois had to borrow from investors to make a required contribution to its pension funds shows the depth of its fiscal problems. Illinois tapped the taxable-debt market, where yields tend to be higher than in the tax-exempt municipal-bond market, because selling bonds to prop up sagging pensions typically doesn't qualify for tax-exempt status under the U.S. tax code, say bankers and state officials.

Wisconsin Public Pensions Are Well Funded - Over at econobrowser, author Minzie Chin points out that Wisconsin has relatively well funded public pensions. Econbrowser reader Bob_in_MA has argued that Governor Walker’s [the] (edit 7:50am 2/22) desire to strip collective bargaining rights from Wisconsin public employees is derived in part from the high labor costs, hidden in part by large unfunded liabilities (e.g. pensions) in the state. This might be an apt characterization for Massachusetts. It is not for Wisconsin. From the Pew Center for the States: Some states are doing a far better job than others of managing this bill coming due. States such as Florida, Idaho, New York, North Carolina and Wisconsin all entered the current recession with fully funded pensions. The following graphic depicts how Wisconsin fares, in terms of funding its pensions.

Boomers Find 401(k) Plans Come Up Short The 401(k) generation is beginning to retire, and it isn't a pretty sight.  The retirement savings plans that many baby boomers thought would see them through old age are falling short in many cases.  The median household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter of what is needed in that account to maintain its standard of living in retirement, according to data compiled by the Federal Reserve and analyzed by the Center for Retirement Research at Boston College for The Wall Street Journal. Even counting Social Security and any pensions or other savings, most 401(k) participants appear to have insufficient savings. Data from other sources also show big gaps between savings and what people need, and the financial crisis has made things worse.

The right to be certain - CERTAIN rights in the workplace should be universal. We all deserve a clean, safe work environment free from harassment. We also all deserve to be paid for the work we perform. What else we are entitled to is contentious and varies across jobs and industries. Should workers have a right to job security and predictable pay raises? How we define increases in compensation may also vary. What if part of your compensation is a basket of services? What if the value of those services increases? Should other parts of your compensation be reduced? For example, health care today is not the same as health care twenty or thirty years ago. The average employee consumes more of it, for longer, at a higher price. The same is true of retirement benefits. People live longer than they used to, but each new cohort retires at the same age. So a pension today is worth more than it used to be.

The 401(k) Pyramid - Matt Yglesias notes Imagine a society with no Social Security, and also no imprudent or short-sighted people. Everyone puts a healthy share of their annual income away in a savings vehicle, and everyone manages to retire on a decent income. Thanks to the ups and downs of the financial markets, there’s a certain inefficiently noisy quality to the income of retired people, but due to the magic of infinite prudence the problem is very manageable. Now imagine that demographers are predicting a one-time demographic adjustment in the ratio of old people to non-old people in the population. This will lead to a decline in the rate of economic growth, and therefore to the expected return on investment. Either workers will need to start increasing their savings rate, or else they’ll need to accept lower living standards when retired. In other words, they’ll face the exact same choice we currently face in the form of higher taxes or lower benefits. Of course people could try to compensate for lower expected returns by engaging in riskier investment strategies, but we’re talking about a perfectly prudent population. Under the circumstances, I don’t think anyone would be saying “saving for your retirement is a pyramid scheme—it depends on the assumption of future economic growth!” Actually the problem goes beyond a simple slow down in economic growth and there was significant hand-wringing about it a while back. It was called the “Asset Market Meltdown Hypothesis.”

Social Security as an Interest Rate Swap - Although they are a dying breed (compared to the late 90s) financial market traders (who obviously should have unionized in the early 90s) still pop up at cocktail parties, dinners etc.  If you're not a trader and get caught in a conversation with one you might find the jargon confusing and the reduction of all life's problems into trading metaphors exasperating.  In the case of Social Security, however, a bit of trader reductionism might help sway those wearing rose colored glasses who feel reform isn't a pressing matter.     Admittedly, given what happened the last few times Social Security has been reformed- regressive tax increases, the proceeds of which were deposited in the Treasury's general fund- I can understand the trepidation with which Social Security supporters approach talk of future reforms.   Some, like Mark Thoma, proclaim it isn't a problem at all, in the sense of having a major impact on our fiscal health  "Look at the CBO projections," they say. We'll get to that in a second.

Ariz. Senate panel votes to kill Medicaid program - A divided Arizona Senate committee voted early Wednesday to eliminate the cash-short state's Medicaid program and replace it with a much smaller system that would cover only a fraction of low-income people now served. The Appropriations Committee voted 8-5 to drop the program, known as the Arizona Health Care Cost Containment System. The program serves approximately 1.3 million people, or roughly one of every five Arizonans. A replacement envisioned in the bill would serve up to 100,000 people, including the seriously mentally ill and people needing long-term care.. Gov. Jan Brewer, who has proposed that 250,000 people be dropped from program eligibility because of the state's budget troubles, said Tuesday she wanted to protect care for the 1 million or so who would be left in the program

Changes to Medicare criticized; up to 70000 could lose coverage - Overshadowed in Gov. Scott Walker’s controversial budget repair bill is a provision that could lead to some 70,000 people losing health insurance. The measure would give the state Department of Health Services the authority to restrict eligibility, modify benefits and make other changes to Medicaid with less legislative review than required now. The proposal has drawn the criticism of health care advocates and Democratic lawmakers upset by what they see as unchecked power for the administration. Walker spokesman Cullen Werwie said changes and flexibility are needed to plug the $1.8 billion hole in the state’s Medicaid budget over the next two years. The program, which includes BadgerCare Plus, Family Care, SeniorCare and other health plans, accounts for half of the state’s estimated $3.6 billion budget gap. Under current rules, people earning up to twice the federal poverty level can participate in the programs. Walker’s bill would allow the state to disqualify those earning more than 133 percent of the poverty level; that includes about 63,200 parents and another 6,800 adults, according to the Legislative Fiscal Bureau.

Georgia anti-abortion bill would require investigations of miscarriages - Legislation recently introduced to the Georgia legislature by House Republican Bobby Franklin would make abortion the legal equivalent of murder and require miscarriages to be investigated by authorities. The bill, known as HB 1, was uncovered by the progressive blog The Daily Kos. Franklin's bill would classify the removal of a fetus from a woman for any reason other than to produce a live birth or to remove a dead fetus as 'prenatal murder.' Physicians indicted for alleged 'prenatal murder' would have their license suspended until they were found innocent of the crime. Although the legislation would not place any criminal penalties on natural spontaneous abortions, it would require miscarriages to be reported by hospitals and other medical institutions, and a fetal death certificate issued. Authorities would be required to investigate the cause of fetal death in cases where a miscarriage occurs without attendance at a medical facility.

The R's are batting 1000.00 lately.. When it comes to attacking women's health needs and going after the working, those douchenozzles on the far right are hitting them outta the friggin park lately. Of all the things Planned Parenthood does..abortions take up a whole three-fucking-percent of their work. Yet, Mike The Fuckwit Pence and his toadies have managed to tar and feather them with the broadest paintbrush imaginable, pushing thru a bill/amendment that eliminates all their funding. Talk about fucking retarded. These jive-ass mutha fuckas will have you believe they are doing Gawd's work, yet the truth is this: They will actually drive up the number of abortions given in this country by wiping out Planned Parenthood. But don't let the facts get in the way of their fuckery..oh hell no.

Enough with the wait times, already - It constantly amazes me how entrenched many people get in opposing health care reform. I’ve been getting a strange number of emails defending the health care spending seen in my post yesterday. Please understand, that spending is what’s bankrupting us. You can hate the PPACA, you can hate single payer, you can hate any form of government regulation at all, and stil recognize that we spend too much on health care.But forget that for a second. Many of you are defending the high costs of our health care with the usual “wait times” meme. You defend our very, very high level of spending by accusing other systems of having long wait times. You believe that we are buying “no wait times” with our spending.No.First of all, what do you mean by wait times? Perhaps it’s “do you have to wait to see a doctor when you’re sick”? Let’s own something right up front. We beat Canada. There’s a reason people always cherry pick Canada to talk about wait times. But many, many other countries do better in terms of getting people in to see the doctor when they are sick.

Republicans Cut Contraceptives for Women but Allow for Horses - The Republican controlled House voted to end all funding to Planned Parenthood for any purpose. The bill to cut Planned Parenthood funds, if passed by the Senate, will also cost lives to men and women. Meanwhile, Rep. Dan Burton (R. IN) introduced a spending bill amendment aimed at promoting contraception use by horses to control and save the population of wild horses. Burton's amendment would prevent the Bureau of Land Management from holding wild horses in pens and offers "immuno-contraception" to the horses as an alternative. These same Republican politicians, who want to strip women of their right for any contraceptive resources through Planned Parenthood, offer an amendment to support funding for contraceptives for wild horses.

Money Won’t Buy You Health Insurance - Most employees assume that if they lose their job and the health coverage that comes along with it, they’ll be able to purchase insurance somewhere. The members of Congress who want to repeal the provision of last year’s health insurance law that makes it easier for individuals to buy coverage must assume that uninsured people do not want to buy it, or are just too cheap or too poor to do so.  The truth is that individual health insurance is not easy to get.  I found this out the hard way. Six years ago, my company was acquired. Since my husband had retired a few years earlier, we found ourselves without an employer and thus without health insurance.  My husband, teenage daughter and I were all active and healthy, and I naïvely thought getting health insurance would be simple.

U.S. Judge Upholds Health-Care Law - A federal judge in Washington, D.C., on Tuesday evening became the third U.S. trial judge to uphold the constitutionality of the new health-care law's requirement that individuals maintain health coverage or pay a penalty. Two other judges, most recently U.S. District Court Judge Roger Vinson in Florida, have ruled the provision unconstitutional. Judge Vinson, who ruled on a legal challenge brought by a group of 26 states, voided the entire law.In the latest ruling, U.S. District Court Judge Gladys Kessler said Congress was within its constitutional authority to regulate interstate commerce when it chose to penalize people who forgo health insurance.  "Congress had a rational basis for its conclusion that the aggregate of individual decisions not to purchase health insurance substantially affects the national health insurance market," Judge Kessler wrote in a 64-page opinion. "Consequently, Congress was acting within the bounds of its Commerce Clause power."

No Brain Damage From Ecstasy, New Research Shows - Contrary to long-held opinion, ecstasy, the popular rave-culture drug, may not harm your brain. This is according to one of the largest studies ever conducted on the illegal drug's effect on cognition, published last week in the journal Addiction. Though former studies have concluded quite the opposite about the drug (technical name 3,4-Methylenedioxymethamphetamine, or MDMA) there's been concern that these conclusions were overstated and reached through faulty methods. The latest research, a $1.8 million study funded by the National Institute on Drug Abuse (NIDA), set out to correct these methods by eliminating all other factors that could possibly contribute to mental impairment: 1) sleep deprivation and dehydration commonplace in rave culture, 2) previous habitual drug or alcohol use, or 3) former cognitive damage for any reason.

Millions of high blood pressure patients are wrongly diagnosed - Currently, anyone suspected of having high blood pressure is diagnosed by a GP with an inflatable arm cuff. Doctors then call the patient back for additional readings, but these are always taken at their surgery or in hospital. New draft guidance to be published today by the National Institute for Health and Clinical Excellence (Nice) says as many as one in four people experiences a surging pulse rate on entering a GP’s surgery. This nervous response, termed “white coat hypertension”, can significantly raise blood pressure readings and many people are being misdiagnosed as a result. To counter this, Nice is recommending that doctors do not rely solely on readings taken in their own surgeries. After the initial assessment, a patient should be sent home and asked to wear an ambulatory blood pressure monitoring (ABPM) device.

Inside the Business of Selling Human Body Parts - Is the human body sacred? Or is it a commodity ready to be chopped up and exposed to the forces of supply and demand? The answer is a matter of perspective. Our own body is a temple. But when we need a spare part, suddenly we’re surprisingly open to a transaction. To a person looking for a kidney, a scientist trying to learn anatomy, a beauty parlor customer looking for the perfect ‘do, there’s no substitute for a piece of someone else. The problem is, demand for replacement flesh grossly outstrips supply. In the US and like-minded countries, it’s illegal to sell body parts—they can be taken only from those who filled out a donor card before they died or who are willing to give up an organ out of sheer benevolence. This means there isn’t enough tissue to go around. So, as with any outlawed or heavily regulated resource, a bustling underground trade has formed. Sometimes the market in body parts is exploitive: Desperate people are paid tiny sums for huge donations. Other times it is ghoulish: Pieces are stolen from the recently dead. And every so often, the resource grab is lethal—people are simply killed for their organs. Welcome to the red market.

Back in the News: The Embarrassment Known as the Value of a Statistical Life  - Some economic ideas thrive only in the darkness: they are simply too weird and half-baked to withstand public scrutiny. Perhaps no concept better exemplifies this than the value of a statistical life, the sum of money that supposedly measures the value of a life saved or sacrificed by a government program. Few nonspecialists pay attention to the slow trickle of research articles on the topic, although the spotlight descends every few years, usually because of a scandal involving government proclamations that some people are worth more than others. (The prime case was the dispute that broke out over the economic analysis in the third IPCC report, which pegged the monetary value of an American life at ten times that of a Chinese or Nigerian life. The numbers were subsequently crossed out.) Today’s New York Times draws our attention to the topic in a less charged context, the discrepancy between VSL’s posted by different federal regulatory agencies. It is a small issue in the larger scheme of things but still illuminating in what it reveals about the economic profession.

City in a Deal for Removing School PCBs - City officials are quietly preparing to accede to federal officials’ demands that they replace aging light fixtures at public schools due to health concerns about leaking PCBs. People familiar with the discussions say Mayor Michael Bloomberg has approved a plan to seek bids for contracts to do the work. The city plans to spend $708 million to implement the plan at 772 public-school buildings over a 10-year period. A Bloomberg official said the announcement could come as early as Wednesday. The city has been in a months-long standoff over the issue with the Environmental Protection Agency, which has demanded quick replacement of the suspect lights. Environmental advocates have argued the work be completed much earlier, in two or five years

Increased Costs For Wheat, Sugar, Gas Combined With Lower Wages Will Cause 'Tsunami' Of Living Costs - Fresh financial pain is on the way, with price hikes expected on everything from underwear to cereal. City merchants say they've held the line during the economic downturn, but now, because of the increased cost of cotton, wheat and other commodities, price increases are inevitable on almost everything we use."It's like a tsunami - when it happens, it hits you later," said Ricardo Rezk, owner of empanada maker Rico M. Panada in Mott Haven, the Bronx. "The warning siren has sounded." Global wheat prices more than doubled from June to January, the World Bank says. Corn and sugar prices rose 73%. Experts say that means the price of cereals, sugary drinks and other foods have nowhere to go but up. "[It] is a perfect storm. Food prices are going up at precisely the time when people have less money to buy food," said Joel Berg of the New York City Coalition Against Hunger, who predicted that rising prices will drive more New Yorkers to food pantries and soup kitchens.  Gasoline prices are soaring as New Yorkers struggle to pay higher bus and subway fares. Gas costs an average $3.46 for a gallon of regular in the city, up from $2.91 a year ago, AAA New York says.

Record U.S. Cattle, Hog Prices Seen on Shrinking Herds, China - U.S. livestock prices may reach records in the next two quarters as farmers reduce herds while China imports the most pork since at least 1992 and the largest amount of beef in three years, according to Societe Generale.  Lean-hog futures will climb to a record $1.10 a pound in the second quarter and live cattle prices will be at an all-time high of $1.30 a pound by the third quarter, Societe Generale SA said in a report. The bank correctly forecast higher grain prices in May. Chinese imports of pork will gain 5.7 percent in 2011 and beef purchases will advance 43 percent, U.S. Department of Agriculture estimates show. World food prices rose 28 percent in the past year, reaching a record in January, according to the United Nations. Riots partly linked to food inflation ended Zine el Abidine Ben Ali’s 23-year rule in Tunisia and Hosni Mubarak’s three-decade- long rule in Egypt. Finance ministers from the Group of 20 nations last week signaled concern that surging commodity costs are driving inflationary pressures around the world.

Wheat Resumes Plunge as African Unrest Drives Away Speculators - Wheat extended a collapse and corn and soybeans also fell as traders speculated that a jump in energy costs caused by protests across North Africa and the Middle East will curb growth and demand for grains.  Riots already ousted leaders in Egypt, the world’s biggest wheat importer, and in Tunisia, and opposition groups have seized control of eastern cities in Libya. While wheat traded in Chicago dropped 10 percent in the past four sessions, crude oil traded in New York jumped 14 percent. Grain prices surged last month as North African and Middle East nations bought more shipments to damp a surge in domestic prices that helped spark the protests from Morocco to Bahrain. Speculators including hedge funds last week cut their bets on higher wheat prices by 20 percent, U.S. Commodity Futures Trading Commission data show.  “Everyone has been bullish corn and wheat for an extended period,”

Farmers Fail to Meet Demand as Corn Stockpiles Drop to 1974 Low - The smallest corn inventories in 37 years are a sign farmers around the globe are failing to produce enough grain to meet rising consumption, even as planting expands and food prices surge. Growers from Canada to Russia boosted annual output of wheat, rice and feed grain by 16 percent since 2000, not enough to keep up with the 20 percent gain in demand, U.S. Department of Agriculture data show. While a Bloomberg survey of 25 analysts shows the agency on Feb. 24 may forecast a 3.5 percent increase in U.S. corn planting, the government says world stockpiles will equal 15 percent of use, the lowest since 1974. Global inventories for all grain will drop 13 percent before the next harvest, the USDA estimates. That’s the first decline since 2007, when surging food prices sparked more than 60 riots from Haiti to Egypt. Increasing demand is causing isolated food shortages and accelerating inflation in developing countries even as it boosts farmers’ incomes and shifts planting strategies.

Food Companies: We’re Going to Start Raising Prices - It’s not just more pain at the gas pump courtesy of spiking oil prices that you need to brace for. You’re going to be feeling more pain at the grocery store soon, too, as major food manufacturers say they are planning to raise prices due to soaring commodity costs. At a food industry conference this week, Sara Lee said it may add another 4 to 6 percent to its prices in the second half of the year, on top of an already announced 3 percent rise in the first half of 2011. ConAgra, which makes packaged meals including the Healthy Choice and Marie Callender lines, said it is eyeing a 25 percent increase in some of its prices. At least those are price hikes you can see; some food companies, like Kraft, are opting for stealth moves, including reducing the package size of food or opting for less expensive ingredients. Here’s some, um, food for thought on what’s going on with food prices and how to cope: In the 12 months through January, the official inflation rate in the U.S. was a benign-sounding 1.6 percent. Only problem is, that stat is just for a broad basket of all sorts of goods and services. Narrow it down to just the cost of food, and recent price trends are anything but benign. A smaller basket of meat, poultry, and fish cost 6 percent more this January compared to a year ago, according to the Bureau of Labor Statistics consumer price data. Given that average wages grew less than 2 percent last year, the rise in food prices is indeed taking a bigger bite out of our wallets. Here’s a breakdown of some specific food prices that are rising a whole lot more than the general rate of inflation:

US warns extreme food prices will stay - The world faces a protracted bout of extremely high food prices, the US government has warned, overwhelming farmers’ ability to cool commodity markets by planting millions of additional hectares with crops.  The US Department of Agriculture on Thursday forecast nominal record farm-gate prices for corn, wheat and soyabeans in the crop year that begins with the 2011 harvests. It added that food inflation would surge in the second half of this year as wholesale prices filtered through the supply chain, affecting consumers.  The warning at the USDA Outlook Forum in Washington, the biggest annual gathering of the agribusiness sector, is likely to fuel global concerns about rising inflation and the potential for destabilising food riots in developing countries. Joseph Glauber, USDA chief economist, told the conference that in spite of higher planting for corn and soyabeans this spring, grain and oilseed markets were “still forecast to be tight” in 2011-12 due to strong export and biofuel demand.

Analysis: In food vs fuel debate, U.S. resolute on ethanol (Reuters) - As world food prices reach new highs, a handful of U.S. politicians and hard-hit corporations are readying a fresh effort to forestall the use of more U.S. corn and soybeans as motor fuel. They are likely doing so in vain, say experts. Unlike in 2008, when a wave of global panic over grain supplies provoked a fierce "food vs fuel" debate, there's so far only muted outcry over biofuels, even after corn surged last week to within 10 percent of its 2008 peak following a forecast showing even higher use in the ethanol sector. While that may yet change as higher prices fuel inflation and trigger worries over supply security, officials and experts say ethanol is too ingrained in public policy and the economy of the U.S. heartland to be easily dislodged. "The best voices for demanding change are U.S. consumers themselves, but that will require a food price spike larger than the 2 to 3 percent currently forecast by USDA. And since the Fed focuses on core inflation and ignores food and energy, it gets ignored there as well." U.S. ethanol production this year will consume 15 percent of the world's corn supply, up from 10 percent in 2008. That share will continue to rise as the industry faces a mandate to boost minimum production an additional 20 percent by 2015. And exports are booming thanks to costly sugar-based rivals.

Researcher: Roundup or Roundup-Ready Crops May Be Causing Animal Miscarriages and Infertility - One of the nation’s senior soil scientists alerted the federal government to a newly discovered organism that may have the potential to cause infertility and spontaneous abortion in farm animals, raising significant concerns about human health.  Dr. Don Huber, professor emeritus at Purdue University, believes the appearance and prevalence of the unnamed organism may be related to the nation’s over reliance on the weed killer known as Roundup and/or to something about the genetically engineered Roundup-Ready crops. In a letter to Secretary of Agriculture Tom Vilsack, the professor called on the federal government to immediately stop deregulation of roundup ready crops, particularly roundup ready alfalfa.

New Pathogen Found in Roundup Ready GM Crops Causes Spontaneous Abortions and Infertility in Livestock?  Via: Institute of Science in Society: An open letter appeared on the Farm and Ranch Freedom Alliance founded and run by Judith McGeary to save family farms in the US [1, 2]. The letter, written by Don Huber, professor emeritus at Purdue University, to Secretary of Agriculture Tom Vilsack, warns of a pathogen “new to science” discovered by “a team of senior plant and animal scientists”. Huber says it should be treated as an “emergency’’, as it could result in “a collapse of US soy and corn export markets and significant disruption of domestic food and feed supplies.” The letter appeared to have been written before Vilsack announced his decision to authorize unrestricted commercial planting of GM alfalfa on 1 February, in the hope of convincing the Secretary of Agriculture to impose a moratorium instead on deregulation of Roundup Ready (RR) crops.

Pathogen in Roundup Ready Soy and Corn Could Lead to Calamity, Scientist Warns - A new self-replicating, micro-fungal virus-size organism could be causing spontaneous abortions in livestock, sudden death syndrome in Monsanto’s Roundup Ready soy and wilt in Monsanto’s Roundup Ready corn, a plant pathologist has warned U.S. Agriculture Secretary Tom Vilsack. Randy Ananda reports today in that Dr. Don M. Huber, who coordinates the Emergent Diseases and Pathogens committee of the American Phytopathological Society, has found that “the pathogen threatens the U.S. food and feed supply and can lead to the collapse of the U.S. corn and soy export markets.” The USDA’s recent move to deregulate GE alfalfa “could be a calamity,” he stated."My letter to Secretary Vilsack was a request to allocate necessary resources to understand potential nutrient-disease interactions before making (in my opinion) an essentially irreversible decision on deregulation of RR alfalfa," Huber told Food Freedom in an email.

Letter to Vilsack About Dangers of Roundup Leaked - Below is a letter from scientist Don Huber to Secretary Vilsack about the dangers of Roundup and Roundup Ready corn and soybeans. A reproduction of the original letter (and additional commentary) is posted here.

Monsanto Shifts ALL Liability to Farmers - Farmers like genetically modified (GM) crops because they can plant them, spray them with herbicide and then there is very little maintenance until harvest. Farmers who plant Monsanto’s GM crops probably don’t realize what they bargain for when they sign the Monsanto Technology Stewardship Agreement contract. One farmer reportedly ‘went crazy’ when he discovered the scope of the contract because it transfers ALL liability to the farmer or grower. G. Edward Griffin, author of ‘The Creature From Jekyll Island’, and numerous other books and documentary films, and Anthony Patchett, retired assistant Head Deputy District Attorney, Los Angeles County Environmental Crimes/ OSHA Division explain the consequences of the Monsanto contract in the video below.

China’s droughts nears worst in 200 years, adding pressure to world food prices - The soil lies cracked and broken in China’s Shangdong Province, thirsting for rains that will not come. China’s key wheat producing region, lying just south of Beijing, has received just 12 millimeters (1/2 inch) of rain since September, according to the Chinese news service Xinhua. If no rains come during the remainder of February, it could become the worst drought in 200 years. The latest precipitation forecast from the GFS ensemble model predicts the possibility of rains of around 1/2 inch for Shandong Province early next week, but these rains would help only a little. A longer-range 2-week forecast from the operational GFS model shows little or no rain for the region from late next week well into March. Columbia University’s International Research Institute for Climate and Society (IRI) projects that spring in Eastern China has an enhanced probability of being dry, with only a 20% – 25% chance that the region will see above average precipitation, and a 40% – 45% chance of below average precipitation. So the great drought will likely continue, and China’s ability to feed itself may be greatly challenged this year.

The Corn Ultimatum: How long can Americans keep burning one sixth the world’s corn supply in our cars? - Bill Clinton warns: Too much ethanol could lead to food riots - I am not a fan of our corn ethanol policy as I made clear made clear during the last food crisis (see “The Fuel on the Hill” and “Can words describe how bad corn ethanol is?” and “Let them eat biofuels!“).  In a world of blatantly increasing food insecurity — driven by population, dietary trends, rising oil prices, and growing climate instability — America’s  policy of burning one third of our corn crop in our engines (soon to be 37% or more) is becoming increasingly untenable, if not unconscionable. I was glad to see former Pres. Bill Clinton start talking about this in a Washington Post piece  headlined, “Clinton: Too much ethanol could lead to food riots” — though I tend to see the world’s increasing use of crops for fuel as an underlying cause for growing food insecurity, something that makes the whole food system more brittle and thus more vulnerable to triggering events, like once in 1000 100 year droughts and once in 500 year floods, which is to say climate instability (see WashPost, Lester Brown explain how extreme weather, climate change drive record food prices). If you want to understand why it will be politically difficult to roll back US ethanol production to saner levels, Reuters has a good article, “Analysis: In food vs fuel debate, U.S. resolute on ethanol.”  Yet it is that piece which notes, “U.S. ethanol production this year will consume 15 percent of the world’s corn supply, up from 10 percent in 2008.”

A Special Report On Feeding The World: No Easy Fix - If crop yields are to match the rise in population, then some of them will have to go up dramatically. The world’s population is growing at just over 1% a year, so—allowing something extra to feed animals because of rising demand for meat—staple yields will have to rise by around 1.5% a year. This may not sound much, but it is a great deal more than current growth rates. CIMMYT reckons that, to keep prices stable, the growth in rice yields will have to increase by about half, from just under 1% a year to 1.5%; maize yields will have to rise by the same amount; and wheat yields will have to more than double, to 2.3% a year.  Since the 1960s the traditional way of growing more food—by ploughing more land—has been out of favour. That is partly for environmental reasons—much irreplaceable Amazon jungle has already been lost—and partly because many countries have used up all their available farmland. So though the population has soared, the supply of land has not. 

An unrecognizable world: Global population of 9billion will compete for food supplies in 2050 - Mankind will need to produce as much food in the next 40 years as in the last 8,000. The earth's population could top nine billion by 2050, leading to an 'unrecognisable' world as people compete for scarcer resources a U.S. science conference heard yesterday. The American Association for the Advancement of Science (AAAS) heard how the world's population's will increase rapidly in poorer countries resulting in the need to produce the same amount of food in a 40 year period as had been produced in the previous 8,000 years. Population growth is expected to be highest in African and South Asian states, while incomes are also expected to rise in these countries by up to four times. This will lead to further strain as research has shown that people earning higher wages consume more food. "More people, more money, more consumption, but the same planet,'  'By 2050 we will not have a planet left that is recognisable,'

The Six-Legged Meat of the Future - At the London restaurant Archipelago, diners can order the $11 Baby Bee Brulee: a creamy custard topped with a crunchy little bee. In New York, the Mexican restaurant Toloache offers $11 chapulines tacos: two tacos stuffed with Oaxacan-style dried grasshoppers.  Could beetles, dragonfly larvae and water bug caviar be the meat of the future? As the global population booms and demand strains the world's supply of meat, there's a growing need for alternate animal proteins. Insects are high in protein, B vitamins and minerals like iron and zinc, and they're low in fat. Insects are easier to raise than livestock, and they produce less waste. Insects are abundant. Of all the known animal species, 80% walk on six legs; over 1,000 edible species have been identified. And the taste? It's often described as "nutty."

Nations to Expand Food Stockpiles, Boost Subsidies, Traders Say - Governments worldwide will increase their role in global food markets and may boost stockpiles and subsidies or impose trade curbs to head off the protests that have rippled through the Middle East, commodity traders said. “Greater political intervention in food matters is only to be expected,” Alan Winney, chairman of Emerald Group Australia Pty Ltd., said in an interview at a sugar-industry conference in Dubai. “Governments will be careful to take preemptive measures to prevent increases in food prices,” said Winney. Countries across Africa to Asia are increasing imports or releasing supply from state reserves to cool inflation as rising demand and adverse weather cuts harvests and pushes food prices to a record. A revolt in Libya widened at the weekend, with leader Muammar Qaddafi’s son warning that a civil war would risk the country’s oil wealth and invite a return of colonial powers.  “Food inflation is there to stay this year as cereals, soft commodities are all affected by supply contraction,” said Vijay Iyengar, managing director of Agrocorp International Pte., who’s traded agricultural commodities since 1986. “Governments will have to subsidize” staples, including sugar, Iyengar said.

Russia May Extend Grain Export Ban: Minister - Russia on Tuesday said it may extend a ban on grain exports that has been blamed for triggering global food price rises beyond its provisional expiry date of July 1. The Russian government's pointman on agriculture emerged from a closed-door cabinet meeting chaired by Prime Minister Vladimir Putin to announce that such an option had been discussed. First Deputy Prime Minister Vitkor Zubkov refused to disclose further details while stressing that no formal decision had yet been reached. "We discussed the option of extending the grain export ban after July 1,". Putin's initial decision to ban all exports following a record 2010 drought shocked the world's commodity markets and helped drive up world food prices that had already been soaring on booming Asian demand.

Study Faults Short Supply For Rise in Commodity Prices - A report being conducted for the world’s Group of 20 leading economies points to supply not keeping up with demand as the main factor behind price increases in wheat, sugar, cotton, metals, oil and other commodities. The Organization for Economic Cooperation and Development’s study–which is being put together ahead of the next G-20 meeting of top finance officials in April in Washington– may lead to increased efforts to boost commodities production around the world. It could also help reduce criticism of the U.S. Federal Reserve’s easy-money policies, which some have blamed for stoking global inflation. French President Nicholas Sarkozy, who heads the G-20, recently warned that rising commodity prices were a threat to the world economy. Finance ministers and central bankers meeting in Paris a week ago said they’d look into the underlying drivers of the price increases and consider possible actions. “It’s very hard to distinguish between financial and structural factors behind the price increases, but it looks like demand and supply are playing the predominant role,”

2011 Tipping Points - Throughout my 2010 article series "Extend & Pretend" and "Sultans of Swap" I stressed that we were rapidly moving from the Financial Crisis of 2008, through the Economic Fallout of 2009 -2010, towards a Political Crisis in 2011 -2012. We are now clearly beginning to see the early emergence of the final part of this continuum.  From North Africa to Wisconsin all are fundamentally based on the single insidious underlying problem - excessive global debt and credit levels. The global macroeconomic environment appears to be rapidly unraveling. The situations in North Africa through the Middle East are blatant proof of social unrest and accelerating political instability. Food shortages and inflation pressures are now driving people into the streets. When you feel the hunger in your stomach and see it in the eyes of your children, it quickly erupts and motivates people to action.  It is now time to revisit our Tipping Points framework to see where this is leading. A framework that is clearly pointing to a global fiat currency failure and an emerging new world order which is detailed in our "2011 Thesis - Beggar-thy-Neighbor".

Peter Fawcett: Ancient megadroughts in U.S. Southwest preceded warmer climate according to sediment cores from the Valles Caldera dried lake bed in northern New Mexico  (Reuters) – Ancient megadroughts that lasted thousands of years in what is now the American Southwest could offer a preview of a climate changed by modern greenhouse gas emissions, researchers reported on Wednesday. The scientists found these persistent dry periods were different from even the most severe decades-long modern droughts, including the 1930s' "Dust Bowl." And they determined that these millennial droughts occurred at times when Earth's mean annual temperature was similar to or slightly higher than what it is now.These findings tally with projections by the U.N. Intergovernmental Panel on Climate Change and others, according to study author Peter Fawcett of the University of New Mexico. The results were published in the current edition of Nature."The IPCC model suggests that when you warm the climate, you'll see extended droughts in this part of the world and this is what the paleo record seems to be telling us," Fawcett said in a telephone interview. "When you've got past temperatures that were at or above today's conditions, conditions got drier."

Do Mediterranean Crop Yields Show Climate Stress? - Yesterday, we were discussing global crop yields (focussing on cereals as the most widespread and nutritionally significant crops).  I was pointing out that in the overall global data, there just really isn't room to see a climate change signal. But, if we were in the early stages of climate change related agricultural problems, you might expect the signature to show up in particularly impacted regions long before it shows up in the global data.  Readers who remember the discussion in the Future of Drought series will recall that the Mediterranean tends to show up at the top of any list of particularly strongly impacted climate regions.  It was fairly dry to begin with, there are clear drying trends in recent decades, and climate models show it getting worse still in the future.  So if anywhere shows a climate change signal in the yield data, this region would be it.

Forest bugs seen aided by creeping climate change - A spruce tree has smothered a few beetles by oozing resin from its trunk, repelling an attack by bugs that seem to be advancing northwards with climate change in a threat to forests and timber companies.  Other sickly spruce trees scarred by bark beetles have been less successful in the snow-covered forest near Oslo, where scientists are seeking ways to halt insects whose relatives have caused millions of dollars in damage in North America. “The effects of climate change are likely only to be positive for spruce bark beetles,”  some pests may fare better in a warming climate than the trees — partly because they grow and can adapt faster. That is also a threat to earnings by forestry firms, which are backing research and trying to adapt forestry management…. In one of the worst northern insect attacks, more than 16 million hectares (39.54 million acres) of pine forest in British Columbia have been killed in a decade long-infestation by mountain pine beetles, which has now entered Alberta.The U.S. states of Colorado and Wyoming also are badly hit.

Eagles fall out of the sky over Washington- more evidence food chain unraveling →

– When David Hancock saw the bald-eagle count on the Chehalis River drop from more than 7,000 to fewer than 400 over a few days in December, he knew a crisis was coming. Earlier this week, news reports that starving eagles were “falling out of the sky” in the Comox Valley, on Vancouver Island, confirmed his fears. Wildlife rescue centers on the Island have reported birds growing so weak from hunger that they fall out of trees, or fly so clumsily they hit things. One crashed into a roof. Mr. Hancock said a collapse of chum salmon runs has left British Columbia’s bald-eagle population without enough food to make it through the winter, leaving them weak from hunger and forcing thousands of birds to scavenge at garbage dumps. Reports of starving eagles have been coming in from all over the Lower Mainland but seem concentrated in the Comox Valley, he said. Mr. Hancock said about 25,000 eagles flock to salmon rivers in the Pacific Northwest in the fall, to feed on the carcasses of spawning salmon. One of the biggest gatherings is on the Chehalis River, about 100 kilometres east of Vancouver, where as many as 9,000 eagles gather in November and December, drawn by what is usually a large run of chum salmon. The big fish, which average about 6 kilograms, are among the last salmon to spawn and their carcasses are usually available on gravel bars well into the winter. But Mr. Hancock said the chum didn’t arrive in any numbers on the Chehalis this year, reflecting a coast-wide collapse of the species, and then heavy rains washed away what carcasses there were. The birds were forced to disperse, to look for food where they could find it. –Globe and Mail

A second antievolution bill in Tennessee - Senate Bill 893 (PDF), filed in the Tennessee Senate on February 16, 2011, is the seventh antievolution bill introduced in a state legislature in 2011, and the second introduced in Tennessee. The bill would, if enacted, would require state and local educational authorities to "assist teachers to find effective ways to present the science curriculum as it addresses scientific controversies" and permit teachers to "help students understand, analyze, critique, and review in an objective manner the scientific strengths and scientific weaknesses of existing scientific theories covered in the course being taught." The only examples provided of "controversial" theories are "biological evolution, the chemical origins of life, global warming, and human cloning."

GOP decides accurate weather forecasting and hurricane tracking are luxuries America can’t afford. Republicans try to defund NOAA’s satellite program -- just as climate change is making the weather much more extreme -Weather predictions were once a frequent punchline but have improved dramatically in recent years. More often than not you’ll need an umbrella if your local television channel or website of choice tells you to take one when you leave the house. But we could take a huge step back to the days when your dartboard had a reasonable chance of outpredicting Al Roker if House Republicans have their way with the 2011 federal budget. The House of Representatives is debating the Full Year Continuing Resolution Act (H.R. 1) to fund the federal government for the remainder of fiscal year 2011. The Republican leadership has proposed sweeping cuts to key programs across the climate change, clean energy, and environmental spectrum. They have also decided that accurate weather forecasting and hurricane tracking are luxuries America can no longer afford.

Jeff Masters: An incredible 110° temperature swing in 1 week in Oklahoma - The temperature in Bartlesville, Oklahoma, shot up to a record 82 °F yesterday, just seven days after the city hit -28 °F on February 10. This 110 °F temperature change has to be one of the greatest 1-week temperature swings in U.S. history. The -31 °F that was recorded in nearby Nowata last week has now been certified by the National Weather Service as the new official all-time coldest temperature ever recorded in Oklahoma. What's more, the 27 inches of snow that fell on Spavinaw, Oklahoma, during the February 8-9 snowstorm set a new official state 24-hour snowfall record. The previous record was 26", set on March 28, 2009, in Woodward and Freedom. A 100+ degree temperature change in just six days is a phenomenally rare event. I checked the records for over twenty major cities in the Midwest in Oklahoma, Texas, Kansas, Wyoming, Nebraska, South Dakota, North Dakota and Montana, and could not find any examples of a 100-degree temperature swing in so short a period of time.

La Niña weaker, may be gone by summer - A significant shift is occurring in the Equatorial waters of the Eastern Pacific off the coast of South America, where the tell-tale signs of the end to the current La Niña event are beginning to show up. A borderline moderate/strong La Niña event has been underway since last summer, with sea surface temperatures (SSTs) about 1.5°C below average over a wide stretch of the Equatorial Pacific. These cool SSTs have altered the course of the jet stream and have had major impacts on the global atmosphere. The La Niña has been partially responsible for some of the extreme flooding events in recent months, such as the floods in Australia, Sri Lanka, and Colombia. La Niña is also largely to blame for the expanding drought over the southern states of the U.S. But in the last few weeks, SSTs in the Equatorial Pacific have undergone a modest warm-up, and these temperatures are now about 1.2°C below average. A region of above-average warmth has appeared immediately adjacent to the coast of South America–often a harbinger of the end to a La Niña event. An animation of SSTs since late November shows this developing warm tongue nicely.

NWS Could Be Cut - As hurricane and tornado seasons approach, funding for the National Weather Service could take a trip back in time. If a House Congressional resolution is passed, $126 million will be cut from the National Weather Service's budget.  This means major cut backs for the service. The effects may be felt in every aspect of daily life, including emergency management, television weather, and information used for transportation, commerce, and agriculture. Some offices may be forced to temporarily close, which means certain areas will not be covered by a working radar.  "Literally, the weather service meteorologists that issue these warnings would be blind. If they do black out these offices, and if they turn off the radars during these blackouts, we are in real trouble," Brown said.

My congressman has selective science disorder - My congressman has selective science disorder. He's been much in the news of late as chairman of the Committee on Energy and Commerce of the U.S. House of Representatives. His name is Fred Upton, and he told us as recently as April 24, 2009 that "[c]limate change is a serious problem that necessitates serious solutions."  But now that he has finally gotten a little power, he has contracted selective science disorder. And, who can blame him? He's been in the wilderness for so long. He held no important posts even when his own party was in power in Congress from 1995 to 2007 because Republicans considered him too moderate. It seems his first taste of real power has thrown off his mental balance. When it was clear that he would become the chairman of the Energy and Commerce Committee, I told friends that the country could do a lot worse, that others who were being considered for the post were flat-out climate change deniers who didn't believe in science as a basis for public policy. I was relieved when Upton was finally confirmed as the choice of the Republican leadership.

Permafrost Timebomb: about Kevin Schaefer's article in Tellus - For tens of thousands of years, huge amounts of plant matter—roots, leaf fragments and the like—have been kept in cold storage underground in the northern parts of Alaska, Canada, Europe and Siberia. They're embedded in permafrost, or permanently frozen soil. Even when the top few inches of ground thaw out in the Arctic summer, permafrost never does. As the planet continues to warm, however, the "perma" in permafrost is looking less eternal. Scientist have known for years, in fact, that rising temperatures threaten to thaw the permafrost, allowing the plant material to decompose and release carbon dioxide (CO2) into the atmosphere, boosting the effects of CO2 from the burning of fossil fuels. What they have never known is just how much of that deep-frozen CO2 is likely to emerge. Now, a study in the journal Tellus has provided an answer: by 2200, the extra CO2 could add up to about half as much (allowing for uncertainties) as we've produced through fossil-fuel burning since the dawn of the Industrial Revolution. I talked to the lead author, Kevin Schaefer, about what they learned.

High tide destroys 400 homes along coast of Angola - At least 400 houses were destroyed on Saturday by high tide in Kilombo ward in Luanda island. Angop learned that strong winds and waves which reached two metres were recorded in the region, and thus it hindered the traffick flow and access to the said ward. According to the spokesman of the National Civil Protection and Fire Service (SNPCB), Faustino Sebastião, about 20 tents were installed in the area, so as to accommodate children, women and elderlies in the first phase. Angop learnt that the incident did not kill any person. -Angencia Angola Press

RealClimate: Going to extremes - There are two new papers in Nature this week that go right to the heart of the conversation about extreme events and their potential relationship to climate change. This is a complex issue, and one not well-suited to soundbite quotes and headlines, and so we’ll try and give a flavour of what the issues are and what new directions these new papers are pointing towards. Let’s start with some very basic, but oft-confused points:

  • Not all extremes are the same. Discussions of ‘changes in extremes’ in general without specifying exactly what is being discussed are meaningless. A tornado is an extreme event, but one whose causes, sensitivity to change and impacts have nothing to do with those related to an ice storm, or a heat wave or cold air outbreak or a drought.
  • There is no theory or result that indicates that climate change increases extremes in general. This is a corollary of the previous statement – each kind of extreme needs to be looked at specifically – and often regionally as well.
  • Some extremes will become more common in future (and some less so). We will discuss the specifics below.
  • Attribution of extremes is hard. There are limited observational data to start with, insufficient testing of climate model simulations of extremes, and (so far) limited assessment of model projections.

50 Million Environmental Refugees By 2020, Experts Predict - This past week, at the annual meeting of the American Association for the Advancement of Science (AAAS), experts warned that, "In 2020, the UN has projected that we will have 50 million environmental refugees," the AFP reports. A refugee is currently considered by the UN High Commissioner on Refugees to be a person who is fleeing persecution due to their race, religion, nationality, etc. There is no mention of the environment as a reason to flee. And yet, if you have no water from a drought, have no food due to flooding, or if your home is quite simply underwater, what other option do you have but to flee? This is not a distant concern that can be put on the backburner, categorized by deniers as just another hyped up global warming fear. This is happening. Now.  For example, there is currently a drastic increase in migrants flooding Southern Europe. Why? Food shortages have a lot to do with it, according to a report by Karin Zeitvogel of the AFP. Professor Ewen Todd explains, "Already, Africans are going in small droves up to Spain, Germany... but we're going to see many, many more trying to go north when food stress comes in. And it was food shortages that put the people of Tunisia and Egypt over the top."

50 million ‘environmental refugees’ by 2020, experts say - Fifty million “environmental refugees” will flood into the global north by 2020, fleeing food shortages sparked by climate change, experts warned at a major science conference that ended here Monday. “In 2020, the UN has projected that we will have 50 million environmental refugees,” University of California, Los Angeles professor Cristina Tirado said at the annual meeting of the American Association for the Advancement of Science (AAAS). “When people are not living in sustainable conditions, they migrate,” she continued, outlining with the other speakers how climate change is impacting both food security and food safety, or the amount of food available and the healthfulness of that food.

The Natural Debt Crisis: Learning to Live Within Our Planet's Means - Ask any Republican what the biggest problem facing the country is today and you're sure to get the same answer: Debt. Conservatives believe a public debt of $14 trillion and growing is crippling the economy and condemning future generations to penury. Obama's own fiscal 2012 budget included a five-year freeze on nonsecurity discretionary spending. But Obama just can't compete with his friends across the aisle. "We face a crushing burden of debt," Wisconsin Republican Paul Ryan said in his response to last month's State of the Union speech. "The debt will soon eclipse our entire economy, and grow to catastrophic levels in the years ahead."  I've heard that sort of rhetoric before, this warning that we're living beyond our means, running up a tremendous debt that will one day cause catastrophe. It's the call of the environmentalist, and it was on display just a few blocks away from the Capitol in Washington this weekend at the annual summit of the American Association for the Advancement of Science. Speaker after speaker took the podium in stuffy halls around the Walter E. Washington Convention Center to warn that we had exceeded the planet's carrying capacity — with too many people, too much pollution and too much carbon dioxide — and that unless we cut back drastically on consumption, our world would collapse, and us with it. "Right now we're living at about 1.5 planets' worth of consumption," says Jason Clay, senior vice president for market transformation at the World Wildlife Fund. "We are living beyond what is sustainable. That can't go on forever."

Solar Energy Faces Tests On Greenness - Just weeks after regulators approved the last of nine multibillion-dollar solar thermal power plants to be built in the Southern California desert, a storm of lawsuits and the resurgence of an older solar technology are clouding the future of the nascent industry.  The litigation, which seeks to block construction of five of the solar thermal projects, underscores the growing risks of building large-scale renewable energy plants in environmentally delicate areas. On Jan. 25, for instance, Solar Millennium withdrew its 16-month-old license application for a 250-megawatt solar station called Ridgecrest, citing regulators’ concerns over the project’s impact on the Mohave ground squirrel.  At peak output, the five licensed solar thermal projects being challenged would power more than two million homes, create thousands of construction jobs and help the state meet aggressive renewable energy mandates. The projects are backed by California’s biggest utilities, top state officials and the Obama administration.  But conservation, labor and American Indian groups are challenging the projects on environmental grounds. The lawsuits, coupled with a broad plunge in prices for energy from competing power sources, threaten the ability of developers to secure expiring federal loan guarantees and private financing.

Climate reformists challenge old economic models - A few weeks ago I wrote about the seemingly different futures foretold by climate science and climate economics. The former is filled with peril and haunted by the unthinkable, the latter blithely assured of continued prosperity. Most economic modeling, you'll recall, forecasts the continued rise of global gross domestic product (GDP) -- people in the future will be richer than we are today. Depending on various assumptions, climate damage will reduce the rate of GDP growth anywhere from 2 to 20 percent by 2050, but under no scenario does climate damage stall or reverse that rate of growth. Collapse is absent from most models, even as a worst-case scenario. How should we react to what the economic modeling tells us? A survey of the wonk landscape reveals three broad camps: conservatives, liberals, and reformists.

E.P.A. Scales Back Emission Rules -  Responding to a changed political climate and a court-ordered deadline, the Obama administration issued significantly revised new air pollution rules1 on Wednesday that will make it easier for operators of thousands of industrial boilers and incinerators to meet federal air quality standards. The new regulations represent a major step back from more demanding and costly rules proposed last spring that provoked an outcry from members of Congress from both parties and from thousands of affected businesses. One industry-financed study said the proposed standard would cost businesses $20 billion to comply and cause the loss of more than 300,000 jobs. E.P.A.2 officials said on Wednesday that the altered rule would cost half as much as the previous proposal while achieving virtually the same health benefits. The agency pegged compliance costs for the new version of the rule at $2.1 billion a year and said it would generate more than 2,000 new jobs.

Failing The Tests Of The 21st Century - Earlier this year, climate scientists measuring the Earth's average surface temperatures found that 2010 was either tied with 2005 as the warmest year in the recent record or the 2nd-warmest year. There is no question that the Earth is warming, especially in the Arctic. But many Americans refuse to accept that the warming is anthropogenic—it is caused by human activities (mostly burning fossil fuels) that release greenhouse gases (CO2, CH4, N2O) into the atmosphere. The science is as clear about this as science ever gets. Multiple lines of evidence point to human activities as the culprit. It is getting to the point where there is nearly an equal probability that these two hypotheses will be overturned—

  • gravity as a fundamental force in the Universe, as opposed to some other explanation for why apples fall
  • anthropogenic warming, as opposed to some undetected natural variability in the Earth's climate

Scientists warn of $2,000bn solar ‘Katrina’  - The sun is waking up from a long quiet spell. Last week it sent out the strongest flare for four years – and scientists are warning that earth should prepare for an intense electromagnetic storm that, in the worst case, could be a “global Katrina” costing the world economy $2,000bn.  Senior officials responsible for policy on solar storms – also known as space weather – in the US, UK and Sweden urged more preparedness at the annual meeting of the American Association for the Advancement of Science in Washington. “We have to take the issue of space weather seriously,” said Sir John Beddington, UK chief scientist. “The sun is coming out of a quiet period, and our vulnerability has increased since the last solar maximum [around 2000].” “Predict and prepare should be the watchwords,” agreed Jane Lubchenco, head of the US National Oceanic and Atmospheric Administration. “So much more of our technology is vulnerable than it was 10 years ago.” Last week’s solar storm may have been the biggest since 2007, but it was relatively small in historical terms. It caused some radio communications problems and minor disruption of civil aviation as airlines routed flights away from the polar regions, said Dr Lubchenco.A more extreme storm can shut down communications satellites for many hours – or even cause permanent damage to their components. On the ground, the intense magnetic fluctuations can induce surges in power lines, leading to grid failures such as the one that blacked out the whole of Quebec in 1989.

Saudi Arabia seeks share of $100 billion climate aid fund…(Reuters) - Saudi Arabia is a special case in need of climate aid if the world shifts to clean energy, the world's top oil exporter told the United Nations ahead of a Monday deadline for proposals about slowing global warming. Almost 200 nations agreed in Mexico in December to a package of measures including a new fund to help poor nations, due to be worth $100 billion annually from 2020, find ways to adapt to climate change and protect tropical forests. That deal set a February 21 deadline for detailed comments. Saudi Arabia said that it would need help to develop solar power and financial aid to diversify, as it was "among the most vulnerable economies," dependent on oil exports whose use may be curbed under a climate deal. "Impacts are expected to be massive and deep," it said of countries dependent on fossil fuels, noting that oil makes up half Saudi Arabia's gross domestic product and 90 percent of its export earnings.

Saudi Arabia, France Sign Nuclear Energy Cooperation Agreement - Saudi Arabia and France agreed to cooperate on developing nuclear energy for peaceful purposes as the world’s top oil producer seeks to meet growing demand for electricity. The agreement allows the two countries to cooperate in the fields of production, use and transfer of knowledge of peaceful uses of nuclear energy, according to an e-mailed statement from the Saudi government. “Saudi Arabia has decided to make use of alternative energy resources, such as atomic energy, solar energy, geothermal energy and wind energy,” according to the statement, which cited Hashim Bin Abdullah Yamani, president of the King Abdullah City for Atomic and Renewable Energy, known as KA-CARE. Power demand is forecast to increase by 8 percent a year in the Arabian Peninsula’s most populous country

Cutting Local Air Pollutants Reduces Warming, Saves Millions of Lives and Improves Crop Yields - Using existing technologies and institutions to cut two local air pollutants can save millions of lives and avoid tens of billions of dollars of crop losses annually, while halving regional warming for 30 to 60 years.  This will reduce the risk that the Arctic, Himalayas and other critical ecosystems will tip into irrevocable and potentially catastrophic changes, such as the accelerated melting of permafrost, which releases methane and carbon dioxide—the top two climate forcers.These are among the findings of a new scientific assessment from the United Nations Environment Programme (UNEP) and World Meteorological Organization (WMO), in collaboration with a global team of scientists released this week by UNEP at its Governing Council meeting in Nairobi.The two local air pollutants are sooty dust known as black carbon and ground-level ozone in the troposphere. (This is different from the good ozone in the upper atmosphere, or stratosphere, that shields us from harmful ultraviolet rays.)

Global warming rate could be halved by controlling 2 pollutants, U.N. study says - The projected rise in global temperatures could be cut in half in coming years if world governments focused on reducing emissions of two harmful pollutants – black carbon and ground-level ozone, including methane – rather than carbon dioxide alone, according to a U.N. study released Wednesday. The study, “Integrated Assessment of Black Carbon and Tropospheric Ozone,” by the U.N. Environment Programme, shows the impact that the two short-lived pollutants have on the environment, compared with carbon dioxide, which can stay in the atmosphere for decades. “I think what this study does that hasn’t been done in the past is look at the contributions to global warming by gases with short lifetimes,” said Steve Seidel, vice president of policy analysis for the Pew Center on Global Climate Change. Black carbon, a component of soot, is a threat to human health and is known to hasten the melting of snow. Ground-level ozone kills farm crops and also adversely affects health. Reducing the two, the study said, would improve health outcomes in the regions where they are implemented and “slow the rate of climate change within the first half of this century.”

Bill McKibben: Money Pollution -- The U.S. Chamber of Commerce Darkens the Skies - In Beijing, they celebrate when they have a “blue sky day,” when, that is, the haze clears long enough so that you can actually see the sun.  Many days, you can’t even make out the next block. Washington, by contrast, looks pretty clean: white marble monuments, broad, tree-lined avenues, the beautiful, green spread of the Mall. But its inhabitants -- at least those who vote in Congress -- can’t see any more clearly than the smoke-shrouded residents of Beijing. Their view, however, is obscured by a different kind of smog.  Call it money pollution. The torrents of cash now pouring unchecked into our political system cloud judgment and obscure science. Money pollution matters as much as or more than the other kind of dirt.  That money is the single biggest reason that, as the planet swelters through the warmest years in the history of civilization, we have yet to take any real action as a nation on global warming. And if you had to pick a single “power plant” whose stack was spewing out the most smoke? No question about it, that would be the U.S. Chamber of Commerce, whose headquarters are conveniently located directly across the street from the White House.  On its webpage, the chamber brags that it’s the biggest lobby in Washington, “consistently leading the pack in lobbying expenditures.”

‘Dirty’ energy dwarfs clean in China and India - Many experts agree that for the world to rein in rising greenhouse gas emissions, the galloping economies of China and India would have to figure out how to base their future economic expansion on technologies and fuels that are “cleaner” than the fossil fuels the United States and Europe used in their own industrial revolutions long ago. We hear a lot about how China and India are becoming world leaders in clean technology, producing and installing solar factories and wind farms at a breakneck pace. Problem solved? Well, no.A couple of developments this week underscored why we should not sleep easy: burgeoning economic growth in China and India requires tons of energy in whatever form it is available. So, yes, while China and India have become bold pioneers in clean technology, they are also enthusiastically developing new sources of the oldest, most polluting fuels. The investments in the latter often dwarf the new clean-tech commitments in terms of dollars and ambition.

Is Natural Gas Good, or Just Less Bad? - Natural gas is billed by its supporters, including President Barack Obama, as a clean fuel that could play a big role in a low-carbon future. But others are questioning the environmental credentials of an energy source that, while easier on the atmosphere than coal and oil, is still a fossil fuel that causes sizable emissions of climate-warming gases. Its backers say it emits only half as much carbon as coal when burned, and some environmentalists agree that it could bridge the gap until cleaner sources slowly come into use. But opponents see the push for natural gas as a distraction from more pressing priorities, like improving efficiency and generating renewable power. “We really have to be quite careful about the language we use to frame things,” said Kevin Anderson, a professor at the Tyndall Center for Climate Change Research at the University of Manchester in England. “If we call things green, we start to feel positive about it.” Natural gas, he said, “is not a positive thing, it’s just less negative.”

As China slashes exports of rare earth elements, U.S. mine digs for more - In the Mojave Desert just off Interstate 15 on the way to Las Vegas, workers are digging for dirt that may be worth far more than a casino full of chips. The massive hole is about to get even bigger. Molycorp Inc., which owns the open mine, plans to dig out about 40,000 tons of dirt a year by 2014, up 1,200% from the current rate of about 3,000 tons. The Colorado company is boosting production to meet an insatiable global appetite for rare earth elements — minerals that have become a hot commodity because they’re used in all kinds of electronics, including smart phone touch screens, wind turbines and fuel cells. The U.S. clean-tech industry, which relies heavily on the minerals, is elated by the stepped-up production rate, but some believe it is not coming soon enough. In recent months the industry has been in a bit of a panic as China, which produces 97% of the world’s supply of rare earths, slashed its exports to a trickle to feed its growing domestic needs.

Japan seeks to cut rare earth usage by a third (Reuters) - Japan aims to cut rare earth consumption by a third within a few years and reduce its reliance on China, by providing subsidies for recycling and investing in new ways to limit their use. Japanese firms consume about 30,000 tons a year of rare earth minerals to produce mobile phones, electric car motors, high-tech electronics parts and batteries. A spat over disputed islands in the East China Sea led to a de-facto suspension by Beijing on exports of rare earths for part of last year, sending Japan scrambling to find alternatives.Some 160 projects by companies such as Intermetallics Co, Hitachi Metals Ltd,Mitsui Mining and Smelting Co and Asahi Glass Co will invest a combined 110 billion yen ($1.34 billion) by March 2012, using government subsidies of 33.1 billion yen as seed money, Japan's trade ministry said on Friday. That number is set to grow as the government solicits more applications with the offer of another 8.9 billion yen in subsidies. In addition to rare earths like cerium for abrasives and dysprosium for magnets, Japan is also looking to cut down on its use of cobalt and tungsten

US scrambles to dig out of a rare earths hole -  Molycorp Inc., which owns the open mine, plans to dig out about 40,000 tons of dirt a year by 2014, up 1,200 percent from the current rate of about 3,000 tons.The Colorado company is boosting production to meet an insatiable global appetite for rare earth elements - minerals that have become a hot commodity because they're used in all kinds of electronics, including smart phone touch screens, wind turbines and fuel cells. The U.S. clean-tech industry, which relies heavily on the minerals, is elated by the stepped-up production rate, but some believe it is not coming soon enough. In recent months the industry has been in a bit of a panic after China, which produces 97 percent of the world's supply of rare earths, slashed its exports to a trickle to feed its growing domestic needs. Rare earth shortages could cause companies already weakened by the recession to shrivel or stall, industry officials say. Molycorp's Mountain Pass mine produces about 3 percent of the world's rare earths, but the company plans to eventually turn out a quarter of the total supply.

Increase In Silver's Spot Price Suggests Shortage Of Metal In Physical Form Markets - The spot price of silver has shot up almost 27% since January 28, 2011. Earlier in January the price of silver (gold too) was in the midst of a powerful correction that had the silver bulls on the run, lending ammunition to the numerous precious metal bubble-believers. The events of the past few months, however, point to an ongoing shortage of available metal in its physical form. It is important to understand the dynamics of the silver futures market itself. Every single futures contract represents the ability to purchase or sell 5,000 ounces of silver at some specified date. While there are contracts expiring every month, actual delivery months are specified in advance. September 2010, December 2010, and March 2011 are all delivery months. Silver futures also protect physical sellers by requiring contract buyers to deposit enough funds in their account to cover the entire contract purchase on “notice days” -- specific days just before the delivery month. For example, the notice day for the March 2011 contract is February 28, 2011. Regardless of how many contracts are outstanding (open interest) on the notice dates, only those that have deposited funds can take physical delivery.

My Polluted Kentucky Home - LAST weekend I joined 19 other Kentuckians in a sit-in at the office of Gov. Steve Beshear. We were there to protest his support of mountaintop removal, a technique used by coal-mining companies that, as its name implies, involves blasting away the tops of mountains and hills to get at the coal seams beneath them.  Since it was first used in 1970, mountaintop removal has destroyed some 500 mountains and poisoned at least 1,200 miles of rivers and streams across the Appalachian coal-mining region. Yet Governor Beshear is so committed to the practice that he recently allied with the Kentucky Coal Association in a suit against the Environmental Protection Agency to block more stringent regulations of it. In court his administration’s lawyers referred to public opposition as simply “an unwarranted burden.”

Toxins from South African mines threaten city - Toxic liquids building up in defunct gold mines beneath Johannesburg could reach environmentally dangerous levels by June 2012, officials and scientists said yesterday. Work is to begin immediately on a chain of pumping stations and treatment plants. Water has already started leaking from abandoned mines west of Johannesburg in the so-called Western Basin. Water accumulating in shafts dug more than a century ago has been reacting with rocks to produce sulphuric acid, heavy metals, toxins and radiation.

Natural Gas Industry Rhetoric Versus Reality - As the recent natural gas industry attacks on the Oscar-nominated documentary Gasland demonstrate, the gas industry is mounting a powerful PR assault against journalists, academics and anyone else who speaks out against the dangers of hydraulic fracturing and other threats to public health and the environment from shale gas development. DeSmogBlog has analyzed some of the common talking points the industry and gas proponents use to try to convince the public and lawmakers that fracking is safe despite real concerns raised by residents living near gas drilling sites, whose experiences reveal a much more controversial situation.  DeSmogBlog extensively reviewed government, academic, industry and public health reports and interviewed the leading hydraulic fracturing experts who challenge the industry claims that hydraulic fracturing does not contaminate drinking water, that the industrial fracking fluids pose no human health risk, that states adequately regulate the industry and that natural gas has a lighter carbon footprint than other fossil fuels like oil and coal.

Energy: What really matters - It’s not uncommon, when I give public talks about the end of the industrial age, for people to ask me whether I can offer them any hope. Now of course people mean many different things by the very indefinite word at the end of that utterance; some want me to tell them that I was only joking and industrial civilization isn’t really careening headfirst into hard planetary limits, others want me to tell them that when the crash is over and the dust settles, some kindly power or other will hand them an even shinier society than the one we’ve got, and still others will settle for being told that our civilization won’t drop dead until at least a few moments after they do.  To all these I have nothing to offer. Still, there are always a few who simply want to know if there’s some reason to believe that the next half century or so might not be quite as ghastly as it looks. I do have something to offer them, and it’s one of the ironies of our time that the reason for hope I’d like to discuss in this week’s post is also one of the most annoying features of contemporary society: the very common assumption that people in the industrial world can’t possibly scrape by without access to amounts and kinds of energy that few if any of our ancestors would have been able to figure out what to do with.

GOP Lawmaker Mike Beard Claims God Will Provide Unlimited Natural Resources - Mike Beard, a Republican state representative from Minnesota, recently argued that coal mining should resume in the Land of 10,000 Lakes, in part because he believes God has created an earth that will provide unlimited natural resources. "God is not capricious. He's given us a creation that is dynamically stable," Beard told MinnPost. "We are not going to run out of anything. Beard is currently in the midst of drafting legislation that would overturn Minnesota's moratorium on coal-fired power plants, an effort that he backs due to his religious belief that God will provide limitless resources while ensuring that humans don't destroy the planet trying to get them. Drawing on his family's childhood property in Pennsylvania, Beard explained to MinnPost his belief that while resource extraction might cause temporary agitation to the landscape, the effects wouldn't be longterm. "Our farm was mined for coal three times," Beard said. "And, now we stand on a point and look over barley and wheat and pines. Did we temporarily disrupt the face of the earth? Yes, but when we were done, we put it all back together again."This observation appears to be indicative of Beard's larger religious belief that God acts as the tireless custodian of the planet.

Pent Up Behind Aging Dams: Danger - Lake Isabella Dam is just one acute example of a widespread problem: Of the nation’s 85,000 dams, more than 4,400 are considered susceptible to failure, according to the Association of State Dam Safety Officials. But repairing all those dams would cost billions of dollars, and it is far from clear who would provide all the money in a recessionary era.  The stakes are particularly high not just for Mr. Brassell and the other 4,000 residents of Lake Isabella, but for the 340,000 people who live in Bakersfield, 40 miles down the Kern River Canyon on the edge of California’s vast agricultural heartland. The Army Corps of Engineers, which built and operates the 57-year-old dam, learned several years ago that it had three serious problems: it was in danger of eroding internally; water could flow over its top in the most extreme flood season; and a fault underneath it was not inactive after all but could produce a strong earthquake. In a worst case, a catastrophic failure could send as much as 180 billion gallons of water — along with mud, boulders, trees and other debris, including, presumably, the ruins of Nelda’s Diner — churning down the canyon and into Bakersfield. The floodwaters would turn the downtown and residential neighborhoods into a lake up to 30 feet deep and spread to industrial and agricultural areas

Indonesia's Infamous Mud Volcano Could Outlive All of Us - Since it roared to life in May 2006, a mud volcano near Indonesia's coastal city of Sidoarjo has swallowed homes, rice paddies, factories, and roads, killing 15 people, displacing 40,000, and harming the livelihoods of many more. Lusi may be a harbinger of disasters to come. "Like a volcanic eruption, a mud eruption is just the effect of geological activity, and I'm sure in the future another mud volcano must erupt in this region,". "We need very serious research to understand this phenomenon." Despite being the most intensely studied mud volcano ever, scientists have failed to agree on the cause of the eruption, which began in the early-morning hours of 29 May 2006. Mud suddenly started gushing out of vents 200 meters from a rig drilling an exploratory gas well. Drilling logs indicate problems with the well several hours before the eruption, and many scientists believe there was an underground blowout. Others, however, suggest that a magnitude-6.3 earthquake that occurred 2 days earlier and 280 kilometers away activated a local fault.

SPIKE REPORTED IN NUMBER OF STILLBORN DOLPHINS ON COAST… Baby dolphins, some barely three feet in length, are washing up along the Mississippi and Alabama shorelines at about 10 times the normal number for the first two months of the year, researchers are finding. Seventeen young dolphins, either aborted before they reached maturity or dead soon after birth, have been collected on the coasts of the states in the past two weeks, both on the barrier islands and mainland beaches. This is the first birthing season for dolphins since the BP oil spill in the Gulf of Mexico; however, Moby Solangi, director of the Institute for Marine Mammal Studies in Gulfport, said it’s too early to tell why they died.  “For some reason, they’ve started aborting or they were dead before they were born,” Solangi said. “The average is one or two a month. This year we have 17 and February isn’t even over yet.”

Scientists make grim Gulf oil discovery – Oil from the BP spill remains stuck on the bottom of the Gulf of Mexico, according to a top scientist's video and slides that she says demonstrate the oil isn't degrading as hoped and has decimated life on parts of the sea floor.That report is at odds with a recent report by the BP spill compensation czar that said nearly all will be well by 2012.At a science conference in Washington Saturday, marine scientist Samantha Joye of the University of Georgia aired early results of her December submarine dives around the BP spill site. She went to places she had visited in the summer and expected the oil and residue from oil-munching microbes would be gone by then. It wasn't."There's some sort of a bottleneck we have yet to identify for why this stuff doesn't seem to be degrading," Joye told the American Association for the Advancement of Science annual conference in Washington. Her research and those of her colleagues contrasts with other studies that show a more optimistic outlook about the health of the gulf, saying microbes did great work munching the oil.

Gulf Oil Spill Update: Scientist Finds Gulf Bottom Still Oily, Dead — Oil from the BP spill remains stuck on the bottom of the Gulf of Mexico, according to a top scientist's video and slides that she says demonstrate the oil isn't degrading as hoped and has decimated life on parts of the sea floor. That report is at odds with a recent report by the BP spill compensation czar that said nearly all will be well by 2012. At a science conference in Washington Saturday, marine scientist Samantha Joye of the University of Georgia aired early results of her December submarine dives around the BP spill site. She went to places she had visited in the summer and expected the oil and residue from oil-munching microbes would be gone by then. It wasn't. "There's some sort of a bottleneck we have yet to identify for why this stuff doesn't seem to be degrading," Joye told the American Association for the Advancement of Science. Her research and those of her colleagues contrasts with other studies that show a more optimistic outlook about the health of the gulf, saying microbes did great work munching the oil. "Magic microbes consumed maybe 10 percent of the total discharge, the rest of it we don't know,"  "there's a lot of it out there."

OPEC Oil Exports Fall 2% as Saudi Shipments Decline - OPEC’s oil exports fell 2 percent in December from a month earlier as Saudi Arabia, the world’s largest exporter, reported a decrease of 4.9 percent.  Total exports by the Organization of Petroleum Exporting Countries, excluding Algeria and the United Arab Emirates, fell by 387,000 barrels a day to 19.4 million barrels a day, the Joint Data Initiative website, which compiles data supplied by governments in an attempt to improve transparency, showed today.  Saudi Arabia’s exports fell to 6.05 million barrels a day in December from 6.36 million in November even as Saudi production rose to a two-year high of 8.37 million barrels a day, JODI said.  “This is a huge difference,” said John Sfakianakis, Chief Economist at Riyadh-based Banque Saudi Fransi, noting the 2.32 million barrel per day difference between what Saudi Arabia produced and its exports.  “It’s not clear if Saudi Arabia consumed the full 2.32 million barrels locally during that month, but what’s clear is that rise in local consumption is becoming eminent,” he said. The Stealth Return of $100 Oil - The days of $100 oil are back—and not just in Europe, where the Brent crude benchmark vaulted past $108 a barrel on Monday. While U.S. prices haven't scaled such heights—the benchmark oil contract on the New York Mercantile Exchange settled on Friday at $86.10, though the price rose to $91.55 in unofficial trading on Monday—many U.S. oil refiners and consumers are finding their costs have already escalated. Refiners such as Valero Energy Corp. are paying prices that mostly track Brent, not the U.S. benchmark often referred to as West Texas Intermediate, and those costs are being passed on to gas stations.

Guest Post: Cooking up trouble – Soaring food and fuel prices in North Africa and the Middle East - -Yves here. I thought this post was useful not only in describing how high food prices posed a particularly difficult policy problem for North African countries, but also in providing important background. World food prices are now even higher than their peak just before the global crisis. During periods of high commodity prices, North African and Middle Eastern governments have a long tradition of subsidising food and fuel products. But this column shows that food price inflation and consequently subsidies were also high during periods when global commodity prices were falling. Now these countries have an opportunity to correct this.

Why are WTI and Brent Oil Prices so Different? - We have all heard at least a partial explanation as to why West Texas Intermediate (WTI) and Brent prices are so far apart. We have been told that the Midwest is oversupplied because of all of the Canadian imports, and the crude oil cannot get down as far as the Gulf Coast, because while there is pipeline capacity to the Midwest, there isn’t adequate pipeline capacity to the Gulf Coast. I have done a little research and tried to add some more context and details. For example, the opening of two pipelines from Canada (one on April 1, 2010 and one on February 8, 2011) seems to be contributing to the problem, as is rising North Dakota oil production.  There are two pipelines (Seaway – 430,000 barrels a day capacity and Capline – 1.2 million barrels a day capacity) bringing oil up from the Gulf to the Midwest. It is really the conflict between the oil coming up from the Gulf and the oil from the North that is leading to excessive crude oil supply for Midwest refineries and the resulting lower price for WTI crude oil at Cushing. Demand for output from the refineries remains high though, so prices for refined products remains high, even as prices for crude oil are low.

Oil prices surge on fear of Libyan unrest - International Energy Agency official David Fyfe said the prospect of an interruption in oil production in the Middle East is “a real concern” because the region lays claim to 60 percent of the world’s proven oil reserves and 40 percent of global gas resources... He emphasized that major consuming nations such as the U.S., Japan and Germany have stockpiled 1.6 billion barrels of oil — enough to provide 4 million barrels a day for a year — in preparation for any disruption... Libya exports about 1 million barrels a day, primarily to European customers. The U.S. strategic reserves have been tapped twice in emergencies — once during the Persian Gulf War in 1991 and again after Hurricane Katrina interrupted U.S. production in the Gulf of Mexico in 2005.

IEA sees oil price danger, ready to use stockpiles - High oil prices were detrimental to the interests of both consumers and producers as they could derail economic growth and curtail fuel demand, the International Energy Agency's Fatih Birol said. "Oil prices are a serious risk for the global economic recovery," Birol told reporters on the sidelines of an energy conference in Indonesia on Tuesday. The IEA is adviser to 28 industrialised nations on energy policy. \"The global economic recovery is very fragile -- especially in OECD countries," Birol said, adding that oil prices had entered a "danger zone" for the recovery at above $90 a barrel.

Saudi says world has enough oil as Libya in ferment - (Reuters) - World markets have plenty of oil, top exporter Saudi Arabia said on Monday, as a wave of revolution that has already toppled two presidents tightened its grip on OPEC member Libya and drove prices to a 2-1/2 year-high. Energy ministers arrived in the Saudi capital Riyadh on the eve of talks designed to narrow the gap between producer and consumer nations. The formal agenda could be overwhelmed by concern anti-government protests will drive oil prices still higher. Oil on Monday climbed above $106 as energy firms recalled international staff from Libya and spreading unrest shut down some 100,000 barrels per day (bpd) of production there. It was the first output disruption since popular unrest erupted in Tunisia, ousting its president, before spreading to Egypt, where it unseated Hosni Mubarak after 30 years of rule. Saudi Oil Minister Ali al-Naimi will open proceedings at the International Energy Forum with a speech on Tuesday, but declined to comment to reporters on Monday.

Libya separatists seen posing oil supply threat (Reuters) - Political turmoil in Libya could threaten energy exports to Europe if separatists in the oil-rich east of the country target infrastructure and look for a bigger slice of revenues, analysts said on Monday. Libya is Africa's fourth-biggest oil producer and a key supplier for Europe. Italy, home to Libya's biggest foreign oil operator Eni (ENI.MI), gets one fifth of its energy consumption from the North African country. Ninety percent of Libyan oil exports come from the eastern region of Cyrenaica, epicenter of the revolt against strongman Muammar Gaddafi. "There's a real threat of instability as secessionists in the Cyrenaica area move," said Stefano Casertano, senior fellow at German think-tank "In 2009 there was an attempt to redistribute oil wealth to the Libyan people, but the reform was blocked and now it's going to explode in their faces."

As BP Prepares To Evacuate Staff From A Burning Libya, Commodities Are Exploding - Is this one of those "who could have possibly seen it coming" moments? As events in Libya overnight spiralled out of control, with dozens if not hundreds killed, the parliament buildng in Tripoli on fire, and output at one of the country's oil fields reported to have been stopped by a workers' strike, BP has said it will soon begin evacuating some of its personnel from the 9th largest producer of oil. And just to complete the total chaos, Iran warships are now going to pass the Suez on Tuesday instead of today, to the full glory of a fully open US stock market. The result: gold over $1,400; silver over $33.50; Crude front month over $93; Brent over $105; etc. Luckily, the US stock market is closed, meaning all this will be "priced in" by tomorrow, and the HFT levitation can resume tomorrow as if today never happened...

Why Crude Oil Prices Are Now Above $100 - As the next chart below shows, a divergence has opened up between various sweet benchmark crude oil prices. For this analysis we will focus on similar grades of sweet crude oil like that found in Cushing Oklahoma. (The other major grade is high sulfur “sour” crude which usually trades at a discount to sweet crude oil. Sour crude oil is more expensive to refine, making it less desirable.) In the chart below, the mid-continent U.S. pipeline delivered benchmarks of West Texas Intermediate (WTI) in Midland Texas (pink line) and WTI in Cushing Oklahoma (black line) are trading around $87/barrel. However, the other sweet crude oil benchmarks are trading around $100/barrel. These are the waterborne (tanker) cargoes originating out of the Bonny oil terminal in Southern Nigeria (Bonny Light in red), the North Sea cargoes from the Sullom Voe oil terminal in Shetland Islands, Scotland (Brent 40s in blue) and St. James Parish in Louisiana that connects to the Louisiana Offshore Oil Port or LOOP (LA Light in Cyan). The Brent crude oil benchmark is the underlying cash market for the Brent futures contract traded on the Intercontinental Commodity Exchange (ICE).

Will $100 Oil Kill the Recovery? - Here's something you never hear: Oil caused the financial crisis. Back when the Financial Crisis Inquiry Commission started a year and a half ago, they had 22 things they were looking into. Oil didn't even make the list. And why not? On the surface it's just as reasonable as the rest. Oil prices shot up during 2007 and 2008. Higher gas prices made it harder for Americans to pay their bills, most importantly their mortgages. Loans went bad. Foreclosures shot up. House prices tumbled. The rest is history. And yet. That's not how anyone remembers it. Oil isn't really even in the conversation. If you don't know why I am bringing this up now, you haven't been watching the news. On Wednesday, oil hit $100 a barrel for the first time since the financial crisis. It ended the day at around $98. Still, the $100 mark is a psychological one. And the fact that oil has marched back to that level so fast while so many people are still out of work, has some concerned. But oil is rarely a recovery killer, and probably won't be this time either.

Energy prices: Tax away vulnerability | The Economist - OIL prices continue to rise today. West Texas Intermediate is over $97 per barrel. Brent crude is closing in on $110 (for an explanation of why the two prices are diverging, click here). Treasury Secretary Tim Geithner isn't worried: “Central banks have a lot of experience in managing these things.” But he probably should be:Analysts at Morgan Stanley note a 85 percent to 90 percent increase in the price of oil over a year was followed by U.S. recessions in 1975, 1980, 1990, 2000 and 2008.Now, an increase in oil prices of that magnitude would take prices back to near $150 per barrel, and it's far from clear that they'll rise that high. But this is nonetheless a clear vulnerability for the American economy. And it's one that America has invited upon itself.Petrol prices in America are substantially below levels elsewhere in the rich world, and this is almost entirely due to the rock bottom level of petrol tax rates. The low cost of petrol encourages greater dependence; the average American uses much more oil per day than other rich world citizens. This dependence also impacts infrastructure investment choices, leading to substantially more spending on highways than transit alternatives. And this, in turn, reduces the ability of American households to substitute away from driving when oil prices rise.

Prepare for a shock from the Middle East - It is understandable that Egypt and Tunisia had essentially not registered on the markets’ traditional scale of systemic influence. The two countries are not significant global economic powers; they do not owe much money to western banks and governments; and they are not large exporters of commodities.Yet Egypt and Tunisia are catalysts for a broader phenomenon of change that is gaining systemic importance. Over the weekend, protests occurred in a growing number of countries in the region, from Algeria and Morocco in the west to Bahrain and Yemen in the east. Two developments are particularly important when it comes to global demand and price dynamics. With an oil exporter such as Libya now in the grips of a popular uprising, markets will push oil prices higher to reflect much greater supply uncertainties for this key global commodity. And with sectarian issues now on display in Bahrain, geopolitical risks are higher for the region – especially as other countries seek to influence events in the Kingdom.  Unfortunately, this weekend also saw a deplorable change in dynamics; and one that makes this transformational period even more unpredictable and dangerous.

Gaddafi orders oil sabotage, source tells Time columnist (Reuters) - Time magazine's intelligence columnist reported on Tuesday that Libyan leader Muammar Gaddafi has ordered his security forces to sabotage the country's oil facilities, citing a source close to the government. In a column posted on Time's website, Robert Baer said the sabotage would begin by blowing up pipelines to the Mediterranean. However he added that the same source had also told him two weeks ago that unrest in neighboring countries would never spread to Libya -- an assertion that has turned out to be wrong. "Among other things, Gaddafi has ordered security services to start sabotaging oil facilities," Baer wrote. "The sabotage, according to the insider, is meant to serve as a message to Libya's rebellious tribes: It's either me or chaos." The growing violence in Libya has forced a number of oil companies to shut in production in Africa's third-largest oil producer and disrupted flows from the country's export terminals.

Oil Rises to Two-Year High on Libya Unrest; Goldman Sees Brent at $110 - Oil jumped to the highest in more than two years in New York as intensifying violence in Libya stoked concern that supplies from the holder of Africa’s largest crude reserves may be disrupted.  Futures for April delivery in New York rose as much as 9.8 percent from the Feb. 18 settlement and London-traded Brent surged to the highest since September 2008, as soldiers deserted Libyan leader Muammar Qaddafi’s government and diplomats resigned. Brent may trade between $105 and $110 a barrel in coming weeks if the unrest continues, according to Goldman Sachs Group Inc.  “Libya is quite an important oil exporter, especially to Europe,” said Hannes Loacker, an analyst with Raiffeisen Bank International AG in Vienna. “Now fear and uncertainty is increasing over whether countries in the Gulf may be affected.”  Crude for April delivery rose as much as $8.77 to $98.48 a barrel in electronic trading on the New York Mercantile Exchange and was at $95.96 at 12:27 p.m. London time. Floor trading was closed yesterday for the U.S. Presidents Day holiday and electronic trades will be booked with today’s transactions for settlement purposes. The March contract, which expires today, gained as much as $8.29, or 9.6 percent, to $94.49 a barrel. Front-month futures are up 17 percent in the past year.

Why the Disruption of Libyan Oil Has Led to a Price Spike -  More broadly, economists are concerned that if oil prices stay high this year, they could slow the already fragile global economic recovery. As a general rule of thumb, every $10 increase in the price of a barrel of oil reduces the growth of the gross domestic product by half a percentage point within two years.  Libya produces less than 2 percent of the world’s oil, and exports little to the United States. But the high quality of its reserves magnifies its importance in world markets.  Libya’s “sweet” crude oil cannot be easily replaced in the production of gasoline, diesel and jet fuel, particularly by the many European and Asian refineries that are not equipped to refine “sour” crude, which is higher in sulfur content. Saudi Arabia has more than four million barrels of spare capacity and has promised to tap it if necessary, but that capacity is mostly for sour grades of oil.  Should the turmoil in Libya last for more than a few weeks, oil experts predict that European refiners will be forced to buy sweet crude from Algeria and Nigeria, two principal sources of sweet crude for the United States. That would probably push up American gasoline prices, which have already risen 6 cents a gallon over the last week to an average of $3.19 for regular grade.

All eyes on Bahrain as Gulf tremors frighten oil markets - Oil analysts are paying very close attention to fast-moving events in Bahrain, fearing that clashes between the island’s Sunni elite and an aggrieved Shi’ite majority could embroil the two Gulf giants of Iran and Saudi Arabia. "While events in Libya are undoubtedly of prime importance, they are a red herring for the oil market," said Helima Croft from Barclays Capital. "We believe the unrest in Bahrain may be of far greater importance to the strategic balance in the Middle East and to the oil market." The risk group Exclusive Analysis said there is a "moderate risk of an extremely violent transition" in Bahrain, the linchpin of stability in the Gulf and host to the US 5th Fleet. "There is a significant probability that the present order is completely overthrown and replaced by a new order aligned with Iran," it said. Marchers from Bahrain’s Shi’ite community, 70pc of the Island’s 800,000 population, poured into Manama’s Lulu square on Tuesday in another day of civic protest after the royal family promised to call off the bloody crackdown

Brent-WTI spread - I wanted today to try to make sense of another equally striking development in oil markets over the last 6 weeks-- the disparity between the price of oil in the Midwest United States and that elsewhere in the world.  The graph below compares the price of West Texas Intermediate for delivery in Cushing, Oklahoma with that for North Sea Brent in Europe. Usually you can hardly tell the two apart on a long-term graph like this. But in the last few weeks, the discrepancy has at times exceeded $15 a barrel. The prices of other high-quality international crudes, like Nigerian Bonny Light and Algerian Sahara Blend, have hugged close to Brent as they also pulled away from the WTI.Stuart Staniford and Donald Marron have discussions of this, with the Oil Drum having the most thorough treatment. An influx of Canadian crude through pipelines delivering to the Midwest, along with impressive production gains from North Dakota, are bringing a lot of new oil to Cushing, depressing the price there relative to other locations. But the fact that more oil is being produced and delivered locally is not an adequate explanation for the price discrepancy.

Floating Crude and Shipping Rates Could Trigger $4 Gas  - For years there has been a large supply of crude floating on big oil tankers. A significant portion of this is not under contract and does not have a specific delivery date. Typically these vessels head for Asia or the Americas. They do it at slow speed. They wait for contact from the owners that the crude has been sold and a delivery date has been set. When that happens the ship picks up speed and heads to the intended port. It is my understanding from talking to some shippers that this is happening in a very big way as I write. It makes perfect sense. If you were China Inc. and worried this morning about the predictability of supply, the first thing you would do would be to secure as much of the floating crude that was out there. We saw this same pattern in the early days of Egypt. Back then the rush was to bulk up on supplies of wheat. Today it is crude. Two consequences from this. First a minor one. The cost of chartering an oil tanker has fallen from a high of $200,000 per day to as low at $20,000 of late. We are going straight up on this number. Transportation is part of the cost we pay to import the 10mm barrels of oil a day we consume. This increased cost will flow very quickly into the cost of gas. More importantly is that the cost of spot crude (not futures) is going to skyrocket. It already has. Look at the price being paid for spot crude at the Gulf of Mexico. It opened yesterday at $112. There is a $20 premium for physical crude versus WTI Should the current uncertainties on supply continue (or worsen) $4 gas in the next few months is a foregone conclusion.

Oil groups prepare to close down in Libya - Oil production in Libya is set to drop dramatically as major international companies and sub-contractors evacuate their staff from the north African country, potentially sending oil prices much higher. Crude oil prices shot up on Monday to a fresh 2½-year high above $105 a barrel as traders braced for the impact of political unrest in Libya, the first major oil exporting country to be hit by turmoil in the Middle East. Brent rallied further in after-hours trading, up to $108.70 a barrel.  Wintershall, a subsidiary of Germany’s BASF, was the only company to confirm publicly it was shutting down production in the country. But executives at other leading oil companies privately conceded they were implementing emergency plans to repatriate all their staff and shut down output. They added that sub-contractors, key to managing the complex oil fields, were already leaving, forcing them to follow suit. Executives asked not to be named as their companies were still in the process of evacuating staff. The oil fields in the south of the country run by international firms have their own airstrips. Until the last staffer is pulled out of the country, a process which could take hours or a few days, companies planned to keep production up.  “But the last man will switch off the button,” an executive said.

North African gas supplies to the European gas market - With civil and bloody unrest spreading across North Africa and The Middle East, it is once again appropriate to look at the dependency of Europe upon imports of gas from North Africa. With the North Sea in decline and Norway struggling to meet supply forecasts, Europe is becoming increasingly reliant upon gas imported from Russia, Africa and The Middle East. Below the fold is a post originally run in December 2007 called 'The European Gas Market'. It is a little out of date but still serves to illustrate the main suppliers and importers of natural gas from North Africa.

Oil And The Revolt In Libya — What If? - Libya is one of the smaller oil exporters in OPEC. They were producing 1.65 million barrels per day in 2010 (through October) according to EIA data. However, the very serious political upheaval in this North African country poses a genuine threat to that production. Unlike in Egypt, where the revolt seemed almost orderly and never exhibited this level of violence, the situation in Libya could quickly escalate out of control. I take it seriously and suggest you do the same. Let's look at a worst case scenario in Libya, ignoring for the moment the contagion that might spill over from Bahrain into eastern Saudi Arabia among the Shia' populations there. Let's assume Libya's oil output has been reduced to zero. What would happen?

Oil Shock Fears As Libya Erupts - The spectre of full civil war in oil-rich Libya and reports of the creation of an Islamic emirate in the country's "Barqa" region has moved the Mid-East crisis into a more dangerous phase, setting off an explosive rise in US crude prices.   "This is potentially worse for oil than the Iran crisis in 1979," said Paul Horsnell, head of oil research at Barclays Capital. "That was a revolution in one country, here there are so many countries at once. The world has only 4.5m barrels-per-day (bpd) of spare capacity, which is not comfortable." US oil contracts jumped more than $9 a barrel in a matter of hours on Tuesday to touch $98, chasing Brent crude at a 30-month high of $109 as the whole global oil system is drawn into the vortex.  While Egypt is a minor oil player, Libya's Sirte Basin holds Africa's largest reserves and supplies 1.4m bpd in exports, mostly to Italy, Germany and Spain.

Gaddafi’s Next Move: Sabotage Oil and Sow Chaos? - The violence in Libya and continuing unrest across the Middle East have pushed oil prices into a "danger zone" that could threaten global economic recovery, the International Energy Agency has warned. Fatih Birol, the IEA's chief economist, said high prices could put pressure on central banks to raise interest rates, especially in more developed countries such as the UK. "Oil prices are a serious risk for the global economic recovery," he said. "The global economic recovery is very fragile – especially in OECD countries." He said oil prices had entered a "danger zone" for the recovery at over $90 a barrel. Brent crude prices fell back slightly from Monday's two-and-a-half-year high of $108.70 a barrel, but US oil prices at one stage rose by more than $8 a barrel to hit $94.49, the highest level since October 2008. That increase was partly a catch-up after the US markets were closed on Monday, but prices are also being driven by fears that unrest could spread to Saudi Arabia, the world's biggest crude exporter.

Oil could exceed $150, analyst warns - Oil could hit get to more than $150 a barrel if the unrest being seen in the Middle East and North Africa spreads across the whole of the region, an energy trading house has warned. Marco Dunand, chairman and co-founder of Swiss group Mercuria Energy, told Reuters: I don't want to over-hype things, but there are scenarios under which oil could go above $150 without a doubt and those scenarios are to do with stability in the Middle East if things start spreading. He added that a $150-a-barrel price was a "20% possibility".The oil price went up another notch this morning after falling back towards the end of yesterday's session.

Oil at 2-year high raises concern about economy - Crude oil prices rose to fresh two-year highs Wednesday, fanning concern about the impact of rising energy prices on the fragile global economic recovery.  West Texas Intermediate crude for April delivery jumped $2.68, or 2.8%, to settle at $98.10 a barrel on the New York Mercantile Exchange. Earlier in the day, prices hit triple digits for the first time since Oct. 2, 2008. Crude oil prices have soared 18% since Valentine's Day. In London, Brent crude added $5.47, or 5%, to $111.25 per barrel on the ICE Futures exchange. "I would view this as a very serious threat to the expansion, just when the economy is hitting its groove," says economist Mark Zandi of Moody's Analytics. Oil's surge has driven retail gasoline prices past $3 a gallon in recent months. The national average price for regular was $3.194 a gallon Wednesday, up from $2.66 a year ago.

Oil Hits $100 Per Barrel: Is The U.S. Economy Hanging In The Balance? The uprisings in the Arab world are beginning to have an economic impact: Oil prices continued to climb and stocks drifted lower on Wednesday as reports emerged about the disruptions of crude operations in Libya. Additionally there have been reports of attempted sabatoge at Libyan oil facilities and reports that pipelines have been turned off. At this point. the market is reacting both to the threat of lower supplies and general uncertainty about where all of this heads next. If Libya falls and this moves on to nations like Algeria or even Saudi Arabia, then you can expect oil prices (and domestic gasoline prices) to continue to rise. If that happens, there's the threat that increased energy costs could dampen the already anemic economic recovery here in the United States:  Indeed, Jeffery Rubin noted in 2008(PDF) that most politicians and economists were ignoring the role that the mid-2000's oil spike played in the economic downturn that started in 2007:

Libya, oil prices, and the economic outlook - What will be the economic effects of this week's developments in Libya? We have a fair amount of historical experience from which to try to answer that question. In a recent paper, I surveyed the history of the oil market with a particular focus on major price movements and their economic effects. The table below summarizes the six episodes since World War II in which geopolitical events led to significant disruptions in the supply of oil. The last column reports the amount by which global oil supplies were reduced as a percent of world production at the time. The first five of the episodes listed in the table were followed by economic recessions, whereas the last was not.The table just reports the reduction in the flow of oil from the countries immediately affected by the events. In each case, there were production increases elsewhere in the world that offset some of the declines. For example, the Venezuelan strikes in 2002 and losses in Iraqi production in the Second Persian Gulf War in 2003 were pretty quickly made up for elsewhere.

In Bahrain, Shiites Turn Out to Protest — More than 100,000 protesters poured into the central Pearl Square here on Tuesday in an unbroken stream stretching back for miles along a central highway in the biggest antigovernment demonstration yet in this tiny Persian Gulf kingdom. In a nation of only a half a million citizens, the sheer size of the gathering was astonishing. The protest, organized by the Shiite opposition parties, began in the central Bahrain Mall, two miles from the square and seemed to fill the entire length of the highway between the two points. Security forces were nowhere to be seen along the demonstration route. The Ministry of the Interior, which has been regularly providing updates on the situation in the capital via its Twitter feed, issued a terse acknowledgment of the protest: “Sheikh Khalifa Bin Salman towards Manama is now closed.”

If Libyan unrest spreads, gas could reach $5 - If political unrest in Libya spreads to other oil-rich countries and the ensuing chaos disrupts crude oil production, gas prices could hit $5 a gallon by peak summer driving season, industry analysts say.Oil prices soared to the highest level in more than two years as violence spread in Libya and Moammar Gadhafi's grip weakened. Only a small amount of Libya's oil production appeared to have been affected, though analysts fear revolts will spread to OPEC heavyweights like Iran. Benchmark West Texas Intermediate for April delivery jumped $4.59, or 5% to $94.30 per barrel on the New York Mercantile Exchange. The last time oil traded at that level was Oct. 2, 2008. The April contract traded as high as $98.48 per barrel.

Oil Heads for Biggest Weekly Gain Since 2009 on Libya Supply, US Economy - Oil headed for its biggest weekly gain in almost two years on concern the turmoil that has cut Libya’s output may spread to other parts of the Middle East, and on speculation U.S. economic growth will boost fuel demand.  Crude pared gains after the U.S., Saudi Arabia and the International Energy Agency made assurances they can compensate for any disruption of Libyan supplies. It surged to a 29-month high in New York yesterday amid estimates that Libya’s output was cut by as much as two-thirds. Futures rose as much as 2 percent today before U.S. data that may show economic growth quickened and consumer confidence improved. “The market is still highly volatile because there’s great uncertainty over the scale of supply outages in Libya and as to which country can compensate for these,” . “So far, there isn’t huge concern about the possibility of contagion, or prices would have risen much more.” Crude for April delivery gained as much as $1.92 to $99.20 a barrel in electronic trading on the New York Mercantile Exchange. Prices have risen more than 13 percent this week, the biggest gain since the five days ended March 20, 2009.

Oil price ‘could hit $220 a barrel’ - The continuing violence in Libya and fears that the unrest will spread to other parts of north Africa and the Middle East could create the biggest oil shock since the first Gulf war, analysts have warned. Up to half of Libya's oil production is now estimated to have been shut down as a result of the crisis engulfing the country – creating supply concerns that pushed the price of Brent crude above $110 a barrel, now experiencing its biggest three-day gain in a year. Commodity analysts at Japanese bank Nomura raised the possibility that prices could perhaps hit $220 a barrel. In a note to clients the bank warned: "The closest comparison to the current unrest in the Middle East and north Africa is the 1990-1991 Gulf war. If Libya and Algeria were to halt oil production together, prices could peak above $220 a barrel and Opec spare capacity will be reduced to levels seen during the Gulf war and when prices hit $147 in 2008."

North African Turmoil Could Rocket Crude to $220 -If the turmoil paralyzing parts of the Middle East and North Africa brings oil production in Libya and Algeria to a standstill, it could cause crude oil to explode to $220 a barrel, derailing the global economic recovery.According to a new report from Tokyo-based Nomura, a simultaneous production halt from embattled Libya and neighboring Algeria would reduce OPEC spare capacity to 2.1 million barrels a day and may cause crude to spike from about $97 a barrel today to $220 a barrel. “The closest comparison is the 1990-1991 Gulf War,” the Nomura analysts, led by Michael Lo, wrote, saying crude prices leaped 70% in seven months when OPEC’s spare capacity was cut to just 1.8 million barrels a day during that conflict with oil-rich Iraq. While the $220 figure may sound high, Nomura said it could be an underestimate as speculative oil traders who were not around during the Gulf War may exaggerate the surge during an oil production halt.

Nomura Predicts $220 Oil If Just Libya, Algeria Cut Output - Waiting for a Saudi revolution before buying those $200 oil calls? It may be time to reevaluate: according to Nomura a halt in just Libyan and Algerian oil production (far more likely than the crisis spilling over to Saudi) would send oil to over $220/bbl. Specifically "the closest comparison to the current MENA unrest is the 1990-91 Gulf War. If Libya and Algeria were to halt oil production together, prices could peak above US$220/bbl and OPEC spare capacity will be reduced to 2.1mmbbl/d, similar to levels seen during the Gulf war and when prices hit US$147/bbl in 2008." Wouldn't a doubling in price lead to a major demand plunge as well? Yes it would "This could also result in a temporary demand destruction of some 2.0mmbbl/d globally." Also, since the Fed's free money was not flooding global market last time, $220 is just a lowball estimate: "We could be underestimating this as speculative activities were largely not present in 1990-91."

Geithner Says World in Better Position to Handle Oil-Price Jump - U.S. Treasury Secretary Timothy F. Geithner said the economic recovery has put the world on a better footing to withstand the increase in oil prices caused by turmoil in the Middle East.  “The economy is in a much stronger position to handle” rising oil prices, Geithner said today during a Bloomberg Breakfast in Washington. “Central banks have a lot of experience in managing these things.”  Political turmoil in Libya, holder of Africa’s largest oil reserves, will add “stagflationary winds” to the global economy, according to Mohamed El-Erian, chief executive officer at Pacific Investment Management Co. Protests in Libya pose more “systemic” risk to the global economy than the upheaval in Egypt and Tunisia, El-Erian said in a Bloomberg Television interview yesterday. Geithner also said the U.S. financial system is in better shape than before the recession and is able to provide the funding needed for the expansion.

BBC News - Saudi king offers benefits as he returns from treatment: Saudi Arabia's King Abdullah has announced increased benefits for his citizens, as he returned after months abroad getting medical treatment. There will be extra funds for housing, studying abroad and social security, according to state television. King Abdullah has been away from the country for three months, during which time mass protests have changed the political landscape of the Middle East. There have been few demonstrations in Saudi Arabia. Hundreds of men in white robes performed a traditional sword dance at Riyadh airport as the king's plane touched down. He disembarked and queues of people waited to personally greet him. The streets of the city had already been decorated with welcome banners and national flags.

Saudi ruler offers $36bn to stave off uprising amid warning oil price could double - The king of Saudi Arabia last night announced $36bn (£22bn) of extra benefits for his people in an attempt to stop the wave of Arab uprisings spreading to the world’s biggest oil exporter, as experts warned Brent crude could hit $220 a barrel.  King Abdullah’s support package offers to give 18m lower and middle-income Saudi’s inflation-busting pay rises, unemployment benefits and affordable housing.  The growing turmoil in the region led experts to warn last night that Brent crude oil prices may double from the $111 a barrel mark it peaked at yesterday if the crisis continues to spread to other Middle Eastern countries. “There is potential for serious tension, and not just among the Shia. High unemployment and the youth bulge means unrest could be country-wide. If Saudi Arabia or Iran are engulfed, we have a serious problem,” Nomura's commodity team said oil prices risk vaulting to uncharted highs over coming weeks if chaos hits Algeria as well, reducing global spare capacity to the wafer-thin margins seen just before the first Gulf War. “

Helicopter Ben Step Aside, Meet Enola Gay Abdullah: Whorism Goes Global - And so the scramble to buy people's love and undying affection moves beyond the Casual Encounters section on Craigslist. After Helicopter Ben and Teleprompter Barack came up with the brilliant plan to give $2,000 to every underwater homeowner, Saudi Arabia blows everyone out of the water with the biggest social whoring attempt to date. "King Abdullah of Saudi Arabia announced financial support measures, worth an estimated SR135bn ($36bn), in a bid to avert the kind of popular unrest that has toppled leaders across the region and is now closing in on Libya’s Muammer Gaddafi. The measures include a 15 per cent salary rise for public employees to offset inflation, reprieves for imprisoned debtors, and financial aid for students and the unemployed." Unfortunately for Saudi, Bahrain tried this and failed. Also, once you start down this path, there is no turning back, as people demand more and more. Just how many printing presses does Saudi Arabia have? At least we now know that the political system that follows capitalism after its violent end is always and everywhere whorism, in those brief moments before total anarchy takes over and the inevitable systemic reset button is finally pushed.

Saudis, Trying to Calm Markets, Say OPEC Is Ready to Pump More Oil -  “OPEC is ready to meet any shortage in supply when it happens,” the Saudi oil minister, Ali al-Naimi, said at a news conference after a meeting of ministers of oil producing and consuming nations in Riyadh, Saudi Arabia. “There is concern and fear, but there is no shortage.” The intensifying turmoil in Libya drove oil prices sharply higher again on Tuesday, in part because at least 50,000 barrels a day of output had already been suspended. That is only a fraction of what Libya produces, but with foreign oil companies beginning to shut down operations and evacuate workers, the price of Brent crude, a benchmark traded in London, rose to more than $106 a barrel on Tuesday.Libya sends only a small fraction of its oil to the United States, but since oil is a world commodity, Americans are not immune to the price shock waves.Refineries on the East and West Coasts, for example, depend on Brent crude, meaning that the higher prices paid by Europeans are also pushing up gasoline and heating oil prices paid by many New Yorkers, New Englanders and other Americans.

Saudi Arabia Pledges OPEC Supplies to Replace Lost Libya Oil - Saudi Arabia and other OPEC nations including those in West Africa are willing and able to replace any lost Libyan oil as soon as companies ask for it, including crude of the same quality, a Saudi Arabian oil official said. There is no reason for oil prices to rise because Saudi Arabia and OPEC won’t allow shortages to exist, the official said by telephone today, declining to be identified by name. Some West African oil that goes to Asian markets can be redirected to Europe, and extra Saudi oil can go to Asia to replace Nigerian or Angolan supplies, the Saudi official said. Exporters are under pressure to ensure adequate supplies to the market after violence in Libya, Africa’s third-largest producer, sent Brent crude futures in London as high as $119.79 a barrel earlier today, the highest since August 2008. Brent retreated below $114 after the Saudi official’s comments were reported. Several hours later, the International Energy Agency said it stands ready to release emergency stockpiles if needed.

Scrambling to swap Libyan crude for Saudi - Hitting the wires at pixel time — an astonishing promise: RIYADH, Feb 24 (Reuters) – Saudi Arabia is willing and able to supply high quality, light oil to replace any lost Libyan crude, senior Saudi sources said on Thursday."Saudi is willing and capable of supplying oil of the same quality, either Arab extra light or through blending,” one source said…Some West African crude, such as Angolan crude can also be redirected to Europe, the sources said, while Saudi Arabia could temporarily send extra oil to Asia to compensate. Well, the feasibility of a straight Libyan-Saudi swap has been an issue. Needless to say, prices of Arab Light and Arab Extra Light have been spiking sharply higher following the chaos in Libyan production:

Libyan Oil Grinding to a Halt - At least 300kbd-400kbd of oil production are shut-in already, and likely more, but the situation is still confusing. As much as a quarter of Libyan oil output has been shut down, Reuters calculations showed on Wednesday, as unrest prompted oil companies to warn of production cuts in Africa's third-largest producer  Austria's OMV said on Wednesday it might be heading for a full production shutdown in Libya. Total, Repsol, Eni and BASF have also said they are either slowing or stopping output. The latest comments point to a growing impact on oil output from Libya, which produces 1.6 million barrels per day (bpd) of high-quality oil, or almost 2 percent of world output. About 1.3 million bpd is exported, mainly to Europe. According to Time Magazine's Robert Baer, anonymous sources close to Gaddafi say he is now giving orders to sabotage Libya's oil industry:
Libyan ports are shutting down: Libyan cargo port operations have shut down due to increasing violence sweeping the country, Reuters has reported. In particular, oil exports appear to be halting completely:

Spare Capacity Theory  - I note with interest that David Fyfe of IEA Paris earlier today attempted to calm world oil markets, by reminding that in the OECD there are over 1.6 billion barrels of oil in inventory. By marshaling these western supplies of already-pumped, above-ground oil, the world could gain a new source of oil for up to one year, at a rate of 4 mbpd (million barrels per day). There are a few sticky issues surrounding such a claim. Not least of which is that oil markets regard drawdowns of above-ground inventories as a reason to send prices even higher. But that point aside, let’s consider what Fyfe did not claim: the head of IEA’s oil markets division did not claim that Non-OPEC oil producers, which account for nearly 60% of world oil supply, could lift supply to make up for the Libyan disruption. That’s no surprise. Non-OPEC oil production has already peaked, and couldn’t increase supply either tomorrow or next year. In the graphic to the left we see the latest publicly available charts for OECD inventories, from the 18 January Oil Market Report from IEA. Note that in the bottom chart what’s being accounted for is not only the 1.6 billion barrels of crude that Fyfe refers to, but another 1 billion barrels of oil products. That said, the scale of these large numbers can be a tad misleading. They represent in part just the normal flows of the global oil market and are a snapshot of oil as it flows from production, to refining, and to distribution. For a different measure, these same levels of inventory represent 57.5 days of supply. Which the IEA itself says are the lowest in the past two years.

Why Saudi Arabia can no longer temper oil prices - The global economy had no sooner put in its first year of solid growth when world oil demand, like a jack in the box, sprang to a new record high. China alone added almost a million barrels a day to global demand, which ended the year at more than 87 million barrels a day. And demand shows no sign of abating this year. It was far from clear where the world was going to find another two million barrels a day of new supply to meet another year of demand growth. That would be in addition to the nearly four million barrels a day of new production that must be brought on simply to replace what is lost every year in depletion.  Then came the turmoil in North Africa and the Middle East. Now it’s even less clear where that oil will be flowing from. The region of the world that was expected to pump that additional oil supply, utilizing its supposedly ample spare capacity, is now falling into anarchy.  In reality, that official spare capacity hasn’t existed for years.

Oil And The Arab World's Unrest: Oil Pressure Rising - A MONTH ago Brent crude oil stood at around $96 a barrel and Hosni Mubarak was ensconced as Egypt’s ruler. Now he is gone, overthrown by a display of people power that is shaking autocratic leaders across north Africa and the Middle East. And oil has surged above $115. Little wonder. The region provides 35% of the world’s oil. Libya, the scene of growing violence this week, produces 1.7m of the world’s 88m barrels a day (b/d). So far prices have not been pushed up by actual disruptions to supply. Oil hit a peak even before news emerged that some foreign oil firms operating in Libya would cut production and that the country’s ports had temporarily closed. As Adam Sieminski at Deutsche Bank points out, oil prices are driven both by current conditions and by future expectations. Oil markets don’t like surprises. The sudden ousting of Mr Mubarak and the unrest in Libya, Bahrain, Yemen, Iran and Algeria (which between them supply a tenth of the world’s oil) had added 20% to oil prices by the middle of this week. The big worry is that spreading unrest will culminate in another shock akin to the oil embargo of 1973, the Iranian revolution or Iraq’s invasion of Kuwait.

Why Can't Saudi Crude Replace Libyan?  - Yesterday, there was a sudden rash of news stories about how Libyan crude is light and sweet and it's loss thus is having a disproportionate effect on world oil prices. In particularly, Saudi Arabia's shut-in spare capacity is alleged to be too heavy and sour to substitute for Libyan oil, so that even though the Saudi's have the capacity to produce more, and would be more than happy to oblige the world by doing so, it wouldn't help because it's the wrong kind of oil. Color me deeply suspicious.This story sounds superficially plausible.  It is true that Arab Light, say, is listed as having 1.97% sulphur, which exceeds the 0.5% limit usually required to consider oil "sweet". But it's an entirely different matter to claim that the entire global refining industry cannot make more use of Saudi crude right now, which is what these news stories are implying.  After all, if there's any refinery anywhere that could take more Saudi crude and refine it into gasoline, diesel, or some other useful product, then that refinery could substitute for the lost output from refiners of Libyan crude that cannot switch.  So there's no requirement for individual refineries to switch as long as someone, somewhere, anyone, anywhere can refine more Saudi crude at present. 

Nine Million Barrels/Day? - Well, it's pretty neck-snapping trying to follow global events at the moment.  A couple of days ago, there was an epidemic of whining about how raising Saudi production couldn't help offset Libyan production, and the Saudis hadn't decided what to do.  Then, this morning, there are anonymous reports from Saudi insiders that Saudi Arabia has actually already raised production at or above 9mbd: Saudi Arabia has increased its oil production to more than 9 million barrels per day (bpd) to compensate for disruption to Libyan output, an industry source familiar with the kingdom's production told Reuters on Friday. "We have started producing over 9 million barrels per day (bpd). We have a lot of production capacity," the source said, but said he could not say when the change had taken place.  Who knows if this is true or not? At any rate, the graph above shows what this would look like in the context of recent Saudi production (which was already seeming to creep up in recent months).

Oil price spikes set grim precedents - The past five global recessions have all followed sharp jumps in the oil price. Investors, traders and analysts this week have all been nervously asking: is a sixth imminent? The shock in markets has been palpable as the Brent oil price jumped as high as $119.79 a barrel on Thursday, up 16 per cent on the week. With equity and bond markets having – until this week – focused more on the prospects of inflation, some investors now think fears of an economic slowdown1 could surface. “In the stagflation debate, markets have been pricing for higher ‘flation’, but it is the ‘stag’ bit that hasn’t been priced in yet ... All routes head in the same direction: threats to economic growth2,” A key part of the debate will be the ultimate size of the jump in oil prices. As oil prices stabilised on Friday at about $111.50, investors started to sound more sanguine about the outlook for equities, saying that a correction had been long overdue but could be short-lived.So far the jump in oil prices is nowhere near as large as during previous oil supply shocks. During the first Gulf war in 1990-1991, oil prices jumped 150 per cent in three months. In the 1970s, when oil supply was struck by a series of events, such as the Arab-Israeli war and the Iranian revolution, prices rose more than 200 per cent in a matter of months.

U.S. Can 'Ride Out' Libyan Oil Supply Disruption With Reserves, Obama Says - President Barack Obama sought to assure markets and the public that the U.S. economy can withstand any disruption in Libya’s oil production caused by the revolt against Muammar Qaddafi’s regime.  Obama and members of his administration said the ability to tap reserves held by major economies and the capacity of other oil-producing countries to pump more crude will blunt the impact from the loss of shipments from Libya, which accounts for about 1.8 percent of global supply.  “We’ll be able to ride out the Libya situation, and it will stabilize,” Obama said yesterday as he joined the first meeting of his advisory council on jobs and competitiveness at the White House.  Crude oil retreated from the highest level in 29 months after the statements by Obama and members of his administration and assurances from Saudi Arabia and the International Energy Agency that they can compensate for any loss of Libyan production.

USA Today gets it wrong: More drilling won’t help - The normally semi-rational USA Today thinks a good response to higher gasoline prices due to MidEast unrest is more domestic drilling, even though that would have no noticeable impact on U.S. gasoline prices — ever! — according to the US Energy Information Administration (see “EIA: New offshore drilling will lower gasoline prices in 2030 a few pennies a gallon). CAP’s Daniel J. Weiss offers the opposing view.. Nearly 20% of our oil imports come from the Persian Gulf, where instability causes roller coaster prices.“Drill, baby, drill” won’t get us out of this mess. We have only 2% of world oil reserves but use one-quarter of world oil production. Oil companies want more ocean drilling, yet it will take years to produce anything from the thousands of undeveloped Gulf of Mexico leases they already own. And nuclear plants are no solution because they are exorbitantly expensive and time consuming to build.

Robert McFarlane: Open Fuel Standards Are Critical To Fighting the Peak Oil Catastrophe - "Well, I wish had a more hopeful answer for you. You've nailed it. We really are very likely to face either a disruption violently [by terrorism] or a political decision by OPEC to change the price of oil to $200 to $300 per barrel and literally destroy the global economy." So predicts Robert McFarlane in today's interview, which focuses on current US energy policy and the risks it faces. Mr. McFarlane's many decades of public and private service in both the Middle East and global energy markets make him uniquely qualified to opine on the mertis (or lack thereof) of the energy strategy that the US is pursuing. He sees the US as committed to a foolish "monopoly-fuel" system that leaves it dependent upon and dangerously vulnerable to the actions of external players, including those hostile to US interests. And as the impacts of Peak Oil begin to be felt, he believes it is a near certainty that our country - along with the global economy - will experience great shocks to which we have no plans currently in place to address sufficiently. The solution lies in creating a viable market for alternative fuels, which is in our power to do, provided we can muster the politcal and civic will. And do so quickly.  Click the play button below to listen to Chris' interview with Robert C. McFarlane (runtime 34m:39s):

Middle East uprising will put oil giant Saudi Arabia in peril, claims historian - Just seven days after the fall of Egypt’s Mubarak, the whole Middle East is in turmoil, with bloodshed from Libya to Bahrain. Tyrants and their well-paid gunmen try to drown opposition to their rules with violence and repression. Civil war and chaos threaten Yemen and Jordan. This is not just a grim prospect for the people who live there. It is extremely unnerving for the West. The oil-rich autocracies on which we depend are now facing full-throated revolution. Libya’s Colonel Gaddafi is willing to shoot as many as it takes to stifle opposition in Libya. But he can’t shoot everyone. And if he is ousted, there is no certainty that any eventual successor would honour existing contracts with Western oil giants – contracts, incidentally, which were the dubious legacy of Tony Blair’s diplomacy.  But it is the rising tide of violence around Saudi Arabia which could ignite a political blow-out of terrifying proportions in the world’s biggest oil producing country.

Watching America's Decline In Real-Time - I often ridicule garden-variety economists and government functionaries, as I did yesterday regarding the CBO's job and economic growth fantasies. I do so because knee-jerk optimism does not help us face the future. Motives vary in these cases, but all such talk has a common theme: the world has changed—not for the better—and these pollyannas have failed to recognize it, preferring to talk about "business cycles" and other nonsense. In these times, complacency is a recipe for disaster. The Nymex front-month price rose above $101/barrel yesterday, and it may be a very long time before we see prices back in the $80s. Brent hit $115, and prices are comparable in the other international markets. If one looks on the surface, as most people do, it's easy to blame these high oil prices on unexpected geopolitical shocks—Nassim Taleb called such events black swans. Beneath the surface, the world oil market has been anything but stable for several years now, so there was always a considerable risk that random events could create the situation we see today. Taleb's point was that such risks have been grossly underestimated in today's complex, fragile financial and commodity markets.

Stratfor On Why Developments In Bahrain Are More Important Than Libya's - The reason why Bahrain is very important is because in any negotiation you have to have some give-and-take, and it’s likely that the Bahraini monarchy will have to give some concession to the opposition. And once that happens, it will lead to an empowerment of the opposition, 70 percent of which is Shia — 70 percent of the population of the country is Shia — and that has very large-scale implications for the region, particularly for Saudi Arabia and Kuwait. In Kuwait, the royal family and the legislature have been engaged in a tug of war for many years, and if the opposition forces within the Bahraini parliament achieve some sort of a concession from the government, that will embolden the Kuwaiti opposition forces to seek the same. Kuwait is very important for the U.S. military operations in Iraq. From the point of view of Saudi Arabia, an empowerment of the Shia in Bahrain will likely energize their own Shia population, which is concentrated in the eastern province, which is an oil-rich area not too far from the border with Bahrain. And this is coming at a time for the Saudis when they’re already in the process of impending succession because of the advanced ages of the top four leaders of the country. And so, this couldn’t come at a worse time, and that’s why we see the Saudis engaged in announcing additional social spending packages

Iraq’s Biggest Oil Refinery Attacked, Production Lines Halted - Three production lines at Iraq’s biggest oil refinery in the northern city of Baiji were destroyed and four engineers were killed in an attack by militants, Iraqi state television reported. The militants blew up kerosene and benzene production units at the refinery, Reuters news agency cited the governor of Salahuddin province as saying. The refinery produces 11 million liters of gasoline, 7 million liters of benzene and 4.5 million liters of kerosene daily, it said. Crude oil capped its biggest weekly gain in two years yesterday on concern about interruptions to Middle East supplies following unrest in Libya. Protests ignited by the ouster of Tunisia’s president last month and fanned by the Feb. 11 fall of Egyptian President Hosni Mubarak have also spread to Yemen and Bahrain.

Iran will benefit from this Arab spring - As upheaval sweeps the Middle East, optimists have hoped that Iran would soon follow Tunisia, Egypt and Libya. In fact, the opposite has happened. As shown by its audacious decision to dispatch warships through the Suez Canal for the first time in 31 years, the Iranian leadership expects to emerge from the regional turmoil further entrenched and emboldened. With a revived opposition mounting a number of large protests, the Islamic Republic ought to be looking across the region with trepidation. Instead its leadership sees the turmoil across the Arab world as confirmation of its ascendancy as a regional power, and America’s decline. Tehran is revelling in analogies between Egypt and Tunisia, and its own revolutionary inception. And despite the resurgence of the “green movement” opposition, Iranian leaders remain confident about their ability to beat back dissent and buy off a conflict-weary population.They are also savvy enough to recognise that those new Arab leaders who emerge are likely to trumpet nationalist sentiments, and are unlikely to embrace the Islamic Republic. Still, regime change will inevitably produce governments that are less compliant to Washington, and less hostile to Tehran. The American experiment in Iraq has taught Iran’s ageing revolutionaries that the eviction of an old antagonist is more than sufficient for the purposes of enhancing influence.

The Last Resource Frontier - In the coming decade, extraction of oil, gas, and mineral ores will constitute by far the most important economic opportunity in Africa’s history. Africa is the last frontier for resource discovery, having long been relatively neglected by mining and other resource-extraction companies, owing to difficult political conditions. But rising commodity prices are overcoming reluctance, and prospecting is generating a multitude of new discoveries.Given that resource extraction per square kilometer in Africa is about 20% of the OECD average, the total volume of extraction could easily grow fivefold. High prices and future discoveries will generate money flows so vast that, if properly managed, they could transform desperately poor parts of Africa into regions of prosperity. Certainly, income from resource extraction will dwarf all other financial flows there. But, too often in Africa’s history, money that should have financed productive investment has been looted or squandered. The challenge now is to prevent the continent’s sad history of exploitation from repeating itself during the coming era of massive resource extraction.

What does the Arab world do when its water runs out? - Poverty, repression, decades of injustice and mass unemployment have all been cited as causes of the political convulsions in the Middle East and north Africa these last weeks. But a less recognised reason for the turmoil in Egypt, Tunisia, Algeria, Yemen, Jordan and now Iran has been rising food prices, directly linked to a growing regional water crisis. The diverse states that make up the Arab world, stretching from the Atlantic coast to Iraq, have some of the world's greatest oil reserves, but this disguises the fact that they mostly occupy hyper-arid places. Rivers are few, water demand is increasing as populations grow, underground reserves are shrinking and nearly all depend on imported staple foods that are now trading at record prices. For a region that expects populations to double to more than 600 million within 40 years, and climate change to raise temperatures, these structural problems are political dynamite and already destabilising countries, say the World Bank, the UN and many independent studies.

Arrests after "Jasmine Revolution" call in China - Several top Chinese rights activists have disappeared into police custody as a web campaign urged angry citizens to mark the Middle East's "Jasmine Revolution" with protests, campaigners said Sunday.Up to 15 leading Chinese rights lawyers and activists have disappeared since Saturday amid a nationwide police mobilisation, according to activists, while the government appeared to censor Internet postings calling for the demonstrations. "We welcome... laid off workers and victims of forced evictions to participate in demonstrations, shout slogans and seek freedom, democracy and political reform to end 'one party rule'," one Internet posting said. The postings, many of which appeared to have originated on overseas websites run by exiled Chinese political activists, called for protests in Beijing, Shanghai, Guangzhou and 10 other major Chinese cities.

China cracks down on lawyers and activists - Chinese authorities have launched a far-reaching crackdown on lawyers and activists following an online call for a “Jasmine revolution” in the country, in an indication of their concern that the democracy movements sweeping the Middle East could prompt a response in China.China Human Rights Defenders, a rights group, said more than 100 people had had their freedoms restricted since last Friday’s online appeal.  The heavy-handed approach is the latest sign that the security forces have gained wide-ranging powers in running the country. Beijing has made maintaining stability a priority since the uprising in Tibet in May 2008. “The scale of the crackdown is about the same as that surrounding the award of the Nobel Peace Prize to Liu Xiaobo, the imprisoned activist, late last year. However the speed is quite astonishing,” said Wang Songlian at the CHRD. “Such rapid and comprehensive, well prepared action can only happen if the security forces have ample resources and a free hand.”

China Is Said to Tell Banks to Prepare Contingency Plans for Credit Crisis - China’s banking regulator plans to require lenders to set up procedures to allow them to restore their finances in the event of a crisis, a person with knowledge of the matter said.  Banks deemed systemically important, including Industrial & Commercial Bank of China Ltd., may have to sell debt convertible into equity, the person said, declining to be identified because the regulator’s deliberations are private. Regulators will also be given broader powers to supervise those lenders in an effort to discover risks early, the person said. China is seeking to avoid a repeat of its last banking crisis, when the government spent more than $650 billion over a decade to bail out banks after years of state-directed lending. Concerns that a deterioration of lenders’ asset quality could derail the world’s fastest-growing major economy surfaced after credit expansion surged to a record 96 percent in 2009, prompting the banking regulator to tighten capital rules.

Zaiteku and China’s January inflation - A large part of my newsletter earlier this week discussed emergent scandals in the railway industry and their implications for the overinvestment debate, and this was even before the Alibaba scandals broke, but I think a lot more interest this week surrounded the inflation numbers.  Last week the National Bureau of Statistics released inflation data for the month of January: In January 2011, consumer price index rose by 4.9 percent over the same period of the previous year. Of which, urban area and rural area was up by 4.8 percent and 5.2 percent respectively; the price of foodstuff, non-foodstuff, consumable and services expanded 10.3, 2.6, 5.0 and 4.6 percent respectively. Compared with December 2010, CPI increased 1.0 percent. The price of foodstuff climbed 2.8 percent. The market expected a much higher inflation number, but there was a revision of the CPI basket, which brought down what would have been 5.1% inflation year-on-year to 4.9%.  Here is Caixin on the subject: The January CPI figure was based on a newly-revised CPI basket which lowered the weighting of food prices by 2.21 percentage point and increased the emphasis of the housing sector by 4.22 percent. I don’t think we should read anything sinister into the revision of the CPI basket (although the timing was perhaps a tad convenient) since rising incomes generally mean a declining food share in the consumption basket.  At some point they had to revise the basket.

Judgment day' fears for high-speed rail tracks  - Construction of the mainland's massive high-speed rail network is in danger of becoming a victim of its own success. The breakneck speed at which track is being laid means engineers are likely to have to sacrifice quality for quantity on the lines' foundations which could ultimately halve their lifespan. The problem lies in the use of high-quality fly ash, a fine powder chemically identical to volcanic ash, collected from the chimneys of coal-fired power plants. When mixed with cement and gravel, it can give the tracks' concrete base a lifespan of 100 years. According to a study by the First Survey and Design Institute of China Railways in 2008, coal-fired power plants on the mainland could produce enough high-quality fly ash for the construction of 100 kilometres of high-speed railway tracks a year. But more than 1,500 kilometres of track have been laid annually for the past five years. This year 4,500 kilometres of track will be laid with the completion of the world's longest high-speed railway line, between Beijing and Shanghai. Fly ash required for that 1,318-kilometre line would be more than that produced by all the coal-fired power plants in the world. Enter low-quality fly ash.

Bank of India becomes first to offer trade settlement in yuan - Bank of India has become the first Indian bank to offer trade settlement facility between the rupee and the Chinese RMB from Hong Kong. This follows intense persuasion by the China Banking Regulatory Commission, which is trying to gain acceptance of the RMB as an international currency.  "We are the first Indian bank to offer real-time settlement facility in RMB to Indian exporters and importers. It will be save a lot of time because settlement in US dollars usually takes three working days," Arun Kumar Arora, BoI's chief executive in Hong Kong, said during a recent visit to meeting regulators in Beijing.  Indian buyers are at present making payments in US dollars, and they often have to convert rupee into the US currency for the purpose. The US dollars will no more be the intermediary currency as the BOI is offering direct settlement between the rupee and the Chinese money.

Brazil Central Bank Sold $848.2M In Reverse Swap Contracts The Brazilian central bank on Tuesday sold the equivalent of $848.2 million in reverse swap contracts on offer at a surprise auction, the bank said.  Typically, a reverse swap auction supports the dollar against the Brazilian real by removing future dollar deliveries from the market. The government revived reverse swap auctions earlier this year in an effort to arrest the continued appreciation of the Brazilian real against the dollar.The real has gained more than 30% against the dollar since the beginning of 2009. The strong real is hurting Brazilian exports.

The eternal capital-inflow dilemma - Reinhart and Reinhart - For three decades, the predominantly prevailing presumption among economic analysts and financial authorities was that the flow of financial capital would become increasingly freer. This underpinned advice from advanced-economy forums, such as the G7, and international institutions, such as the IMF, and was collectively referred to as the triumph of the “Anglo-Saxon model”. There were three flaws, however, in this intellectual edifice.Sudden stops and reversals in capital flows are the stuff of policymakers’ nightmares. This column builds on the last 20 years of research and argues that the capital-inflow dilemma is not an external problem – it is an eternal one.

Exchange Rates: Two Stylized Facts and Yet Another (Consequent) Puzzle - My colleague, Charles Engel, has a new paper entitled The Real Exchange Rate, Real Interest Rates, and the Risk Premium, in which he tries to identify what characteristics an exchange rate model must possess in order to explain two stylized facts. ...The well-known interest parity puzzle in foreign exchange markets finds ... the high interest rate country tends to have the higher expected return in the short run. The second stylized fact concerns evidence that when a country's relative real interest rate rises above its average, its currency tends to be stronger than average in real terms. The first stylized fact pertains to forward rate bias, or equivalently the fact that ex post uncovered interest parity doesn't hold, discussed in these posts [1] [2]. Engel sums up the results of the paper:

The international monetary system: If it ain’t broke, don’t fix it - Reform of the international monetary system tops France’s agenda as G20 chair. French policymakers are not the first to be scrutinising the international monetary system (see for example Dooley and Gaber 2009 and Vines 2010), but the question remains: What about the international monetary system needs to change? A review of its core – the exchange-rate system – and how it functioned during the financial crisis suggests that the answer is: Not much. Instead, currency tensions point to the need for changes in the policies of the major economies.

Good Inflation, Bad Inflation - Krugman - And another economistic piece: FTAlphaville reports that some people believe that surging commodity prices might be good for Japan, because they will make deflation go away. OK, this is a failure to understand the principle. Why does deflation have a depressing effect on the economy? Two reasons. First, it reduces money incomes while debt stays the same, so it worsens balance sheet problems, reducing spending. Second, expectations of future deflation mean that any borrowing now will have to be repaid out of smaller wages (if the borrower is a household) or smaller profits (if the borrower is a firm.) So expected future deflation also reduces spending. So, does a rise in food and energy prices do anything to alleviate these problems? No. In fact, it makes them worse, by reducing purchasing power. So while the commodity surge may temporarily lead to rising headline prices in Japan, the underlying deflation problem won’t be affected at all.

World's Biggest Pension Fund May Sell Japan Bonds - Japan’s public pension fund, the world’s largest, said it may become a net seller of bonds to cover payments in the world’s most rapidly aging society. The Government Pension Investment Fund, which oversees 117.6 trillion yen ($1.4 trillion), in September forecast that it would sell 4 trillion yen in assets in the business year ending March 31 to fund payouts. Sales may be less than that in the year starting April as bonds reach maturity, said Takahiro Mitani, president of the fund, known as GPIF. “We will likely be a net seller in the market,” Mitani, a former executive director at the Bank of Japan, said in an interview in Tokyo yesterday. “We certainly have to come up with an adequate amount” to pay pensions, he said, declining to elaborate on the amount.Sales by the fund, which helps oversee public pension funds for Japan’s 37 million retirees, come as the first of Japan’s baby boomers is set to turn 65 in 2012, making them eligible for pension payments.

G-20 Deal Reached, but Outcome Open to Interpretation - Negotiators from the world's leading economies haggled all night over seemingly technical details regarding how to measure global economic imbalances. They eventually produced a 53-word sentence intended to appease all sides—and open to interpretation by all sides. All 20 countries must agree on any technical detail for there to be a deal. If one country walks away, no deal. The key agreement they came up with on Saturday—one sentence in the four-page "communiqué"—essentially says that exchange rates and fiscal and monetary policies will be taken into consideration when determining whether a country's policies lead to imbalances. To draft that sentence, officials from the U.S., Canada, France, Germany, China, Russia, Indonesia, Brazil and India were just some of the members who weighed in—at times with much different views—according to several people present. The sentence had one colon, one semi-colon, three commas, and the word "and" appeared six times. And officials acknowledged that it could create as much confusion as it does attention.

53 Word G-20 Sentence Takes 3 Days to Produce; No One Knows What the Sentence Means; Deft Diplomacy or Deft Idiocy? - The G20 is a dysfunctional, totally useless organization. All 20 member nations have to agree to every proposal or there is no agreement. Thus, South Africa, Turkey, Argentina, Indonesia, and Saudi Arabia all have the power to nix any agreement. The dispute this time however, had to do with trade imbalances in general and China in particular. The fight was over a single 53 word sentence. 19 countries agreed to the statement but China would not. At the last moment, France (which is part of the G-20 through the EU) managed to come up with a wording change China could agree to.

India’s expectations from the G20 - The world anticipates many things from India over the coming years, but what does India expect from the rest of the world? This column explores India’s immediate and long-term concerns for the G20. It argues that India is focused on achieving a global framework for more inclusive economic growth that encompasses developed and developing countries, as well as emerging markets.

Ruble Loses Most in Month to Dollar as Investors Shun Risk… -- The ruble slid the most this month against the dollar as chaos in the Middle East prompted investors to take their money out of markets viewed as posing a higher risk.Russia’s currency weakened for the first day in four, sliding 0.3 percent by the 5 p.m. close of trading in Moscow to 29.2680 per dollar, its biggest drop since Jan. 28.Unrest has spread to Libya, Bahrain, Iran and Yemen, after protesters brought down the ruling regimes of Egypt and Tunisia amid complaints about corruption and rising prices. The tension has spurred investors to seek out the relative safety of the dollar, with all but two of the 25 emerging-market currencies tracked by Bloomberg sliding against the greenback today.

ECB Emergency Overnight Borrowings Near Record For Third Day In A Row - As was reported on Saturday, the culprits for the surge in borrowing on the Marginal Lending Facility have been supposedly identified, with Ireland once again to blame. The flawed explanation provided was that insolvent Irish banks are paying an extra 75 bps in interest just so they have access to capital on a day's notice (as opposed to a week) as they unwind their collateral. Needless to say, we are skeptical of that "explanation." And judging by the fact that today total borrowing on the MLP, while still near record highs, dropped by €2 billion, without any news of collateral unwind to free up asset sales by either Anglo Irish Bank and the Irish Nationwide Building Society, puts the credibility of the FT source at question. What is without doubt, is that borrowings on the MLP will persist for a long time, as was insinuated in the original piece. After all the whole point was to make this latest outlier event "priced in."

Ireland's Leading Party Wants New Bailout Terms - The leading party in Ireland's national election campaign wants to spread the pain from the nation's bank collapse to investors in bank bonds. There has been much talk in the campaign leading up to Friday's national election about renegotiating the massive European Union/IMF bailout and of "burning" senior bondholders and subjecting their investments to sharp discounts. There are widespread doubts whether Enda Kenny, leader of the opinion poll-leading Fine Gael party, can go further. The European Commission is opposed, and investment ratings agencies have fired warning shots by further downgrading Irish bank bonds this month.
Iceland's President Vetoes Icesave Deal - For the second time, Iceland's president vetoed a bid by the island nation's Parliament to repay the U.K. and the Netherlands more than $5 billion lost by depositors in Iceland's epic 2008 banking collapse—sending the matter to a referendum by a deeply skeptical public and complicating the country's application to join the European Union. The dispute over Icesave—the online arm of a failed Iceland bank that took deposits from British and Dutch savers—has percolated for more than two years, reflecting the Icelandic people's dissatisfaction with paying the price for what is almost universally regarded as the hubris of a few bankers. A first attempt at a repayment deal in 2009 faced stiff opposition in the Icelandic parliament. A modified bill passed later that year, but President Ólafur Ragnar Grímsson vetoed it in early 2010, triggering a referendum, which failed.

Irish Banks Behind ECB Lending Surge —An unusual surge in overnight lending from the European Central Bank last week was connected to Ireland's effort to wind down nationalized lenders Anglo Irish Bank Corp. and Irish Nationwide Building Society, a person familiar with the matter said.  The two banks moved collateral from the ECB's longer-term refinancing facilities to the more expensive overnight-lending program as part of a plan to auction off deposits and certain other assets on their balance sheets, the person said. The change, though unorthodox, allows the banks to sell the holdings on short notice because they aren't pledged as collateral for longer-term loans.  The ECB's disclosure late last week that it had lent around €16 billion, or $21.90 billion—the highest levels since June 2009—under its emergency marginal lending facility left many financial-market participants searching for the cause.

Ireland needs help with its debt (FT) - How has the crisis been handled? A crucial point is that this is not one, but three, crises: an economic collapse; a financial implosion; and a fiscal disaster. On the first, given the fall in demand and the need for fiscal contraction, prospects for recovery depend heavily on exports. On the second, the direct costs of recapitalising the system are set to be around 36 per cent of GDP, according to Goodbody stockbrokers. For comparison, the cost of the Asian financial crisis to South Korea was 31 per cent of GDP, while the cost of today’s crisis to Iceland might be only 13 per cent of GDP. On the last, according to the IMF, general government debt could be 123 per cent of GDP by 2014. A little over a third of this increase in the public debt ratio would then be a direct result of recapitalising the banks (see charts).

Iceland-Ireland Again - Krugman - Via the Irish Economy, I see that there have been two articles in the Irish Times comparing Iceland and Ireland, and concluding that Iceland did no better. The articles aren’t bad — but need to be read with caution. Specifically, I’d make four counter-arguments:

  • 1. It’s telling that Ireland now consoles itself by comparing itself to Iceland. Remember, two years ago the notion that Ireland might do as badly as Iceland was considered gallows humor — no way it could really be that bad.
  • 2. Iceland did somewhat worse than Ireland in terms of GDP, but better in terms of employment. Well, employment matters much more for peoples’ sense that the economy is working. By all accounts, there’s just a lot less misery in Iceland, despite a sharp drop in consumption.
  • 3. Iceland has more or less resolved its crisis; Ireland, famously, has not, as shown by the CDS spread:
  • 4. Maybe most importantly from my point of view, comparing export growth — which looks similar in the two cases — is misleading, because Iceland is a very open economy.

Greece’s Efforts to Limit Tax Evasion Have Little Success - The agents from the Financial and Economic Crime Unit slipped in on a holiday evening recently, taking some of the tall seats at the crowded bar in the Three Little Pigs Cafe here.  Soon, however, they were asking customers to show their receipts — an indication that the trendy night spot was paying value-added taxes. But the agents were not satisfied. Armed with a new law devised to help Greece crack down on tax cheats, the agents shut the cafe for the next 48 hours because, they said, receipts were missing. Across the city, other restaurants and nightclubs were also being padlocked, their names showing up in the local newspapers, their front doors sealed for all to see.  The highly visible campaign against cafes and night spots is only one of the many efforts Greek authorities have made over the past year to change what has long been a way of life in this country — rampant tax evasion. But so far, to little avail.

Greek PM: “We do not sell our soil!” – Demands Respect from IMF, EU, ECB - Greece is adamant not to sell land plots, not even for the shake of getting together 50 billion euros as the country’s lenders IMF, EU and ECB demand. Is it so? Well… almost but not exactly…  Greek Prime Minister George Papandreou proposed a law according to which land transfer or sale should require the approval of the Greek Parliament. “Our position is fixed, and I say it to those in and outside the country who have not assess it – that we are talking about utilization of state property for the shake of development and debt repayment. The terms “utilization” and “sale” should not be confused. Greece does not sell its soil”. Papandreou’s law proposal comes as an answer to the heated debate in Greece after the IMF/EU/ECB controversial press conference and as an effort to diffuse the political turmoil.

"I Won't Pay" Movement Grips Debt-Ridden Greece - They blockade highway toll booths to give drivers free passage. They cover subway ticket machines with plastic bags so commuters can't pay. Even doctors are joining in, preventing patients from paying fees at state hospitals. Some call it civil disobedience. Others a freeloading spirit. Either way, Greece's "I Won't Pay" movement has sparked heated debate in a nation reeling from a debt crisis that's forced the government to take drastic austerity measures - including higher taxes, wage and pension cuts, and price spikes in public services. What started as a small pressure group of residents outside Athens angered by higher highway tolls has grown into a movement affecting ever more sectors of society - one that many say is being hijacked by left-wing parties keen to ride popular discontent.

Greek strike disrupts flights, cripples services - A general strike halted public transportation across Greece on Wednesday and led to the cancellation of more than 100 flights at Athens International Airport, as unions stepped up opposition to the country's austerity measures.More than 30,000 protesters chanting "Don't obey the rich -- Fight back!" marched to parliament as the city center was heavily policed. A brass band, tractors and cyclists joined one of two main rallies, by a Communist-backed union.State hospital doctors, ambulance drivers, pharmacists, lawyers and tax collectors also joined school teachers, journalists and thousands of small businesses in the 24-hour strike as more middle-class groups took part in the protest than have in the past. Athens' main shopping district was mostly empty, as many small business owners shuttered their stores. This year's first major labor protest in Greece began as Prime Minister George Papandreou's Socialist government faces international pressure to make more lasting cuts after the nation's debt-crippled economy was rescued from bankruptcy by the European Union and the International Monetary Fund.

Greeks Just Say No to Austerity - In reaction to fiscal austerity, Greeks have apparently decided on a campaign of grassroots sabotage: They blockade highway toll booths to give drivers free passage. They cover subway ticket machines with plastic bags so commuters can't pay. Even doctors are joining in, preventing patients from paying fees at state hospitals.Some call it civil disobedience. Others a freeloading spirit. Either way, Greece's "I Won't Pay" movement has sparked heated debate in a nation reeling from a debt crisis that's forced the government to take drastic austerity measures -- including higher taxes, wage and pension cuts, and price spikes in public services.What started as a small pressure group of residents outside Athens angered by higher highway tolls has grown into a movement affecting ever more sectors of society -- one that many say is being hijacked by left-wing parties keen to ride popular discontent.

Portuguese bond yields back to full crisis levels as ECB intervenes - Only a week ago, the German and Austrian finance ministers speculated that they might not even need to increase the size of the EFSF since market conditions had improved. The statement made markets very nervous, and by the end of the week, the crisis came back in full force, as Portuguese 10-year bond yield reached a level at which a bailout from the EFSF is considered very likely. On Friday, the 10-year  yield rose to 7.58%, with a spread of 4.38pc over Germany, triggering ECB intervention, according to the FT. The goal of the intervention was to keep the spread to under 4.5pc, in order to avoid a damaging increase in margin requirements, which clearers would then impose on banks that use Portuguese debt as collateral in refinance operations. The rise in margin requirements was, after all, one of the accelerators in the Irish crisis.  In our last briefing, we reported on the spike in ECB overnight lending on Thursday to just under €16bn. It continued on Friday, which excluded the hypothesis of an accident “fat finger” type decimal point input error by a bank. The FT has the story that the rise in the ECB’s marginal lending – at an interest rate of currently 1.75% - came from Anglo Irish Bank and Nationwide Building Society, who swapped from the ECB’s normal funding to the emergency funding procedure to gain greater flexibility in the sale of its assets.

Portugal's Debt D-Day Nears - Some European officials are quietly discussing contingencies for what might be a Portuguese request for financial aid as early as next month, when the highly indebted country begins facing large-scale debt redemptions.  Financial pressure on the country's treasury is increasing, a topic that is likely to come up at the March 11 and March 24 meetings of European Union leaders, according to people familiar with the discussions.  "The feeling is that it can't go without a bailout beyond March or April at the latest and is already under pressure by countries like Germany to ask for help, to get it so the situation in the euro zone becomes more clear," a senior euro-zone government official said. Some Portuguese officials are privately considering the possibility, this official said. Portugal has raised €4.75 billion ($6.5 billion) via bond sales so far this year. But it now faces redemptions totaling €3.848 billion in maturing Treasury bills in March,

Gaddafi exposure, via a SWF - Can political unrest bring down a sovereign wealth fund? It might pay to ask the question on Monday for a number of companies who have the Libya Investment Authority on their holders lists. They include Unicredit, most infamously (2.59 per cent, plus a large holding by the Libya Central Bank) … … Finmeccania (2.01 per cent) … and there a few Italian names entined with LIA beyond actual holdings, following a 2008 investment treaty. Outside Italy, and lest we forget — Pearson (the publishers of the FT and FT Alphaville; LIA holds 3 per cent): Apart from shareholdings, LIA owns a good chunk of prime real estate locations around London, in addition to backing a hedge fund:

UniCredit not worried about impact from Libya (Reuters) - Italy's top bank UniCredit 7.5-percent-owned by Libyan investors, is not concerned about the impact of current turmoil on the group. "We are closely watching developments on the turmoil in Libya because this is a difficult situation, but we are not worried for the group," Chief Executive Officer Federico Ghizzoni told reporters on Monday. Separately, a top UniCredit executive said Libyan investors were acting "rationally" while protests sweep across the North African country. Shares in UniCredit sank nearly 6 percent on Monday, sharply underperforming the Europe STOXX 600 banking index .SX7P as investors worried that the Libyan investors may offload their holdings in the Italian bank. "Our Libyan shareholders are behaving extremely rationally at the moment," Theodor Weimer, the head of UniCredit's German arm Hvb, said on the sidelines of a lunch event in Frankfurt. Libyan shareholders hiked their investment in UniCredit as the bank tapped the market for additional cash in the wake of the credit crisis.

Yields Blow Out, Italy Becomes The Hot New Crisis Zone, And The Borsa Italiana Is Plagued By Glitches: "Italy is the new hot spot crisis zone of Europe. It was already under scrutiny thanks to the foibles of and legal pressure on its President Silvio Berlusconi. Then Tunisia happened and it was forced to deal with a flood of unwelcome immigrants. Now Libya is happening, and the problem is magnified to the point where the government has basically sided with Gaddafi. Yesterday Italian stocks had a horrible day, with the FTSE MIB index falling 3.6%. Today.... well, we don't know, because of a glitch at the Borsa Italiana. But we do know that the country's 10-year spreads blowing out sharply today. Probably tells you all you need to know.

Spain's Cajas Have $137 Billion of Potential Bad Loans, Central Bank Says - The total exposure of Spanish savings banks to real estate and building amounts to 217 billion euros ($297 billion), of which 100 billion euros ($137 billion) is classified as “potentially problematic,” the Bank of Spain said today. Bank of Spain Governor Miguel Angel Fernandez Ordonez, speaking in Madrid, said cajas had covered 100 percent of actual losses connected to the industry with provisions. Of the “potentially problematic” assets,” 38 percent is covered by provisions.  Spain’s government approved new capital requirements for lenders on Feb. 18 and set deadlines for them to meet the new rules or risk partial nationalization. The Bank of Spain is due to tell banks on March 10 how much additional capital they need and lenders planning initial public offerings have as long as a year to raise it.  Ordonez said the decree was “absolutely necessary.” He stuck to an estimate published by the government that the additional capital required won’t exceed 20 billion euros and said the capital needs of individual banks will be published on March 10.

"Massive Collapse" For Angela Merkel Following Today's Hamburg Election As Germans "Just Say No" To More European Bail Outs - As the results of the first of seven German regional elections hits the wire, the German people are heard loud and clear: 'no more bail outs.' The outcome of the Hamburg election is nothing short of a disaster for Angela Merkel and her ruling (for now) CDU party. Bloomberg reports that 'Chancellor Angela Merkel’s party lost control of Hamburg, Germany’s richest state, in the first of seven state votes this year that threaten to limit her scope to respond to Europe’s debt crisis, television projections show.' Merkel’s Christian Democratic Union took 20.8 percent in today’s election, its worst result in the port city since at least World War II, ARD television projections showed. The Social Democrats, the main national opposition party, took 49.8 percent, enough to end the CDU’s 10-year rule in Hamburg and form a majority government without need of a coalition partner. The CDU suffered “a massive collapse of support in this booming city that must set off hand-wringing in Berlin,”

Bad News For The PIIGS: Angela Merkel’s Party Gets Crushed In Regional Elections - Obviously the bailouts of Europe have not been popular among the Germans, and it seems Angela Merkel's party, the Christian Democrats, are suffering the consequences. They were, apparently, crushed in regional elections. NYT reports that the CDU took 21% of the vote in Hamburg, down from 42% last time around.Bear in mind that this was just a regional election -- like a state election in the US -- and the CDU insists that it's only a local matter, not reflective of any national or international issues. That seems somewhat doubtful. Meanwhile, the Euro has begun the week higher, so at the moment this doesn't appear to be causing ripples

Germany must choose EMU fusion or fission - For all her fiery language in defence of the euro - as if a currency trading so high against the yuan, dollar, and sterling could be under meaningful external attack - Chancellor Angela Merkel has not yet agreed to pay one cent in help to crippled debtor states. Nor has she faced up to the elemental question hanging over monetary union.  Her own Bundesbank argued years ago that EMU is unworkable without fiscal union, and it has been vindicated by the events of the past two years. Either creditor states agree to an EU treasury, 'Transferunion' and debt pool, or EMU will be subject to unending stress and ultimately fracture or shrink to a viable core, or so goes the argument.  This 'Fusion or Fission’ debate has not been settled. Yes, there has been much talk about Eurobonds and rescues. Talk is cheap. The reality of Germany's 'rescue policy' is to extract subsidy from the periphery by lending to Greece and Ireland at rates far above its own borrowing cost, widening the gap between core and periphery yet further.

Bundestag wants to reduce Merkel’s room for manoeuvre - We can hardly ever recall so much confusion and cacophony coming from Berlin, and we are not surprised that outside observers are confused about what the German negotiating position in the two important March summits will be. The reason is that the government, the Bundestag, and the Bundesbank all have their own, and conflicting, views on how the crisis should be resolved. To add to the confusion, the three parliamentary groups in the Bundestag yesterday made a recommendation to the Bundestag – a proposal that will be formally voted on - that Merkel must not agree anything without asking the parliament first, something FT Deutschland reports she was “not entirely happy” about. In addition, as Reuters reports, the parliamentary parties are dead set against any bond buyback to be organised by the ESM. A draft contained the following excerpt: "Parliament expects that jointly financed or guaranteed  purchase programmes of government debt would be ruled out for reasons of constitutional and European law, and on economic grounds."  Merkel yesterday signalled a concession on lengthening the terms of the Greek loan. She said the Irish loan was for seven years, and the Greek loan could be increased from three to seven years.

The Bundestag is pulling the brakes on the grand bargain - Merkel is hiding behind the Bundestag in eurozone crisis management, which means that she now supports the measures passed by the three parliamentary groups of her coalition, ruling out debt buybacks through the ESM. Her spokesman pretended that there was close co-ordination between her and her groups. (We hear different. The Bundestag is becoming a lot more assertive in this question, and is now pulling the brakes. The Bundestag also wants Merkel to consult officially before making any decisions in the European Council on this matter, as we reported in yesterday’s briefing.) The FT writes from Berlin that the Bundestag’s proposals are certain to be approved on March 17. The article quotes Michael Meister, the CDU finance spokesman, as saying that the coalition did this “to strengthen the government for the difficult Brussels negotiations”. And while there is no explicit mention of the EFSF, the understanding is that the same rules should be applied to the EFSF as well. Apart from a ban on bond-buy-backs, it also includes a demand that countries must impose a financial transactions tax. The article also said that Wolfgang Schäuble faced hostile questions from the CDU parliamentary party over his readiness to agree to ESM funding to the tune of €500bn.

Is the Bundesbank spoiling for a fight over the destiny of EMU? - Bundesbank chief Axel Weber has pushed his attack on EMU’s policy elites one step further. This time he has undercut the triumvirate – ECB chief Jean-Claude Trichet, Eurogroup chief Jean-Claude Junker, and Commission chief Jose Barroso –  with an op-ed for the Financial Times excoriating their plans to head off another round of the debt crisis by giving real teeth to the eurozone’s €440bn bail-out fund. He claimed that the latest EFSF proposals – which investors had already pocketed as a done deal – would amount to “eurobonds more or less through the back door”. They would “result in a weakening of the responsibility of financial market participants and member states, diminished incentives for sound fiscal policies, and again a shifting of risks to the taxpayers of other member states.”

Gillian Tett on Losses at Central Banks - - Yves Smith - Is the old Gillian Tett back? The one-time Financial Times capital market editor has taken to writing less frequently (understandable now that she has head the US operation) and less intrepidly (much of her commentary was prescient, particularly on my pet topic, collateralized debt obligations). But her latest piece sounds a wee warning, and it’s one we’ve commented on as well, namely, that central banks are vulnerable to losses, and just like the banks they mind, may need a rescue by taxpayers if the err badly enough. Her object lesson is the Swiss National Bank. Unlike most central banks, the SNB is quite transparent, and publishes periodic statements of the value of its assets on a mark to market basis. The usually conservative SNB made a uncharacteristically aggressive move last year, intervening in currency markets in an effort to suppress the value of its levitating franc.  Even though the locals applauded the move, the central bank was outgunned by currency traders and threw in the towel mid year. As the swissie continued to rise, the bank showed losses at the end of 2010 of SFr 21 billion. The only saving grace was that the gains on the bank’s hefty gold positions exceeded the damage.The critical part of Tett’s article:

Axel Weber – the Last Man Standing - If you want to know why Axel Weber would have been the wrong man to head the ECB, you should read this op-ed commentary in this morning’s Financial Times. It is unbelievable how far he stands outside the emerging policy consensus in European capitals. His message is that everybody should do their own thing. The cornerstones of the monetary union are subsidiarity, responsibility of individual member countries, and the no-bailout rule. In other words, this is a monetary union only. The rules of this monetary union have to be strengthened, and he favours a stronger stability pact and macroeconomic surveillance. But he is not happy with what is proposed. He writes that he fears “that the proposals currently on the table fall short of what is required and run the risk of being weakened further in the political process.” On bond purchases, he writes that they were a costly instrument and not well targeted. He makes one substantive point on the ESM, that a combination of bond purchases by the ESM and its secured credit status might jeopardise financial market stability, as existing bondholders might be forced to sell.  The Bundesbank also yesterday launched a further broadside against bond purchases in its monthly report. The Bundesbank said it opposed giving the EFSF or the ESM powers to buy government bonds in the secondary market. Such action would relieve the pressure on overspending governments to restore public finances. The Bundesbank also opposes bond buybacks.

Weber: Currency Union Damaged - The financial rescues of Greece and Ireland have damaged the foundations of Europe’s currency union, Deutsche Bundesbank President Axel Weber said Monday. In a speech to an audience of academics and business representatives in Duesseldorf, Weber said it was essential not to let the deals that have been made to keep financial stability in the euro zone become the norm. “We have to strengthen the foundations again,” he said. Returning to a theme already made earlier Monday in the Bundesbank’s monthly report for February, Weber warned against measures that buy time in the short term but which encourage moral hazard in the longer term by creating false incentives for states. “All too often, short-term, ad hoc decisions are taken that are counter-productive in the medium term,”

Hard-working Germans are about to discover what it feels like to be mugged by the EMU project - Angela Merkel’s Christian Democrats have just suffered the worst defeat since World War Two in the Hamburg elections. Their vote share collapsed from 43pc to 21pc. A casualty of rising bread costs or Gefühlte Inflation as they say in Germany, perhaps, or bail-out rage? Merkel will lose another three seats in the Bundesrat, reducing her to a lame-duck Chancellor. This greatly complicate chances of an EU deal next month to sort out the rescue fund, ie:To boost its firepower so that it is not caught with its pants down if trouble spreads beyond Portugal; to cut the penal interest rates on the Irish, Greek, (and Portuguese?) rescue packages so that these countries don’t suffocate to death. To allow the fund to buy the bonds pre-emptively to nip crises in the bud; to carry out a “soft-restructuring” by lending to Athens (or Dublin) so that it can buy back its own bonds cheaply on the open market. Markets are not going to like it if Germany fails to deliver on the new “joined-up” package that has been flagged so widely in the press, usually sourced to Eurocrats in Brussels who do not have to face their own taxpayers, and officials from countries that might need a bail-out.

A misguided German narrative of the crisis - To understand Angela Merkel’s next strategic move, it is essential to become acquainted with the German narrative for explaining the crisis in the eurozone. It is a story of fiscal irresponsibility and lack of competitiveness. There is a banking crisis, but it is not central. It is the crisis the European Union is trying to solve right now. In a warped variant of this narrative that is popular among conservative europhobic circles in Berlin, the European financial stability facility (EFSF) is the foil through which Germany surrenders national sovereignty. Frankfurter Allgemeine Zeitung, the paper of record for conservative Germany, captured the country’s ultimate fear in a dark and moody picture of Ms Merkel and Nicolas Sarkozy. It shows the German chancellor and French president walking on the beach at Deauville, venue of a fateful Franco-German summit last autumn, when Ms Merkel supposedly capitulated to France. The headline read: “Europe on the way to the transfer union”. Worse, most Germans believe that the transfer union has already happened. The media reports the crisis as though Germany was simply giving money away. Few people, even politicians, are aware that the bail-out is, in fact, a remunerated loan guarantee.

Misguided Narratives _ Krugman - Wolfgang Munchau has an especially good piece today about how Germany sees the eurozone crisis. The key graf: So while the rest of us are debating how to solve Europe’s banking crisis, and become exasperated by the lack of progress, Ms Merkel is solving a crisis in a parallel universe. The German narrative is the outgrowth of a lie the country’s establishment has peddled ever since debate on the single currency started 20 years ago: that a monetary union can be sustained through a simple set of rules for monetary and fiscal policy; that financial regulation and current account imbalances do not matter. The eurozone crisis has proved this is not the case. But the conservatives cling to this old, comfortable straw. If there is a crisis, then it must be fiscal. And austerity is the answer. Indeed. And it’s not just the Germans. It’s amazing how this whole crisis has been fiscalized; deficits, which are overwhelmingly the result of the crisis, have been retroactively deemed its cause. And at the same time, influential people around the world have seized on the idea of expansionary austerity, becoming ever more adamant about it as the alleged historical evidence has collapsed.

Germany in open revolt against European bailout - Yesterday, 189 German economists signed a letter, published in Frankfurter Allgemeine Zeitung, in which they called on the German government to refuse any extension of the EFSF, and to force highly indebted countries into an insolvency procedure. They include some of the best known German economists – Hans Werner Sinn, Jürgen von Hagen, Manfred Neumann, Michael Burda and Volker Wieland. They make the following points.

  • 1. A permanent credit guarantee for insolvent countries would provide “massive incentives” to repeat the mistakes of the past. The reforms of the stability pact, and the newly discussed pact for competitiveness, are too weak to counteract this;
  • 2. A long-term strategy against debt crises requires the possibility of a sovereign insolvency;
  • 3. Credits to countries should be possible, but only after debt restructuring;
  • 4. The fact of state insolvency should be determined not by the country itself, but by an international institution, such as the IMF;
  • 5. The ECB must not provide unlimited support of insolvent countries through bond purchases;
  • 6. Of the three solutions to a national debt crisis – debt reduction through growth, insolvency, and bailout-the latter would imply higher taxes, and/or higher inflation.

Based on the German inflation print, the ECB may be less 'hawkish' next week than people think - Rebecca Wilder- Today the German Federal Statistics Office reported that the February Consumer Price Index is expected to mark a 2.0% (2.047% by my calculations, which is very close to a rounded 2.1%) annual pace in February 2011. This is simply a 'flash' print, and the Statistics Office was very careful to discount the fact that inflation continues to be driven by energy. But the harmonised index of German consumer prices (HICP) increased a greater than expected 2.2% over the year, suggesting upward pressure to the headline Eurozone rate remains in play. Market participants are expecting ECB rate hikes this year - there are currently at least 2 hikes priced in through this year - based on an elevated Eurozone inflation rate, currently estimated at 2.4% in January. The ECB is a devout inflation targeter (see first chart of this post); it's a central bank that raised rates late in 2008 only to see Eurozone inflation plummet as the economy dropped into recession (see chart below). But I think that the ECB will be less hawkish than expected next week, because I'm noticing an interesting correlation between German-based inflation (supposedly not relevant, per se, to ECB policy), Eurozone HICP inflation (the ECB's target rate of inflation), and the refi rate.

Does Germany know the secret to creating jobs? - Something pretty incredible is going on in Germany. While the U.S. and much of the rest of the developed world is suffering not only with high unemployment, but also stubborn unemployment, Germany has been heading in the exact opposite direction. Defying the odds, Germany's unemployment rate has been declining during the Great Recession. According to the OECD, German unemployment stood at 8.6% in the boom year of 2007; in 2010, the OECD estimates unemployment fell to 6.9%. What's even more interesting is that Germany is creating jobs using the Obama administration's preferred strategy for America – through exports. Germany is experienced a giant surge in exports (up 18.5% in 2010) and that is driving the economy. And those exports to a great degree are industrial goods churned out by German factories. Germany specializes in machinery and other heavy equipment – it's not sexy stuff that grabs headlines, but it sure is good business.  Simply put, Germany has found a way to create jobs through maintaining manufacturing competitiveness.

Libya: Oil Troubles Could Hit Europe Hard - Libya exploded last night. Protesters, tired of not seeing their country’s wealth trickle down, burned and looted in Tripilo, the country’s capital. At least 200 people are reported dead, and Dictator Moammar Gaddafi’s son warned of anarchy if his father is overthrown (looks like it’s already arrived). Libya is the world’s twelfth-biggest oil producer, and oil is at a 2.5-year high today. Zero Hedge sums it up: …output at one of the country’s oil fields reported to have been stopped by a workers’ strike, BP has said it will soon begin evacuating some of its personnel from the 9th largest producer of oil. And just to complete the total chaos, Iran warships are now going to pass the Suez on Tuesday instead of today, to the full glory of a fully open US stock market. The result: gold over $1,400; silver over $33.50; Crude front month over $93; Brent (crude) over $105

Mersch Says ECB May Warn Next Week of Rising Inflation Risks in Euro Area - European Central Bank council member Yves Mersch said officials may toughen their language on inflation next week, indicating a readiness to raise interest rates in coming months.  “I would not be surprised at most colleagues concluding that we have upside risks to price stability,” Mersch said in an interview in Luxembourg yesterday. With the economy strengthening and inflation in breach of the ECB’s 2 percent limit, policy makers will “inevitably” have to “rebalance our monetary policy stance,” Mersch said, without giving a timeframe.  The ECB, which has kept its benchmark interest rate at a record low of 1 percent for almost two years, is growing more concerned that soaring energy and food prices will drive up wages and entrench faster inflation. At the same time, raising borrowing costs too soon could exacerbate Europe’s sovereign debt crisis by increasing pressure on stressed banking systems in countries such as Greece and Ireland.

ECB Ready to ‘Act as Appropriate’ on Inflation - European Central Bank Governing Council member Athanasios Orphanides said in an interview that further rises in food and energy prices could keep inflation above 2% for longer than expected and that the ECB will “act as appropriate” to maintain price stability in the 17 countries that use the euro. Speaking with Dow Jones Newswires, Mr. Orphanides also discussed the euro zone and said Portugal could run into even deeper fiscal trouble, with negative implications for other nations in the currency bloc, if euro-zone leaders don’t accelerate steps to improve how the currency bloc is managed. Here are excerpts from the interview:

The UK faces a serious inflation issue if oil pops! – Rebecca Wilder - Bond markets are pricing in rate hikes this year by the ECB and the BoE. Both are inflation targeters, so which one should react first to a possible spike in oil prices? What's your answer?
(1) Neither. As FX appreciation and fiscal austerity pass through to domestic prices, the core will drag down the headline. Stagflation will result.
(2) The ECB, because it is the most hawkish of all central banks, in my view. The ECB mandates a rigid targeting scheme compared to that of the BoE. Since the January 2005, the BoE has successfully targeted inflation slightly under 2% just 27% of the time, while ECB has done so 61% of the time.
(3) The UK. The January 2011 UK inflation rate was 4% Y/Y (3.2% in November on a harmonized basis) and near-double that in the Eurozone, 2.4% according to the flash estimate.
Furthermore, the UK story is not one of just energy and food. The chart below illustrates the diffusion of price inflation across the components of the harmonized HICP (data at Eurostat), and the legend lists the period average for each economy. Diffusion levels above 50 indicate that a larger share of component prices are growing at an annual rate above 2% that below 2%. The diffusion a measure of the breadth of price pressures...

UK economy contracts faster than first estimated - Britain's economy contracted even faster than previously thought in the last three months of 2010, shrinking by 0.6pc, after downward revisions to industrial and services output, official data showed on Friday.The figures may make Bank of England policymakers think twice about raising interest rates, although there have been recent signs that activity picked up at the start of this year following December's snow-related disruption. Analysts had expected an unchanged reading of -0.5pc. The Office for National Statistics (ONS) added that its “best estimate” for the impact of cold weather on the data remained at 0.5pc. A breakdown of the figures showed that households were tightening their belts even before the rise in VAT sales tax at the start of this year, as household spending fell 0.1pc, the first fall in 18 months.

Central Bank Independence - Ben Bernanke's British counterpart, Mervyn King, is taking alot of heat for supporting the government's harsh package of spending cuts and tax increases.  Paul Krugman writes: Mervyn King, governor of the Bank of England, has stepped way over the line by turning into a cheerleader for the current government’s policies. He’s wrong on the economics — front-loaded spending cuts are the wrong policy for a still-depressed economy — but that’s not the key point; rather, the point is that if you’re going to have an independent central bank, the people running that bank have to be careful to stay above the political fray. A Guardian story quotes Ed Balls, the Labour party shadow chancellor (i.e., the opposition's point person on economic policy): "The last thing you ever want is for the Bank of England to be drawn into the political arena,"  "Central bank governors have to be very careful about tying themselves too closely to fiscal strategies, especially when they are extreme and are making their job on monetary policy more complicated." One of the things that comes with central bank independence is the expectation that central bankers should be neutral technocrats who keep a narrow focus on monetary policy.  In part, this is because central bank independence is a fragile thing, which could be undone by a change to the Federal Reserve Act in the US, or, in the UK, the Bank of England Act. 

Further Discussion of Krugman on Mervyn King, Greenspan, and Bernanke - Yves Smith - Paul Krugman was kind enough to link to me with respect to a Guardian article pointing to his criticism of the fiscal stance, and arguably more important, the political role that the Bank of England governor Mervyn King is taking. However, Krugman said I was in error in claiming he never criticized Greenspan for compromising Fed independence. Yes, I agree fully with Krugman that austerity is a bad idea in the UK and pretty much anywhere still in a hangover after the global financial crisis. But there seems to be a lot of opportunism in the broadsides against King. He is the only central banker that has stood firm against the bad practices of the major dealer banks. And his dim view is reportedly widely shared among Bank of England staff. My sense (which UK readers confirm) is that the piling on seems unduly aggressive, and looks to be an effort to discredit King in order to weaken him (and as much as possible, the Bank) as a reformer. I’m still going to quibble a bit. The NC remark in question about Krugman was: “And he’s said nothing about the “political” Greenspan and Bernanke.” Now I’ll admit I stuck my neck out; “nothing” is a strong word, and Krugman has a large opus. The 2005 op-ed he cited as refutation gets to the matter of central bank independence only after dismembering Greenspan’s economics arguments at length:

King Dinged - Soon-to-be-unemployed sports team managers the world over know what it means when they receive an affirmation of full confidence from the club chairman. Accordingly, we know roughly what to make of this: ‘The Bank of England has credibility,’ said Osborne (pictured). ‘I have complete confidence in it.’The chancellor will not alter the 2% inflation target and said he was ‘happy with the approach’ taken by the Monetary Policy Committee (MPC).‘The inflation remit is the correct one,’ he said. ‘I have not plans or thoughts about changing it and, as my exchange of letters with the governor confirmed, I’m happy with the approach they are taking and trust the judgment of the MPC.’ Well, he said “Bank Of England” not “Mervyn King”, so perhaps that’s even worse for King. Anyhow, after the outbreak of King-bashing over the past couple of weeks, well characterized in a report on last week’s inflation report bunfight,

Andy Haldane outlines proposals for breaking the ‘doom loop’ -The Bank of England’s Andy Haldane gave a fresh perspective on the true causes of the global financial crisis and ran through some cures at a recent lecture at Irish think tank the Institute of International and European Affairs.Haldane, the BoE’s executive director of financial stability, who also sits on the Basel Committee, kicked off by reminding his audience of the severity of the crisis and why another one is literally unaffordable. He said that the permanent loss of output caused by the global financial crisis is between $50 trillion ($50,000bn) and $200 trillion. That’s between one and four years’ global production of goods and services globally. He also put the amount of money thrown at the problem (in bailouts etc) by governments around the world at $15 trillion and counting — 13% of global GDP.Charting the reasons for the global financial collapse Haldane said that UK and US banks (and those in certain other countries) had been allowed to grow too big. He described how they had ballooned their balance sheets in 2000-07 largely by lending vast sums to each other — as opposed to the real economy.

Egypt Seeking Debt Relief From European Union - Egypt has asked Britain for its support in seeking debt forgiveness from Europe, the Finance Ministry said Tuesday, in the latest push to boost an economy bruised by weeks of protests that toppled President Hosni Mubarak. Finance Minister Samir Radwan also said in a statement that the current government's immediate priorities center on helping Egyptians directly affected by the 18 days of protests, as well as enacting quick measures that could boost the economy. The protests that led to Mubarak's ouster after nearly 30 years in power ravaged Egypt's economy, forcing banks to close, businesses to shut down and banks and the stock market to halt operations. The bourse on Tuesday further postponed the resumption of trading until next week, not specifying a date.

Divine Coincidence Failure - Nick Rowe - According to "divine coincidence", the monetary policy that is best for stabilising inflation is also best for stabilising real output. Divine coincidence seems to be holding up fairly well in Canada. But the recent UK experience is a case where divine coincidence has failed. The Bank of Canada's inflation target is up for renewal this year. Canadians spend too much time looking at the US. I think we could learn more by looking at the UK. The Bank of England, like the Bank of Canada, has been targeting inflation. And the UK, like Canada, is a more open economy than the US. Which is why I find the recent UK experience worrying. What's worrying about the UK is that the inflation rate is above target, but the country is still deep in recession. That's not true in Canada. But it might have been. We ought to pay attention, because Canada might be in that same situation in future, if we are unlucky.

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