week ending Feb 5

Fed Assets Rise to Record $2.47 Trillion on Treasury Purchases - The Federal Reserve’s total assets rose by $25.9 billion to $2.47 trillion as the central bank bought Treasury securities as part of the second round of its quantitative easing strategy.  Treasuries held by the Fed increased by $23.7 billion to $1.14 trillion as of yesterday, according to a weekly release by the central bank today. Mortgage-backed securities held by the Fed and holdings of federal agency debt were unchanged in the week ended Feb. 2.  The central bank has purchased $295.4 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 central bank also provided a quarterly update to the fair value holdings of the three corporations set up by the Fed for the mortgages and securities it took on in bailing out American International Group Inc. and Bear Stearns Cos.  The three special-purpose companies were named Maiden Lane, Maiden Lane II and Maiden Lane III after a street bordering the New York Fed building in Manhattan. Maiden Lane had assets of $26.5 billion, Maiden Lane II of $16 billion and Maiden Lane III of $22.9 billion, as of Feb. 2.  M2 money supply declined by $33.2 billion in the week ended Jan. 24, the Fed said. That left M2 growing at an annual rate of 3.6 percent for the past 52 weeks, below the target of 5 percent the Fed once set for maximum growth. The Fed no longer has a formal target.

US Fed Total Discount Window Borrowings Wed $22.60 Bln--The Fed's asset holdings in the week ended Jan. 26 climbed to $2.473 trillion, from $2.447 trillion a week earlier, it said in a weekly report released Thursday.  The Fed's holdings of U.S. Treasury securities rose to $1.138 trillion on Wednesday from $1.114 trillion..  Meanwhile, Thursday's report showed total borrowing from the Fed's discount lending window slipped to $22.60 billion Wednesday from $23.26 billion a week earlier. Borrowing by commercial banks fell to $36 million Wednesday from $54 million a week earlier.  Thursday's report showed U.S. government securities held in custody on behalf of foreign official accounts grew to $3.359 trillion, from $3.353 trillion in the previous week.  U.S. Treasurys held in custody on behalf of foreign official accounts grew to $2.607 trillion from $2.604 trillion in the previous week. Holdings of agency securities grew to $751.75 billion from the prior week's $748.91 billion. 

The Macroeconomic Effects of the Fed's Asset Purchases - FRBSF - An analysis shows that the Federal Reserve's large-scale asset purchases have been effective at reducing the economic costs of the zero lower bound on interest rates. Model simulations indicate that, by 2012, the past and projected expansion of the Fed's securities holdings since late 2008 will lower the unemployment rate by 1½ percentage points relative to what it would have been absent the purchases. The asset purchases also have probably prevented the U.S. economy from falling into deflation.

QE2 Speculation and Summary - I'm hearing speculation that the Fed might taper off the QE2 purchases of treasury securities to "promote a smooth transition in markets". Currently the plan is to purchase $600 billion in Treasury securities by the end of Q2 or about $75 billion per month. The speculation is that the size will remain the same ($600 billion), but that the Fed will taper off the purchases through the end of Q3 or so. That is what the Fed did with previous purchase programs. In August 2009 for Treasury securities:  To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October.

Fed's Hoenig Says QE3 "May Get Discussed" -  The Federal Reserve could debate extending its bond-buying program beyond June if U.S. economic data proves weaker than expected, Kansas City Fed President Thomas Hoenig said. Another round of bond buying "may get discussed" if the numbers look "disappointing," Hoenig told Market News International in an interview published on Tuesday. Hoenig, an inflation hawk who vocally opposed the Fed's commitment to purchase an additional $600 billion in government bonds, reiterated his call for the central bank to reverse course, according to Market News. He called for the U.S. central bank to "normalize" policy by shrinking its balance sheet and raising interest rates. Hoenig has argued the Fed should raise rates to 1 percent and potentially higher depending on the economy's performance.

Fed’s Lockhart: Economy Still Needs Support of Stimulative Fed - The U.S. economic recovery, while ongoing, still needs the support of supportive monetary policy, a Federal Reserve official said Monday. “There are definitely hopeful signs of sustained recovery in 2011,” and “much of the strength in the fourth quarter of last year has carried over into 2011,” and will prove sustainable, Federal Reserve Bank of Atlanta President Dennis Lockhart said. “Progress is real, but fitful, and support of accommodative Fed policy is still required,” he said. His comments came from the text of the address. The rotation of regional Fed presidents means Lockhart doesn’t have a voting role on the FOMC this year — he will in 2012 — but in comments last year, the official indicated he was very much a supporter of the bond-buying policy, popularly known as QE2. The Fed is trying to engineer better levels of economic growth through the purchases, hoping the action will lower high levels of unemployment and bump inflation up and away from deflationary levels.

Functions of the Fed and the Current Economic Situation - Atlanta Fed  -Dennis Lockhart Key Points:
• Lockhart believes the moderate pace of economic expansion seems to have momentum and should prove sustainable as the year progresses. While consumer and business confidence appears to be growing, he believes overstatement of the likely speed of improvement should be avoided. In his view, support of accommodative Fed policy is still required, with employment nowhere near acceptable levels.
• Lockhart expects gradual firming of underlying inflation pressures through 2011 and 2012 from current very low levels to healthier levels.

Is QEII Working? - It's great that QEII seems to be working, but let's not get overexcited here. According to this FRBSF Economic Letter, the effect on unemployment will be around 1.5% (and it won't happen overnight).By 2012, the ... program's incremental contribution is ... 700,000 jobs generated ... by the most recent phase of the program. Increased hiring lowers the unemployment rate by 1½ percentage points compared with what it would have been absent the Fed's asset purchases... Based on other simulations, providing an equivalent amount of support to real economic activity through conventional monetary policy would have required cutting the federal funds rate approximately 3 percentage points relative to baseline from early 2009 through 2012, an obvious impossibility because of the zero lower bound.That gets us down to 8% in 2012 (Update: as Ryan Avent notes, plus any change that would have happened anyway, but see the note below). We can argue about what "working" means, but if it means reducing unemployment to acceptable levels, to repeat a point I've made again and again, this alone is not nearly enough.

Is QE2 working? -FEDERAL RESERVE Chairman Ben Bernanke gave a speech today discussing the economic outlook and the Fed's role in supporting economic activity. The Federal Open Market Committee's policy stance, he argued, is having a positive effect on current economic conditions: A wide range of market indicators supports the view that the Federal Reserve's securities purchases have been effective at easing financial conditions. For example, since August, when we announced our policy of reinvesting maturing securities and signaled we were considering more purchases, equity prices have risen significantly, volatility in the equity market has fallen, corporate bond spreads have narrowed, and inflation compensation as measured in the market for inflation-indexed securities has risen from low to more normal levels. Yields on 5- to 10-year Treasury securities initially declined markedly as markets priced in prospective Fed purchases; these yields subsequently rose, however, as investors became more optimistic about economic growth and as traders scaled back their expectations of future securities purchases.

Bernanke Lays Out Evidence QE2 Is Working - It’s a steady-as-she-goes address from Federal Reserve captain Ben Bernanke at the National Press Club today. He said the recovery is picking up steam, but its pace is still too modest to push down the unemployment rate much.. Bernanke also says there’s evidence the Fed’s bond-buying program – known as QE2 — is working. In his own words, he lays out the case: “Since August, when we announced our policy of reinvesting maturing securities and signaled we were considering more purchases, equity prices have risen significantly, volatility in the equity market has fallen, corporate bond spreads have narrowed, and inflation compensation as measured in the market for inflation-indexed securities has risen from low to more normal levels. Yields on 5- to 10-year Treasury securities initially declined markedly as markets priced in prospective Fed purchases; these yields subsequently rose, however, as investors became more optimistic about economic growth and as traders scaled back their expectations of future securities purchases.”

Bernanke Acknowledges Risings Yields a Sign of Success - For some time now, I have been making the case that a sign of QE2 success would be rising yields rather than falling yields.  Yes, interest rates may initially fall, but if QE2 is successful in raising expectations of real growth then interest rates should start to increase.  For example, back in December, 2010 I said the following: If QE2 is successful, then we would expect treasury yields to rise!  A successful QE will first raise inflation expectations.  This alone will put upward pressure on nominal yields.  However, expectations of higher inflation are in effect expectations of higher nominal spending.  And higher expected nominal spending in an economy with sticky prices and excess capacity will lead to increases in expected real economic growth.  The expected real economic growth should in turn increase the real yields.  It is that simple.  Here is an updated graph from a more recent post that indicates this is in fact happening:

Bernanke: Does He Really Think We’re This Dumb? - An unbelievable display of hubris and idiocy was on display today at the Press Club:  Let's just focus on this one statement. Bernanke says that the increase in the stock market is a sign that his policies are working to "ease financial conditions."  Ok, let's say I accept that. Then we should see, in addition to equity prices rising, that the amount of leverage in the corporate market in relationship to those equity prices is falling. That is, corporations should be a better value than they were before this policy was introduced.  Corporations should be able to build their balance sheets and acquire assets of various forms, including cash, while reducing debt outstanding.  The value represented by one dollar of stock should thus rise in absolute terms, irrespective of speculation.We can test this, using only Bernanke's own data.  We do it using the Corporate Leverage Index.  That is, how many dollars of stock do you have to buy in order to acquire one dollar of tangible assets less outstanding debt?  The data is all from The Fed's own Z1, the Flow of Funds report that they produce quarterly.

Groundhog Day - Bernanke Saw His Shadow - 6 More Months of QE3? - Kid Dynamite - How does this Groundhog Day thing work again? If Ben Bernanke smells deflation, we get 6 more months of quantitative easing? If Bernanke pokes his head out in front of a Congressional committee we get 60 more pages of academic papers?  Or 6 more months of financial crisis investigations?

NY Fed Says 32 New Money Funds Join Reverse Repo - The Federal Reserve Bank of New York on Monday broadened the pool of money funds that will serve as counterparties to reserve draining reverse repo transactions. The bank said in a statement that it has added 32 new money funds to the list of funds already announced. These money funds and their managers join the 18 primary dealers who will also serve in this special capacity. The New York Fed’s announcement builds on the group of money fund counterparties first announced on Aug. 18. The new list is effective Jan. 31. (See the complete list.) The counterparties are there to take the other side of reserve draining transactions the Fed will eventually undertake when it decides to tighten monetary policy. The Fed has traditionally bought, sold and lent securities with a list of banks known as primary dealers. The size of the transactions the Fed will need to undertake to manage a balance sheet that will likely exceed $2.5 trillion by the summer has motivated the Fed to look beyond primary dealers to ensure it can find enough counterparties to take in securities the central bank wants to unload.

Divine Coincidence and the Fed's Dual Mandate - John Taylor says the Fed should adopt a single mandate. In his view, which seems to be fairly common on the political right, the Fed should abandon targeting the output gap and restrict its attention it keeping the inflation rate stable: Former U.S. Treasury Department undersecretary John Taylor on Wednesday called for overhauling the Federal Reserve’s dual mandate of ensuring stable prices and maximum employment, saying that the central bank should focus on prices.Taylor said that “too many goals blur responsibility and accountability.” ... Robert Barbera, a fellow at John Hopkins, sends an email making the case that a single mandate is a bad idea, particularly near the zero bound. It is based upon an IMF paper showing that deflation does not generally occur when there are large output gaps. Instead, downward price and wage rigidities cause inflation to stabilize at low rates, and this is part of the reason for a suboptimal response under a single mandate.

John Taylor and Fed reform: Is change required? - Atlanta Fed's macroblog - In a Wall Street Journal article this past Friday, Stanford economist John Taylor articulated a two-track plan to restore growth. The first track pertains to fiscal policy, but what always attracts our attention here at macroblog are Professor Taylor's comments on monetary policy, the essential second track in his formulation for economic restoration. Here are the highlights (emphasis mine): "… the Fed should lay out a plan for reducing its extraordinarily large balance sheet. To achieve a more predictable rules-based policy going forward, the Fed's objectives should be clarified… "Recently the multiple objectives [for both price stability and maximum employment] have been used as a rationale for interventionist policies, such as QE2, an approach that Fed officials avoided in the 1980s and '90s. Such interventions can have the unintended consequence of increasing unemployment—as illustrated by the decisions to hold interest rates very low in 2003–2005, which may have caused a bubble and led to the high unemployment today. "It would be better for economic growth and job creation if the Fed's objective was simply 'long-run price stability within a clear framework of economic stability…'

The Monetary Reform Debate is Joined - John Taylor -The Atlanta Fed, through its “macroblog,” has joined the discussion about reform of the Federal Reserve. It’s a good discussion to have. David Altig, Senior Vice President of the Federal Reserve Bank of Atlanta and main blogger, wrote the latest entry on my Wall Street Journal article of last week which offered proposals to return to sound fiscal and sound monetary policy. Macroblog has no quarrel with the proposals for sound fiscal policy but, as in past posts, disagrees with the analysis of monetary policy. The latest macroblog entry starts by appealing to a paper from New Zealand which shows that an “estimated” Taylor rule indicates that interest rates were not too low for too long in 2003-05 as I have argued. But the “estimated” policy rule in that paper doesn’t looks anything like what I proposed and given that there are already scores of existing models I fail to see the advantages of another model from New Zealand.

Chicago Fed Economists Create Financial Stability Gauge - Economists writing for the Federal Reserve Bank of Chicago say they’ve come up with a new way to measure the stability of the financial system, creating a tool that could help the central bank and other officials conduct policy better.In a research note published by the bank, economists Scott Brave and R. Andrew Butters describe two related indexes that look across a broad array of financial activity to determine the health of the banking sector. They reckon what they’ve produced will allow regulators and Federal Reserve officials to make better economic policy and help avoid being surprised by events. “Major events in U.S. financial history are well captured by the history of our indexes, as is the interdependence of financial and economic conditions,” Brave and Butters wrote. What’s more, “it is possible to use our indexes to improve upon forecasts of measures of economic activity over short and medium forecast horizons.”

Did the Fed keep rates too low in the run up to the crisis?  - According to its official mandate, the Federal Reserve sets the federal funds rate to achieve a dual goal of price stability and maximum sustainable employment. Since the global crisis erupted, debate has been raging over the Federal Reserve's conduct of monetary policy over the period 2002-2006. For example, Taylor (2007) criticises the Federal Reserve for departing from its usual conduct of monetary policy after 2001 and suggests it kept the federal funds rate too low between 2002 and 2006 (see Figure 1). On the other hand, Bernanke (2010) justifies the policy of the Federal Reserve on the grounds that the risks of deflation and high unemployment were particularly pronounced at that time. Was monetary policy in the US too easy between 2002 and 2006? This column argues "no”. It shows that the large and persistent deviations from the Taylor rule over that period were indeed consistent with the pursuit of the Federal Reserve's dual mandate.

A Picture Is Worth a Thousand Words - Why should the Fed aim to stabilize total current dollar spending?  This figure makes it very clear why: changes in nominal spending get translated largely into changes in real economic activity.  Its impact on the price level is far less.  Of course, in an environment where inflation expectations get unanchored, like the 1965-1979 period, nominal spending shocks will have a greater impact on the price level and less influence on real economic activity.   And, over the long-run the trend growth rate of the real economy is determined by real factors.  But for business cycle considerations, it is hard to argue with a monetary policy goal of stabilizing nominal spending when looking at this figure.

Bernanke Reports "Good News" on Inflation Targets; Treasury Selloff Continues on Strong ISM; 2-30 Yield Spread at Record - With a stronger than expected manufacturing ISM numbers, especially prices paid, U.S treasuries continued their slide.  Manufacturing continued to grow in January as the PMI registered 60.8 percent, an increase of 2.3 percentage points when compared to December's seasonally adjusted reading of 58.5 percent. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting. The ISM Prices Index registered 81.5 percent in January, 9 percentage points higher than the 72.5 percent reported in December and the highest reading since July 2008. This is the 19th consecutive month the Prices Index has registered above 50 percent. While 64 percent of respondents reported paying higher prices and 1 percent reported paying lower prices, 35 percent of supply executives reported paying the same prices as in December.

Screw Your Coreage to the Sticking Place - Krugman - Back when I first tried to explain the logic of focusing on core inflation rather than headline inflation, I emphasized the distinction between goods whose prices fluctuate all the time and those whose prices are revised only occasionally; it’s the latter category that is subject to inflation inertia, and therefore where you have to worry that inflation or deflation can get baked into the economy, and become hard to undo. The usual measures of core inflation try to get at this distinction by excluding goods — food and energy — that we know are subject to large short-term price fluctuations. But in theory, we should be dividing goods up by their typical price behavior, regardless of which sector they belong to. And researchers at the Atlanta and Cleveland Feds have done just that, creating a measure of “sticky price inflation”.  What I somehow missed until now is that these measures are available on a monthly basis, providing a nice alternative picture of inflation trends — plus they offer some additional useful stuff that I’ll get to in a minute. So here’s what the fixed versus flexible price measures of inflation show over the past 5 years:

The Un-COLA Era - Paul Krugman - I’m still having fun with the Atlanta Fed’s sticky-price CPI data. These data go back to the late 1960s, and offer an interesting contrast between then and now. For those just joining this conversation: the idea of core inflation involves making a distinction between prices that fluctuate all the time, and those that are changed only at fairly long intervals, and are therefore set with future inflation in mind. I explained how limited price-setting can cause inflation inertia a while back; the original version of this argument goes back to Ned Phelps, who explained more than 40 years ago (pdf) how staggered wage setting leads to a situation in which actual wage growth depends both on unemployment and on expected future wage growth. The point here is that there’s an important distinction between the prices of wheat, oil, rubber, etc. that may rise or fall by double-digit amounts over the course of a year, then quickly reverse that rise or fall, and the prices of many services and manufactured goods — and most wages — which are set for periods of months or years. The latter are slow to develop inflation, but also slow to give it up, which is why policy should focus on whether those prices have started to rise too fast (or too slowly).

Bernanke dismisses inflation concerns, says unemployment to take several years to get back on track - The economy is poised to grow more rapidly this year, Federal Reserve Chairman Ben S. Bernanke said Thursday, dismissing fears that rising fuel prices will trigger broad-based inflation. But he stressed that it will still take several years before the unemployment rate comes down to normal levels. Speaking at the National Press Club just before a rare question-and-answer period with journalists, Bernanke gave a mixed assessment of the nation's economic prospects, according to a prepared text of his remarks. He made clear that the economy cannot get back on track until the job market improves. Bernanke maintained his view that the Fed's program of buying $600 billion in Treasurys to try to prop up growth, announced in November, is working: Stock prices have risen; the stock market has become less jumpy; companies are able to borrow money more cheaply; and inflation expectations have risen a bit. All were expected results, he said.

Is Inflation Good for the Economy? - The Federal Reserve has come under a lot of heat in the past few months for its plan to flood the market with cash by buying $600 billion of US Treasury bonds. The main criticism is that it will cause inflation. And indeed, the United Nations on Thursday said its monthly food price index had reached an all time high. Even Sarah Palin has called out Fed Chairman Ben Bernanke. But there are growing signs that inflation might not be as bad as people think. In fact, rising inflation, or at least the fear of it, might be the best thing this economy has going for it these days. It might even boost employment. Call it, stimulus part trois. First of all, inflation is not something that is an unwanted byproduct of the Fed's plans to boost the economy. Bernanke is actively trying to boost inflation. People were freaking out a few months ago when they realized this, and thought Bernanke had really lost his senses. Instead, I predicted that he was doing exactly the right thing and that rising inflation would be a good thing for the economy and not something that was bound to lower our standard of living so much we could no long afford indoor plumbing.

Bernanke: Don’t Blame Me for Higher Food Prices - Supply and demand abroad for commodities, not U.S. monetary policy, are causing higher food and energy prices rattling much of the world, Federal Reserve Chairman Ben Bernanke said Thursday. “The most important development globally is that the world is growing more quickly, particularly in emerging markets,” Bernanke said in response to a question after his speech at the National Press Club.As economies in Asia grapple with high inflation, Bernanke said constraints on supply — such as bad weather — along with increased demand are to blame for pushing up prices for food commodities. Strong growth in emerging economies is moving millions of people from poverty to the middle class, changing their eating habits — “more beef and less grains and so on,” Bernanke said.

Bernanke On Egypt: It Is "Unfair" To Blame The Fed For Rising Food Prices: Federal Reserve Chairman Ben Bernanke said today that it was “unfair” to blame the Federal Reserve’s monetary policies for inflation in emerging markets and defended the Fed against accusations that it has contributed to the rise of global food prices, which have fueled political instability in countries like Tunisia and Egypt.  Bernanke was asked about the situation in Egypt during a rare question and answer session following a speech today at the National Press Club in Washington, D.C. He initially rejected the premise of the question, but went on to discuss food prices. “The most important development globally is the fact that the world is growing more quickly, particularly in emerging markets,” he explained. “I think it’s entirely unfair to attribute excess demand pressures in emerging markets to U.S. monetary policy because emerging markets have all the tools they need to address excess demand in those countries… It really is up to emerging markets to find the appropriate tools to balance their own growth.”

Food inflation and QE2: the correlation is undeniable - Experts can argue all they want about the causality relationship between food inflation and the Federal Reserve’s second round of quantitative easing (QE2). What cannot be denied, however, is the correlation. Indeed, ever since QE2 was clearly signaled by the Fed, the price of food commodities surged. There are at least three possible explanations. (The truth may be a combination of the three).

• 1. It’s a coincidence and there is no causality between food inflation and QE2. The rally in food commodities is due to poor harvests and rising global demand. Moreover, speculators and hoarders, in anticipation of these two trends, drove prices higher.
• 2. QE2 was expected to make the global economy better. This expectation lifted confidence, which sparked a recovery in the real economy and increased food demand. Speculators and hoarders may also have driven up food prices in anticipation of this boost.
• 3. QE2 was expected to flood the world with liquidity, devalue the dollar, and drive institutional investors out of U.S. Treasuries. In anticipation of this, institutional investors, speculators, and hoarders drove up the prices of food commodities.

Will Commodity Prices Pass Through to the Core? -  Surging commodity prices have economists debating whether the gains will kick off an inflation surge, create new obstacles for the modest U.S. recovery or generate a noxious combination of both. For now, many forecasters remain confident the U.S. will be able to withstand a storm that’s bedeviling other economies. They believe the nation will continue forward with its modestly paced recovery, with inflation rising only gradually. This sentiment is shared by Federal Reserve policymakers who are pressing forward with their aggressive campaign of bond buying, as they try to goose inflation a bit higher and bring down unemployment. And yet, there’s plenty of reason to worry. A recent research piece from Credit Suisse said “the common global concern of the moment is commodity price inflation.”

The Road to Madness Is Paved With $100 Bills - Ben Bernanke is insane. I mean neither insane in a flippant sense, nor in the ordinary sense (as in plain nuts), but an even more insidious form of insanity, namely the insanity of one who cannot see the world as a place outside his own thoughts and beliefs.  I am speaking of the insanity of one who believes that all things can be reduced to a simple issue or pattern, the insanity of which Chesterton spoke in his essay The Maniac. Indeed, all of Bernanke’s monetary policies and actions can be traced to his one core belief: that the US Federal Reserve didn’t do enough to stave off the Great Depression. Never mind that this belief is completely inaccurate (as the data clearly shows), it is the foundation of Bernanke’s entire academic and now monetary career. It is the lone road on his mental map of the world.  It doesn’t matter that the road is leading us all to disaster, for Bernanke there is simply no other course of action to take. In his mind, the Fed failed to act in the ‘30s and so he MUST act regardless of facts, data, or consequence.

Monday - Mubarak's Mood May Move Morning Markets - We're a lot older now and have learned a lot about the World since then.  We learned that China, Japan and the IMF are all ready, willing and able to buy the bonds of various EU nations.  We learned that the Dollar can still fall 5% (was 81.44 on November 30th) further down despite Europe's very obvious problems and Japan's MASSIVE 200% Debt to GDP ratio.  We learned that Uncle Ben will never stop printing money (until forced) and we learned that commodities can rise much faster than even our aggressive "Secret Santa" plays anticipated, with every one of our hedges  already over our year-end targets, all on track for gains well over 100%.   This is what hyperinflation looks like folks - you're not supposed to pick 4 commodities and make over 100% in 60 days on what were not even particularly risky trade ideas.  If everyone can make this kind of money, what good does it do you as it's just funny money being spit out by a broken system that will, eventually, become meaningless once that money begins to circulate again and people begin to realize just how much of it there really is flowing around (and how relatively worthless that makes it). 

Bernanke says growth, inflation still missing Fed goals (Reuters) - Federal Reserve Chairman Ben Bernanke said on Thursday that despite recent signs of improvement in the U.S. economy, the recovery still needs help from the Fed. "Although economic growth will probably increase this year, we expect the unemployment rate to remain stubbornly above, and inflation to remain stubbornly below, the levels that Federal Reserve policymakers have judged to be consistent over the longer term with our mandate," Bernanke provided a modestly more rosy outlook for the world's largest economy than in previous speeches, citing gains in household spending, improved confidence, and stepped up bank lending as signs 2011 may see stronger growth than 2010. Even the hard hit job market shows some grounds for optimism, Bernanke said. However, modest growth and cautious hiring suggest that it will be several years before the jobless rate returns to a more normal level, he said

Fed Chairman Bernanke: The Economic Outlook and Macroeconomic Policies - [W]e have seen increased evidence that a self-sustaining recovery in consumer and business spending may be taking hold. ... [A]lthough economic growth will probably increase this year, we expect the unemployment rate to remain stubbornly above, and inflation to remain persistently below, the levels that Federal Reserve policymakers have judged to be consistent over the longer term with our mandate from the Congress to foster maximum employment and price stability. Under such conditions, the Federal Reserve would typically ease monetary policy by reducing the target for its short-term policy interest rate, the federal funds rate. However, the target range for the funds rate has been near zero since December 2008, and the Federal Reserve has indicated that economic conditions are likely to warrant an exceptionally low target rate for an extended period. As a result, for the past two years we have been using alternative tools to provide additional monetary accommodation.

A Bubble in Complacency - Gross Domestic Product is the combination of domestic Consumption (both consumer and business) plus Investments plus Government Expenditure plus Net Exports (exports minus imports). This latter category has been negative for quite some time, as imports, especially oil, have been larger than exports. Now to get Real GDP (actual GDP after inflation) you have to take away the effects of inflation/deflation. This is done by the use of a deflator built in for each category. But the deflator for exports/imports is a little tricky at times. Moody’s correctly noted that “private inventories were an enormous drag on growth” and concluded that this was a good thing, in that they assumed that meant inventories went down and thus inventory rebuilding in future quarters will add to GDP growth. And that is where you have to look at the numbers, and there we find our anomaly. There really wasn’t that big a drop in inventories. It was in large part in the statistics, not in the warehouse. Oil in the 4^th quarter rose from roughly $81 to $89, or about 10%. On an annualized basis, this is 40%. Inventory investment is equal to the change in book value of the inventories, minus what is known as the IVA, or inventory valuation adjustment, which is used to correct for prices going up or down. Because the value of oil rose and thus cost more to acquire, the accounting requires that you reduce the value of the current inventories. Thus “real” imports fell at a 13% annual rate. Why? Because the deflator rose by 19%, largely because of the rise in the price of oil.

Rebalancing Watch - International trade fell sharply during the worst days of 2008-09, and this was reflected in a sharp decline in the US trade deficit.  One of the big questions in the recovery is whether the trade deficit (or, more broadly, the current account deficit) will return to its pre-crisis level.  That is, was the reduction in the deficit temporary, or have we achieved some "rebalancing"? Friday's advance estimate of GDP provides some encouragement in this regard.  The US economy still has a long way to go, but it is now at least back to its pre-recession level of output.  The trade deficit remains smaller than it was before the recession - it was 3.3% of GDP in the 4th quarter of 2010, versus 4.9% in the last quarter of 2007.The widening trend that began in mid-2009 appears to have leveled off or reversed.  Menzie Chinn suspects that the decline in the trade deficit in the quarter was tied to the decline in inventory accumulation:

Rosie Highlights The Biggest Problem With Last Week's GDP Miss… Last week's GDP miss is now long-forgotten, as not only that but the Egyptian revolution has been priced into daily POMO and $195 billion worth of incremental liquidity from the SFP program unwind.Today, David Rosenberg ignores all the noise comprising the number which lately is almost as credible as the goal-seeked data coming out of China (not to mention seasonally and weather adjusted) and instead looks at the big picture, namely how much debt is required to purchase not only the actual incremental growth, but a trendline 7.3% quarterly annualized GDP growth in a normal recovery. The math works out as follows: the US Economy should be adding $42 billion a month. It is at roughly half of this. But in the meantime, it is also adding $125 billion of debt per month (and soon much more). In other words, the US economy now takes $6 of debt to generate $1 of GDP growth (and would require $3 if it was growin in a normal fashion).

Fed Watch: Underappreciated Data - I must admit that I surprised by the tepid response to the advance release of the 4q2010 GDP data. Mark Thoma catalogues the most common critiques – the negative contribution from government spending and the minimal reduction in the output gap. My review of the data differs. In my opinion, this is the first GDP report since the recession “ended” that offers a certain optimism, a glimmer of hope that perhaps that light at the end of the tunnel is not simply an oncoming train. If it is an oncoming train, it not the train of sagging government spending, but instead a train of imports blasting forward. It is no secret that this recovery, to date, has been anything but vigorous. Certainly nothing like the “Morning in America” of the mid-80’s. Real final sales – GDP excluding inventory effects – outperformed for quarter after quarter during that period as demand clearly outstrip the pace of capacity growth. In comparison, real final sales during the most recent recovery has been almost laughable:

New High in U.S. GDP Does NOT Indicate Recovery is Complete - The big news when the advanced estimate of the 4Q/2010 GDP was announced last week was the recovery of the pre-recession level of GDP.  This was presented by some as good news, but was suitably qualified by others.On the surface it might seem someone needs to tell Main Street that their misery must be all in their head.  Here is the evidence of good news, provided by Business Insider:Actually, this measurement of recession and recovery is flawed.  Those who have followed me for a while know I propose that aggregate factors, like GDP, should really be measured against readings normalized to population.  After all, to use a ridiculous extreme as an example, a GDP of $1 billion for a population to 100,000 is a much bigger number (10X) in value to society than is the same $1 billion for a population of 1 million.  See here.The following graph shows that, if normalized to population, real GDP is only a little over half way through recovery

Don't Believe Goldman Sachs, The U.S. Economy Has Endured 3 'Lost Decades'  - Step back from the ledge, America. Scotch the gloomy talk of a Japan-style Lost Decade in which we sink into decline and marinate morosely there for years. We're back, baby! So says a cheery depiction of these times from the wizards at Goldman Sachs (a firm that, come to think of it, played a starring role in trashing our economic security). The report from Goldman's Investment Strategy Group, and served up here as evidence of happy times by the credulous folks at Politico's Morning Money, dismisses suggestions that the American economy might yet confront substantial problems. "The U.S. Will Not Face a 'Lost Decade,'" declares a subheading in the report, which later calls the odds of that prospect "very remote indeed." Instead, "America's structural resilience, fortitude and ingenuity will carry the economy and financial markets in 2011 -- and beyond."  But one problem with all this soothing talk: As millions of ordinary people can readily attest, we are already deep into a Lost Decade and then some. Rescuing ourselves from this era of diminished expectations is going to require far more than disseminating rosy projections about this year's stock market while touting the innate power of American business.

Bill Gross: Devil’s Bargain - Bill Gross is at it again. The bond king who has taken a populist turn is out with another monthly investment commentary that features a negative view of Wall Street (God’s work) and Federal Reserve monetary policy. I want to hone in on the Fed piece. In a piece entitled, "Devil’s Bargain", Gross makes the following points:

• Money has become the economic and political wedge for profound changes in American society.
• Perhaps the most deceptive policy tool to lessen debt loads is the “negative” or exceedingly low real interest rate that central banks impose on savers and debt holders.
• Old-fashioned gilts and Treasury bonds may need to be “exorcised” from model portfolios and replaced with more attractive alternatives both from a risk and a reward standpoint.

Fed's No. 1 in Treasury Holdings: Report - The Federal Reserve has passed China as the leading holder of U.S. Treasuries, according to the Financial Times, even though the central bank is only halfway through its second round of quantitative easing. Based on weekly data, the New York Fed's holdings of Treasuries in its System Open Market Account total $1.108 billion. The holdings include bills, notes, bonds and Treasury Inflation Protected Securities, the FT reports. China holds U.S. government paper of $896 billion and Japan owns $877 billion, the newspaper reports, citing recent U.S. Treasury data.  Just last month, the central bank voted to keep interest rates at near zero, saying the U.S. economy's slow improvement warrants maintaining the asset-purchase program through the middle of 2011.  The FT quotes a strategist at TD Securities as saying that by June, the Fed will have purchased $1.6 trillion of Treasuries, about the same as the combined holdings of China and Japan.

Policymakers see dollar losing reserve currency allure (Reuters) - The U.S. dollar's role as a reserve currency will diminish in the coming years as Asian economies like China grow and countries seek to diversify their monetary holdings, policymakers said on Friday. The U.S. Federal Reserve's policy of quantitative easing -- essentially printing money -- and a call by France to look at ways to wean the world off the dollar as the sole reserve money have put the U.S. currency in the spotlight. "I'm more optimistic about the euro gaining strength as a potential reserve currency," Bank of Israel Governor Stanley Fischer said during a panel discussion at the annual World Economic Forum in Davos, Switzerland. "We ourselves are diversifying into currencies which we would never have put in the reserves before, including the Australian dollar and so forth," he added. "I think people will diversify their reserves." French President Nicolas Sarkozy is trying to rally the Group of 20 powers to the idea of a more varied monetary system after decades of the dollar being the world's reserve currency and a major unit of international trade settlement.. Bank of Canada Governor Mark Carney and Fischer anticipated that, in the long run, Asian monies would have a greater role as reserve currencies.

Former Fed Officials Expect Dollar to Stay Dominant - The U.S. dollar will still be the world’s dominant currency for at least the next decade, said three former top officials at the Federal Reserve, including former Fed Vice Chairman Donald Kohn. In separate interviews, Kohn and former Fed governors Laurence Meyer and Randall Kroszner stressed that forecasting currency rates is often akin to reading entrails. But they still offered some well-educated guesses of what could happen in foreign exchange markets in 2011. “The dollar will continue to be a reserve currency for decades to come,” said Kohn, who retired in September 2010 after 40 years at the U.S. central bank. Meyer, 66 and a member of the Fed’s Board of Governors from 1996 to 2002, is certain the dollar will still be the dominant currency in his “lifetime” because there are no valid alternatives.

The Dollar and Global Standing - From Barry Eichengreen (via Matt Yglesias):  Sterling lost its position as an international currency because Britain lost its great-power status, not the other way around. And Britain lost its great-power status as a result of homegrown economic problems. There isn’t much point in complaining about the devaluation of the dollar right now, given the trade deficit the United States is running. But there really isn’t much point in complaining about devaluation and not also complaining about our big long-term economic problems: slowing educational gains, the uniquely high cost of health care and the country’s inability to align taxes with government benefits. Those problems, not the dollar’s value, threaten the United States’ global standing.

Bernanke: Congress Shouldn’t Use Debt Ceiling as Bargaining Chip - Federal Reserve Chairman Ben Bernanke said Thursday congressional lawmakers shouldn’t use the country’s debt ceiling as a bargaining chip when they debate how to reduce the budget deficit. “If the debt limit is not extended for a time the Treasury has various resources it can use to make payments on our national debt,” Bernanke said during a press conference at the National Press Club. “But beyond a certain point it would not have those resources and the United States could conceivably — I think this is very remote but it is not something you would want to play around with–the United States would be forced into a position of defaulting on its debt,” he said.A default would be “catastrophic,” Bernanke added. The U.S. Treasury Department said Wednesday the country would hit its congressionally imposed debt ceiling of nearly $14.3 trillion somewhere between April 5 to May 31.

Bernanke Warns Republicans on Toying With Debt Limit Vote… The Federal Reserve chairman, Ben S. Bernanke, warned Congressional Republicans on Thursday not to “play around with” a coming vote to raise the government’s legal borrowing limit or use it as a bargaining chip for spending cuts.  In remarks after a luncheon speech here, Mr. Bernanke sided with the Obama administration in the fight over the debt ceiling, which the government is on course to hit in April or May, saying it should be raised without conditions. Some Republicans have insisted on immediate spending cuts in exchange for raising the limit.  It was the first time that Mr. Bernanke, who in contrast to his predecessors has avoided taking sides in partisan debates on fiscal matters, had spoken out on the debt ceiling issue. His willingness to do so suggested a desire by the central bank to prevent Washington lawmakers from toying with bond markets that have been volatile since the European debt crisis last year.

Early Maneuvering on Possible Shutdown - Democrats do not intend to shut up when it comes to a potential government shutdown.  Well aware that a 1995 budget impasse during the early days of Republican control of the House backfired on the new majority, Democrats are moving pre-emptively this time to frame the battle on their terms.  There are two reasons: They say that focusing early on the issue could deter Republicans from pushing ahead with demands for spending cuts that Democrats say are unacceptable. At the same time, they are making the case that voters should hold Republicans accountable if things do go off the rails in the coming months.  Through statements, news conferences and summoning expert testimony, Democrats are raising red flags about the threat to the economic recovery posed by the possibility of even a temporary interruption in government services or a federal default.

Failure to Pay US Soldiers is Not Default - Unconscionable no doubt, but not default.  Contra to Neal Wolin, if bondholders needed sign that under no state of affairs will any credit losses on US bonds ever be allowed, then prioritizing debt payments over the men and women who have shed blood for their country would do it. If seniors across America start having their chemo cancelled so that Arab Sheik’s get their bond payments on time then US creditworthiness will go through the roof.  Its already sky high of course, but a wealthy powerful  government that is willing to see its weakest citizens lose care before it allows its creditors to miss a single payment would be the most credit worthy entity imaginable. Economics is not a morality play.

Bigger Deficits, More Debt - Washington has gotten deficit religion, or at least that’s what you’d infer from recent rhetoric. From the president to congressional leaders to the newest representative elected by tea party supporters, everyone in town promises to bring the federal deficit under control. Maybe not this year—the economy is still too fragile—but soon. The president wants to freeze discretionary spending for the next five years. Republicans promise to cut this year’s spending by $100 billion—or maybe less because we’re already halfway through fiscal 2011. But actions speak louder than words and recent actions show no real signs of increased fiscal responsibility. The Congressional Budget Office’s release last week of its semiannual budget projections showed how hard the job will be and how much worse the situation has gotten. CBO’s official estimates by law assume current law—in particular, that scheduled tax increases will actually occur. Last August’s estimate showed the federal deficit shrinking rapidly from 8.9 percent of GDP last year to 7 percent this year and less than 3 percent the last half of this decade (see red area in first graph). From there, reaching budget balance seemed feasible: trim spending, raise taxes a bit, and you’re there.

How Should the U.S. Break Its Promises? - Pat Toomey is apparently introducing plans to give US debt payments first priority in the event that the debt ceiling is not raised.  Matt Yglesias calls this "default by another name":  Now of course this is nonetheless a kind of default. A person whose creditworthiness is above question meets all his financial obligations. Another kind of person might manage to stay current on his mortgage and make minimum credit card payments while leaving utility bills unpaid and welching on sundry promises to friends and business associates. That's not grounds for foreclosure, but obviously it's going to hurt your standing as a borrower. Well, sort of.  The first thing to point out is that legally, changing social security benefits would not be default, because (as the Supreme Court has already ruled), beneficiaries have no legal, contractual right to their benefits.  They enjoy them at the sufferance of Congress, and Congress has the perfect right to change them.  Doing so will not affect our status as a borrower adversely in the eyes of people we actually borrow money from..

Interest on national debt: 'Skyrocketing' costs ahead -- Interest payments on the national debt could total $5.5 trillion over the next decade, or about 79% of the new debt estimated to accrue between 2012 and 2021. nd that's the optimistic scenario."Interest payments on the debt are poised to skyrocket over the next decade," the nonpartisan Congressional Budget Office wrote in its most recent budget outlook report. The CBO -- and everyone else for that matter -- assumes that interest rates will rise. Just how quickly is the question. The CBO assumes a gradual rise, and projects that the 10-year Treasury rate won't hit 5% before 2015, up from an average of 3.2% today.  But if interest rates end up being 1 percentage point higher than the CBO assumes over each of the next 10 years, interest costs could go up by another $1.3 trillion, putting total costs at $6.8 trillion.

Volume Of Default Swaps On U.S. Debt Rises 12% In Recent Days - The net notional amount of derivatives used to hedge or speculate against a default on U.S. government debt rose 12% in late January, according to Depository Trust & Clearing Corp. figures updated as of Tuesday. The move suggests investors are becoming more nervous about the quality of U.S. debt, and threatens to cast a pall over the notion that Treasurys are risk- free assets investors should run to for safe haven from other instruments. The net notional of credit default swaps bought and sold on U.S. debt rose from $2.67 billion to just over $3 billion between Jan. 14 and Jan. 21, or 12.35%; while the gross notional rose from $16.1 billion to $17.2 billion, or 6.76%. When it comes to credit default swaps--more commonly known as 'CDS'--gross notional refers to the amount of protection bought or sold in the aggregate. Net notional values are a more precise reflection of the amount of money that would change hands between net sellers of CDS protection and net buyers in a default.

A Missed Opportunity On the Budget - It was a teachable moment - and Barack Obama didn't teach. Unless public opinion changes, we won't end our budget deadlock. As is well-known, Americans want budget deficits curbed.  But there's little support for cuts in Social Security (64 percent opposed), Medicare (56 percent) and Medicaid (47 percent), which together approach half of federal spending. The State of the Union gave Obama the opportunity to confront the contradictions and educate Americans in the unpleasant realities of uncontrolled government. He declined.  What we got were empty platitudes. We won't be "buried under a mountain of debt," Obama declared. Heck, we're already buried. We will "win the future." Not by deluding ourselves, we won't. Americans think deficits are someone else's problem that can be cured by taxing the rich (say liberals) or ending wasteful spending (conservatives). Obama indulged these fantasies. If deficits stemmed mainly from the recession, this wouldn't matter. Unfortunately, this isn't the case.

America’s Ungovernable Budget - The heart of any government is found in its budget. Politicians can make endless promises, but if the budget doesn’t add up, politics is little more than mere words. The United States is now caught in such a bind. In his recent State of the Union address, President Barack Obama painted a convincing picture of modern, twenty-first-century government. His Republican Party opponents complained that Obama’s proposals would bust the budget. But the truth is that both parties are hiding from the reality: without more taxes, a modern, competitive US economy is not possible.  The US and Europe are in direct competition with Brazil, China, India, and other emerging economies, where wage levels are sometimes one-quarter those in high-income countries (if not even lower). America and Europe will keep their high living standards only by basing their competitiveness on advanced skills, cutting-edge technologies, and modern infrastructure. That is why Obama called for an increase in US public investment in three areas: education, science and technology, and infrastructure (including broadband Internet, fast rail, and clean energy).

Signs of hope for deficit plan - A bipartisan effort to resurrect the recommendations of last year’s presidential deficit-reduction commission gained steam Tuesday in the Senate, where nearly half the members turned out for early morning briefing on the debt crisis and old friends of House Speaker John Boehner are taking the lead alongside the Democratic chairman of the Senate Budget Committee. The path ahead remains extremely difficult, but the forces coming together represent the best shot this Congress has of finding the political mass needed to bring President Barack Obama and the new House Republican majority to the table.  “I think we will make it easier for him to jump in,” said Sen. Tom Coburn (R-Okla.) of the president. “None of us know how we can go yet,” said Sen. Richard Burr (R-N.C.). “But if we can bring the White House to the table on Social Security, the House will be there”

Key Democrat Seeks Budget Summit on Fiscal Woes - Senate Budget CommitteeChairman Kent Conrad (D., N.D.) called for a summit between congressional leaders and top officials in the Obama administration to craft a solution to ease the country’s budget woes. The lawmaker said the summit should convene before Congress is forced to act to pass an increase in the nation’s borrowing limit, something he said would likely occur in May. “If we want to send a signal that America is going to face up to this…then the leaders of America should get together and come up with that plan,” Conrad said.The debt ceiling is $14.3 trillion, which the Treasury said recently the federal government is on track to reach this spring. Conrad seemed to accept, however, that such a summit was unlikely, as he followed his call by saying that the budget committee he chairs will have to initiate the conversation.

GOP budget cuts: Deficit hawkery as farce | The Economist - I'M HAVING trouble writing about the GOP effort to reach a compromise over whether to cut $100 billion out of the 2011 budget, or just $50-60 billion. My problem is that I can't really write about the advantages or disadvantages of one or another version of the cuts when the entire enterprise appears completely senseless to me. The notion, apparently, is that continuing unemployment and slow growth in America are caused by the federal budget deficit. So shrinking the deficit by $50-60 billion will presumably lead to faster economic growth and renewed hiring. Yet exactly one month ago, these same Republican leaders eagerly agreed to a tax-cut package that raised the federal deficit for 2011 by over $400 billion. Even if there were a plausible argument that unemployment and lethargic growth today stem from the current budget deficit, any impact congressional leaders hope to see from their spending cuts will add up to no more than noise around the edges of their tax cuts.

House Republicans propose $32 billion in budget cuts - House Republicans pledged Thursday to slice more than $32 billion from agency budgets over the next few months, firing the opening shot in a battle over government spending that is likely to dominate debate heading into the 2012 presidential campaign.  The figure, announced by House Budget Committee Chairman Paul Ryan (R-Wis.), represents an unprecedented rollback that would force some domestic agencies to immediately slash spending by as much as 20 percent, independent budget analysts said.  Democrats immediately vowed to fight the proposal, calling it a short-sighted plan that would kill many critical government services and slow the burgeoning economic recovery. But a group of conservative Republicans is demanding even deeper cuts and vowing to offer a plan to slash $100 billion from agency budgets when House leaders bring a spending bill to the floor Feb. 14.

Dems adopting aggressive posture in fight over government spending - Don't look now, but there are increasing signs that Democrats are adopting a surprisingly aggressive and unapologetic posture in the looming political battle with Republicans over government spending. Rather than running from the issue -- which has obvious perils for Dems, given that Republicans are trying to tar them as Big Government liberals -- they are treating this as an argument that can be turned to their advantage, if it's framed in the right way. The latest sign of this is the new DCCC radio ad that is targeting multiple House Republicans in targeted districts. The ad attacks Republicans for supporting plans to "cut education" and "cut science and technology research," defending the latter as the way "we get the new products that create new jobs." Crucially, the ad cites specific programs that Republicans would target, and frames the cuts as threats to job creation, an effort to cast Dems as defenders of popular programs and to undercut the GOP case that government spending is inevitably a "job killer."

The Growing Government Deficit Actually Means Savings For The Private Sector - In recent months, the nation's pundits have been whipping up deficit hysteria in a mass public mis-education campaign funded by billionaire Pete Peterson. In this blog I will explain why we should not be misled. First, most of the growth of the deficit can be attributed to the rotten economy--which destroyed jobs and thus tax revenue. Second, and more importantly, a sovereign government deficit is nothing to fear. It is simply the mirror image to the non-government sector's saving. As the US private sector retrenched to rebuild its balance sheet, the government's balance moved toward deficit. There is an unrecognized identity at work. One sector's deficit equals another's surplus. If we sum the deficits run by one or more sectors, this must equal the surpluses run by the other sector(s). Following the pioneering work by Wynne Godley, we can state this principle in the form of a simple identity: Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0

The Right Kind of Spending Can Fuel Real Growth - As Congress turns its attention to deficit reduction, one argument we’ll hear again and again from those in favor of large cuts in spending is that our children and grandchildren should not be asked to pay the bills of this generation. The deficit will reach a record $1.5 trillion this year before declining, according to the Congressional Budget Office. However, deficits are not always harmful to future generations, and it would be a mistake to cut the deficit on behalf of our children and grandchildren and end up making them worse off in the process.When the government incurs debt, the important factor to consider is what the government does with the money relative to what the private sector would have done with it. If the money would have been used for consumption goods or remained idle in bank accounts, and the government uses it to purchase needed infrastructure instead, then this is better from the perspective of future generations since it enhances the productive capacity that they will inherit.

US taxpayers should not pay for fixing US infrastructure, new White House chief declares - American taxpayers should not foot the bill for infrastructure improvements around the country, the new White House chief of staff said recently. “I don’t think raising the taxes on the American people right now is the way to go at this point of our economy," William M. Daley told Bob Schieffer of CBS's "Face the Nation" Sunday. Daley, a former Wall Street executive who opposed two of President Obama's major initiatives, said that investment for US infrastructure could instead come from private sources both foreign and domestic. "That's a creative way to move forward," he said. Daley continued, "Reality is, as certain people in the Republican Party have said, there's no way they are going to look for revenue raising in any way, shape, or form. It obviously puts an enormous constraint on the budget and the deficit."

 The Paradox of Corporate Taxes in America - The United States Coast Guard keeps the seas safe for Carnival’s cruise ships. Customs officers make it possible for Carnival cruises to travel to other countries. State and local governments have built roads and bridges leading up to the ports where Carnival’s ships dock.  But Carnival’s biggest government benefit of all may be the price it pays for many of those services. Over the last five years, the company has paid total corporate taxes — federal, state, local and foreign — equal to only 1.1 percent of its cumulative $11.3 billion in profits. Thanks to an obscure loophole in the tax code, Carnival can legally avoid most taxes.  It is an extreme case, but it’s hardly the only company that pays far less than the much-quoted federal corporate tax rate of 35 percent. Of the 500 big companies in the well-known Standard & Poor’s stock index, 115 paid a total corporate tax rate — both federal and otherwise — of less than 20 percent over the last five years, according to an analysis of company reports done for The New York Times by Capital IQ, a research firm. Thirty-nine of those companies paid a rate less than 10 percent.

The Details on Corporate Taxes - My column this week mentions several companies that have paid relatively little in corporate taxes in the last five years. Each company explained to me that it was complying with all tax laws, and I have no doubt that every one is. In many ways, these explanations are the problem with the corporate tax code. This country’s official corporate income-tax rate is among the highest in the world, forcing companies to change their behavior to qualify for deductions, credits and other loopholes. Yet so many loopholes exist that the federal government receives less money in corporate taxes than it once did, relative to the size of the economy. This post offers more details on some of the companies mentioned in the column.

Corporate Tax Debate Ranges Beyond Obama Request - In his State of the Union address, President Barack Obama called for lowering the U.S. corporate tax rate “without adding to our deficit” by closing down corporate “loopholes.” That could be easier said than done. At a Senate Budget Committee hearing on Wednesday, lawmakers and experts already were looking for ways around Mr. Obama’s self-imposed limitation.  Some conservatives said that a basic tax overhaul could boost overall economic growth, and thus increase government revenues beyond what’s expected. That could help businesses make their case for cutting fewer of their existing tax breaks. Several of the expert witnesses – and at least a couple of the senators – went further, suggesting that some type of consumption tax such as a value-added tax might be needed to make up the cost of a corporate rate reduction.  . Almost all major economies except the U.S. now have consumption-type taxes. Some analysts believe that gives those countries a trade advantage because value-added taxes typically are rebated at the border to exporting companies.

It’s That Damned “Holey” Tax System - Fed Chairman Ben Bernanke gave a very good speech today at the National Press Club.  In it he emphasized why having a plan to get back to economically sustainable deficits is not only important for longer-term economic growth, but to our near-term economic health as well.  He also suggested that “acting now to develop a credible program to reduce future deficits” is not so daunting a task now that the President’s fiscal commission and related groups have put forward proposals that “provide useful starting points.”Chairman Bernanke then hints about what he likes about the commission proposals, in his concluding paragraph (emphasis added): Of course, economic growth is affected not only by the levels of taxes and spending, but also by their composition and structure. I hope that, in addressing our long-term fiscal challenges, the Congress and the Administration will seek reforms to the government’s tax policies and spending priorities that serve not only to reduce the deficit, but also to enhance the long-term growth potential of our economy–for example, by reducing disincentives to work and to save, by encouraging investment in the skills of our workforce as well as in new machinery and equipment, by promoting research and development, and by providing necessary public infrastructure.

What’s next for tax code? Geithner discusses overhaul with wide range of groups - Timothy F. Geithner can't seem to talk enough these days about corporate tax reform. From D.C. to Davos, the Treasury secretary has chatted up chief executives and academics, bankers and labor groups, Republicans and Democrats, all in the name of fixing a tax code that most everyone agrees could use a major overhaul.  What remains unclear is whether the Obama administration actually intends to push for meaningful changes to the corporate tax code this year, or whether political obstacles will relegate Geithner's campaign to a mere plank in President Obama's new business-friendly platform.   Some of those who attended the powwows have left with the impression that little real action lies ahead.  "All this talk about tax reform is happy talk,"

The Ruinous Fiscal Impact of Big Banks - Simon Johnson - The newly standard line from big global banks has two components – as seen clearly in the statements of Jamie Dimon of JPMorgan Chase and Robert E. Diamond Jr. of the British bank Barclays at Davos last weekend.  First, if you regulate us, we’ll move to other countries. And second, the public policy priority should not be banks but rather the spending cuts needed to get budget deficits under control in the United States, Britain and other industrialized countries. This rhetoric is misleading at best. At worst it represents a blatant attempt to shake down the public purse. On Tuesday, in testimony to the Senate Budget Committee, I had an opportunity to confront this myth-making by the banks and to suggest that the bankers’ logic is completely backward. Start with the bankers’ point about budget deficits and spending cuts. Public deficits and debt relative to gross domestic product have ballooned in the last three years for one simple reason – the big banks at the heart of our financial system blew themselves up. On this point, the conclusions of the Financial Crisis Inquiry Commission, which appeared last week, are very clear and utterly compelling.

A Whole Bunch of Prominent Economists Backs the Use of Capital Controls - Yves Smith - A letter signed by over 250 economists opposing restrictions on capital controls is more of a shot across the bow than it might appear to be.  This letter is at odds with a longstanding project of major financial firms: to allow them to move money across borders with no muss or fuss. This was the dream of Citibank’s Walter Wriston, who perversely was not deterred by the large losses his bank incurred in its sovereign lending misadventures of the late 1970s. It became a matter of policy in the Rubin/Summers Treasury Department.  The letter with signatories appears here, and it includes highly respected trade and development economists like Ricardo Hausmann, Dani Rodrik, Joe Stiglitz, and Arvind Subramanian; we are reproducing the text below:

SEC warns budget threats give swindlers upper hand - (Reuters) – Tighter budgets at the Securities and Exchange Commission could mean killing vital technology upgrades needed to catch swindlers, the agency's chief said on Friday in a blunt appeal for more funding. With Republicans in Congress threatening to restrain her budget, SEC Chairman Mary Schapiro said the agency faces severe challenges in doing its existing job and in taking on new duties mandated under 2010's Dodd-Frank market reform law. SEC enforcement head Robert Khuzami said budget constraints are hurting the agency, but nevertheless defended its record against critics who say too few Wall Street financiers have been held accountable for the 2007-2009 financial crisis. "Credit crisis cases continue to be a priority," Khuzami said, citing cases brought against Goldman Sachs, Citigroup and former mortgage lending giant Countrywide Financial, which was acquired in 2008 by Bank of America Corp. Schapiro said the SEC desperately needs resources to catch more bad guys.

Gross Derivatives Exposure - U.S. banks may be required to bring billions of dollars of additional derivatives exposure onto their balance sheets under a proposal being considered by accounting rulemakers. The change would tighten rules that now allow U.S. financial firms to “net” derivative positions when they report them, meaning they can offset opposite positions and report the net amount on their books. Rulemakers mull change to US derivatives accounting [x] IFRS vs US-GAAP: European Banks Leverage Overstated (Picture) [x]

Satyajit Das: Derivatives Regulation Dance - Derivative contracts are valued on a mark-to-market (“MtM”) basis. This requires valuation of the contracts based on the current market price. OTC derivatives trade privately. Market prices for specific transactions are not directly available. This means current valuations rely on pricing models. There are significant differences in the complexity of the models and the ability to verify and calibrate inputs. More complex products used sophisticated financial models, often derived from science or statistical methodology. There are frequently differences in choice, exact factorisation and even numerical implementation of the models. Different dealers may use different models. Some required inputs for the models are available from markets sources. The nature of the OTC market and the limited trading in certain instruments mean that key input parameters must frequently be “estimated” or “bootstrapped” from available data. In certain products, the limited number of active dealers means that “market” prices are sometimes no more than the dealer’s own quote being fed back after being collated and “scrubbed” by an external data provider. This is referred to prosaically as “mark-to-myself”. Model variations and small differences in input can frequently result in large changes in values for some products.

Legerdemath -The credit-derivatives group, then just three or four people I sat next to, soon spawned an ever-expanding team managing ever-more complex creations: credit-default swaps, collateralized debt obligations, and the myriad other structures built with black boxes and shrouded by acronyms. Meanwhile, my group continued to peddle mostly the forbears of these recent menaces, the more mundane interest-rate swaps and Treasury-rate locks. The newer derivatives, though hardly identical to their predecessors, nonetheless evolved in similar environments, were likewise designed to manipulate risk, and were also customized on a trade-by-trade basis.  Our clients were non-financial corporations, the Deltas and Verizons of the world, which relied on us for advice and education. Our directive was “to help companies decrease and manage their risks.” Often we did just that. And often we advised clients to execute trades solely because they presented opportunities for us to profit. In either case, whenever possible we used our superior knowledge to manipulate the pricing of the trade in our favor.

Internet Payday Loans, Arbitration Clauses, and Agreements Not to Bring Class Actions - You know a case before the New Mexico Court of Appeals is a big when  lots of out of town lawyers come to argue the case. And, so it was in the case of Andrea Felts, heard on January 19, 2011. Ms. Felts, a high school vice principal, took out  internet payday loans when going through a divorce, one at 684 percent per annum, and another at 730 percent. After paying back more than she borrowed in just a few months, she found a consumer lawyer to bring a class action against the two lenders, CLK Management and Cash Advance Network Inc., for unconscionability and unfair practices. One small detail….language buried in the click-through screens in her on-line “contract” said any disputes between the parties must be arbitrated, and also that she could not bring a class-action lawsuit.

Credit Card Interest Rates Near 60% as Banks Return to Risky Borrowers - It’s true that the bill put a cap on how and when companies could jack up interest rates after a card is signed. But rates are now reaching record highs before accounts are opened, at an average of 14.72% APR. If your credit is really bad, you could end up with a rate as high as 59.9%. And just as banks protest that the rates are high in order to balance out risk, like addicts who can’t kick the habit they’re ramping up lending to risky borrowers again. Yes, they’re being more cautious — this time credit scores alone are no longer enough for their screening purposes. They’re now scrutinizing other behavior, such as registering on a job site (something that millions of unemployed Americans are probably doing). They’ve got a new classification system worked out too: “strategic defaulters,” whose scores took a hit when they walked away from an underwater mortgage; “first-time defaulters,” who once had a strong score but hit financial trouble because of the recession; “sloppy payers,” who only pay some bills on time; “abusers,” who are defiant about paying; and “distressed borrowers,” who just can’t pay. Those last three categories are the ones they’re trying to weed out; they’re focused on wooing defaulters who theoretically would have a good score if the crisis hadn’t happened. But when 14.5 million are out of a job, more and more people may find themselves simply unable to pay. Not to mention that they may also start to feel defiant.

Inquiry and Intimidation - Krugman - I haven’t seen this reported elsewhere — but Republicans in Congress are planning to investigate the Financial Crisis Inquiry Commission, looking for evidence of corruption and wrongdoing. It’s absurd, of course: a tiny commission with a small budget didn’t offer much scope for corruption. But what this is really about is intimidation — in much the same way that investigations of climate scientists are about intimidation. What the GOP wants is to make people afraid even to do research that produces conclusions they don’t like. And they don’t stop at trying to undermine the research — they go after the researchers personally. The goal is to create an environment in which analysts and academics are afraid to look into things like financial-industry malfeasance or climate change, for fear that some subcommittee will either dig up or invent dirt about their private lives. McCarthy had nothing on these guys.

Washington’s Financial Disaster - THE long-awaited Financial Crisis Inquiry Commission report, finally published on Thursday, was supposed to be the economic equivalent of the 9/11 commission report. But instead of a lucid narrative explaining what happened when the economy imploded in 2008, why, and who was to blame, the report is a confusing and contradictory mess, part rehash, part mishmash, as impenetrable as the collateralized debt obligations at the core of the crisis.  The main reason so much time, money and ink were wasted — politics — is apparent just from eyeballing the report, or really the three reports. There is a 410-page volume signed by the commission’s six Democrats, a leaner 10-pronged dissent from three of the four Republicans, and a nearly 100-page dissent-from-the-dissent filed by Peter J. Wallison, a fellow at the American Enterprise Institute. The primary volume contains familiar vignettes on topics like deregulation, excess pay and poor risk management, and is infused with populist rhetoric and an anti-Wall Street tone

Second-guessing the WaMu seizure and sale: FCIC report - A Treasury official and the leader of the Federal Deposit Insurance Corp. disagree on how the Washington Mutual seizure was handled, while a banker questions whether he paid too much for the thrift, according to a new report on the causes of the 2008 financial crisis. Jaime Dimon, CEO of JPMorgan Chase, said he would have only bid $1 for the failing Seattle-based thrift instead of nearly $2 billion had he known no one else was bidding. About a page is devoted to the thrift's seizure and the decisions surrounding it, but issues involving WaMu’s option adjusted-rate mortgages, loose lending standards and questionable appraisal practices, get mention elsewhere in the report. Neel Kashkari is the U.S. Treasury official quoted on second-guessing how the seizure was handled. WaMu, with $307 billion in assets, was the largest bank failure in U.S. history. 

On the FCIC report - I’m currently reading the Financial Crisis Inquiry Commission Final Report after having skimmed it, and so far it’s an excellent guide through the financial markets and how they’ve changed over the past 30 years, as well as the lead-up to the financial crisis. The Republicans and conservatives did a great job trying to hatch-job and politicize the reception of this volume by breaking away and writing a dissenting opinion, since the FCIC’s opinion has virtually all the honest conservative thoughts expressed in there. Two items in particular jumped out at me in the first skim.  First, the role of regulator’s 2001 Recourse Rule has been blamed by conservatives (and others) for increasing the demand for securitization and, more specifically, placing the Ratings Agencies in the drivers seat for bank capital stocks. This claim has been made by by Jeffrey Friedman, Editor, Critical Review here, John Carney, CNBC here, Arnold Kling at AEI here. I think it is fair to say that these are strong libertarians, maybe even a kind of anarchist in some cases – they are to the right of most of the discussion on the financial sector.

FCIC Report Misses Central Issue: Why Was There Demand for Bad Mortgage Loans? - Yves Smith - In common with other accounts of the financial crisis, the Financial Crisis Inquiry Commission report notes that mortgage underwriting standards were abandoned, allowing many more loans to be made. It blames the regulators for not standing pat while this occurred. However, the report fails to ask, let alone answer, why standards were abandoned.In our view, blaming the regulators is a weak argument.  A much more sensible explanation can be found by asking: what were the financial incentives for such poorly underwritten loans? Why would “the market” want bad loans? All the report offers as explanation is that the “machine” drove it or “investors” wanted these loans. This is lazy and fails to illuminate anything, So why, with the trouble obvious in the 2005 time frame, did the market create even worse loans in late 2005 through the beginning of the meltdown, in mid 2007, even as demand for better mortgage loans was waning? It’s critical to recognize that this is an unheard of pattern. Normally, when interest rates rise (and the Fed had begun tightening), appetite for the weakest loans falls first; the highest quality credits continue to be sought by lenders, albeit on somewhat less favorable terms to the borrowers than before.In other words: who wanted bad loans?

Was the Financial Crisis Avoidable? Room for Debate, New York Times - Last week, the Financial Crisis Inquiry Commission, after reviewing thousands of documents, issued a report, which explained the causes of the financial unraveling, the role of government and the banks, and the aftershocks of the crisis. The 10-member commission, however, split along party lines, with the six Democrats voting to adopt the report and its findings, and the four Republican members issuing two dissenting reports.On NPR, Keith Hennessey, one of the Republican commissioners, said that the disagreement could perhaps be boiled down to one statement in the majority report: "We conclude this financial crisis was avoidable." Mr. Hennessey said that sentence "is, if not the key difference, one of just a very small number" of differences between the majority and the dissenters.  Is the conclusion that the financial crisis was "avoidable" defensible? What does the partisan split on this central question mean for future policy choices?

• Foreseeable and Preventable -  Jeffry A. Frieden, professor of government
• Address Excessive Leverage - Anat R. Admati, professor, Stanford University
• A Nonpartisan Conclusion - Nicole Gelinas, Manhattan Institute
• Follow the Money - Yves Smith, Naked Capitalism
• When 'Liar's Loans' Flourish -  William K. Black, professor of economics and law
• More Than Just Greed - Jeffrey A. Miron, economist

FCIC report: Wall Street's debt problem is different from yours. On Jan. 27 the Financial Crisis Inquiry Commission completed its work with the issuance of a 633-page report. It actually made for pretty great reading. Among my favorite parts is former Citigroup CEO Chuck Prince telling the commission that "I did not know" about the stupendous amounts Citi lent to companies that originated mortgages—which at any one time totaled as much as $7 billion—until "the end of my tenure," and that he wouldn't have approved the loans if he had. Another jewel is former Bear Stearns CEO Jimmy Cayne saying that the rating agencies' downgrade of Bear's debt was "like having a beautiful child and they have a disease of some sort that you never expect to happen." Evidence of CEO stupidity aside, what most struck me was this statistic: From 1978 to 2007, the amount of debt held by the financial sector increased twelvefold, from $3 trillion to $36 trillion. Maybe underneath all the idiocy, deception and delusion, and all the complexity of financial instruments like mortgage-backed securities and collateralized debt obligations—maybe under all that, the real lesson of the financial crisis is really quite simple: Steeply rising debt isn't healthy for people, and it isn't healthy for banks.

Probe of Financial Crisis Commission Appears Stuck - House Republicans find themselves stymied in an attempt to investigate the panel’s work. Rep. Darrell Issa (R., Calif.) first requested documents and other materials from the Financial Crisis Inquiry Commission back in July. At the time, Mr. Issa said he had questions about the commission’s spending as well as concerns that the panel was taking a partisan turn.  But according to a Jan. 25 follow-up letter from Mr. Issa, who is now chairman of the House Committee on Oversight and Government Reform, the commission still hadn’t provided any of the documents he requested.  In a reply letter to Mr. Issa this week, the commission’s chairman, former California Treasurer Phil Angelides, said that the panel’s staff members were too busy preparing the panel’s report to respond to all the questions. And now they’re packing up the commission’s materials to send off to the National Archives before they disband on Feb. 13

FCIC Report Turns a Blind Eye to Wall Street Fraud - The Financial Crisis Inquiry Commission is better than its reviews but still very disappointing. Its 545-page report represents a powerful, fact-filled indictment of the financial system and the leading players and institutions that produced the national catastrophe. But there is one glaring omission—the massive fraud that occurred on Wall Street. Some leading economists and former regulators (not to mention citizens at large) think fraud is a central explanation for what went wrong. The commission’s conclusions skip lightly over the matter—both civil fraud and go-to-jail criminal fraud. In this regard, the FCIC report resembles a giant haystack sprinkled with sharp needles. Somewhere in the FCIC’s daunting details are explosive revelations. But can citizens find or understand them? Not very likely; the six Democratic commissioners who produced the final report don’t mention any needles or provide any clues about how to find them. Instead, the commission blandly states that it has referred “potential violations” to “appropriate authorities.” But it won’t say how many cases were passed along to prosecutors or whether they involve big-name bankers or low-level clerks forging mortgage documents.

Follow the Money - Yves Smith - Despite its length, the Financial Crisis Inquiry Commission’s central conclusion, that the crisis was avoidable, merely validates conventional wisdom. The report fails to tie together elements like excessive leverage, imprudent investment, poor risk management, lack of government oversight and opaqueness. These conclusions, in turn, rest on one foundation, namely, massive fraud in the residential mortgage-backed security and collateralized debt obligation markets. But that’s insufficient. Why, starting in 2005, did investors increasingly demand not just any old subprime loans, but the “spreadiest” or worst, even as appetite for good mortgages was falling? The answer is simple: follow the money. John Paulson made nearly $20 billion for his hedge fund by shorting subprime. This amount of money was simply inconceivable in the mortgage business prior to that point. How did this happen? Paulson didn't make this money by investing in good loans, but by investing in bad ones. A small cartel subverted the market to create bad loans so they could bet against them. By any normal standard, this activity was both fraudulent and obscenely profitable.

The necessity of deleveraging - Bethany McLean has an excellent column on the FCIC report, concentrating on the explosion of debt among both homeowners and banks. The numbers bear repeating: From 1978 to 2007, the amount of debt held by the financial sector increased twelvefold, from $3 trillion to $36 trillion… The end of the housing market’s era of financial sobriety came, by one plausible reckoning, with passage of the Tax Reform Act of 1986. That much-praised legislation ended the tax deductibility of interest on credit cards and other consumer debt but left in place the mortgage interest deduction… On top of that, Citi was operating at 48-to-1 leverage, if you include its SIVs and whatnot; Frannie had 75-to-1 leverage; and Bear Stearns, with $12 billion in equity at end-2007, was borrowing as much as $70 billion overnight. What does all this devastating debt have in common? It’s tax deductible against income. The more you pay in debt service every year, the lower your taxable income. And so both banks and homeowners have a strong incentive baked into the tax code to load themselves up with as much leverage as possible.

Wallison is far too Kind to Fannie and Freddie - It is easy to understand why Commissioner Wallison’s lengthy dissent to the report of the Financial Crisis Inquiry Commission has received such poor reviews.  The first page of his dissent [p. 443] insults Congress, President Obama, former Congressman Rahm, the Democratic Commissioners, the Commission’s staff, and Democratic Congressmen in 1977, particularly Representative Frank.  His dissent is partisan and unprofessional.  It is also long. Despite those defects, however, Wallison has the virtue of emphasizing the key fact about the crisis that is most often misunderstood.  The conventional economic wisdom starts with the effort to explain a mystery – how could such a relatively small number of subprime loans have caused the Great Recession?  Wallison’s dissent stresses that there were in fact enormous numbers of nonprime loans.  The data on nonprime loans demonstrate several other points:

BAD NEWS: What Role Did Reporters Play In The Financial Crisis? - Given that some economists still debate the root causes of the Great Depression, little wonder that a multitude of competing stories still vies for affirmation as explanation for the financial crisis of 2008. Depending upon your ideological predisposition, the crisis owes to the greedy bankers who turned home loans into casino chips, or to the federal regulators who abdicated authority, allowing Wall Street to turn itself into a gambling parlor. It was homeowners who treated their mortgages like winning lottery tickets, cashing in through repeated rounds of refinancing. It was politicians who championed expanded home ownership with reckless tax incentives and mandates forcing banks to lend even to borrowers with sketchy credit. It was the Federal Reserve which kept interest rates too low for too long.  But one segment of American society has largely evaded scrutiny in the search for the source of the disaster: the financial press.

The Financial Crisis: Foreseeable and Preventable - From the NY Times Room for Debate forum Was the Crisis Avoidable, Jeffry Frieden writes: Economists of varied ideological bents warned of dangers in the housing and financial markets long before the crash..But there should be no dispute over the fact that there were major warning signals before the crisis. Nor should there be any dispute over the fact that more appropriate policies could have reduced the impact of the crisis, or avoided it altogether.  By 2003-2004, most analysts of international economic conditions were concerned by growing global macroeconomic imbalances, in particular, the fact that the United States was borrowing between a half trillion and a trillion dollars a year from the rest of the world. This huge capital inflow was fueling a financial and real estate boom, in ways typical of such borrowing experiences.  By 2005, most analysts agreed that these imbalances would cause serious problems, although the specific nature and timing of the problems were debated. All through 2005 and 2006, economists of varied ideological persuasions -- from Raghuram Rajan and Ken Rogoff to Nouriel Roubini and Robert Shiller -- warned of dangers accumulating in the housing and financial markets.

How the crisis catapulted us into the future - Did the financial crisis change very much? That was my question as I went to the annual meeting of the World Economic Forum in Davos last week. The answer is: yes. Above all, it has accelerated the arrival of our future. Even for the winners, this is quite a shock. It is three and a half years since the financial crisis began and a little more than two years since it reached its worst. With the crisis fading into memory, how will historians assess its legacy? Journalists do not have the luxury of distance. So here are my guesses. I will start with possible turnrounds.The crisis was neither the beginning of a depression nor the end of capitalism. But it has caused a tightening of financial regulation, particularly of banks, though this has occurred within the pre-existing intellectual and institutional framework. After three decades of deregulation, movement is in the opposite direction, though not without resistance.

The Great Panic of 2015: The next worldwide financial crisis could be a scary replay of the Great Recession. - The Great Recession officially started in December 2007. But the better question is not when the last financial crisis began, but when the next one will.According to some creative analysts at the management consulting firm Oliver Wyman, that date is April 26, 2015. In a paper presented last week at the World Economic Forum in Davos to much chattering from the fur-and-cashmere class, Wyman analysts imagine an all-too-familiar scenario coming back all too soon. The next time, the authors say, the fat-cat financiers will be in Singapore or Hong Kong, chased away from New York and London by stricter reserve requirements and emboldened regulators. The bubble will appear in developing markets, with easy developed-world money and the promise of ever-spiraling commodity prices funding unnecessary building and silly investments. So there you have it—again: a big pool of money chasing market-beating returns and ultimately inflating asset-price bubbles that burst with awful consequences, from bank failures to sovereign-debt crises.

How Banks Influence People in High Places - Yves Smith - This e-mail to Congressional staffers speaks for itself. I am probably being far too nice by omitting the RSVP details. However, I must note the ethics rules for Congress are more lax than those of some private sector companies. I had one client, a Fortune 25 company, that forbade all employees from taking gifts or entertainment of any kind from vendors, down to a cup of coffee. And that’s not as nuts as it sounds. Research by social psychologist Robert Cialdini verifies that a gift as small as a can of soda predisposes the recipient to a sales pitch.From: The Financial Services Roundtable. Subject: Financial Services University (FSU) Seminars ~ Feb 10-11

On Wall Street, pay vaults to record altitude - When it comes to paychecks, Wall Street's law of gravity is back in full force: What goes down must come back up. In 2010, total compensation and benefits at publicly traded Wall Street banks and securities firms hit a record of $135 billion, according to an analysis by The Wall Street Journal. The total is up 5.7% from $128 billion in combined compensation and benefits by the same companies in 2009. The increase was fueled by a revenue rebound as the financial crisis recedes in the rearview mirror. At 25 large financial firms that have reported full-year results, revenue rose to $417 billion, another all-time high, even though last year's 1% increase was just a fraction of the industry's revenue jolt from 2008 to 2009 as trading and investment banking sprang back to life. "Things are shifting back to where they were before,"

Breaking Records: High Pay on Wall Street, Low Wages on Main Street - Last year sucked, didn’t it? The recession dragged on, unemployment kept rising, wages fell… It turns out, though, there was one place where the streets were lined with gold: Wall Street. Yup, pay on Wall Street broke a record last year, hitting $135 billion — up 5.7%. Revenue for firms is up to $417 billion, another record, rising 1%. And executives are seeing fit to give themselves a big pat on the back for that achievement, whether their firm saw such profits or not — million dollar back pats. Even though Goldman Sachs’ earnings are down 37% from 2009, pay is way up: head honcho Lloyd Blankfein will get $13.2 million in compensation for 2010. He’s also getting a raise, with his base pay going from $600,000 to $2 million, and the base pay for all 470 partners will go up, the first time it’s been raised since the company went public in 1999. Blankfein’s not the only one seeing green: Blackrock CEO Laurence Fink is getting a bonus of $13 million, one of the largest for this season. But let’s not forget: bankers still aren’t getting paid enough.

Croesus Watch: Banker Pay Levitates to New Highs - - Yves Smith - Oh, I need a new round of black humor as a coping device to deal with the predictable but nevertheless disheartening news that banksters are getting record pay for 2010, after having gotten record pay for 2009…after having wrecked the global economy.  If this isn’t incentivizing destructive behavior, I’d like you to suggest how we could make this picture worse. A newspaper ad for the swaps salesman that tanked the most municipalities? Ticker tape parades for the deal structurer that was best at pulling most fees out of clients in ways they wouldn’t detect? (Oh wait, you’d have to include pretty much every derivative salesman) Honorable mention for the banker with the biggest expense account charges in the industry? (Oh wait, that’s not the right metric, we learned in Inside Job that the drugs and hookers get charged to research budgets. Damn).  My pet joke from the dot bomb era scandals is now looking a bit tired: If you steal $1000 from the local convenience store, you go to jail for ten years. If you steal $100 million, you get called before Congress and get called bad names for ten minutes.

Regulators press for trader pay ‘clawbacks’ -Regulators are pressing banks to include more “clawbacks” and “holdbacks” in traders’ pay as part of an overhaul of compensation at financial institutions, according to people familiar with discussions between the industry and its supervisors. The Federal Reserve, Federal Deposit Insurance Corporation and other regulators are expected to propose on Monday that a high proportion of bonuses for senior executives at banks with more than $50bn in assets should be paid over at least three years, rather than in large annual cash sums, these people said. Regulators are also looking to instil more conservative compensation practices among more junior staff. Boards of the largest banks will be told to identify employees who could put their companies at “material risk” of failure and ensure that their pay is held back for several years, and cancelled if their trading or loans go bad.

The Specious Logic of Wall Street Pay -  Yves Smith - It’s remarkable how Masters of the Universe, the new financial elite first identified by Tom Wolfe in 1986, remember nothing and regret nothing. And why should they? Their position remains remarkably secure 25 years later. We see the “Who us, take responsibility for our actions?” stance in full view courtesy one of their most effective spokesman, Steve Eckhaus, an attorney who has negotiated many big ticket Wall Street compensation contracts. From the Wall Street Journal: “It was understandable why there was anger,” says Mr. Eckhaus, but “the crisis was not caused by Wall Street fat cats. It was caused by a confluence of economic, political and historical factors.”.. In general, he said his clients are “pure as the driven snow” and doing work that supports the economy and justifies their pay…. “You have to know what the profits are” to know what someone should make, said Mr. Eckhaus, noting Wall Street’s top performers usually gobble up 80% of the bonus pool. “Those who are responsible for profits should share in the profits in a way that rewards them.”"

A Goldman Partner Explains The Value Goldman Sachs Is Adding To Society - A New York Times reporter really stuck it to Abby Cohen, a Goldman partner and one of the firm's most high profile analysts, in an interview published today. The two go at it for about 10 questions, which we'll divide into sparring rounds, and we'll spoil it and tell you that the winner is not Cohen.  The best (worst?) part is when the Deborah Soloman asks Cohen what value high-paid financiers add to society. Cohen comes up with two things. She says: Without banks it’s hard to see how businesses would get the money they need to grow and to hire new workers. Let’s not lose track of the fact that most people need to borrow in order to buy a home, and if you don’t have banks, that’s not going to happen. Her answer is interesting because at face value neither of them are central to Goldman's business.

A Cross of Rubber, by Paul Krugman- Last Saturday, reported The Financial Times, some of the world’s most powerful financial executives were going to hold a private meeting with finance ministers in Davos... The principal demand of the executives would be that governments “stop banker-bashing.” Apparently bailing bankers out after they precipitated the worst slump since the Great Depression isn’t enough — politicians have to stop hurting their feelings, too. But the bankers also had a more substantive demand: they want higher interest rates, despite the persistence of very high unemployment in the United States and Europe, because they say that low rates are feeding inflation. And what worries me is the possibility that policy makers might actually take their advice. To understand the issues, you need to know that we’re in the midst of what the International Monetary Fund calls a “two speed” recovery, in which some countries are speeding ahead, but others — including the United States — have yet to get out of first gear.

Another Kind of Financial Fragility - Recent events have a lot of economists working hard at trying to determine the causes of financial fragility — the vulnerability of some economies, ours very much included, to disruptive shocks that cause credit and spending to freeze. But recent events have also highlighted another kind of financial fragility: the sensitive egos of powerful bankers. I’ve been calling this the Ma! He’s looking at me funny! syndrome; it’s quite something to behold. In a way, it sort of makes sense. Anyway, a good read from Reuters about the fragile ego of Jamie Dimon, who is not only wealthy beyond count but has also received a lot of fawning press. But it’s apparently not good enough.

Unofficial Problem Bank list at 946 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources.  Here is the unofficial problem bank list for Feb 4, 2011. Changes and comments from surferdude808:  Mergers, both unassisted and FDIC- assisted, contributed to a slight reduction in the number of institutions on the Unofficial Problem Bank List this week. There were five removals and two additions, which leaves the list with 946 institutions with assets of $411.1 compared with 948 institutions with $410.9 billion last week.

JPMorgan Hid Doubts on Madoff, Documents Suggest - Senior executives at JPMorgan Chase expressed serious doubts about the legitimacy of Bernard L. Madoff’s investment business more than 18 months before his Ponzi scheme collapsed but continued to do business with him, according to internal bank documents made public in a lawsuit on Thursday.  On June 15, 2007, an evidently high-level risk management officer for Chase’s investment bank sent a lunchtime e-mail to colleagues to report that another bank executive “just told me that there is a well-known cloud over the head of Madoff and that his returns are speculated to be part of a Ponzi scheme.”  Even before that, a top private banking executive had been consistently steering clients away from investments linked to Mr. Madoff because his “Oz-like signals” were “too difficult to ignore.” And the first Chase risk analyst to look at a Madoff feeder fund, in February 2006, reported to his superiors that its returns did not make sense because it did far better than the securities that were supposedly in its portfolio.

Three takes on JP Morgan and Madoff - I love the NYT’s coverage, by Diana Henriques, of Irving Picard’s lawsuit against JP Morgan Chase. Not only has the NYT put the lawsuit online in full, but it also regularly links to the exact page of the lawsuit that it’s talking about, using the nifty NYT document viewer. As you’d expect from the NYT, the story is clear and accurate, with handy interactive sidebars and audio extras. Alongside the official NYT coverage, Floyd Norris wrote a blog on the case. He picks up on something quite astonishing: JP Morgan had created products which paid out the return on Madoff’s funds. In order to hedge that exposure, JPM was naturally invested in those funds. But even as it retained its exposure to its investors, JPM took its money out of the funds. “JPMC was still required to pay its investors based on the returns generated by the BLMIS feeder funds, which were generating positive returns when the market was down,” says the complaint drily. “But for JPMC’s suspicions about fraud at BLMIS, this move would have been counterintuitive.”

What's good for CEOs isn't good for America - The day after President Obama's State of the Union speech, Mitt Romney appeared on Fox News' "Hannity" to offer his insights as to what the United States needs after two years of "the most anti-investment, anti-business, anti-jobs regimen we've seen probably [in] the last couple of decades." And as if that wasn't hurtful enough, Romney followed up with a slam aimed not only at Obama, but at all the other likely 2012 Republican candidates for president.I don't know who else is going to get in the race but I do believe that it would be helpful if at least one of the people who's running in the Republican field had extensive experience in the private sector, in small business, in big business, working with the economy. Because frankly, not just solving the near term problems of unemployment, people not getting checks, is going to require someone with that experience, but also long term. We've got to have a strong economic foundation to make sure that we can stay ahead of the challenges we face, like a growing China and a militarily aggressive China.

AIG CEO: Liberals are deadbeats - Could Treasury Secretary Timothy Geithner please send someone over to AIG to slap some sense into CEO Robert Benmosche? I am aware that the man is undergoing chemotherapy in a fight against cancer, but that's no excuse for the remarks he made at an insurance conference in Washington on Tuesday. According to Benmosche, cultural reasons explain why AIG's mortgage insurance subsidiary is doing better in red states than blue states "All of the states where we're a leader, where we're the No. 1 insurer, are red states, all of the states where we're at the bottom are blue states," "Part of what we found out is that our model is about culture and it's about the attitude in the public. And what we find is where there's more of a tendency for people to be more liberal, more that the government is responsible for what happens to me." In other words, liberals are deadbeats. They're not buying mortgage insurance because they'll be happy to walk away from their loans.

The rentership society - Economists Ed Glaeser, Joshua Gottleib, and Joseph Gyourko have presented convincing evidence that interest rates probably aren't responsible for big increases in housing prices. From this chart, however, it does look as though interest rates have a big impact on homeownership rates. Homeownership tumbled as mortgage rates rose above 16% in the early 1980s. They levelled off as rates fell back to around 10% between 1985 and 1990, and then around 1994, as rates slipped below 8%, homeownership surged again. That's one interesting thing. Another interesting thing is that from 1994 to 2005, the homeownership rate rises steadily, with no real trend break and almost no change in slope. This is funny for a couple of reasons. First, mortgage rates rose back above 8% in 2000, and the country then slipped into recession. You'd be hard-pressed to see any sign of that in the chart above. And second, after 2001, rates fell to near 5%—incredibly cheap by historical standards—and yet there's no acceleration in growth in homeownership.

Why Were FNM/FRE Banned From Lobbying But Not C/BAC/JPM/MER/GS/MS ? - Let’s start with the FACTS, something Washington D.C. seems to be allergic to: When the GSEs were put into conservatorship by Hank Paulson, several steps were immediately effected: The CEOs and much of the senior management were fired. One of the very next steps put into place was a total ban on all political activities, including — most especially — lobbying. Common stockholders were placed last in line for any claims, with preferred shareholders right behind them. Compare that to the rescues of Citigroup, Bank of America, Merrill Lynch, and the rest of the bankers wrecking crew. The vast majority of senior management and board members who created and oversaw their own implosions are still in place. A report on Corporate Governance by Professor Emma Coleman Jordan of the Georgetown University Law found that 92% of senior bank execs were still working in their same jobs. But worse of all, at any insolvent banking institution not named Fannie or Freddie,  none of the POLITICAL ACTIVITIES, CAMPAIGN DONATIONS OR LOBBYING ACTIVITIES were halted. It was business as usual on capital hill, for the bankrupt banks and their highly paid shills.

Wall Street Co-Opting Nominally Liberal Think Tanks; Banks Lobbying to Become New GSEs - Yves Smith - While the shiny bright object these days in DC is health care repeal, or perhaps Egypt, in quiet corners in think tanks and trade associations the bankers and their allies are getting ready to appropriate themselves a permanent US credit card worth trillions of dollars. The dynamic that became all too familiar during the bailouts is about to repeat itself. Barney Frank’s great moral passion is low-income housing, and that’s not an accident. The traditional alliance in financial politics since the 1950s was between liberal low-income housing advocates and Wall Street financiers. Since the 1970s, Democrats tried to balance the two sets of interests by creating consumer protections but allowing the capital markets to manage themselves. This dynamic has created a serious political problem in the last four years, because complete capitulation to the banks in the capital markets has pillaged the low-income and middle-income communities the Democrats thought they were standing up for. It’s not that the people who made this Faustian bargain are bad so much as they are fundamentally irresponsible and childish. The breakdown of law and order in the capital markets arena has created predatory lending, and ultimately has subverted any attempt to implement new laws. Dodd-Frank not just a weak response to the crisis, but actually downright pathetic thanks to the lack of prosecution for anyone who breaks the rules set forth in the bill.

Competition pushes US banks to ease credit - Competition to lend to large US companies is forcing banks to start easing credit terms according to the latest Federal Reserve survey of senior credit officers.  Twenty-eight out of 30 banks that eased some of their terms on business lending in the past three months said “more aggressive competition from other banks or non-bank lenders” was important in their decision. Growing competition to lend to prime corporate borrowers is one of the first signs of “animal spirits” returning to the US banking sector. It will fuel hopes that growth will be less constrained by credit and deleveraging during 2011. Banks are preparing for lending to become more competitive.Large companies may also be finding an appetite to borrow, especially for mergers and acquisitions.

 CMBS takes a beating as delinquencies reach record high - Commercial mortgage-backed securities delinquencies hit a record high, as the cumulative total jumped 20 basis points. According to a securitization report by Barclays Capital, 9.1% of all CMBS loans were 60 days or more delinquent as of Jan. 31.Data analytics firm Trepp also reported CMBS delinquencies on the rise. The firm said loans 30-days delinquent hit a record high in January at 9.34%.The multifamily sector was up 120 bps to a 15.8% delinquency rate, according to Barclays Capital. Industrial delinquencies increased the most month-over-month yet still remained below multifamily, up to 8.9% from 6.3%. In the lodging sector, 17% of CMBS are delinquent, Barclays said.

CRE “extend and pretend” reaching breaking point - For 2011, 10 of the 11 banks that have closed so far showed bad commercial real estate loans taking the lion's share of the distressed loan book. In six of those cases, losses on bad construction loans made up more than half of the bank's nonperfoming loans. According to Trepp Analytics, CRE loans comprised $600 million, or 82% of the $732 million in nonperforming loans. For the past two years, lenders followed a trend of refinancing the terms of the loan, in a strategy called "extend and pretend." Losses on those loans leading to bank failures show a distinct end to that practice, at least in markets where commercial real estate is struggling. Standard & Poor's recently added that they still expect modifications to remain high in 2011, although liquidations are projected "to increase as a percentage of total resolutions as market conditions improve," . "For awhile commercial real estate servicers were happy to clunk along and extend the terms of loans,"  "But now as they are facing their own reserve challenges they want to see who's putting fresh equity in the game."

Q4 Investment: Office, Mall, Lodging and Residential Components - The advance Q4 GDP report released last Friday showed a small annualized real increase of 0.8% for investment in non-residential structures. This broke a streak of nine straight quarterly declines. Note: this gain might be revised away.  With the release of underlying detail data yesterday - we can see that the reported small gain for non-residential structure investment in Q4 was mostly for power and petroleum mining structures.   If we look at just office, mall and lodging investment, non-residential structure investment continued to decline in Q4.This graph shows investment in offices, malls and lodging as a percent of GDP. Office investment as a percent of GDP peaked at 0.46% in Q1 2008 and has declined sharply to a new series low as a percent of GDP (data series starts in 1959). Investment in multimerchandise shopping structures (malls) peaked in 2007 and has fallen by two-thirds (note that investment includes remodels, so this will not fall to zero). Mall investment is also at a series low (as a percent of GDP).  The bubble boom in lodging investment was stunning. Lodging investment peaked at 0.32% of GDP in Q2 2008 and has fallen by over 70% already.

Delinquency Rate Hits Record 9.34% - Even as banks are restarting the engines of their long-dormant commercial real-estate lending shops, old loans continue to fall into default faster than they can be worked out, with the delinquency rate for commercial mortgage-backed securities reaching a new high last month. The missed-payment rate for all U.S. CMBS hit a record 9.34% in January, according to figures of research firm Trepp LLC. "I think people at this point would have expected it to level off a little bit more," says Manus Clancy, managing director of Trepp.

My Most Libertarian Post Ever - Most people think that Fannie Mae and Freddie Mac had something to do with the financial crisis. Some people think that they were the major reason the crisis happened, which (to them) proves that activist government policy was the cause of the crisis. Other people, including me, think they were a modest contributing factor because they did buy a lot of securities that were backed by subprime loans, but they were well behind the curve when it came to mortgage “innovation” and the creation of toxic assets. But that’s not the question here. The question now is what to do about them. Although they had been private, profit-seeking companies for forty years, they were taken over by government regulators in September 2008 when they had become clearly insolvent, and are still being operated in conservatorship. Because Fannie and Freddie were very, very long housing, they have suffered massive losses since the financial crisis began. But because the private mortgage securitization market has collapsed, they are the bulk of the secondary mortgage market at the moment, which means the housing market could collapse without them.

Correcting James Kwak - This post about Freddie Mac and Fannie Mae does not reach a fundamentally unsound conclusion. However, along the way, I think he gets a number of things wrong. First, a minor correction. He writes, If thirty-year fixed-rate assets are bad, that means no one would buy thirty-year U.S. Treasury bonds, yet people do (at 4.53 percent). A bank could originate a thirty-year fixed-rate mortgage and just buy an interest rate swap to hedge the interest rate risk. Yes, there are 30-year Treasuries. But the volume is miniscule compared to the volume of 30-year fixed-rate mortgages. Without Freddie and Fannie willing to hold 30-year fixed-rate mortgages in portfolio, the market would not be as deep. I think that those who worry that the 30-year fixed-rate would be more expensive without Freddie and Fannie have a point.

White House Allies Push Bank Lobby Line On Government Mortgage Reform  -- Quiet discussions are going on between Washington and New York's financial elite circles to chart a course forward for the mortgage market and the federal government's role in it.  The loan-guarantee structure built during the Great Depression created the safe and effective 30-year mortgage. But the system spiraled out of control over the past decade as banks took advantage of Fannie Mae and Freddie Mac's too-big-to-fail status to dump other garbage loans on the taxpayer. The housing collapse led to the seizure of Fannie and Freddie, which the government now holds in limbo as banks continue to back up garbage trucks and deposit the waste of the past decade.  How to reform this system while maintaining continuity of the availability of affordable, 30-year mortgages is the question facing policymakers. How to make billions of dollars while doing it is the question facing banks. Now, a leading liberal think tank has put forward a reform agenda similar to that of the banks. Last week, the Center for American Progress rolled out its plan to reform the government-owned mortgage giants currently propping up the U.S. housing market. Progressive critics have been quick to cry foul.

The Debate over the GSEs and the 30-Year Fixed Mortgage.  - Every advance country in the world has some regulation and government involvement in their mortgage market.   In 2011 we are going to discuss the proper role of the government and the United States’ mortgage market as GSE reform comes into the public. James Kwak has two posts, which brought some helpful comments from Arnold Kling. Yves Smith and Zach Carter shoot a round off at Center for American Progress’ GSE proposal.  Before this wanders too far into the weeds, there’s a few simple questions that will guide where reform needs to go.  Raj Date from Cambridge Winter came up with a decision tree about GSE reform that I think was very helpful.  You can zoom into the full tree here:

Ally Financial Humans Fix 90% of Robo-signed Documents - Ally Financial, the bank holding company formerly known as GMAC, has fixed about 90% of its 25,000 robo-signed foreclosure affidavits. GMAC, which at time of writing is 74% owned by the Treasury Dept (after its $17 billion TARP investment), just hired an adviser for its IPO later this year. From Housing Wire: The bank earned $79 million during the fourth quarter. But it proved to be a period of corrections for the lender. Along with a multi-million settlement with Fannie Mae over representations and warranties, the bank began correcting affidavits signed en masse and without a review of the documentation as required by law in 23 states. Ally said all but 2,548 affidavits in three states have been remediated or re-executed. The bank did not disclose which states exactly, but added the delay was due to stricter foreclosu processes in those areas.

How Servicer Junk Fees Push Borrowers into Foreclosure - Yves Smith - A story at Huffington Post by Shahien Narisipour and Arthur Delaney, about how a couple lost their home as a result of the Administration’s HAMP program, actually serves to illustrate a broader issue, namely, how servicers’ dubious fees can put mortgage borrowers hopelessly under water.  It is critical to understand that it is not uncommon for borrowers to lose their homes thanks to servicer errors and abuses. And this bad practice has policy implications. Whenever we discuss “fix the housing mess” solutions that involve loss sharing, like giving viable borrowers a deep principal mod, some readers react that “deadbeat borrowers” are getting a free ride, and often will contend that they were irresponsible and need to take their medicine.  This black/white picture is simplistic and misleading. Yes, there were people who borrowed too much in the bubble. Guess what? Those people tended to have been subprime borrowers and the resets on teaser loans had pretty much concluded by the end of 2008. As a result, they would have been relatively early to hit the wall. Many have already lost their house.

HAMP Paperwork Blizzard - Those of us in the upper Midwest have blizzards on the brain.  On Monday the Treasury Department released its loan-level data files on the more than 2.5 million mortgage borrowers who have sought help from the Home Affordable Modification program.  Not surprisingly, the data confirm that homeowners are being done in by paperwork.  For example, of the 1.2 million homeowners who were non-accepted (Treasuryspeak for rejected), only 6% were turned down because they failed the net present value test, i.e. because a modification wouldn't make economic sense for the investor.  Much more common were denials because the homeowner was not considered to be payment-stressed (20%), not in imminent danger of default (11%), couldn't meet paperwork requirements (21%) or had the misfortune to have an ineligible mortgage (18%).  Many of those identified as having withdrawn applications (8%) could also have fallen victim to the paperwork shuffle.

One in Five Mortgages Default Again After Modification - One in five U.S. homeowners whose loans were modified under a federal government program to help reduce foreclosures were at least 60 days late in their payments a year after their mortgages were reworked.  The re-default rate for the Making Home Affordable Program averaged 20.4 percent after 12 months, 15.9 percent after nine months, 10.7 percent after six months and 4.6 percent after three months, according to a report released today by the Treasury Department.  The program has been criticized by housing advocates, lawmakers and watchdog groups. The number of active, permanent modifications reached 521,630 as of Dec. 31 under the program, which originally was intended to help 3 million to 4 million homeowners save their properties from being seized by lenders.

Fannie Mae and Freddie Mac Delinquency Rates decline slightly - Fannie Mae reported that the serious delinquency rate decreased to 4.50% in November from 4.52% in October. Freddie Mac reported that the serious delinquency rate decreased to 3.84% in December from 3.85% in November. These are loans that are "three monthly payments or more past due or in foreclosure". Some of the rapid increase over the last couple of years was probably because of foreclosure moratoriums, and also because loans in trial mods were considered delinquent until the modifications were made permanent. As modifications have become permanent, they are no longer counted as delinquent.  The increases for Freddie Mac in October and November were probably related to the new foreclosure moratoriums. Now it appears the rate has started to decrease again.

Bank legally bound by loan-modification promise - A bank is legally bound by its promise to try to work out a loan modification with a homeowner to avoid foreclosure, a state appeals court has ruled. Thursday's decision by the Second District Court of Appeal in Los Angeles involved a homeowner who said she refrained from protecting her home in a Bankruptcy Court filing after the bank promised to negotiate new loan terms - then foreclosed and evicted her. The court refused to undo the foreclosure but said the owner, Claudia Aceves, could sue the bank for fraud. Her lawyer, Nick Alden, said the ruling should also help financially distressed homeowners who make several months of reduced payments in reliance on a bank's promise to modify their mortgages. "The homeowner has no choice but to work with the bank," Alden said. Typically in such cases, he said, the lender will reject the final payment as insufficient, declare the borrower unqualified for a loan, and foreclose.A lawyer for U.S. Bank, the lender in the case, was unavailable for comment.

So How Did Major Law Firms Lose Deal Documents on the Way to the Massachusetts Supreme Judicial Court? - Yves Smith - At the time of the now famous Ibanez decision, in which the Massachusetts Supreme Judicial Court dealt the securitization industry a not-all-that-surprinsing loss by saying that lenders and servicers had to be able to produce reasonable evidence that the mortgage had indeed been transferred to the party that was trying to seize the house. We were reminded of an outstanding mystery in the Ibanez case by a story tonight by Abigail Field on the role of carelessness by lawyers in the mortgage mess. She mentions a stunning aspect of the Ibanez case, one that quite a few observers, including yours truly, discussed privately at the time: that neither of the banks involved in the case produced a decent set of transaction documents (US Bank didn’t even provide a copy of the pooling and servicing agreement).  It is hard to convey how surprising this revelation is. If you have participated in any kind of corporate transaction, even at the small business level, your attorney as a matter of course will keep a signed copy of the agreement and any important related documents. The servicers and trustees would know that full well. So why did no one call issuer’s counsel and get the paperwork?

BofA admits they quit delivering default notices last fall. – Dusty - Oh, this just gets uglier and uglier for Bank of America. From the WSJ: BofA Resumed Default Notices Last Year After Brief Halt (Dow Jones)--Bank of America Corp. (BAC) confirmed Tuesday that during its nationwide moratorium on foreclosures last fall, it also stopped delivering notices to delinquent homeowners that typically inform borrowers the bank is starting foreclosure.The bank resumed foreclosures it had halted, along with notices of disclosure, in December.That the bank specifically stopped issuing notices of default to borrowers during its moratorium is a new line in a story the bank longs to close. It is also not terribly surprising, given it was unlikely the bank would have initiated foreclosures during its review of its processes.Earlier Tuesday, CNBC reported the bank had stopped notice of defaults in some states, along with the halt to foreclosure sales in the rest of the country that had been the focus of most reports on the problem. That report followed an article in the American Banker that highlighted notices of default as another possible legal headache for banks. The article said lawsuits have started pointing to issues in notices of default that echo issues found in foreclosure files that caused waves in the industry.

Proposed class action targets BofA on foreclosures - The suit, a proposed class action, says Bank of America concealed defects in the recording of mortgages, which harmed investors when the company had to temporarily discontinue foreclosures last fall. "We are reviewing the lawsuit and have no further comment at this time," Along with other lenders like JPMorgan Chase & Co and Wells Fargo, Bank of America has been the subject of scrutiny over its foreclosure practices. Attorneys General from 50 states kicked off an investigation last year amid questions about legal documents submitted in court.And while litigation from angry borrowers has mushroomed, many of the leading U.S. class action firms have stayed out of the fray, citing the difficulty of recovering substantial damages.

More Judges Pushing Back on Dubious Foreclosure Documents - - Yves Smith - Even though this example involves only three judges in Ohio, don’t underestimate its significance. The fact that judges of their own initiative have started insisting that all attorneys provide certifications of foreclosure-related documents, a standard now in effect in New York state, shows how much their credibility has fallen. From the Columbus Dispatch In response to a national outcry over fraudulent foreclosure filings, three Franklin County judges are requiring lawyers to verify that all of the documents in residential-foreclosure actions are valid.Six of the lawyers affected by the order are fighting back. They have asked the Ohio Supreme Court to prohibit the judges from requiring them to sign “certifications” on behalf of their clients….Among the 17 judges in the Common Pleas general division, at least two others – Laurel Beatty and David W. Fais – had intended to mail the orders to lawyers but stopped after the complaint was filed with the Supreme Court….

Florida Bar Says Attorneys Must Report Foreclosure Fraud to Judges - - Yves Smith - Florida, which has been Ground Zero of the foreclosure crisis as well as a hotbed of judicial abuses, ranging from the biggest and most active foreclosure mills to kangaroo courts known as “rocket dockets”, has taken a surprising step in the right direction. The state bar association has told foreclosure lawyers in no uncertain terms that they have a duty to report fraud to the court, and that supersedes their responsibilities to clients. And even more surprising, the duty is retroactive: lawyers are supposed to inform judges even if the home has already been sold!  This move will have the very salutary effect, if the new order were actually followed, of having judges know the extent of servicer abuses. And the side effect would be even greater skepticism on the behalf of judges (well at least those judges not bought and paid for by the banking industry). Even if lawyers complied in only, say, one-quarter of the abuses, the effect on servicer credibility, which has already taken a big hit, would be considerable.

Bet on Foreclosure Boom Turns Sour for Investors - Early in 2010, the back-office processing operations of Mr. Stern’s law firm were converted into a publicly traded company called DJSP Enterprises. Mr. Stern pocketed nearly $60 million from that transaction, public filings show.  Behind that big-money deal was a curious cast of characters, including some with previous run-ins with regulators. Other parties included a small Wall Street investment bank headed by a former presidential candidate, the retired Gen. Wesley K. Clark, and a little-known private equity firm based in New York.  As the Florida attorney general’s office continues to investigate whether Mr. Stern’s law firm falsified documents in order to speed up foreclosures, the firm has lost its biggest clients, including Citibank and Fannie Mae. Many of DJSP’s executives have left the company, and it has laid off about 80 percent of its 1,200 employees.

Foreclosed Homeowners Go to Court on Their Own - Saving your home from foreclosure is increasingly a do-it-yourself project.  Lawyers are scarce and free legal assistance is overwhelmed in New Mexico, so a community center here is offering an hourlong class in how to download the correct forms, decipher the lingo and mount a defense, however tentative and primitive, against a multibillion-dollar bank.  In New Mexico, New York, Florida and the 20 other states where foreclosures require a judge’s approval, homeowners in default have traditionally surrendered their homes without ever coming to court to defend themselves. (In the 27 other states, including California, Nevada and Arizona, homeowners have a much harder time contesting a foreclosure even if they want to.)  That passivity has begun to recede. While many foreclosures are still unopposed, courts are seeing a sharp rise in cases where defendants show up representing themselves.

Fraudclosure: Will State AGs Step Up to Their Moment in History? - Rumor has it that the 50-state attorney general investigation into the Fraudclosure scandal is wrapping up. It's time for a backbone check. Will the state attorneys general just ask the big banks and service providers to turn over a chunk of change from seemingly bottomless pockets? Americans know that the big banks and the mortgage service providers got us into this hole by pursuing an array of financial crimes. The SEC settlements alone have revealed a plethora of illegal, predatory and deceptive lending related to mortgages, securities fraud, accounting fraud, insider trading, brokerage fraud, bribery of government officials, criminal conflict of interest, deception of shareholders and investors, and more.  Now the "robo-signing" scandal is pulling back the curtain on Act II of this white collar crime spree -- revealing a new array of financial crimes by the very same institutions: robo-signing, fake witnesses, fake notaries, fake documents, fake attorneys, not to mention plain old theft as servicers rob consumers of hundreds or thousands of dollars in misapplied fees. There are additional crimes related to the way that banks have failed to correctly transfer promissory notes through the system and efforts to mislead and defraud investors. The short story is that many homeowners were foreclosed upon based on falsified documents by a bank who was not the true holder of the mortgage note.

Shadow inventory to push foreclosures to new heights - Two reports from separate credit rating agencies are drawing the same conclusion: Foreclosures will reach new heights this year, even after setting records in 2010. It was hoped that mortgage delinquencies, and subsequent foreclosure filings, had peaked. Until that moment, the stockpile of properties facing imminent default, the "shadow inventory," will continue to threaten to further glut real estate market supply, with downside knock-on impact."DBRS expects foreclosure filings and completed foreclosures to reach record levels in 2011 as alternatives such as modifications for seriously delinquent borrowers are exhausted," said Kathleen Tillwitz, an operational risk strategist at the rating agency. "Consequently, losses to residential mortgage-backed securities will likely increase as REO inventories are sold at deep discounts causing writedowns in transactions — particularly the subordinate tranches."

Low rates prompting more 'cash-in' refinances - A record number of homeowners are kicking in cash when they refinance their mortgages, in most cases to qualify for interest rates that are now near historic lows, mortgage financier Freddie Mac reported this week.  In the fourth quarter, 46 percent of borrowers who refinanced their primary mortgages brought cash to settlement to lower the balance on their loans, Freddie Mac said. That's the highest share of so-called "cash-in" refinances since the company started tracking the numbers in 1985.  Borrowers, in essence, are buying peace of mind about their debts by moving to more affordable mortgages and, according to the firm, coming out ahead by using cash that's earning little interest in the bank to realize significant savings on their monthly loan payments.

Learning To Walk: Fear, Shame And Your Underwater Mortgage -- Nearly one in every four homeowners across the country owe more on their home than it's worth. Once a month, those 10.8 million are faced with a question that cuts to the core of the American Dream and offers a confusing collision between a deep-seated sense of personal obligation and a cold, simple business calculation: Should I pay my mortgage?  For decades, there was only one answer for most people: Of course I should keep paying, it's the right thing to do. Besides, the argument went, a home is a great investment. Today, in the wake of the most seismic housing collapse in the nation's history, that logic has increasingly been challenged by homeowners despondent about their lack of options. Although researchers find that some underwater borrowers who could continue paying their mortgages strategically default anyway, the vast majority continue to pay. Many homeowners, out of a combined sense of fear, shame, courage and morality, resist making what is otherwise a logical financial decision. Walking away from a home, however, is more than the sum of a few business decisions.

Lawler: How Many Folks Have “Lost Their Homes” to Foreclosure/Short Sales/DILs? - According to Hope Now estimates, completed foreclosure sales (rounded) were about as follows over the past few years. While these numbers are disturbingly high, they are not nearly as large as one would have expected given the surge in seriously delinquent loans and loans in the process of foreclosure. For the latter, here is a chart based on data from the MBA’s National Delinquency Survey, which covers “over 85%” of total 1-4 family first-lien mortgages. On one side, the “completed foreclosure sales” understates the number of homes “lost,” given that many homeowners have “lost” their homes but been able to negotiate a short sale or (much less likely) done a deed in lieu of foreclosure. While there are no official estimates of either short sales or DILs, there is no doubt that the volume of short sales increased dramatically in 2009 and 2010.  Using CoreLogic’s estimates and grossing them up to reflect its incomplete geographic coverage, one would get short sales estimates of around 78,000 for 2007, 164,000 for 2008, 278,000 for 2009, and 331,000 for 2010.

Homeownership Tanks to 12 Year Low -A smaller percentage of American households own their own homes today than at any time since 1998, a dramatic decline from the all-time high in homeownership just six years ago.  The homeownership gap between white and minority households is approaching 30 percent, greater than it has ever been as long as data has been kept. The national homeownership rate fell to a seasonally adjusted 66.6 percent in the fourth quarter of last year, according to the Census Bureau, down .4 percent from the third quarter and .7 percent from the fourth quarter of 2009.  Homeownership reached its all-time high in the fourth quarter of 2004, at 69 percent.  The last time homeownership was lower than it is today was the fourth quarter of 1998, at 66.5 percent. Among minorities, homeownership rates fell even more and.  Only 44.8 percent of Black households now own their own homes, down from 48 percent in 2007.  Among Hispanics, 46.8 percent are homeowners, down from 50.1 percent in 2007.  Non-Hispanic Whites have a homeownership rate of 74.2 percent.

Q4 2010: Homeownership Rate Falls to 1998 Levels - The Census Bureau reported the homeownership and vacancy rates for Q4 2010 this morning.  The homeownership rate was at 66.5%, down from 66.9% in Q3. This is at about the level as 1998. The homeownership rate increased in the '90s and early '00s because of changes in demographics and "innovations" in mortgage lending. Some of the increase due to demographics (older population) will probably stick, so I've been expecting the rate to decline to around 66%, and probably not all the way back to 64%. The homeowner vacancy rate increased to 2.7% in Q4 2010 from 2.5% in Q3 2010. This has been bouncing around in the 2.5% to 2.7% range for two years, and is slightly below the peak of 2.9% in 2008. A normal rate for recent years appears to be about 1.7%.  This data is not perfect, but based on the approximately 75 million homeowner occupied homes, we can estimate that there are close to 750 thousand excess vacant homes.

Home Ownership—Nearly 11 Percent of US Houses Empty - America's home ownership rate, after holding steady for a while, took a pretty big plunge in Q4, from 66.9 percent to 66.5 percent. That's down from the 2004 peak of 69.2 percent and the lowest level since 1998.  Homeownership is falling at an alarming pace, despite the fact that home prices have fallen, affordability is much improved and inventories of new and existing homes are still running quite high.  Bargains abound, but few are interested or eligible to take advantage.  More concerning than the home ownership rate is the vacancy rate. The Census tables don't tell the entire story, but they tell a lot of it. Of the nearly 131 million housing units in this country, 112.5 million are occupied. 74.8 million are owned, and that's only dropped by about 30 thousand in the past year. 38 million are rented, but that's up by over a million year over year. That means more new households are choosing to rent.  Now to vacancies. There were 18.4 million vacant homes in the U.S. in Q4 '10 (11 percent of all housing units vacant all year round), which is actually an improvement of 427,000 from a year ago, but not for the reasons you'd think.  The number of vacant homes for rent fell by 493 thousand, as rental demand rose. 471,000 homes are listed as "Held off Market" about half for temporary use, but the other half are likely foreclosures.

18.4 Million Vacant Homes in the U.S.A. - If you are still trying to understand why the housing market in the United States is in trouble just read the following paragraph.  Now to vacancies. There were 18.4 million vacant homes in the U.S. in Q4 ’10 (11 percent of all housing units vacant all year round), which is actually an improvement of 427,000 from a year ago, but not for the reasons you’d think. The number of vacant homes for rent fell by 493 thousand, as rental demand rose. 471,000 homes are listed as “Held off Market” about half for temporary use, but the other half are likely foreclosures. And no, the shadow inventory isn’t just 200,000, it’s far higher than that. So think about it. Eleven percent of the houses in America are empty. 11 percent or 18.4 million homes in the United States are empty.  To put this in perspective there is only 329,000 homes expected to be built this year.

Homeownership and Social Justice - I am reading and enjoying Simon Johnson and James Kwak's 13 Bankers. Like a lot of recent stuff (including an OECD report), it takes a swipe, if a mild one, at the virtues of homeownership.   If people think homeownershipp is overrated, I can live with that (even if I disagree with it. Where I do have a problem is when people argue that government "pushes" homeownership on people, whether they really want it or not. I am not sure that the pushing matters that much--it is entirely possible that people, for reasons beyond financial reasons, want to own houses in particular and real estate in general.  Two things stick with me:
(1) I was talking yesterday with a developer here in India who is trying to building market-rate affordable housing.  He faces a number of hurdles, one of which, he said, is "Indians' obsession with homeownership."
(2) Years ago, the guy who cut my hair loved to talk about the rental property he owned in Florida.  It would, he said, be the source of his retirement income.  I asked him why he was so undiversified--why he didn't sell his place and put the money in an index fund.  His reply was that he didn't trust Wall Street, and that he needed an investment that he could "touch" as well as control. 

Private Construction Spending decreases in December - Catching up ... the Census Bureau reported this morning that overall construction spending decreased in December compared to November.  [C]onstruction spending during December 2010 was estimated at a seasonally adjusted annual rate of $787.9 billion, 2.5 percent (±1.3%) below the revised November estimate of $807.8 billion. This graph shows private residential and nonresidential construction spending since 1993. . Private construction spending also decreased in December.Both private residential and non-residential construction spending decreased in December. Residential spending is 66.5% below the peak in early 2006, and non-residential spending is 37% below the peak in January 2008.

Construction Spending in U.S. Unexpectedly Fell to Decade Low - Construction spending in the U.S. unexpectedly fell in December to the lowest level in a decade, signaling the industry will continue to lag behind the economic recovery.  The 2.5 percent drop was the biggest since July and brought the value of all projects down to a $787.9 billion annual rate, the lowest since July 2000, Commerce Department figures showed today in Washington. The median estimate of economists in a Bloomberg survey called for a 0.1 percent gain.  Mounting foreclosures and an unemployment rate that will average more than 9 percent in 2011 indicate homebuilding may take time to rebound. Non-residential projects also will slow as budget-constrained state and local governments restrict funding for public works such as highways.  “Housing will remain lackluster for at least another year,”

Stocks Up, Houses Down, And What This Means for Most - Robert Reich - “The U.S. economy is back!” says a prominent Wall Streeter. Ummm. Not quite.  Corporate earnings remain strong (better-than-expected reports from UPS and Pfizer fueled Tuesday’s rally). The Fed’s continuing slush pump of money into the financial system is also lifting the animal spirits of Wall Street. Traders like nothing more than speculating with almost-free money. And tumult in the Middle East is pushing more foreign money into the relatively safe and reliable American equities market. It’s simply wonderful, especially if you’re among the richest 1 percent of Americans who own more than half of all the shares of stock traded on Wall Street. Hey, you might feel chipper even if you’re among the next richest 9 percent, who own 40 percent. But most Americans own a tiny sliver of the stock market, even including stocks in their 401(k) plans. What do most Americans own? To the extent they have any significant assets at all, it’s their homes.

Phoenix real estate market being held up by all cash buyers – 47 percent of Phoenix sales were from all cash buyers in December. The $1 priced Detroit home. The Phoenix real estate market has collapsed after reaching a price apex in 2006.  It is hard to imagine another market with similar real estate fundamentals but Las Vegas is a mirror image of foreclosure ridden Phoenix.  These desert cities rose up during the housing bubble with plentiful and cheap land to expand on.  Builders were able to build at a feverish pitch with the sound of jack hammers cranking and skeletal frames of model homes for as far as the eye could see since demand for easy loans and second homes were pushing many of these markets upward.  Las Vegas and Phoenix had enormous demand from eager wide-eyed California investors.  It is hard to pinpoint exact figures but at one point over 40 percent of purchases in Las Vegas were estimated to come from California buyers.  Home sales for these regions have perked up but anything looks higher when you are bouncing off the financial ground.  Yet I believe something else is going on here.  Many sidelined investors are now jumping into the market head first since they are merely reacting to lower prices.  Yet many are not thinking about longer term fundamentals like rising oil costs that will likely stifle many of these desert communities.  All that is being seen right now is insanely low prices that haven’t been on the radar for over a decade.  To show investor demand let us look at all cash purchases for Phoenix in the last month.

How Good Is That PMI Number? - Krugman - A good manufacturing survey result. Mostly for my own edification, I thought I’d try to figure out how good that number really is. So, using FRED — which now makes it easy to take quarterly averages of monthly data, although the scatterplots aren’t quite there yet — we can plot PMI against the growth rate of GDP: It’s a somewhat noisy relationship, but if the PMI were all we had to go on, it would say 6 percent growth. I don’t really believe that; we’d be hearing a lot more jubilant noises from business if that were really happening. But this was a good number, indeed

GM Parks 510,000 Cars With Dealers, 31% Higher Than Year Earlier - One more month, one more chance for GM to stuff its dealers with cars. Sure enough, in the just release January sales PR, the company announced that 'General Motors dealers in the United States reported 178,896 total sales in January, a 23-percent increase from a year ago for the company’s four brands. The gain was driven by solid retail sales which were 36 percent higher than a strong January a year ago.' And behind the scenes, GM has continued to shove a whopping 510,000 cars with dealers: In January 2011, the firm had 510k cars at its dealers, compared to just 390,000 in January 2010, a 30% increase. Furthermore, as the only component of consumer credit that is surging, non-revolving loans, indicates that virtually all car purchases are made based on the old formula of 'no money down.' And with the government backstopping both the car maker and the lender banks, we would be very interested in discovering just how bad the delinquency rate in non-revolving car debt is over the past year, especially as it relates to GM.

ISM Non-Manufacturing Index showed expansion in January - The January ISM Non-manufacturing index was at 59.4%, up from 57.1% in December. The employment index showed faster expansion in December at 54.5%, up from 52.6% in December. Note: Above 50 indicates expansion, below 50 contraction. This graph shows the ISM non-manufacturing index (started in January 2008) and the ISM non-manufacturing employment diffusion index. From the Institute for Supply Management: January 2011 Non-Manufacturing ISM Report On Business®  - Economic activity in the non-manufacturing sector grew in January for the 14th consecutive month, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business

"But where will the demand come from?" - It gets asked in every recession. Recovery requires an increase in demand. "But where will the demand come from?" When I was young and foolish I would answer "housing". Which was actually a fairly good guess in the past. But when I got older and more devious I would refuse to answer. "If an armchair economist like me really knew the answer to questions like that, we wouldn't need a market economy; we would just make me central planner". Or "If I really knew the answer to questions like that, I would be very rich and sitting on a beach somewhere". But "housing", even if it were the right answer, isn't really answering the question. It's not really a question about which sector of the economy will be the leading edge of the revival. It's not really a question about which particular group of people or firms will be the first to increase spending. It's not a micro question at all. That's not what they are asking. It's a macro question.

Consumer Spending in U.S. Rose More Than Estimated - Consumer spending in the U.S. rose more than forecast in December, giving the world’s largest economy a lift heading into 2011.  Purchases, which account for about 70 percent of the economy, increased 0.7 percent after climbing 0.3 percent the prior month, Commerce Department figures showed today in Washington. Another report showed businesses expanded in January at the fastest pace in two decades.  Rising incomes and a cut in payroll taxes this year will probably continue to drive household demand. Today’s spending report also showed the Federal Reserve’s preferred inflation gauge rose at the slowest pace on record, one reason policy makers are pushing ahead with a second round of monetary stimulus worth $600 billion.

Household size and stagnant median income - One loyal MR reader writes to me: However, census Bureau data show that the size of the average US household decreased from 3.1 to 2.6 from 1970 to 2007... The underlying question is whether figures for the median household are underrating the true growth in average living standards.  A few points are in order. 1. Here is one passage from The Great Stagnation: "Since 1989, the size-adjusted and size -- unadjusted measures have been rising at roughly the same rate, and post-1979 the difference between the size-adjusted and the size-unadjusted median income measures is never more than 0.3 percent."  For more on this, see Lawrence Mishel, Jared Bernstein, and Heidi Shierholz, The State of Working America 2008/2009, chapter one.  2. David Leonhardt writes: "In fact, households were shrinking more quickly in the 1960s, ’70s and ’80s than they are now — and incomes were growing."  Read the rest of this post as well.

Back to the global imbalances norm -Here is my mantra regarding so-called ‘unsustainable’ debt levels. I feel strongly about this topic so I’ll repeat it and show you a few statistics on consumer debt from the recent US government data:[P]oor quality growth can continue for very long indeed. And it is this fact which allows the narrative of easy money and overconsumption to gain sway. The fact is: low quality growth does not lead to immediate economic calamity. It can continue through many business cycles.-Is economic boom around the corner?, See, things don’t move in a straight line – not on the way up and not on the way down. The problem with big macro calls is all about timing. When it comes to the ‘New Normal’, the balance sheet recession, deleveraging or whatever moniker you want to put on this post-crisis world, there are plenty of ways to forestall the inevitable.

Delaware, Rhode Island residents have most debt - Americans are still up to their ears in consumer debt, with Delawareans topping the list with an average per-person debt load of a whopping $20,233, a report by debt relief company CareOne Services shows. The company ranks the 10 states with the highest and lowest average consumer debt levels based on a survey of 135,000 people enrolled in debt management programs in 2009 and 2010. Most alarmingly, it found that even those in California — the state with the lowest debt level — carry more than $12,000 in debt; in fact, residents in all states still carry an average debt load of more than $10,000. But debt-plagued consumers might not be who you think there are, says Mike Croxson, president of CareOne. He says the typical person calling for help is a female in her mid-30s with a household income of about $37,000 and some college education. Sixty percent of the time she’s a homeowner.

What Happens Next: The Us Consumer Sector Gets Crushed - Now that the food crisis is in full swing, I want to write about what happens next. Before hyperinflation begins in America, the US consumer sector is going to experience economic disintegration, crushed out of existence by two competing forces: skyrocketing costs and weakening demand. This process has already begun! 1) The Inflationary force: SKYROCKETING COSTS The inflationary force that has begun to devastate the US consumer sector is skyrocketing costs. The article below gives a good overview of process. The Business Spectator reports about Nike's run-away China costs.

Bernanke: More Jobs Needed for Real Recovery Federal Reserve Chairman Ben Bernanke says the U.S. can't fully recover from the worst recession in decades until hiring improves. Bernanke says the economy is strengthening, and will likely grow at a faster pace this year as more confident consumers and companies spend more, in prepared remarks to the National Press Club. But he warns that the growth still won't be strong enough to quickly drive down high unemployment, and it could take several years before it returns to more normal levels. He says: "Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established."

Floyd Norris Makes Bizarre Comparison to 1983 to Put Smiley Face on Job Outlook - Yves Smith - Ben Bernanke was talking up the economy yet again yesterday, and it appears Floyd Norris got the same memo.  I must digress a tad by giving The Daily Capitalist’s translation of Bernanke’s remarks:  Now to Norris’ truly bizarre column, in which he argues that circumstances now are very much like those of 1983, when forecasters were not optimistic about the odds of unemployment falling quickly, when lo and behold, it did.  The problem is that there are some of us who are old enough to remember 1983, like yours truly. And 1983 has about as much resemblance to today as a merely badly out of shape athlete does to one who is in the hospital and is refusing surgery (or in our case, structural change). Even though I do have the bad habit of reacting strongly to nonsense in the MSM (it’s such a frequent occurrence that I should be used to it by now), I expect more from Norris, who has to know better.This is complete horseshit and Norris should be embarrassed.

John Bougearel: Claims the Job Market Will Boom Are Entirely Unsubstantiated - A decade ago, the Bureau of Labor Statistics predicted that the U.S. economy would create nearly 22 million net jobs in the 2000s. Obama said with the benefit of his stimulus measures, the US economy would create three million jobs in 2010. The actual number of jobs created in 2011 was 1.12 million (before final benchmark revisions). Now, the CBO is projecting 2.5 million jobs will be created annually from 2011 to 2015. Faith in the US gov’t’s ability to create 2.5 million jobs for the next 5 yrs (one of the several silly and preposterous CBO projections) is sorely misplaced. The CBO has sugarplums dancing in their heads. Their 2011-2016 forecast for the US jobs market is disingenuous, misleading poppycock.

High unemployment after the recession (Cleveland Fed) Unemployment has remained very high since the end of last recession, leading some economists to suggest that the underlying trend of the unemployment rate must have risen, driving unemployment permanently higher. Using a more accurate method of calculating the underlying trend, I find that the long-term rate has not risen and that most of the recent increase in the unemployment rate can be attributed to cyclical causes. But the weak nature of the recovery in real output and the slow rate of worker reallocation are likely to keep unemployment at relatively high levels for the near term.

Cleveland Fed: US Jobless Rate Likely To Stay High - U.S. unemployment will stay high "for some time," in part because changes in the labor market have made it tougher for those out of work to find jobs, a Federal Reserve Bank of Cleveland economist said on Monday....Some policymakers have suggested that structural changes in the economy have created a mismatch between the skills that job-seekers have and those that employers want. The upshot, these policymakers say, is that the ability to influence the unemployment rate via monetary policy is limited. Minneapolis Fed President Narayana Kocherlakota has suggested the "natural" rate of unemployment, long pegged at 5 percent, could now be as high as 8 percent.

Gallup Poll: Small Businesses Point to Aggregate Demand Failure - Gallup ask small businesses about their hiring practices. Nearly as many reported hiring fewer than needed as reported hiring as many as needed.  Note the question asked was as needed.  From an economists perspective this is as if the firm is saying that if deliberately did not continue hiring until marginal revenue produce equaled the wage rate. There were workers, there was work, profit could have been made. They decided not to make it. The question is of course why? Gallup asks that as well. The top two answers are consistent with standard Aggregate Demand stories.  The first is a New Keynesian story that employers can’t sell all the product that they want at existing prices. The second is a more monetarist flavored story that real cash balances are two low. The third is a structural reason. Not the right employee mix. Note that this is a Mismatch story. Not recalculation.  The fourth is harder to interpret. It could be regulatory uncertainty: Is the new health care law going to cost me too much.

Number of the Week: Businesses’ Unemployment Taxes Rise - 37%: The rise in businesses’ unemployment-insurance payments in 2010. The sheer depth and duration of the U.S. job-market slump has created all sorts of unique problems for the economy. Now, it’s hitting businesses in a new way, through the taxes they pay to support unemployment insurance.  In 2010, the amount employers paid into state unemployment-insurance funds rose 34% as a share of total wages, the Labor Department estimates. Total wages also rose a bit, so the sum private businesses paid out increased some 37%, to about $43 billion, data from the Commerce Department suggest. The payments are small as a share of total wages, amounting to less than 1%. But that can represent a much bigger chunk of profits.

Back to Full Employment - Employment conditions in the United States today, in the aftermath of the 2008–09 Wall Street collapse and worldwide Great Recession, remain disastrous—worse than at any time since the Depression of the 1930s. Since Barack Obama entered office in January 2009, the official unemployment rate has averaged more than 9.5 percent, representing some fifteen million people in a labor force of about 154 million. By a broader definition, including people employed for fewer hours than they would like and those discouraged from looking for work, the unemployment rate has been far higher—16.5 percent, on average. Still worse, if we count people who have dropped out of the labor force, unemployment would rise to nearly 20 percent, or 30 million people, roughly twice the combined populations of New York, Los Angeles, and Chicago.

How a New Jobless Era Will Transform America - The Great Recession may be over, but this era of high joblessness is probably just beginning. Before it ends, it will likely change the life course and character of a generation of young adults. It will leave an indelible imprint on many blue-collar men. It could cripple marriage as an institution in many communities. It may already be plunging many inner cities into a despair not seen for decades. Ultimately, it is likely to warp our politics, our culture, and the character of our society for years to come.

The Problem of Structrual Unemployment: Really Incompetent Managers- The Washington Post had a major front page article highlighting the argument that the reason that the country has high unemployment is that workers don't have the skills needed for the jobs that are available. While it features comments from several employers, the only data that it presents to support this case is that the number of job openings reported by the Bureau of Labor Statistics is 900,000 higher than the low in the summer of 2009. The number of openings is still down by more than 1,000,000 from pre-recession levels. Furthermore, even if every last job opening were filled (an absurd situation, since there will always be some flux in the labor market), it would still leave almost 80 percent of the unemployed without jobs. The anecdotal evidence from employers suggests that the problem is that people who run businesses don't understand basic economics. It presents comments from one employer who complains that he can't find workers for jobs that pay $15 an hour. This is not a very good wage. It would be difficult for someone to support themselves and their children on a job paying $15 an hour ($30,000 a year). If the company president understand economics, then he would raise wages enough so that the jobs were attractive to workers who have the necessary skills.

ADP: Private Employment increased by 187,000 in January - ADP reports: Private-sector employment increased by 187,000 from December to January on a seasonally adjusted basis, according to the latest ADP National Employment Report® released today. The estimated change of employment from November to December was revised down by 50,000 to 247,000 from the previously reported increase of 297,000.Note: ADP is private nonfarm employment only (no government jobs). This was slightly above the consensus forecast of an increase of about 150,000 private sector jobs in January. The BLS reports on Friday, and the consensus is for an increase of 150,000 payroll jobs in January, on a seasonally adjusted (SA) basis, and for the unemployment rate to increase slightly to 9.5%.

U.S. Jobless Rate Falls to 9% in January; Payrolls Rise - The U.S. jobless rate unexpectedly fell in January to the lowest level since April 2009, while payrolls rose less than forecast, depressed by winter storms.  Unemployment declined to 9 percent last month from 9.4 percent in December, the Labor Department said today in Washington. Employment rose by 36,000 workers, the smallest gain in four months, after a 121,000 rise in December that was larger than initially reported. Payrolls were projected to climb 146,000, according to the median forecast in a Bloomberg News survey.  “Snow suppressed payrolls but look past it and the labor market is clearly improving,” said Ward McCarthy, chief financial economist at Jefferies & Co. in New York. McCarthy projected an 85,000 gain in January employment. Payrolls in construction and transportation, industries most affected by bad weather, dropped in January, while factory employment rose the most since August 1998.

January Employment Report: 36,000 Jobs, 9.0% Unemployment Rate - From the BLS:  The unemployment rate fell by 0.4 percentage point to 9.0 percent inJanuary, while nonfarm payroll employment changed little (+36,000), the U.S. Bureau of Labor Statistics reported today. And on the benchmark revision: The total nonfarm employment level for March 2010 was revised downward by 378,000 ... The previously published level for December 2010 was revised downward by 452,000. The following graph shows the employment population ratio, the participation rate, and the unemployment rate. The unemployment rate decreased to 9.0% (red line).  The Labor Force Participation Rate declined to 64.2% in January (blue line). This is the lowest level since the early '80s. (This is the percentage of the working age population in the labor force. The participation rate is well below the 66% to 67% rate that was normal over the last 20 years.) The Employment-Population ratio increased to 58.4% in January (black line).The second graph shows the job losses from the start of the employment recession, in percentage terms from the start of the recession. The dotted line is ex-Census hiring.

Leonhardt and Norris on the Jobs Report - After this morning’s announcement that the United States economy added 36,000 jobs in January, two Times columnists — David Leonhardt and Floyd Norris — are continuing the discussion they began on Thursday about the employment situation and the prospects for the economy. The most recent posts are at the top. 10:03 a.m. |Leonhardt: The Role of New Businesses Garry in Boston asks: “Could it be that there are a lot of new businesses starting up that aren’t being captured in the jobs numbers?” Yes, absolutely. Floyd Norris’s column addresses some of these issues. I also touched on them in this blog post. 10:00 a.m. |Norris: Jobs Moving Down the Scale I just looked at some of the unemployment rate breakdowns. Since unemployment peaked, the largest rate decline has been for high school graduates. Their rate went from 11.2 percent to 9.4 percent. That’s still bad, of course, but it may indicate that jobs are moving down the scale.Even with that decline, the 9.4 percent rate is exactly twice what it was when the recession began. The rate for college graduates fell from 4.8 percent to 4.2 percent. That also happens to be twice what the rate was (2.1 percent) when the recession began.

EMPLOYMENT SITUATION (5 charts) Signs of stronger growth are showing almost everwhere but the employment data. In January payroll employment grew by 36,000 while private payroll job only expanded some 50,000. Employment as reported by the household survey grew 117,000. This is the third consecutive jobless recovery and the payroll gains have been very weak in all three.The unemployment rate fell to 9.0%, but that was largely due to a 504.000 contraction in the labor force. I suspect the bad weather is distorting the data and it is hard to place much faith in any of this months data. The work week contracted and as a consequence the index of aggregate hours worked ticked down. The severe winter weather weather almost certainly impacted the average work week data as many institutions worked fewer hours because of the snow.For the second month, however average hourly earnings growth improved as the year over year gain in hourly earnings is now 1.9% versus the low of 1.7%. But with the drop in the work week average weekly earnings weakened.

Labor market moving in two directions at the same time - The January employment report shows the labor market moving in two directions at the same time, with employers reporting disappointing payroll job growth of only 36,000, but households reporting large employment gains (after removing the effect of new population weights). Some of the lack of payroll jobs growth can be chalked up to unusually cold weather in January and snowstorms in the Midwest and Northeast during the reference week. Given the confounding nature of this report, we will have to wait at least another month to see if the labor market is rebounding strongly.  Aside from today’s muddled picture, one thing is crystal clear: The U.S. labor market started 2011 with half a million fewer jobs than it had eleven years ago, in January 2000, though the labor force has grown by nearly 11 million workers since then.

The household survey paints a clearer picture of the January employment report than does the nonfarm payroll - Rebecca Wilder - I'll forward you to Spencer's post on the January Employment report. As always, he sifts through this massive report and eloquently describes the state of the labor market. But I thought that I'd add a bit on the disparity between the household survey and the establishment survey. The annual population revisions and weather distortions have confused some. The issue at hand is, that the BLS' two surveys, CPS (Current Population Survey, from which the unemployment rate is derived and called the household survey) and CES (Current Employment Statistics, from which the nonfarm payroll is estimated and called the establishment survey), offer conflicting views on the strength of the headline report (i.e., just the statistics about the unemployment rate and the nonfarm payroll): the unemployment rate dropped 0.4% to 9.0%, while the nonfarm payroll increased a meager 36,000 when 146,00 was expected (by Bloomberg consensus). The report is not conflicting, in my view - it's just weather related stuff that impacts the CES, and to a much lesser extent the CPS. The drop in the unemployment rate, although usually the statistically less popular data point, is probably the best descriptor of the monthly shift in the labor market: strong.

A real drop in unemployment - DESPITE the good efforts of my colleague, there’s still a lot of misinterpretation of the drop in the unemployment rate from 9.4% in December to 9.0% in January. Some on Wall Street say it’s a bad sign, attributing it to a decline in the labour force as people gave up looking for work. But that decline in the labour force is a statistical illusion. When you remove that illusion, the entire drop in the unemployment rate can be attributed to the unemployed finding jobs. I’ll dig a bit more deeply into the disparity. The low payroll employment number seems to be due to bad weather. Normally you can look to the separate tally of employment from the survey of households for a different perspective but that figure was distorted by the estimation procedure that always happens between December and January.

Mixed jobs report: How can the unemployment rate drop so much when the economy adds so few jobs? - On Friday morning, the Bureau of Labor Statistics announced the unemployment rate for January, and the news was very good. The overall rate declined from 9.4 percent to 9 percent flat. In the past two months, the unemployment rate has fallen 0.8 percent percentage points—the biggest 60-day drop in more than 50 years.  It must mean that American businesses, finally confident that the recovery has taken hold and feeling flush after a good holiday shopping season, have decided to add workers. It must mean that jobseekers are facing less competition, and the labor market is stabilizing. It must mean that fewer and fewer Americans need unemployment insurance. By now, three years after the official start of the recession, things must finally be looking up.  Or not. To be sure, the economy is getting better. American businesses are creating jobs. The unemployment rate should continue to decline. But that .8 percent two-month drop is an example of how statistics can lie.

Strangest Part of the Jobs Report - The unemployment rate has declined more in the last two months than in any two months since 1958. The rate was 9.8 percent in November, and it was 9 percent in January. Since the Labor Department began keeping these statistics, only four other two-month periods have seen a larger decline. They are: December 1949 (when the rate had dropped 1.3 percentage points in the previous two months, to 6.6. percent); August 1950 (0.9 percentage point decline, to 4.5 percent); February 1951 (0.9 percentage point decline, to 3.4 percent); and November 1958 (0.9 percentage point decline, to 6.2 percent). As I said before, the job market is neither healthy nor seems to be improving very rapidly. But the unemployment rate is dropping at a historically rapid rate. It’s very odd.

Messy payrolls - On its face, today’s payrolls report makes no sense. The headline news, that just 36,000 jobs were created in January, is undeniably atrocious. It’s much less than the market expected, and it’s much less than even needed to keep up with population growth. On the other hand, there was a whopping great reduction of 0.4 percentage points in the unemployment rate, to 9.0%: that’s great news, seeing as how it was 9.8% in November. There’s lots of scrambling around this morning from people attempting to reconcile these figures: how could unemployment have fallen by 600,000 people when the labor force was unchanged and barely any new jobs were created? The main answer, I think, is that there altogether far too many moving parts going into this particular report, and as a result month-on-month changes simply aren’t very useful.

How Much Did Weather Hurt Payrolls? - WSJ - Snow storms early last month clearly hurt the labor market in January, contributing to the weakness in job growth last month. But how much that mattered is impossible to gauge.

So this is the new year? - Bureau of Labour Statistics has dropped a puzzler of an employment report in our laps—one which points in many directions but not, decidedly, toward strong job growth. In the month of January, total nonfarm employment grew by a very disappointing 39,000 jobs. This was not at all what forecasters were expecting. Earlier this week, an ADP report indicated that private sector employment rose by 187,000 in January; the BLS pegged the figure at just 50,000. There were some compensating shifts. December's employment gain was revised upward from 103,000 to 121,000. November's employment rise, which was originally reported at 39,000, has been revised to a total gain of 93,000. The BLS included its annual revision of the previous year's data in this report, and while job growth over the year looks stronger than before, the level of employment looks worse. In March of last year, 411,000 fewer Americans were working than originally reported. And thanks to a weaker employment performance in April through October, 483,000 fewer Americans were on the job in December than was originally believed to be the case. For now, the economy remains 7.7m jobs short of its previous employment peak.

Summing Up the Jobs Report - Today’s report gives a messy picture, but when you look beyond the messiness — bad weather, questions about survey methodology — I think the picture is much clearer. The job market has not improved much if at all over the past six months. There’s some chance it may be just starting to improve, yet it’s hard to be confident about that.  Let’s start by going back to late 2009 and early 2010. After two years of recession, the job market finally began recovering. Employers were adding jobs. In the spring of 2010, though, the situation changed. The federal government started laying off its temporary Census workers. State and local government accelerated their own job cuts as the stimulus money began to slow. Private employers became spooked, too — perhaps because of the European debt crisis, perhaps because they remained unsure how quickly indebted households would begin spending again. In all likelihood, there was a complicated mix of reasons.

Today’s Job Report: Unemployed Far More Likely to Drop Out Than Find a Job - While today’s jobs numbers show the unemployment rate has gone down, don’t call it a recovery just yet. Less jobs were created than expected — it’s not that more people are finding work, it’s that they’re dropping out of the labor force altogether. The percentage of unemployed who will drop out of the labor force is increasing, gaining over those who will find a job. This is unique in the post-World War II economy — and only getting worse. More and more will fall into this hole as the 99ers lose their unemployment benefits. Worse, while President Obama talks of wanting to “win the future,” it looks bleak for those who experience such long spells of unemployment, which harms their financial outlook. The longer they spend without work, the more they are likely to stay permanently out of the workforce. And we lose too, as we miss out on their productivity (and of course the taxes they would be spending if they brought in regular paychecks). The graph below charts the difference between the chance of an unemployed person finding a job and an unemployed person dropping out of the labor force.

The employment news is good (I think) - The Bureau of Labor Statistics reported yesterday that the unemployment rate has fallen from 9.8% in November to 9.0% in January, as big a two-month drop as we've seen in the last 50 years (hooray!). But in the same report, BLS indicated that their seasonally adjusted estimate of the number of Americans employed on nonfarm payrolls increased in January by an anemic 36,000 (oh dear!). Reconciling the very contradictory claims is even harder than usual, but I'll give it a try. We can start with the fact that the two numbers come from two different surveys and are measuring different things. The unemployment rate comes from a survey of households, and counts someone as employed if they did any work at all as a paid employee or worked in their own business during the surveyed week, and also people who have a regular job but missed work due to temporary factors such as illness or bad weather. The nonfarm payrolls, on the other hand, come from surveys of establishments themselves. If bad weather caused someone to miss work for a two-week payroll period that included the 12th of the month, that person would not be counted as employed according to the establishment survey. Rebecca Wilder notes that Nomura economists accurately predicted prior to the BLS release that weather distortions would cause the reported nonfarm payroll gain to come in well below 56,000.

The Employment Report Belly Flop - Wow ... if you remember on the ADP and Claims numbers, I said I was expecting +100k. That was way off; we really got +36k. From today's report on January:The unemployment rate fell by 0.4 percentage point to 9.0 percent in January, while nonfarm payroll employment changed little (+36,000), the U.S. Bureau of Labor Statistics reported today. Employment rose in manufacturing and in retail trade but was down in construction and in transportation and warehousing. Employment in most other major industries changed little over the month. Youch. [Click all to enlarge] There's no love in here. Worse, the benchmark revisions are out, and they show about 300,000 supposedly-reported jobs that didn't really happen. No, really? How come that number seems to always be in this direction? That is, why is it that the BLS always seems to over-report reality in the establishment survey?

The Non-Mystery of the January Employment Report, Dean Baker: Most of the news reports on the January employment report expressed confusion over the seeming contradiction between the 0.4 percentage point plunge in the unemployment rate shown by the survey of households and the weak 36,000 job growth reported by the establishment survey. The drop in unemployment in the household survey was the result of a reported increase in employment of 589,000, after adjusting for changes in population controls. This difference is actually not very confusing to people familiar with the data. The household survey is always erratic. It effectively is measuring the level of total employment in the economy. Even if it is off by just 0.2 percent, this implies an error of almost 300,000. If it errors by this much on the high side one month and then by an equal amount on the low side the following month, it would imply a drop in employment of 600,000 in a context where there was no actual change in employment. Looking back over the last two decades it is easy to find months with large changes in employment that did not coincide with any obvious upturns or downturns in the economy.

Rosenberg Deconstructs The Unemployment Number - There were so many cross-currents in the January employment report that it is next to impossible to make book on the data. Bullish or bearish, there was something for everyone. All I can say is that the data were not as weak as the disappointing headline would suggest, but there was nothing here to suggest that the U.S. labour market is progressing at anything remotely close to resembling a normal post-recession recovery, even when benchmarked against the past two jobless recoveries in the early 1990s and again coming out of the tech wreckage a decade ago. Fed Chairman Bernanke highlighted the lack of impetus in the jobs market as a chief source of concern and there was nothing here that will help alleviate that, sad to say. The headline nonfarm payroll report came in light at +36k, well below consensus views of 146k and whispered numbers ahead of the report that were bordering +180k. Not only that, but adjusting for our estimate of what the Bureau of Labor Statistics (BLS) birth-death model artificially added, the headline would have been -52k!

Another Lousy Jobs Report - Another lousy jobs report! The economy only added 36, 000 jobs in January and that is terrible. The unemployment rate fell to 9.0 percent, because the labor force decreased by 504,000 and the working age population shrunk by 185,000. Despite all the Administration’s claims, things are getting worse, not better. Folks are giving up looking, and the country appears to be losing population to emigration. Many workers are resorting to self employment, not because home-based businesses offer great opportunities, but because real jobs simply are not being created. The private sector is creating very few permanent jobs. After health care and social services, which are mostly government funded, and temporary services are backed out, the private sector gained only 49.000 jobs. Core jobs outpaced overall jobs growth because even the temp services sector lost jobs—so much for temporary services being the leading edge of a recovery in jobs creation. Rearranging the chairs on the deck of the Titanic.

US Needs To Generate 246,600 Jobs A Month To Get To Pre-Depression Employment By End Of Obama Second Term - Every time we revise the attached chart, its looks worse and worse. The first time we did an analysis of how many jobs per month the US has to generate each month to get back to the same payroll number as of November 2007, right before the start of the Greater Depression, and when accounting for the 90K/month natural growth to the labor force, something the administration continues to blissfully ignore (with the labor participation rate plunging to a 26 year low) it was in the mid 220s. As of today, the number is almost quarter of a million, or 246,600. That is how many jobs the US has to generate every single month until November 2016, or the end of Obama's improbable second turn, for the unemployment rate to get back to where it was when accounting for population growth. And while this is obviously impossible, one other thing that is concerning is that post the revised NFP numbers, not only do we now get a lower cumulative low of all jobs lost, at just over 8.6 million attained in February 2010, but as the highlighted area demonstrates, the recent trend in jobs is one of accelerating deterioration. If in the offchance it were to, gasp, snow in February, March will likely have the first negative NFP print since September. Oh yes, post today's revisions, we now learn that the months June through September actually lost jobs (granted, inclusive of census adjustments). One thing is certain: 5% unemployment will not be back for the next 5 years. 100% guaranteed."

A Look at the Self-Employed - Conventional wisdom over the last few years has been that, with staff jobs scarce, more of America’s relentlessly entrepreneurial workers have turned to self-employment. The numbers don’t quite bear that out. Here’s a chart, using data from today’s jobs report, showing the percent of employed workers who are self-employed, regardless of whether they are incorporated: The numbers are not seasonally adjusted, which accounts for some of the noise. But even so, the self-employment rate had generally been trending downward over the last year, and has only recently ticked upward. While it’s true that fewer payroll jobs might make self-employment seem more attractive, now is an especially hard time for workers to go it alone. Demand for goods and services is still relatively weak, creating a bad environment for any business, especially a new and thinly staffed one.

Messy New Estimates Complicate Explanation for Unemployment Rate Drop The January unemployment report was very noisy, not just because bad weather kept people at home. The Labor Department also incorporated unusually large revisions to its estimates of the size of the population which make it hard to offer a clear explanation for what caused a drop in the unemployment rate to 9%. The Labor Department’s bean counters recalculate the size of the population every January. Those new counts, in turn, are used to come up with new estimates for how many Americans are employed, unemployed or not in the labor force. Because of the revisions, Labor Department officials are flashing warning signs to anybody trying to infer too much in the unemployment portion of the monthly jobs numbers. The Labor Department — using updated Census Bureau data — determined that its 2010 estimates of the size of the population had been 347,000 too high, its estimates of overall employment in 2010 had been 472,000 too high and that its estimates of people who were unemployed or not in the labor force were also off.

Employment Summary and Part Time Workers, Unemployed over 26 Weeks - Here are a few more graphs based on the employment report ... This graph shows the job losses from the start of the employment recession, in percentage terms - this time aligned at maximum job losses.  In the previous post, the graph showed the job losses aligned at the start of the recession. In terms of lost payroll jobs, the 2007 recession is by far the worst since WWII, and the "recovery" for payroll jobs is one of the slowest. The number of persons employed part time for economic reasons (sometimes referred to as involuntary part-time workers) declined from 8.9 to 8.4 million in January. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.  The number of workers only able to find part time jobs (or have had their hours cut for economic reasons) declined to 8.407 million in January.  These workers are included in the alternate measure of labor underutilization (U-6) that declined sharply to 16.1% in January from 16.7% in December. Still very high, but improving.  This graph shows the number of workers unemployed for 27 weeks or more.  According to the BLS, there are 6.21 million workers who have been unemployed for more than 26 weeks and still want a job. This was down from 6.44 million in December. This is still very high.

1.2 Million Americans Quit Seeking Work Since November 2010 - The February 2011 Employment Situation report indicates that 228,000 young adults (Age 20-24) found work in January 2011, but that 154,000 older individuals (Age 25+) were no longer counted as being part of the U.S. work force. Meanwhile, teens (Age 16-19) saw a mild improvement, with 43,000 more counted as having jobs in January than in December 2010.  For January 2011, 139,323,000 Americans have been counted as having jobs, which is up by 117,000 from the level recorded for December 2010. Compared to November 2007, when total employment peaked in the United States one month ahead of when the most recent recession officially began, some 7,261,000 fewer Americans are being counted among the employed portion of the U.S. civilian labor force.  No significant sustained improvement in the number of employed Americans has been recorded since March 2010. During that time, the total number of employed Americans has ranged between 138,909,000 (recorded in November 2010) and 139,382,000 (recorded in April 2010), with the average from March 2010 through January 2011 set at 139,176,091.

Daily Color: Two Employment Surveys, Different Results - FAQ: How can the unemployment rate fall sharply if the economy is adding so few jobs, especially since the population is growing? This data comes from two separate surveys. The unemployment rate comes from the Current Population Survey (CPS: commonly called the household survey), a monthly survey of about 60,000 households. The payroll jobs number comes from Current Employment Statistics (CES: establishment survey), a sample of approximately “140,000 businesses and government agencies representing approximately 410,000 worksites”. These are very different surveys: the CPS gives the total number of employed (and unemployed including the alternative measures), and the CES gives the total number of positions (excluding some categories like the self-employed, and a person working two jobs counts as two positions).

Comparing Recoveries: Job Changes - The United States added 36,000 jobs on net in January, the Labor Department said today. The growth was again disappointingly slow, but many economists are unsure how to interpret the latest number because January snowstorms most likely played a big role in depressing employment. The industries that were probably most affected by the snowstorms were construction, which lost 32,000 jobs on net, and transportation and warehousing, which lost 38,000 jobs. The big winner last month was manufacturing, which added 49,000 jobs. Still, while any growth is a positive sign for the nation’s beleaguered manufacturing workers, the manufacturing industry has two  million fewer jobs today than it had when the Great Recession started in December 2007. The chart above shows economy-wide job changes in this recession compared with recent ones, with the black line representing the current downturn. Since the downturn began in December 2007, the economy has shed, on net, about 5.6 percent of its nonfarm payroll jobs. And that doesn’t even account for the fact that the working-age population has continued to grow, meaning that if the economy were healthy we should have more jobs today than we had before the recession.

Propaganda Techniques — The Official Story - In two consecutive months, the Bureau of Labor Statistics had lowered the "official" (U-3) unemployment rate from 9.8% in November to 9.0% in January. These hardworking economists/statisticians also revised upward the number of jobs created in November and December. All of this deserves close scrutiny. I'll do that next week. Today I want to focus on the propaganda these revisions have engendered. First, watch this short (0:39) video. I have transcribed the text. Italics provide emphasis following the speaker's inflection. The most widely followed gauge of the job market, the nation's unemployment rate, dropped to 9 percent from 9.4 percent. That's the word from the Labor Department. It's a big surprise since economists had been expecting the jobless rate to rise slightly. That's in keeping with other recent reports showing consumers spending more, and manufacturers hiking their output. At the same time, the government survey of businesses found lower than expected job creation. That's seen reflecting harsh winter weather last month. Even so, the report says manufacturing added 49 thousand jobs last month, and that's the most for that sector in over a decade. Let's go through it, line by line, highlighting the propaganda techniques employed.

Bewitched by the Numbers -The data zealots have utterly discombobulated themselves. They were expecting something on the order of 150,000 new jobs to have been created in January. That would have been a lousy number, but they were fully prepared to spin it as being pretty good. They thought the official jobless rate might hop up a tick to 9.5 percent. Instead, the economy created just 36,000 jobs in January, an absolutely dreadful number. But the unemployment rate fell like a stone from 9.4 percent to 9.0 percent.  The crunchers stared at the numbers in disbelief. They moved them this way and that. No matter how they arranged them, they made no sense. Nothing even close to enough jobs were being created to bring the unemployment rate down, but for two successive months it had dropped sharply. (It dived from 9.8 percent to 9.4 in December.)  A baffled commentator on CNBC said, “I think there is an improvement in the economy, though you can’t see it in today’s payroll survey.”  Mark Zandi of Moody’s Analytics, who is frequently very good at this stuff, said: “I think these numbers are meaningless. I don’t think they mean anything.”

Duration of Unemployment, Unemployment by Education, Diffusion Indexes - This graph shows the duration of unemployment as a percent of the civilian labor force. The graph shows the number of unemployed in four categories: less than 5 week, 6 to 14 weeks, 15 to 26 weeks, and 27 weeks or more. In January 2011, the number of unemployed for 27 weeks or more declined to 6.21 million (seasonally adjusted). It appears the number of long term unemployed has peaked, but it is still very difficult for these people to find a job - and this is a very serious employment issue. Both the 'less than 5 weeks', and the '5 to 14 weeks' categories declined in January - this followed the decline in initial weekly unemployment claims. The '15 to 26 weeks' category increased slightly in January, but the general trend appears to be down too. This graph shows the unemployment rate by four levels of education (all groups are 25 years and older).This is a little more technical. The BLS diffusion index for total private employment was at 59.4 in January. For manufacturing, the diffusion index increased to 69.1.  Think of this as a measure of how widespread job gains are across industries. The further from 50 (above or below), the more widespread the job losses or gains reported by the BLS.

Innovation Is Doing Little for Incomes, by Tyler Cowen - My grandmother, who was born in 1905, spoke often about the immense changes she had seen, including the widespread adoption of electricity, the automobile, flush toilets, antibiotics and convenient household appliances. Since my birth in 1962, it seems to me, there have not been comparable improvements.The income numbers for Americans reflect this slowdown in growth. From 1947 to 1973 — a period of just 26 years — inflation-adjusted median income in the United States more than doubled. But in the 31 years from 1973 to 2004, it rose only 22 percent. And, over the last decade, it actually declined. ... Although America produces plenty of innovations, most are not geared toward significantly raising the average standard of living.. Instead of facing up to this scarcity, politicians promote tax cuts and income redistribution policies to benefit favored constituencies. Yet these are one-off adjustments and, over time, they cannot undo the slower rate of growth in average living standards.

Much of nation's recent growth may have been a mirage - You have to give them credit - while the rest of the country will spend the next year stuck in a Talmudic debate about the constitutionality of requiring all Americans to buy health insurance, Massachusetts has already achieved universal coverage and is moving on to controlling costs. And judging from the weekend discussion, I'd wager that by the time Massachusetts settles on a plan to reform its health-care delivery and payment systems, the rest of us will still be parsing the meaning of the "necessary and proper" clause and the Supreme Court's holding in Lochner v. New York.  The movers and shakers in Boston aren't the only ones who have focused on health-care costs as the central economic issue. Tyler Cowen, an engaging and peripatetic economist at George Mason University, has just published a short but important new e-book, "The Great Stagnation," that attempts to explain the slow growth and the rising inequality that characterize the U.S. economy over the past 35 years. (Full disclosure: I'll be joining Cowen on the GMU faculty starting next fall, although not in his department.)

Bad and Good Inequality-Becker - The Economist in its January 20^th issue has an excellent discussion of many issues related to inequality within and between countries. I believe the main issues related to judging inequality and its changes over time come down to deciding whether the inequality is of the good or bad kind. Many people, especially academics and other intellectuals, find the phrase “good inequality” jarring because they can hardly think of any aspect of inequality as being “good”. Yet a little thought makes clear that some types of economic inequality have great social value. For example, it would be hard to motivate the vast majority of individuals to exert much effort, including creative effort, if everyone had the same earnings, status, prestige, and other types of rewards. .

Prices and Plutocrats - Paul Krugman - Mark Thoma sends us to Lane Kenworthy on the disconnect between economic growth and median income since 1973:. First, this figure compares real income with real income — but they’re two different versions of reality. The rise in prices implied by real GDP numbers is measured by the GDP deflator, while the rise in incomes as calculated by the Census involves dividing by the CPI. And while those two price measures matched very well pre-1973, since then, not so much: What’s going on here? It means that we’re either overstating inflation (and hence understating income gains) or overstating economic growth. Both the BEA (which measures GDP and related) and the BLS (which does consumer prices) work hard and honestly at their tasks; the difference probably arises (I’m sure someone has done this more carefully) in how you value new or improved goods. My sense has always been that the GDP accounts overdo their hedonics, but that’s very much a matter of opinion. Maybe the real point here is to remember, always, that economic statistics are a peculiarly boring sub-genre of science fiction; extremely useful, but not to be treated as absolute truth.

Economic Growth and Household Income - Paul Krugman - Apologies to Lane Kenworthy — he already took into account the price-index issue I raised here. So the question is, what does account for the divergence between economic growth and median family income? Let’s look at GDP per household versus median and mean income per household since 1973. I use households because there’s some slippage between “families” and “households”, and I didn’t want to get into all that. I end at 2007 to leave the Great Recession out of the picture. Anyway, here’s what you get: A lot of the difference goes away when you focus on mean rather than median income; this tells you that the gap between economic growth and median incomes has a lot to do with rising inequality. The remaining gap probably reflects two things: additional increases in inequality not captured by the Census data thanks to top-coding, and a growth in benefits that aren’t counted as cash income. Not that much of a mystery, then — but it remains striking how little of growth has trickled down to the typical family.

GDP per Household and Average Household Income - Paul Krugman notes that average household income has grown markedly less than GDP per household since 1973. He discusses the two most important factors. The cost of employee benefits (health insurance) have increased more than wages and are not counted in personal income, and household income is top coded -- the very highest incomes are recorded just as more than x ($250,000 last I checked) so the increased income of the very rich does not appear in average household income. I consider four other factors but don't believe or don't have much to say about three (all after the jump). The one that interests me, causes me to invade Rebecca's turf and may have caused me to demonstrate my ignorance of NIPA terminology is GDP vs Net DP, which means net of depreciation of capital. GDP-NDP isn't income and, therefore isn't any household's income.

America's Invisible Poor -There is an increasing sense of foreboding among the poor in the United States. These feelings of impending doom are entirely justified. A comment on yesterday's post by sharonsj spoke to these fears— Are we addressing our problems? No. But I'm tired of hearing yet another wealthy fucker [Howard Davidowitz] say us old folks will have to learn to live on even less. I challenge him to live on an average of $11,000 a year (that's about what somebody on Social Security gets). If you think we have tent cities now, just wait until the clowns in Congress (and in your state legislatures) cut back on social programs. Those programs are the only reason you don't see bread lines...or riots in the streets. But it's all part of the plan to privatize profits and socialize the losses. I agree entirely. What is the situation? The debt ceiling must now be raised beyond the $14,292 trillion limit now required by law. The CBO estimates this year's deficit will be nearly 1.5 trillion dollars. It is only a matter of time before the mounting debt blows up in America's face. Spending cuts must be made, or they will be forced upon us. Entitlements spending (Social Security, Medicare) and other government transfers (e.g. welfare, food stamps) will be under heavy threat.

Interactive map: Unemployment then and now - While all 50 states lost jobs in the Great Recession, Nevada, Florida and California suffered particularly steep losses that have resulted in significantly higher unemployment rates today than at start of the recession three years ago. The Interactive Map shows the latest state unemployment data for December 2010, the third anniversary of the start of the Great Recession, along with the change in the unemployment rate over that period. Nevada’s unemployment rate has risen 9.3 percentage points, to a current 14.5%, the highest in the nation. Florida’s has risen 7.3 percentage points to a current rate of 12.0%, and California’s has risen 6.7 percentage points to 12.5%. Nationwide, the unemployment rate was 5.0 in December 2007, peaked at 10.1% in October of 2009 and stood at 9.4% in December 2010. (New unemployment data for the month of January will be released on Friday). Click on any state to see current unemployment rate and the increase since the start of the recession, below.

Unemployment Tax Hike Expected To Fuel Job Loss - "Walked in Monday, got a letter from the state saying we had a million dollar tax increase, effective Jan. 1, retroactive to Jan. 1, so we have spent the last couple days figuring out how we're going to manage that," said HTI president Herb Dew.  The tax hike was part of a plan by South Carolina legislators to pay back a $1 billion loan from the federal government that was used to pay unemployment benefits when the state ran out of money in 2008.  Legislators created a 20-tier system which basically ranks businesses by the number of people they laid off. The more layoffs, the higher the tax rate.  "It's even worse than I anticipated back when the legislation was passed in the summer,"

Nev. employers will feel pain of jobless fund debt — Nevada is borrowing heavily to pay jobless benefits, and employers will start seeing higher federal taxes to cover the debt, a legislative panel was told Thursday. Nevada has had the nation's highest unemployment rate since May, and it set a record high of 14.5 percent in December. The state's unemployment insurance trust fund went broke in October 2009, and like many other states, Nevada has been borrowing from the federal government since then to pay benefits. Cindy Jones, administrator for the Employment Security Division, said Nevada is on track to borrow $890 million by the end of 2011 and $1.08 billion by the end of 2012. Interest on loans from the federal government is expected to cost $66 million in the upcoming biennium — money Gov. Brian Sandoval recommended be paid out of the state general fund. Besides higher state taxes imposed this year to begin replenishing Nevada's trust fund, employers this year also will see the federal tax rate climb about $21, to a maximum $77 per employee, Jones said.

In Vallejo, A Municipal Bankruptcy Means Big Sacrifices For Ordinary Workers  - Like cities across the country, Vallejo has seen its revenues wither in the wake of the recession, prompting pay cuts for municipal employees. In one regard, Vallejo's experience is unusual -- municipal bankruptcy remains rare, as it brings negotiations with employees into court proceedings. But the negotiations themselves are now commonplace: As cities like Vallejo struggle to get their fiscal houses in order, they are often doing so at the expense of their middle-class workers. Vallejo's latest plan to emerge from bankruptcy, filed this month, illustrates a stark fact about municipal finance. If bondholders -- including banks and other financial institutions -- were to take a significant hit, that could send tremors through the bond market, raising borrowing costs for cities nationwide. This is why Vallejo and other municipal governments find themselves leaning most directly on their "unsecured creditors," those with no direct claims on assets pledged against debts. In plainest talk: They are zeroing in on ordinary workers and retirees, putting wages and benefits on the line.

Ohio Bill Will Kill Collective Bargaining for State Employees - A BILL To formally state the General Assembly's intentions to revise the collective bargaining law.  BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF OHIO: Section 1. It is the General Assembly's intent that sections of the Revised Code be amended, enacted, or repealed to prohibit the state and state employees and state institutions of higher education and their employees from collectively bargaining, to abolish salary schedules for public employees and instead require merit pay, and to make various other changes to the Collective Bargaining Law.

Worker democracy works - Here’s some laboratory evidence that workplace democracy raises productivity: We report evidence from a real-effort experiment confirming that worker performance is sensitive to the process used to select the compensation contract. Groups of workers that voted to determine their compensation scheme provided significantly more effort than groups that had no say in how they would be compensated. This effect is robust to controls for the compensation scheme implemented and worker characteristics.This is especially impressive because it focuses upon only one channel through which democracy raises productivity, and ignores others - for example that workplace democracy increases workers’ monitoring of co-workers, or increases motivation over longer periods than can be measured in laboratory experiments. One message I take from this is that a government that was serious about wanting to increase the efficiency of the public sector would consider ways of empowering workers.

Debts Should Be Honored, Except When the Money Is Owed to Working People - This seems to be the lesson that our nation's leaders are trying to pound home to us. According to The New York Times, members of Congress are secretly running around in closets and back alleys working up a law allowing states to declare bankruptcy. According to the article, a main goal of state bankruptcy is to allow states to default on their pension obligations. This means that states will be able to tell workers, including those already retired, that they are out of luck. Teachers, highway patrol officers, and other government employees, some of whom worked decades for the government, will be told that their contracts no longer mean anything. They will not get the pensions that they were expecting. Depending on the specific circumstances, they may find their pensions cut back 20 percent, 30 percent, perhaps even 50 percent. There would be no guarantees if a state goes into bankruptcy. There has been a concerted effort to bash public-sector employees by either highlighting the few instances where pensions actually are exorbitant, or just making things up.

Some 43 Million Use Food Stamps - Nearly a year and a half into the economic recovery, some 43.6 million Americans continued to rely on food stamps in November. More than 14% of the population drew food stamps in November to purchase groceries as high unemployment and muted wage growth crimped budgets. The number of recipients was up 0.9% from October, according to the new report by the U.S. Department of Agriculture. Compared to a year ago, the number of people receiving food stamps was up 14.2%. In both Washington, D.C. and Mississippi more than a fifth of residents received food stamps — the highest recipiency rates of any state.In New Mexico, 19.4% of the population tapped into food stamps. That’s up 3.2 percentage points from the same month a year ago, the largest increase for any state. Idaho reported a similar jump: 14% of residents received food stamps, up 3.1 points from a year ago. Washington, D.C., Florida, Delaware and Texas all experienced similar year over year increases. (see interactive table)

Today in regressive voluntary taxes - IN WIRED, Jonah Lehrer discusses the logic of lotteries and writes:While approximately half of Americans buy at least one lottery ticket at some point, the vast majority of tickets are purchased by about 20 percent of the population. These high-frequency players tend to be poor and uneducated, which is why critics refer to lotteries as a regressive tax. (In a 2006 survey, 30 percent of people without a high school degree said that playing the lottery was a wealth-building strategy.) On average, households that make less than $12,400 a year spend 5 percent of their income on lotteries—a source of hope for just a few bucks a throw.That seems like crazy behaviour on the part of the very poor, and yet it fits nicely with the bee sting theory of poverty. Does it make you think paternalistic thoughts? Should it?

U.S. state, local fiscal situations 'a major drag'-Zandi (Reuters) - State and local government budget cuts and tax hikes will be a major drain on the U.S. economy, the chief economist for Moody's Analytics, Mark Zandi, said on Thurday. And if state and local governments suffer a string of municipal bond defaults, U.S. economic recovery could be threatened, Zandi warned Congressional lawmakers. The Senate hearing was called as Republicans in Congress push for cuts in funding to states and local government to shrink the federal deficit and lawmakers fret about the impact this could have on the U.S economy. Local and state fiscal problems have already prompted investors to dump assets in the $2.8 trillion municipal bond market over the last three months. "The tough budget and tax decisions being made in state and local government offices across the country will be a major drag, dampening enthusiasm," said Zandi, who has carefully monitored effects of the 2007-2009 recession at the state and local level. Zandi expects state and local government spending cuts and tax increases, along with their economic multipliers, to shave about 0.4 percentage points from real U.S. gross domestic product growth in 2011.

Brown cites unrest in Egypt to make his case for budget vote - Citing the pro-democracy unrest in Egypt and Tunisia, Gov. Jerry Brown called it “unconscionable” that GOP legislators are vowing to block his attempt to ask voters to extend tax hikes to balance the budget. “When democratic ideals and calls for the right to vote are stirring the imagination of young people in Egypt and Tunisia and other parts of the world, we in California can’t say now is the time to block a vote of the people,” Brown said in his first State of the State address in nearly 30 years.He said the budget has tough choices but that the people “have a right to vote” on the package. He challenged both parties to take the difficult votes necessary to balance the budget.

Michigan report paints bleak financial picture (Reuters) - Michigan is deep in debt and has almost no financial cushion for its budget, according to a report released by Governor Rick Snyder on Monday. Snyder, a Republican who took office in January, said he released the report to bring transparency to state and local finances and provide taxpayers with a complete picture.His "Citizen's Guide to Michigan's Financial Health" says state debt per capita has jumped to more than $2,431 per person in 2009 from only $724 in 1979. The state had $3.1 billion in unfunded pension liabilities at the end of fiscal 2009, while promised retiree health care benefits could top $40 billion for the state's two largest pension systems. Snyder blames Michigan's financial problems on government overspending and the recession. The state has been hit hard by troubles in the U.S. automobile industry and has had one of the highest unemployment rates among states.

State's structural deficit $10 billion, official says - Texas will have a persistent $10 billion hole in its budget for years to come unless legislators address it this session, the state’s chief revenue estimator told senators Monday morning.Pressed by Democratic senators on the Finance Committee, John Heleman said the state will have a $10 billion structural deficit in future budgets largely because the business tax has underperformed and the 2006 property tax swap has cost more than expected.The revised business tax was supposed to bring in $6 billion per year. Instead, it it is generating $4 billion. The cost of the property tax relief is also running about $1 billion per year above expectations.“That gap is not closing up,” said Heleman, chief revenue estimator for Comptroller Susan Combs.Republican state leaders have attributed the state’s budget woes to the recesssion and have dismissed calls to raise taxes to deal with the current budget shortfall, estimated at $15 billion to $27 billion, saying they can cut their way out of that hole.But the structural deficit would mean legislators would have to come back in 2013 and beyond to deal with at least another $10 billion hole.

Texas' budget challenges could persist beyond 2011 - Texas' budget problems will not go away when legislators eventually sign a balanced budget later this year, senators heard on Monday.  A $10 billion budget shortfall will reappear in future legislative sessions again and again unless lawmakers better align how much money comes in and how much goes out, said John Heleman, chief revenue estimator for Comptroller Susan Combs.  Some state leaders have attributed the state's budget woes solely to the economic downturn and have vowed to deal with the current budget shortfall, estimated at $15 billion to $27 billion, through spending cuts alone.  Heleman, with some prompting from senators, said a "structural deficit" developed in the state budget after the 2006 school finance reform package that lowered local school property taxes and restructured the business tax.  After the Texas Supreme Court found the state's school finance system to be unconstitutional, the state increased its contribution to public education to the tune of $14 billion in each two-year budget.

Andrew Cuomo Launches War on ‘Permanent’ Spending Increases - Every year, spending in certain segments of the New York state budget automatically increases a set amount — regardless of need, program efficiency, or the current level of inflation. So, for example, this year's budget includes an increase in spending on education and Medicare of 13 percent — even though the state is cash-strapped and inflation is actually closer to 2 percent. In an editorial printed in several state newspapers today, Governor Andrew Cuomo calls this system a "sham," and vowed to take it on.  Wouldn't you like your salary or savings account to be based on a formula that gave you a 13 percent increase even though inflation was under 2 percent? The world doesn't work that way — except in Albany ... The rate of increase is rarely discussed. The 13 percent increase this year is close to a state secret. I spoke with numerous experienced Albany hands who had no idea the programs increased 13 percent.

Boom Town and Bust City: A Tale of Two New Yorks - In December, as 2010 glittered to a close, life among New York City’s affluent caste looked remarkably like the go-go good old days before the recession. At the opening bell of the New York Stock Exchange on December 1, Citigroup executives, apparently unfazed by their role in the financial crisis, clapped heartily as they celebrated the initial public offering of CVOL, a complex new financial product they had cooked up. At Sotheby’s, collectors at the Magnificent Jewels auction snapped up more than $49 million worth of gilded baubles (including a 27.2 carat Tiffany diamond necklace that sold for more than $3.6 million), making it Sotheby’s highest grossing jewelry sale ever. And at Harry Cipriani, natty-looking power-lunchers waited two deep at the bar for a table, boosting a business that only two years earlier had been troubled enough that management had considered closing off nearly half the restaurant. Nearly 100 blocks north, in the heart of central Harlem, the picture is noticeably different. Things are not picking up, at least not for Pamela Brown, 51, a poised mother of three who has recently moved into the neighborhood after losing her apartment in the Bronx.

Banks Get Tough With Municipalities - As municipal borrowers look to renegotiate bond deals, banks are drawing a tough line in the refinancing talks.  Some banks that helped borrowers get cash are less willing to or able to do so now. Stronger banks that still can provide backstops, called letters of credit, will do them only with strings attached. Costs for the letters have risen. "The terrain has changed quite dramatically," The change in banks' stance and its effect on municipal borrowers' finances shows interrelationships in the credit market that are often out of view. Before the 2008 financial crisis, banks provided letters of credit as backstops that effectively guaranteed payment on floating-rate debt sold by municipal-debt issuers. They were an easy source of fee income for at least a dozen U.S. and European banks that relied on their high credit ratings to land the business. Meanwhile, variable-rate debt allowed a municipality or other entity to raise money for long periods, but at lower rates typically associated with short-term bonds.

Meredith Whitney Called To Testify Before House On Her Muni Call - According to Charlie Gasparino, the intifada between Meredith Whitney and the rest of the world just got uglier. According to the former CNBCer, the one-time Citi scourge has been called in to testify before the House TARP committee and explain her less than favorable position on munis.  From Dow Jones: Meredith Whitney has been called to appear as a witness at an upcoming hearing by the U.S. House TARP oversight subcommittee, Charles Gasparino reported Thursday. Gasparino cited sources as saying the financial analyst, whose prediction of potential defaults totaling "hundreds of billions of dollars" is widely blamed for the recent selloff in municipal bonds, has declined the offer to appear at the Feb. 9 hearing.  Rep. Patrick McHenry, might subpoena Whitney and the report in which she apparently made the prediction, Gasparino said. Attendees at the hearing will include "experts who disagree with" Whitney's call, according to Gasparino. We are not sure how this will change the fact that most municipalities are, in a word, insolvent.

End of the Road For Idaho Bridges? - Chances are you drive over or under one just about every time you get behind the wheel. We're talking about Idaho's roughly 1,800 roadway bridges. And it really doesn't matter if you're cruising the interstate, trucking down a mountain road, or fighting busy city traffic, the safety of those bridges is probably an important factor for you. Yet, due to hundreds of millions of dollars in state budget shortfalls, the safety of those bridges could be questionable. The reason: in just a few short years, about 600 of Idaho's bridges will reach the end of their life span. What's more, the Idaho Department of Transportation says they'll need massive amounts of money and time to fix them.

Detroit Public Library's 'Unprecedented' Fiscal Crisis Could Mean Closures, Layoffs -The Detroit Public Library is considering "all options" in a feverish attempt to address a looming budget crisis, according to spokesman A.J. Funchess. Could that mean branch closures? Layoffs? Reduced operating hours? "All options," Funchess reiterated Monday on WDET's "The Craig Fahle Show," refusing to discuss specifics until the library completes a budget deficit plan it must implement by the end of March. While Funchess played coy, a Jan. 18 memo from DPL Executive Director Jo Anne Mondowney warned of significant cuts in personal and other operating expenses as a result "of a fiscal crisis that is unprecedented in magnitude and is likely to continue beyond this fiscal year.

Oklahoma bill would mandate educators question evolution in classes - Educators in Oklahoma would be forced to openly question in their classes the legitimacy of the scientific theory of evolution should a new bill become state law. “It’s a simple fact that the presentation of some issues in science classes can lead to controversy, which can discourage teachers from engaging students in an open discussion of the issues,” state Rep. Sally Kern, a Republican, said in defense of the bill she filed recently. The legislation (HB 1551) titled the “Scientific Education and Academic Freedom Act” singled out “biological evolution, the chemical origins of life, global warming, and human cloning” as topics that are controversial and thus questionable. It is the second of such anti-evolution proposals in Oklahoma and the fourth filed nationwide so far this year. In response to a similar bill that died in committee in 2009, Oklahomans for Excellence in Science Education called any claims that evolution is controversial as “just plain dishonest,” adding that they are 'phony fabrications, invented and promoted by people who don’t like evolution.’

Long Beach Unified prepares to send out 621 preliminary layoff notices to teachers - Administrators at the Long Beach Unified School District say proposed budget cuts are likely to force the district in the next month to send out more than 600 Reduction In Force notices to employees with teaching credentials. If the proposed layoffs are made final by summer, the ensuing teacher cuts would mean a minimum class size increase of five students in kindergarten, first, second and third grades. The increase would lead to 30-students classes in those grades. Classes in grades sixth through 12th grade would increase by two students to 34 students per class. “I don’t find a dour mood at all but I expect that to change when we, by Feb. 15 when we announce the number of RIF notices that we’re going to have to send,” says Long Beach Unified school board member Jon Meyer. The school board meets Tuesday to discuss a long list of proposed cuts that includes the layoff of 621 employees, most of them classroom teachers. Librarians, nurses, school psychologists, counselors, and security personnel are also on the proposed layoff list.

Superintendent: 'Perfect storm' threatens Arlington school system - The Arlington school district is bracing for what Superintendent Geoffrey Hicks said is a potential "perfect storm" of budget factors that threaten to place extreme stress on the school system. Hicks said due to the looming $10 billion deficit in Albany, the district is projecting a cut in state aid next year of at least 5 percent or $2.4 million. The district will have a better idea of how much that reduction could be when Gov. Andrew Cuomo unveils his 2011-12 executive budget on Tuesday, he said. On top of the drop in state aid, next school year is when the federal stimulus money runs dry. This school year, Arlington was provided more than $4 million in revenue through the American Recovery and Reinvestment Act of 2009. "We're not going to count on a bailout from the federal government,"

Nothing Off Limits On OPS Budget - Class sizes couldgo up. Some programs, such as summer school or programs for the gifted, could be scaled back. And new textbooks could wait a year. All of those are options as Omaha Public Schools look to make budget cuts next school year. District administrators are seeking to make cuts totaling $22.2 million, including $11.1 million from programs funded by federal stimulus money that runs out after this year. Teachers, school board members and administrators say the list is intended to ignite discussions with the public and OPS staff about where to make cuts. “There's nothing that's off the table at this point,”

G.O.P. Governors Take Aim at Teacher Tenure - Seizing on a national anxiety over poor student performance, many governors are taking aim at a bedrock tradition of public schools: teacher tenure.Republican governors have concluded that removing ineffective teachers requires undoing the century-old protections of tenure. Governors in Florida, Idaho, Indiana, Nevada and New Jersey have called for the elimination or dismantling of tenure. As state legislatures convene this winter, anti-tenure bills are being written in those states and others. Their chances of passing have risen because of crushing state budget deficits that have put teachers’ unions on the defensive.

Pennsylvania schools could lose $1 billion - Less than three weeks after taking office, Gov. Tom Corbett is swinging the budget axe at public schools.  Schools may lose up $1 billion in state aid in the coming school year, setting up one of three scenarios.  Homeowners could see substantial property tax increases.  School boards may slash programs and jobs in the coming school year.  Or families may take a hit to their wallets and still see school programs or jobs wiped out.  School boards are working on their 2011-12 budgets right now. Those budgets must be approved by the end of June.  Corbett’s budget cutting will have school districts scrambling to cover a $1 billion hole in state funding that is being papered over this year with federal dollars.  How big is a $1 billion loss? It amounts to about a fifth of the $5.1 billion that the state budgeted for basic education this year. That is by far the biggest source of money outside of property taxes that most districts receive.

New York City Teacher Layoffs Likely If State Cuts Aid - New York City could lose $1 billion in education aid from the state, forcing the nation's largest school system to cut more than 21,000 teachers, Mayor Michael Bloomberg said Friday. As Gov. Andrew Cuomo prepares to unveil his first budget proposal since taking office on New Year's Day, Mr. Bloomberg and his new schools chancellor, Cathie Black, are bracing for what could be devastating cuts to city schools. On his weekly radio show Friday, Mr. Bloomberg stressed that he has yet to receive word of a definitive budget proposal from the governor. "Scuttlebutt is that the education budget will be cut statewide, and New York City's share of that would be a billion-dollar cut," he said. If the governor proposes a $1 billion cut and the Legislature approves it, the mayor estimated the city would be forced to cut 15,000 teachers, most of which would be accomplished through layoffs. That's on top of plans, outlined by the mayor in November, to cut 6,166 teachers in the fiscal year beginning July 1. In total, the administration is facing the specter of losing 21,000 teachers in the coming months, most through layoffs. An aide to the mayor warned that these numbers would probably change as negotiations with lawmakers over the state and city budgets begin in earnest in the coming weeks.

New York City May Fire 21,000 Teachers - New York City could lose $1 billion in education aid from the state, forcing the nation's largest school system to cut more than 21,000 teachers, Mayor Michael Bloomberg said Friday. As Gov. Andrew Cuomo prepares to unveil his first budget proposal since taking office on New Year's Day, Mr. Bloomberg and his new schools chancellor, Cathie Black, are bracing for what could be devastating cuts to city schools. On his weekly radio show Friday, Mr. Bloomberg stressed that he has yet to receive word of a definitive budget proposal from the governor. "Scuttlebutt is that the education budget will be cut statewide, and New York City's share of that would be a billion-dollar cut," he said. If the governor proposes a $1 billion cut and the Legislature approves it, the mayor estimated the city would be forced to cut 15,000 teachers, most of which would be accomplished through layoffs. That's on top of plans, outlined by the mayor in November, to cut 6,166 teachers in the fiscal year beginning July 1.

Cuomo’s Budget Cuts Spending on Schools and Medicaid - Declaring New York State “functionally bankrupt,” Gov. Andrew M. Cuomo proposed a $132.9 billion budget on Tuesday that would reduce year-to-year spending for the first time in more than a decade, sharply cut back projected spending on education and health care, and cut the budget for state agencies by more than half a billion dollars in the next fiscal year. In a novel and potentially risky move, Mr. Cuomo’s budget defers specific Medicaid cuts to the work of a task force he appointed last month and which includes lawmakers and representatives of labor and health care interests. The task force’s recommendations are due in one month — time that may buy Mr. Cuomo protection from the withering attack advertisements that those same interests typically unleash on governors seeking Medicaid cuts. Presenting his budget to lawmakers and other officials at a state theater in Albany, Mr. Cuomo sounded stern, even angry, about the way past governors and lawmakers have built inexorable spending growth into future budgets, even as he urged the Legislature to join him in reigning in government expenditures.

Bloomberg Seeks a Sweeping Overhaul of City’s Pensions - Mayor Michael R. Bloomberg proposed sweeping changes on Wednesday to New York’s costly pension system, seeking to save billions of dollars by fundamentally altering long-established rules that have awarded generous retirement benefits to municipal workers and have deepened the city’s financial hole. The mayor wants to require most new municipal workers to work at least 10 years, or double the current amount, to qualify for a pension, and bar them from receiving pension checks until age 65. Now most nonuniformed workers, including teachers, can get pension checks at age 57, and some police officers and firefighters can receive full pension checks after working 20 years, no matter their age. New employees would also need to contribute more of their own money to their retirement accounts, according to the plan. The mayor did not spare current retirees, vowing to eliminate a $12,000 annual stipend that retired police officers and firefighters get on top of their regular pension benefits.

Mayor Bloomberg Proposes Pension Cuts for Future NYC Workers - Future New York City workers wouldn’t receive full retirement benefits until age 65, and couldn’t count overtime in calculating retirement pay, under proposals by Mayor Michael Bloomberg.  Bloomberg offered the plan at a meeting yesterday with the Municipal Labor Committee, composed of the unions that represent the city’s 300,000 workers, his press office said in an e-mail. The changes, some of which the mayor has suggested in the past, have been opposed by union leaders. While the proposal would need state lawmakers to create a “new tier” of pensions applicable to future workers, current employees would keep their benefits.  Pension costs will amount to about 12 percent of New York City’s $67.5 billion budget for the year beginning July 1, according to the spending plan. Annual costs, now about $7.5 billion, are expected to increase to about $9 billion by 2016, from $1.4 billion in 2002, the mayor has said.

Christie Says 'Sue Me' as Pensioners Challenge Cuts - New Jersey Governor Chris Christie said he doesn’t mind breaking promises to pensioners to close a $10.5 billion budget deficit -- even if they sue.  “I have bigger issues than who sues me,” said Christie, 48, a Republican and former federal prosecutor who wants to end cost-of-living increases for retirees. “Get in line.”  Public workers in Colorado, South Dakota and Minnesota are already suing their states, which are among 18 that want to pare pension costs by increasing employee contributions, raising the retirement age or curbing cost-of-living increases.  “We believe it’s unconstitutional,” said Gary Justus, 63, a retired mathematics teacher in the Denver public schools, “These are contracts that I and 100,000 other retirees worked for.”

Hawaii State ERS Underfunded by $7 Billion - The state got just what it was expecting in its Christmas stocking. Unfortunately, it was another lump of coal – more bad news about the Employee Retirement System, which covers both state and county employees. In its five-year report, the actuary firm of Gabriel Roeder Smith & Company claims the system’s future liabilities now exceed the assets set aside to pay for them by $7.1 billion. That’s nearly $5,500 for every man, woman and child in the state. Worse still, because of the arcane rules governing actuarial accounting, those figures don’t fully incorporate the system’s huge market losses in 2008 and 2009. Consequently, an additional $1.5 billion will be added to the state’s unfunded liability over the next two years. This means the state’s legally required contribution to the pension system will increase to more than $671 million a year by 2015. The actuary’s findings were hardly a surprise to those familiar with the state’s pension system.

Why the Tax Cut Reduced Pension Checks and Why It Doesn’t Matter - Many retirees were surprised when their January pension checks were smaller than their December payments. Pension plans had increased withholding for federal income tax, shrinking net benefits. But pensioners shouldn’t worry—they’ll get it all back next year when they file their federal tax returns. It’s only a matter of timing. What’s going on? The 2010 tax act extended every provision affecting retirees. If anything, inflation adjustments should have reduced withholding. In fact, as TPC colleague Joe Rosenberg pointed out to me, new withholding tables from the IRS adjusted not only for inflation but also for the expiration of the Making Work Pay (MWP) credit that Congress created in 2009 to help stimulate the economy. Withholding dropped in the spring of 2009 so workers would get a small chunk of their tax cut in every paycheck. When the credit died at the end of 2010, taxes went back up and so did withholding.

Eyes on the Prize: A Social Security summary - We have had twenty years and a billion dollars spent by Pete Peterson and friends telling the people that Social Security is going broke and will create huge deficits that will kill the economy and be a crushing burden to the young. Peterson has funded an army of "non partisan experts" who tell the media what to say and what not to say about Social Security.  On the other side we have had Bruce Webb... who does all the hard work... showing that the reports of Social Security going broke are based on assumptions that seem unlikely. We have had professer Rosser show that even under the pessimistic assumptions Social Security with no changes at all will still be able to pay a benefit that is larger in real value than what retirees get today.  And we have had Coberly show that even under the Trustees projections... the ones that produce the "Five Trillion Dollar Unfunded Deficit!", the actual cost to each worker would be a raise of less than a dollar per week from time to time over the next seventy five years, and then no further increases after that.

Pete Peterson Using High School Courses As Trojan Horse for Anti-Social Security, Medicare Propaganda - Yves Smith - It’s not a pretty spectacle when a very rich man tells little people they ought to get by with less, particularly when his firm benefitted handsomely from the pump and dump operation that led to the financial crisis.  Pete Peterson, one of the two founders of the Blackstone Group, has had a longstanding campaign against Social Security and Medicare. He’s sufficiently aggressive that to combat consistent poll ratings that show that both programs enjoy substantial support, his foundation set out to generate different survey results by stacking the deck heavily in its favor. As we recounted last July: For those who did not catch wind of it, the Peterson Foundation, which has long had Social Security and Medicare in its crosshairs, held a bizarre set of 19 faux town hall meetings over the previous weekend to scare participants into compliance and then collect the resulting distorted survey data, presumably to use in a wider PR campaign. It’s important to keep tabs on this propaganda effort, since its big budget (the Foundation has a billion dollars to its name), means it will keep hammering away on this topic. But it appears that they overestimated how much public opinion expensively produced and stage-managed presentations can buy.

For Governors, Medicaid Looks Ripe for Slashing - Hamstrung by federal prohibitions against lowering Medicaid eligibility, governors from both parties are exercising their remaining options in proposing bone-deep cuts to the program during the fourth consecutive year of brutal economic conditions. In Arizona, which last year ended Medicaid payments for some organ transplants, Gov. Jan Brewer, a Republican, is asking the Obama administration to waive a provision of the new health care law so that the state can remove 280,000 adults from the program's rolls. In California, the newly elected governor, Jerry Brown, a Democrat, proposes cutting Medicaid by $1.7 billion, in part by limiting the beneficiaries to 10 doctor visits a year and six prescriptions a month. Gov. Andrew M. Cuomo of New York is expected to propose cutting even more — at least $2 billion from projected state spending on Medicaid, which totaled about $14 billion this year. And Gov. Nathan Deal, the new Republican leader of Georgia, proposed this month to end Medicaid coverage of dental, vision and podiatry treatments for adults. South Carolina is considering going a step further by also eliminating hospice care.

Dayton: Cuts Will Have 'Devastating Effects' On Poorest Minnesotans - Gov. Mark Dayton said Monday that his proposal to balance the state's projected $6.2 billion deficit contains "terrible cuts" that will have "devastating effects" for some of the state's poorest residents.  "I hate what I'm having to do," Dayton said at a Minneapolis event organized by the Downtown Congregations to End Homelessness.  Hundreds of advocates for the homeless gathered at Westminster Presbyterian Church to get a glimpse at what they might expect from the Democratic governor's budget. Dayton plans to release his proposal for the state's 2012-13 budget on Feb. 15.  The governor did not discuss the details of that proposal on Monday, but repeatedly said his budget cuts would be tough on poor and homeless Minnesotans.  "I won't pretend here that even my budget, which is a balance between revenues and spending cuts, is not going to have drastic effects, painful effects, harmful effects," Dayton said.

Crushed by Medicaid costs, states expand managed care - Last week, Illinois Governor Pat Quinn signed a health care reform bill that will dramatically change the way many Medicaid patients receive care. The bill aims to push half of Illinois’ Medicaid caseload into the hands of managed care organizations by 2015. Illinois has a long way to go to reach that goal: Only 8 percent of Medicaid patients in the state receive care this way now.  When he signed the bill, Quinn promised the reforms would reduce the state’s Medicaid costs by as much as $774 million over the next five years. The savings is supposed to come from shifting from a system in which the Illinois Medicaid program generally pays doctors for each service they provide, to one where the state pays insurers a set rate per year for each patient. Quinn also said Medicaid patients will see their health care services improve because insurers would be responsible for more carefully coordinating patient care to reduce avoidable hospitalizations and worsening of chronic conditions.

Nevada Medicaid Applications Up 60% - Medicaid applications are up 60% in Nevada from two years ago. KLAS-TV reported Thursday that more than 10,000 Nevadans apply for Medicaid every month, one of the highest rates for new Medicaid applicants in the country. Medicaid is mostly income-based. A single adult can make up to $14,400 a year and a family of four can make a little over $29,000 to qualify. Some people wait months to get coverage.Nevada has the highest unemployment, foreclosure and bankruptcy rates in the nation.

Medicaid Cuts Could Force Hundreds Of Texas Nursing Homes To Close - Hundreds of nursing homes across Texas warn they’re at risk of closing if state lawmakers don’t change the proposed 33 percent cut from Medicaid-funded nursing care. Like at many nursing homes, more than half of the residents at the Autumn Winds Retirement Lodge in Schertz rely on Medicaid. If the state cuts reimbursements, the out of pocket expense many patients will have to pay will likely go up, and owner Darlene Evans said that could force some residents out. "Many of them have used their private resources to fund a stay of 5-10 years, and they have exhausted those resources and now depend on the state,” she explained.  “It is a slap in the face to them to be treated this way by our lawmakers."

SC health, welfare cuts about to go into effect — South Carolina's poor are getting tough news on health and welfare benefits as February begins and agencies grapple with deficits by cutting benefits and programs. New reductions in welfare that lower average monthly checks to $216 from $270 for a parent with two children take effect Tuesday. The $270 paid for that typical mother of two was already among the nation's lowest benefits for welfare-to-work programs.Meanwhile, the state is cutting back on optional Medicaid programs as it tries to trim a $228 million deficit. On Monday, the state Department of Health and Human Services was putting together a last-minute change in just what would be lost. Advocates expect reduced welfare payments will cause more people to turn to food assistance programs for help.

Bill Would Give Sc Medicaid Doctors Less Money - South Carolina's Medicaid program director says the state can't possibly cut $228 million in health care services before the end of the year and said legislators need to work on changes that will make the system solvent. State Department of Health and Human Services Director Anthony Keck told a Senate committee Tuesday that lowering doctor and hospital reimbursement rates could trim the shortfall. But doctor, hospital and pharmacy groups warned that fewer Medicaid patients may get attention and that health care workers stand to lose jobs if rates are cut. They've proposed a higher tax on themselves to blunt the shortfall. But Keck said Gov. Nikki Haley won't support raising taxes to help Medicaid.

Medicaid agency needs $228M soon, director says - The state Medicaid director told lawmakers Tuesday he needs $228 million in the next several months or South Carolina is going to have to cut loose hundreds of thousands of poor, disabled and elderly residents who rely on the state for health care. Tony Keck's testimony before House and Senate budget writers sets the stage for a major clash over how the state will pay its bills, given the alternative of being the only state in the nation to consider withdrawing from the federal Medicaid program.  The decision to allow the Department of Health and Human Services to operate with a deficit will be made next week by the Budget and Control Board, which is chaired by Gov. Nikki Haley, who has not yet revealed where she stands on allowing her Cabinet agency to operate in the red.  State lawmakers, chiefly Senate President Pro Tem Glenn McConnell, R-Charleston, have insisted the agency find a way to make do with the cash the Legislature allocated and not come back for more

Ohio's Medicaid cost could jump 49 percent - Left unchanged, Medicaid will cost Ohio taxpayers an additional $1.6 billion next year. That's a 49 percent jump in the state's share of costs for the health-care program covering more than 2 million poor and disabled Ohioans, pushing to $4.9 billion the cost to the state for the next fiscal year. Most of the increase to Ohioans is due to the loss of federal stimulus money. The federal government has been covering a higher share of Medicaid costs to help states during the recession, but that help ends June 30. In addition, state officials are projecting an increase in enrollment and utilization of services, both of which also will drive up costs."

Emergency bill to fund Medicaid shortfall - The cost of health care is putting a strain on the Hawaii state budget, and pending legislation could both reduce and add to the problem. A Medicaid funding shortfall has resulted in an emergency request for more than $150 million. Yet some proposed measures could add to the tab, while more efficient ways of delivering care are being looked at even more closely. A pending emergency money bill before the legislature calls for $57 million in state and $96 million in federal funds to patch a Medicaid shortfall by the summer or payments to health plans may have to be deferred. "We're trying to figure out those ways in the midst of the present financial crisis that we can continue to provide the services, that in fact we can expand them,”

Republicans target long-term care program - Any American can unexpectedly need long-term health care, and the CLASS Act in the new health reform law is the federal government’s attempt to create a new, economically self-sustaining insurance program to provide such care.But the new program is also a top target of Republicans seeking to dismantle the Patient Protection and Affordable Care Act. “We don’t know who we’re going to be tomorrow morning,” Garner said, referring to how quickly life changed for Rep. Gabrielle Giffords (D-Ariz.) and several others after an attack by a gunman. Roughly 70 percent of Americans over age 65 will eventually need help with daily tasks, like dressing, eating and using the bathroom. CLASS will also serve younger people who are permanently disabled. Today, two in five people needing long-term care are between 18 years old and 64 years old.

House GOP considers privatizing Medicare - – Months after they hammered Democrats for cutting Medicare, House Republicans are debating whether to relaunch their quest to privatize the health program for seniors. House Budget Committee Chairman Paul Ryan, R-Wis., is testing support for his idea to replace Medicare with a fixed payment to buy a private medical plan from a menu of coverage options. Party leaders will determine if the so-called voucher plan will be part of the budget Republicans put forward in the spring. "No decisions have been made on the details of our House GOP budget," Michael Steel, a spokesman for Speaker John Boehner, R-Ohio, said

The Problems with Rivlin-Ryan - Uwe Reinhardt has a post about the Rivlin-Ryan Medicare Plan, which would convert Medicare into a voucher program for people currently under 55 and also fix the growth rate of the value of the vouchers at GDP growth plus one percentage point. The issue Reinhardt focuses on, and which I also blogged about a while back, is that health care costs have been climbing considerably faster than that, so over time the value of the vouchers will fall relative to real health care costs. But another problem is that, at least according to the CBO’s summary, the Rivlin-Ryan plan doesn’t say anything about how elderly people will buy insurance. Today, the cost of Medicare is reduced by the program’s bargaining power with providers. which means the total amount spent by Medicare is less than the total amount that would be spent by all Medicare beneficiaries if they had to buy insurance on the individual market. A voucher system would push them into the individual market, which means that the amount they would have to spend would go up dramatically.

Ruling Against Health Care Law Evens Scorecard at 2-to-2  - A second federal judge ruled on Monday that it was unconstitutional for Congress to enact a health care law that required Americans to obtain commercial insurance, evening the score at 2 to 2 in the lower courts as conflicting opinions begin their path to the Supreme Court.  But unlike a Virginia judge in December, Judge Roger Vinson of Federal District Court in Pensacola, Fla., concluded that the insurance requirement was so “inextricably bound” to other provisions of the Affordable Care Act that its unconstitutionality required the invalidation of the entire law.  “The act, like a defectively designed watch, needs to be redesigned and reconstructed by the watchmaker,” Judge Vinson wrote.  The judge declined to immediately enjoin, or suspend, the law pending appeals, a process that could last two years. But he wrote that the federal government should adhere to his declaratory judgment as the functional equivalent of an injunction. That left confusion about how the ruling might be interpreted in the 26 states that are parties to the legal challenge.

The simplest defense of the mandate - If one wants to address the problems in health insurance markets and/or to get providers to accept payment reforms, the mandate–or something like it–is the political price. Yes, it’s about money. What else? Put it this way, if one wants to retain a private market-based health insurance system (which ours largely is), it takes a mandate. Reject the mandate without replacement with a similar mechanism and the whole thing unravels, not just as a matter of health economics (adverse selection) but as a matter of politics. If the private solutions fail, what’s left? It’s rather obvious, isn’t it? Yet this seems not to be widely appreciated.

Virginia to ask top court to review US health law (Reuters) - Virginia said on Thursday it will ask the U.S. Supreme Court to hear its challenge to President Barack Obama's healthcare overhaul, bypassing the appeals process in a rarely used move to try to speed up a definitive ruling on the year-old law. The Obama administration opposed the move and said the case should follow the regular process, which could put off until 2012 a Supreme Court ruling on the sweeping law that aims to provide more than 30 million uninsured Americans with medical coverage and cracks down on unpopular insurance industry practices. It was unclear whether the Supreme Court, which typically prefers that cases go though the appeals court first, would grant the request. The last time it agreed to such a request was in 2002 in a case on using race in university admissions. Virginia, with a conservative Republican governor and attorney general, wants the entire law scrapped and contends a federal judge in Virginia erred in not striking down the full law which has been championed by Obama, a Democrat, and opposed by most Republicans.

Marshall Auerback: Plan B for Health Care Reform – It’s Called ‘Medicare for All’ - If we’re forced back to square one by the Supreme Court, why not get it right? My colleague, Bo Cutter, has noted the likelihood of continued challenges to health care reform in the wake of the recent Florida State Supreme Court decision to invalidate the entire health care bill. Frankly, the legal attacks on the bill, even if driven by highly suspect and selfish motives, are unsurprising. They represent the inherent flaws of a bill that entrenches private insurance as the basis for our health care system. Randy Wray and I have argued previously that the health care reform plan represented primarily a huge and unprecedented mandate to benefit private insurers. Under the new “reform,” 50 million people are being told they must turn over their paychecks to private companies. Of course this was bound to lead to court challenges. And it is hard to fault the Virginia and Florida courts for rejecting the mandate. The auto insurance analogy that has been deployed in favor of the mandate is flawed because NOBODY is forced to drive a car. If we had wanted incremental improvements to HEALTH CARE there are nearly infinite combinations of small policy changes we could have pursued — without involving insurers at all. And Dems celebrating this great victory by Wall Street were both laughable and hugely disingenuous. .

The Health Care Debate: Yes, Congress Can Make You Buy Vegetables! - Some folks claiming that Congress's passage of the health insurance mandate in the Affordable Care Act exceeded Congress's Commerce Clause powers have argued that if Congress can make you buy insurance (or pay a tax or fine) as part of health care reform, it can also make you buy veggies (or pay a tax or fine) as part of national nutritional reform. So what, says former Reagan Administration Solicitor General Charles Fried. Fried thinks that it's complete nonsense that Congress lacked authority to pass the insurance mandate, and he's got a view on forced vegetable puchases as well. Testifying before Congress on Wednesday, Fried said: As for the veggies, I suppose ... forced feeding would indeed be an invasion of personal liberty, but making you pay for them would not, just as making you pay for a gym membership which you can afford but do not use would not.

A Food Manifesto for the Future - For decades, Americans believed that we had the world’s healthiest and safest diet. We worried little about this diet’s effect on the environment or on the lives of the animals (or even the workers) it relies upon. Nor did we worry about its ability to endure — that is, its sustainability. That didn’t mean all was well. And we’ve come to recognize that our diet is unhealthful and unsafe. Many food production workers labor in difficult, even deplorable, conditions, and animals are produced as if they were widgets. It would be hard to devise a more wasteful, damaging, unsustainable system. Here are some ideas — frequently discussed, but sadly not yet implemented — that would make the growing, preparation and consumption of food healthier, saner, more productive, less damaging and more enduring. In no particular order:

EPA’s Jackson summoned to discuss chemicals in tap water With the Obama administration moving toward stricter rules on a pair of toxic chemicals that have been found in public water supplies, the head of U.S. EPA has been summoned to Capitol Hill to explain the agency’s plans to the Senate Environment and Public Works Committee. That issue has emerged as a priority for EPW Chairwoman Barbara Boxer (D-Calif.) early in the new Congress. Last week, she introduced bills that would require EPA to set standards for perchlorate, a rocket-fuel component that is believed to have contaminated water supplies in at least 35 states, and chromium-6, a chemical that is suspected to cause cancer and was recently found in the water of about 30 U.S. cities. Boxer’s bills would force the hand of the Obama administration, which is already considering limiting the two chemicals.

Coal ash a key source of tap-water toxin — report - With U.S. EPA’s chief preparing to testify today before a Senate panel on toxics in drinking water, a new report from environmental and health groups identified the waste from coal-burning power plants as a key source of one of the chemicals coming under the microscope. EPA took swift action last month to prod utilities to tighten drinking water screening for hexavalent chromium, a probable carcinogen, after a nonprofit group sounded alarms over tests that found significant amounts of the chemical in the tap water of 25 U.S. cities (E&ENews PM, Jan. 11).A new report released yesterday draws a link between hexavalent chromium and coal ash, identifying the ash landfills as potential contributors to the groundwater pollution. Jackson is scheduled to testify on hexavalent chromium today at a hearing of the Senate Environment and Public Works Committee (E&E Daily, Jan. 31).

EPA Decides to Limit Rocket Fuel in Drinking Water–Guess Who Objects? Overturning a 2008 decision by the Bush administration, the Environmental Protection Agency announced Wednesday that it will establish a federal limit on the amount of perchlorate in drinking water. This would be the first nation-wide limit and would crack down on the naturally occurring and artificially produced chemical that is used in rocket fuel, fireworks, flares and missiles. The reason for concern is that the EPA says perchlorate may have an impact on the thyroid, which Time Magazine’s Bryan Walsh calls a “nasty” chemical because it hinders the “thyroid’s ability to produce hormones needed for developing fetuses and infants.” According to an EPA study, the chemical’s reach is not small: “more than 4 percent of public water systems have detected perchlorate and between 5 million and 17 million people may be served drinking water containing perchlorate.” Furthermore, The Washington Post’s Brian Vastag notes that the FDA peeked into just how pervasive perchlorate was in the food supply in 2006 and found it in 74 percent of the items it tested. Unsurprisingly, Wednesday’s announcement has its critics. Among them: The Perchlorate Information Bureau, of course, “ supported by Aerojet, American Pacific Corporation and Lockheed Martin,”

TED Talk: Blue is the New Green As Water Footprints Enter The Economy - Water rights holders get paid to leave water in streams, businesses pay to clean up water... it sounds too good to be true, yet it's a solution that is already in practice and working today. Rob Harmon of the nonprofit Bonneville Environmental Foundation, explains the plan they put together for a market-based willing seller, willing buyer solution that doesn't require litigation. It solves a major issue in water rights conflict and riparian habitat degradation, and helps restore ecosystems. How does it work? Check out the short talk and see.  As Sustainable Business Oregon reports, the nonprofit sold the country's first retail renewable energy certificate in 2000, and now it has moved on to selling water restoration certificates, or WRCs, late summer 2009. Similar to carbon offset credits, one $1 certificate represents 1,000 gallons of water restored to a river or stream, which companies can purchase to offset their water consumption.

2,500 Gallons All Wet? - I have been asked recently whether the figures given in Diet For A New America for how much water it takes to produce a pound of meat today are still accurate. The figure of 2,500 gallons to produce a pound of meat that I used in Diet For A New America comes from a statement by the renowned scientist Dr. Georg Borgstrom at the 1981 annual meeting of the American Association for the Advancement of Science, in a presentation titled “Impacts On Demand For And Quality Of Land And Water.” He was then head of the Food Science and Human Nutrition Department of the College of Agriculture and Natural Resources at Michigan State University in Lansing, Michigan. I’m not aware of anything that has changed in the production of modern meat that has made the industry more water efficient.The December, 1999, issue of Audubon concurs, stating (page 110), “Nearly half the water consumed in this country…is used for livestock, mostly cattle.” There have, however, been interesting developments relative to these figures.

What if mandatory rainwater harvesting isn't enough? - When it comes to conserving potable water, no one says the city of Flagstaff and its residents aren't trying. Studies show that the city has one of the lowest per-capita water use rates in Arizona -- and that even includes NAU students and all those summer tourists. But as the city tries to wring even more conservation out of its residents, it has moved from voluntary incentives based on price to mandatory water schedules. And now it might be about to mandate one type of nonpotable water source that will inevitably drive up the cost of construction -- and might not work. The city's main water supply problem is tied to peak use. For 10 months out of the year, water use of about 8 million gallons a day is well below capacity of about 19 million gallons a day. But during May and June, when many residents turn on the sprinklers to water their lawns and gardens, the city's deep wells, Lake Mary and the Inner Basin pipeline are taxed to the limit.

Pity the businessman and the farmer - What is it about smallness that turns erstwhile progressives into the next pro-business lobbyist? I think the fetishization of small, whether it’s small businesses or small farmers, does a huge disservice to welfare generally, but in particular it can easily get in the way of policies and outcomes that progressives care about. Case in point is Marion Nestle discussing Walmart’s new healthy foods initiative. Now sketpicism is of course merited anytime a business appears to be doing something that is less than profit maximizing, but skepticism about efficacy is not what bothers me about Nestle’s take. No, it’s worrying about how the policy will affect our cherished smallness:Walmart says it will price better-for-you processed foods lower than the regular versions and will develop its own supply chain as a means to reduce the price of fruits and vegetables.  This sounds good, but what about the downside?  Will this hurt small farmers?…

USDA Completely Deregulates Genetically Engineered Alfalfa - On January 27, the US Department of Agriculture reached a decision on genetically engineered Roundup Ready^® alfalfa, having reached the end of the review period for the environmental impact statement (EIS). Out of the three possible options—regulation, partial deregulation, and complete deregulation—the USDA chose the worst possible option: full non-regulated status. This was unexpected news, as the USDA had been hinting that it would partially deregulate. Agriculture Secretary Tom Vilsack previously suggested that the agency would “pursue compromise.”There is evidence that the USDA was subjected to intense lobbying by Monsanto at the last minute, and possible collusion with Monsanto by the White House. According to Food Safety News, “Sources familiar with the negotiations at the USDA…believe the White House asked Vilsack to drop proposed regulations so the Administration would appear more friendly to business.”

Organic Leaders Targeted in Approval of Monsanto’s GM Alfalfa - In a surprising attack on three well known organic brands, the Organic Consumer’s Association and the Agriculture Society reported that the named brands gave a supportive nod to what they’re calling “the conditional deregulation” of genetically modified (GM) alfalfa. The nation’s first certified organic retail chain, Whole Foods—who has a storewide policy banning the sale of GM foods—along with the largest organic yogurt brand, Stonyfield Yogurt, and Organic Valley, the largest co-op of organic meat, egg and dairy farmers issued their formal denial of claims that they support the deregulation of GM alfalfa. The accusations may have come as a result of Agriculture Secretary Tom Vilsack’s friendships with individuals in the organic organizations. He received financial backing from many leaders in the natural foods industry during his run for president in the 2008 primaries and has developed what are being called “personal relationships” with individuals in the organizations.

A spat among friends over GMO alfalfa - Last week, Agriculture Secretary Thomas Vilsack announced rules that would de-regulate a genetically modified (GMO) variety of alfalfa.  This decision disappointed advocates for organic agriculture, because there are legitimate concerns that the new variety will sometimes spread to the fields of organic alfalfa farmers, who are not supposed to use GMO varieties. Earlier, Vilsack had made some effort to explore a co-existence policy, which would permit GMO alfalfa, but with restrictions to ensure that it does not contaminate the fields of other farmers.  In the end, bowing to intense pressure from agricultural technology companies and major farm interests, USDA mostly skipped the co-existence idea and opted instead for what amounts to outright de-regulation. Different regulatory agencies in different countries may react differently to the possibility of an occasional GMO plant in organic fields.  In the United States, although this possibility may not put organic farmers in much jeopardy of losing their certification, most organic farmers and organic-friendly food companies are upset by the USDA decision.

Why You Can Now Kiss Organic Beef, Dairy and Many Vegetables Goodbye. USDA rules that no one needs to monitor Monsanto's genetically modified Roundup-Ready alfalfa - Monsanto has been trying for years to gain approval for its genetically modified Roundup-Ready alfalfa seed. On January 27, 2011, it finally got the green light in the form of "deregulation." This means that farmers are free to plant GE alfalfa, and the USDA won't even be keeping track of who plants it where. There will be no tracking, no notification system, and no responsibility on the part of Monsanto for any business that is lost as a result of the genetic contamination that is certain to result. If the ruling stands, we can kiss organic dairy and beef goodbye, and many organic vegetable growers will have to switch the cover crops they use on their fields.The Center for Food Safety is planning on dragging the issue back to court, where the organization has a good track record in recent years against Monsanto, even in the notoriously business-friendly U.S. Supreme Court, which in June upheld a ban on the planting of Roundup-Ready alfalfa until the USDA drafts an environmental impact statement (EIS).

Winter storm 2011 - "storm of the century" hits farmers hard - The winter 2011 storm that is referred to as "the storm of the century" is hitting farmers extremely hard. The snow that's quickly moving across the nation is significantly threatening the agriculture industry.The storm heading to the U.S. plains are expected to threaten key farming operations including winter wheat crops, deliveries of grain, and livestock herds. Tuesday Kansas, Missouri, and Oklahoma are in the midst of experiencing a foot or more of snow and blizzard conditions.For farmers, this isn't ideal for producing America's food supply. Ranchers are scurrying to protect their animals from brutal winds and to have drinking water and hay.  When it comes to wheat fields, the seeds planted last fall may be threated as well with the snow and ice if they lack protective snow cover.  Frigid weather conditions can potentially result in winterkill for new plants if they don't have adequate moisture.

Corn, Soybeans Advance to 30-Month Highs on Argentine Strike - Corn and soybeans rose to 30-month highs in Chicago as a strike by port workers in Argentina disrupted crop shipments. Rice climbed to the highest price in 13 months.  Argentine port workers, who have been on strike since last week, are blocking between 20 and 30 soybean- and grain-hauling ships from the country’s main terminals, Alberto Jacobson, head of the San Lorenzo Chamber of Commerce, said yesterday.  “A significant amount of vessels are unable to load with grain and oilseed exports,” Luke Mathews, a commodity strategist at Commonwealth Bank of Australia, said by phone from Sydney today. “Buyers will continue to turn to the U.S.” Corn for March delivery gained 4.75 cents, or 0.7 percent, to $6.7075 a bushel at 10:49 a.m. London time on the Chicago Board of Trade

Sugar Rises to 30-Year High as Storm Heads for Australian Crop -  Sugar futures surged to a 30-year high on mounting concern that global supplies will trail demand following crop damage in Australia and India, two of the world’s leading producers.  Cyclone Yasi has crossed the coast of Australia’s Queensland state. The storm may cause crop losses of as much as $505 million, a grower group said. Output from India may be less than predicted after heavy rains, a producer organization said. Prices have more than doubled since the end of June.  “The cyclone is the story,” said Jason Cole, a broker at Starsupply Renewables SA in Geneva. An extended rally will depend on the severity of the damage, he said.  Raw sugar for March delivery climbed 1.23 cents, or 3.6 percent, to 35.19 cents at 11:38 a.m. on ICE Futures U.S. in New York. Earlier, the price reached 36.08 cents, the highest for a most-active contract since November 1980.

Cotton Climbs for Third Day to Record on Tight Supply Concern - Cotton futures surged to a record on mounting supply concerns after flooding in Pakistan and Australia slashed crops.  Pakistan, the fourth-biggest grower of cotton, faces a shortfall of 2.5 million bales, according to the nation’s textile mills association. An Australia industry group said last month that 300,000 bales were lost, and the northeast part of the country braced today for Tropical Cyclone Yasi. Cotton inventories monitored by ICE Futures U.S. tumbled 85 percent since June 1 and prices have more than doubled.  “At the moment, supply is extremely tight,” said Hiroyuki Kikukawa, the general manager of research at IDO Securities Co. in Tokyo. “Nothing can stop the current runaway price for the time being.”

Why your T-shirts could drive food inflation - As global food inflation surges to ever greater heights, fears are mounting prices will be driven even higher by a commodity that’s not even edible: cotton. The price of cotton is at highs not seen in more than 140 years, sparking concerns that farmers in many countries will switch their crops for the more lucrative commodity, and stop planting food staples such as corn, soybeans and sugar.Many food stocks are already tight, and prices at record levels, because of poor weather conditions in countries such as Russia, Canada and Australia, coupled with demands for biofuel and the overall lack of investment in agriculture in many regions. Any big move by farmers will cut supplies even more and increase prices.

Rice Hits 27-Month High  - U.S. rice futures reached 27-month highs Thursday on concerns Egypt will start importing in the face of escalating tensions and U.S. farmers will sow fewer rice acres come spring. Rice futures climbed 2% to settle at 16.285 cents a pound at the Chicago Board of Trade. The grain was left out of a boom in U.S. commodity prices last year, but has more than kept pace in 2011, up 16% so far this year. In 2010, rice futures fell nearly 4%, while soybean futures climbed 34% and cotton futures surged 91%. Rice futures have been fueled by projections U.S. farmers are likely to abandon the grain this spring in favor of more profitable crops like corn, soybeans and cotton. Analysts predict plantings of long-grain rice—the variety traded in Chicago—could drop 30% from last year.

China makes fake rice from plastic : report  - China allegedly makes fake rice, reported The Korea Times, a reputable English-language newspaper in Korea on January 20, 2011. The original source is a report obtained by "Singapore media," said The Korea Times. Allegedly, some Chinese companies produce fake rice by mixing in plastic. This fake rice is then "massively sold" on the Chinese market. Fake rice sold in Taiyuan, Shaanxi is made from a mixture of potatoes, sweet potatoes, and plastic, according to the report.  The Korea Times said while officials warn that eating fake rice is obviously dangerous to human health, merchants still sell it in "mass quantity" because it's highly profiit. China has a history of making fake food items. The Global Times reported in July 2010 that a company in Xi'an, Shaanxi makes a fake version of the expensive "Wuchang rice" by adding flavoring to ordinary rice

Commodities Overtake Stocks, Bonds After Two-Day Gain - The biggest two-day rally in commodities since December pushed raw materials past stocks, bonds and the dollar for a second month, after Egyptian riots drove oil, wheat and rice higher.  The S&P GSCI Total Return Index of 24 raw materials gained 3.1 percent in January and rose for a fifth month, the longest streak since 2004, according to data compiled by Bloomberg. The MSCI All-Country World Index of equities climbed 1.6 percent including dividends. The U.S. Dollar Index, a gauge of the currency against six counterparts, fell 1.6 percent. The Global Broad Market Index for corporate and government bonds lost 0.3 percent, Bank of America Merrill Lynch data show.  Commodities have beaten stocks for three months, the longest stretch since June 2008, after the Federal Reserve pledged to buy $600 billion of Treasuries and demand for clothes and food lifted cotton, cocoa and copper. Equities were poised to break the streak until Jan. 28, when concern Egyptian President Hosni Mubarak will be ousted sent the MSCI gauge to its biggest retreat since November and boosted food and fuel.  “There are supply-side issues that have really kicked up the price of a lot of commodities,”

Here’s The Real Cost Of Food Inflation In America - Take a look at the chart we’ve constructed from the Bureau of Labor and Statistics 2009 Consumer Expenditure Survey.  It conveys a sense of how Egypt’s poverty combined with the sharp rise in food prices sparked the political revolt against the Mubarek government. The chart illustrates how the lower income groups in the U.S. really get squeezed when food and gas prices rise.  In the U.S. the average annual income for the consumer units (households) measured is $62,857, where food expenditures consume a little over 10 percent of income. But averages distort the true picture of what is really going on as only 15 percent of consumer units fit into this income group.   Many have drowned in pools of water where the average depth is only 11 inches deep.    Almost one third of the households in the U.S.  spend close to or more than 20 percent of their annual income on food. Remember this the next time the market cheerleaders and policymakers tout core CPI and dismiss food and energy inflation.  It may also help explain the rise in  social angst in U.S. society.  (click here if chart is not observable)

Demand for fish hits record high - The global consumption of fish has hit a record high, reaching an average of 17kg per person, a UN report has shown. Fisheries and aquaculture supplied the world with about 145m tonnes in 2009, providing about 16% of the population's animal protein intake.The findings published by the Food and Agriculture Organization (FAO) also stressed that the status of global fish stocks had not improved. It said that about 32% were overexploited, depleted or recovering."That there has been no improvement in the status of stocks is a matter of great concern," said Richard Grainger, one of the report's authors and FAO senior fish expert. "The percentage of overexploitation needs to go down, although at least we seem to reaching a plateau," he observed.

85% of oyster reef ecosystems have been lost - A survey of oyster habitats around the world has found that the succulent mollusks are disappearing fast and 85% of their reefs have been lost due to disease and over-harvesting. Most of the remaining wild oysters in the world, or about 75 percent, can be found in five locations in North America, said the study published in BioScience, the journal of the American Institute of Biological Sciences….“Oyster reefs are at less than 10 percent of their prior abundance in most bays (70 percent) and ecoregions (63 percent),” said the study.“They are functionally extinct — in that they lack any significant ecosystem role and remain at less than one percent of prior abundances in many bays (37 percent) and ecoregions (28 percent) — particularly in North America, Australia and Europe.”

CBSNews: In-Vitro Meat Still Not on the Menu -A few years ago, CBSNews visited with a scientist who claimed he could grow real hamburgers out of a few cells taken from a live animal. He still hasn't reached the "Eureka!" moment, but after a decade of research, Vladimir Mironov's work at the Medical University of South Carolina, Vladimir Mironov is still attracting press attention. Understandably. In an era punctuated by concerns about rising food prices - let alone increasing food scarcity - the idea of growing meat from test tubes holds a certain fascination. If it works as advertised, the process would be a boon for many nations where arable land comes at a premium. What's more, raising cattle is a land-intensive process and has been criticized by environmentalists. One study published a couple of years ago claimed that meat production was responsible for half of all greenhouse gases.  But so far, Miranov's work hasn't translated into into official - read budgetary - recognition by the powers that be - something that he made sure to mention to the Reuters reporter who interviewed him. Not a cent from the National Institute of Food and Agriculture or the National Institutes of Health. He said that only the National Aeronautics and Space Administration funded the work for a brief time.

Commodities Traders May Face Curbs Under EU Proposal - Commodity traders in the European Union may face restrictions including position limits under proposals from the European Commission aimed at curbing excessive price volatility. Curbing the proportion of a commodity derivatives market that a single trader can control may help rein in “excessive speculation,” the commission said in an e-mailed statement. Price fluctuations hurt farmers, food-makers and consumers, including in the poorest countries, the commission said. “We need regulators to keep a closer eye on positions taken up in respect of commodity derivatives,” “This will include the possibility of introducing position limits if necessary,” he said.French President Nicolas Sarkozy said in Davos last week that speculation was driving up food prices. World food costs rose to a record in December on higher costs for sugar, grain and oilseeds, according to a United Nations report earlier this month, contributing to the uprising that ousted Tunisia’s Zine El Abidine Ben Ali on Jan. 14. Protests have spread to Egypt, Algeria, Morocco and Yemen.

FAO sees Jan food prices close to record high - (Reuters) - World food prices in January are expected to be close to record highs seen in December when they climbed above peaks which triggered riots in several countries in 2008, an economist at the United Nations' food agency said."FAO's expectation is that the January index would be very close or slightly below December," Abdolreza Abbassian, UN's Food and Agriculture Organisation economist, told Reuters on Monday ahead of the release of FAO's monthly food index. The FAO Food Price Index, which measures monthly price changes for a food basket composed of cereals, oilseeds, dairy, meat and sugar, hit an all-time high of 214.7 points in December, above a previous record set in June 2008 during the food crisis.High food prices have come back into the spotlight after they fuelled protests in Tunisia that led to the fall of the president there earlier this month and have spilled over to Egypt. World leaders at the World Economic Forum in Davos last week warned rising food prices risked stoking more unrest and even war. French President Nicolas Sarkozy reiterated calls for regulation to rein in speculation and volatility.

Global food prices rise to new highs, not expected to fall in coming months – UN - Food prices around the world surged to a new historic peak in January, for the seventh consecutive month, the United Nations Food and Agriculture Organization (FAO) reported today, adding that the prices are not likely to decline in the months ahead. According to the FAO, its latest Food Price Index, a commodity basket that tracks monthly changes in global food prices, averaged 231 points in January and was up 3.4 per cent from December last year – the highest level since the agency started measuring food prices in 1990. It added that prices of all monitored commodity groups surged in January, except the cost of meat, which remained unchanged. “The new figures clearly show that the upward pressure on world food prices is not abating. These high prices are likely to persist in the months to come,”. “High food prices are of major concern especially for low-income food deficit countries that may face problems in financing food imports and for poor households which spend a large share of their income on food.”

Rampant Speculation Inflated Food Price Bubble - The Russian drought simply sparked this latest speculative bubble. Russia did lose 33 percent of its wheat harvest, but it had plenty of wheat stocks on hand to make up the difference. Instead of using those stocks, the Russian government was persuaded by multinational grain companies to ban wheat exports.  That enabled those companies to break their low-price export contracts with Egypt, Bangladesh and other countries and sell their grain on the inflated domestic wheat market, says Devlin Kuyek of GRAIN, a small international non-profit organisation that works to support small farmers.  "Big companies now control much of the Russian agriculture," Kuyek said in an interview. GRAIN has documented how foreign and local investors have set up huge, vertically integrated "agro-holdings", particularly in the southern grain belt where they now control 40-50 percent of total grain production.   Russia is a major wheat exporter and Swiss-owned Glencore exports most of Russia's wheat. However, GRAIN research reveals that Glencore lobbied to get an export ban allowing the company to cancel its low-price contracts without penalty. To ease the 'sting' of the ban, Russia also promised one billion dollars in low-interest loans and subsidies for grain producers. "Countries like Egypt really got screwed and the grain traders made a killing," Kuyek said.

Commodity prices and speculation, again - I think prices are rising mainly in response to increased growth and demand in the Southern Hemisphere and Asia, but particularly from China.  Speculation is an important part of commodity prices, but as far as I can tell, only in good ways. For example, if the market expects demand to rise in the future, prices may go up today, since some of today's production will be placed in inventories in anticipation of higher future demand.  Without speculation, we wouldn't have markets trying to maneuver production from times when it is less valued to times when it will be more valued. Note that speculation does not necessarily imply a speculative bubble.  I do not think there is a speculative bubble in commodities, nor do I think has been one in recent history.  I agree with the likes of Paul Krugman who has pointed out several times, that for there to be a speculative bubble in commodity prices, there needs to be a general buildup in inventories.  We have not seen such a buildup in inventories.  It's been quite the opposite: prices have gone up in response to declines in inventories.  This is what happened in 2008 as well.

Soaring Food Prices  - Krugman - What’s behind the surge in food prices? The usual suspects have made the usual claims — it’s all about the Fed, or it’s all about speculators. But I’ve been looking at the USDA World supply and demand estimates, and what stands out from the data is mainly that we’ve had a huge global harvest failure. Here are some percentage changes in world grain production between 2008/2009 and 2010/2011, according to the USDA estimates: Overall grain production is down — and it’s down substantially more when you take account of a growing world population. Wheat production (this time not per capita) is way down. You might ask why a production shortfall of 5 percent leads to a doubling of prices. Part of the answer is that some kinds of demand are growing faster than population — in particular, China is becoming a growing importer of feed to meet the demand for meat. But the main point is that the demand for grain is highly price-inelastic: it takes big price rises to induce people to consume less, yet collectively that’s what they must do given the shortfall in production.

Wholesale food prices rise for 7th consecutive month - World food prices rose to a record high in January, according to the UN’s Food and Agricultural Organization (FAO). The FAO Food Price Index, which measures the wholesale price of basic foods within a basket, averaged 231 points last month, up by 3.4% from December. It is the seventh monthly rise for the index. “These high prices are likely to persist in the months to come,” FAO economist Abdolreza Abbassian said. The individual group components of the index, apart from meat, all registered rises in January. The Cereal Price Index averaged 245 points in January reflecting rises in the price of wheat and grain. This was driven higher by flooding in Australia, which is a major wheat exporter. Rice prices fell slightly as the data coincided with harvests in many countries. The high price of food is thought to have been a factor in recent political unrest in both Algeria and Tunisia in the form of anti-government demonstrations, protests which have spread to neighbouring Egypt and Jordan. Recently, white sugar futures hit a record high over concern that the damage Cyclone Yasi could cause to the Australian cane crop. World Bank President Robert Zoellick has asked global leaders to “put food first” and tackle the problem of price volatility.

World entering era of food price volatility: WFP (Reuters) - The world is going into a period of food volatility and supply disruptions due in part to weather related problems and a backdrop of rising prices, the U.N. World Food Programme's executive director said on Thursday. "We are entering an era of food volatility and disruptions in supplies. This is a very serious business for the world," Josette Sheeran, executive director of the World Food Programme, told Insider TV on the sidelines of a U.N. Conference in London. "If people don't have enough to eat they only have three options: they can revolt, they can migrate or they can die. We need a better action plan," she said. "We think that we are in an era where we have to be very serious about food supply." Earlier on Thursday the U.N. Food and Agriculture Organisation said world food prices hit a record in January

Tensions rise on surging food prices  -- Food prices have been rising worldwide, as the cost of raw materials and agricultural products surge, contributing to political unrest around the globe. In December, international food prices broke an all-time high when they rose 25% for the year, led by rising costs for staples like rice, wheat, and maize, the United Nations reported.  The sharp rise in food prices, in particular, has become "a source of political instability," New York University economist Nouriel Roubini, told CNNMoney. Bad weather in Australia and Russia over the summer severely diminished wheat crops, partially fueling the latest commodities surge. Rising incomes in emerging markets like China and India also play a role, analysts at the Eurasia Group say. The growing middle class in those countries has prompted a shift from a grain-based diet to one consisting of more meat.

Fed May Be Fueling U.K., EU, Commodity-Price Inflation, RBC Says - The Federal Reserve’s program of asset purchases may be fueling an “inflation problem” in Europe even as price rises in the U.S. remain subdued, according to Royal Bank of Canada.  “One need not look to U.S. prices or factors that are relevant to the Fed’s mandate for evidence that the Federal Reserve is creating an inflation problem,” David Watt, senior currency strategist in Toronto, wrote in a research report today. “Maybe look to the U.K., where as in the U.S., there are no domestic cost pressures driving up inflation. Maybe look to the European Union. Maybe look to commodities, which are adding to pressures in many countries, but not in the U.S.,” Watt wrote.

Fed chief Ben Bernanke denies US policy behind record global food prices - Mr Bernanke said that the rapid growth of developing economies was behind the increase in food prices, rather than the Fed’s decision to embark on a second, $600bn (£371bn) round of printing money. “Clearly what’s happening is not a dollar effect, it’s a growth effect,” Mr Bernanke said in a rare question and answer session with journalists at the National Press Club in Washington on Thursday.  The United Nations Food and Agriculture Organization (UN FAO) has warned that high prices, already above levels in 2008 which sparked riots, were likely to rise further.  The FAO measures food prices from an index made up of a basket of key commodities such as wheat, milk, oil and sugar, and is widely watched by economists and politicians around the world as the first indicator of whether prices will end up higher on shop shelves.  The index hit averaged 230.7 points in January, up from 223.1 points in December and 206 in November. .

India’s crops affected by erratic climate - A number of India’s key crops are experiencing the effects of climate change, experts say. H Pathak, an investigator with the Indian Agricultural Research Institute’s Climate Change Challenge Program, said global warming isn’t limited to a rise in average temperatures. “It’s a little more complicated than that. There is for example also a rise in carbon dioxide and a change in rainfall patterns, which could affect India very severely because much of our agriculture is still rain-fed,” Pathak told The Times of India… While some regions of India are getting too much rain, other regions aren’t getting enough, affecting crops ranging from coffee and tea to grapes and rice. In the south, erratic rain patterns are causing the coffee crop to fruit twice and sometimes three times, resulting in inferior beans.

World Food Prices Hit Record High - World food prices rose to an all-time high in January, according to the UN's Food and Agriculture Organization (FAO).  The FAO's Food Price Index measures the cost of a basket of basic food supplies -- sugar, cereals, dairy, oils and fats and meat -- across the globe.  The index rose by 3.4% in January -- the seventh monthly increase in a row -- to its highest level since records began in 1990.  The cost of sugar, cereals, dairy and oils and fats all went up last month, while meat prices remained steady.  FAO economist Abdolreza Abbassian said high prices were likely to persist in the months to come.  Rising commodities costs are one of the major factors behind a growing wave of civil unrest across the Middle East and North Africa.

Reports: Egyptian and Tunisian riots were driven in part by the spike in global food prices - Food prices were driven up by extreme weather and high oil prices - Political unrest has broken out in Tunisia, Yemen, Egypt and other Arab countries. Social media and governmental policies are getting most of the credit for spurring the turmoil, but there’s another factor at play. Many of the people protesting are also angry about dramatic price hikes for basic foodstuffs, such as rice, cereals, cooking oil and sugar.That’s from the NPR story today, “Rising Food Prices Can Topple Governments, Too.” This summer’s extreme global weather raised fears of a “Coming Food Crisis,” as CAP’s John D. Podesta and Jake Caldwell warned in Foreign Policy:  “Global food security is stretched to the breaking point, and Russia’s fires and Pakistan’s floods are making a bad situation worse.”  Earlier this month I discussed how, in fact, “Extreme weather events helped drive food prices to record highs.”  Back then, experts were worried about food riots.  Now they are happening. The Washington Post reported on the connection between food prices and Tunisian  violence in mid-January, in a piece headlined, “Spike in global food prices contributes to Tunisian violence”:

Ensure food security well in time - Food scarcity looms large worldwide. Food and Agricultural Organisation (FAO) has revealed in its report recently that only 94 per cent of the total demand of food grains will come to the food markets. As a result, 6.0 per cent deficit of food grains will remain to be fulfilled.  According to the report, 4.2 per cent increase in the price of food has been recorded so far on account of diminishing supply of food in the international market. The FAO report has also depicted that 77 food subsidised countries, including Bangladesh, will have to spend 12 per cent more for the import of food grains to avert a serious food crisis at home.  In the circumstance, the government should increase food stock on priority basis. Moreover, it will be very difficult to import food grains, if the price of fertiliser was increased due to price hike of fossil fuel.

High food prices are contributing to MidEast unrest - And, yes, extreme weather and high oil prices are major contributors to those price hikes - Leading experts, reported in the media, have made the case that high food prices are one of the triggers of MidEast unrest.  Bizarrely, people who were once full-time professional journalists now dismiss the serious reporting of their fellow journalists — and are apparently completely unable to distinguish between underlying causes and triggering events.

• Washington Post headline (1/14):  “Spike in global food prices contributes to Tunisian violence”
• Guardian headline (1/15): “Jordanians protest against soaring food prices:  Protesters angry over high food costs and unemployment call for the prime minister to step down, in an echo of Tunisian demonstrations”
• NPR story (1/30):  “Rising Food Prices Can Topple Governments, Too:  Political unrest has broken out in Tunisia, Yemen, Egypt and other Arab countries. .  Many of the people protesting are also angry about dramatic price hikes for basic foodstuffs, such as rice, cereals, cooking oil and sugar.”

Bernanke and Ethanol Sink Egypt -In addition to Egypt, the people have taken to the streets to varying degrees in Algeria, Jordan, Libya, Morocco, and Yemen. Local food riots have even broken out in rural China and other Asian locales.  While the mainstream media focuses on the political aspects of this turmoil, they are overlooking the impact of rising inflation, driven mainly by record food prices. For example, former Bush advisor Dan Senor notes that Egypt is the world’s largest wheat importer. Yet because of skyrocketing prices, Egyptian inflation is now over 10 percent, while some experts estimate that Egyptian food inflation has risen as much as 20 percent.  So I have to ask this tough question: Is Ben Bernanke’s ultra-easy QE2 money pump-priming partially to blame?  Commodities are priced in dollars, and the Federal Reserve has been overproducing dollars for more than two years. Consequently, emerging markets throughout the world -- and the food sector in particular — are suffering from rising inflation.

Hunger for Change  - Sharply rising food prices have often meant trouble for governments, especially when people expect better and the cost of food is a big fraction of average household consumption. In the U.S., where grocery costs are a small fraction of the average budget, it is hard to imagine the effect of sharply rising prices for bread or rice, cooking oil, and other essential foods. It's seldom been enough for out-of-touch regimes to say, "let them eat paistries" (or brioche, as Marie Antoinette put it in the face of the French revolution).  In what countries is a big fraction of the average household budget gobbled by purchases at the produce market, bakery, and butcher? Based on data from Nomura, Business Insider claims that the highest percentage occurs in Nigeria (70%). and that every North African nation is among the top 25. The first of the recent headlines about riots against the regime came out of Tunisia (36% of household consumption spent for food) and Egypt (48%). Algeria has not been quiet (53%). All are in North Africa, along with Morocco and Libya.

Egyptian protests: How a food crisis is driving a political crisis. -Any number of political and social factors underpins the current unrest in Egypt—and as always, economics figures in. The upheaval has shined a light on two serious problems facing the country: Most jobs pay too little, and most food costs too much. First, the structural issue: Egypt has posted solid economic growth numbers, particularly in the past half-decade, but that growth has failed to improve the quality of life or income of most of its 80 million citizens. Then, there is a secondary problem: a huge run-up in food costs in recent months. According to the Food and Agriculture Organization of the United Nations, the worldwide food price index is at an all-time high—surpassing its 2008 peak, when skyrocketing costs caused global rioting and pushed as many as 64 million people into poverty. The price of oils, sugar, and cereals have all recently hit new peaks—and those latter prices are especially troubling for Egypt, as the world's biggest importer of wheat.

Food staples starting to run out in Egypt -- While discontent, resentment and nationalism continue to fuel demonstrations, one vital staple is in short supply: food. Many families in Egypt are fast running out of staples such as bread, beans and rice and are often unable or unwilling to shop for groceries. "Everything is running out. I have three children, and I only have enough to feed them for maybe two more days. After that I do not know what we will do." school administrator Gamalat Gadalla told CNN. The unrest has paralyzed daily life in Egypt with many grocers closing shop and spotty food shipments.  "With the curfew, there are no restaurants, food or gas. Basic goods will soon be in shortage,"  Egyptian President Hosni Mubarak has ordered a curfew in Egypt to be extended from 3 p.m. to 8 a.m. on Monday, further stifling normal life in the embattled nation

Egypt And Tunisia Usher In The New Era Of Global Food Revolutions - Political risk has returned with a vengeance. The first food revolutions of our Malthusian era have exposed the weak grip of authoritarian regimes in poor countries that import grain, whether in North Africa today or parts of Asia tomorrow.  Events have moved briskly since a Tunisian fruit vendor with a handcart set fire to himself six weeks ago, and in doing so lit the fuse that has detonated Egypt and threatens to topple the political order of the Maghreb, Yemen, and beyond.  As we sit glued to Al-Jazeera watching authority crumble in the cultural and political capital of the Arab world, exhilaration can turn quickly to foreboding.  This is nothing like the fall of the Berlin Wall. The triumph of secular democracy was hardly in doubt in central Europe. Whatever the mix of aspirations of those on the streets of Cairo, such uprisings are easy prey for tight-knit organizations – known in the revolutionary lexicon as Leninist vanguard parties.

Egyptians Turn To Tor To Organize Dissent Online - An anonymous reader writes "Even as President Obama prepares to follow Mubarak with his own 'internet kill switch', Egyptians were turning to the Tor anonymiser to organise their protests online. The number of Egyptians connecting to the internet over Tor rose more than five-fold after protests broke out last week before crashing when the Government severed links to the global internet. Information security researcher, Tor coder and writer of the bridge that allowed Egypt's citizens to short-circuit government filters, Jacob Appelbaum, told SC Magazine Egyptians were 'concerned and some understand the risk of network traffic analysis.' Appelbaum has himself been the subject of attention from US security services who routinely snatch his electronics and search his belongings when he re-enters the country and who subpoenaed his private Twitter account last December." Which helps explain why Appelbaum is helping to organize a small fundraiser to get more communications gear into Egypt.

Citizens want Kuwait-like govt bounty -  Kuwait’s announcement yesterday to distribute free food for 14 months and $3,572 to every citizen has led to huge excitement in the Qatari community, with some saying they expect their government to follow suit. The Kuwaiti news agency said the ruler has announced that free coupons for basic food items would be provided to each citizen from February 1 this year until March 31, 2012. The beneficiaries would also be given $3,572 each and even those (citizens) born until February 1, 2011 will be eligible for the state’s generous one-off gesture. The news agency said the cash package totals $4bn and additional amounts are to be spent on providing free food for 14 months in a row to its citizens. The gesture is to mark the country’s 50th independence anniversary. But just as reports trickled in from Kuwait, social websites in Qatar started buzzing with a number of Qatari nationals posting comments, saying they hoped a similar gesture from their government. Some commentators said that since Qatar was a wealthier nation and citizens accounted for a small population, the government should announce a similar or even more attractive ‘gift package’ for its people in the form of free food and some cash.

Syrians call for protests on Facebook and Twitter - BEIRUT Syrians are organizing campaigns on Facebook and Twitter that call for a "day of rage" in Damascus this week, taking inspiration from Egypt and Tunisia in using social networking sites to rally their followers for sweeping political reforms.Like Egypt and Tunisia, Syria suffers from corruption, poverty and unemployment. All three nations have seen subsidy cuts on staples like bread and oil. Syria's authoritarian president has resisted calls for political freedoms and jailed critics of his regime. The main Syrian protest page on Facebook is urging people to protest in Damascus on Feb. 4 and 5 for "a day of rage." It says the goal is to "end the state of emergency in Syria and end corruption." The number of people who have joined Facebook and Twitter pages calling for protests on Friday and Saturday is still relatively small, and some are believed to live outside the country.

Jordan's king fires Cabinet amid protests - Jordan's King Abdullah II, bowing to public pressure, fired his government on Tuesday and tasked a new prime minister with quickly boosting economic opportunities and giving Jordanians a greater say in politics. The country's powerful Muslim opposition, which had demanded the dismissal of Prime Minister Samir Rifai in several nationwide protests inspired by those in Tunisia and Egypt, said the changes didn't go far enough.Rifai, 45, who has been widely blamed for a rise in fuel and food prices and slow-moving political reforms, tendered his resignation early Tuesday to the king, who accepted it immediately, a Royal Palace statement said.Abdullah named Marouf al-Bakhit, 63, as Rifai's replacement. Al-Bakhit, an ex-general who supports strong ties with the U.S. and Jordan's peace treaty with Israel, previously served as prime minister from 2005-2007. Abdullah ordered al-Bakhit to "undertake quick and tangible steps for real political reforms, which reflect our vision for comprehensive modernization and development in Jordan."

Global Food Prices Hit All-Time High As Violence Erupts In Yemen - Adding one more brick to the wall, world food prices have hit a new all-time high in January, according to the UN’s Food and Agriculture Organization (FAO). Along with crude oil’s surge past $100 a barrel thanks to civil unrest and violence in the streets of Egypt, and Cyclone Yasi tightening the supplies of hard commodities, the global economy will have to face increased inflationary pressures and the possibility of civil unrest amongst the world’s poor. Reaching its highest value, both in nominal and real values, the FAO’s Food Price Index gained 3.4% in January with increases in all its components with the exception of meat prices, which remained unchanged. Global food markets have tightened on every angle, with increased demand from emerging markets and supply pressure from bad weather pushing prices even higher. The index showed the cost of dairy products and oils/fats gaining the most in January, rising 6.2% and 5.6% respectively. Sugar hit a 30-year high in New York on February 3 and cereals show no sign of slowing down either. As global attention shifts from possible deflation to the very real impacts of commodity-price inflation, analysts are preparing for the worst

Egyptians Face Soaring Food Prices by Day, Looters at Night Amid Turmoil - Shattered glass fills the streets of Cairo as pedestrians are forced to avoid army tanks that guard banks and government buildings vulnerable to looters.  Banks are closed, making it difficult for Cairenes to get cash to buy staples. For those that have money, food prices are skyrocketing as consumers flood the few open stores.  Street demonstrations and night-time riots have left the Arab world’s biggest city largely paralyzed, as protester fill the city’s main square and looters and neighborhood groups armed with clubs take over at night.  “We have to protect our homes and children at night from the looters and in the morning we have to go to work,” said Saed Ragab, a café owner from Cairo’s Bab El Louq area. “The shops are at a standstill. It’s very difficult.”  Protesters are gathering in the city for an eighth day. Today’s march is aimed at drawing a million people onto the streets and forcing President Hosni Mubarak from power after 30 years. The military promised not to fire on marchers and said it recognized “the legitimacy of the people’s demands.”

India's Food inflation soars to 17.05% - India’s wholesale price index (WPI)-based inflation climbed to 17.05% for the week-ended January 22 — up from the previous week’s 15.57% — reflecting price shocks in essential commodities, data released on Thursday showed. Finance minister Pranab Mukherjee termed the rise in food prices as a matter of “grave concern.”   “Price rise always, particularly, the commodity price and food items are matter of grave concern,” he told reporters. He said efforts are being made both from the demand and supply side to moderate it. Making matters worse, crude oil prices have inched up to a 28-week high amid mounting political tension in Egypt is impacting global crude oil prices. Oil firms see this as “a worrying trend” that could lead to another petrol price hike.

Chili Peppers Indicate Inflation Is Heating Up - It’s hot in Indonesia these days, and I don’t just mean the equatorial weather.  We’re talking about two things that rarely fuse together: Chili peppers and hot money. Try chatting up a local without both topics coming up. The reason: Record prices for the fiery spice Indonesians eat at breakfast, lunch and dinner are partly due to Federal Reserve Chairman Ben Bernanke.  La Nina weather patterns also are to blame. Yet near-zero interest rates set by central bankers in Washington, Tokyo and Frankfurt are sending torrents of cash to Asia in destabilizing ways. Inflation in Indonesia almost doubled to 7 percent last month from a year earlier.  Indonesians will put up with all kinds of indignities. Rising rents? Dismal infrastructure? Endemic corruption? Public inefficiency? Such is life. But a four- or five-fold surge in chili prices? An outrage!  The message is clear: Policy makers must intensify their inflation battle immediately and interest rates aren’t enough.

Egypt's Revolution: Coming to an Economy Near You - It was a society in stagnation, if not decline. Despite ostensible stability, its people — especially its young people — faced a future bleaker than the dark side of Pluto. For decades, the richest grew even richer, as national debt mounted, middle-class people tried to make ends meet, and upward mobility fell. Government failed to address these problems, and the governed felt increasingly disenfranchised — and partisan. Mass unemployment metastasized from a temporary illness to a chronic condition. One of its major cities decided to erect a permanent tent city, for a permanently excluded, marginalized underclass. This isn't Tunisia, or Egypt — but America. Yes, in many ways Egypt and America couldn't be more different. But the broad contours are just a little too similar for comfort. Consider a tweet that made the rounds this weekend. "Youth unemployment: #Yemen 49%, #Palestine 38%, #Morocco 35%, #Egypt 33%, #Tunisia 26%". It sounds staggering. But youth unemployment rates are 20-40% across Europe. And in the USA, estimates range from 20-50% depending on how you count, and when. Egypt's youth unemployment crisis — which many seemed to think on Twitter was merely an Arab problem (oh, those Arabs!) is, in point of fact, a global one.

IMF, warning of war, Ready To Put Egypt Into Debt - The International Monetary Fund stands ready to help riot-torn Egypt rebuild its economy, the IMF chief said Tuesday as he warned governments to tackle unemployment and income inequality or risk war.  Dominique Strauss-Kahn also said rising food prices could have "potentially devastating consequences" for poorer nations, and warned that Asia's fast-growing economies faced a risk of a "hard landing". Overall, according to the IMF managing director, widening imbalances across and within countries were sparking tensions that threaten to derail the fragile global economic recovery -- and could even spark armed conflict. As Egyptian protesters gathered in their thousands demanding the departure of President Hosni Mubarak, Strauss-Kahn said: "The IMF is ready to help in defining the kind of economic policy that could be put in place." In a speech in Singapore, he said rampant unemployment and a growing income gap was a "strong undercurrent of the political turmoil in Tunisia and of rising social strains in other countries".

IMF Warned of Egyptian Youth Jobless Rate Ahead of Protests - The International Monetary Fund warned of dangerously elevated unemployment levels in Egypt, especially highlighting high jobless youth rates, just two days ahead of thousands taking to the streets to protest the ruling government. IMF managing director Dominique Strauss-Kahn Tuesday said such levels created a ticking “time bomb” that could politically explode in other countries. While he declined to comment specifically on the protests, the IMF chief said, “clearly the situation in Egypt is the kind of situation that could have been expected not only in Egypt, when you see the problem created by the high level of unemployment.” He was speaking at an event in Singapore. The IMF expects nearly 10 million jobs are needed in Egypt — more than 12% of the country’s population — and nations such as Jordan, Morocco, Syria and Lebanon will require millions more.

Joblessness, rising prices could spark war within (Reuters) - The world economy is beset by problems such as high unemployment and rising prices which could fuel trade protectionism and even lead to war within nations, the head of the International Monetary Fund warned on Tuesday. Rising food and fuel prices in recent months have already hit poorer countries and are one of the factors behind massive anti-government protests in Egypt and in Tunisia, whose president was ousted last month. "As tensions between countries increase, we could see rising protectionism -- of trade and of finance. And as tensions within countries increase, we could see rising social and political instability within nations - even war," . Strauss-Kahn noted two "dangerous" imbalances that he said could sow the seeds of the next crisis. The first was the unbalanced recovery across countries, as emerging nations grow much faster than developed economies and possibly overheat. The second was the social strains within countries with high unemployment and widening income gaps. Over the next decade, 400 million young people would join the global labor force, posing a daunting challenge for governments, Strauss-Kahn added.

Inequality Drives Egyptians to Streets, But Ours is Worse - In spite of what some on Fox News (and the Israel lobby’s camp) sought to argue this weekend—namely that the protests were all the work of Islamist radicals—every report from the ground contradicts that. As in Tunisia, the protesters are driven by fury at poverty, lack of options and the looting of their state by the super-powerful.It’s an equation we understand—elsewhere: a massive gap between rich and poor is inconsistent with democracy. But before you get carried away with third world conditions there, try here. On Friday a guest blogger at Yves Smith’s Naked Capitalism blog noted a remarkable fact: the US actually has much greater inequality than Egypt—or Tunisia, or Yemen. The Gini Coefficient is a number economists use to measure inequality, and the US is ranked as the forty-second most unequal nation—Egypt is ninetieth. It’s not just numbers—we can see it every day. As Edwidge Danticat told us last week, “There are places in the US that are like Haiti, that are like Zimbabwe.”

CSM: Why a nervous China aims to shield citizens from Egypt news - “China is worried about chaos, because that is bad for Egypt and for other countries,” says Yin Gang, a Middle East expert at the China Academy of Social Sciences. “China’s concern is the same as America’s … but China has very little influence in the Middle East.” Beijing has been studiously neutral in the face of mass demonstrations in Cairo and other Egyptian cities calling for President Hosni Mubarak’s resignation. The Chinese authorities are even more concerned about preserving stability and normal order at home. Apparently fearing that Chinese citizens be inspired by Egyptian protesters, the government has issued strict orders limiting press coverage of the unrest. “All media nationwide must use Xinhua’s reporting on the Egyptian riots,” read a directive issued last Friday, referring to the state run Xinhua news agency. “It is strictly forbidden to translate foreign media coverage,” the order said, warning that websites that did not censor comments about Egypt would be “shut down by force.”

The Youth Unemployment Bomb - In Tunisia, the young people who helped bring down a dictator are called hittistes—French-Arabic slang for those who lean against the wall. Their counterparts in Egypt, who on Feb. 1 forced President Hosni Mubarak to say he won't seek reelection, are the shabab atileen, unemployed youths. The hittistes and shabab have brothers and sisters across the globe. In Britain, they are NEETs—"not in education, employment, or training." In Japan, they are freeters: an amalgam of the English word freelance and the German word Arbeiter, or worker. Spaniards call them mileuristas, meaning they earn no more than 1,000 euros a month. In the U.S., they're "boomerang" kids who move back home after college because they can't find work. Even fast-growing China, where labor shortages are more common than surpluses, has its "ant tribe"—recent college graduates who crowd together in cheap flats on the fringes of big cities because they can't find well-paying work.

The Inequality Wildcard, by Kenneth Rogoff - As the dramatic events in North Africa continue to unfold, many observers outside the Arab world smugly tell themselves that it is all about corruption and political repression. But high unemployment, glaring inequality, and soaring prices for basic commodities are also a huge factor. So observers should not just be asking how far similar events will spread across the region; they should be asking themselves what kind of changes might be coming at home in the face of similar, if not quite so extreme, economic pressures. Within countries, inequality of income, wealth, and opportunity is arguably greater than at any time in the last century. Across Europe, Asia, and the Americas, corporations are bulging with cash as their relentless drive for efficiency continues to yield huge profits. Yet workers’ share of the pie is falling, thanks to high unemployment, shortened working hours, and stagnant wages.

The Carbon Tax Miracle Cure - President Obama called for a major technological push for cleaner energy: "the Apollo projects of our time." But when the details emerge, it is predictable that his political foes will object to the new government spending and decry the "heavy hand" of government in telling business what to do. Fortunately, there is a marvelous way to square the circle.  Under this policy approach, decision-making is left in private hands and the jobs created will be in the private sector. Furthermore, the policy would not cost taxpayers a dime. In fact, it would eventually reduce the federal budget deficit significantly. Plus, there are a few nice side effects, like reducing our trade deficit, making our economy more efficient, ameliorating global warming, and showing the world that American capitalism has not lost its edge. What is this miraculous policy? It's called a carbon tax—really, a carbon dioxide tax—but one that starts at zero and ramps up gradually over time.

Behind Obama’s Clean-Energy Strategy - The day after President Obama delivered his second State of the Union address last week, dozens of Web sites turned it into a “word cloud,” graphically showing the relative frequency with which particular words appeared. One such cloud-seeding Web site was none other than www.whitehouse.gov, where, as a chirpy White House blogger helpfully pointed out, “words like ‘jobs,’ ‘people,’ ‘America’ and ‘new’ show up often. It’s not a scientific measurement, but the visualization gives a sense of the President’s priorities.” Among the words that do not show up in the clouds, or in the text, are “unemployment,” “inequality,” “gun,” “environment,” “Israel,” “Palestine,” and “Guantánamo.” Their absence, which was more art than science, gives a sense of the President’s problems. These were not the most conspicuous omissions, however. “Change” made the cut (five mentions), and so did “global” (one mention, in the phrase “global trade talks”). But “climate” was nowhere to be found. Neither was “warming.”

Don’t Buy the Clean Energy Illusion -  Last week, President Obama addressed the nation. He talked about jobs, energy, education, and bipartisan necessities… All in all, it was a fantastic pep rally that answered few important questions, but got the masses all riled up anyway. Obama supporters cheered and got a fresh jolt of cosmetic enthusiasm, though it’s likely most still don’t know why they’re so excited. Obama critics attacked with sound bites left over from the November election, and made their rounds on the “news” on Twitter and any message board that doesn’t require you to register before posting. Either way, of all the comments and criticisms I heard — both positive and negative — few addressed the overall picture of reality versus the illusions created during the State of the Union Address. Especially as it pertains to education and energy.

Science, yes. But don't forget the poor: "Cars that can run on sunlight and water. A million electric cars on the road by 2015. High-speed rail. A faster, more accessible Internet. Renewable technologies paid for by eliminating subsidies to oil and gas companies. These, all mentioned by the president in his address, are just a small sampling of what awaits an America that rededicates itself to scientific pursuit over the next decade. The goal - 'to win the future' as the president put it - is, indeed, a worthy one, especially when you consider how poorly we have handled the recent past. Largely because of trade policies that place profits ahead of working people, more than 40,000 factories have been shuttered in less than a decade. Meanwhile, American 15-year-olds rank 25th in the world in math, and 21st in science, and we are haunted by a skills shortage that makes it harder to compete. All the while, we spent the better part of a decade with a president who scorned science, and a federal government that always let politics trump scientific progress.

Wall Street Journal: Selectively Pro-Science - Recently, there were multiple editorials and op-eds in the Wall Street Journal (WSJ) bemoaning the fact that people have not believed the scientific community on the question of vaccine safety.  Unfortunately, while the WSJ touts accurate science with regard to vaccines, the WSJ is anti-science when it comes to climate change.  Read on for an analysis of the WSJ’s coverage of climate change and to read an excellent Letter to the Editor that was never published. The WSJ has an archive of editorials and op-eds in a category labeled Climate Change that is only available to subscribers.  (Non-subscribers can see a few lines of content for each opinion piece but not the entire piece.)  Between October 2008 and January 25, 2011 there were a total of 86 items in the archive.  I decided to sign up for a one-year subscription ($103) that featured a two-week free trial period.  After reading all 86 items, I canceled via phone and was not charged.

93 Percent of Wall Street Journal’s Climate Op-Eds Misrepresent Science - File this one under "Big Surprise". The Wall Street Journal has long been revered as the standard bearer for American business journalism -- so it should be no revelation that the WSJ's op-ed page leads the pack in refutations to climate science. Addressing climate change is still considered anathema to the business community, which envisions a web of regulations and fees that will sap its collective bottom line. That aversion to climate policy translates, as it so often does, into an aversion to the climate science itself on the WSJ's opinion pages. In fact, one researcher found that over the last 3 years, the paper had published only 4 op-eds that got the science right -- and 52 that got it wrong. Professor Scott Mandia determined those results in a little experiment he did in a guest post for Climate Progress. Here's how it worked:

Sen. Inhofe Shapes Major GOP Bills to Fight EPA's Greenhouse Gas Regs - The Senate's most vocal climate change skeptic has taken a key role in crafting two bills to be introduced next week that would both permanently stop U.S. EPA from regulating greenhouse gas emissions under the Clean Air Act. Sen. James Inhofe (R-Okla.), who famously called climate change the 'greatest hoax ever perpetrated on the American people,' will unveil a bill with House Energy and Commerce Chairman Fred Upton (R-Mich.) that would strip EPA of its authority to limit carbon emissions from power plants, refineries and other stationary sources. At the same time, he will be a 'first co-sponsor' of a much broader bill that would bar the federal government from regulating greenhouse gas emissions under any existing environmental law. That measure will be introduced Monday by Sen. John Barrasso (R-Wyo.), who serves on the Environment and Public Works Committee, on which Inhofe is the ranking Republican. 'I think you'll find the Republicans are pretty lock step in this,"

Felicity Barringer, NYT: Are We Hard-Wired to Doubt Science? - In researching Monday’s article about opposition to smart meters,  I found myself once again facing a dilemma built into environmental reporting: how to evaluate whether claims of health effects caused by some environmental contaminant — chemicals, noise, radiation, whatever — are potentially valid? I turned, as usual, to the peer-reviewed science. But some very intelligent people I interviewed had little use for the existing (if sparse) science. How, in a rational society, does one understand those who reject science, a common touchstone of what is real and verifiable? The absence of scientific evidence doesn’t dissuade those who believe childhood vaccines are linked to autism, or those who believe their headaches, dizziness and other symptoms are caused by cellphones and smart meters. And the presence of large amounts of scientific evidence doesn’t convince those who reject the idea that human activities are disrupting the climate. What gives? A recovering journalist, David Ropeik, who is an instructor at the Harvard University extension school and the author of a book, “How Risky Is It Really?” offers one explanation.

An atlas of pollution: the world in carbon dioxide emissions - The deepest recession since the 1930s has failed to reverse rising global carbon emissions, as plummeting industrial output in the west was offset by the continuing rapid expansion of China and a handful of other emerging economies, new statistics for 2009 show. While US emissions fell substantially in 2009, to levels not seen since 1995-96, China surged ahead with an increase of more than 13% on the previous year – the equivalent of adding the yearly emissions of Germany, Greece and Peru combined. Europe, Russia, Canada and South Africa saw their emissions dip, and India has risen to third place in the league table, with the strong growth in its carbon output driven by a ramping-up of coal burning to generate power. Overall, by these estimates, global emissions fell by a tiny 0.1%. For short periods in the wake of less severe recessions, such as those in 1981-83, and 1991-92, emissions fell more steeply only to continue their upward trend shortly afterwards.

Jeff Kiehl: If carbon dioxide emissions continue at their current rate through to the end of this century, atmospheric concentrations of the greenhouse gas will reach levels that existed about 30-100 million years ago  - In a Perspective article in Science, Kiehl describes how he examined the relationship between global temperatures and high levels of carbon dioxide in the atmosphere tens of millions of years ago. Global temperatures then averaged about 16 °C above pre-industrial levels.The article pulls together several recent studies that look at various aspects of the climate system, while adding a mathematical approach by Kiehl to estimate average global temperatures in the distant past. The study found that carbon dioxide may have two times or more the effect on global temperatures than currently projected by computer models of global climate. The world's leading computer models generally project that a doubling of carbon dioxide in the atmosphere would have a climate feedback factor (ratio of change in surface temperature to radiative forcing) in the range of 0.5 to 1.0 °C per watts per square metre

Amazon drought stirs climate fear - Last year's drought in the Amazon raises concerns about the region's capacity to continue absorbing carbon dioxide, scientists say. Researchers report in the journal Science that the 2010 drought was more widespead than in 2005 - the last big one - with more trees probably lost.The 2005 drought had been termed a "one in a century" event. In drought years, the Amazon region changes from being a net absorber of carbon dioxide into a net emitter. The scientists, from the UK and Brazil, suggest this is further evidence of the Amazon's vulnerability to rising global temperatures. They also suggest the days of the Amazon forest curbing the impact of rising greenhouse gas emissions may be coming to an end.

Two severe Amazon droughts in five years alarm scientists  — New research shows that the 2010 Amazon drought may have been even more devastating to the region's rainforests than the unusual 2005 drought, which was previously billed as a one-in-100 year event.Analyses of rainfall across 5.3 million square kilometres of Amazonia during the 2010 dry season, recently published in Science, show that the drought was more widespread and severe than in 2005. The UK-Brazilian team also calculate that the carbon impact of the 2010 drought may eventually exceed the 5 billion tonnes of CO₂ released following the 2005 event, as severe droughts kill rainforest trees. For context, the United States emitted 5.4 billion tonnes of CO₂ from fossil fuel use in 2009.The authors suggest that if extreme droughts like these become more frequent, the days of the Amazon rainforest acting as a natural buffer to man-made carbon emissions may be numbered.

Obama’s ‘climate eyas’ moment today: “Carbon pollution” is contributing to “climate change” - The President was widely criticized last week for omitting certain words critical to explaining the State of the Union (see “Obama calls for massive boost in low-carbon energy, but doesn’t mention carbon, climate or warming”). This weekend, his climate hawkish science adviser, John Holdren, was not so reticent.   Today, in a Penn State speech on energy efficiency, Obama reemerged as a ‘climate eyas’, an unfledged young climate hawk, with these remarks: Everybody focuses on cars and gas prices, and that’s understandable. But our homes and our businesses use 40 percent of the energy. They contribute to 40 percent of the carbon pollution that we produce and that is contributing to climate change. It costs us billions of dollars in energy bills. They waste huge amounts of energy. The good news is we can change all that. Making our buildings more energy-efficient is one of the fastest, easiest, and cheapest ways to save money, combat pollution, and create jobs right here in the United States of America. And that’s what we’re going to do.

Renewable Energy Can Phase Out Fossil Fuels in 40 Years - The reasons for transitioning from fossil fuels to clean energy are numerous—job creation, global competitiveness, reduced childhood asthma, ending our dependence on oil, halting the flow of oil money to hostile regimes.  What has gotten lost in the mix recently is safeguarding the health of our planet – species, ecosystems and natural resources – from the impacts of climate change. The buildup of carbon pollution from fossil fuels is the key driver for climate change which is already threatening the integrity of ecosystems around the world. From the melting sea-ice habitats of polar bears and walruses to warmer sea waters that destroy the coral habitats of fish, we are already seeing the fingerprints of climate change everywhere. Scientists estimate that as warming reaches 2.0-3.0 °C (3.6-5.4 °F) 20-30% of plant and animal species face a higher risk of extinction. But we are currently on track to exceed even this level of warming. The National Academies project that global temperatures could increase as much as 6.4 °C (11.5 °F) over the 21st century. Such an increase would pose even greater risks to the natural systems that people and animals rely on for food, water and prosperity.

Pursuing Real Environmental Justice in California - California Governor Jerry Brown plans to move forward with the implementation of Assembly Bill 32, the Global Warming Solutions Act, under which California seeks to take dramatic steps to reduce its greenhouse gas emissions.  Questions have been raised about the wisdom of a single state trying to address a global commons problem, but with national climate policy developments having slowed dramatically in Washington, California is now the focal point of meaningful U.S. climate policy action. A key element of the mechanisms to be used for achieving California’s ambitious emissions reductions will be cap-and-trade, a promising approach with a successful track record, despite its recent demonization as “cap-and-tax” by conservatives and other opponents in the U.S. Congress. Under this approach, regulators restrict emissions by issuing a limited number of emission allowances, with the number of allowances ratcheted down over time, thus assuring ever-larger reductions in overall emissions.  Pollution sources such as electric power plants and factories are allowed to trade allowances, and as a result, sources able to reduce emissions least expensively take on more of the pollution-reduction effort.  Experience has shown that cap-and-trade programs achieve emissions reductions at dramatically lower cost than conventional regulation

Brazil approves clearing of Amazon forest to make way for controversial dam - Brazil's environmental agency has approved the clearing of nearly 600 acres of Amazon forest so that work can begin on a controversial hydroelectric dam. The Belo Monte dam, which will be the third-largest such project in the world, has been strongly opposed by environmental campaigners and indigenous people who face being displaced. Last year James Cameron, the film director, compared the plans to the plot of his box office hit Avatar, in which the Na'vi race fight to protect their planet from outside forces seeking to extract resources. Ibama, the Brazilian environment agency, said on its website that it has approved the clearing of 588 acres (238 hectares) of forest at the site where the dam will be built in the state of Para. It also said that Norte Energia, the consortium that won the bidding to construct the dam, can begin building roads to reach the remote site on the Xingu River, a tributary to the Amazon. Contracts for the dam - which the government expects to cost nearly £10bn - were finally signed last August after decades of disputes about plans for a dam in the area and a series of court injunctions.

The Arctic death spiral lives. Yes, it’s a record-breaking winter: Arctic sees lowest January sea ice extent in satellite record  - I know, the records broken this winter are supposed to be for cold weather.  But the National Snow and Ice Data Center reports: January 2011 had the lowest ice extent for the month since the beginning of satellite records. Why?  Because while it’s been coolish in parts of the United States, it’s been very mild in the Arctic, especially northern Canada: Hudson Bay did not completely freeze up until mid-January, about a month later than normal according to Canadian Ice Service analyses. The Labrador Sea region is still largely free of ice, except in protected bays along the coast. Normally at this time of year, ice extends several hundred kilometers from the coast all the way to northern Nova Scotia. I have previously noted that Canada was seeing staggering mildness as the planet’s high-pressure record is “obliterated”:

Is the jet stream broken? - Some years ago, it seemed to me that, someday, the massive amounts of hot air being pumped out of the oceans in the Equatorial regions, subsequently transported to the poles of the respective hemispheres, would do two things.  (1) The poles would gradually warm up.  (2) The cap of cold air that sat up around the North Pole would weaken, dwindle, and eventually get pushed out of the way, i.e., to the south.  And then, of course, the winds that used to circle below that cap of cold air would go haywire. I didn't actually think that this would all occur really soon, but there are signs that it might be.  This is starting to look like the shape of things to come. Below is a link to a 30-day animation of global temperature anomalies -- it is easiest to focus on one geographical location and watch what happens there, for example, the northwestern provinces of Canada.  There you can see the cold has been pushed out of the Arctic and down into southern Canada.:  http://www.esrl.noaa.gov/psd/map/images/fnl/sfctmpmer_01a_30frames.fnl.anim.html

Disaster brewing as cyclone stalks - Queensland ABC  - Premier Anna Bligh says the cyclone bearing down on the Queensland coast has the potential to be the biggest the state has ever seen. Ms Bligh is calling on Queenslanders to prepare for gale-force winds, torrential rain and massive storm surges when Cyclone Yasi crosses the coast on Wednesday night. Authorities fear the massive cyclone, which could pack winds up to 260 kilometres per hour, may be as intense as Cyclone Larry, which devastated parts of far north Queensland in 2006. Listen to ABC Local Radio for the latest coverage "[Yasi] may well be one of the largest and most significant cyclones that we have ever had to deal with," Ms Bligh said.

Expect Spike In Coal, Iron Ore, Copper Stocks Due To Australian Cyclone, Floods -  The cyclone hitting Queensland, Australia just days after massive flooding rains have thrown up obstacles to  coal production and the supply of  the coal required for the  emerging markets of China and India. This is a serious problem short and intermediate term for ravenous appetite required natural resources power the fastest expanding economies in the world. So, expect prices of the required raw material to spike 15-20% in the short term — driving up the price of coal suppliers, as well as iron ore,  zinc and sugar, which are the chief exports from Australia to  China and other emerging markets. Queensland reputed to produce 50% of the world’s coking coal supplies.  Cyclone Yasi already has pushed the price of sugar to a 30 year peak in New York, and rice prices are skyrocketing as well due to tropical rains in Asia recently.The Same relationship exists in iron ore– used in steel manufacturing, where the Brazilian producer Vale and Australian giant BHP are the main supply chain for China.

Poleshift: Sea Floor DROP at the edge of west Sumatra and south Java - Data of sea level measured at Sibolga, Padang and Cilacap stations in Indonesia show that the sea level has lowered in those points, suggesting that off-coast the edge of west of Sumatra and the edge of south of Java the sea floor has DROPPED, or sunk. http://www.ioc-sealevelmonitoring.org/index.php

FedEx CEO Frederick W. Smith: Let's end our need for oil - Every day more than 285,000 FedEx team members deliver some 7 million packages to 220 countries. Every 24 hours our aircraft fly 500,000 miles, and our couriers travel 2.5 million miles. We accomplish this with 670 aircraft and 70,000 motorized vehicles worldwide -- nearly every single one of which is fueled by oil, the lifeblood of today's mobile, global economy. We are all dependent upon it, and that dependence comes at a significant cost. U.S. armed forces expend enormous resources protecting chronically vulnerable oil transit routes and infrastructure around the globe. Oil dependence influences U.S. foreign policy, requiring us to accommodate governments that share neither our values nor our goals. Every American recession over the past 35 years has been preceded by -- or occurred concurrently with -- an oil price spike. And petroleum was responsible for 43% of U.S. energy-related CO^₂ emissions in 2009.  We cannot continue down this path. There is, however, a solution that may become economically attractive sooner than most think: cars and trucks powered by electricity.

Land fizzing like soda pop: farmer says CO2 injected underground is leaking - A Saskatchewan farm couple whose land lies over the world's largest carbon capture and storage project says greenhouse gases seeping from the soil are killing animals and sending groundwater foaming to the surface like shaken soda pop. The gases were supposed to have been injected permanently underground. Cameron and Jane Kerr own nine quarter-sections of land above the Weyburn oilfield in eastern Saskatchewan. They released a consultant's report Tuesday that links high concentrations of carbon dioxide in their soil to 6,000 tonnes of the gas injected underground every day by energy giant Cenovus (TSX:CVE) in an attempt to enhance oil recovery and fight climate change.  A Cenovus spokeswoman said the company doubts those findings. She pointed out they contradict years of research from other scientists.

Manchin claims coal “doesn’t get a penny of subsidies” - In fact, the industry gets trillions of pennies - Sen. Joe Manchin (D-WV), the newest member of the Senate Energy and Natural Resources Committee, claimed today that the coal industry doesn’t receive any government subsidies, unlike every other form of energy.  Brad Johnson debunks this absurd claim. The former governor of coal-state West Virginia, who famously fired a rifle at clean energy legislation in a campaign ad, argued that the Obama administration has “villainized” coal. In a hearing on energy markets, Manchin went on to criticize the Environmental Protection Agency — which has issued regulations to limit the catastrophic impact of mountaintop removal mining and the existential threat of global warming pollution — for putting up “roadblocks” on the “greatest source” of energy in the nation:

Coal Foes Play China Card A battle over a proposed coal export terminal on the Columbia River has taken on a global dimension, as opponents say local officials have to consider the potential environmental harm when the U.S. fuel is burned at its destination—in China. Making this argument is “a core strategy in the fight against a huge expansion of the fossil-fuel economy,” said Ross Macfarlane of Seattle-based Climate Solutions, one of the groups that want the terminal project stopped.Terminal critics also say the potential environmental damage from mining the material in Montana and Wyoming hasn’t been adequately assessed.

Gas Companies Illegally Using Diesel Fuel for Fracking - Fracking, or Fracing as the oil and gas industry ungrammatically spells it, is short for hydraulic fracturing, and the technology is now being used extensively to extract shale gas, by pumping liquids at high pressure into the rock, creating and expanding fissures. The liquid is a mix of chemicals designed to carry a proppant, perhaps sand or ceramics, designed to keep the cracks open after the injection stops.  Controversially, it is exempt from the Safe Drinking Water Act, unless diesel fuel is used. (we noted that diesel was used in our first post on the subject: Jargon Watch: Fracking) Unsurprisingly, that didn't stop anyone. The Arkansas Times reports: Reps. Henry Waxman (D-CA), Edward Markey (D-MA) and Diana DeGette (D-CO) sent a letter to the Environmental Protection Agency today following an investigation into the use of diesel in fracturing fluids. The investigation found that a number of companies injected millions of gallons of diesel into the ground.

Gas Drilling Technique Is Labeled Violation - Oil and gas service companies injected tens of millions of gallons of diesel fuel into onshore wells in more than a dozen states from 2005 to 2009, Congressional investigators have charged. Those injections appear to have violated the Safe Water Drinking Act, the investigators said in a letter to the Environmental Protection Agency on Monday.  The diesel fuel was used by drillers as part of a contentious process known as hydraulic fracturing, or fracking, which involves the high-pressure injection of a mixture of water, sand and chemical additives — including diesel fuel — into rock formations deep underground. The process, which has opened up vast new deposits of natural gas to drilling, creates and props open fissures in the rock to ease the release of oil and gas.  But concerns have been growing over the potential for fracking chemicals — particularly those found in diesel fuel — to contaminate underground sources of drinking water.  “We learned that no oil and gas service companies have sought — and no state and federal regulators have issued — permits for diesel fuel use in hydraulic fracturing,”

US Energy Cos Flee Natural Gas for Unconventional Oil Fields -Analyst  U.S. energy producers are making a massive investment shift from natural-gas production to unconventional oil drilling as natural-gas prices stagnate. With natural-gas prices remaining stuck at about $4 per million British thermal unit, more energy companies are taking the advanced drilling technologies that allowed them to unlock previously unattainable natural gas and moving to less developed, but potentially more profitable, unconventional oil fields. The widening spread between oil and natural-gas prices is driving the investment shift, Barnes said. The oil-to-gas price ratio, which was traditionally 6-to-1, is expected to reach 18-to-1 by November. The move away from natural gas is shown by energy company capital-expenditure decisions, Barnes said. For example, Devon said 90% of its capital expenditures in 2011 will be to increase production of oil and natural-gas liquids. Chesapeake said it will increase its oil and liquids production from its current rate of 8%, or 55,000 barrels a day, to 20% by 2015

Gov declares state of emergency due to gas shortage, cold - Gov. Susana Martinez declared a state of emergency Thursday afternoon due to record-breaking cold and shortages in natural gas throughout the state. Towns and cities throughout the state have been without natural gas including Taos, Questa and portions of Santa Fe. Martinez also announced that the heat would be turned down in all state buildings and sent all non-essential employees home to save natural gas and electricity. The New Mexico Gas Company issued a press release at noon which said, “Due to rolling black outs in West Texas and other problems, the delivery of natural gas into New Mexico has been impeded. States in the southwest are experiencing similar issues.”Las Cruces suffered rolling electrical blackouts yesterday and El Paso Electric warned that it could happen again today. The company urged residents to conserve to put less strain on the system. “Do not use appliances such as the washing machine, dishwasher, or electric clothes dryer,” a statement issued by El Paso Electric said. “Turn off extra lights, electric water heater and other electric appliances that you do not absolutely need. Minimize the use of your electric range or oven when preparing meals.”

BP Mediator Feinberg Can’t Call Himself Independent, Judge Says - A federal judge said Kenneth Feinberg, the lawyer paying victims of BP Plc’s Gulf of Mexico oil spill, can’t identify himself as an independent administrator of a $20 billion settlement fund.  U.S. District Judge Carl Barbier in New Orleans concluded yesterday that Feinberg must fully disclose his ties to BP when communicating with potential claimants. Lawyers for oil-spill victims had questioned Feinberg’s handling of the $20 billion trust fund, known as the Gulf Coast Claims Facility, or GCCF.  “A full disclosure of the relationship between Mr. Feinberg, the GCCF, and BP will at least make transparent that it is BP’s interests” that Feinberg is promoting in his role as head of the fund, the judge said in a 15-page ruling.  BP is paying Feinberg’s law firm $850,000 a month to run the trust fund, victims’ lawyers said in court filings.

North America’s Bounty of Unconventional Hydrocarbons - North America contains a huge portion of global hydrocarbons, when unconventionals are taken into account. As the price of oil creeps ever higher over time, engineers and technologists are developing cleaner and more economical ways to utilise unconventional hydrocarbons. Canada's economic growth is being driven largely by oil sands. As the importance of this resource is slowly sinking into the thick skulls of Canadian politicians, various Canadian governments are beginning to take a more realistic view of oil sands production.  Both Canada and the US possess huge coal resources. Many different approaches are being considered, in order to use the resource more cleanly and economically, including coal-to-liquids technologies and in situ gasification technologies.

A Giant Pipeline Carrying Dirty Oil From Canada to Texas. What Could Go Wrong? - Last year was quite a year for oil and gas disasters. In addition to the BP blowout, there was a leak on BP's TransAlaska pipeline, a million-gallon oil spill in Michigan, and a gas explosion that destroyed 37 homes and killed eight people in California. So it would seem like a lousy time for a Canadian company to propose building a pipeline, the Keystone XL, right through the middle of the continent—especially one that may be unnecessary and that even some oil companies think is overpriced. Several environmental groups have recently raised concerns about the ties between Secretary of State Hillary Clinton and the lead lobbyist for the international oil services company TransCanada. The initial Freedom of Information Act request was denied. A new request was submitted in late January.

Iraq's largest hydropower dam grinds to halt - Record low water levels at Iraq's largest hydroelectric dam have ground turbines there to a halt, amplifying a power shortage that led to riots last summer, a top official said on Thursday. Adel Mahdi, advisor to the electricity minister, said water levels at the Mosul dam on the Tigris River had fallen to 298 metres (977 feet) above sea level. "It is the first time since 1984 when the dam was built that water levels have fallen this low," "The installed power generation capacity of Mosul's hydroelectric plant is 1,175 megawatts, but the current production is zero, because the turbines need a minimum water level of 307 metres (1,007 feet) to operate," he added. The Tigris flows directly from Turkey, and the Euphrates goes from Turkey through Syria, then flows to Iraq. Water projects in the two countries have had a severe impact on Iraq. Mahdi said Iraq also was eyeing with extreme worry Turkey's controversial Aliso dam on the Tigris, work on which began in 2006. "If Aliso is completed, it will finish with the Tigris in Iraq completely," Mahdi said.

Oil and food prices - Several years ago National Geographic magazine published an article on oil that included a stunning photo of mature steer and the barrels of oil needed to grow an animal to that size. I recently went looking for that picture, found it, and post it here because it hasn’t lost its impact or relevance one bit. Weighing in at 1,250 pounds (567 kilograms), Marina Wilson’s champion steer Grandview Rebel is ready for auction at a county fair in Maryland. Raising this steer has taken an agricultural investment equal to 283 gallons (1,071 liters) of oil, represented here by the red drums. That includes everything from fertilizers on cornfields to the diesel that runs machinery on the farm. Overall, it takes three-quarters of a gallon of oil to produce a pound of beef. Yowza! Three quarters of a gallon of oil to produce a pound of beef. At $4.00 per gallon, this implies the cost of a pound of beef includes $3.00 worth of oil.

Oil companies and tax breaks - Analysts are expecting a bonanza when Exxon Mobil Corp. announces its fourth-quarter earnings on Monday; the company's stock has jumped by nearly 20% during the last year, and in the first three quarters of 2010, its profit was $21.2 billion — not a bad haul during a worldwide recession. Other oil companies have had similar success, thanks to growing demand in India and China. Yet U.S. taxpayers subsidize this industry to the tune of $4 billion a year.  This kind of largesse toward a hugely profitable business seems bizarre, especially at a time when the federal deficit is reaching alarming proportions, yet efforts to end the tax deductions and credits for companies that don't need them have gone nowhere. That isn't stopping President Obama from trying. In his State of the Union address, he proposed an uptick in federal spending on clean-energy research and development, to be paid for by ending subsidies for oil companies.

Senate shoots down attempt to end set of oil industry tax breaks- The oil and gas industry, which beat back new regulatory bills even during the worst days of last year’s massive BP oil spill in the Gulf of Mexico, scored another victory this week. The Senate voted late Wednesday against a proposal to end some oil industry tax breaks to pay for easing paperwork requirements for small business under President Barack Obama’s health overhaul law. Instead, the Senate passed an alternative, using unappropriated federal funds, to pay for the $22 billion estimated cost over 10 years of the small-business provision. It would drop a requirement that, starting next year, small businesses file IRS forms every time they make purchases of services or goods worth $600 or more.

Geopolitical unrest and world oil markets - Change is on the way in the Arab world, with Egypt the latest focal point. Here I review recent events and their implications for world oil markets.  I begin with a timeline, if not to connect the dots, at least to collect the dots in a single list.   In the event that some of the transitions of power prove to be more chaotic than peaceful, let me comment on their potential to disrupt world oil markets.  The table at the right reports the recent levels of oil production in the countries mentioned above and some of their neighbors. For the most part, the popular uprisings so far have been in the "have-nots" of the Arab world, with modest levels of oil production relative to the members of OPEC. Of the countries facing a likely immediate transition of power, the most important in terms of oil markets is Egypt, with 2/3 mb/d of its own production and another million barrels of oil being transported each day through the Suez Canal plus 1.1 mb/d crossing Egypt via the SUMED pipeline.

Mid-East contagion fears for Saudi oil fields - Risk analysts and intelligence agencies fear that Egypt's uprising may set off escalating protests in the tense Shia region of Saudi Arabia, home to the world's richest oilfields. "Yemen, Sudan, Jordan and Syria all look vulnerable. However, the greatest risk in terms of both probability and severity is in Saudi Arabia," said a report by risk consultants Exclusive Analysis.  While markets have focused on possible disruption to the Suez Canal, conduit for 8pc of global shipping, it is unlikely that Egyptian leaders of any stripe would cut off an income stream worth $5bn (£3.1bn) a year to the Egyptian state.  "I don't think the Egyptians will ever dare to touch it," said Opec chief Abdalla El-Badri, adding that the separate Suez oil pipeline is "very well protected". There has been less focus on the risk of instability spreading to Saudi Arabia's Eastern Province, headquarters of the Saudi oil giant Aramco. The region boasts the vast Safaniya, Shaybah and Ghawar oilfields. "This is potentially far more dangerous,"

OPEC quotas and crude oil production - It is hard to obtain reliable graphs and quotas on OPEC oil production and to know how these quotas are ascertained. The few graphs that I found are incomplete and inaccurate. OPEC's website reports the oil production allocations (quotas or ceilings) from April 82 to Nov 2007. OPEC's 2009 annual report extends the data up to December 2009 but only with the total (24.845 Mb/d); there's no detail since January 2009. Energy Intelligence provided this missing breakdown by country as targeted since 2009. Quotas are agreed upon by each member during OPEC's meetings, but the detail of the compromise is not given, only the results. Thus I decided to plot OPEC's quotas, comparing them with production. The outcome is interesting.

Brent Crude Oil Price Passes $100 - Political unrest in Egypt and fears that the strife would spread throughout the Middle east continue to send the price of oil higher on Monday. Brent crude oil surpassed the $100 mark for the first time since October 2008 in Monday trading, while in the U.S. the price of crude oil touched above $90. Exxon Mobil(XOM_) reported strong earnings on Monday morning and cited global economic stabilization in its outlook, but the action in the oil trade on Monday was more closely linked to the continued uncertainty in the Middle East. There was also a macroeconomic bet that even in the face of higher interest rates, China's growth will continue to keep oil demand at a high level, that sent both the price of crude and energy stocks higher. Fears that the Suez Canal would be shut down as a result of the Egyptian political crisis hadn't materialized on Monday, and Raymond James analysts equated the "Middle East Contagion" theory to Cold War rhetoric.

Libya Welcomes $100 A Barrel Oil - OPEC member Libya rejected today the need for OPEC to meet this month in order to discuss raising production, saying that oil at $US100 a barrel is justified by a weaker dollar and rising food costs.  Libya's top oil official Shokri Ghanem hailed higher prices, a stance that was at odds with moderate OPEC members such as Saudi Arabia, which have maintained that they favor prices below current levels.  The head of the International Energy Agency reiterated his call for OPEC to be "flexible" in its policy.  Brent crude hit $US100 a barrel yesterday for the first time since 2008 on concern that oil flows through Egypt could be disrupted and that tension could spread into other big producers in the Middle East and North Africa.  The rally has put pressure on the Organization of the Petroleum Exporting Countries to raise output.

U.S. Gasoline at the Pump May Rise to $3.50 a Gallon by May - U.S. gasoline at the pump may rise 13 percent by May as crude oil in New York tops $100 a barrel and a recovering economy boosts fuel demand, according to analysts surveyed by Bloomberg News.  The highest price for regular gasoline this year will be $3.50 a gallon, based on the median estimate of 14 analysts. The motor fuel hasn’t reached that level since Oct. 6, 2008, according to AAA, the nation’s largest motoring organization.  “Gasoline prices could spike to $3.40 to $3.50,” said Amrita Sen, a commodity analyst at Barclays Capital in London. “We’re impressed at how well demand has held up at these prices. If crude goes up, it would be difficult to see gasoline not go up.”

Oil Prices: Too Early For A Choke Point - Tightening efforts in China have had virtually no impact on energy demand, as crude oil imports remain in a strong uptrend as the country transitions to a ‘car economy’. Furthermore, physical demand for oil has started to draw down energy inventories in the OECD countries despite an increase in OPEC production and non-OPEC supply. Vehicle miles traveled in the U.S. are growing robustly and sales of SUVs and light trucks have reaccelerated, which point to increased fuel consumption. This means that refiners should be able to ‘pass through’ crude oil price increases. True, the increase in energy prices has a self-limiting aspect. However, we are still far from a choke point. Global energy consumption as a share of GDP remains well below the 2008 high. In the U.S, the bill for oil consumption as a share of GDP is about 40% below the same measure in 2008. Low natural gas prices have helped moderate the overall U.S. energy bill even further. After accounting for NG consumption, the cost of energy as a share of GDP is about 25% below the levels that prevailed during the 2005-2007 period, and less than half of the 2008 riot point. Bottom line: Energy prices are sustainable at today’s prices and are set to move higher.

An Export Land Model Analysis for the USA-Part2 - In Part 1, I presented my best estimate Export Land Model analysis for the USA , based on my analysis of trends in petroleum production and consumption for the USA and its top ten import sources. In the article I laid out my explicit assumptions. Here, in Part 2, I examine some different possible future scenarios, based on alternative pessimistic and optimistic assumptions about the trends in petroleum production and consumption for the USA and it top ten import sources.  Warning If you are the type of person whose hates the feeling of cognitive dissonance, you may not enjoy this article. I explore several different possible future scenarios here (and still more in part 3), and, when you get through them all, you might feel more confused than ever about what might happen to the USA's consumption in the future.  If you are looking for: “And that's the way it is,” you may find this article troubling—but I encourage you to work through it nevertheless.

Peak Oil 101: A Closer Look at Oil Production and Demand - Take a good long hard look at that chart. The Saudis say they can ramp up production at any time. Their peak production occurred in 2005. That’s funny. Matt Simmons said peak worldwide production would occur in 2005. When prices skyrocketed in 2008, the Saudis did not reach their previous peak production of 2005. Why? Did they not want to make billions of profits? Only a fool would pass up such riches, unless they just didn’t really have the ability to produce more. Now Saudi production is 14% below 2008 levels. According to the IEA: Global oil product demand for 2010 and 2011 is revised up by an average of 320 kb/d on higher-than-expected submissions, reflecting buoyant global economic growth and cold northern hemisphere weather. Global oil demand, assessed at 87.7 mb/d in 2010 (+2.7 mb/d year-on-year), rises by 1.4 mb/d to 89.1 mb/d in 2011. Please take a look at this chart (opens to pdf). World oil demand in 2011 will exceed the 2007 all-time peak demand by 2.4 million barrels per day. Why would the Saudis be producing at 14% below 2008 levels when worldwide demand in 2011 will reach an all-time high? Peak oil is here, people. If it looks like a duck, walks like a duck, and quacks like a duck - it's probably a duck.

Energy and the Planet - The oil age started in Pennsylvania and 40 years later came to Texas. From then on, massive oil deposits were found virtually everywhere around the planet, except in most of Europe. This is why Europe has always had some form of energy plan and we haven't. It's probably fair to say that from the earliest days, most Europeans have not been able to take oil for granted, unlike Americans.  And unlike America's, Europe's governments are already considering what the economic impact will be when oil production hits a brick wall in the future - and making plans premised on global warming.

Copper hits record near $10000 as investors pile in - Copper surged to record highs on Wednesday, within a whisker of the key psychological $10,000 level as investors scrambled to buy the metal ahead of expected supply shortages and market deficits. A key gauge of economic growth, copper has shot up more than 60 percent since last June when markets tumbled on fears of sovereign default in euro zone countries such as Greece. "The copper market is supply starved as demand rebounds strongly, even more strongly with the U.S. recovering and the rest of the world getting stronger," said Robin Bhar, analyst at Credit Agricole. Buoyant growth in top consumer China and improving economic data in the United States, the world's largest economy, have boosted investor interest in copper, which is used extensively in the power and construction sectors. A generally weaker U.S. currency has also helped copper, making dollar-denominated metals cheaper for holders of other currencies. Benchmark copper on the London Metal Exchange hit an all-time high of $9,988.25 a tonne on Wednesday, up from $9,945 on Tuesday and compared with levels below $3,000 a tonne in late 2008 in the aftermath of the credit crisis. Analysts say global copper supplies will remain tight and help propel prices to $12,000 a tonne and higher as output struggles to keep up with demand into 2012 and perhaps beyond with the lack of new big mines coming through

Gary Shilling On The Chinese Hard Landing That's Going To Prick The Global Commodity Bubble - China's economy is, "in for a hard landing...this year or next year," according to Gary Shilling, who spoke at Bloomberg's China Investment Strategies conference.  He doubts the ability of the Chinese government to control the economy, and described its monetary policy as "very crude." Shilling said the hard landing scenario would mean GDP growth of 6% or less in China. That's because the country needs at least 8% growth to accommodate people moving from inland China to its coastal cities, Shilling said. The result of the slowdown would be the pricking of the global commodities bubble. While that would have a direct impact on the prices of a multitude of commodities, Shilling said it would also hit currencies tied to commodity production, like the Australian dollar, Canadian dollar, and New Zealand dollar.

The China domino - The stated goal of the Hu Jintao-led Chinese government is a “harmonious society”. Perhaps that is why the word “Egypt” was blocked on certain search engines over the weekend. Multiple factors are in play in Egypt, but there is one vital similarity with China: Food inflation of a breadth and severity that few in the market appreciate. China’s food inflation is different from its other inflations, notably real estate and wages. It is more dangerous. For as much as there have been spasmodic protests around the price and availability of homes and pay, and as much as there has been a gross misallocation of capital – whether viewed from the perspective of urban property investors or the gigantic follies of empty shopping malls and cities – neither wage disputes nor asset price bubbles bring down centralised political regimes. China’s ruling Communist Party is not the broken coalition of Ireland’s Brian Cowen, nor the discredited government of Gordon Brown. With the national army literally at the party’s sole disposal and an extraordinary network of economic, commercial, media and social control, it would take something a lot more serious to unseat the powers that be; something like food. With food prices having played a part in destabilising two autocratic regimes in Tunisia and now Egypt (plus possibly more from Yemen to Algeria), it’s time we canvass the unthinkable and ask could the same happen in China?

Underground world hints at China’s coming crisis - To understand how far ordinary Chinese have been priced out of their country's property market, you need to look not upwards at the Beijing's shimmering high-rise skyline, but down, far below the bustling streets where nearly 20m people live and work.  There, in the city's vast network of unused air defence bunkers, as many as a million people live in small, windowless rooms that rent for £30 to £50 a month, which is as much as many of the city's army of migrant labourers can afford. In a Beijing suburb, beneath one of the thousands of faceless residential tower blocks that have carpeted the city's peripheries in a decade-long building frenzy, one of Beijing's "bomb shelter hoteliers", as they are known, agrees to show us his wares.

China's economy expands faster in 2010, tightening fears grow - China's economy grew 10.3 percent last year, up from 9.2 percent in 2009, consolidating its recovery from the global crisis and adding expectations of further monetary tightening. The country's gross domestic product (GDP) hit 39.8 trillion yuan (6.05 trillion U.S. dollars) last year, up 10.3 percent year on year, Ma Jiantang, director of the National Bureau of Statistics (NBS), told a press conference Thursday. In the fourth quarter, GDP growth picked up to 9.8 percent year on year from 9.6 percent in the third quarter, after slowing from 11.9 percent in the first quarter and 10.3 percent in the second. 'In the past year, China has consolidated and boosted its recovery from the global financial crisis, and the national economy is generally operating well,' Ma said. The country's economy has avoided overheating and a 'double dip,' he said. The government set the full-year growth target at 8 percent in early 2010, after the economy recovered from the global economic downturn in 2009.

What if China’s GDP is Seriously Overstated? -- Yves Smith - Michael Pettis has released one of his carefully reasoned posts, this one on the dark art of guesstimating what China’s GDP really is, given the notorious unreliability of its official data.  The strength of Pettis’ approach sometimes works to his advantage. He does a great job in breaking down his arguments to clear, easy to understand, step-by-step reasoning. That tends to make his posts pretty long. In this case, that meant that the part I though was most provocative came towards the end, when impatient readers might have figured they had gotten the drift of his gist and moved on.  In this one, he starts with the last GDP release, and in particular, the implications the fact that its alarmingly high investment rate continues to increase at a stunning clip. But he then turns to the rather tiresome debate as to when China’s economy will overtake that of the US, and discusses the possibility that the GDP figures touted now could well be overstated by a considerable degree:

Real Apprecation In China, One Way or the Other - Just last week I noted that because of QE2 a real appreciation in China will occur one way or the other: either its currency will appreciate faster or its domestic prices will soar.   The former seems unlikely because of China's commitment to its export-driven growth strategy.  Consequently, China will most  likely stay tied to the Fed's QE2 monetary policy via its crawling peg and continue to allow domestic prices to soar.   I also mentioned that this real appreciation should contribute to a rebalancing of the global economy.  As if on cue, the New York Times reports the following yesterday: Inflation is starting to slow China’s mighty export machine, as buyers from Western multinational companies balk at higher prices and have cut back their planned spring shipments across the Pacific. Markups of 20 to 50 percent on products like leather shoes and polo shirts have sent Western buyers scrambling for alternate suppliers. This is an interesting article throughout, but the one thing it fails to do is connect China's high inflation to the Fed's monetary policy.  It is no coincidence that inflation is accelerating now.

Treasury gives China a pass on currency manipulation -Changes already underway in China "will gradually erode" the country's ability to closely manage the value of its currency and force the renminbi to float more freely on world markets, the U.S. Treasury said yesterday in a report that declined to cite China as a "currency manipulator."  As in previous biannual Treasury reports on world currencies, the document released Friday addressed the politically contentious issue of China's currency management, which critics argue is used to keep the country's exports unfairly cheap.  Members of Congress and others have urged the Obama administration to brand the country a "currency manipulator," which, under U.S. law, would trigger negotiations and possible sanctions.  But like his predecessors, Treasury Secretary Timothy F. Geithner has tried to resolve the issue through diplomatic channels - criticizing Chinese policy and urging them to make changes without formally invoking U.S. law.

Currency manipulation - On Friday the US Treasury released its presumably semi-annual (it was due last October) report to Congress on currency issues, and in it refrained from calling any of the countries under review “currency manipulators.”  Today’s People’s Daily had this to say : Major trading partners of the United States, including China, did not manipulate their currencies to gain an unfair advantage in international trade in 2010, according to a report released by the U.S Treasury Department on Friday.  ”Based on the resumption of exchange rate flexibility last June and the acceleration of the pace of real bilateral appreciation over the past few months,” China’s behavior did not qualify under the official definition of manipulation, the Treasury said in its long-delayed semiannual report to the Congress on International Economic and Exchange Rate Policies. Perhaps not surprisingly the Bloomberg version of the story was a little more nuanced: The U.S. declined to brand China a currency manipulator while saying its No. 2 trading partner has made “insufficient” progress on allowing the yuan to rise.

China still looking to win the future - PRESIDENT OBAMA hoped his "Win the future" message would rally Americans behind a plan to invest in education and infrastructure. But China seems ready to beat America at winning the future: The Telegraph reports: City planners in south China have laid out an ambitious plan to merge together the nine cities that lie around the Pearl River Delta. The "Turn The Pearl River Delta Into One" scheme will create a 16,000 sq mile urban area that is 26 times larger geographically than Greater London, or twice the size of Wales. The new mega-city will cover a large part of China's manufacturing heartland, stretching from Guangzhou to Shenzhen and including Foshan, Dongguan, Zhongshan, Zhuhai, Jiangmen, Huizhou and Zhaoqing. Together, they account for nearly a tenth of the Chinese economy. Over the next six years, around 150 major infrastructure projects will mesh the transport, energy, water and telecommunications networks of the nine cities together, at a cost of some 2 trillion yuan (£190 billion). An express rail line will also connect the hub with nearby Hong Kong.

‘China syndrome’ means country faces dangerous property bubble - One of China's leading economists has said that the country is facing the possibility of a dangerous real-estate bubble and rising inflation which could put growth at risk.  Yu Yongding, senior fellow at the Chinese Academy of Social Sciences (CASS) and former member of the monetary policy committee of the People's Bank of China, said that the demand for new property was so high that prices were in danger of soaring out of control.  Speaking at the World Economic Forum in Davos, Mr Yongding said that China's authorities would have to act to calm the market and that the rate of growth would have to be lowered: "Definitely inflation is the biggest concern so far. At the same time we are concerned about a real estate bubble.  "The demand for houses is still tremendous. So there is a tug of war between the central bank and the real estate developers. If the bank loosens [the property] policy there may be a re-emergence of a real estate bubble."  CASS is affiliated to the State Council, one of the major government bodies in China.

China’s Housing Nears U.S., Japan Bubble Levels: Chart of Day - China’s property market may be heading into a bubble as the economy’s reliance on real estate reaches a level close to the housing peaks in the U.S. and Japan, according to Citigroup Inc.  The CHART OF THE DAY shows investment in residential property accounted for 6.1 percent of China’s gross domestic product last year, the same level as the record in the U.S. in 2005 that was followed by the subprime crisis, said Shen Minggao, Citigroup’s China research head. It’s also about 2 percentage points away from Japan’s 1970s housing boom, he said.  “China’s property market is entering into a bubble stage,” Shen said in a phone interview. “It’s evident that property prices are no longer sustainable once the residential investments achieve above 8 percent of nominal GDP, and China may not be an exception.”  A 10 percent drop in China’s property investment translates to a 1 percentage point decline in nominal GDP, Shen said. Adding investments indirectly related to the real estate industry, nominal GDP will fall 2 percentage points to 2.5 percentage points, he said

China Central Bank Pledges Vigilance - The People's Bank of China must be vigilant on inflation and may need to tighten reserve requirements further to address rapid capital inflows, the central bank's governor warned Sunday. Speaking to Dow Jones Newswires on the sidelines of meetings in Kyoto, Zhou Xiaochuan pointed out that Chinese price growth slowed slightly in December, but he signalled it had more room to climb. Rising consumer prices have prompted a series of monetary-tightening measures since the beginning of last year; the central bank has twice raised interest rates and seven times increased banks' reserve requirements.

IMF raises spectre of civil wars as global inequalities worsen - The International Monetary Fund (IMF) has warned that "dangerous" imbalances have emerged that threaten to derail global recovery and stoke tensions that may ultimately set off civil wars in deeply unequal countries. Dominique Strauss-Kahn, the IMF's chief, said the economic rebound across the world is built on unstable foundations, with many rich nations still strapped in job slumps while the rising powers of China, India and Brazil already facing the threat of overheating. "It is not the recovery we wanted. It is a recovery beset by tensions and strain, which could even sow the seeds of the next crisis," he said.  "Global unemployment remains at record highs, with widening income inequality adding to social strains," he said, citing turmoil in North Africa as a prelude to what may happen as 400m youths join the workforce over the next decade. "We could see rising social and political instability within nations – even war," he said.

Asia Faces Overheating, `Hard Landing' Risks, IMF Says - Asian central banks may need to raise interest rates further to limit the risk of overheating in their economies and prevent a “hard landing,” International Monetary Fund Managing Director Dominique Strauss-Kahn said.  Policy makers in some countries may consider a temporary use of capital controls as fund inflows raise “financial stability” concerns, he said in a speech in Singapore today. Global imbalances are re-emerging as the world rebounds from the financial crisis, and may put the sustainability of the recovery at risk, he said.  Asian economies led a global recovery last year that’s been restrained by Europe’s sovereign-debt crisis and a U.S. job market where unemployment has exceeded 9 percent since May 2009. Last month, the fund pressed euro-region governments to build a comprehensive plan to prevent debt woes from spreading to other countries and urged emerging nations to closely watch the rise of asset-price bubbles as inflation risks increase.

Pakistan adds zero to huge debt burden - The total debt and liabilities of Pakistan have reached a record 10 trillion rupees (US$117 billion), as the government violated almost all the limits on borrowing imposed in the Fiscal Responsibility and Debt Limitation Act.  Every Pakistani owes more than 57,000 rupees per head to foreign and domestic lenders, compared with 22,000 rupees per head when the present government took over in 2008.  The country this year has to spend almost 900 billion rupees on debt servicing alone, which is five times more than the revised federal development budget. The financing of a large fiscal deficit is forcing the government to rely on borrowing from the central bank and commercial banks, triggering inflation and squeezing the private sector.  Last week, Islamabad sought United States intervention for restoration of the suspended US$11.3 billion International Monetary Fund (IMF) bailout program on assurance of implementing the economic reforms agenda.

New threats to India’s growth - The latest official estimates indicate that gross domestic investment stayed buoyant at 35 per cent of GDP in the first half of 2010/11, holding out the prospect of continued strong growth in 2011/12. And it has now become conventional wisdom to expect 8 per cent plus growth rates for the next decade or two as globalisation, “catch up” and favourable demographics continue to propel the Indian economy forward. All this is true. But developments during 2010 have spawned new threats to sustained rapid growth. First, there is the return of the “twin deficits” problem after almost two decades during which one of them, the current account deficit in the balance of payments, was muted. Second, the latter half of 2010 has seen the resurgence worldwide of energy and food inflation. Third the proliferation of scandals (including telecom 2-G spectrum allocation and the Commonwealth Games) has further weakened the government’s ability to take and execute decisions in all areas, including economic. Fourth, an activist environment ministry has sharpened the conflict between development and the environment, including through a number of high profile retrospective challenges to large investment projects. Last, but not least, economic reforms appear to have stalled completely. Some of these merit elaboration.

Emerging Markets Spend Big on Forex Intervention Amid Dubious Success - Emerging-market countries have been undertaking costly interventions to hold down the value of their currencies, but how effective these efforts have been in containing investment inflows is debatable. Countries from Brazil to South Korea have raised their reserves, taxed outside investments or instituted other types of capital controls to prevent foreign inflows from driving up their currencies. Yet the success in halting currency appreciation remains hard to gauge, with the focus more on slowing the rate of increase rather than on reversing it. At the same time, the interventions have imposed a battery of hidden costs on these countries’ central banks and capital markets. In Brazil, where taxes have been placed on various types of foreign flows and where the central bank has been buying up U.S. dollars on a nearly daily basis, the real has generally stayed on an upward path. It was at 1.6722 Brazilian reais recently, according to CQG, putting it up roughly 1.7% since increased taxes were announced on outside investments in October. Still, HSBC strategist Maya Hernandez estimated that the real might have strengthened to as much as 1.50 reais to the dollar, without the policy moves.

SRI: Water shortage a significant threat for China's economic growth - A little-explored side effect of China's economic growth is an increased demand for water. A new white paper from Schroders suggests that the Chinese government's response to the water shortage could have serious consequences for the strength or weakness of its long-term economic development.  China's growth is straining already limited water supplies. Creaking infrastructure also means that it uses water inefficiently. In the coming years, this may decrease China's internally-produced food supplies and create even greater pressure on global agriculture.  Although global food shortages and soaring agricultural prices have been higher up the international agenda in 2010, water shortages are a significant long-term threat. The problem was brought to the attention of investors when the giant Norwegian sovereign wealth fund - one of the biggest investors in the world - said in 2009 it would require that all the relevant companies in which it was invested had a long-term strategy for dealing with water shortages.

Press Release: Somalia faces severe water crisis as drought looms – Somalia is facing a severe water shortage following failure of the short rains also known as Deyr, heightening fears of deepening humanitarian crisis in coming months, a new report shows. Seasonal analysis by the Food Security and Nutrition Analysis unit (FSNAU), managed by the Food and Agriculture Organization (FAO) in Somalia, in collaboration with FEWSNET, indicates that the failure of short rain season dwindled water sources for both human and livestock in most areas, leading to crop failure and subsequent increase in prices of water and local cereals. “Although poor rains are a normal part of the climatic seasonal pattern in Somalia, and are experienced, on average, every 5 years, when the population is already dealing with other shocks such as conflict, displacement, limited access to basic services and limited opportunities for income, even one poor rainy season is enough to put a poor household into crisis,” said Grainne Moloney, FSNAU’s Chief Technical Advisor.

Brazil sees 2011 debt rising by up to 14 percent  (Reuters) - Brazil's total debt could rise nearly 14 percent in 2011 as the government looks to drain liquidity from the banking system, the national treasury said on Tuesday. Federal public debt is forecast to rise to between 1.8 trillion reais and 1.93 trillion reais ($1.15 trillion) in 2011 from 1.694 trillion reais at the end of 2010, the treasury said in its annual debt financing plan. "The increase forecast for the federal public debt stock is explained by the expectation of debt issuance by the national treasury in excess of the net financing need." the treasury said in a report. "This move is associated with the policy to reduce the excess liquidity in the banking system along the next years," it added. Net financing needs for the year, or the amount of bonds the government plans to issue to roll over maturities and meet its obligations, are forecast at 365.6 billion reais, the treasury said in its 2011 debt financing plan. Brazil has 464.3 billion in maturities in 2011, including 12.8 billion reais in external debt and 410.1 billion reais in domestic debt coming due, the treasury said.

Exchange Rates and Price Stickiness (Wonkish) -  Krugman - I mentioned recently that the correlation between nominal and real exchange rates is one key piece of evidence that we live in a Keynes-Friedman world of sticky prices, not the classical, perfect flexibility world of real business cycle theorists. Now that I have a few moments, let me elaborate on that. In international macro we talk a lot about real exchange rates, which are price-level adjusted rates. The nominal dollar-euro rate is the number of dollars per euro; the real dollar-euro rate is dollars/euro * European price level / US price level. So suppose that there were a doubling of prices in America while inflation remained at zero in Europe, but that the dollar lost half its value against the euro. The real exchange rate, which measures the relative price of US goods, would not change.

Clearing Questions - Since the credit crisis, regulators have been coming to grips with counterparty risk, or the notion that one party in a transaction might not honour its contractual obligations. Policymakers from the G20 countries, in particular, have been pushing for derivatives contracts to be settled through a central counterparty clearing system. This, it is hoped, will help reduce wider systemic risks in the financial market. In a market worth over €200 billion, more than half of Europe’s exchange-traded funds use synthetic replication.  This means that their returns depend on an over-the-counter (privately negotiated, bilateral) derivative agreement with a counterparty, typically a bank. According to some lawyers and risk experts, the shift towards central counterparty clearing could hit the synthetic ETF industry by making it more expensive - or even impossible - to provide those derivatives at an economic level.

Hu's counting II - IN MY previous post, I scrutinised President Hu Jintao's claim that Chinese imports had saved American consumers $600 billion over the past decade. My back-of-the-envelope calculations suggested that his figure was, if anything, an understatement. At the same luncheon, China's president also talked about trade in the opposite direction. He said that imports to China had created more than 14m jobs around the world, since China joined the World Trade Organisation in 2001. \So how many people owe their jobs to purchases by the Middle Kingdom? I have no idea how President Hu arrived at his figure of 14m, but I've attempted to replicate it in the table at right. The first column of the table shows various countries' exports to China from 2001 to 2009, expressed as an annual averageIf you carry out this crude calculation for the top 13 exporters to China, you quickly reach and surpass President Hu's total. Again, by this back-of-the-envelope calculation, President Hu's big claim looks quite plausible.

Inflation in China may limit U.S. trade deficit — Inflation is starting to slow China’s mighty export machine, as buyers from Western multinational companies balk at higher prices and have cut back their planned spring shipments across the Pacific. Markups of 20 to 50 percent on products like leather shoes and polo shirts have sent Western buyers scrambling for alternate suppliers. But from Vietnam to India, few low-wage developing countries can match China’s manufacturing might — and no country offers refuge from high global commodity prices.  Already, the slowdown in American orders has forced some container shipping lines to cancel up to a quarter of their trips to the United States this spring from Hong Kong and other Chinese ports.

Agency Revamp Focuses on Trade - The White House is looking at combining a set of agencies involved in trade and exports as it works to implement President Barack Obama's State of the Union call to "merge, consolidate and reorganize the federal government." White House officials in recent months seriously considered a plan to combine parts of the Commerce Department with other trade and export agencies, and to have the president announce the proposal during the speech, according to two people familiar with the conversations. They pulled back amid unsettled questions over which agencies would fold into the new department, among other details. But trade, exports and boosting competitiveness remain the focus of White House thinking on a reorganization plan, a White House official said.

A Shrinking Nonoil Trade Gap? Really? - If you accept that the impact of imports on the U.S. economy has increased over the past ten years, then the official GDP stats are by definition missing the boat when it comes to trade. They are underestimating both the nominal impact of growing imports, and the real impact of increasing trade deficits (I’ve written about this many times in the past, but I’m about to write a post that summarizes what we know). And that brings us to Friday’s GDP report. Please note that out of the 3.2% real GDP growth, 3.44 percentage points came from reports of a shrinking trade gap–a drop in real imports combined with a rise in real exports….and it wasn’t just oil. In fact, the nonoil goods trade gap shrank at a $40 billion annual rate, according to the BEA. Am I suspicious of this number? Yes. For three reasons. First, given the long-term apparent bias in the GDP stats, I believe that increases in the real trade deficit have been underestimated. That suggests we might be underestimating the increase in the real trade deficit now as well.

Who’s afraid of the big bad dragon? How Chinese trade boosts European innovation - Twin spectres are haunting Europe and the US – the growing economic power of China and fears about where the West’s own growth will come from after the crisis. This has been driven by the tremendous growth of imports from China, as shown in Figure 1 (see also Keller et. al 2010). Some economist even argue for trade sanctions if China does not allow its currency to appreciate (see for example Gros 2010). Chinese exports are often blamed for job losses and firm closures in developed economies. This column tracks the performance of more than half a million manufacturing firms in 12 European countries over the past decade. It finds that competition with Chinese exports is directly responsible for around 15% of technical change and an annual benefit of almost €10 billion in these countries – the wider productivity effects may well be larger.

Is short-time work a good method to keep unemployment down? - Vox EU - One method for combating unemployment during the global crisis has been the use of short-time work schemes that allow employers to temporarily reduce hours worked while compensating workers for the induced loss of income. In the first of two columns on labour markets, the authors present new evidence establishing that these schemes do indeed reduce unemployment. But they are no panacea and are not without their own problems.

Taxes and labour supply: more evidence- Do tax cuts boost labour supply and hence tax revenues? Here’s some evidence that they don’t. Pierre Cahuc and Stephane Carcillo report on an experiment in France: The detaxation of overtime hours introduced in October 2007 was intended to allow individuals in France to work more so as to earn more. The evaluation conducted in this article indicates that the detaxation of overtime hours has not, in fact, had any significant impact on hours worked… Detaxation is a measure costly for the public purse, without any ascertained impact on hours worked. We can put this alongside the evidence we have for footballers and New York cabbies, which suggests that we are on the positive side of the Laffer curve, where tax cuts do not increase revenues. ... Now, this is not to deny that Laffer curves exist. No doubt, there is a point at which higher taxes would be counter-productive and tax cuts would pay for themselves. ... But where is the hard evidence that, at tax rates around current levels, there are such effects?

French, British Banks Have Most Exposure to Egyptian Loans, BIS Data Show - International banks have lent $49.3 billion to Egyptian borrowers, with French and U.K. banks having the most exposure to the country torn by anti-government protests, data from the Bank for International Settlements show. French banks’ claims on Egyptian borrowers stood at $17.6 billion at the end of September, BIS statistics released Jan. 27 show. U.K. banks’ exposure was $10.7 billion and Italian banks had $6.3 billion in claims, the data show. European banks’ total claims amounted to $40.3 billion.  Societe Generale’s Egypt subsidiary, National Societe Generale Bank, had 4.1 billion euros ($5.6 billion) in loans and 6.2 billion euros of deposits in the country, according to the Paris-based bank’s third-quarter results presentation. Societe Generale took “appropriate measures” to protect its 3,700 staff in the country, it said on Jan. 28.

Egyptian CDS in line with Portuguese CDS - Rebecca Wilder - It occurred to me that some Angry Bear readers may be interested in a short analysis of the Egyptian bond market. Professionally, I'm a macroeconomic analyst and portfolio manager on a global fixed income team. Since we do trade emerging market debt, of which Egyptian debt is categorized, I'll be happy to comment. The gist of the article is this: markets are pricing the probability of default in Portugal and Egypt similarly - I'd sell protection on the Egyptian debt. At this point, I should state the following disclaimer: this is not a trade recommendation, nor does this represent my firm's views on Egypt or Portugal. Some bond market developments of late:

1. Egypt holds a BBB- rating on its local currency debt by Fitch and S&P (BB+ on its foreign currency debt). The local currency debt in Egypt is at the lowest of the investment-grade ratings, while on January 20, 2011, Fitch put Egypt on credit-watch negative.
2. The Egyptian pound is heavily managed. Over the last week, the USD gained just 0.9% against the pound. Maintaining a stronger nominal currency is common in developing economies to temper the effects of import prices (in this case, food).
3. The 5.75% 10-yr Egyptian international bond, which is denominated in USD, sold off 7% over the last week. According to JP Morgan, Egypt is well underperforming the index (Egpyt is roughly 0.5% of the index): the year to date total return on the Egyptian international bonds is -10%, while that of the JP Morgan Emerging Market Bond Index Global (EMBIG) is -0.7%.
4. Credit default swap spreads jumped 50% over the last week to 454 basis points (bps), according to one Bloomberg source (no link, subscription required). CDS are bilateral contracts between two parties, so pricing varies somewhat - but the trend is the same among all sources: up. This means that it's becoming increasingly expensive to buy protection against Egyptian sovereign default.

If you want to know more about CDS, please see a helpful 2009 publication by Deutsche Bank.

Portuguese, Spanish Bonds Back To All Time High Yields - One would think that judging by all the frequency of lies about Europe's latest CDO knight in shining armor, also known as the EFSF, that bond spreads would be rushing headlong to zero as yet another form of perpetual taxpayer backstop is implemented. One would be wrong. Spreads on the Portuguese and Spanish 10 Years are now back to their widest levels in history. It is fairly complicated to reconcile this stickiness with the daily barrage of mendacity from all ECB apparatchiks. Basically, the market, unlike Goldman (see below), is fairly unconvinced that any of the currently planned rescue plans have any chance of being successful.  Elsewhere, the Koolaid farmers at Goldman issued the following pamphlet on why the EFSF is just swell:

Understanding and quantifying contagion - Vox EU - Contagion is one of the more elusive concepts in the current debate about the financial crisis. Indeed, the logic behind it is often unclear. Take, for example, the suggestion of pricing externalities across markets following a default on Greek sovereign debt. It implies that the financing costs of other “vulnerable” sovereign borrowers may also increase. Yet if we consider the insolvency of one private household, it doesn’t follow that his neighbour is denied credit as well. Why, then, should this be the case for countries with very different economic fundamentals and access to a wide range of investors? Fear of contagion across asset classes is again stalking European sovereign bond markets. This column discusses how shocks to bank stocks spread to non-financial stocks in 2007 and 2008. It finds that equity fire sales by mutual funds had a surprisingly large and devastating effect on the price of non-financial stocks. Could the sale of bonds trigger a similar reaction?

European Inflation Quickens to Two-Year High of 2.4% -- European inflation accelerated more than economists forecast in January, keeping pressure on policy makers to monitor price gains that are exceeding the European Central Bank’s limit. Inflation in the euro region quickened to 2.4 percent from 2.2 percent in December, the European Union’s statistics office in Luxembourg said today in a preliminary estimate without providing a breakdown. That’s the fastest since October 2008 and exceeded the 2.3 percent median estimate of 37 economists in a Bloomberg News survey. Increasing commodity prices are adding pressure on companies to pass on higher costs. ECB policy makers will discuss the inflation outlook on Feb. 3, a day before European leaders gather in Brussels to advance their response to the sovereign-debt crisis. ECB President Jean-Claude Trichet has said he only expects

How to deal with rising inflation - Should we worry about inflation in Europe? Or rather: should we worry about inflation in the presence of an inflation target of under 2 per cent? The European Central Bank has been warning about the inflationary effects of higher commodity prices. For a central bank that takes its target seriously the concern is justified. But higher food and energy costs are not even the biggest problem. A clearer and more present inflationary threat would be an overheating German economy at a time when peripheral Europe is in a depression.  Is Germany overheating? It is hard to come to that conclusion from the actual levels of real gross domestic product. Between the third quarters of 2007 and 2010, seasonally adjusted quarterly German real GDP fell by 0.2 per cent, according to Thomson Datastream, while it rose by 0.1 per cent in the US. So how can it be overheating when it has not even reached the pre-crisis level of output? It would certainly be a sign of extraordinary structural weakness if that were to happen. And Germany, so we are told, is very strong.

Eurozone Inflation - Krugman - Wolfgang Munchau agonizes over European inflation targets; he worries that rising German inflation may lead the ECB to raise rates, which would be disastrous for troubled peripheral economies. I wrote about this a couple of weeks ago. Trying to keep German inflation low means imposing harsh deflation on the European periphery, as it tries to get costs and prices back in line. I’d add that given what we know about price adjustment during persistent large output gaps (PLOGs), the reality is that keeping overall eurozone inflation at 2 percent would probably mean at best very slow deflation in the periphery — because prices really don’t want to fall — but a prolonged period of very high unemployment.The point, as Munchau says, is that a monetary union of imperfectly integrated economies really needed a higher inflation target than the United States; having what amounts to a low-inflation target, and a central bank that’s always looking for reasons to worry about inflation, is really destructive.

Trichet Signals No Rush to Raise Rates Even as Inflation Tops ECB's Limit - European Central Bank President Jean- Claude Trichet signaled no immediate plans to raise interest rates even though the bank expects inflation to stay above its 2 percent limit for longer than it predicted just three weeks ago.  Trichet said the ECB’s benchmark rate, which it left at a record low of 1 percent today, remains “appropriate” and despite “short-term upward pressure,” inflation risks are balanced. The euro fell more than a cent against the dollar as investors pared expectations for an increase in borrowing costs.  “For now they are prepared to look through the inflation hump,” said Julian Callow, chief European economist at Barclays Capital in London. “Unless inflation expectations move up abruptly, the ECB will probably maintain its accommodative stance to help Europe to patch itself together again.”

Fitch on Spanish mortgage walkaways - Fitch seems angry. In a Friday statement, the rating agency dealt with a recent ruling by a judge in the Spanish province of Navarra, which said that giving a mortgaged house back to a bank is sufficient to cancel mortgage debt, even if the house has negative equity (H/T mh arb). This is rather different to what normally happens in the Spanish system, with banks able to go after the assets of defaulted borrowers for up to 15 years. The Fitch statement: Fitch Ratings-Madrid/London-28 January 2011: Fitch Ratings says that a recent court ruling that ignores the full recourse option for mortgages originated under Spanish law will not have any immediate impact on outstanding structured finance ratings. Fitch will not revisit its default or recovery assumptions until the potential implications of the isolated ruling are fully clarified. WILL NOT revisit potential implications!

Update on conditions in Ireland…another letter from Ireland - The first letter from Ireland is here Update on conditions in Ireland...a second letter from Ireland Ireland, Land of Thieves, Charlatans and Sodomites… Zeus-Boy We’re forced to do silly things out of desperation, things that other nations don’t have to resort to. For instance, we’ve the lowest corporate tax rate in Europe at 12.5%. Sarkozy recently excoriated us for this. But we use it as an incentive to bait the multi-nationals. We’ve no other choice. Why else would the big companies bother locating here? If the labour market is cheaper elsewhere then we have to compete somehow, we're told. We lure them in by offering them tax shelters. We even set aside developed estates for them and we build their factories when they come, with the Taoiseach on hand to cut the ribbons. Their overheads remain very low and then we allow them to siphon all their profits out of the country. Talk about being recolonized by self-imposed deference, but Ireland is a dependent economy and does what it must do to survive.

When Irish eyes are crying - First Iceland. Then Greece. Now Ireland, which headed for bankruptcy with its own mysterious logic. In 2000, suddenly among the richest people in Europe, the Irish decided to buy their country—from one another. After which their banks and government really screwed them. So where’s the rage? When I flew to Dublin in early November, the Irish government was busy helping the Irish people come to terms with their loss. It had been two years since a handful of Irish politicians and bankers decided to guarantee all the debts of the country’s biggest banks, but the people were only now getting their minds around what that meant for them. The numbers were breathtaking. A single bank, Anglo Irish, which, two years before, the Irish government had claimed was merely suffering from a “liquidity problem,” faced losses of up to 34 billion euros. To get some sense of how “34 billion euros” sounds to Irish ears, an American thinking in dollars needs to multiply it by roughly one hundred: $3.4 trillion. And that was for a single bank.

Irish bank flight quickens despite EU rescue - Deposit flight from Irish banks accelerated sharply at the end of last year on fears of political turmoil, suggesting that the EU-IMF rescue package for Ireland failed to restore confidence.  Irish central bank data showed losses of €40bn (£34bn) in deposits from the key banks in December, compared with €27bn a month earlier. Over the past year Irish lenders have haemorrhaged €110bn, equal to 60pc of gross national product. "Would I want to leave money in an institution where I don't know who is making the rules?" said Gary Jenkins from Evolution Securities.  On Wednesday, Standard & Poor's cut Ireland's sovereign rating one notch to A-, citing a "weaker economic outlook, reduced prospects for bank earnings and funding difficulties of domestic banks". It also downgraded Bank of Ireland, Allied Irish, Anglo Irish and Irish Life, questioning "both the ability and willingness of the Irish government" to keep propping up lenders. The quartet remain "highly reliant on central bank funding" and have been unable to raise market funds despite state guarantees. 

Merkel to present her eurozone governance proposals at Friday’s summit - European Commission says it supports Merkel’s initiative, focusing mostly on competitiveness; FT Deutschland says Merkel is proposing action only in areas where Germany is strong; the underlying political goal is to shed her image as a naysayer; the Spanish savings banks’ total doubtful property exposure is put at just under €100bn; EU to discuss direct funding proposals for EFSF; the Irish central bank cuts the growth forecast to 1%; Portugal’s bankers oppose EFSF bailout; a Jornal de Negocios editorial supports the idea of Portugal accepting an EFSF loan; eurozone inflation reaches 2.4% in January; bond yields in Spain and Portugal are approaching critical levels; the rise in the euro may in part been due to different inflation rhetoric across the Atlantic; Lucas Zeise says that those who failed to foresee the crisis are now the main beneficiaries of institutional reform; Pierre-Cyrille Hautcoeur, meanwhile, argues that the threat of a unilateral default is low because most debtors are also creditors.[more]

Towards a deal - Markets remain euphoric about prospects of a grand bargain on crisis resolution at the March EU summit; Germany and France are now discussing Merkel’s “pact for competitiveness” at bilateral level; differences remain over some of Germany’s more extreme proposals; France and Germany are also working on a new set of measures and benchmarks for competitiveness; Germany says pact will be final – cannot go back to parliament for an increase in EFSF funds after this; Wolfgang Münchau writes that Merkel’s competitiveness proposals are the result of a fundamental misunderstanding of the causes of the crisis; Martin Wolf says the mood on the eurozone is more optimistic, but still not clear how the eurozone will get out of its mess; Peter Praet is ahead in the race for the open slot on the ECB’s executive board; European Parliament is hostile to the three nominees to head the new financial supervisory authorities; Italian borrowing requirement rises as a consequences of the loan package to Greece; in a U-turn, the European Commission acknowledges link between speculation and commodity prices; Francois Bourguignon debunks some myths about commodities; Sinn Fein, meanwhile, is gaining support in the polls, as a consequence of its opposition to the EU/IMF deal.[more]

European Bond Spreads Update - With the key European meeting tomorrow, here is a look at European bond spreads from the Atlanta Fed weekly Financial Highlights released today (graph as of Feb 1st): From the Atlanta Fed:  While there has been some improvement since the start of the year, most peripheral European bond spreads (over German bonds) continue to be elevated, particularly those of Greece, Ireland, and Portugal. Since the start of the year, the 10-year Greece-to-German bond spread has narrowed by 183 basis points (bps), through February 1. Similarly, the spread for Ireland is 41 bps lower, 54 bps lower for Spain, and down 42 bps for Italy.  Portugal’s spread, however, is essentially unchanged over the period.  The bond yields are up slightly today. The Portugal 10 year is at 6.99%, the Ireland 10-year bond yield is at 8.86%, and the Greece 10-year bond yield has fallen to 10.9%.

Germany pushes for recognition of silent capital through the backdoor - German finance ministry wants the EU Commission to circumvent a critical element of the Basel III agreement by allowing German banks to count the category of silent capital as core capital; this means that Germany has no intention to force a genione recapitalisation of its banking system – large parts of which are insolvent; King Albert of Belgium has a appointed Didier Reynders as a new mediator in the country’s political crisis; S&P warns that bank bondholder bail-ins are still possible in Ireland; Tom O’Connell blames crony capitalism in Ireland for the crisis; the French government is considering a balanced budget constitutional rule before the summer; Portugal basks in the illusion that it can escape the clutches of the EFSF, encouraged by the recent let-up of market pressures; German insurers are afraid of the impact of Solvency II after a test run came up with devastating results; euro rises further, and bond spreads continue to narrow; market-based measures of inflation expectations have risen above the ECB’s inflation target; Joseph Stiglitz, meanwhile, warns about the effects excessive austerity. [more]

Not as close to a deal on a comprehensive anti-crisis package as you might think Officials express doubt whether a package could be ready by end March, as substantive disagreements emerged between member states, and between European Council and European Commission; today’s summit will set March as the date for a final agreement; Merkel now accepts the principle of eurozone-only summits; Sylvie Goulard MEP says if pension reform is part of a package, then, surely, so must be a eurozone bond; the European Commission has expressed concern about its exclusion from the coordination process; Merkel’s acceptance of a German-dominated eurozone economic governance may well be motivated by domestic concerns; the Irish opposition parties call for a renegotiation of the bailout agreement, prompting a stern rejection by the ECB; demand in a Spanish bond auction was low, a sign that the recent wave of eurozone euphoria may be ending; Trichet cools the anti-inflation rhetoric, sending the euro sharply lower; Mohamed El Erian says Spain needs a lot more to avert a crisis; Romain Rancière, meanwhile, argues that a new international monetary system would require two components: diversification away from the dollar, and insurance against capital flow reversals [more]

Germany and France roll out plan to boost euro - — Initiating a bold effort to strengthen the euro, Germany and France on Friday laid down far-reaching plans to deepen integration among the 17 nations that use the currency. The move prompted immediate opposition, but could lead to embryonic economic government for Europe.  After days of speculation, the proposal from the German chancellor, Angela Merkel, and the French president, Nicolas Sarkozy, was greeted with criticism from governments that fear they may have to raise corporate tax rates or scrap deals that link annual wage increases to inflation.  At a European Union summit meeting in Brussels, several prime ministers from euro-zone countries, including Belgium’s caretaker premier, Yves Leterme, criticized the proposal or questioned the way it would operate. Non-euro nations, including Poland, expressed fears they could be sidelined.

When will the Recession End? Part 139 Russia admits it’s dead and falling apart - A member of the Russian Advisory Council in the State Duma Committee for Regional Policy, Natalia Zubarevich, admitted that four large reasons will lead to the inevitable and inexorable death of the Russian Federation, as a result of which this country will cease to exist as a single entity and will be divided into independent states:  "First, the quality of life is deteriorating in the Moscow metropolitan agglomeration due to growing infrastructure and environmental problems, while the population increases.  Second, economic development of large cities which are regional centers is sharply slowing because of lack of investments and deterioration of the institutional environment, which also leads to an even greater concentration of manpower in the federal city.  Third, marginalization of vast peripheral areas is increasing, and a depopulation takes place.  Unemployment, social benefits, etc. And there is less and less money in the budget. Fourth, growth of tensions, ethnic conflicts and cronyism in the North Caucasus republics stimulate migration outflow of educated and more "modernized" urban residents of the republics to other regions",

Lonely Analyst Warns of 2015 Bank Crisis Amid ‘Upbeat’ Davos … As politicians, executives and financiers networked at parties and panels last week in Davos, Switzerland, Barrie Wilkinson was in a nearby hotel, warning that a 2015 financial catastrophe may be looming.  “The fundamentals haven’t been addressed at all,” Wilkinson, a London-based partner at consulting firm Oliver Wyman, said. “The things that caused the previous crisis -- loose monetary policy and trade imbalances -- they’re actually bigger now than they were then.”  The same theme pervaded a World Economic Forum dinner on Jan. 28 that discussed what would happen if a big bank were allowed to fail. The group, which included Nomura Holdings Inc. Chief Operating Officer Takumi Shibata, 58, former Italian Finance Minister Domenico Siniscalco, 56, and ING Groep NV CEO Jan Hommen, concluded that governments have no choice but to come to the rescue of any failing multinational megabank because there is no system to handle a controlled failure.  If a government was unable to save such a bank, the contagion and damage could be severe.  “I came into this dinner somewhat pessimistic and worried about the assignment we are here to discuss,” Simon Johnson said halfway through the evening. “I am now terrified. There is an incipient sovereign crisis here mixed in with the bank crisis.”

God-Washing Davos - Can religion save the soul of the world’s economic system? What does religion have to do with ethics? In particular, what does religion have to do with business ethics? There’s certainly no necessary connection. You’ll notice an utter lack of theological arguments in this blog, for instance. But many people see a connection, and perhaps a necessary one. For example, see this piece by Dan Gilgoff, for CNN’s “Belief” Blog: How Davos found God …Since the banking crisis shook global markets more than two years ago and contributed to a worldwide economic slump, the annual Davos summit has invited dozens of religious and spiritual leaders to hash out issues like business ethics and the morality of markets in the company of presidents and corporate titans…. This worries me for two reasons.

A pay-up and shut-up deal for the banks - It is time to make Britain’s banks an offer they cannot refuse. Politicians, regulators and the media promise to shut up about seven-figure bonuses and opulent lifestyles; in return the banks agree to reimburse taxpayers for the subsidy they receive from the public purse. Management consultant types would call this a win-win, and economists a market-based solution. The banks stand on their own financial feet; and critics disavow a public interest in their pay packets. The bankers join the ranks of footballers, rock stars and hedge fund chiefs: the only losers from telephone-number bonuses are soft-headed shareholders and investors. We know the banks want to quell the controversy. Bob Diamond, the US investment banker who has just taken over as chief executive of Barclays, has put himself in the vanguard of the “let’s draw a line” brigade. Mr Diamond told MPs the other day it was time to take off the hair-shirt of remorse. As for bonuses, if banks were to compete globally they had to pay the market rate.

UK: No Expansionary Fiscal Contraction Yet - The UK can be seen as a kind of test case for the proposition that contractionary fiscal policy can induce an economic expansion, a proposition forwarded by most recently Alesina and Ardana (2010) [wp version] (following up earlier work by Alesina and Perroti). So far, admittedly early in the process, the evidence is not consistent with the view of expansionary contraction. Here's Gavyn Davies' view: ...The statistics were expected to show a significant slowdown in output growth, but nothing like the drop of 0.5% in real GDP (-2 per cent quarter-on-quarter annualised) which was actually announced this morning. ...Davies provides a caveat: ..these figures seem much too bad to be true, and not just because of the weather. The underlying growth rate of private sector GDP probably remains at around +2 per cent on an annualised basis, and it would not be at all surprising to see a sharp rebound in recorded growth in the current quarter. Nevertheless, the recovery in the UK economy, while still intact, continues to run at a less impressive pace than we are seeing elsewhere in the developed world.

Conservative Austerity Idea Is Failing - - Sorry, fiscal austerity doesn’t work. For evidence, look no further than the U.K. This can’t be good news for the U.S. political right, whose mantra has been: cut spending, put a lid on deficits, and growth will improve. All sorts of good things, it is claimed, will spring from a turn to austerity that stops all this stimulus nonsense and prevents the Federal Reserve from doing more quantitative easing. Reductions in spending, according to a theory known as Ricardian equivalence, will do no harm because lower borrowing will automatically lead to higher private spending. Plus, of course, there is the notion of crowding out, meaning that reining in the public sector leaves room for the private industry to step in and all will be well. This is dangerous hogwash. There is little historical precedent in the real world --though lots of fantasizing in the made-up world of economic theorists -- to suggest that fiscal austerity works. The best example of austerity’s failure is the double-dip that occurred in the late 1930s in the U.S., when spending was reduced too soon in a nascent recovery. In contrast, the U.K. didn’t have a double-dip because it was engaging in classic Keynesian spending as it began re- arming.

The Great British austerity experiment - Three months ago, I noted that the United States might benefit from the pain being suffered by the citizens of the United Kingdom. The reason was the new coalition government's commitment to prosperity through austerity. As predicted, this looks very much like a path to pain and stagnation, not healthy growth.  That's bad news for the citizens of the United Kingdom. They will be forced to suffer through years of unnecessarily high unemployment. They will also have to endure cutbacks in support for important public services like healthcare and education.  But the pain for the people in England could provide a useful example for the United States. After failing to see the $8tn housing bubble that wrecked the US economy, the austerity crew in the United States has been newly emboldened by the hugely partisan media that desperately want to eviscerate the country's bedrock social programmes: social security and Medicare.  The elite media and the politicians whom they promote would love to see the United States follow the austerity path of the UK's new government. However, if this path takes the UK into dangerous economic waters, it could provide a powerful warning to the public in the United States before we make the same mistake.