Fed's balance sheet grows in latest week - The U.S. Federal Reserve's balance sheet expanded to a new record size in the latest week, as the central bank continued to purchase bonds, Fed data released on Thursday showed. The balance sheet expanded to $2.561 trillion in the week ended March 9 from $2.528 trillion the prior week. The central bank's holding of U.S. government securities jumped to $1.266 trillion on Wednesday from last week's $1.236 trillion total. The Fed's ownership of mortgage bonds guaranteed by Fannie Mae,Freddie Mac and the Government National Mortgage Association (Ginnie Mae) was unchanged on the week at $948.932 billion.The Fed's holdings of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank system was also unchanged at $143.249 billion.The Fed's overnight direct loans to credit-worthy banks via its discount window dipped to an average of $8 million a day in the week ended Wednesday from $18 million the previous week.
Federal Reserve Balance Sheet Rises To $2.581 Trillion - The U.S. Federal Reserve's balance sheet continued to expand last week as the central bank bought more government debt in an effort to spur economic growth. The Fed's asset holdings in the week ended March 9 climbed to $2.581 trillion, from $2.549 trillion a week earlier, it said in a weekly report released Thursday. It was the fifth consecutive week in which assets were above $2.5 trillion. The Fed's holdings of U.S. Treasury securities rose to $1.266 trillion on Wednesday from $1.236 trillion the previous week. Meanwhile, Thursday's report showed total borrowing from the Fed's discount window edged down to $20.18 billion Wednesday from $20.38 billion a week earlier. Borrowing by commercial banks rose to $12 million Wednesday from $7 million a week earlier. Thursday's report showed U.S. government securities held in custody on behalf of foreign official accounts increased slightly to $3.398 trillion, from $3.392 trillion in the previous week. U.S. Treasurys held in custody on behalf of foreign official accounts increased to $2.638 trillion from $2.631 trillion in the previous week. Holdings of agency securities, meanwhile, edged down to $759.25 billion from the prior week's $761.06 billion.
Velocity of Federal Reserve deposits I've been emphasizing that the U.S. Federal Reserve has not been printing money in the conventional sense of creating new dollar bills that have ended up in anybody's wallets. Instead, the Fed has been creating new reserves by crediting the accounts that banks maintain with the Fed. Today I'd like to offer some further observations on how those reserve balances mattered for the economy historically, how they matter in the current setting, and how they may matter in the future.When the Fed makes a purchase of, for example, U.S. Treasury bonds, it does so by simply crediting an account that the selling institution maintains with the Fed, creating new funds out of thin air. The selling bank surrendered T-bonds which the Fed now owns, and has command of new reserve deposits, with which it can do anything it likes.
Imperfect Credibility and the Zero Lower Bound on the Nominal Interest Rate - Fed paper - When the nominal interest rate reaches its zero lower bound, credibility is crucial for conducting forward guidance. We determine optimal policy in a New Keynesian model when the central bank has imperfect credibility and cannot set the nominal interest rate below zero. In our model, an announcement of a low interest rate for an extended period does not necessarily reflect high credibility. Even if the central bank does not face a temptation to act discretionarily in the current period, policy commitments should not be postponed. In reality, central banks are often reluctant to allow a recovery path with output and inflation temporarily above target. From the perspective of our model such a policy reflects a low degree of credibility. We find increased forecast uncertainty in inflation and the output gap at the zero lower bound while interest rate uncertainty is reduced. Furthermore, misalignments between announced interest rate paths and market expectations are found to be best explained by lack of credibility
Fed Unlikely to Remove Its Economic Stimulus Just Yet - Federal Reserve officials have grown more confident that a self-sustaining economic recovery is taking root in the U.S., but they want to see more evidence before they seriously consider how and when to pull back the enormous amounts of stimulus they pumped into the financial system. So when officials gather for their next policy meeting March 15, they are likely to decide to continue a $600 billion Treasury securities purchasing program. They are also likely to maintain a commitment to keep short-term interest rates near zero for an "extended period." Barring a surprising turn in the economy or inflation, it seems increasingly likely that the securities purchase program, known by some as quantitative easing, is likely to end in June as scheduled.
Lockhart Says Fed Shouldn’t Rule Out More Asset Purchases If Economy Slows -- Federal Reserve Bank of Atlanta President Dennis Lockhart said the central bank shouldn’t rule out asset purchases beyond the $600 billion planned by June because turmoil in the Middle East risks causing a slowdown in the U.S. “With the information I have today, my first inclination is to be very cautious about extending asset purchases after June,” . “Given the emergence of new risks, however, I prefer a posture of flexibility as regards policy options.” Lockhart’s comments echoed Fed Chairman Ben S. Bernanke, who told Congress last week that economic conditions continue to justify holding the central bank’s target rate at near zero as well as additional monetary stimulus. Private economists are projecting the Fed will start to raise interest rates by early 2012 as the economy strengthens.
Fed must be flexible given oil prices, Lockhart says - The Federal Reserve may want to consider a third round of bond purchases if an oil shock materializes, a central bank official said Monday. Dennis Lockhart, the president of the Atlanta Fed, said that while his first instinct is to be “very cautious” about making another round of bond purchases once the Fed’s $600 billion bond-buy program expires in June, he said he would consider them depending on oil prices. Given the new risks from the Middle East turmoil, “I prefer a posture of flexibility as regards to policy options,” Noting that economic studies show a high correlation between oil shocks and the onset of recessions, Lockhart said it was possible that prices may rise to a level that would endanger the economic recovery and force the Fed to ease further with another round of asset purchases.
Fed’s Lockhart: Oil Shock Could Spur More Bond Purchases - Federal Reserve Bank of Atlanta President Dennis Lockhart said Monday that the U.S. economy can absorb some rise in energy prices, though the Fed could loosen monetary policy in the unlikely event that an oil shock threatens the economy. “My instinctive sense is that the economy and prices can absorb a moderate increase and that a relatively short or intermediate period of time is manageable for the economy,” Lockhart said events in the Middle East and North Africa are adding to uncertainty around oil prices. “We cannot rule out that there would be a higher run up of energy prices,” Lockhart said. “It is not my base case scenario for the economy.” In the event of a severe shock — with a prolonged oil price increase and recessionary conditions developing — the Fed could consider supporting the economy with a third round of bond purchases.
Fed’s Dudley: Stronger Recovery Doesn’t Mean Early End to QE2 - A top Federal Reserve official reiterated Friday that improving economic growth doesn’t mean the central bank will need to end its $600 billion bond buying program early. “We provided additional monetary policy stimulus via the asset purchase program to help ensure that the recovery regained momentum,” Federal Reserve Bank of New York President William Dudley said. “A stronger recovery with more rapid progress toward our dual mandate objectives is what we have been seeking. This is welcome and not a reason to reverse course” on policy, he said. Dudley’s expression of continued support for the program, popularly known as QE2, came in a speech that largely reprised an address the central banker gave at the end of February.
Oil Jump Presents Conundrum for Fed - Two top Federal Reserve officials on Monday offered conflicting views on the right response to higher oil prices, kicking off what’s likely to be a lively debate within the central bank. While Dallas Fed President Richard Fisher signaled higher oil prices may lead the central bank to roll back its huge monetary stimulus to prevent an inflation outbreak, Atlanta Fed chief Dennis Lockhart said more stimulus may be needed to avoid another recession. Higher oil prices can cut two ways. Depending on the economy’s health, they can either lead to inflation if growth is strong and companies raise prices to make up for higher raw material costs, or they can bring about a recession by hurting consumer spending if the economy is too weak. In the worst-case scenario, they can lead to both: a weak economy with high unemployment and high inflation — commonly know by economists as stagflation.
Fed Watch: Ignore Hawkish Rhetoric - The Wall Street Journal suggests the Fed is facing a policy conundrum. I would suggest that "conundrum" is an overstatement. Push comes to shove, there will be little debate - if the current oil price shock turns nasty, Fed officials will embrace another round of quantitative easing. Dallas Federal Reserve President Richard Fisher offers the hawkish view, and remains colorful as always. Today he ranted against QE2.Am I the only one who sees Fisher as a remarkably irresponsible policymaker? I get the sense that at best he is trying to undermine the effectiveness of monetary policy by repeatedly emphasizing that it doesn’t work. At worst, he is deliberately trying to feed inflation expectations, for what purpose I know not. I think the responsible policy approach would be to exude confidence in the Federal Reserve, particularly during period of turmoil. The policy is in play; no good comes from public derision at this junction. Simply reiterate that the Fed has the tools to remove the accommodation should it become necessary.
The Fed doves have not caved in - The combination of a rapidly growing economy, and a surge in oil prices, has raised questions about the strength of the doves’ hand at the Fed. Previously in firm control, the doves had until yesterday been silent about the recent mixture of strong GDP growth and rising headline inflation. Was the case for exceptionally easy monetary policy beginning to fray at the edges? Not in the mind of New York Fed President Bill Dudley, who is among the most eloquent spokespersons for the dovish standpoint. In an important speech, Bill Dudley confirmed that the US economy is now growing at an accelerating rate, but said that this reflected the success of Fed policy, rather than providing any case for changing it. He conceded that the structural unemployment rate may have risen to between 6 and 7 per cent, but argued that much of this increase may be temporary. And, in any event, he suggested that employment could rise by 300,000 per month for two years before the economy would run out of spare capacity. On the commodity price surge, he said that this would not be a sufficient reason for tightening monetary policy, unless it started to increase inflation expectations. Assuming this does not happen, Bill Dudley will remain an influential dove for a long time. And this is important, because his recent thinking has been very close to that of US Federal Reserve chairman Ben Bernanke himself.
Fed Gives Markets Clues on Exit Path From Unprecedented Easing-- The Federal Reserve is trying to let investors know that, even as it pursues an unprecedented expansion of monetary stimulus, it hasn’t forgotten about exiting. In the week after the Federal Open Market Committee’s Jan. 25-26 meeting, policy makers issued three announcements about expanding the number of counterparties for transactions that will help drain the record amount of cash added to the financial system. Brian Sack, the New York Fed’s markets-group head, added more details about the preparations in a Feb. 9 speech, and New York Fed President William Dudley reiterated last week that officials have the ability and will to withdraw their stimulus when necessary.The disclosures come as a decline in the unemployment rate and growth in manufacturing underscore that the economic recovery is gaining momentum. Policy makers need to “communicate effectively” about their exit strategy to build confidence in the Fed and anchor inflation expectations, Dudley said Feb. 28 in a New York speech. The plan to buy $600 billion of Treasuries through June sparked the harshest political backlash against the Fed in three decades, with Republican lawmakers warning the stimulus risks a surge in prices.
This Is How QE Really Works - The Mechanics of QE: In March of 2010, the Fed described QE this way in a paper written by Joseph Gagnon, Matthew Raskin, Julie Remache, and Brian Sack on the New York Fed’s website: Since December 2008, the Federal Reserve’s traditional policy instrument, the target federal funds rate, has been effectively at its lower bound of zero. In order to further ease the stance of monetary policy as the economic outlook deteriorated, the Federal Reserve purchased substantial quantities of assets with medium and long maturities. In this paper, we explain how these purchases were implemented and discuss the mechanisms through which they can affect the economy. So quantitative easing is simply large scale asset purchases (LSAP) by the central bank. The central bank is permitted by law to purchase a wide range of assets including but not limited to Treasury securities, mortgage-backed securities, or municipal bonds (see Blanchflower: The Fed Should Buy Munis And Monetize State Debt). Before the first round of quantitative easing, the Federal Reserve’s asset base consisted mostly of Treasury securities. However, as bond market liquidity dried up, the Fed stepped in and purchased a panoply of assets in the first round of quantitative easing including many mortgage-backed securities
Quantitative Easing and the Iron Law of Equilibrium - Hussman - The Iron Law of Equilibrium: Every security that is issued must be held by someone until it is retired. There are three corollaries to that Law: 1) No security can be under- or over-owned. Prices and expected returns adjust to ensure that the exact quantity outstanding is the exact quantity held. The investor's challenge is to ask whether those prices and expected returns are reasonable; 2) The outstanding stock of issued currency and money market securities always remains effectively “on the sidelines” and held by someone - until the time those securities cease to exist; 3) Money never goes “into” or comes “out of” a secondary market. It is always “home.” If you think carefully about equilibrium, it helps to clear up all sorts of fallacies that people hold about the financial markets. For example, the currency and money market securities that are held by investors will - in aggregate - never "find a home" in any other form or any other market. If somebody takes their cash and tries to buy stock, they get the stock and the seller gets the cash. Nothing disappears, and nothing is created - only the owner changes.
Monetary Policy and Regional Divergences - Gavyn Davies of the FT has a thoughtful piece up about the way that the Fed and ECB have generally tended, until recently, to act similarly. In particular, they have both tended to be in tightening or loosening mode at the same time: Strange bedfellows – the Fed and the ECB The behaviour of the world’s two main central banks, and the relationship between them, have profound effects on global financial markets. As a broad rule of thumb, the ECB (and the Bundesbank before it) have tended to act in a very similar manner to the Fed...For three decades it has been fairly unusual for the ECB or the Bundesbank to strike out in an entirely different direction from the Fed. Yet that is what seems to have happened last week, when the ECB clearly threatened an imminent rise in interest rates, while leading figures at the Fed equally clearly reiterated their very accommodating stance on monetary policy. Why has this divergence of opinion developed, and what will be the consequences? There are a few reasons for the present divergence, I think. But a crucial one has to do with the fact that the Fed has a relatively coherent national economy to manage, while the ECB has authority over an area that, while similar in geographic reach and population to the US, encompasses much wider divergences in economic performance.
End the Fed? - Ron Paul was on Fox News this past week (see this, particularly the exchange starting at about 3:40), and seems interested in "intellectual arguments," so I thought I would do my best to help him out. I just read Paul's book End the Fed on the airplane (a quick read), and in previous post on Ron Paul I learned a lot from commenters about Paul's intellectual roots.In case you didn't know, Ron Paul is a US Congressman who currently heads the House Financial Services Committee's subcommittee on monetary policy. I assume that this gives him some power to mobilize forces to implement his ideas. Paul is of course a vocal critic of the Fed. If there was good science backing up Ron Paul's ideas, and if the ideas were tight and well-reasoned, that would be great. Unfortunately, End the Fed which I take to be the best Paul can do in marshaling his thoughts, is for the most part bad science, consisting of flimsy arguments and some utter nonsense.
The free-banking vs. central-banking debate - Long ago, a remarkable debate took place about the optimal way to organize an economy's money and banking system. The proponents of free-banking eventually lost out to those who favored some form of central bank regime. The nature of these debates are nicely summarized by Vera Smith in her book, The Rationale of Central Banking. Then for a long time, it seemed that very few people were interested in this debate anymore... one simply had to take the existence of a central bank as given. That attitude always struck me as wrong-headed. As a young academic, I was interested in the theoretical foundations for monetary exchange. And I became fascinated in the experiments with money and banking regimes that were tried in the past. I made a point of teaching this to my students. And, in particular, I emphasized the free-banking alternative. And now I find myself employed at a central bank (I still retain affiliation with my university). Well, I'm at a regional branch of a central bank (there are 12 regional Feds). And because of my present employment, many people evidently believe that I am a hard-nosed central bank type whose sole purpose is to defend the institution and its policies.
The War On Peter Diamond - As you read Alabama Senator Richard Shelby’s reasons for refusing to allow a Senate vote on the confirmation of Peter Diamond to the Federal Reserve Board of Governors, keep in mind that Diamond recently won a Nobel Prize: The top Republican on the Senate banking panel made clear Tuesday that he still opposed the nomination of the M.I.T. professor and Nobel laureate, Peter A. Diamond, to the Federal Reserve calling him an “old-fashioned” Keynesian supporter of big government.“It is clear to many of us that he does not possess the appropriate background, experience or policy preferences to serve,” on the Fed’s board, Mr. Shelby said of Mr. Diamond. It’s true that Diamond isn’t a specialist in monetary economics, but this has never been the confirmation standard before. Indeed, as Steve Benen reminds us the Bush administration appointed several non-economists to the Fed board and nobody complained. Diamond, meanwhile, has both a PhD in economics and a Nobel Prize.
Poor Peter Diamond - It looks like the Nobel-prize winning MIT economist is going to get blocked by the Republicans again in his nomination to the Fed’s Board of Governors. Either the Democratic majority is going to have to force a vote on this, and see if there are 60 votes to overcome a filibuster, or Mr Diamond’s nomination is going to fall by the wayside. Here is Senator Richard Shelby at the nomination hearing today:
The Myth Of The Exploding US Money Supply - In recent weeks some hyperinflationists have succumbed to the reality that QE2 isn’t really adding net new financial assets to the private sector – it is indeed just an asset swap. But this hasn’t stopped them from claiming that QE2 directly results in an exploding money supply. This convoluted thinking claims that QE is directly funding government spending (as if the US government would have stopped spending money and folded up shop without QE2). So now the theory is that QE is really resulting in excess of $1.5T in new money in the form of deficit spending. This is flawed for reasons I have previously explained, but let’s not theorize about the money supply – let’s allow the facts to speak for themselves. Over the years many have been quick to cite the monetary base as the direct transmission mechanism that would lead to the great hyperinflation. We all know the story – the Fed’s balance sheet explodes, the monetary base shoots higher and money starts flowing out of bank vaults like a volcanic overflow. But regular readers are all too aware that the monetary base has no correlation with the broader money supply. The reasoning is simple – the money multiplier is a myth. So, it doesn’t matter how many apples (reserves) the Fed puts on the shelves. It doesn’t result in more apple sales (loans).
Out of thin air? - The fact that promises are made "out of thin air" does not mean they are worthless. The value of a promise is determined by the perceived (and ultimately, actual) credibility of the promise-maker to make good on his/her promises. The relevant concern of those who rely on financial agencies is the credibility of they claims they make. The fact that financial agencies issue promises "out of thin air" is a red herring. And if the charge is made with exclamation, well...forgive me for suspecting that the motive is to arouse impassioned anger, rather than rational discourse.The Fed creates fiat money (yes, out of thin air). But fiat money in itself does not constitute a promise against anything in particular (on the other hand, there are those who argue that it is a promise to discharge a tax obligation). In a gold standard regime, a Fed note would constitute a claim against gold. But we do not presently live in a gold standard regime. So what sort of promise underlies fiat money?Apart from any intrinsic value determined by its ability to discharge a tax obligation, the value of fiat money ultimately hinges on its scarcity. More precisely, it depends on how its supply is managed over time. Or even more accurately: it depends on the expectation of how its supply is to evolve over the indefinite future. This expectation hinges critically on the credibility of the money supply manager.
Ron Paul To Hold Hearing On CPI Lies And Fed Inflation Creation; Jim Grant To Tesify - Congressman Ron Paul, Chairman of the Domestic Monetary Policy and Technology subcommittee, announced that the subcommittee will hold a hearing to examine the relationship between monetary policy and rising prices (with a particular focus on food and energy prices). The hearing is scheduled for Thursday, March 17th at 10:00 AM, in room 2128 of the Rayburn House office building. “It is unconscionable that published government statistics mislead Americans regarding the true rate of price inflation, which is much higher than commonly-reported CPI numbers,” Paul stated. “It is also unconscionable that Federal Reserve Bank officials continue to deny the effects of their monetary expansion on consumer prices. Inflation, properly understood, is a monetary phenomenon. The price inflation Americans suffer today is largely the direct result of relentless monetary expansion by the Federal Reserve over the past decade. Our witnesses will explore how current monetary policy, including QE2, directly impacts the standard of living of Americans in ways that are not reflected in official government data.”
Inflation Worries Creep Higher - The president of the European Central Bank is worried about inflation. "We're in an environment where we have a spike in the price of oil, commodities – it's more acute in the present circumstances," he says. Is the market also worried? Yes, at least on the margins. The inflation forecast is creeping higher, based on the yield spread between the nominal and inflation-indexed 10-year Treasuries. As of yesterday, this market-based prediction of inflation was 2.51%, the highest since July 2008. By long-run historical standards, inflation in the 2.5% range is still quite low, although bond traders won't fail to notice that the Treasury forecast has been climbing, albeit slowly, for several weeks.“Investors are increasingly nervous that higher oil prices will push up headline inflation,” “The longer end [of the Treasury curve] is being influenced by the perceptions on inflation and creeping concerns that the Federal Reserve is getting a bit behind the curve compared to other central banks.”
One chasm that really isn't one - Atlanta Fed's macroblog - Floyd Norris, writing last Friday in the The New York Times, fretted about "The Chasm Between Consumers and the Fed." We here at the Atlanta Fed share some of that concern, and indeed the Times article quotes from a speech by our president Dennis Lockhart on just that subject from last month. But then Norris takes a turn I didn't expect. Norris's Times article includes the following chart…(enlarge) …and the article proceeds: 'Below a certain level of inflation,' Mr. Fridson said, 'a further decline reflects economic weakness more than it reflects a salutary reining in of excessive monetary creation.' "If that is correct, then it could be that both investors and those simply concerned with promoting economic growth should, as Mr. Fridson wrote, hope that Mr. Bernanke 'fails in his stated goal of holding inflation to 2 percent or less.' " It was all good, up to that last paragraph. As President Lockhart reiterated in a speech today Through the summer and into the fall of last year, our internal forecasts at the Atlanta Fed were calling into question whether the policy stance at the time assured progress toward the committee's growth and price stability objectives.
NY Fed Chief’s iPad 2 Comment Irks Queens Audience - New York Fed President William Dudley on Friday cited the new improved tablet as an example of the economy’s dearth of upward inflation pressures. But for a Queens, N.Y., audience more worried about the price of food, that didn’t go down so well. The central banker hit the iceberg when he was trying to defend his belief–one shared by many private-sector economists–that underlying inflation in the U.S. economy is low despite a worrisome surge in commodity prices which Dudley said the Fed would be “unwise” to overreact to. The grief Dudley got indicates the Fed is facing a growing gulf between how it and the public at large perceives inflation. If this disconnect widens, it could risk undoing the public’s confidence that the Fed will be able to keep price pressures at bay. Dudley’s day went south when he was pressed by several audience members about how he can view inflation as low when things such as grocery prices are marching higher. One participant asked “when was the last time, sir, you went grocery shopping?”
Former Goldmanite And Head Of New York Fed Bill Dudley: "Let Them Eat iPad" - Earlier today, Goldman New York Fed plant, and Jan Hatzius predecessor, Bill Dudley, emerged from his ivory tower to make a trek to Queens to deliver prepared remarks written by some intern, discussing the prospering state of the New York burrough (speech link). Unfortunately for the multi-millionaire, things quickly went from Unicorny and Rainbowy to horribly wrong. During the Q&A, one audience member asked: "When was the last time, sir, that you went grocery shopping?" A stunned Dudley did not have the heart to elaborate that the caviar and ambrosia eaten on the Dudley family table is hand delivered through the Fed's G-6 from Kamchatka, so instead, as Reuters reports, he "tried to explain how the Fed sees things: Yes, food prices may be rising, but at the same time, other prices are declining. The Fed looks at core inflation, which strips out volatile food and energy costs, to get a better sense of where inflation may actually be heading." At which point he proffered his sage advice to the increasingly restless natives: "Let them eat iPad."
Beware: Core CPI Follows Food Inflation - Many economists try to separate food and energy prices increases from their analysis of inflation. While it is true that both are volatile, there is strong correlation between food price increases and the overall Consumer Price Index (CPI) (the blue and red lines on the chart below) with only rare periods of exception (click to enlarge images): Food is required for human existence. When prices rise in one food sector, the public substitutes food from a lower priced sector. Demand falls in one sector and increases in another. The food basket overall wobbles within an ever increasing price trend. It is the energy cost record which has a poorer historical correlation with both food and core CPI. For this reason it is a fair question: What is the justification for lumping food and energy together as exclusions from core inflation? A more logical characterization would be to include food in core inflation and exclude only energy. So when somebody tells you that food prices are not a sign of inflation, you can look them in the eyes and call bullpucky. Food price increases and the Consumer Price Index travel in almost complete lockstep most of the time.
Higher Oil Prices Do Not Equal Higher Inflation - Caroline Baum goes after the confused thinking on oil prices and inflation: It must be the noxious fumes or the stratospheric prices because crude oil crossing the $100 threshold makes normally thoughtful individuals funny in the head. The early symptoms of high oil price syndrome, or HOPS, can easily be masked or confused with a more generalized form of lazy economic thinking. For example, those afflicted with HOPS start making assertions that higher oil prices are inflationary, as if relative price changes can morph into an economy-wide rise in prices without help from the central bank. One implication of this is that the Fed should not tighten monetary policy since the higher oil prices are just a relative price change. The Fed should also not loosen monetary policy to ease the pain of such relative price shocks. As Baum notes, that is what the Fed did in the 1970s and look what it got us. The Fed should only respond to aggregate demand shocks. This piece dovetails nicely with Mark Thoma's post where he considers whether the Fed should respond to commodity prices in general.
QE: Hyper-Inflation to Oblivion - USFed Chairman Bernanke and the Quantitative Easing programs are caught in a negative feedback loop, the instruments at risk being the USDollar and the USTreasury Bond. The former suffers from lost integrity and direct inflation effect. The latter suffers from direct intervention and market ruin. The next QE round is guaranteed by the failure of the previous program in an endless cycle to be recognized later this year. Leaders are confused why the recovery does not take root. It is because the entire system is insolvent, and the 0% rate assures total capital destruction, not to mention the big US banks are sacred, never to be liquidated, a primary condition for recovery. Liquidation is tantamount to abdication of power of the Purse and control of the Printing Pre$$, never to happen. The greatest hidden damage is psychological, where the USDollar and its erstwhile trusted USTreasury Bond are no longer viewed as the safe haven. Capital destruction is the main byproduct of monetary inflation, a concept totally foreign to the inflation engineers at the USFed and its satellite central banks. They are agents of magnificent systemic devastation. In the wake of each QE round are discouraged creditors who turn away in disgust. The damage and inflation feeds upon itself in stages of intense wreckage. The motive, need, and desperation for QE3 is being formed here and now, to be announced by late summer probably. Prepare for QE to infinity, endless hyper-inflation, a process that cannot be stopped, as the urgent needs grows.
Bottom About to Fall Out of the Dollar? - The Dollar Index, a trade-weighted benchmark of the greenback versus six other currencies, put in significant bottoms in early 2008, late 2009 and late 2010, forming a rock solid trend line that are exactly the kind of support that chart analysts look for in a bullish security. But after a violent move lower this year, the index is threatening to break that trend line at the 76.20 on the index, alarming technical analysts everywhere. A daily close below $76.20 “would signal a significant shift in sentiment is underway from bullish to bearish,” said George Davis, Chief technical Analyst at RBC Dominion Securities, in a special report to clients Monday. “This development would also produce a bearish medium to long-term trend reversal for the DXY."
U.S. Dollar Very Long Term Chart: Emperor et Ses Amis du Vins - The weakness with this US Dollar DX index is that it is highly weighted to the developed economies of Europe and Japan. As such it may not reflect erosion of dollar purchasing power vis a vis the BRICs, and external measures such as gold, oil, and silver. It may be masked by the mutual weakness of central banks all inflating their currencies in unison. This is what the Federal Reserve desires: to repair its economy and unpayable debts by expanding its monetary base while exporting much of the negative effects of such monetary inflation to the rest of the world, keeping things relatively stable to maintain confidence in their paper. And this is why the central banks attempt to control the price of less manageable currencies such as gold and silver. Silver is the most problematic because its supplies are difficult for the banks, as they have none of their own, and the world has largely depleted its discretionary strategic stockpiles of this metal. Long term price suppression breeds underinvestment and the inevitable shortages of real goods.
Debasing dollar not solution to US-China trade imbalances: experts (Xinhua) -- Debasing the U.S. dollar would not help reduce the massive U.S. trade deficit with China, economists on a panel at the Council on Foreign Relations said in New York Wednesday. In 2010, the U.S. trade deficit with China jumped to a record 273.1 billion dollars, up from 226.9 billion dollars in 2009. Both countries have pledged to fix the imbalance. Since the financial crisis, the United States has been printing money to depreciate the greenback, yet the trade imbalance remains. This showed devaluation was not a viable way to boost exports, said Peter Schiff, president and chief global strategist of Euro Pacific Capital. "There are severe structural problems that underlie the imbalance. We spend too much and save too little, consume too much, produce too little," Schiff said.
Survey Shows Economists Bet Long on Yuan, But Mixed on Dollar - The bulk of economists surveyed by The Wall Street Journal would bet on the Chinese yuan rising over the next three years and the euro falling–but they’re split on the direction the U.S. dollar is likely to take.The Journal surveyed 54 economists, not all of whom answer every question and most of whom are U.S.-based, and asked which one currency they would bet on rising in value over the next three years. Eighteen, or 43% of the 42 who responded to the question, pointed to the Chinese yuan. “Chinese inflation makes artificially low values difficult to sustain,” said Sean M. Snaith of the University of Central Florida. Twelve economists, or 30% of 40 respondents to the question, chose the euro as the most likely to decline in value over that same period. “The debt crisis still has more iterations to go, which will rattle currency markets,” said Diane Swonk of Mesirow Financial. And the dollar? Eleven said they would bet the greenback will rise in value over the next three years and exactly the same number said they would bet on its value declining.
Flirting With a Repeat of an Economic Reversal - It’s a strange moment for the economy. Just when it is picking up speed, the risks of another slowdown are also increasing. On the positive side, exports and consumer spending are up, and the job market finally seems to be improving. If anything, last week’s jobs report probably undercounted recent gains. That often happens early in an economic recovery because the Labor Department has a hard time keeping track of newly started businesses. On the negative side, oil prices have risen more than 40 percent since September, and every level of government is considering spending cuts and layoffs. All in all, the situation is uncomfortably reminiscent of last spring. Back then, companies were just starting to hire again, before a combination of events — including Europe’s debt crisis and the fading of the stimulus program here — spooked them and cut short the recovery. It’s easy to imagine how energy costs and government cuts could do the same this year. But no branch of the federal government seems to be taking these risks seriously enough. At the Federal Reserve, some top officials still argue that the economy is at risk of overheating, even though they have been wrong on this point for months and still don’t have much data on their side.
Richard Koo: How the West is Repeating Japan’s Mistakes – video - Richard Koo’s book The Holy Grail of Economics is the definitive work on what he calls “balance sheet recessions”. He explain, among other things, why QE2 is not likely to be successful.
Balance Sheet Recessions. They Are Different Than Normal Recessions. » In a normal, healthy economy this is what happens. You get paid $1,000. You spend $900 and save $100 and put it into the bank. The $900 spent is someone else’s income, and the $100 in the bank is lent out to further economic activity. In a fractional banking world, that $100 may be used as a bank reserve that can allow $500 in lending, for one example. So the total economic activity is $1,400 and the economy grows. The person whose income was the $900 orginally spent, spends $810 and saves $90 in the bank and the sequence repeats itself including the bank lending out $450 on the $90 saved. Total economic activity now increases by another $1,350. And so on. But in a balance sheet recession everyone decides to pay down debt at the same time. And no one borrows because they want to pay down debt, not increase it. So the $100 saved by the first person in the example above gets stuck at the bank. As a result instead of economic growth, the only income for anyone else is the $900 spent. And the same thing happens for the second person, whose $90 is saved gets stuck in the bank too. The result is that the economy shrinks. You get a very nasty recession or even worse, a depression. These types of recessions/depression actually make deleveraging harder, not easier, because debt levels remain constant while income, the ability to pay debt, shrinks. This situation is also known as the ‘paradox of thrift.’ During the Depression many banks simply returned everyone’s deposit and closed the doors because there was no loan demand.
Downside Risks - We continue to be reminded of the downside risks to economic growth this year: higher oil prices and the potential for a supply shock, the European financial crisis, state and local government fiscal issues, Federal government budget issues, and the two sides of the inflation coin (inflation increases or policymakers overreact).
• U.S. oil prices were near $107 per barrel this morning before declining slightly to $105. I think this is the key risk to U.S. economic growth in the short term.Not only is the situation in Libya looking more and more like a prolonged civil war, but the unrest may spread to Bahrain and Saudi Arabia (March 11th is the "Day of Rage" in Saudi).
• The European financial crisis has been on the back burner, but yields are still elevated and there are key Euro Zone meetings scheduled in March - including a special eurozone debt crisis summit scheduled for Friday, March 11th. Ireland is asking to renegotiate the terms of their bailout, Greece debt was downgraded this morning, and Portugal is probably next in line. And the European Banking Authority has now launched the next round of bank stress tests.
Does a fall in wealth necessitate a recession? - To many, the answer is obvious. If home prices suddenly fall, then we’re all poorer, and we’re all spend less money, resulting in a recession. Empirically, this is in fact what tends to happen. But as this interesting comment from some anonymous economist explains, the actual reason why is considerably more complicated: Though it’s difficult, let me try to explain why this is wrong. Roughly speaking, your spending in a year is a combination of (1) your income and (2) the change in your asset position. When the value of your assets suddenly declines, what are the first-order effects *going forward*? How does the sum of (1) and (2) change? There is no immediate effect on your labor income — surely as the economy finds a new equilibrium, there will be some changes in wages, but there is no clear movement here for most people (except those involved in industries related to the specific assets that declined). So (1) isn’t the important part.
Why the American Economy Will Stay Slow - Bad news from the future: the U.S. economy could be in for slow growth for decades to come. According to a recent McKinsey Global Institute study, the economy is likely to stay slow even though the recovery finally seems to be gaining momentum. That has nothing to do with the facts that even if the economy continues to add jobs at the current rate it will take a decade to get the unemployment rate back down to 5% and that federal and state governments are likely to keep eliminating jobs. It really has nothing to do with our current economic crisis, and everything to do with long-term demographic trends. McKinsey argues that the economy is likely to slow because as labor force participation drops—as more and more baby boomers retire and the number of new women entering the workforce slows—Americans who do work will have to support the increasingly large proportion of Americans who don’t. As a result, the income of working Americans will be divided among a larger number of people.
Earthquake Points to Fallibility of Forecasts - The Japanese earthquake is one of those shocks that derail an economic forecast. Until the full extent of the damage is known, uncertainty will be the key word for the Japanese outlook and perhaps the global one as well. Economists can be correct on what the fundamentals say about future growth, but no one can forecast an unexpected event. That’s why forecasts are best written in pencil. Indeed, the global and U.S. economies have had their shares of unexpected events so far this year. The unrest in Tunisia that spread across the Middle East pushed up oil prices to unexpected levels. The latest twist to that story are Friday’s protests in Saudi Arabia. Record highs in food prices are squeezing households around the world. In the U.S., the prospects of a Washington shutdown cannot be taken off the table. Now, Japan, which had only cobbled together a weak recovery, will have deal with the aftermath of the strongest earthquake to hit the island nation in at least three centuries.
Pimco's Bill Gross — "No Way Out" - This was my favorite moment in Aaron Task's interview with Pimco's Bill Gross— Task — Do have faith in our policymakers? That they will tackle the deficit, and by extension, address entitlement programs? Gross — I don't. I want to be hopeful, but I want to be realistic, and having a trillion and a quarter dollars here at Pimco to invest, and to invest wisely, I'd have to say that faith is very low... Well! Gross has decided honesty is the best policy. He is not spouting nonsense about how Americans, when they are pushed to the brink of disaster, will always do the right thing. He's got skin in the game. There was a time some months ago when hopeful idiots started quoting Winston Churchill. Americans can always be counted on to do the right thing ... after they have exhausted all other possibilities. I assume Churchill was working his way through the day's second bottle of scotch when he said that.
China should steer clear of US debt, expert warns - China, the largest US creditor, should stop buying US Treasuries because the "cost" of lending to a nation that may face a default on its debt is too high, said former Chinese central bank adviser Yu Yongding. The US may reach its congressionally-mandated debt limit of $14.3 trillion in a few months, which could lead to a default, Yu said on Thursday. If the US were a euro-zone nation, a default or bailout would have happened long ago, said Yu, who is president of the China Society of World Economics and a former adviser to the People's Bank of China. "China has kept on lending money to the US to keep its export machine going, and to prevent losses" on its holdings of Treasuries, said Yu. "Perhaps it is too late to do anything about the existing stock without causing a serious political and financial backlash. But at least China should stop continuing building up its holdings."
Government bonds aren't net wealth...or are they? - In 1974, economist Robert Barro published a very famous paper entitled "Are government bonds net wealth?" You can read it here. The question it poses is a subtle one. Barro's basic argument is that no, government bonds are not actually wealth, since they will have to be paid off by future taxes; what looks like an "asset" is in fact also a "liability" of equal value. (This principle also goes by the name of "Ricardian equivalence".)The reason people treat government bonds as wealth, Barro argues, is because of a cognitive illusion - bonds are in your hand right now, while future taxes seem far away. This is exactly the argument made by Tyler Cowen in a recent article in the New York Times: It would have been nice of Cowen to mention Barro's name in connection with this idea. But be that as it may, I'm finding myself skeptical on a deep level about the basic argument. Maybe government bonds really are net wealth.
Errors in macroeconomic forecasts or in politics? -In December 2000, Bill Clinton announced that the "The United States is on course to eliminate its public debt within the next decade." According to the 2001 budget presented by his administration (during the year 2000), the government debt held by the public would decrease from about 3.7 trillion at the end of 1998 (42% of GDP) to 377 billion by 2013 (around 3% of GDP). This prediction turned out to be highly inaccurate as today (2010) government debt in the US has reached close to 9 trillion (60% of GDP). What went wrong? Did the New Economy led to unrealistic macroeconomics assumptions or did the next administration(s) behave differently from what the Clinton administration had predicted? The next two figures helps us understand the source of this forecasting error.
"No Way Out" of Debt Trap, Gross Says: U.S. Living Standards Doomed to Fall - Debt, debt and more mounting debt is plaguing countries around the globe. In the U.S., states across the country face a collective $125 billion shortfall for fiscal 2012, while Congress is facing a budget gap nearly 10 times that size. PIMCO founder Bill Gross -- one of the world's largest mutual funds managers, who focuses mostly on bonds -- has previously said that if the United States were a corporation, no one in their right mind would lend us money. For the last decade, we’ve been “relying on the kindness of strangers” to help cover our debts, he tells Aaron Task in the accompanying clip. By “strangers” he is referring to our foreign counterparts, like China for example. Basically, for years Americans have spent their hard-earned dollars on less-expensive Chinese made goods. With great gratitude, China turned around and used all those dollars to buy up U.S. Treasuries and other dollar-denominated assets. But now after years of reckless spending, America’s debt level is nearing a breaking point and can no longer rely on foreign capital as a last resort. “When a country reaches a certain debt level, confidence in that country’s ability to repay that debt becomes jeopardized,” says Gross, citing the work of Ken Rogoff and Carmen Reinhart in This Time Is Different.
Gross Eliminates Government Debt From Pimco’s Flagship Total Return Fund - Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., eliminated government-related debt from his flagship fund last month as the U.S. projected record budget deficits. Pimco’s $237 billion Total Return Fund last held zero government-related debt in January 2009. Gross had cut the holdings to 12 percent of assets in January, according to the Newport Beach, California-based company’s website. The fund’s net cash-and-equivalent position surged from 5 percent to 23 percent in February, the highest since May 2008. Yields on Treasuries may be too low to sustain demand for U.S. government debt as the Federal Reserve approaches the end of its second round of quantitative easing, Gross wrote in a monthly investment outlook posted on Pimco’s website on March 2. Gross mentioned that Pimco may be a buyer of Treasuries if yields rise to attractive levels. Treasury yields are about 150 basis points too low when viewed on a historical context and when compared with expected nominal gross domestic product growth of 5 percent, he wrote in the commentary. The Fed is scheduled to complete purchases of $600 billion of Treasuries in June.
Gross Dumping Treasuries Leads Managers Calling Rally's End -- Bill Gross has dumped all Treasuries from the world’s biggest mutual fund, Warren Buffett is shifting to shorter-term debt, and Swiss Reinsurance Co. is boosting equities and corporate bonds. Some of the biggest private investors in the bond market, from fund managers to insurers and pensions, are preparing for an end to the three-decade Treasury rally, as interest rates near zero and unprecedented spending by the U.S. government and the central bank threaten to fuel inflation. Their strategies range from reducing the longest-dated holdings and shifting to higher-yielding corporate debt, to investing in stocks, commodities, non-U.S. bonds and even holding cash. “U.S. government bonds are not a safe haven,” Jim Rogers, the global investor who predicted the 2007-2009 housing-market crash, said in a telephone interview from Singapore. “I cannot conceive of lending money to the U.S. government for 30 years.” Pacific Investment Management Co. said yesterday that Gross, who runs the $237 billion Pimco Total Return Fund, eliminated government-related debt from his flagship fund last month as the U.S. projected record budget deficits.
World’s Largest Bond Fund Dumps All Government Debt -- When the professionals stop buying government bonds, it’s time to start paying attention: (CNNMoney) — Pimco’s Total Return Fund (PTTRX), the world’s biggest bond fund, slashed its exposure to U.S. government debt to zero last month. It’s the second month in a row that well-known fund manager Bill Gross has drastically reduced Pimco’s exposure to U.S. government debt. Gross has been very vocal about his feelings toward U.S. interest rates, saying in January that they were “robbing” investors and that U.S. government debt should be “exorcized” from investors’ portfolios. That’s been an underlying fear in the bond markets, and Washington, for some time now, and Fed Chairman Ben Bernanke has attempted to calm the markets by refusing to rule out the possibility of a third round of Quantitative Easing, although in this case it seems clear that the purpose behind such a move would be to prop up the bond market and prevent interest rates from rising.
Why Did PIMCO's Bill Gross sell all of his funds US Treasury Bonds? - US debt may no longer be a good investment, at least for now. And that might be the good news. Famed investor Bill Gross, who runs the PIMCO Total Return Fund, recently sold all of the US Treasury bonds is his fund's portfolio. It's a huge move for the manager of the world's largest bond fund. As recently as June 2010, Gross' fund held nearly $150 billion in US bonds. That amount has now been slashed to zero. But while the action will certainly be fodder for the crowd that thinks America is bankrupt, Gross' moves may actually be another sign that the US economy is improving. Here's why: First of all, Gross didn't sell all of his US Treasury bonds because he is worried that the US won't be able to pay its debts. In a CNBC appearance on Thursday afternoon, Gross said credit wasn't an issue for him. And in fact, Gross hasn't sold all of his US debt holdings. He still owns Treasuries that mature in less than a year, which are technically called notes or bills, not bonds. Gross sold because he thinks the price of US Treasury bonds are as high as they can go for now, and will fall. OK. That sounds bad. But you have to know a thing or two about the bond market. Bond prices and bond yields move in opposite directions. When yields rises, prices drop. That's means Gross thinks that bond yields are set to rise (prices dropping), and that's a good thing for everyone (other than traders of US Treasury bonds). Yields tend to rise when the economy is improving.
Four Observations about the Federal Budget - CBO Director's Blog - I spoke this morning to the Economic Policy Conference of the National Association for Business Economics. My talk was structured around four observations about the federal budget: First, if current policies are continued, the gap between spending and revenues will remain very large even after we return to normal economic conditions.Second, fiscal policy cannot be put on a sustainable path just by eliminating waste and inefficiency; the policy changes that are needed will significantly affect popular programs or people’s tax payments or both. Third, policymakers face difficult tradeoffs in deciding how quickly to implement policy changes that would reduce future budget deficits.Fourth, there is more focus in Washington on federal budget problems today than there has been since the late 1990s, and that focus has led to a range of proposals for tackling the problems.
Sen. Chambliss Invokes China When Warning About Debt - Sen. Saxby Chambliss (R., Ga.) issued a direct warning to business leaders on Monday when he traveled to Richmond with Sen. Mark Warner (D., Va.) to warn about the country’s growing debt problems. He said Congress had to act this year to arrest ballooning debt or countries that hold U.S. debt would have direct control over the future of the United States.“ We know the change has got to come,” he said. “We’ve got a window of opportunity for Congress to do it on our terms.”If Congress doesn’t do it, “those people who buy our bonds, i.e. the Chinese, are going to dictate exactly how we do it. And I don’t think there’s any American that wants to see [that] happen,” he said.The meeting was part of a public campaign the two lawmakers are trying to launch to emphasize what they believe are dire consequences the country faces if dramatic action isn’t taken soon to bring down the costs of large entitlement programs like Medicare and Social Security and bring in more revenue through taxes. They plan a similar meeting April 11 in Atlanta.
Continuing Resolutions: Are We There Yet? - No! We're not there yet. We're not even sure where there is yet. The NFL talks are going better. So far, for the whopping price of $4.1 billion of easy pickings, $2.7 billion of Administration proposals that had no chance of enactment anyway plus $1.7 billion of earmarks, we funded two more weeks of FY11. Wait a minute. That's last year's budget. Right. We still don't have a budget for FY11, which we are more than five months into. No budget resolution passed Congress last year, and no regular appropriations did either. The only FY11 appropriations have been continuing resolutions and a supplemental. So what about the FY12 budget? President Obama presented his FY12 Budget a week late, partly because Jack Lew's confirmation as OMB Director was held hostage to speeding up Gulf drilling permits. That pushed back CBO's Analysis of the Presidents Budget, until the end of March or early April. That usually produces the baseline the Budget Committees use, but there's no way to produce a baseline anyway because no one can say what FY11 will be
Holding Firm on the Budget - NYTimes Editorial - Last year the administration acted as referee in a similar situation and got mixed results. It allowed Republicans their cherished goal of keeping taxes low on the richest 2 percent of Americans, and even gave multimillionaires and billionaires new estate tax benefits. President Obama won an extension of jobless benefits and a cut in payroll taxes that could boost the economy. But this is not a moment for another difference-splitting deal. The House wants to carve $61 billion out of the government for just the next seven months, which would throw hundreds of thousands of people out of work and kill off scores of vital functions. Many of them, like funding for health care reform, environmental regulation and Planned Parenthood, are on the Republicans’ ideological hit list. The latest deadline for an agreement is March 18; without one, the government would close. There is nothing wrong with having a serious negotiation over long-term cuts, many of which are reasonable and necessary. But serious cuts cannot be made against the threat of a shutdown. That discussion should be had over the 2012 budget, not what’s left of the 2011 fiscal year.
Senate rejects spending bills from both Republicans and Democrats - The Senate on Wednesday rejected a Republican plan to sharply cut spending this year, as well as a far more modest Democratic proposal, clearing a path for negotiations toward a compromise that could streamline government without damaging critical services. Senate Democratic leaders are pressing to expand the talks beyond the small slice of the budget that funds government agencies, arguing that any serious effort to reduce record deficits must also include cuts in entitlement programs and higher taxes. "With this vote out of the way, we're going to do some serious negotiations now," said Majority Leader Harry M. Reid (D-Nev.). "Our goal is to fund the government the rest of this year, and then out-years. This isn't just for the next few weeks. We want to try to get a universal deal and do something good for the country." Senior White House officials joined GOP leaders in questioning the practicality of that approach, however, saying policymakers must break the impasse over funding for domestic agencies through Sept. 30 before tackling broader - and more politically sensitive - budget issues. Without a spending agreement, the government could shut down as soon as next week, when a temporary bill financing federal operations1 expires.
Deficit Proposal Picks Up New Allies - The effort of a bipartisan group of senators to attack the long-term budget deficit has won notable new support in recent days, raising lawmakers' hopes of reaching a deal within weeks. Sens. Mark Warner (D., Va.) and Saxby Chambliss (R., Ga.), who are leading the push, believe they have the tentative backing of 31 senators: 16 Republicans and 15 Democrats. Democrat Erskine Bowles and Republican Alan Simpson, who co-chaired the White House's deficit-reduction commission last year, have embraced the effort and launched a new nonprofit organization to raise public awareness about the debt and possible solutions. Pete Peterson, the New York billionaire who often funds projects aimed at cutting the debt, met with Messrs. Warner and Chambliss Wednesday morning and said in an interview later he was "seriously" considering giving money to the nonprofit.And Sen. Chuck Schumer (D., N.Y.), who many had seen as a potential obstacle of the senators' effort to build a larger consensus within Congress, threw his support behind the process Wednesday.
Washington’s Budget Battle: Where Is Obama?- In the struggle over government spending for the current fiscal year, the Republicans have forced the White House and the Senate Democrats into a series of retreats, and the outcome is likely to reflect more what the Republicans want than the objective situation seemed to warrant at the outset. Both sides are feeling their way along in a situation with more uncertainties than usual, but this is a most unusual time in Washington. Both sides have already made miscalculations, but thus far, the House Republicans, who were not expected to play such an important role, have held the upper hand. It appears that House Speaker John Boehner, at first taken aback by the rebelliousness of the Tea Party-backed members of his flock is now using them as leverage to his advantage in this fight—which could also help cement his relationship with them. The absence of leadership from the White House—yes, we’re back to that—has left Senate Democrats to fend for themselves, with the result that so far they have been taking a more passive role than the “upper body” usually does. The deal that was reached on Friday, March 4 to keep the government going until March 18 in order to avoid a shutdown simply postpones what may be further capitulations to the Tea Party-dominated house.
WSJ/NBC News Poll Finds Support Lacking for Entitlement Cuts… Less than a quarter of Americans support making significant cuts to Social Security or Medicare to tackle the country's mounting deficit, according to a new Wall Street Journal/NBC News poll, illustrating the challenge facing lawmakers who want voter buy-in to alter entitlement programs. In the poll, Americans across all age groups and ideologies said by large margins that it was "unacceptable'' to make significant cuts in entitlement programs in order to reduce the federal deficit. Even tea party supporters, by a nearly 2-to-1 margin, declared significant cuts to Social Security "unacceptable." At the same time, a majority supported two specific measures that lawmakers might employ to shore up the shaky finances of the main entitlement programs.More than 60% of poll respondents supported reducing Social Security and Medicare payments to wealthier Americans. And more than half favored bumping the retirement age to 69 by 2075. The age to receive full benefits is 66 now and is scheduled to rise to 67 in 2027
Americans Oppose Government Shutdown, Fault Cuts in Poll - Americans are sending a message to congressional Republicans: Don’t shut down the federal government or slash spending on popular programs. Almost 8 in 10 people say Republicans and Democrats should reach a compromise on a plan to reduce the federal budget deficit to keep the government running, a Bloomberg National Poll shows. At the same time, lopsided margins oppose cuts to Medicare, education, environmental protection, medical research and community-renewal programs. While Americans say it’s important to improve the government’s fiscal situation, among the few deficit-reducing moves they back are cutting foreign aid, pulling U.S. troops out of Afghanistan and Iraq, and repealing the Bush-era tax cuts for households earning more than $250,000 a year.
The New Bloomberg Poll on the Budget: Confusion Reigns - According to the story, there's much in this poll that bears reviewing and it's definitely worth a few minutes of your time to read the whole thing, but here's the money quote that provides a sense of why this year's budget debate is so difficult to handicap: Almost 8 in 10 people say Republicans and Democrats should reach a compromise on a plan to reduce the federal budget deficit to keep the government running, a Bloomberg National Poll shows. At the same time, lopsided margins oppose cuts to Medicare, education, environmental protection, medical research and community-renewal programs. Note that the areas where "lopsided margins" oppose cuts are the same ones that the GOP has already proposed or is promising to cut. Add another result from the poll -- that "repealing the Bush-era tax cuts for households earning more than $250,000 a year" is supported by a majority even though the GOP insisted last year that they be extended -- and you get the same continuing picture that, in spite of the public rhetoric, is absolutely undeniable: "Reducing the deficit" is very popular but almost all of the changes that would actually reduce the deficit are exceedingly unpopular.
What Budget Deal? - This morning, some top Wall Street investors called around to check on whether a big budget deal might emerge from the "Gang of Six" talks after the Wall Street Journal published this article, claiming "tentative backing of 31 senators: 16 Republicans and 15 Democrats." Woaa! Wait a minute!Before you start buying long Treasuries, read further down: "Lawmakers appear split over how quickly to propose the package. Some believe they could try and attach it to a coming vote in a few weeks on whether to raise the government's borrowing limit above $14.3 trillion. But Messrs. Chambliss and Warner have said they don't know if their effort will be completed in time." Once the debt limit is raised for the rest of the year, this year's budget battles will be over. "Tentative backing" and 50 cents used to get you a cup of coffee. Sure there have plenty of discussions about doing something big to bring down the deficit. Doing it is a lot more difficult. A big budget deal would occur only if a long-term debt limit increase and government funding deal were part of it and only with strong presidential leadership.
Deficit gang warfare in the Senate - So now a new Gang of Six is ganging up on the deficit issue. A bipartisan group of half a dozen senators is embarking on a road show to alert the American public to a coming “financial Armageddon” as the Senate is mired in a stalemate over the budget. Bipartisan, of course, does not mean balanced. The three Republican members of the new Gang of Six are among the most conservative members of the world’s greatest deliberative body. Two of the three Democratic members are certified deficit hawks. So this group is not about achieving a compromise, but about tilting the balance in the Senate toward radical and largely unjustified budget cuts. None of them has any economic training, though the leading Democratic member, Mark Warner of Virginia, enjoyed considerable success in business when he shrewdly jumped into mobile phones at just the right time.
On The Budget, Compromise is a Four-Letter Word - I've been saying for a while that one of the biggest changes from 1995-1996 -- the last time we had a government shutdown -- was that then House Speaker Newt Gingrich (R-GA) had the permission of his caucus to compromise with the White House while the current speaker, John Boehner (R-OH), does not. Bloomberg reporter Laura Litvan, who has covered the budget on Capital Hill for a long time and seen a great deal, has a wonderful story today that shows just how little room Boehner has to maneuver. Litvan shows that, led by the tea party wing of his own caucus, Boehner is on a very short leash indeed. The money quote is the lead in the story: House Republican freshmen are urging their leaders to resist compromising on spending cuts after the Senate defeated the party’s plan to cut $61 billion from the federal budget this year. What would happen if Boehner did compromise? My guess is that his tea party folks would all vote against the plan and he almost immediately would get some type of challenge to his position as speaker.
Why Obama Isn’t Fighting the Budget Battle, by Robert Reich - In the next week the action moves from Wisconsin to Washington, where the deadline looms for a possible government shutdown over the federal budget. President Obama has to take a more direct and personal role in that budget battle – both for the economy’s sake and for the sake of his reelection. But will he? Don’t count on it. Worried congressional Democrats say the President needs to use his bully pulpit to counter defections in Democatic ranks, such as the ten Democrats and one allied Independent who on Wednesday voted against a Senate leadership plan to cut $6.2 billion from the federal budget over the rest of fiscal year 2011. They want Obama to grab the initiative and push a plan to eliminate tax breaks for oil companies and for companies that move manufacturing facilities out of the country, and a proposal for a surtax on millionaires. Most importantly, they’re worried the President’s absence from the debate will result in Republicans winning large budget cuts for the remainder of the fiscal year – large enough to imperil the fragile recovery. But Obama won’t actively fight the budget battle if the current White House view of how he wins in 2012 continues to prevail.
Options for Reducing the Deficit- CBO Director's Blog - The choices facing the 112th Congress come at a time when the federal government’s debt has increased dramatically in the past few years and when large annual budget deficits are projected to continue indefinitely under current laws or policies. Federal budget deficits will total $7 trillion over the next decade if current laws remain unchanged, CBO projects. If certain policies that are scheduled to expire under current law are extended instead, deficits may be much larger. Today CBO released Reducing the Deficit: Spending and Revenue Options, which presents more than 100 options for altering federal spending and revenues. As in past reports of this type, the options cover an array of policy areas—from defense to energy to entitlement programs to provisions of the tax code. They come from legislative proposals, various Administrations’ budget proposals, Congressional staff, other government entities, and private groups, among others. The options are intended to reflect a range of possibilities, not a ranking of priorities, and the inclusion or exclusion of a particular policy does not represent an endorsement or a rejection of that policy by CBO.
How Can We Break Out of the Psychological Dysfunction on the Deficit? - Ezra Klein so aptly wonders whether John Boehner is more likely to lead on the solution or to continue to be a big part of the problem: It seems to me that for all the talk about the need for “adult conversations” about the budget deficit, we continue to see immaturity on the issue from all the political sides of the debate: temper tantrums about the small stuff, denial over one’s own role in the mess, bullying and finger-pointing about it being the other side’s fault, clinging to fairy tales and fantasies (such as about deficit-financed tax cuts or investments paying for themselves), ignoring advice we don’t like (even that we have ourselves asked for–i.e., the fiscal commission), and shirking our duties as the parents to our kids (by letting the debt continue to pile up). There’s a huge amount of psychological dysfunction among our leadership right now. How can we get anywhere with deficit reduction if there aren’t any adults in charge? Where is the analogous miracle-worker (fiscal) therapist–if even Alice hasn’t yet proven to be the one?
It’s Time to Face the Fiscal Illusion - James M. Buchanan, a Nobel laureate in economics argued that deficit spending would evolve into a permanent disconnect between spending and revenue, precisely because it brings short-term gains. We end up institutionalizing irresponsibility in the federal government, the largest and most central institution in our society. As we fail to make progress on entitlement reform with each passing year, Professor Buchanan’s essentially moral critique of deficit spending looks more prophetic. We are fooling ourselves most of all. United States government debt in public hands is now more than $9 trillion, but most people still don’t realize what it will take to pay that off. Here’s an example: Say that you have $20,000 in Treasury bills1. You probably believe that you own $20,000 in wealth. This will encourage you to spend and come up with ambitious plans. Yet someone — quite possibly you — will be taxed in the future to pay off the government debt. The $20,000 may be needed in order to do that. In this case, the sorry truth is that our savings aren’t worth as much as many of us think, and a rude awakening is coming. One way or another, some of our savings will be taxed away to make good on governmental commitments, like future Medicare2 benefits, which we currently are framing as personal free lunches.
Political Illusions - Brad DeLong - Tyler Cowen writes a column that is both good and bad. It is good for what it says: it debunks fiscal illusions. It is bad for what it does not say, and for what it does not say it tends to deepen our political illusions. You see, for some reason Tyler Cowen does not mention the obvious solution at the ballot box to the very real fiscal illusion problems he writes about. If we simply stopped electing Republicans--if we simply elected presidents who would choose policies designed by the technocrats of the Clinton and Obama administrations and elected senators and representatives who voted for them--we would be absolutely fine. He makes two mistakes in the article as well, but I will postpone them until later...
White House Fears Budget Cuts Will Hurt Trade Leverage - The Obama administration fears the U.S. could cede substantial political power and trade leverage with emerging nations around the globe under proposed Republican budget cuts that slashes funding for international programs.Although the total 2011 commitments at just over $3 billion are comparatively small, U.S. Treasury Secretary Timothy Geithner says investing in institutions such as the World Bank promotes substantial U.S. influence on geopolitical and trade issues throughout Asia, the Middle East, Latin America and Africa. The proposed cuts “would be deeply damaging to our own interests directly where we have lives at risk and to our long-term interests,” Geithner told a Senate panel late last week. Wednesday, the secretary will urge House Appropriation members to maintain investment in the programs, stressing how support for such institutions have historically strengthened trade for U.S. companies and give Washington a powerful political tool.“These institutions are again the most effective means we have to leverage resources with conditions that work for our interests,” Geithner told the Senate panel.
Turning a Blind Eye to the Obvious -- Krugman - Look: until 1980 or so the United States generally paid its way; the ratio of debt to GDP generally fell over time. Then starve-the-beast came to power, and fiscal realism went away. That’s the story; anyone who glosses over that, who makes it a plague-on-both-houses issue or, worse, makes it seem as if Obama is the villain, is in an essential way misleading his readers.Bear in mind, too, that the signature initiatives of Republican presidents — the Reagan tax cut, the Bush tax cut, the Medicare drug benefit — have all been unfunded deficit-raisers; the signature initiatives of Democratic presidents — the Clinton tax hike, Obamacare — have all been deficit-reducing. (Yes, the stimulus — but that was intended to be temporary, and has in fact proved too temporary; and Bush I’s tax increase was an exception, but the GOP has made it clear that nothing like that will ever happen again.)
Social Security Commissioner Warns of Painful Cuts - Elderly Americans would suffer considerably under proposed Social Security Administration budget cuts outlined in House Republicans' continuing resolution, the head of the agency warned today as budget-related disputes continue to flare on Capitol Hill. The House GOP budget proposal that would fund the government for the rest of the fiscal year yanks $125 million from the SSA's current levels and $500 million from the reserve fund. The cuts could cost 3,500 employees their jobs, affecting the quality and quantity of services to Americans, SSA Commissioner Michael J. Astrue testified in Washington. "I regret we may not be able to keep our commitment to the American people because we don't have the necessary support to move forward," Astrue said today at a Senate subcommittee today. "We cannot meet our stewardship duties unless Congress provides us the funds to do the job." Democrats, who are against the cuts, echoed his concern.
FactCheck.org Does Not Have Access to the Internet - That is what this project of the Annenburg Public Policy School told readers today when it backed up its earlier piece claiming that Social Security does contribute to the budget deficit. If did have access to the Internet, FactCheck.org could have easily discovered references to the "on-budget" budget in any budget document it chose to examine (e.g. here and here). The political figures who FactCheck.org criticized in its initial post were obviously referrig to this measure of the budget deficit, as was pointed out in a previous note. An organization engaged in fact checking statements by public figures should probably invest in an Internet subscription so that it can more accurately do its work.
Comparative Destructiveness - Krugman - Jonathan Chait gets angry at the way Republicans, who claim to care about the deficit, propose saving money by cutting back on expenditures that are needed to control health costs. Indeed. But there’s a larger dynamic at work here than mere stupidity. Let’s focus, in particular, on the ridicule some of the quoted Republicans heap on “comparative effectiveness research.” Ask yourself, what do we have to do to control Medicare costs? We can save some money, maybe a lot, by reforming payment systems so that providers are paid for overall treatment rather than on a fee-for-service basis. But over the long term, the fundamental issue is going to be to decide what Medicare will and won’t pay for. We need, as Henry Aaron has often said, to learn how to say no. Notice that this is very different from the issue on Social Security. You can propose simply cutting retirement benefits by 25 percent, and that’s doable. But you can’t decide to do only three-quarters of every operation and test that Medicare pays for So Medicare cuts are an inherently harder problem than SS cuts. In fact, I suspect that’s one reason, beyond the political motivations, why inside-the-Beltway types love to talk about Social Security, a trivial concern, while avoiding the vastly more important Medicare issue.
Dumbing Deficits Down, by Paul Krugman - Like anyone who writes regularly about what passes for economic and fiscal debate in American politics, I’ve developed a strong tolerance for nonsense. Yet there are still moments when I find myself saying, “They can’t really be that stupid,” or maybe, “They can’t really think the rest of us are that stupid.” And I had one of those moments reading about a recent conference on national health policy, which featured a bipartisan dialogue among Congressional staffers. According to a column in Kaiser Health News, Republican staffers jeered at any and all proposals to use Medicare and Medicaid funds better. Spending money on prevention was no more than a “slush fund.” Research on innovation was “an oxymoron.” And there was no reason to pay for “so-called effectiveness research.” To put this in context, you have to realize two things about the fiscal state of America. First, the nation is not, in fact, “broke.” The federal government is having no trouble raising money, and the price of that money — the interest rate on federal borrowing — is very low by historical standards. Second, while the government does have a long-run fiscal problem, that problem is overwhelmingly driven by rising health care costs.
How Dumb? - In his latest column, “Dumbing Deficits Down,” Paul Krugman has harsh words for Republican nonsense about the budget deficit:Today’s Republicans claim to care deeply about deficits — but they’ve spent the past two years putting cynical, demagogic attacks on any attempt to actually deal with long-run deficits at the heart of their campaign strategy. But he’s only slightly less harsh toward President Obama:The president and his aides know that the G.O.P. approach to the budget is wrongheaded and destructive. But they’ve stopped making the case for an alternative approach; instead, they’ve positioned themselves as know-nothings lite, accepting the notion that spending must be slashed immediately — just not as much as Republicans want. . . .In this context, this concluding passage from the book I just read seems appropriate:U.S. political leaders now seem determined to follow Nero’s reputed example when setting budget policy. They dicker with trivial deficit reduction packages, and then on a regular basis stoke the fire by passing much larger tax cuts, while the long-term budget picture keeps getting worse. They know what is happening, as do the voters.
Naomi Klein: GOP Strategy for Disaster Capitalism (Video) Naomi Klein, author of "The Shock Doctrine," talks with Rachel Maddow about Republicans using economic crisis (real or ginned up) as an excuse to push through radical conservative and corporate agenda items.
Same As It Ever Was _ Krugman - If you’re in despair over the state of our economic debate, it’s probably worth noting that it was ever thus. But in a way, that’s what’s so depressing: 75 years of economic research have apparently had no impact on perceptions, either among the public or among the political elite.
The resistance to being labelled a Keynesian economist - Here is an example of the resistance that professional economists show to adhere to the standard keynesian prescriptions for an economy with ample spare capacity (and high unemployment). Justin Yifu Lin, Chief Economist of the World Bank, writes in an article entitled "Beyond Keynesianism and the New Normal": "The above risks to a sustained recovery are directly or indirectly related to the simultaneous existence of large excess capacity in the high-income countries. In my view, a global push for investment along the line of Keynesian stimulus is the key for a sustained global recovery; however, the stimulus needs to go beyond the traditional Keynesian investment...But how can the Ricardian trap be avoided, i.e. an outcome where the government stimulus fails to boost aggregate demand because economic agents expect future tax increases to pay for larger deficits and thereby increase savings? To avoid the Ricardian trap, it is important to go beyond conventional Keynesian stimulus of “digging a hole and paving a hole” by investing in projects which increase future productivity."So in the presence of large excess capacity he is in favor of policies intended to increase demand. But he is concerned that the standard policies (e.g. increase government spending) will not work this time. And this is because the private sector might undo the actions of the government by saving more (to pay for future taxes).
McConnell is Partially Right About Government Employment - David Weigel listens to Senator McConnell so we don’t have to: "Unemployment among government workers is about 4.5 percent," said McConnell. "Most of those government workers work for state and local government. The federal government over the last two years has added 100,000 employees. The only industry in America that's not sacrificing in this current downturn is government employees. I can't tell you some federal worker won't be affected by reducing government spending, but we have largely insulated the federal government from this recession." As our table shows, total government employment during February 2011 was 22.217 million (down from 22.582 million as of January 2009) whereas Federal employment was only 2.856 million (up from 2.792 million as of January 2009). Federal employment grew by only 64,000 which was more than offset by the fall in state government employment. Local government employment fell by 352,000 and total government employment fell by 365,000. Not exactly consistent with the message that the Senator was trying to convey.
Rep. Jim McDermott: Crushing Workers Won't Solve Deficits…While millions of ordinary Americans have been struggling to cope with the harsh economic realities of the last two years, Republican elected officials have focused their attention on ways to take political advantage of widespread hardship. Republicans have decided that ongoing economic turmoil offers a perfect opportunity to go after their political opponents. So, every Democratic proposal is a "job-killing" bill -- even a measure to assure continuing medical treatment to 9/11 first responders was somehow a job killer. Our economy's free fall was the result of "unreasonably high taxes" -- never mind the high-flying Wall Street speculators who gambled with our housing market and lost. And, now, when state and local governments are trying desperately to rebuild their crumbling budgets, the Republican Party is ready to assign blame for the catastrophe: unions. New Jersey Governor Chris Christie got the ball rolling by blaming that state's budget shortfalls on overpaid state employees and their underfunded pensions. Let's not forget that New Jersey has failed to make 13 of its last 17 scheduled payments to its pension trust fund, and the good Governor has missed every payment since taking office. Governor Christie is robbing the public employees' bank account and then blaming those employees for not keeping enough in the safe.
The Democrats Should Never Have Paid Ransom - Robert Reich - It’s called ransom. That’s what Republicans are demanding from the White House and congressional Democrats for not pulling the plug on the government. Problem is, when you pay ransom once, you’re almost begging to pay it again. And that’s exactly the pickle the Obama administration is finding itself in.In order to avoid a shutdown last week and buy time until March 18, the White House agreed to more spending cuts for the remainder of this fiscal year than it originally put on the table. Now, in order to get past March 18, Republicans want even more. Democrats have offered to cut an additional $10.5 billion but Republicans want $61 billion. The White House is hinting it’s ready to compromise further.That means they’ll have to agree to split the difference - which will result in around $35 billion of additional cuts. Not in Social Security or Medicare or national defense. The $35 billion will come out of what’s called non-defense discretionary spending for the rest of this year. It’s also where most federal education programs appear, as well as most programs for the poor apart from Medicaid. In effect, a third of non-defense discretionary spending is handed over to states and locales. Which means cities and states will be taking a huge hit. Detroit is already making plans to put 60 students in each of its high school classrooms.This is ludicrous
Where Is the Party of Recovery? - The Republican-led House has passed a budget cutting more than $60 billion in domestic outlay this fiscal year, in a still fragile economy. Senior Republicans in both houses have also proposed slashing Social Security, setting up what should be a slam dunk for Democrats defending America's best loved public program.But while Republicans overreach, President Barack Obama sometimes seems determined to snatch defeat out of the jaws of victory. The president can't quite bring himself to draw a line in the sand and declare that Democrats will never allow cuts to Social Security benefits. Nor does Obama's own budget propose sufficient job-creation measures. Rather, both parties have their own version of deficit-reduction fever, crowding out more urgent national needs and marginalizing the scope of necessary debate.In the dubious spirit of the president's own fiscal reform commission, a bipartisan group of six senators is working on a grand budget compromise. Their formula includes Social Security cuts as well as an automatic trigger mechanism that forces deeper spending cuts if predetermined deficit targets are not met.
The Ricardian Equivalence Bubble - Suddenly it’s everywhere. Justin Yifu Lin (the chief economist at the World Bank), Tyler Cowen, Paul Krugman, Nick Rowe, our own PGL: hot debate about how Ricardian equivalence applies to the current economic situation. There’s just one minor problem: Ricardian equivalence is an absurd idea, with not a shred of evidence or logic to support it. Behind the imposing moniker dreamed up by Robert Barro, RE simply says that government debt must eventually be paid down to zero. If the government borrows $1B this year, it must run a surplus of $1B some time in the future. If spending is constant, this means taxes have to go up. I pointed out the vacuity of this idea in a previous post, so I won’t repeat myself. The question of the day is, why should anyone give RE more than a moment’s attention? The only answer I can give is that the theory can be decked out with lots of math (overlapping generations ratex models of the behavioral response to knowledge of future taxes), enhancing the reputations of all involved. That, in a nutshell, is what’s wrong with economics.
Ricardian Equivalence, Freudian Screen Memory and Keynes on the Long Term Problem of Full Employment - The econoblogosphere has erupted -- here, here, here and here -- in a flurry of contention over an
abstract concept "absurd idea, with not a shred of evidence or logic to support it" that has nothing to do with employment but that purports to have something to do with full-employment policy. Mr. Keynes had the foresight to observe that in the long-run we are all dead. He forgot to mention that in the meanwhile economists will have redefined "the long run" as equivalent to "at all times", death as equivalent to life, hypertrophy as equivalent to euthanasia and amnesia as equivalent to deliberation.
Starving the Moral Beast - If we want to build a model of what the government spends money on we would be best to start this way: ask people what social obligations do they believe “society” has. Look around for the cheapest – though not necessarily most efficient – programs that could credibly – though not necessarily effectively– address those obligations. Sum the cost of those programs. That will be government spending.Contrary to Jonah Goldberg and others who see Canada and the United States as examples of two clashing ideologies, they are actually examples of two different ethic distributions. The United States is not Canada because there is ethnic strife between Southern Blacks and Southern Whites. That strife reduces the sense of moral obligation on the part of the white majority and so reduces government spending. I want to be very clear that I don’t say this to paint those against social spending as racists. From where I sit I am betting that most of the intellectuals lined up against expanding the welfare state are naively unaware that their support rests upon racial strife. Otherwise they would realize that as America integrates they are doomed. They are fighting as if they believe they have a chance of winning. Given the strong secular trend in racial harmony, they clearly do not.
A GOP-Pentagon Clash Looms Over Spending - There's a game of chicken now under way in Congress -- and the Pentagon is caught in the middle. House Republicans, eager to show they're serious about cutting spending, are talking about a series of so-called "continuing resolutions" that will basically freeze government funding at 2010 levels unless Senate Democrats agree to deeper cuts in the planned 2011 budget. That turns long-time allies -- pro-defense Republicans and their mil-mates at the Pentagon -- into fiscal foes. That's because Defense Secretary Robert Gates has made it clear that he can't run his shop in 2011 on 2010's budget. "That means there's no funds for the pay raise, for any increase in fuel prices, no money to pay for increases in health care costs," Gates complained to Congress on Wednesday. But the two-week funding bill just signed by President Obama, which includes a $4 billion spending cut, means he's going to have to keep doing that. Additional such stopgap measures are likely deeper into 2011 that could force the Defense Department to halt weapons production and lay off workers.
Black 9/11: A Walk on the Dark Side - In his important 2006 book, Nemesis, the Last Days of the American Republic, the third and concluding part of a trilogy, the late Chalmers Johnson, who was an expert on Japan and US foreign policy, writes that as much as 40% of the Pentagon budget is “black,” meaning hidden from public scrutiny.If the figure is even approximately correct, and I believe it is, the number is alarming because it suggests that democratic oversight of US military research and development has broken down. In which case our democratic values and way of life are presently at risk; not from without, as there is no foreign enemy that can destroy the US Constitution, but from within. I would argue that Chalmers Johnson’s estimate was corroborated on September 10, 2001, on the eve of the worst terrorist attack in US history, when Secretary of Defense Donald Rumsfeld acknowledged during a press conference that the Department of Defense (DoD) could not account for $2.3 trillion of the massive Pentagon budget, a number so large as to be incomprehensible.Any remaining hope that the US military might still get its budgetary house in order were dashed at 9:38 am the next morning, when the west wing of the Pentagon exploded in flames and smoke, the target of a terrorist strike.
The Greatest Rip-Off - The American Empire is failing. A number of its puppet rulers are being overthrown by popular protests, and the almighty dollar will not even buy one Swiss franc, one Canadian dollar, or one Australian dollar. Despite the sovereign debt problem that threatens EU members Greece, Ireland, Spain, and Portugal, it requires $1.38 dollars to buy one euro, a new currency that was issued at parity with the US dollar. The US dollar's value is likely to fall further in terms of other currencies, because nothing is being done about the US budget and trade deficits. Obama's budget, if passed, doesn't reduce the deficit over the next ten years by enough to cover the projected deficit in the FY 2012 budget. Indeed, the deficits are likely to be substantially larger than forecast. The military/security complex, about which President Eisenhower warned Americans a half century ago, is more powerful than ever and shows no inclination to halt the wars for US hegemony. The cost of these wars is enormous. The US media, being good servants for the government, only reports the out-of-pocket or current cost of the wars, which is only about one-third of the real cost. The current cost leaves out the cost of life-long care for the wounded and maimed, the cost of life-long military pensions of those who fought in the wars, the replacement costs of the destroyed equipment, the opportunity cost of the resources wasted in war, and other costs.
Who Says Grow Jobs Before Cutting Spending? Everyone - This week, yet another poll showed the public puts creating jobs ahead of deficit reduction for the "top priority of the federal government." Are the masses simply pining for the candy of American politics? Should we instead follow the hard-headed advice from our elite economists and budget experts? Fortunately, they are saying the same thing. Leaving aside the hacks from ideological "advocacy tanks," credible experts from widely varying political backgrounds all say the same thing: create jobs first. There may differences of opinion regarding how to eventually reduce our budget deficits, but no one argues that we should embrace austerity now and risk a double-dip recession which would only deepen the debt. Here's just a sampling:
Taxes Cuts Drive Deficits - I am a bit late to this Op-Ed by Charles Koch but it so plainly illustrates a common fallacy I have to bring it back up. Koch writesYears of tremendous overspending by federal, state and local governments have brought us face-to-face with an economic crisis. Federal spending will total at least $3.8 trillion this year—double what it was 10 years ago. And unlike in 2001, when there was a small federal surplus, this year’s projected budget deficit is more than $1.6 trillion. The clear implication is that our budget deficit is the result of overspending. Now there are a lot of reasons people will point to as to why that’s not the case this time, the economy, the Bush Tax cuts, etc. However, I want to make the more general point that spending is pretty much never the cause of budget deficits. Or, to be a bit more formal, variations in spending do not predict variations in the deficit. Variations in tax revenue, however, do predict variations in the deficit. We can look at the US experience quickly.
Budget hawks: Does US need to give gas and oil companies $41 billion a year? - As President Obama and Congress look for budget cuts, some experts say federal energy subsidies are ripe for trimming. Among oil companies, nuclear power, and coal, who gets what from US taxpayers? Desperately seeking fiscal savings, Congress and President Obama are scrambling to find anything in the federal budget that can be thrown overboard, from child nutrition aid to funding for military bands1.Skip to next paragraph2 But the American people might be on to something. In a poll conducted for NBC and the Wall Street Journal, three-quarters of respondents favored 'eliminating tax credits for the oil and gas industries.' Specifically, 47 percent said they found such cuts 'totally acceptable' and 27 percent said they found it 'mostly acceptable.'To some budget hawks cutting subsidies to mature and profitable energy industries is an inevitable part of any budget deficit solution. 'Clearly most of the attention has been focused on non-security discretionary budget,” says Steve Ellis, vice president of Taxpayers for Common Sense in Washington. “But even if we eliminated every dime of that, we would still have a trillion-dollar deficit. So these issues like subsidies for the oil and gas industry – and the tax code – are going to have to be tackled.'
Put High Income Tax Cuts Back on the Budget Negotiating Table - We’ve previously discussed how the House Republican proposal to cut $66 billion in non-security discretionary spending — everything from K-12 education to clean water funds to medical research — in the current fiscal year (2011) would affect millions of middle- and lower-income families in communities all across America.We shouldn’t think of that proposal in isolation, however. In December, congressional Republicans demanded that Congress enact a two-year extension of President Bush’s tax cuts for people making over $250,000 – which will cost about the same amount as their proposed cuts to non-security discretionary spending for this year – as part of the year-end tax and unemployment insurance agreement. When you think about how these priorities affect real people, you might ask yourself why no one in Washington who wants to save about $66 billion or so seems willing to talk about reversing these tax cuts at the top. Consider the following three illustrative Americans:
Sen. Conrad Pushes to Drop Tax Breaks for Wealthy - Do the rich get richer because of tax breaks? Senate Budget Committee Chairman Kent Conrad thinks so. The North Dakota Democrat made a big pitch for getting rid of many tax deductions and credits at a hearing on Wednesday, saying they’re contributing to a wide disparity in income between the wealthy and not-so-wealthy. Citing recent research by tax expert Martin Sullivan, Mr. Conrad said a resident of a typical Park Avenue building in New York – with average household income of $1.1 million – is paying taxes at an effective rate of about 15%. But the rate for janitors in the building hovers closer to 25%, Mr. Conrad said. “I don’t know how anybody can defend or justify that kind of tax burden,” Mr. Conrad said.The discrepancy has been noted previously, for example by investor Warren Buffett, who often complains that his tax rate is lower than his secretary’s. The differential is largely due to the lower tax rates the government imposes on investment income, such as capital gains and dividends.
Justifying Progressive Tax Rates - A smart writer - even one you don't always agree with - also has smart readers. Here's a bit of a letter one of Sullivan's readers readers sent him, reproduced on Sullivan's blog: I'm a bit late with this, but I wanted to respond to your post yesterday in which you wrote: "To many on the right, this inequality is a non-issue, and in an abstract sense, I agree. Penalizing people for their success does not help the less successful." Let's look at this issue another way: A homeowner who owns a $1 million home will pay more for insurance than will the owner of a $200,000 home. The insurer is not penalizing the first homeowner for his success. The first homeowner simply has more to lose and therefore pays more. If you believe the core function of government is to provide a stable environment (physical, financial, legal, social) in which society can flourish, the wealthy have more to lose from government's absence. Penalizing the successful wouldn't help anyone. Underwriting the successful costs money.
Bill Gross "of course" the wealthy should pay higher taxes corporations too - Add PIMCO founder Bill Gross to the list of wealthy Americans who think they aren't being taxed enough, already. 'Of course we should' pay higher taxes, Gross says. 'Higher income groups have enjoyed an enormous privilege ever since the Reagan tax cuts...and actually ever since Kennedy began the process back in the ‘60s.' Gross admits it's difficult to know what constitutes 'wealthy' in America or what federal income tax rate serves as a disincentive to those at the top of the food chain. 'But I don't think it's 36%,' he says. 'I think high-income earners would work well into the 50% tax rate. That would certainly help balance the books going forward.' In addition to tax hikes on the wealthy, 'let's raise corporate taxes too,' the famed bond fund manager says, a view that runs in direct opposition to the current discussions in Washington. 'Corporations complain and complain and complain and have got the Obama administration suggesting there should be some corporate tax reform,' Gross notes. But at just 1% of GDP, corporate taxes are 'historically low.'
The Domestic Manufacturing Deduction: A Fossil Fuel Subsidy? - In President Obama's proposed FY 2012 budget, the section on proposed cuts and consolidations includes (PDF): Eliminating 12 tax breaks for oil, gas, and coal companies, closing loopholes to raise nearly $46 billion over the next decade. The proposal is explained further in the budget's Analytical Perspectives (PDF, p. 204), with the objective being "to phase out subsidies for fossil fuels so that we can transition to a 21st century energy economy." It's hard for me to argue against eliminating subsidies of any kind, whatever the reason, but one non-subsidy jumped out at me: "the ability to claim the domestic manufacturing deduction against income derived from the production of oil and gas." That's referring to Internal Revenue Code Section 199, a deduction created in 2004 and broadly available to all manufacturers. Initially, domestic manufacturers were able to deduct 3% of income; this was increased to a 6% deduction in 2007 and a 9% deduction in 2010. What the budget proposes is to curtail this deduction so that out of all manufacturers, only oil and gas producers cannot take it.
Some Back of the Envelope Nerdery on Corporate Taxes - Bill Easterly reminds me about a recently published paper on Corporate tax rates and Investment. I decided to run a few back of the envelope calculations to see if a push to eliminate the corporate tax could make basic arithmetic sense. The up shot is that it does. The effects are quite mild but not trivial. As an critical caveat this based completely on averages and says nothing about distribution. Here is a chart from the paper that presents a nice downwardly sloping relationship you’d like to start with. They measure the effective corporate tax rate against various measures. Shown below is the effective corporate tax rate versus total economic investment.To make you feel more comfortable I will note that the authors hit the data with a few controls. Its not out of this world robustness, but it does have the kind of checks you would like. They control for property rights. We might think that low tax countries are more committed to markets and thus have stronger property rights. So it could look like low taxes are associated with investment but its really just strong property rights. Yet, the relationship maintains.
Why Tax Law Should be Required of All Law Students - We tax profs have a tendency to tell our colleagues that tax law should be a mandatory topic for all law students because there's nothing that you do that has economic consequences for which tax law isn't relevant. Whether you are marrying or divorcing, having a baby or buying a home, there are tax considerations that you should know about. If you are starting a business, depositing the proceeds of a theft in a bank, embezzling or gambling, there are tax considerations that you should know about. If you are filing a tort action, there are tax ramifications. If you own property, there are tax consequences. If you work and earn a salary, there are tax consequences. If you find a diamond in the street and keep it, there are tax considerations. If you get an "extreme makeover" home, there are tax consequences. If your home is rented by tourists in town to see the Master's Golf tourney, the tax consequences will vary tremendously if the tenants are there for only 10 days versus if they are there for three weeks, even if you live in the house every other day of the year. And on and on.
Banks, Tail Risk, and Agency Problems - In a very good interview with the Telegraph, Mervyn King complains that we haven’t yet properly sorted out the banks: “We’ve not yet solved the 'too big to fail’ or, as I prefer to call it, the 'too important to fail’ problem… Every supervisor should say: 'The banks I should worry about are not only the ones that are losing money but the ones who are making a lot of money.’ For me, one issue here is that tail risk, asymmetric information and agency problems interact nastily. Put it this way. Imagine the safe interest rate is 1%. A banker than devises a strategy which as a 98% chance of paying 3% and a 2% chance of losing 100%, and these chances are random. This strategy then has an expected payoff in any one year of 0.94%. Logically, this is a bad investment. A rational non-risk-tolerant person wouldn’t accept it if in involved his own money. However, over a 10 year period there’s a four-fifths chance of this gamble paying off every year. And there’s a two-thirds chance of it paying off every year for 20 years. So, who has the incentive or ability to stop banks pursuing such a strategy?
Will Next Time Be Different? - These words are often uttered when politicians and central banks want to bail out some troubled segment of the economy. “Yes,” one can almost hear them saying, “we understand that bailing out banks will subvert market discipline. But you cannot expect us to stand by and watch the system collapse, causing millions of innocent people to suffer. We have to live with the hand we are dealt. But next time will be different.” They then use every tool they have to prevent economic losses on their watch.The government’s incentives are clear. The public rewards them for dealing with the problem at hand – whether building levees to protect houses built on a flood plain or rescuing banks that have dodgy securities on their balance sheets. Politicians and central bankers gain little by letting the greedy or careless face the full consequences of their actions, for many innocent people would suffer as well. To the extent that the rough justice meted out by markets or nature teaches anyone to behave better, it has consequences far beyond the horizon of anyone in power today. When asked to choose between the risk of being known to posterity as the central banker who let the system collapse and the intangible future benefits of teaching risk takers a lesson, it does not take genius to predict the central banker’s decision. Democracy tends to institutionalize moral hazard in sectors that are economically or politically important, such as finance or real estate, allowing them to privatize gains and socialize losses.
Monsters that lurk in the shadows of Wall St - Lobbying campaigns are like New York subway trains: you can hear the rumbling well before they arrive. So when banks decided it was time to shift the regulatory focus away from them and towards hedge funds, private equity groups and other parts of the “shadow banking system”, words preceded action.Jamie Dimon went first. In September last year, the outspoken head of JPMorgan Chase warned that the post-crisis reforms could create “non-bank monsters”. A month later Vikram Pandit, the publicity-shy Citigroup chief, was less colourful but more explicit. “Shifting risk into unregulated or differently regulated sectors won’t make the banking system safer,” he said. And in Davos in January, Gary Cohn, Goldman Sachs’ number two, made the mountain air even chillier. “What I most worry about,” he told me, “is that in the next cycle, as the regulatory pendulum swings, we are going to have to use taxpayer money to bail out unregulated businesses.”These outbursts of concern come at an opportune time.In the US, regulators are drawing up a list of “systemic” groups – cornerstones of the financial edifice whose failure would bring it tumbling down – that will be subject to tighter rules and oversight. All institutions with more than $50bn in assets will be automatically included. The question is whether smaller but risky players should join them.
Should all financial innovation be curbed? - I was struck by a name, Shleifer, that kept popping up in Adair Turner's recent lecture on whether reform of the financial system had been radical enough (see my post, Turner's 'radical' changes at the banks) and in the response to Lord Turner made by Paul Tucker, deputy governor of the Bank of England. But that's a proper punch up for another day, since on this occasion they were agreed on the importance of a recent academic paper by the Harvard economist Andrei Shleifer - in collaboration with Nicola Gennaioli and Robert Vishny - entitled Financial Innovation and Financial Fragility.As much as these things ever set the pulse racing (unless you are a saddo like me). It is a gripping piece of work - because it purports to offer a mathematical proof that much financial innovation is socially and economically harmful, by definition as it were, turning on its head the prevailing orthodoxy of the previous 30 years that markets are rational and efficient.
Battle of the Bank Policy Heavyweights - Just when it seemed that the debate over banking was winding down – with overwhelming victories on almost all dimensions for the people who run the world’s largest cross-border financial institutions – two of the biggest name policy heavyweights have entered the arena. Both voices are typically listened to most carefully within official circles and yet their messages today are diametrically opposed. Which one is right?Speaking on the side of greater reform for the biggest banks, Mervyn King – governor of the Bank of England – gave a forceful interview to the British newspaper The Telegraph at the end of last week. “Why do banks in general want to pay bonuses? It’s because they live in a ‘too big to fail’ world in which the state will bail them out on the downside.” In Mr. King’s view, casino-type banking caused the crisis of 2007-08. “Financial services don’t like the word ‘casino’, but instruments were created and traded only within the financial community. It was a zero sum game. No one knew which ones were winners when the crisis hit. Everyone became a suspect. Hence, no one would provide liquidity to any of those institutions.” In the debate so far, only one voice has been raised that rivals Mervyn King in terms of reputation in the international economics policy community — Jacques de Larosière weighed in last week, publishing a high profile op ed piece in the Financial Times (see also this news coverage). But his views last week raised eyebrows because he came out so strongly in favor of Europe’s “universal banks”.
All Your Debt Are Belong To Us - Paul Krugman is doubting that financial collapse was a key part of the recession My take on the US economic crisis has increasingly been that banks were less central than many people think, while the housing bubble and household debt are the key players — which is why financial stabilization by itself wasn’t enough to produce a V-shaped recovery. I am not sure how central people think the banks were so I am not sure how hard to push back. My take is that household debt and the banking collapse were symbiotic in their destructive nature. At the center of the story, however, is money and credit. Highly leveraged households meant that consumers were very sensitive to economic disruption. The danger in having a lot of leverage is that when things go bad they go really bad. The flipside of course is that when things go good they go really good. We have to have some story about how things started to go bad before household debt can be invoked to explain why things went really bad.
Will Federal Regulators Crack Down on Oil Speculation? - While the Labor Department’s announcement last Friday that US employers had created 192,000 new jobs seems to confirm that the American economy is indeed showing signs of life, the adjective most observers have used to describe its recovery is “fragile.” But arguably the biggest threat to recovery is the price of oil. If oil prices in particular, and commodities in general, begin to rise, those trends will almost certainly constrain demand and consumer confidence at exactly the moment they are most needed. This week oil traded at $104.42 a barrel, up 7 percent from last week and at its highest since the September 26, 2008, close at $106.89. And we know from recent experience the oil prices (along with all sorts of other commodities) can skyrocket with little warning. Cast your memory back to the summer of 2008, before the financial crisis and in the heat of the presidential campaign. That summer, oil hit $147 a barrel and gas hit above $4 a gallon; airfare went through the roof and nearly every single major carrier came very close to declaring bankruptcy. Food prices shot up as well, with wheat trading up 137 percent year over year in July 2008, and corn 98 percent. Famine and food riots spread throughout the globe.
Oil lobbyists focus new attention on regulators - With Congress in friendlier hands, oil and gas lobbyists are shifting more of their attention away from Capitol Hill and to a new arena: the federal agencies developing aggressive regulations that will affect how the industry does business. That means lobbyists who have focused on Congress for years are trying to adapt and make their arguments to audiences in the executive branch while keeping an eye on Capitol Hill and getting acquainted with more than 100 new House and Senate members. Even when Democrats controlled both chambers, the industry beat back legislation to force caps on greenhouse gas emissions. Then it faced heightened scrutiny and legislative initiatives prompted by the Gulf of Mexico oil spill – including a proposal to lift or eliminate a 21-year-old cap on spill liability.
Republicans Seek to Slow Agency’s Work on Derivatives Regulation - Federal regulators are running out of time to write hundreds of new rules for Wall Street. Yet Republican lawmakers — and even some regulators — want to slow the pace. Representative Scott Garrett of New Jersey is the latest prominent Republican to rebuke the speed at which the Commodity Futures Trading Commission is writing rules. In a letter dated March 3 to the agency chairman, Gary Gensler, Mr. Garrett complained that a “rapid pace” prevented the financial industry from fully digesting proposed rules for derivatives trading. Mr. Garrett, chairman of the House Financial Services Committee’s capital markets panel, contended that there “seems to be no order in which the rules are proposed.” He cited, for example, the commission’s move to set standards for derivatives dealers before defining which banks and firms would qualify as dealers. Republicans are threatening repercussions for regulators that ignore their concerns.
New York Times Disappointing Article on Credit Card Interchange Fee Reform. -Edward Wyatt has a disappointing article in the New York Times on interchange reform. Felix Salmon takes it apart, noting: “By my count, he gives the banks’ side of the story eight different times, by quoting bankers directly or just recounting what “banks contend”. By contrast, the merchants get cited only twice, and their argument doesn’t really get parsed at all.” Felix’s post is really good. Since I think the Durbin amendment is a pretty elegant solution for this market problem, I wish some other things were included in the article. Let’s include some stuff that you wouldn’t get from the article.First, interchange rates in the United States are among the highest, if not the highest, in the developed world. From the Minneapolis Fed, circa 2006:
Debit Card Fees Prompt a Push Near Deadline - It seemed a good idea last year, when the financial crisis had turned banks1 into Public Enemy No. 1 and lawmakers were looking for ways to reward consumers still bitter about billion-dollar bailouts and executive bonuses. Without much warning or debate, the Senate passed an amendment directing the Federal Reserve2 to reduce the hidden “swipe fees” that banks collect from retailers each time a customer makes a purchase with a debit card. Merchants, who had complained that the $20.5 billion in annual fees were biting into their profits, were elated. Banks were stunned. Their lobbyists tried to reverse the move, but when the overhaul of the nation’s financial regulation3 was passed by Congress last July, the debit card cut survived. Now, as the Fed faces a deadline in April to write the rules for the lower fees, banks and debit card companies are engaged in an all-out assault on Capitol Hill, enlisting a growing cadre of lawmakers and lobbyists to push for changes, delay or outright repeal.
Elizabeth Warren’s Charm Offensive - She is a lightning rod on the right, the Harvard professor who championed the creation of a Consumer Financial Protection Bureau. Now, Elizabeth Warren is visiting with Republican freshmen in an effort to soften their animosity toward this expansion of government, which she now is turning into reality. Beginning with the half dozen freshmen who serve on the House Financial Services Committee, Warren is methodically working her way through the GOP’s 87 new members, many of whom are among her harshest critics. They don’t buy her argument that Wall Street greed was at the core of the financial collapse. [They blame such government-backed giants as Fannie Mae and Freddie Mac, along with the Community Reinvestment Bank, for intentionally making risky loans so people could buy homes even when they couldn’t afford the mortgage.] Asked why she is seeking out these lawmakers, Warren said: “If I can reduce the hostility they feel towards the agency I'm building, that's why I'm there.”
Guest Post: Democratic Finance v. Banking Fraud in Early America - Calling modern banking “a widespread fraud,” Rob Burns wants to push the finance industry out of everyday lending. A candidate for Congress in the fourth district of Illinois, Burns proposes using federally insured savings as a public fund for mortgages, student loans, consumer credit, business bridge loans — the kind of borrowing engaged in by ordinary Americans, not entrepreneurs. On a different finance reform front, the technology pioneer and culture critic Douglas Rushkoff has been exploring complementary currencies. Rushkoff envisions new monetary units, exchanged via handheld devices, helping to break what he calls “the money monopoly.” Far-reaching ideas for getting money, currency, and credit to flow more democratically through the American economy would probably draw all-purpose condemnations like “socialism!” from the rightists led by Sarah Palin and Michele Bachmann. Liberal high finance experts too might find such proposals dangerously chaotic. But regardless of practicalities and politics, it’s useful to recognize that ideas like Burns’ and Rushkoff’s have deep roots in the American founding period. The Tea Party has done such a successful job of associating anti-government, free-market politics with essential American values — and historians have been so eager to ignore the economic activism of ordinary, founding-era Americans in favor of assessing and re-assessing the elite founders’ republican philosophies — that it can be startling to confront the democratic theories about popular finance that prevailed in 18th-century America.
Lehman Failed Lending to Itself in Alchemy Eluding Dodd-Frank - By the time Lehman Brothers Holdings Inc. (LEHMQ) became the biggest bankruptcy in U.S. history, plunging the economy into the worst financial crisis since the 1930s, the firm had made $3 billion in loans to itself in transactions that even today would elude the Dodd-Frank law designed to prevent such financial alchemy. Lehman turned souring real estate investments into top- rated securities that the bank’s insiders dubbed “goat poo,” according to court records. The securities, called Fenway commercial paper, helped keep Lehman afloat over the summer of 2008, until a trading partner determined they were “worth practically nothing.” That precipitated Lehman’s demise on Sept. 15, 2008, bankruptcy documents and a May 2010 Lehman lawsuit show. “It wasn’t a mistake to let Lehman fail, it was a mistake to let it live so long,” Nothing in the 800-plus pages of the Dodd-Frank regulatory overhaul enacted last year would prevent a bank from using similar techniques to try to make regulators, credit-rating companies and lenders believe it was healthier than it was, said David Skeel, a professor at the University of Pennsylvania Law School in Philadelphia.
A New “Whocoulddanode” Defense, This Time of Coddling Banksters in the Crisis - Yves Smith - I hate shooting the messenger even when he lets us know that he is a tad invested in the information he is conveying, but sometimes it is warranted. Floyd Norris now tells us that maybe it wasn’t such a good idea to have been so generous to the banks during the crisis. He cites the usual reasons: the recovery is shallow, the officialdom missed the opportunity created by the crisis to restructure the financial system, sparing bondholders created moral hazard, and we are now stuck with banks in the driver’s seat. His lament, as the headline accurately summarizes, is “Crisis Is Over, But Where’s The Fix?” The problem is that his account is larded with a rationalization of the decisions made at the time to treat major financial firms with soft gloves: At the time, rescuing seemed more important than reforming. The world economy was breaking down because of a lack of financing. Trade flows collapsed, and companies and individuals stopped spending. It seemed clear that halting the slide was critical… A surprising citadel of that second-guessing is at the International Monetary Fund, where researchers this week concluded that the rescues “only treated the symptoms of the global financial meltdown.” “Second guessing” is simply misleading. It gives the inaccurate impression that decisions made at the time are now being questioned with the benefit of hindsight. But in fact, those decisions were criticized loudly at the time by a vocal minority, including yours truly.
Towards a Theory of Corporate and Financial Sector Solidarity - Krugman links to this from Matt Yglesias: On financial reform, it’s not merely that the big banks opposed the Dodd-Frank bill, but there was absolutely no counter-lobbying from firms in the non-financial economy in favor of it. And that’s not to say that Dodd-Frank was the greatest thing since sliced brad, but there were no proposals coming out of corporate America for any financial regulatory overhaul of any kind. Yet clearly something went badly awry in 2007-2008. But the business class united behind TARP, then united to oppose any regulatory reforms, and is now united against any return to pre-Bush levels of taxation on rich people. During the financial reform debate there was no push by the corporate sector to reform the broken financial sector. I’ve put a bit of thought into why this might be. A few ideas, non-conclusive:
BofA “Bad Bank” for Legacy Assets: Will This Eventually Be a First Use of Dodd Frank Resolution Powers? - Yves Smith - In a move not noticed much three weeks ago, Bank of America announced that it was segregating its crappy mortgages into a “bad bank”. It got more attention today by virtue of being discussed long form in an investor conference call (see related stories at Bloomberg and Housing Wire).The use of a “bad bank” is strongly associatied with failed institutions. Some of the big Texas banks that went bust in the 1980s (Texas Commerce Bank and First Interstate) used “good bank/bad bank” structures to hive off the dud assets to investors at the best attainable price, and preserve the value of the performing assets. The Resolution Trust Corporation, the workout vehicle in the savings and loan crisis, was effectively a really big bad bank. The FDIC is (and I presume was) able to sell branches and deposits pretty readily; the remaining bad loans and unsellable branch operations reached such a level that the FDIC was forced to go hat in hand to Congress and get funding while it worked out the dreck. A similar structure was used in in the wake of the banking crisis in Sweden in the early 1990s.I am told by mortgage maven Rosner and others that this move is not meant as a legal separation, but a mere financial reporting measure, so that BofA can declare, “See, we do have this toxic waste over here, but we are chipping away at it and we’ll have that resolved in some not infinite time frame” (the current talk is 36 months) “and look at how the rest of the bank looks pretty good!.”
S.E.C. Chairwoman Under Fire Over Ethics Issues -The Securities and Exchange Commission1 took a beating two years ago for failing to detect Bernard L. Madoff2’s multibillion-dollar Ponzi scheme3 during the decades that he ran it. Now, its chairwoman is coming under Congressional fire for hiring as the S.E.C.’s general counsel someone with a Madoff financial interest — David M. Becker, who participated in matters involving how the scheme’s victims would be compensated. The revelations about Mr. Becker’s role have raised fresh questions about ethical standards and practices at the agency, where Mary L. Schapiro4 was brought in as chairwoman two years ago with a mandate to strengthen its enforcement unit. Ms. Schapiro will appear before Congress on Thursday to discuss the matter. Questions about Mr. Becker arose last month after Irving H. Picard5, the trustee overseeing the Madoff case, sued him and two of his brothers to recover $1.5 million of the $2 million they had inherited in 2004 from a Madoff investment by their late mother. Mr. Becker’s financial ties to Madoff had not been publicly disclosed until that suit. Mr. Becker said that he advised Ms. Schapiro and the chief ethics officer of his financial interest in a Madoff investment account, “either shortly before or after” joining the agency in February 2009.
Hey, S.E.C., That Escape Hatch Is Still Open - IT’S hard to say what’s more exasperating: the woeful performance of the credit ratings agencies during the recent mortgage1 securities boom or the failure to hold them accountable in the bust that followed. Not that Congress hasn’t tried, mind you. The Dodd-Frank financial reform law, enacted last year, imposed the same legal liabilities on Moody’s2, Standard & Poor’s3 and other credit raters that have long applied to legal and accounting firms that attest to statements made in securities prospectuses. Investors cheered the legislation, which subjected the ratings agencies to what is known as expert liability under the securities laws. But since Dodd-Frank passed, Congress’s noble attempt to protect investors from misconduct by ratings agencies has been thwarted by, of all things, the Securities & Exchange Commission. The S.E.C., which calls itself “the investor’s advocate,” is quietly allowing the raters to escape this accountability.
Wall Street's secretive 'expert networks - Insider dealing is as old as markets themselves and the Financial Services Authority, the UK regulator, said there were "abnormal pre-announcement price movements" before 30.6% of 2009 takeover announcements. While Gupta's name makes the US inquiry among the highest-profile pursuits of insider traders since the groundbreaking Wall Street investigations of the 1980s, what is really unusual about this crackdown is how the likes of Longoria have become embroiled in the controversy. Gupta, who denies any wrongdoing, is alleged to have passed corporate secrets learned as a board member of Goldman Sachs to Raj Rajaratnam, the founder of the Galleon hedge fund, whose own trial on several counts of fraud and insider trading is due to start on Tuesday.
McKinsey, the Insider Trading Scandal, and the Problems With Consulting - Yves Smith - I’m not easily shocked these days, but I have to confess I gasped out loud when I read that the former managing director of McKinsey, and until recently board member of Goldman and Procter & Gamble, Rajat Gupta, had been charged by the SEC for insider trading. Why would someone with one of the most blue chip reputations in Corporate America, who has clearly done very well financially, risk it all to make a bit more? Not only is the downside considerable, but it also isn’t as if these moves would have made a meaningful difference in his lifestyle. He already had status others would kill for. And passing profitable tips to Raj Rajaratnam was never going to be a ticket to Hedgistan levels of wealth. But the next interesting bit was to watch the reaction in terms of what this scandal meant for McKinsey. This event was a Rorschach tests on the firm, often with a bit of schadenfreude at another elite name being shown to have feet of clay. And even though I worked for McKinsey over 20 years ago and think the firm has a lot to answer for, some of the charges are a bit barmy. So let’s dispatch with the uninformed inflammatory stuff first and get to the real dirt.
Curious Accusations in S.E.C.’s Insider Case - The fact pattern looks bad, very bad. Seconds after Rajat K. Gupta, then a director of Goldman Sachs, finished up a board call during which he learned that Warren E. Buffett had agreed to invest $5 billion in the firm, he picked up the phone and called his friend Raj Rajaratnam, regulators contend. Minutes later, Mr. Rajaratnam placed bets on shares of Goldman Sachs that netted his firm, the Galleon Group, $900,000. The Securities and Exchange Commission, which accused Mr. Gupta of insider trading last week, says this happened not once, but repeatedly. He did the same thing at Procter & Gamble, where he was also a director, the S.E.C. claims.Exactly what was said on these phone calls remains unknown. But if the S.E.C. proves its case, then Mr. Gupta, a respected management guru who once ran McKinsey & Company and advised the Bill & Melinda Gates Foundation, was routinely “disclosing their most sensitive and valuable secrets.”
Insider Trading Case Testimony Suggests McKinsey Types are Stupid Crooks - Yves Smith - I’m still pretty gobsmacked in reading the bits of testimony presented in the financial media’s accounts of the first day of testimony in the SEC’s insider trading case against hedge fund manager Raj Rajaratnam. I’m struck by how simple it seemed in retrospect for Rajaratnam to suborn McKinsey partner Anil Kumar. Kumar had been pitching Rajaratnam’s fund as a prospective client, since the hedgie claimed to have a budget of $100 million a year to spend on research. But Rajaratnam was cool to Kumar’s proposals. After a charity event, Rajaratnam turned the tables and started wooing Kumar, telling him he was smart, underpaid, and he really just wanted his insights, not the firm’s. Now partners can in fact bill clients on an unlevered basis (at least in my day), meaning a price that led to a similar level of profit as when working with a normal team with everyone’s cost suitably marked up. They didn’t for practical reasons, namely, it would quickly lead to a burn rate that clients would deem unacceptable. I was brought in by McKinsey to work on a client project a few years after I had left the firm, in the early 1990s when the topic came up. The number then was $20,000 a day. Given how much the firm’s rates increased in the 1990s, I’d guesstimate it would be easily double that by 2004. So it was pretty apparent what this was really about when Rajaratnam suggested paying Kumar $500,000 a year in via an offshore account .
TARP: By the Numbers - You may have seen a lot of news stories recently about Treasury’s efforts to wind down TARP and exit its investments in private companies. And most of those stories include a sea of numbers about the program: How much it’s expected to cost. How much money has gone out the door. How much has been repaid. And many others. If you don’t follow TARP on a day-to-day basis, it might be hard to keep all of them in perspective. That’s why we put together the following chart that boils down some of the key facts about TARP, by the numbers.
Wall Street's Euphoric Birthday - Robert Reich - Some say the Street’s buoyant revival should pull the rest of the economy with it. But this is hardly a buoyant recovery.In theory, at least, the extraordinary bull market should be making Americans feel far wealthier than they felt two years ago. So they should be spending far more, and that spending should be fueling far more job growth than it is.Why hasn’t it happened? In reality, the vast majority of Americans don’t feel wealthier because they hold few if any shares of stock. In fact most feel poorer because their major asset is their homes – now worth 20 to 40 percent less than they were worth in 2007 (and there’s no sign of a rebound in housing). The Street’s bull market over the last two years has seriously enriched only the wealthiest 5 percent of Americans who hold the lion’s share of stock. While their earned income starts at $210,000, their unearned income – dividends and capital gains — now puts them considerably above that. Shouldn’t the shopping of the top 5 percent spur lots of new jobs? Not really. While the top 5 percent are spending more, they’re not spending all that much as a proportion of their earnings.
Hacker Collective Anonymous To Release Documents Proving Bank Of America Committed Fraud This Monday - After Julian Assange crashed and burned in his threat to release documents that expose fraud at Bank of America, many thought he had been only bluffing, and that BofA is actually clean. Not so fast. A member of the hacker collective Anonymous, which singlehandedly destroyed "hacker defense" firm HB Gary, who goes under the handle OperationLeakS "is claiming to be have emails and documents which prove "fraud" was committed by Bank of America employees, and the group says it'll release them on Monday" reports Gawker. As to the contents of the possible disclosure: ""He Just told me he have GMAC emails showing BoA order to mix loan numbers to not match it's Documents. to foreclose on Americans.. Shame." If indeed this makes the case against BofA' foreclosure practices stronger, it certainly explains why the banking consortium is scrambling to arrange a settlement, and also why Bank of America recently split off its $2 trillion in mortgages into "good bank" and "bad bank" entities.
Financial Sector: Move to 'Synthetic' US Junk Bonds - Demand is growing for "synthetic" financial instruments that enable investors to take positions in the US junk bond market without owning the underlying securities. The instruments, created by using credit derivatives on junk bond or high-yield indices, resemble transactions linked to US mortgages that proliferated before the financial crisis. The collapse of these synthetic mortgage-backed collateralized debt obligations when mortgages turned sour was a big feature of the crisis. Exposure to such instruments proved toxic for the banks and investors that bought them, causing hundreds of billions of dollars of losses, and substantial profits for hedge funds that sold them.Now, hedge funds are buying the riskiest parts of instruments linked to bonds. This demand reflects more bullish views on the US economy, which investors believe will translate into lower corporate defaults. "We see much interest in synthetic high yield, more than we would have predicted just a few months ago," said Sivan Mahadevan, managing director at Morgan Stanley.
Shades of 2007: Synthetic Junk Bonds - Yves Smith - Aha, the level of financial innovation spurred by super low interest rates is starting to have that “I love the smell of napalm in the morning” feel to it. The Financial Times reports that there is a frenzy to create synthetic junk bonds, ostensibly to satisfy the desire of yield-hungry investors. Any time you see a lot of long money flowing into synthetic assets rather than real economy uses, it’s a sign that Keynes’ casino is open for business (”When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”) The author compare this development to that of the asset backed securities CDO market, one of our betes noirs which blew up spectacularly in the crisis. There are some similarities and differences.The amusing bit is that the article focuses on the demand from the longs and conveniently fails to mention that the people who want to short this market have to be at least as active. In fact, demand for synthetic assets almost always starts with the short side. That means the structures are devised to suit their needs.As Satyajit Das wrote to us:It is exactly the same structure as a synthetic CDO – a la Magnetar. The smart money is shorting corporate and high yield credit – they just can’t see how the Ponzi scheme can carry on for much longer. I differ in that I think everyone is underestimating how long the governments can keep the illusion going.
Quake Aftershocks Could Hit Markets Days Later - If you think Japan’s quake tsunami combo looks bad, just pause for a moment. There may be worse to come. We might just get financial devastation on top of a human and physical disaster.And if history is anything to go by it could be monumental. Just look what happened when Mother Nature made an unexpected call in 1987. On October 15 and 16 a hurricane hit southern England. Hurricanes almost never hit Britain — I know, I grew up there.As the cost estimates of the disaster grew insurance companies started to dump their holdings of stocks and bonds so they had cash to pay the mounting claims. By Monday October 19 there was enough to selling to cause the stocks to slide by over 22% in New York. It was Black Monday. It was worse in London than New York.So what can we expect this time? Well, we are already seeing the first-order effects. Insurance company stocks are selling off. Prudential Financial, AIG and MetLife shares were marked down in early trading. That’s likely a gut reaction.
Paul Farrell On The 4 Time Bombs That Would "Ignite A Wall Street Revolution" -That the bankrupt US is living on borrowed time between various can kicking episodes is by now not news to anyone. Neither is it news that as long as the broader population finds brief distractions, such as the latest iPad app or the occasional Charlie Sheen scandal, which keep them busy in peak advertising hours, few if any will care about the sordid details of the unsustainable big picture. This ongoing apathy is starting to get to some market commentators most notably Paul Farrell of MarketWatch who summarizes events in the past 2 years as follows: ' Admit it, we lost the opportunity. Jail a bank CEO and Wall Street will miraculously reform? You’re joking, right? Wall Street got away with a “legal” bank heist. Today the should-be/would-be inmates are running the prison. Wall Street’s corrupt banks have lost their moral compass … their insatiable greed has become a deadly virus destroying its host nation … their campaign billions buy senate votes, stop regulators’ actions, manipulate presidential decisions. Wall Street money controls voters, runs America, both parties. Yes, Wall Street is bankrupting America.' But nobody cares. So what would make America care? Here are the four time-bombs which Farrell believes will be sufficient to blow up Wall Street."
Unofficial Problem Bank list increases to 964 Institutions - Note: this is an unofficial list of Problem Banks compiled only from public sources. Here is the unofficial problem bank list for Mar 11, 2011. Changes and comments from surferdude808: The week included failures and new additions to the Unofficial Problem Bank List. In all, there were two removals and four additions.The List has 964 institutions with assets of $420.7 billion, which represents the second highest asset level since the List has been published. So far, the peak in assets occurred on September 24, 2010 at $422.4 billion.
US banks don't need borrowers in order to 'lend' - Who says that a bank needs to find a willing and creditworthy borrower for it to be able to lend out money? Only incompetent unimaginative putzes will insist that a willing borrower be at the other end of a profitable banking transaction. This is what separates the men from the boys; the masters of the universe form the masters of the basement. All you ever need, to have a profitable ‘lender’-like arrangement, is a willing credit default insurer. And with the environment the way it is nowadays, willing parties for this arrangement practically fall from the sky. Opportunity abounds to create synthetic junk bonds. Here is a list of some of the things bankers are most thankful for, that make this unbelievable wealthmaking opportunity possible for those willing to go for gold:
Number of the Week: Companies’ Cash Hoard Grows - $1.9 trillion: Corporate America’s cash. U.S. companies’ cash hoard keeps getting bigger, a trend both good and troubling. After hitting new highs in five of the last six quarters, nonfinancial corporations’ cash and other liquid assets reached $1.9 trillion at the end of 2010, according to the Federal Reserve. That’s 7% of all their assets, the highest level since 1963. On the bright side, the cash pile reflects the resilience of America’s companies and capital markets. Thanks in part to improved resource-management systems, executives have been able to act with lightning speed, slashing costs during the recession and hiring only as much as they need during the recovery — tactics that have generated record profits, if not jobs. Dynamic bond markets have allowed big companies to raise vast amounts of money even as banks have pulled back on lending. That has helped the U.S. avoid the kind of bankruptcy epidemic many had expected. At the same time, though, the persistent growth of companies’ cash hoard suggests a problem: Businesses appear to lack the confidence in the recovery needed to plow the money back into new projects and hiring.
Minimal Work To Indict For Securities Fraud In Real Estate Mortgage-Backed Securities - One of the excuses given by the media for the repulsive failure to charge anyone with crimes arising from the Great Crash is that the FBI is too busy fighting terrorism. That’s nonsense. As Yves Smith points out in her explanation of criminal violations of Sarbanes-Oxley, investigators are not starting from scratch. A lot of the work has already been done.For example, as the Final Report [large .pdf] of the FCIC says, the underwriting firms knew in detail the statistical make-up of the sour loans they bought to put into real estate mortgage-backed securities. Most hired outside firms to examine a random selection of the loans proposed for the RMBS, and received reports showing, among other things, compliance with underwriting guidelines of the originators of the mortgages. That means that all the work necessary for a solid criminal case like this one is sitting at the offices of the firms that did the due diligence, including Clayton Holdings, the firm that cooperated with the Financial Crisis Inquiry Commission, and figures prominently in its Final Report.
White House CoS Daley: Obama Shouldn't Support Prosecution of My Bankster Buddies - File this under “Who could have predicted?” President Obama’s White House Chief of Staff, William Daley, told the nation he didn’t think it was appropriate for a President to recommend criminal prosecutions for the banksters whose reckless behavior and massive fraud brought down the entire financial system, looted their own companies, defrauded thousands of investors and who are still engaging in fraudulent manipulation of the mortgage/foreclosure system. Huffington Post’s Sam Stein (with video) has the Meet the Press atrocity watch today: Appearing on NBC’s “Meet the Press,” Daley, who worked as an executive at JP Morgan prior to joining the White House, said it wasn’t the role of a politician, let alone a president, to weigh in on judicial matters. Besides that, he added, the reforms that Obama instituted years after the crash occurred were indicative of his dissatisfaction with the financial sector.
Exclusive: ‘Make Wall St. Pay’ campaign debuts by occupying bank branch, House speaker’s office - A new campaign by a national network of activists kicked off Monday morning with a splash as it led hundreds of fed up homeowners in a series of protests that brought business to a halt at a major bank and the House speaker's office. The National People's Action network picked Monday to launch the "Make Wall Street Pay" campaign thanks to another show in town: the National Association of Attorneys General's Convention in Washington, D.C.But they didn't stop there.Moving from the meeting of all 50 Attorneys General, the crowd made their way to a Bank of America branch on Pennsylvania Ave. While about 300 stood outside, another 300 moved indoors, filling up the lobby and bringing business to a standstill.Then, they went to see if Rep. John Boehner (R-OH) was available, filing into his Capitol Hill offices to send an unambiguous message: Wall Street must pay."They delivered the message that we have a revenue crisis and that Wall Street must pay its fair share,"
Should Fannie and Freddie Go? -New York Times Room for Debate - The Obama administration and the Republicans are agreed that it's time to begin winding down Fannie Mae and Freddie Mac, the housing finance giants, whose bailouts have cost taxpayers more than $135 billion. Even if these companies are shuttered, the question remains whether the government should provide support to middle-class borrowers, including lower interest rates and lenient terms. Some critics argue that a purely private mortgage finance market would be perfectly achievable and effective. What are the consequences to ending all government support in the mortgage market? Would there have to be additional regulations to ensure that mortgages remain within reach for most Americans?
Housing Finance Reform - Credit Slips is well-represented on the New York Times Room for Debate website. Susan Wachter (Wharton School) and I have a short opinion piece on housing finance reform on the site. Our main point: housing finance risk is inevitably socialized, so we'd best come up with a system that keeps risk in check. And Alan White also has a piece on the site. Alan's take: we need to avoid the upside-down nature of the pre-crisis system where the most marginal borrowers were the ones who ended up in the totally private part of the market; they should be the ones receiving government support.
Housing: The leverage bulls return - I know that memories are short on Wall Street. But are they short on Main Street too? Reading Linda Stern’s latest paean to leverage and housing risk, it certainly seems that way. Saving for a down payment is hard, she says. It can take time! And that doesn’t seem to pay. If you think about the cost of paying rent for five or more years, you may be better off jumping into a home with a low down payment now. That’s true even if you have to spend more money on fees and mortgage insurance to get one of those low down payment loans. Well, yes, let’s think about the cost of paying rent for five or more years. In fact, let’s plug all our numbers into a rent-vs-buy calculator and see where we’re at after five years. The problem with Linda’s formulation here is that it helps to reinforce the common fallacy that 100% of rent payments are “wasted,” in a way that mortgage payments are not. But that’s simply not true. In both cases you’re paying money every month for your shelter; in the rental case that money goes to the landlord, while in the ownership case it goes to the bank.
Behind the foreclosure crisis, big banks' reign of error - Republicans are aiming to repeal the Home Affordable Modification Program, the Obama administration's main response to the foreclosure crisis. The program, by all accounts, has been disappointing, helping only about 600,000 homeowners of the 3 million to 4 million projected. But its failure, watchdog groups say, was caused by the mortgage servicers' ineptitude - lost paperwork, bad accounting and the like - and lack of concern about whether the mortgages they service (but don't own) go into default. Rather than crack down on the banks, the House Republicans would kill the one program that, at least in theory, gives borrowers some chance of avoiding foreclosure. "If you take that away, you've got nothing," says Julia Gordon, senior policy counsel at the Center for Responsible Lending1. "The servicers can just do whatever they want."
A Liberal Is a Villager Who’s Been Screwed By a Mortgage Servicer - The past week has seen a pronounced evolution in the writing of Dana Milbank. Earlier in the week he severely criticized the incestuous relationship between the political and media culture in Washington – including engaging in a healthy dose of self-criticism – revealed by the Kurt Bardella email scandal. Where did this newfound self-awareness come from? Perhaps that can be explained by his latest piece. See, Milbank discovered that, regardless of his prominence in the DC journalism community or access to power, to the banks he was still nothing but a mark.Last fall, my wife and I refinanced our mortgage with Citibank. Sixty days later, we received a “cancellation notice” from our homeowners insurance company “for non-payment of premium.”Turns out Citibank, which had been collecting hundreds of dollars a month from us to pay the insurer, hadn’t made the payments. It was, I later learned, one of the usual tricks mortgage servicers use to squeeze more cash out of their customers. Sometimes it takes only a little shared experience to recognize the major problems in our society. For Milbank to understand the mortgage crisis, he needed to experience it first-hand.
Carrington and the Problems of Mortgage Debt Servicing - So, in case you haven’t heard, there’s a tentative settlement leaked in the situation with foreclosures and mortgage servicing. Before we get to it it will be helpful to recap what’s broken with servicing. There are many things to discuss, but two recent stories help explain the situation. The first is the way servicing devastates investor value. I highly recommend this article by Jeff Horwitz: A Servicer’s Alleged Conflict Raises Doubts About ‘Skin in the Game’ Reforms. I’d recommend reading the whole thing, but here’s how it works. Carrington owns the servicers and it owns the the riskiest tranches of the mortgage loan bonds it services. It has a conflict between servicing loans well - renegotiating bad debt, making sure payments are processed correctly, and for foreclosures that are necessary to be carried out to be done in a value maximizing way – and its own botom line. How do they harm investor value to their own benefit in practice? First they bounce around mortgages in order to protect the weakest claims to debt payments, which hurts the senior most claimants:
Fed Can't Find Single Homeowner Wrongly Foreclosed Upon - Fed Report Finds No Wrongful Foreclosures By Banks, Consumer Advocates Slam Methodology - A months-long internal investigation into abusive mortgage practices by the Federal Reserve found no wrongful foreclosures, members of the Fed's Consumer Advisory Council said Thursday. During a public meeting attended by Fed chairman Ben Bernanke, consumer advocates on the panel criticized the central bank's examiners for narrowly defining what constitutes a "wrongful foreclosure." At least one member of the panel, comprised of consumer finance experts not employed by the Fed, voiced concerns that the public would not take the Fed's findings of improper practices seriously, since the wide-ranging review did not find a single homeowner who was wrongfully foreclosed upon.Members of the panel were briefed on the report's findings on Wednesday by Fed staff during a closed-door meeting. It appears the results were not supposed to have been disclosed Thursday. The Fed's findings seem to support claims from the banking industry, which has admitted to sloppy practices but has maintained that the homeowners whose homes have been repossessed were substantially behind on their payments.
Quelle Surprise! Fed Issues “See No Evil” Report Using Bogus Methodology to Defend Servicers - - Yves Smith - We commented earlier this week on bank defenses of their foreclosure practices: I’ll spare you several paragraphs of the “but they were deadbeats and no one was hurt by robo-signing and all our foreclosures were warranted.” Well, if you normally operate as judge, jury, and executioner, and it’s too costly for borrowers to counteract predatory servicing, in your little self-referencing world, everything will look hunky-dory and challenges to your authority will be deemed to be improper and unwarranted. As we have indicated repeatedly. lawyers fighting foreclosure estimate that 50% to 70% of the cases they represent are ones where the borrower is in foreclosure as a result of bank fee pyramiding and other improper fees (note there is sample bias here; contrary to bank spin, most borrower attorneys fight foreclosures when they think the case has merit). But they just about never argue in court on those grounds; the cost of hiring an expert witness and doing the forensics on full details of the banks’ overcharges is too costly. But of course, the Fed is throwing its authority behind the banking industry spin that all foreclosures are warranted. From Shahien Nasirpour of the Huffington Post:A months-long investigation into abusive mortgage practices by the Federal Reserve found no wrongful foreclosures, members of the Fed’s Consumer Advisory Council said Thursday.
The Folks Who Run Our Economy Believe in the Easter Bunny - The folks at the Fed who run our economy apparently believe in the Easter Bunny. And Casper the Friendly Ghost. And Santa Claus. I mean, I can only conclude the folks over there are completely unhinged from reality given their claim that no people–not a single homeowner–was wrongly foreclosed. A months-long investigation into abusive mortgage practices by the Federal Reserve found no wrongful foreclosures, members of the Fed’s Consumer Advisory Council said Thursday. Jason Grodensky, who paid cash for his house yet lost it to Bank of America in “foreclosure” nevertheless. The Fed says there were no wrongful foreclosures. Christopher Marconi, who got foreclosed by Wells Fargo on a house he didn’t own and had never seen. The Fed says there were no wrongful foreclosures. Jonathan Rowles, who never missed a payment, who got foreclosed by Chase while he was away in Iraq, in violation of the Servicemembers Civil Relief Act. The Fed says there were no wrongful foreclosures.
Administration Acts on Mortgage Fraud Against Military, Yet Denies It Exists Anywhere Else - Yves Smith - We have yet another example of media cravenness. You would assume that when official positions presented in the media contradict each other, it would represent an obvious opportunity for reporting, and an intrepid young journalist would take up the task. But since the job of US news outlets is increasingly to distribute propaganda, they manage not to notice. We’ve had a stenography masquerading as reporting on the results of the recent Foreclosure Task Force “review” of servicer practices. After looking at 2800 severely delinquent loans, it found only some operational shortcomings and no unjustified foreclosures. Given that all that this cross agency effort did was to have tea and cookies with the servicers while reviewing their documents, as opposed to doing any validation of their data, this means the “exam” was a garbage in, garbage out exercise. Similarly, today the Fed made the similarly ludicrous statement that there were “no wrongful foreclosures” based on a review of a mere 500 loan files. Given that there are 14 major servicers, that means it looked at 36 files on average per servicer. Heck of a job, Brownie!
Mortgage Modification Overhaul Sought by States - State attorneys general have presented the nation’s five biggest banks with a list of demands that could drastically alter the foreclosure process and give the government sweeping authority over how mortgage servicers deal with millions of Americans in danger of losing their homes. Under the blueprint, banks would be prohibited from starting foreclosure proceedings while a borrower was actively trying to lower the interest rate or ease other terms of the home loan, a process known as a mortgage modification. Any borrower who successfully made three payments in a trial modification would be given a permanent modification. When a modification was denied, it would be automatically reviewed by an ombudsman or independent review panel. The proposed changes, which will be discussed by the attorneys general when they meet in Washington early next week, would compel the banks to treat each borrower in default individually.
Mortgage Practices Overhaul Proposed - State and federal officials are pushing to more tightly regulate the way banks and other mortgage servicers treat struggling homeowners in a bid to stem foreclosures. Current government modification programs are largely voluntary, and there are few rules governing servicers' practices. But on Thursday, the nation's largest banks, including Wells Fargo & Co., Bank of America Corp., and Citigroup3 Inc., received a detailed 27-page proposal from state attorneys general and federal agencies to force a shakeup in banks' mortgage-servicing policies. One mortgage industry executive familiar with the document described it as "almost like a wish list." The document is separate from any proposed financial penalties to settle various abuses that surfaced last fall. That settlement could include requirements for banks to write down more than $20 billion in loan balances for borrowers that are underwater or to pay more in fines. The current proposal, outlining a code of conduct, is designed to lay the foundation for more permanent changes in mortgage-servicing practices that would outlast such a settlement.
Foreclosure-Gate Settlement? What appears to be part of a Foreclosure-gate settlement has been leaked. There's a lot in this 27-page document, but here are some initial thoughts.First, let's recall that this is not a complete document. We don't know how it will interface with monetary penalties, modification quotas, etc. It also isn't clear which government actors are on board with this and therefore how much ability the banks have to push back against these terms. Are these just a preliminary offer or are these negotiated terms? That said, whatever these terms are, they look astonishingly strong to me. There are some places where they could be tightened, but they amount to a complete and desparately needed overhaul of the mortgage servicing industry. The terms here lay out a lot of explicit duties and prohibitions for servicers. Some of them already exist for some parts of the servicing industry or might be implied in contractual terms, but this document would make them all explicit. Perhaps most appropriately, it makes servicers bear the costs of their own failed business model, rather than externalizing that on homeowners. Servicers entered into servicing contracts in which they took on default management duties, but were woefully unprepared for the level of defaults that came, in part because they cut fees and costs to increase profits and failed to reserve for bad times. It's possible that servicers will shift the costs of this settlement back to MBS investors, but this is at least a start for making them internalize the costs.
27 Page Mortgage Settlement Terms Document - American Banker has posted the 27 page draft servicer settlement agreement that the state attorneys general sent to the servicers last week. Settlement Terms (27 page PDF) And from American Banker: Cheat Sheet: How the State AGs Want to Revamp Mortgage Servicing The 27-page term sheet handed to the five largest mortgage servicers last week is a detailed, dense list of requirements that, if implemented as proposed, would fundamentally change the relationship between servicers, investors and borrowers. The term sheet, obtained by American Banker and available here, is just the opening bid in an ongoing negotiating process between the servicers and various state and federal agencies attempting to punish them for significant issues uncovered in the foreclosure process. While some of the details of the term sheet have been made public already, the sheer breadth and depth of the proposed requirements were not clear until now.The article has a nice summary of the document.
The well-intentioned but doomed mortgage settlement - No wonder the proposed settlement with mortgage servicers is proving too hard to write about: it’s really hard to read. There might be a lot of Elizabeth Warren in its substance, but there’s none of her in its style. For those who can wade through it, however, it really is a code of best practices for servicers and it’s sorely needed. There’s much to love here, but it all basically comes down to the golden rule: treat your borrowers with honesty and humanity and common sense and you’ll be fine. Do servicers really need to be told that if they make more money from a loan mod than from a foreclosure, they should do the loan mod? Or that “sworn statements shall not contain information that is false”? Evidently, yes, they do. I do have my doubts about whether all of this is feasible in the real world.
Mortgage Settlement Term Sheet: Bailout as Reward for Institutionalized Fraud - Yves Smith - American Banker posted the 27 page term sheet presented by the 50 state attorneys general and Federal banking regulators to banks with major servicing operations.Whether they recognize it or not, this deal is a suicide pact for the attorneys general in states that are suffering serious economic damage as a result of the foreclosure crisis. Tom Miller, the Iowa attorney who is serving as lead negotiator for this travesty, is in a state whose unemployment was a mere 6.2% last December. In addition he is reportedly jockeying to become the first head of the Consumer Financial Protection Bureau. So the AGs who are in the firing line and have the most reason to want a tough deal or no deal have as their spokesman someone whose interests are not aligned with theirs. Moreover, Miller’s refusal to discuss even general parameters of a deal goes well beyond what is necessary. He knows that well warranted public demands that a deal be tough will complicate his job, but it also does the AGs whose citizens have been most damaged a huge disservice. Pressure on the banks from the public at large is a negotiating lever they need that Miller has chosen not to use.
Iowa AG looks to foreclosure deal within 2 months - The Iowa attorney general, who is leading the 50-state probe into mortgage foreclosure problems, said on Monday that he hopes to have a settlement with the nation's biggest banks in the next two months. U.S. regulators and a coalition of state attorneys general are negotiating with the biggest mortgage lenders, including Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. The probe is the result of problems that burst into public view last year of banks taking possibly illegal shortcuts in some foreclosure proceedings, such as using "robo-signers" to sign hundreds of unread documents a day.
State Attorneys General Sell Out Americans To The Banks - The 27-page fluff-piece is now out where we can see it…. Let’s be blunt: There’s no “there” there. The entire document is a rehash of what servicers had a legal mandate to do right up front. Accurately apply payments. Respond to inquiries. Operate in good faith. Use a NPV test for HAMP (was in the HAMP program originally.) Document the assignment chain before foreclosing. There’s exactly one substantive change, in that HAMP did not prohibit “dual-track” (that is, foreclosure while attempting modification.) Essentially every other item in this 27 pages is something that Servicers already had a legal duty to do, either as a fiduciary to the investor or just through the ordinary covenant of operating in good faith (You know, the original standards that all businesses are held to that aren’t actually racketeering outfits and gangsters? Yes, that.) You’re kidding, right? This is a NEW requirement? Thou shalt not perjure! Really! We mean it this time!
Foreclosure-Gate Settlement--More Thoughts - Some bloggers on the left (e.g. here and reposted here) are upset with the servicing standard term sheet that got leaked because they think it just prohibits things that are already illegal. This is an incorrect reading of the term sheet. Let me give three examples.
- 1. Prohibition on false affidavits and sworn statements. - Filing a false affidavit or sworn statement with a court is likely already illegal in every jurisdiction. But what some bloggers have missed is that the definition of "affidavit or sworn statement" in the term sheet is broader than what the law already covers.
- 2. HAMP requirements. The term sheet appears to repeat some existing HAMP requirements. What bloggers have missed is that the CFPB and AGs currently have no authority to enforce HAMP violations. The inclusion of these terms makes HAMP violations a violation of the settlement with the AGs/CFPB, which means that the AGs and CFPB can enforce these violations.
- 3. UDAP and Good Faith/Fair Dealing Requirements - I'm not entirely sure of the purchase of deeming violations of the agreement unfair and deceptive acts and practices (UDAP). It might mean that the penalty for violation would track UDAP penalities for each state or CFPB. Or it might, just might, give homeowners grounds for a suit.
Banks Beef About Fraudclosure Settlement As Stocks Rise on the News - Yves Smith - I’ve pointed out how effective a non-negotiable posture can be, at least until the other side pulls out its ammo or threatens to walk from the deal. Most people in negotiations go on the assumption that the other side is reasonable or at least sincere (even if sincerely deluded) and will offer concessions on the assumption the other side will reciprocate. The poster child of the usual outcome of offering concessions to a party who is non-negotiable is can be summarized in one word, as in “appeasement” circa 1939. And the ridiculous part is that the banks are being allowed to cop a ‘tude when the other side holds all the cards. Let’s get this straight: this “settlement” should not be a negotiation. Virtually all the items in the 27 page outline of mortgage settlement terms that was leaked yesterday simply restates existing law or existing contractual obligations. If the officialdom wants to rely on mechanisms beyond the courts (since some judges are more pro-bank than others, which can produce the dreaded disease of “uncertainty”), the same results could be achieve by rulemaking without regulators or state attorneys general providing any releases from legal liability to the banks.
Foreclosure Fraud Settlement: The Empire Strikes Back (or Why Are Republicans So Obsessed with Backdoor Cramdown?) It's not surprising to see the banks and their supporters on the Hill pushing back on the proposed Foreclosure Fraud settlement term sheet. (See here and here and here). There seem to be three major lines coming out of the banks:(1) It's "backdoor cramdown," and the agencies shouldn't be pursuing a policy rejected by Congress. Thus, House Republicans wrote to Treasury Secretary Geithner that "The settlement agreement not only legislates new standards and practices for the servicing industry, it also resuscitates programs and policies [namely bankruptcy cramdown] that have not worked or that Congress has explicitly rejected." (2) CFPB has no business being involved given that it doesn't have a director. This has to be read between the lines as a thinly veiled Elizabeth Warren witch hunt. At least one commentator was upfront about that in the American Banker. (3) The settlement could negatively affect the safety and soundness of the banks. Let me address all of these points. There's a lot of willful confusion about this term sheet and what it is.
Tom Adams: Fraudclosure Settlement Largely Repeats 2003 FTC Servicing Settlement - Back in 2003, Fairbanks Capital billed itself as the largest servicer of subprime mortgages. It was also a stand alone servicer, in that it was not in the business of lending. In a high profile case within the mortgage industry, the Federal Trade Commission brought an action against Fairbanks for violating the FTC Act, the Fair Debt Collection Practices Act, the Fair Credit Reporting Act, and the Real Estate Settlement Procedures Act (RESPA) . Fairbanks was accused of a host of improper servicing activities that will sound remarkably familiar to anyone following the foreclosure and servicing issues in today’s mortgage markets.The FTC intended the settlement with Fairbanks to provide guidance for the mortgage servicing industry for the boundaries of acceptable business practices for the treatment of borrowers, deadbeat or otherwise. Among the transgressions, Fairbanks was alleged to have:
-failed to post payments in a timely manner, resulting in additional late fees or interest,
-charging for forced place insurance,
-assessed improper fees, such as for attorneys, service, appraisals, FedEx,
-misrepresented the amounts owed by borrowers,
-submitted misleading or false information to credit reporting agencies,
-failed to report disputed charges to credit reporting agencies,
-failed to respond to borrowers written requests for information or investigation into charges, and
-failed to make timely payments of escrow funds for insurance and taxes.
Protesters rally in D.C. for harsher sanctions on mortgage servicers - The state attorneys general investigating abuses in the mortgage servicing industry said Monday that as they hammer out details of a massive settlement with banks, their main objective remains fixing a system that has subjected consumers to confusion and financial strife. As attorneys general from across the country gathered at the Fairmont Hotel, housing advocates rallied at several sites across Washington, beginning with a stop at Bank of America on 15th Street NW, to press for tough sanctions against servicers. National People's Action, a network of community groups, said it wants to heighten awareness of the talks taking place. Outside the Fairmont, Miller's chief policy deputy, Tam Ormiston, joined the crowd for a quick prayer, in which the Rev. Tony Pierce of Illinois urged the chief law officers to "stiffen their backs" and "do justice by the American people."
America Fights Back Against Foreclosure - A Dylan Ratigan Show panel explains how homeowners are demanding big banks pay for their role in the mortgage meltdown. with transcript
By the Numbers: A Revealing Look at the Mortgage Mod Meltdown - For the past year, we've been digging into the administration's fumbling efforts . We've crunched a lot of numbers along the way, and now we're sharing what we found – including loads of previously unreported data.Using new Treasury Department figures, previously unreleased documents obtained through Freedom of Information Act requests, and new analyses of state and industry data, we have assembled the most detailed look yet at how the the mortgage industry  and the government's main effort, the Home Affordable Modification Program (HAMP), have failed homeowners. It provides crucial context to the ongoing government investigation into mortgage servicing practices, which might lead to reforms  of how banks and servicers handle homeowner requests for modifications.Here's what we learned:
- Only a fraction of struggling homeowners are getting help.… 
- Mortgage servicers are only reaching a small fraction of struggling homeowners.… 
- The largest servicers, especially Bank of America, have left most struggling homeowners in limbo without either modifying or foreclosing. 
- HAMP itself hasn't made much difference: It hasn't led to an increase in modifications.… 
- Just over one in five homeowners who applied for a HAMP mod have received a permanent modification… 
- And in one quarter of rejections, mortgage servicers - notorious for losing documents - have cited missing documents as the reason. 
- Here are your overall chances of getting a mod with each of the top servicers. 
- Treasury claims servicers are improving, but its own data show otherwise. 
- When servicers offer a mod, it's generally more affordable than mods used to be.… 
- But instead of mods, servicers have recently been offering more repayment plans, which actually increase struggling homeowners' payments. 
- In the end, most government funds set aside to help homeowners are still unused.
Foreclosures = Affordability Problem? - Critics of HAMP and other efforts to increase mortgage workouts often assert that there are too many homeowners in mortgages they simply cannot afford; due to unemployment and other causes, there is just not enough income to work with. The data realeased by Treasury on more than one million applicants for HAMP assistance provide some insight into the question: how many foreclosures could actually be prevented? As a starting point, we can look at the incomes reported by HAMP applicants, the amount of their mortgage debt, and the value of their homes. The median income of applicants is around $4,000 monthly, i.e. not much below the national median annual income of $50,000. Only 11% of applicants have incomes below $2,000 per month, in poverty-level range. The median mortgage balance owed is between $200,000 and $250,000, also within national norms. The median property value is between $150,00 0 and $200,000. Comparing current home values to income, the median ratio is about 4:1. Thus a typical HAMP applicant might have a $50,000 income, and owe about $250,000 on a house now worth $200,000. In fact, 86% of HAMP applicants had a home value-to-income ratio of 6:1 or less. Putting aside excessive unsecured debts for a moment, this hardly sounds like an insoluble problem.
The (New) Push for Mortgage Modifications - While the Republican House has passed two bills defunding HAMP and other federal modification efforts, the Administration is reportedly working to pursue modification efforts through other channels. According to reports from The Wall Street Journal, state attorneys generals and federal agencies, led by Elizabeth Warren, are working to revamp mortgage servicing. Part of their agreement would include the creation of a new fund to finance principal reductions. Some news outlets are reporting that this fund could total ~$20 billion. There are good reasons to be skeptical of this potential deal
Bank Chief Rejects Idea Of Reducing Home Loans - Showing resistance for the first time against government pressure to write off tens of billions worth of mortgage debt, Bank of America1 executives said on Tuesday that the idea was unworkable and warned that it would be unfair to borrowers who had managed to stay current on their loans. “There’s a core problem that if you start to help certain people and don’t help other people, it’s going to be very hard to explain the difference,” said Brian T. Moynihan2, the chief executive of Bank of America. “Our duty is to have a fair modification process.” All 50 state attorneys general, as well as a host of federal agencies, are pushing for a settlement over investigations into foreclosure abuses by major mortgage servicers that could cost the industry $20 billion or more. Much of that money would be earmarked to reduce principal owed by homeowners facing foreclosure.
BoA Nonesense -The irony of the CEO of Bank of America kvetching that it would be unfair to responsible homeowners for the bank to give principal reductions to homeowners in default is really too much. Does he recall that he's the CEO of a bank that is only still in business by grace of a federal bailout?But where is Moynihan getting that he'll be required to help only deadbeats, when he feels morally bound to share the love with current borrowers? I sure didn't see anything in the AG/CFPB term sheet that requires that. Instead, it leaves the question of who will live and who will die up to the banks, precisely so they can't bellyache that federal regulation is restricting their ability to do loan mods, as they have about HAMP. Here's the relevant language from the term sheet. As far as I can see, the basic principle for mods is NPV maximization (i.e., investor protection). Default status surely plays a role in that calculus, but it's the servicer's decision how to account for that:
BofA doesn’t believe in treating borrowers fairly -- Bank of America is setting up a bad bank, which will be run by Terry Laughlin. Roughly half of its 14 million mortgages are going to be carved off and put into the bad bank, in an attempt, according to FBR analyst Paul Miller, “to get investors focus on the good” and as “a way to talk about good things and ignore the bad.” The presentation which Laughlin handed out talks about how his new group will work on loan modifications for delinquent customers: “as borrowers default,” he said, “we’ll evaluate them for a loan modification.” Essentially BofA is doing two things here. One is to try to sweep its bad loans under the carpet by creating the new Legacy Asset Servicing unit; the other is to step up its pushback against the proposed mortgage-servicing settlement, which quite explicitly does include loan modifications for borrowers who aren’t in default. Check out part II.K.8: Servicer’s employees shall not instruct, advise or recommend that borrowers go into default in order to qualify for loss mitigation relief. This is something BofA hates — because it opens the door to underwater borrowers who are making timely payments being able to get a loan modification and thereby reduce the value of the loan. And BofA CEO Brian Moynihan is on the warpath against it, saying that such a system would be unfair to borrowers who don’t get their loans modified.
Proposed Servicer Settlement Met With Resistance - As predicted by many reports following the recent settlement proposal from the state attorneys general and several federal agencies, servicers are not reacting with enthusiasm to the terms offered. One of the biggest conflicts in coming to an agreement is the proposed punishments servicers will have to face as consequences for their role in last year’s robo-signing mess. Though nothing has been confirmed, hefty fines and/or principal reductions are projected to be in development. The reaction from banks and other industry participants has been less than receptive. In a call with investors on Tuesday, Bank of America CEO Brian Moynihan said the bank’s goal is to have a modification that is fair for all customers. Reducing principal balances on defaulted loans or for bankruptcy cases would not be fair to underwater homeowners who have struggled but remained current, he said. Echoing his sentiment, Senator Richard Shelby of Alabama claimed the settlement is nothing more than bullying, and doesn’t reflect a punishment appropriate for the grievances committed by servicers.
Republicans Parrot Big Banks: Foreclosure Fraud Settlement Is Just A ‘Shakedown’ - In the wake of the “robo-signing” scandal — which involved the nation’s biggest banks approving foreclosures without ensuring due process for homeowners or even having the proper documentation — 50 state attorneys general, along with federal bank regulators and the Department of Justice, developed a settlement under which the banks would use tens of billions of dollars to modify mortgages, instead of having to litigate. The banks, predictably, are pushing back on the notion that they should have to pay anything for their mortgage malfeasance.Bank of America CEO Brian Moynihan publicly whined that the settlement might involve his bank helping underwater homeowners, while other bank executives told Politico (anonymously, of course) that the settlement amounted to a “naked shakedown by regulators.” “How can [the Obama administration] be business-friendly and sign-off on something like this?” an executive asked. House Majority Leader Eric Cantor (R-VA) this week criticized “fraudulent mortgage actors,” but instead of following his lead, other Republicans are parroting the banks’ rhetoric and standing in opposition to the settlement:
States Test Mortgage Principal Write-Downs - Financial institutions have grudgingly modified mortgages for thousands of distressed homeowners by lowering interest rates, spreading principal repayments over more months, even forgiving some overdue interest. They've tried almost anything—except lowering the total amount owed. Just 4 percent of loan modifications involved a principal reduction in the third quarter of 2010, according to the U.S. Office of the Comptroller of the Currency. Mark Zandi, chief economist at Moody's Analytics (MCO), says that negative equity, owing more than a home's value, is the biggest long-term obstacle to a rebound. Principal write-downs "would be very helpful in stemming the ongoing foreclosure crisis," he says. Now California, Nevada, and Arizona—states with some of the sharpest declines in home values—are experimenting with principal reductions, drawing from the U.S. Treasury's Hardest Hit Fund, which helps states with particularly bad unemployment and housing problems. Treasury is splitting the cost with banks and investor groups that own the loans. The program will trim balances for fewer than 40,000 homeowners but could yield data to help banks, mortgage servicers, and government agencies evaluate the effectiveness of principal reductions.
Research: "The flawed logic of principal reduction" - From the Atlanta Fed: The seductive but flawed logic of principal reduction. The researchers point out that principal reduction seems to make sense if a borrower is going to default and the lender foreclose, but that it is hard to predict exactly who is going to default (and not cure). If lenders aggressively offered principal reductions to underwater homeowners who are delinquent, then borrowers who are current would have an incentive to stop paying their mortgages.I noted this a couple of years ago:If it became widely known that lenders routinely reduce the principal balance for delinquent borrowers with negative equity, this would be an incentive for a large number of additional homeowners to stop paying their mortgages.
Securitization Chain-of-Title: the US Bank v. Congress ruling - Over on Housing Wire, Paul Jackson is crowing that chain-of-title issues in mortgage securitization are overblown because an Alabama state trial court rejected such arguments in a case ironically captioned U.S. Bank v. Congress. But let’s actually consider whether the opinion matters, what the court actually did and did not say, and whether it was right. Jackson and Yves Smith at Naked Capitalism have a running fued over the seriousness of chain-of-title problems, and I think that explains why Jackson is so worked up over this decision. My own take is that it is much ado about nothing. Before anyone gets too excited one way or the other about this case, let’s remember that this is a ruling by one judge in an Alabama state trial court decision. This court ruling doesn’t have precedential value anywhere, including in Alabama, and its persuasive value is very low too, both on account of it being an Alabama state trial court and because of the quality of its analysis. Put differently, this ain’t an Ibanez type ruling, where a leading state supreme court issues a very thoughtful unanimous opinion
Adam Levitin: Alabama Mortgage Ruling “doesn’t have precedential value anywhere“ - Yves Smith - Georgetown law professor and securitization expert Adam Levitin has weighed in on the ruling in an Alabama case, U.S. Bank v. Congress, in which a state court judge ruled against what we have called the New York trust theory. For readers new to this terrain, the short form is that the parties to mortgage securitizations are governed by a so-called pooling and servicing agreement. The PSA, among many other things, described how the notes (the borrower IOU) were to be conveyed to a trust that would hold them for the benefit of investors. The trust was almost without exception a New York trust. New York was chosen because its trust law is both very well settled and very rigid. New York trusts have no discretion in how they operate. Any measure undertaken that is inconsistent with explicit instructions is deemed to be a “void act”. Now it appears that the notes were not conveyed to the trusts as stipulated in the PSAs on a widespread basis. (You can read the details here). Because the trusts are New York trusts, that means you have a really big mess. You can’t convey the notes in now, that’s not permitted because the trust had specific dates for accepting the assets that have long passed. The party that has the note (someone earlier in the securitization chain) can foreclose, but no one wants to do that. It isn’t just that this would be an admission that that parties to the agreement didn’t fulfill their contractual obligations; there is no way to get the money from the party that foreclosed to the trust and then to the investors.
Paul Jackson Claims It’s All About the Money - Housing Wire’s Paul Jackson has another post up continuing his row with Yves over securitization chain of title issues. It presents itself as a rebuttal of her previous post, about an Alabama trial court decision that Jackson deems to be a significant defeat, but which Yves and more recently Adam Levitin have argued is both insignificant and not very relevant. Normally I’d leave the two of them to slug it out. However, Jackson’s weekend submission, in which he says he is “going to address her latest talking points” piqued my interest. Rather than addressing any of the substance of the post itself, he mounts a bizarre attack on the motives of the attorneys behind the Alabama case, based on a pretty peculiar interpretation of one of Yves’ comments to the post. The comment:Are you kidding? Each side spent over $250K on this case. Trials where you are making real legal arguments, as opposed to presenting papers for a judge to approve, are costly. And Alabama billing rates are a lot lower than in other states. For borrower’s counsel, since the borrower has no money, the “spent” is what their time was worth plus hard dollar expenses (experts witnesses and so on). They are out the real out of pocket real costs. Sooo…bank attorneys run up a tab fighting a foreclosure in a pretty obscure courthouse, that results in a 300% loss to investors, when all the borrower’s attorney wanted was the house back and a loan modification.
MERS? It May Have Swallowed Your Loan - FOR more than a decade, the American real estate market resembled an overstuffed novel, which is to say, it was an engrossing piece of fiction. Mortgage brokers hip deep in profits handed out no-doc mortgages to people with fictional incomes. Wall Street shopped bundles of those loans to investors, no matter how unappetizing the details. And federal regulators gave sleepy nods. That world largely collapsed under the weight of its improbabilities in 2008. But a piece of that world survives on Library Street in Reston, Va., where an obscure business, the MERS1 Corporation, claims to hold title to roughly half of all the home mortgages in the nation — an astonishing 60 million loans. Never heard of MERS? That’s fine with the mortgage banking industry—as MERS is starting to overheat and sputter. If its many detractors are correct, this private corporation, with a full-time staff of fewer than 50 employees, could turn out to be a very public problem for the mortgage industry.
The Unanticipated Consequences of MERS - This column focuses on MERS as an example of the first and third types of counter narrative. It will be the first in a series of columns about MERS. A conservative, but not theoclassical economist, Hernando de Soto, is famous for his work on private property. . De Soto's primary point is that private ownership of real property allows even poorer people to mobilize their limited wealth by pledging the real estate as security for loans. The individuals can use those loans as a source of capital to become entrepreneurs. De Soto uses the United States as an exemplar of his thesis, explaining that the colonies that become the U.S. began a system of public recordation of land titles and a system of surveying land. The developing U.S. made these systems a major priority. De Soto argues that these public sector programs were spectacularly successful and helped produce America's economic success by encouraging entrepreneurial activity.
Moody’s on MERS in 1999: “No Material Impact on the Ability to Foreclose and Sell Foreclosed Homes” -- Yves Smith - The folks at ForeclosureFraud were kind enough to pass along an archival document that I thought readers would enjoy. This Moody’s report illustrates what the prospect of higher fees for securitization-related ratings did to rating agencies’ quality of analysis. Moody’s MERS Report 1999 The arrogance of the MERS position (the Moody’s document is basically MERS dictation) is evident:The recording system has been set up to provide notice of security interests, but not necessarily the identity of the secured parties…..There will probably be an adjustment period during which the courts and the foreclosure attorneys will need to get familiar with MERS and learn how to deal with issues concerning foreclosure by a nominee that the foreclosure statues did not contemplate.This makes for entertaining reading, in a sick sort of way. You’ll see again and again the notion that the law and the courts should give way to MERS. That’s consistent with what Gretchen Morgenson reported over the weekend, namely, that no review was made of the legality of MERS in any of the 50 states. The assumption was that MERS could simply be imposed.
Many Foreclosures in Oregon Halted Due to Decisions Against MERS - Yves Smith - We pointed last week to an analysis by Lynn Syzmoniak that showed that foreclosures across a number of different servicers were way down in January 2011 versus the same period in January 2010. This was admittedly a tally in only two Florida counties, but she indicated that a quick look at other counties in Florida showed a similar pattern. So the question then becomes: is this a Florida only development, due perhaps in part the fact that all the big foreclosure mills in the state are under investigation by the state AG and are imploding (as in losing clients and shedding staff)? Or is this a broader trend due to the robo signing scandal leading judges being more receptive to arguments about chain of title and validity of transfers? Before, the assumption was “bank right, borrower trying to abuse the law to stay in house”. Now more judges, seeing that banks have run roughshod over legal requirements, are prepared to give borrower arguments a hearing. That forces banks to up their game, which in turn may be the real driver for this apparent slowdown in foreclosure actions. We are seeing analogous developments, but the drivers appear to be state specific, as judges give adverse rulings on common practices in foreclosure land. Reader wc4d pointed to a report in the Portland Oregonian, that lenders are withdrawing cases because five court decisions have found that lenders that used MERS violated state recording laws.
Hundreds of Oregon foreclosure sales stopped after judges' rulings - Sales of hundreds of foreclosed homes in Oregon have been halted or withdrawn in recent weeks after federal judges repeatedly questioned their legality, according to a number of real estate attorneys in the state. Lenders have withdrawn more than 300 foreclosure sales since February in Deschutes County alone, one of the Oregon area's hardest hit by the housing collapse. About 130 of those notices were filed in the past week, attorneys say. Dozens of foreclosure listings by ReconTrust Co., the foreclosure arm of Bank of America Corp., have disappeared from its website, attorneys say. A BofA spokeswoman said the bank was canceling certain sales to ensure that those homeowners had fully explored options to avoid foreclosure. And, in a potential deal breaker for other foreclosure cases, one of the nation's largest title-insurance companies is warning lenders that it might not guarantee title in some cases.
House approves foreclosure fraud measure - Fudging foreclosure documents is a step closer to being fraud in Georgia, after the state House of Representatives approved a foreclosure fraud bill on Wednesday. House Bill 237 is a key part of the legislative agenda of new Attorney General Sam Olens. It would criminalize falsifying documents, which has been done to speed up the foreclosure process in some instances, and also would give Olens and district attorneys more power to investigate claims of fraud in those matters.The bill passed 168-1 and now heads to the state Senate for review and a possible vote.“It is very straightforward,” said Rich Golick, chair of the House Judiciary Non-Civil Committee and the bill’s sponsor.
Foreclosure King David Stern Shuttering His Law Firm - By the end of the month, the Law Offices of David J. Stern, the once-mighty foreclosure mill in southeastern Florida, will be no more. According to a terse, two-sentence filing with the Securities and Exchange Commission, the firm—the subject of a Mother Jones investigation published last August—"will be ceasing the practice of law with respect to all pending foreclosure matters in the State of Florida" by March 31. The reversal of fortune for David Stern and his law firm has been swift and breathtaking. A little over a year ago, the Stern's operation reigned king in the foreclosure business. Its clients included Wall Street powerhouses such as JPMorgan Chase, Bank of America, and Citgroup; the firm was also cozy with government housing corporations Fannie Mae and Freddie Mac, which hand-picked Stern's firm operation to process foreclosure cases for them. In 2009, the firm handled 70,000 foreclosure cases, and employed more than 1,000 people—paralegals, attorneys, paper-pushers, secretaries, and more. From 2006 to 2008, revenue generated by the non-legal, foreclosure-related parts of Stern's operations spiked from $40 million to $200 million. But the big payoff didn't come until January 2010, when Stern spun off those lucrative non-legal operations into a separate, publicly-traded company, netting him $58.5 million.
Drop in Foreclosure Filings Reveals Operational Mess at Servicers - Yves Smith - The level of complaints about servicer screw ups in the HAMP program and more recent horror stories from borrowers not seeking loan modifications confirms something we’ve noted on this blog: that servicers fee structures aren’t set up for them to handle the workload associated with high volumes of foreclosures. Accordingly they devised processes like robosigning, which are legally impermissible, as a way to contain costs. Many of the abuses still have not gotten the attention they deserve. For instance, the most widely used foreclosure platform for the industry, that of Lender Processing Services, does not have a field in its software to allow a foreclosure of a person in a Chapter 13 bankruptcy to be processed differently. This results in impermissible charges. For instance, when a Chapter 13 debtor is in a bankruptcy plan and sending his payments to the Chapter 13 trustee, who in turn disburses them to various creditors, there is no such thing as a late payment. But if the old borrower due date was the 10th of the month and the trustee sends checks on the 15th, the bank will record a late fee. Then when the borrower emerges from Chapter 13 which means he is current on all the debt under the bankruptcy plans, the bank will send him a bill for what is typically several thousand dollars of fees. The borrower who is still under a lot of financial stress (Ch. 13 plans by design soak up all of a borrower’s income) then has to spend money he does not have to go to court to get the charges removed. We also pointed in previous posts to signs that foreclosure filings had fallen markedly versus year prior levels. From Bloomberg:
Reverse Mortgage Reversal Puts Elders Into Foreclosure - I'm fairly skeptical of those reverse mortgages that you see advertised on television (or, at least, you do if you watch a lot of daytime news, the way I do.) The fees are high, and while I understand the appeal of staying in your own home, financially, it looks to me as if you're almost always better off selling the house and using the cash to downsize to somewhere more affordable, than you are betting the bank that you're going to live a long time. Now it looks as if there's another reason to be wary: if you die, your spouse could end up out on the street. Lenders sometimes encourage only the elder member of a couple to put his or her name on the mortgage because then the payout is greater. Mr. Bennett said he did not realize that his new mortgage had taken his name off the title of the home, which the couple had owned together since 1981. Mrs. Bennett, who was a decade senior to her husband, died shortly after the new mortgage went into effect. The payments immediately stopped and the mortgage became due and payable. The lender began foreclosure proceedings and scheduled a sale of the property last month.
CoreLogic: 11.1 Million U.S. Properties with Negative Equity in Q4 - CoreLogic released the Q4 2010 negative equity report today. CoreLogic ... today released negative equity data showing that 11.1 million, or 23.1 percent, of all residential properties with a mortgage were in negative equity at the end of the fourth quarter of 2010, up from 10.8 million, or 22.5 percent, in the third quarter. The small increase reflects the price declines that occurred during the fourth quarter and led to lower values. An additional 2.4 million borrowers had less than five percent equity, referred to as near-negative equity, in the fourth quarter. Together, negative equity and near-negative equity mortgages accounted for 27.9 percent of all residential properties with a mortgage nationwide....The consensus is that home prices will fall another 5 percent to 10 percent in 2011. If so, the most that negative equity will rise is another 10 percentage points, all else equal. This graph shows the distribution of negative equity (and near negative equity). The more negative equity, the more at risk the homeowner is to losing their home. About 10% of homeowners with mortgages have more than 25% negative equity. The second graph from CoreLogic shows the aggregate dollar volume by percent of negative equity. Of the $751 billion in negative equity in Q4, over $450 billion of the aggregate negative equity dollars are for borrowers who are upside down by more than 50%. Just under $200 billion more is for borrowers who have 25% to 50% negative equity.
New CoreLogic Data Shows 23 Percent of Borrowers Underwater with $750 Billion Dollars of Negative Equity - Negative equity, often referred to as “underwater” or “upside down,” means that borrowers owe more on their mortgages than their homes are worth. Negative equity can occur because of a decline in value, an increase in mortgage debt or a combination of both. Data Highlights:
- Nevada had the highest negative equity percentage with 65 percent of all of its mortgaged properties underwater, followed by Arizona (51 percent), Florida (47 percent), Michigan (36 percent) and California (32 percent).
- At 118 percent, Nevada had the highest average loan-to-value (LTV) ratios for properties with a mortgage, followed by Arizona (95 percent), Florida (91 percent), Michigan (84 percent), and Georgia (81 percent). New York had the lowest LTV at 50 percent, followed by Hawaii (54 percent), District of Columbia (58 percent), Connecticut (60 percent), and North Dakota (60 percent).
- The distribution of LTV varies greatly by state. For example, California has a higher share of borrowers with 60 percent or less LTV compared to Texas even though California has a negative equity share that is 3 times higher than Texas. Florida and Michigan have fairly similar concentrations of low LTV loans, but above 70 percent LTV the profiles of the states begin to diverge with Florida significantly worse than Michigan.
The Great Real Estate Recalculation - We will need to rethink where bookstores should go: not always in the higher-rent suburban locations, where Borders outlets were placed, but rather in out of the way fringes. Book lovers will have to drive for longer periods of time to do their browsing, or use Amazon. Buildings should become taller, more densely packed in, and there is a chance of vertical farming. Best Buy stores are too large. The NoVa landscape is already starting to be littered with empty big boxes. What will be put in them? How many current "stores" should evolve into "petting zoos" designed to complement the company's web sales operations?
Altos Research shows February home prices down 2% - Home prices fell another 2% in February with declines in all 27 markets tracked by Altos Research. The company said prices are slowly improving and housing inventory is up 3.75% nationwide as the market moves into a much-anticipated spring selling season. The inventory of homes for sale declined sharply over through the holiday season, Altos said. Prices were down significantly in San Francisco and Washington in February while the listing inventory in the two cities increased, likely indicating sellers are bringing properties to market ahead of an expected uptick in buyer activity, according to Altos. Altos said its 10-city composite index decreased just more than 2% last month to nearly $433,600 and is now down 3.4% over the past three months. On Monday, Freddie Mac said fourth-quarter home prices fell 4.3% from a year earlier as foreclosures and slowing sales buoyed inventory levels. In early January, Clear Capital said home prices ended a turbulent 2010 down 4.1% from the year before. The analytics firm expects another decline of 3.6% in 2011.
CoreLogic: House Prices declined 2.5% in January, Prices at New Post-bubble low - Notes: CoreLogic reports the year-over-year change. The headline for this post is for the change from December to January 2011. The CoreLogic HPI is a three month weighted average of November, December and January and is not seasonally adjusted (NSA). From CoreLogic: CoreLogic® Home Price Index Shows Year-Over-Year Decline for Sixth Straight Month CoreLogic ... January Home Price Index (HPI) which shows that home prices in the U.S. declined for the sixth month in a row. According to the CoreLogic HPI, national home prices, including distressed sales, declined by 5.7 percent in January 2011 compared to January 2010 after declining by 4.7 percent in December 2010 compared to December 2009. Excluding distressed sales, year-over-year prices declined by 1.6 percent in January 2011 compared to January 2010 and by 3.2 percent in December 2010 compared to December 2009. Distressed sales include short sales and real estate owned (REO) transactions. This graph shows the national CoreLogic HPI data since 1976. January 2000 = 100. The index is down 5.7% over the last year, and off 32.8% from the peak. The index is now 1.6% below the previous post-bubble low set in March 2009, and I expect to see further new post-bubble lows for this index over the next few months.
California Realtors: Only three out of five short sale transactions close - The previous post was about the problems with principal reductions. One effective way to reduce principal is a short sale ... but it is a very difficult process.The president of the California Association of Realtors, Beth Peerce, sent out an "open letter" tonight. Here is an excerpt on short sales: Short sales can play an important role in our state’s economic recovery by accelerating the pace of home sales and reducing the inventory of bank-owned homes on the market. There are other benefits as well. ... Unfortunately, many homeowners are unable to successfully negotiate a short sale. According to a recent survey of 2,150 California REALTORS® who have assisted clients with a short sale, only three out of five transactions closed – even when there was an interested and qualified buyer.
Distressed House Sales using Sacramento data - This graph shows the percent of REO, short sales and conventional sales. There is a seasonal pattern for conventional sales (strong in the spring and summer), and distressed sales happen all year - so the percentage of distressed sales increases every winter. The tax credits might have also boosted conventional sales in 2009 and early 2010. In February 2011, 71.2% of all resales (single family homes and condos) were distressed sales. This is the 2nd highest level of distressed sales since Sacramento started breaking out short sales - last month was the highest. And this is the highest level of REO since July 2009. Also one-third of all homes were sold for cash, up from 31.3% last month. A high level of distressed sales suggests falling prices, and this data from Sacramento suggests further price declines in February. The CoreLogic House Price index hit a new post-bubble low in January, and my guess is the Case-Shiller index will fall to a post-bubble low when the January data is released on March 29th.
Five Years of Housing Supply and 5 or 6 Trillion Dollars of Additional Pain - In a Bloomberg Interview on Housing, Michael Feder, chief executive officer of Radar Logic Inc. says there may be as much as 5 years' worth of housing supply. Feder, speaking with Matt Miller and Carol Massar on Bloomberg Television's "Street Smart," also discusses the Obama administration's efforts to prevent foreclosures and plans to overhaul Fannie Mae and Freddie Mac "We are terribly concerned with what is ultimately the pain hast to be taken. The number could approach aggregate mortgages 5 or 6 trillion dollars. The question is how much of that is overhang and how much of it has to be written off.""NAR says based on inventory and absorption rates we have little over 8 months supply. The reality which you add up all the houses for sale, houses vacant not yet on the market, houses underwater, seriously delinquent, in foreclosure, almost in foreclosure, the number is closer to 60 months, 5 years""Who is going to absorb the foreclosed homes?
Nameless, formless crisis enveloping nation's home price indices - Fears of a double dip in housing are giving away to a realization that the nation's mortgage markets are facing a much colder reality — something that will not so easily be named, but is nonetheless hanging around for a very long time. Both Standard & Poor's and Radar Logic Research released updates Monday on the prices sellers are asking for residential properties. Neither is positive. 'No matter what you call it, a 'double dip' or the continuation of a long process of deterioration, the current trend in home prices is evidence that housing markets are continuing to languish,' said Quinn Eddins, director of research at Radar Logic. 'We expect the negative trend to continue under a severe supply overhang that includes a large and growing 'shadow inventory' of homes in default or foreclosure,'
How cheap houses spell bad news - Housing is "exceptionally undervalued" by this measure, Dales writes. He says houses are trading at a 21% discount to their average price as a multiple of income, going by the S&P Case-Shiller national composite index. Cheap houses and low interest rates seem to point toward a housing renaissance. A buyer who takes home the median per capita income can acquire the median-priced house while spending just 13% of disposable income on monthly housing bills, Capital Economics estimates. That's another low3. Yet low monthly payments alone won't be enough to keep house prices from spiraling downward again over the next year or two. The issue isn't what houses fetch now, it's what they might be worth in the near future – and how many people might be able to foot that bill. Both of those numbers look to be headed sharply lower.
Housing Prices as a Roller Coaster - Here is the Case-Schiller Home Price Index depicted as a roller-coaster.�The data is inflation-adjusted and runs from 1890 to 2010. It's a redo of the original one that was developed in 2007. (HT to ChartPorn.)
What foreclosure problem? - IN THIS morning's edition of his "Wonkbook" newsletter, Ezra Klein directed readers to news pieces about the developing proposal for a foreclosure settlement with America's big banks. Mr Klein added: For all that the economy is improving, housing remains a huge drag, with legitimate estimates suggesting we've still got as many as 11 million foreclosures in the pipeline. "The number one reason for nervousness about the economy in the next six to nine months is the foreclosure crisis," Moody's economist Mark Zandi told me last week. That strikes me as way off the mark. Austerity? Sure. Monetary tightening? No question. European crisis? Oil prices? Real issues. But housing? No, not really. That isn't to say that things in housing markets are lovely. But here's why housing isn't the threat Mark Zandi suggests it is: none of the above comes as any surprise. The residential investment contribution to GDP has been awful since the beginning of 2006. It simply can't get much worse.
Q4 Flow of Funds: Household Real Estate assets off $6.3 trillion from peak - The Federal Reserve released the Q4 2010 Flow of Funds report this morning: Flow of Funds. According to the Fed, household net worth is now off $8.8 Trillion from the peak in 2007, but up $8.1 trillion from the trough in Q1 2009.: Household net worked peaked at $65.7 trillion in Q2 2007. Net worth fell to $48.7 trillion in Q1 2009 (a loss of almost $17 trillion), and net worth was at $56.8 trillion in Q4 2010 (up $8.1 trillion from the trough). The Fed estimated that the value of household real estate fell $260 billion to $16.37 trillion in Q4 2010. The value of household real estate has fallen $6.3 trillion from the peak - and is still falling in 2011. This is the Households and Nonprofit net worth as a percent of GDP. This includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc) net of liabilities (mostly mortgages). Note that this does NOT include public debt obligations. This graph shows homeowner percent equity since 1952. Household percent equity (as measured by the Fed) collapsed when house prices fell sharply in 2007 and 2008. The third graph shows household real estate assets and mortgage debt as a percent of GDP.
Q4 2010 Flow of Funds: Household leverage down, wealth effect dead, and equities surge - Rebecca Wilder - The Federal Reserve released the Q4 2010 Flow of Funds Accounts for the US. On the household balance sheet, net worth (total assets minus total liabilities) was estimated at $56.8 trillion, which is up $2.1 trillion over the quarter. Notably, household net worth has increased $6.4 trillion since the recession's end (Q2 2009). Moreover, personal disposable income increased another $918 billion over the quarter, which dropped household leverage (total liabilities/disposable income) 1.1% to 116%. Personal saving as a percentage of disposable income rose markedly in Q4 2010 to 10.9% (based on the BEA's measurement of saving using flow of funds data - see Table F.10, lines 49-52). The chart above illustrates the the wealth effect - the wealth effect is the propensity to consume (save) as wealth increases/decreases. In the Flow of Funds data, this is best approximated by the ratio of net worth (wealth) to disposable income. In Q4 2010, wealth rose 0.15 times disposable income to 4.9, while the saving rate surged 6 pps to 10.9%.
A Note On Household Balance Sheets - Krugman - Calculated Risk has gone through the latest Flow of Funds report, which shows that households have made up about half of the loss in net worth they suffered in the crisis. We’re almost home! Or not. The central insight of deleveraging models is that the distribution of wealth matters — specifically, that what is weighing down the economy in the aftermath of a Minsky moment is the debt of highly-indebted agents, which is not offset by the assets of creditors, because the debtors are forced to spend less while the creditors aren’t forced to spend more.So, whose net worth has improved? Most of the gain reflects the recovery of the stock market — and highly indebted households are not major stock investors. The main asset price affecting debtors’ financial position, the price of housing, has not improved. That’s not to say that rising stock prices have no effect; they do encourage higher spending — but not remotely to the extent that an equal-value fall in debt would. So the news on net worth isn’t nearly as positive as it seems. Full recovery is still a long, long way off.
Families Slice Debt to Lowest in 6 Years - U.S. families—by defaulting on their loans and scrimping on expenses—shouldered a smaller debt burden in 2010 than at any point in the previous six years, putting them in position to start spending more. Total U.S. household debt, including mortgages and credit cards, fell for the second straight year in 2010 to $13.4 trillion, the Federal Reserve reported Thursday. That came to 116% of disposable income, down from a peak debt burden of 130% in 2007, and the lowest level since the fourth quarter of 2004.With the help of rising stock prices, the decrease in debts put average household net worth at $505,000 at the end of 2010, up 5.1% from 2009, though still well below a peak of $595,000 in the second quarter of 2007, before housing prices plunged. The shrinking debt burden, though, brings U.S. consumers, whose purchases make up about one-sixth of global demand, closer to the point where they can make a big contribution to the world-wide recovery.
Credit CARD Act: One Year Later, How's It Going? - During the battle over Credit CARD Act, much talk focused on what the legislation would -- and wouldn't -- do. A year after the two-phase law was rolled out, what's the word now? Mostly, it's been a mixed bag. Some of the significant changes under the law included: 45-day notice if the terms of your card change. No rate increases in the first year. Payment dates must be the same every month. Statements must be delivered at least 21 days before the due date, and the statement must be explicit about late fees and other consequences of late payment. Fees cannot exceed 25% of the initial credit limit on the card, and over-limit fees aren't allowed. 'The Credit CARD Act was designed to protect consumers from unfair credit card practices, eliminate predatory credit card lending tactics and increase transparency,' says Barbara Stark of the nonprofit American Debt Counseling. Before this law was passed, she notes, 'Banks could charge usurious fees to cardholders who went over their limits, apply payments to balances with lower interest rates first, put forth credit card offers with hidden fees and interest rate information and extend credit to individuals under the age of 21,' she adds.
The 79.9% APR: Winners and Losers of the CARD Act, One Year Later - February marked the one-year anniversary of the second phase of the CARD Act’s roll out. The first phase, in August 2009, required that creditors give a written 45-day notice to consumers before jacking up interest rates or other significant changes to the account. The second phase eliminated retroactive interest rate changes except on accounts where the consumer is 60 days late and barred raising rates for the first year, required clear disclosure of the card’s terms before borrowers open accounts, required that consumers opt in to overdraft fees, made sure card companies apply payments to the higher interest balance first, and put in roadblocks to giving cards to people under 21 who don’t have a co-signer. So how’s it going, one year later?
Now Back to Our Regularly Scheduled Programming (i.e., Interchange!) - It's been a while since I've blogged about interchange. But I've been meaning to share a personal story about how weak signature debit fraud protection is. Recently Mallory Duncan, the General Counsel at the National Retail Federation was kind enough to speak to my Consumer Finance class about interchange regulation. I took Mallory out for coffee at Starbuck's afterward. I treated. But I asked Mallory if he would do the transaction, with my Visa signature debit card. I stood off to the side while Mallory purchased the coffee with my card. It turned out to be a signatureless transaction, so Mallory didn't sign anything. And my card has my photograph on the front. You be the judge of whether anyone is likely to confuse me and Mallory based on physical appearance. Pictures after the break. Mallory's on the left, I'm on the right.
Debit card fees: Why the big banks want you to blame Washington, not them. Occasionally banks send letters to their customers explaining changes in their credit- and debit-card agreements. This is not one of those letters. It's how one of those letters would read if banks were a distant and annoying cousin whom you never hear from except when he needs a favor. Dear Valued Customer, How are you doing? I'm great. Of course, the recession took its toll, and I lost some of my nearest and dearest friends—little banks that made a lot of mortgage loans, bigger banks that spliced and diced a lot of mortgage loans. But I'm a big, big bank, and my profits are back to all-time highs, so I'm feeling pretty good. All the same, I'm worried. I feel bad for even bothering you about this—there are a million other things I'd love to talk to you about—but it's kind of urgent. Washington is changing some rules about your debit card that are going to end up turning out really badly for me—I mean you!—and you could really help me out by writing to your member of Congress. Like, today.
NAACP: Cap on Debit Card Fees Could Hurt, Not Help - Prospects for legislation to delay new rules capping debit card fees improved a bit: The NAACP came out in favor of allowing time for further study on the possible impact on consumers.In a letter to House Speaker John Boehner (R., Ohio) NAACP Washington bureau director Hilary Shelton said the civil-rights group believes the proposed rule “should be further examined fully to ensure that it does not have a negative impact on the communities it was meant to help.” Specifically, Mr. Shelton raised concerns that the rule could unintentionally make it harder for poor and minority consumers to afford checking accounts and other basic financial services. Delaying implementation of the so-called swipe fee rule is exactly what a number of lawmakers on Capitol Hill are pushing for. In the Senate, where such a measure faces the most obstacles to success, Sen. Jon Tester (D., Mont.) is readying a bill that would postpone the July enactment date. Legislation to force a two-year study period is being prepared by House Republicans. The Dodd-Frank financial-overhaul law that became law in July directed the Federal Reserve to write the debit-card rules, and in December the central bank unveiled a proposal to cap these interchange fees at 12 cents per transaction, a dramatic cut from the current average of 44 cents per transaction.
Gap in Cost of Credit for Haves and Have-nots Broadens -I can remember when the Card Act first came out. Many professionals, including some of my colleagues, bemoaned the loss of perks for the well-healed. They were all sure that from now on, since the card companies could no longer boost rates on existing balances or in the first year of a card relationship, or charge more than $25 in late fees, annual fees for all were going up and points and other perks were going down. Did it happen? Nope. At least not for the good credit risks. Quite the contrary.An AP story that ran in many papers across the country today confirms a trend toward very beneficial credit deals for the rich. Offers to the well-off but less fastidious in credit cleanliness are worse than before. These B-listers are getting card offers at higher interest rates and higher annual fees than before. This is the demographic from which card compares will make up for lost fees resulting from the Card Act. As for the ones with poor credit habits and little funds? They are getting fewer offers, period.
Bankruptcy Filings Climb in February, But Looks Can Be Deceiving - There were a total of 109,178 bankruptcy filings in the month of February for a rate of 5,750 new cases per day. The February figure represents a 12.6% increase from March. Although bankruptcy filings seem to be up sharply in February, looks are deceiving. In reality, the 12.6% increase in February supports the idea that, on an annual basis, bankruptcy filings actually will decline in 2011. As always, the data for this analysis is courtesy of Epiq Systems. In recent years, the first two months of the year have accounted for about 13.5% - 14.0% of all bankruptcy filings for the year. Extrapolating from the first two months of 2011, this recent history would indicate that we will have just under 1.50 million bankruptcies in 2011, a small decline from the 1.56 in 2010.On a year-over-year basis, the daily filing rate in February 2011 represented a 7.4% decline from February 2010. To the right, I have updated an old chart showing the trend in the year-over-year change.
From "Morning in America" to the Nightmare on Main Street - Ronald Reagan's infamous "it's morning in America" slogan, used as part of his 1984 presidential campaign, paved the way for a set of market-driven policies that historians faithful to the human record will be compelled to rename twilight in America to signal a historical crisis fueled less by a spirited hope for the future than by a shocking refusal to be held accountable to and for it. The policies that informed Reagan's neoliberal agenda have given way to the intense assault now being waged by his more extremist governmental descendants on all vestiges of the democratic state. This brutal evisceration includes a rejection and devaluing of the welfare state, unions, public values, young people, public and higher education; and other political, social and economic institutions and forces in American life that provide a counterweight against the political power of mega-corporations, the rich and the powerful. Political power is now up for sale just as government resources are increasingly being contracted out or sold off to the highest bidder. Like lemmings in heat, thousands of corporate lobbyists flock to Washington determined to corrupt the political process, while multibillionaires such as the Koch brothers use their $42 billion-dollar war chest to fund right-wing think tanks, the Tea Party, and other conservative groups
Financial dismantling of the American middle class in 8 charts – Peak debt, credit card addiction withdrawal, banks hoarding cash, financial sector dominance in pay, Federal debt will never be paid off, and struggles of the middle class. - The American economy runs on high octane debt. Debt has been welcomed by many with open arms and things seemed to be going well until people realized they actually had to pay the debt back. Average Americans trying to keep up with the picket white fence image of Leave it to Beaver were largely relying on debt to keep up with this lifestyle that was unsustainable with current incomes. Paradigm shifts in economies the size of the United States happen gradually over time. They occur slowly and systematically with the patience of a person watching grass grow. The Federal Reserve has made a conscious effort to bailout the banks and use the crisis as an excuse to lower the standard of living of most Americans to pay for the bailouts. Federal debt is so large that only someone with blind optimism would have any hope that it would ever be paid off. When an average person cannot pay their mortgage they lose their home in foreclosure. If someone can’t pay their car they get it repossessed. When banks need bailouts they simply print away and devalue the currency of the domestic country shifting the burden to society. Have we in the United States reached a peak debt scenario? Is the Fed willing to sacrifice the middle class to keep the banking system intact? Let us look at 8 charts showing shifts in our economy that put the middle class at risk.
Americans in Poll Show Scant Confidence as Plurality See Decline… Only 1 American in 7 has faith a lasting economic recovery has taken hold and a plurality say they are personally worse off than they were two years ago. Almost half of the respondents in a Bloomberg National Poll conducted March 4-7 believe the U.S. is in a “fragile” rebound and could fall back into recession. More than a third of the country believes the U.S. never emerged from recession. Sixty-three percent of Americans say the nation is on the wrong track, compared with 66 percent who said so in December, which was the lowest in the national mood in the one and a half years the Bloomberg poll has been conducted. The gloomy outlook contradicts economic data showing an economy on the mend, including six quarters of economic growth, a 95 percent rise in the Standard & Poor’s 500 index over the past two years and job growth last month of 192,000. The National Bureau of Economic Research officially dated the end of the recession to June 2009. Almost half of poll respondents say they are personally worse off than they were two years ago, when the country was losing 796,000 jobs a month and the economy was shrinking at a 4.9 percent annual rate. The stock market hit its post-financial crisis low two years ago yesterday.
The Conference Board Consumer Confidence Index Improves Further - The Conference Board Consumer Confidence Index®, which had increased in January, improved further in February. The Index now stands at 70.4 (1985=100), up from 64.8 in January. The Present Situation Index improved to 33.4 from 31.1. The Expectations Index increased to 95.1 from 87.3 last month... Says Lynn Franco, Director of The Conference Board Consumer Research Center: “The Consumer Confidence Index is now at a three-year high (Feb. 2008, 76.4), due to growing optimism about the short-term future. Consumers’ assessment of current business and labor market conditions has improved moderately, but still remains rather weak. Looking ahead, consumers are more positive about the economy and their income prospects, but feel somewhat mixed about employment conditions.”
U.S. Economic Optimism Declines in February - Gallup's Economic Confidence Index worsened to -24 in February from -21 the prior month as Americans' optimism about the U.S. economy receded from a three-year high reached in January. Gallup's Economic Confidence Index is based on two questions. One measures consumers' perceptions of current economic conditions and shows them to be the same in February as in January, with 42% of Americans rating current economic conditions "poor." The second Index component asks Americans to rate the outlook for the U.S. economy. In February, 38% said economic conditions are "getting better," down from 41% a month earlier. However, this decline follows a January optimism level that tied for the highest since Gallup Daily tracking began in January 2008.
Americans in Poll Show Scant Confidence as Plurality See Decline - Only 1 American in 7 has faith a lasting economic recovery has taken hold and a plurality say they are personally worse off than they were two years ago. Almost half of the respondents in a Bloomberg National Poll conducted March 4-7 believe the U.S. is in a “fragile” rebound and could fall back into recession. More than a third of the country believes the U.S. never emerged from recession. Sixty-three percent of Americans say the nation is on the wrong track, compared with 66 percent who said so in December, which was the lowest in the national mood in the one and a half years the Bloomberg poll has been conducted. Almost half of poll respondents say they are personally worse off than they were two years ago, when the country was losing 796,000 jobs a month and the economy was shrinking at a 4.9 percent annual rate. The stock market hit its post-financial crisis low two years ago yesterday.
CR Index: At last, consumers' financial lives improve - Despite international unrest and escalating energy prices, the March Consumer Reports Index reveals its most positive results in two years. A major decline in consumer financial troubles and positive sentiment provide some encouraging news for the American consumer. The Consumer Sentiment Index has broken into positive territory at 50.3, which is up from 48.7 a month ago. The Consumer Reports Sentiment Index captures respondents’ attitudes regarding their financial situation, asking them if they are feeling better or worse off than a year ago. When the index is greater than 50, more consumers are feeling positive about their situation. This is the first time sentiment has been in positive territory since it was first measured in October, 2008.
Consumer Sentiment declines sharply in March - The preliminary March Reuters / University of Michigan consumer sentiment index declined to 68.2 from 77.5 in February, the lowest level since October 2010. (graph) This was well below the consensus forecast of 76.5. In general consumer sentiment is a coincident indicator and is usually impacted by employment (and the unemployment rate) and gasoline prices. My initial guess is this decline was because of higher gasoline prices.
Retail Sales increased 1.0% in February - On a monthly basis, retail sales increased 1.0% from January to February(seasonally adjusted, after revisions), and sales were up 8.9% from February 2010. The December 2010 to January 2011 percent change was revised from +0.3% to +0.7%. This graph shows retail sales since 1992. This is monthly retail sales, seasonally adjusted (total and ex-gasoline). Retail sales are up 15.3% from the bottom, and now 1.9% above the pre-recession peak. The second graph shows the year-over-year change in retail sales (ex-gasoline) since 1993. Retail sales ex-gasoline increased by 8.0% on a YoY basis (8.9% for all retail sales). Here is the Census Bureau report:
Why the Big Deal About Consumer Spending? - Economic commentary makes a big deal out of consumer spending, but with little explanation. The many facets of consumer spending are confusing, and public policy often ends up treating the symptoms rather than curing the disease. Both Republican and Democratic politicians promote their economic policies as ways to put money in the hands of consumers. Unemployment insurance, for example, helps people who are unemployed, but it is also said to benefit employed people because the unemployment benefits received are spent elsewhere in the economy. But a person receiving money from the government has to do something with it. And policy makers like to argue that investment is healthy for the economy, too. So isn’t investment just as good as spending? Don’t we admire the thrifty more than the spendthrifts?To answer these questions, we need to know whether consumer spending has a causal influence on the wider economy, as politicians often suggest, or whether it is a barometer of economic efficiency.
NFIB: Small Business Optimism Index increases in February - Small-business owners were more optimistic in February, according to data released Tuesday. Firms reported good news on the hiring front, and more planned to raise their selling prices. The National Federation of Independent Business‘s small-business optimism index last month increased 0.4 point from January, to 94.5. The subindex of expected business conditions in six months slipped one percentage point to 9% although small-business owners expected an improvement in demand, with the expected sales index up one percentage point to 14%. Hiring also made gains. The February employment subindex increased two points to 5%. The average employment change per firm was reported to be 0.17 employee over the past three months, up from a negative 0.15 reported in January.
NFIB: Small Business Optimism Index increases in February - From National Federation of Independent Business (NFIB): NFIB Small Business Optimism Index -- Slow and Steady: Continues Gradual Rise in February. The first graph shows the small business optimism index since 1986. The index increased to 94.5 in February from 94.1 in January. Although still fairly low, this is the highest level for the index since December 2007. This graph shows the net hiring plans for the next three months. Hiring plans increased slightly in February. According to NFIB: “The percent of owners reporting hard-to-fill job openings rose two points to 15 percent, indicating that a reduction in the unemployment rate is likely within the next few months. Plans to create jobs strengthened; up two points to a net 5 percent of all firms. While this is still low, it is 15 points better than the recession low reading of negative 10 percent, reached in March 2009." Weak sales is still the top business problem with 28 percent of the owners reporting that weak sales continued to be their top business problem in February. In good times, owners usually report taxes and regulation as their biggest problems.
AAR: Rail Traffic increases in February compared to February 2010 - From the Association of American Railroads: February Freight Rail Traffic Continues to Make Gains. The AAR reports carload traffic in February 2011 was up 4.2% compared to February 2010 and intermodal traffic (using intermodal or shipping containers) was up 10.3% over February 2010. U.S. freight railroads originated 1,135,396 carloads in February 2011, an average of 283,849 per week (see chart below). That’s up 4.2% (46,054 carloads) over February 2010 and up 2.7% (29,400 carloads) over February 2009. On a seasonally adjusted basis, U.S. rail carloads were down 3.0% in February 2011 from January 2011. That’s the biggest month-to-month decline since April 2009, but we cannot be certain that the weather effect was completely captured by the seasonal adjustment process. As the first graph shows, rail carload traffic collapsed in November 2008, and now, over 18 months into the recovery, carload traffic has only recovered a little. The second graph is for intermodal traffic (using intermodal or shipping containers):
Why High-Speed Rail Isn’t That Great - I want to like trains. I like riding them, both here and abroad. You can get work done while sitting on the train; you don’t have to worry about traffic jams or bad driver behavior, let alone parking. They’re good for the environment and make life easier on everyone, right? Not so much. With Obama’s exaltation of the transport, I decided to research the costs and benefits of high-speed rail in more detail. As it turns out, they’re not that green, not that efficient, and, in many ways, not that great. Here’s a breakdown of what I found.
An Actual Improvement in the U.S. Employment Situation - For the first time since April 2010, the employment situation in the United States showed an actual improvement in February 2011, as the number of employed Americans rose to its highest level since that time. Here, the total number of individuals counted as being employed rose by 250,000 from January 2011's 139,323,000 to 139,573,000 in February 2011. Breaking that down by age group, the largest improvement was seen for individuals Age 25 or older, whose numbers in the U.S. workforce increased by 278,000, followed by young adults between the ages of 20 and 24, who saw their representation increase by 13,000. However, the improvement in jobs was not up across the board, as these increases were offset by a reduction of 41,000 individuals between the ages of 16 and 19 in the U.S. workforce.
Gallup Survey Shows Unemployment Rate at 10.3% and Rising, BLS Says 8.9% and Falling - A Gallup survey says the unemployment rate in the US is 10.3% and rising. Meanwhile, the BLS says it's 8.9%. The comparison is not precise because Gallup does not seasonally adjust but the BLS does. However, on an equal comparison basis, Gallup has the unemployment rate where it was a year ago but the BLS shows a drop of .5%. For BLS details please see BLS Jobs Report: Nonfarm Payroll +192,000, Unemployment Rate 8.9%; Reflections on the Jobs Report . Now let's take a look at the most recent Gallup survey. Inquiring minds note Gallup Finds U.S. Unemployment Hitting 10.3% in February Unemployment, as measured by Gallup without seasonal adjustment, hit 10.3% in February -- up from 9.8% at the end of January. The U.S. unemployment rate is now essentially the same as the 10.4% at the end of February 2010.
More on Labor Force Participation Rate -As I noted yesterday, a key question is what happens to the labor force participation rate as the economy hopefully improves. The current participation rate is 64.2%. Here are a two earlier analysis pieces:
• From BLS economist Mitra Toossi in November 2006: A new look at long-term labor force projections to 2050
• From Austin State University Professor Robert Szafran in September 2002: Age-adjusted labor force participation rates, 1960–2045
Those papers were written when the participation rate was in the mid-66% range. Based on demographics, Szafran had forecast the participation rate to fall to 64.6% in 2015, and Toosi had forecast the rate to fall to 64.5% in 2020. So some of the recent decline was expected - although it happened sooner and faster than either expected because of the severe recession. And there might be reasons those forecasts were too high. First the participation rate of the 16 to 19 age group has fallen much faster than Toosi forecast (and might not bounce back much after the recession), and second, some people might have permanently given up.
Working Age Employment/Population Ratios - My preferred employment indicator is the employment/population ratio for working aged men (here age 25-54). The most recent data (including the point for February released on Friday) is shown above, on a graph since 2000, showing the two most recent recessions, and one recovery between them, along with the sluggish sort-of-recovery since the great recession. The last data point is pretty good, however, adding to the evidence that the US economy, at least, is starting to recover more strongly. Here's the long term picture for that series (since 1948) for the context:Basically, working-age men used to, well, work. But not so much any more - the ratio has been declining for decades, ratcheting down in each recession, and then failing to fully recover before the next recession. Presumably the pattern will continue, with this ratio, having dropped dramatically in the great recession, recovering a few percentage points before the next big drop (unless we get a big Middle East oil shock this year in which case it will drop again before it has a chance to recover much at all).
The Challenges of Long Term Unemployment - The composition and implications of long term unemployment has been vigorously debated over the last year. The most recent informed commentary (skipping non-evidence based assessments ) includes Macroblog and SF Fed (earlier discussion here and here). Two conferences on the subject will be held at the University of Wisconsin-Madison, this Friday, and later at the end of April.The magnitude of the phenomenon can be illustrated by inspecting mean unemployment duration, and number of unemployed over 27 weeks.As I mentioned before, UW-Madison is taking the lead on bringing together scholars to examine the challenges posed by persistent and high long term unemployment (for now, the university has resources to put on conferences; we'll see how that plays out going forward ). The first is this week, on Friday, March 11, and is organized by the Institute for Poverty Research, entitled Employment Prospects for Lower Wage Workers: Easing the Implications of a Slow Recovery Conference
BLS: Job Openings decline in January, Low Labor Turnover -From the BLS: Job Openings and Labor Turnover Summary = There were 2.8 million job openings on the last business day of January 2011, the U.S. Bureau of Labor Statistics reported today. The job openings rate (2.1 percent), hires rate (2.8 percent), and total separations rate (2.7 percent) were little changed over the month. The following graph shows job openings (yellow line), hires (purple), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS. Note: The difference between JOLTS hires and separations is similar to the CES (payroll survey) net jobs headline numbers. This report is for January, the most recent employment report was for February.Notice that hires (purple) and total separations (red and blue columns stacked) are pretty close each month. When the purple line is above the two stacked columns, the economy is adding net jobs - when it is below the columns, the economy is losing jobs. In January, about 3.555 million people lost (or left) their jobs, and 3.712 million were hired (this is the labor turnover in the economy) adding 157 thousand total jobs. In general job openings (yellow) has been trending up - and are up 15% from January 2010 - although openings have declined over the last two months.
5 Unemployed for Every Job Opening - There were five unemployed workers for every available job in January, a ratio that has been virtually unchanged for several months, according to a new report from the Bureau of Labor Statistics. The ratio is lower than it was during the worst of the recession two years ago — when it was nearly 7 workers per job opening — but it is still much higher than it was prior to the Great Recession. The trend from the last decade appears in the chart below: During the recession, the source of problems in the job market was the widespread shedding of existing employees. Today, the number of layoffs and discharges is relatively low. The bigger problem is the very slow pace of job creation to put all the people already laid off back to work. Keep in mind that these figures are from January, and a more recent Labor Department release for February showed widespread hiring.
Okun’s Confounding Law … Here We Go Again - In 1962, Yale professor Arthur Okun laid out in very clear and understandable terms a long-standing relationship between economic growth and the behavior of unemployment. If the economy dropped one percentage point below its long-term growth rate in a given year, the unemployment rate tended to rise by about a third as much. So a recession that pulled economic output three percentage points below the economy’s long-run trend would push the unemployment rate up by a percentage point. Okun’s law has been a staple tool for economists ever since, but it’s been driving them crazy lately because it doesn’t seem to be working all that well. During the recession, unemployment rose a lot more than the rule of thumb would have predicted given the drop in the nation’s economic growth rate. From 2007 to 2009, the growth rate was below the economy’s 2.5% longer term trend – it grew 1.9% in 2007, was flat in 2008 and contracted 2.6% in 2009. Michael Feroli, a J.P. Morgan economist, estimates that if Okun’s law had applied, the unemployment rate would have risen a little more than five percentage points, from 4.4% to 8.9%, during that stretch. Instead, it shot up to 10.1%.
Falling Demand for Brains? - Paul Krugman - About 15 years ago, before I became a regular columnist, the Times asked me and a bunch of other people to contribute to a special edition celebrating the 100th anniversary of the NYT magazine. The stated rule was that the pieces should be written as if submitted in 2096, looking back at the magazine’s second century. I decided to write the piece around a conceit: that information technology would end up reducing, not increasing, the demand for highly educated workers, because a lot of what highly educated workers do could actually be replaced by sophisticated information processing — indeed, replaced more easily than a lot of manual labor. Here’s the piece: I still think it’s a fun read. So here’s the question: is it starting to happen? Today’s Times has an interesting and, if you think about it, fairly scary report about how software is replacing the teams of lawyers who used to do document research. Getting a bit more serious, Larry Mishel wrote recently about the overselling of education, pointing out that the college wage premium, after rising sharply in the 80s and 90s, has stagnated lately. Indeed. Here’s the ratio of earnings for full-time working men with college degrees versus those with high school, from the Census:
Autor! Autor! - Krugman - A further note on brains and jobs: the story I told in my whimsical magazine piece bears a clear family resemblance to the influential analysis of Autor, Levy, and Murnane a few years later, which argued that the crucial difference in terms of possible replacement of humans by machines was one of routine versus non-routine, rather than white-collar versus blue-collar, and that computerization was if anything likely to increase demand for some “low-skill” occupations and reduce demand for some traditionally well-paying white-collar jobs:And you can actually see this happening in the data. From the recent Autor-Acemoglu paper: In the 80s, the higher the skill required for an occupation, the bigger the employment gains. In the 90s, there was “hollowing out”, with the middle-skill occupations losing relative to both ends. And most recently, the hollowing seems to have spread further up the scale. This is real, and it calls some of our favorite platitudes into question.
M.I.T. Eonomist David Autor Shows Soaring Demand for Uneducated Workers - Dean Baker -David Autor has inaccurately reported that he has found evidence of a hollowing out of the distribution of jobs for men, with increased employment at the top and the bottom ends of the wage distribution and a loss of jobs in the middle. NYT columnist David Leonhardt seems to have largely bought this story as well.Actually, as John Schmitt, my colleague at CEPR, and former colleague Heather Boushey pointed out, Autor's work shows the opposite. In the most recent business cycle, 2000-2007, there was a relative decline in the demand for all male occupations, except those at the bottom of the wage distribution. There was less of a decline for jobs near the top than for those in the middle, but it would be a more than a bit of an exaggeration to call this a hollowing out of the job distribution. Autor's data is essentially showing an increased demand for less-skilled occupations pure and simple.The story for the prior business cycle is also not quite what Autor describes. Between 1989 and 1999, there actually was a decline in relative employment for all occupations below the median except those near the very bottom (the bottom decile).
Oh noes! We’re being replaced by machines! - Paul Krugman is worried that lots of jobs will be replaced by machines in the near future. What will all those people do!? Brad DeLong thinks there’ll still be plenty of jobs, but massive income inequality. Some of Brad’s commenters think that the reserve army of unemployed will take up prostitution on a large scale. Oh dear. Allow me to suggest a third possibility. Instead of mass unemployment or horrendous inequality, technological improvement could reduce the time people spend working to meet their needs and give them more free time. Free time that they could use for other purposes (such as their all-round human development) . The Jerry Cohen video that I posted the other week centres on this very point.
Some Thoughts On The Expanding Service Industry - Lots of responses to Paul Krugman’s column on the future of the labor force with computerization, especially the hollowing-out of mid-skill jobs:There’s a lot of blogging responses to the piece (Delong, Kevin Drum and Ezra Klein). This invokes David Autor’s excellent work on job polarization (“Rising demand for highly educated workers, combined with lagging supply, is contributing to higher levels of earnings inequality. Demand for middle-skill jobs is declining, and consequently, workers that do not obtain postsecondary education face a contracting set of job opportunities”).I’m surprised nobody brought up one of the more important recent pieces of work in making sense of the low-skill service economy, Barbara Ehrenreich’s Nickel and Dimed: On (Not) Getting By in America. Ehrenreich’s book is important for many reasons, but two jump out. First is that it challenges the economic (but also political) notion of what constitutes skills. The second one I want to focus on is that service industry work is difficult not just because of the low pay – though that is important – but because it is a degrading experience
The Wage Premium Puzzle and the Quality of Human Capital - Abstract The wage premium for high-skilled workers in the United States, measured as the ratio of the 90th-to-10th percentiles from the wage distribution, increased by 20 percent from the 1970s to the late 1980s. A large literature has emerged to explain this phenomenon. A leading explanation is that skill-biased technological change (SBTC) increased the demand for skilled labor relative to unskilled labor. In a calibrated vintage capital model with heterogenous labor, this paper examines whether SBTC is likely to have been a major factor in driving up the wage premium. Our results suggest that the contribution of SBTC is very small, accounting for about 1/20th of the observed increase. By contrast, a gradual and very modest shift in the distribution of human capital across workers can easily account for the large observed increase in wage inequality.
What to do with all these cheap humans? - CONTINUING the discussion of the relationship between technological progress and employment, Tyler Cowen links to a paper by Robin Hanson. The horse is the most useful ally to the man preaching technological unemployment. Society used to employ millions of horses. To see one now you have to go to a racetrack or a farm. But horses aren't people. Most of them can't even talk. We don't care if huge swathes of the horse population are unemployed, we don't rely on horses to provide final demand for goods, and we can't send useless people off to be turned into meat. Horses are also more limited creatures than people. They're good at pulling. Once horses weren't needed for pulling, we couldn't use them for sewing or filing. But people are remarkably flexible.
Technology in the gaps - It must have been strange to be an ancient Greek. Storms happened because Zeus woke up in a bad mood. Seas were calm because Poseidon was off playing XBox...or something. Basically, everything happening around you was due to the whims of mercurial, ineffable superbeings. I feel like economists often treat technology the same way - as a capricious god who lives in all the gaps of our theories, pulling the levers and making the clockwork run.The most famous example is the "Real Business Cycle" (RBC) model, for which Ed Prescott won the Nobel Prize.in 2004. Briefly, in this model (as in many others), you split economic production into two "factors": capital and labor. Whatever's left over - that is, the fraction you can't measure as capital or labor - is called "total factor productivity," or TFP. The RBC model says that TFP is, basically, technology. When technology gets better at a rapid rate, the theory says, we have an economic boom, and when it gets better only slowly (or gets worse), we have a recession. Ta-da! Business cycle explained!
Growth: Is there a "great stagnation"? - The Economist -MUCH of the recent discussion about innovation, unemployment, wages, and robots is best viewed as a continuation of the discussion of Tyler Cowen's new book, "The Great Stagnation". In this weeks issue of The Economist, the Economics focus reviews and discusses Mr Cowen's book. Here's part of the conclusion: The divergence camp seems to have the better arguments. Productivity improvements eliminated many middle-skilled American jobs just as emerging-market industrialisation undermined the position of low-skilled workers. After adjusting for these factors there may not be much wage stagnation left to explain. Nor is it clear that innovation has slowed. The evidence of improvement is all around. Communication is dramatically cheaper, easier and better than it was just a decade ago. Kitchens may look much as they did 30 years ago but living rooms and desktops look remarkably different. Innovation plateaus have been identified before, often to the later embarrassment of their spotter. To advance the discussion, we asked the economists at Economics by invitation to weigh in on the book, and we offered Mr Cowen (a forum member) the opportunity to address our response and others'. He wrote
Time is money - ONE interesting point made by several contributors to the Economics by invitation discussion on Tyler Cowen's new book is that the most precious commodities around these days are time and attention, and the internet helps people conserve these resources. Reihan Salam suggests that this characteristic doesn't necessarily benefit the population as a whole: I actually believe that attention-saving technologies have made us much, much better off, which is why I’m an ardent techno-optimist — but again, attention-saving technologies don’t benefit everyone equally. Rather, they benefit the kind of people who like and need to pay attention to lots of different things, e.g., the kind of people who enjoy reading blog posts and tweets, freelancers who manage a variety of different clients, etc. So we’ve seen consumer surplus for infovores zoom while it’s grown somewhat more modestly for those who value other things in life. That’s hardly a terrible thing.
A "Great Stagnation"?--NOT!! - I RECEIVED an email from The Economist's editor in London referring to Tyler Cowen's book yesterday afternoon. I went to Amazon, downloaded the book to my iPad, and read it...all in the space of an hour and a half. I then composed this note and sent it to London—19 hours after receiving the first email. I have every reason to believe that this note will appear on economist.com a few hours after it is received. None of this would have been possible 30 years ago. It is therefore particularly ironic that a major theme of the book is about how technological progress has stalled in the last 30 years. To be fair, Mr Cowen singles out the internet as “one sector where we've had more innovation than anyone had expected”. The problem with the internet, according to Mr Cowen, is that it doesn't contribute much to jobs or revenue. But these facts just show that the internet is hugely efficient in producing consumer surplus: a relatively small amount of labour (plus a substantial dose of capital and know how) produces a huge amount of benefits.... costs of communication and computation have tumbled. William Nordhaus at Yale University claims that computing performance has increased by a factor of 1 to 5 trillion since 1900, which represents a compound growth rate of 30-35% for a century. Since 1940, the growth rate has accelerated to 50% a year.
Why hasn't the Internet done more for growth? - If you have attended any economists' cocktail parties in the past month or so—lucky you!—then you have probably heard chatter about Tyler Cowen's e-book, The Great Stagnation. The book seeks to explain why in the United States median wages have grown only slowly since the 1970s and have actually declined in the past decade. Cowen points to an innovation problem: Through the 1970s, the country had plenty of "low-hanging fruit" to juice GDP growth. In the past 40 years, coming up with whiz-bang, life-changing innovations—penicillin, free universal kindergarten, toilets, planes, cars—has proved harder, pulling down growth rates across the industrialized world.But wait! you might say. In the 1970s, American businesses started pumping out amazing, life-changing computing technologies. We got graphing calculators, data-processing systems, modern finance, GPS, silicon chips, ATMs, cell phones, and a host of other innovations. Has the Internet, the most revolutionary communications technology advance since Gutenberg rolled out the printing press, done nothing for GDP growth? The answer, economists broadly agree, is: Sorry, but no—at least, not nearly as much as you would expect.
The Internet and Consumer Surplus - Brad DeLong takes on Tyler Cowen's astonishing argument that the internet is, in Annie Lowrey's paraphrasing, "not as revolutionary as we think it is." Cowen is quoted as saying: "we have a collective historical memory that technological progress brings a big and predictable stream of revenue growth across most of the economy... When it comes to the web, those assumptions are turning out to be wrong or misleading. The revenue-intensive sectors of our economy have been slowing down and the big technological gains are coming in revenue-deficient sectors." He contrasts the internet to railroads, which clearly produced substantial revenues and profits for identifiable individuals and companies in the 19th century. By contrast, his argument seems to be, the internet just drives down costs but doesn't create new revenue. Really? The internet is "revenue-deficient"? Would anyone reading this blog today be willing to pay for internet access? Does anyone reading this post actually pay for access to the internet?
The Luddite Question: Rhythm, Rebounds and Elasticity... - Paul Krugman, Brad DeLong, Chris Bertram at Crooked Timber and Frances Woolley at Worthwhile Canadian Initiative have all chimed in recently on aspects of what could be termed the Luddite question without, however, noting that Friday marks the two hundredth anniversary of the start of the Luddite riots. On March 11, 1811, workers protesting unemployment and low wages smashed textile machinery in a village near Nottingham, England. There has been a presumption in much of the subsequent debate that the workers broke stocking frames because they blamed the machines for the low wages and unemployment. Although that presumption has been challenged repeatedly, the commonplace framing of the Luddite question remains: do machines eliminate jobs and destroy livelihoods? Or do they "create more jobs than they destroy" and promote a higher standard of living? The correct answer is, of course, "both." But getting to that answer requires recognition of an element that is excluded from the technological optimist and the technological pessimist arguments. That element is rhythm.
Rustbelt recovery - The Economist - For the first time in many years, American manufacturing is doing better than the rest of the economy. Manufacturing output tumbled 15% over the course of the recession, from December 2007 to the end of June 2009. Since then it has recovered two-thirds of that drop; production is now just 5% below its peak level (see chart 1). Factory employment has been slower to recover than output, since productivity has risen. Nonetheless, that too is growing. In February factory payrolls rose by 33,000 from January. In the past year manufacturing employment has gone up by 189,000, or 1.6%, the biggest gain since the late 1990s. Total employment rose just 1% in that period. Unemployment has fallen more sharply than the national average in Illinois, Ohio and Michigan, which are relatively dependent on manufacturing. Much of the recovery there is payback for the stomach-churning plunge that came before. . “We were in the valley of death in April of 2009,”
Winners and Losers in US Manufacturing - Manufacturing in the US has recently been doing quite well, as I've noted before. But as I continue to ponder exactly what is driving US manufacturing growth, I thought it might be interesting to get a better sense for exactly which types of manufacturing activities have been doing particularly well and particularly poorly. Of course we all know that manufacturing employment in the US has been on a secular downward trend for about 3 decades now. This has been driven largely, I would argue, by technological advances that have dramatically increased manufacturing productivity. As illustrated by the picture below, improvements in productivity mean that the US manufacturing sector now requires a third fewer workers to produce the same output compared to the year 2000. That largely explains the 33% drop in manufacturing employment in the US between the years 2000 and 2010. But some sectors of US manufacturing have done better than others. To get a better understanding of this, I put together a table showing the change in manufacturing employment in the US during the 2000s by type of manufactured product. Here's the result:
Danger at the Factory - There is a long history of celebrating American manufacturing. And often for good reason. Manufacturing made up a big share of the American economy during its great 20th century rise. Some people also find factory work to be more satisfying than office work: you’re making something tangible. But I think the celebration of manufacturing sometimes veers into unwarranted nostalgia. History suggests that economies should become less dependent on manufacturing jobs as they become richer, just as countries move away from agricultural jobs as they escape poverty. The United States doesn’t really want to be the home of dollar-an-hour factory jobs. Manufacturing isn’t the end of economic evolution any more than agriculture is. A new research paper points out another reason not to get too misty-eyed about factory work: It’s often hard and dangerous. The paper examines the effect of people’s initial occupation and finds: Blue collar work early in life is associated with increased probabilities of obesity and smoking, and decreased physical activity later in life..
Who reaps the rewards of productivity? - Washington politicians, like politicians everywhere in the west, have been running around with shrill cries about how we are adding trillions of dollars to the national debt and that this burden will impoverish our children and grandchildren. It is almost impossible to pick up a newspaper or listen to a news show without hearing such whining. By contrast, next to no one knows that productivity has increased by almost 10% since the start of the recession. This is too bad, because this increase in productivity will matter far more to the wellbeing of our children and grandchildren than the trillions of dollars of debt that are getting our politicians so excited. Productivity matters for the prosperity of children because it measures the amount that an average worker produces in an hour of work. Unfortunately, most workers are not seeing the benefit of these gains in productivity. There are two reasons why workers are not benefiting. First, the country has seen an enormous upward redistribution of income over the last three decades. As a result of this redistribution, most workers have seen very little benefit from their productivity growth. The big winners have been highly-paid professionals like doctors and lawyers, corporate CEOs and their sidekicks, and, of course, the Wall Street gang.
His Recession, Becoming Hers - It started out as a “mancession”: Men’s unemployment rates have been higher than women’s for the last three years in the United States, as elsewhere. Now, women may be feeling more fear, if not more pain. Their overall job prospects are lagging behind those of men, and they are likely to be more sharply affected by proposed cuts in federal, state and local spending.Heather Boushey, an economist with the Center for American Progress, points out that since the economic recovery officially began in June 2009, private-sector employers have hired a net total of 503,000 men, while jobs held by women have declined by 141,000. According to a new report by the National Women’s Law Center, women lost about 3 in every 10 jobs cut between December 2007 and June 2009 but filled fewer than 1 in every 10 jobs since job growth picked up in 2010. Between January and February, unemployment rose slightly among women (to 8 percent from 7.9 percent) even as it declined slightly among men (to 8.7 percent from 8.8 percent).
Education and Women in the Labor Market - Laura D'Andrea Tyson - In 1970 (around the time I completed college), only about 22 percent of female workers had attended some college or had a college degree. By 2010, that figure had increased threefold to nearly 67 percent of all women in the work force, while the percentage of women with less than a high-school degree had declined to less than 7 percent from about 34 percent.The dramatic increase in college education among women is one major reason that the earnings of female workers have increased, that the gap between male and female earnings has fallen and that, in recent recessions, the unemployment rate for women has been lower than the rate for men.Over the last several decades, the real earnings of the median American male worker have stagnated. Indeed, in a widely cited recent report, scholars at the Hamilton Project found that these earnings may have declined significantly.But while the real earnings of the median male worker have stagnated, the real earnings of the median female worker have increased considerably. Between 1979 and 2009, median real weekly earnings of full-time female workers increased by 31 percent, compared with an increase of only 2 percent for full-time male workers.
Middle-Wage Workers and the Recession - David Autor, an M.I.T. economist who has done excellent research on the labor market, has been the focus of blogosphere discussion lately. Tyler Cowen says he deserves much more attention than he gets. Paul Krugman discussed his work in a blog post and column. Michael Luo featured Mr. Autor’s work in a Times article last summer. The very brief version of Mr. Autor’s argument is that the middle of the American job market is being hollowed out. As he wrote in a recent paper: the structure of job opportunities in the United States has sharply polarized over the past two decades, with expanding job opportunities in both high-skill, high-wage occupations and low-skill, low-wage occupations, coupled with contracting opportunities in middle-wage, middle-skill white-collar and blue-collar jobs. On the most fundamental level, his thesis seems hard to argue with. Job losses in middle-skill occupations, as they’re defined by the Labor Department, appear larger than job losses in many high-skill and low-skill occupations. But I think it would be a mistake to use Mr. Autor’s findings to make a broader argument that seems as if it might flow naturally from his work — namely, that most middle-wage workers have fared worse in this recession than high-wage or low-wage workers. That doesn’t appear to be the case.
Where the jobs are - THE Bureau of Labour Statistics has released the latest state-level employment data, for the month of December, so it's possible to get a look at which states enjoyed the most job growth in 2010. Here is the total employment change: As you can (hopefully) see, Texas leads the pack. About a fifth of all new jobs were created there last year. About half of net new jobs were produced by the top 6 states, and about 80% were produced in the top 15. New Jersey had the biggest job loss, followed by Nevada. New Jersey's job losses were almost entirely due to cuts in government employment. Next, here is a chart of percentage change in employment: Most of the District of Columbia's employment increase isn't government employees, but it does reflect the macroeconomic stabilising effect of the acyclical government. After the District and Texas, the list gets interesting. It's not exactly the places you'd expect to see, and neither is there a clear geographic pattern. The country's west is generally in poor shape, but Washington is in the top ten. Arizona is there, while other bubble centres have done very poorly.
Why Washington Doesn't Care About Jobs - This disconnect between the jobs crisis in the country and the blithe dismissal thereof in Washington is the most incomprehensible aspect of the political moment. But I think there are two numbers that go a long way toward explaining it.The first is 4.2. That’s the percentage of Americans with a four-year college degree who are unemployed. It’s less than half the official unemployment rate of 9 percent for the labor force as a whole and one-fourth the underemployment rate (which counts those who have given up looking for work or are working part time but want full-time work) of 16.1 percent. So while the overall economy continues to suffer through the worst labor market since the Great Depression, the elite centers of power have recovered. The other number is 5.7 percent. That’s the unemployment rate for the Washington/Arlington/Alexandria metro area and just so happens to be lowest among large metropolitan areas in the entire country. In 2010 the DC metro area added 57,000 jobs, more than any in the nation, and now boasts the hottest market for commercial office space. In other words: DC is booming.
Share the sacrifice - In a piece in last week’s edition of The Nation titled “Why Washington doesn’t care about jobs,” Christopher Hayes points out that D.C. is doing much better than the rest of the country economically, which is a significant contributor to what he terms “social distance” from the Americans the government purports to serve. That distance is disorienting and bizarre to those of us outside the Beltway, and is hugely fueled by the annoying conceit of many in the political media that they personally embody the concerns of average Americans. This misguided assumption would be merely amusing if not for the fact that almost the entire political conversation in the U.S. takes place among this small group of people — and that these alleged champions of the middle class inevitably convey the impression that Americans across the land are obsessed with deficit reduction and low taxes, which require deep cuts to “entitlements.” Yet out here in the real world, poll after poll shows that, in fact, Americans are far more concerned with unemployment and favor surtaxes on the wealthy to close the deficit. And so, from time to time, these gilded Regular Joes are forced to regretfully admit that sometimes the people are like dotty old relatives who “just don’t get it” or that they just want a “free lunch” — after which they promptly forget those findings and go back to pretending that the American people see things exactly the way they do.
Inequality and mobility at the top- Income inequality in America has soared over the past generation. But some see little cause for concern. One reason is that ... people move up and down over time. Our incomes in any given year may be more dispersed now than several decades ago, but if many of us are switching places from year to year, why the fuss? Two claims need to be distinguished here. One says there’s enough movement up and down in the income distribution over time (in technical lingo, relative intragenerational income mobility) that we needn’t worry about single-year inequality at all. ... Single-year income inequality is simply irrelevant, on this view, because there is a lot of mobility. Since “a lot” and “enough” are in the eye of the beholder, evidence can’t confirm or refute this claim.A second claim says that the rise in income inequality has been offset by a rise in mobility. Here we can look to the data for a verdict. Has income mobility increased?For the bulk of the population — everyone but the richest — ... there has been no increase in income mobility in recent decades (see also here).
The Minimum Wage and Job Loss from 2006 through 2010 - In 2006, the last full year in which the U.S. federal minimum wage was a constant value throughout the whole year, at least before 2010, approximately 6,637,649 individuals in the United States earned the 2010 equivalent of $7.85 per hour or less. For 2010, the first full year in which the U.S. federal minimum wage was a constant value through the year since 2006, the U.S. Bureau of Labor Statistics estimates that an average of just 4,361,000 individuals in the United States earned the same equivalent of the current prevailing federal minimum wage of $7.85 or less throughout the year. In terms of jobs lost, that means that 2,276,949 of the jobs lost in the U.S. economy since 2006 have been jobs that were directly impacted by the series of minimum wage increases that were mandated by the federal goverment in 2007, 2008 and 2009.
A Depressing Look At Income Growth Compared To Health Care And College Cost - In a previous post I illustrated the growth of household incomes since 1967 based on Census Bureau data. Let's trim the timeline and compare the growth of two major household expenses — medical costs and college tuition and fees. The first chart below shows the real (inflation-adjusted) annualized income growth from 1980 to 2009 (the most recent annual data). The lines represent the average household incomes by quintile along with the average for the top five percent of households. The next chart shows the real growth of medical costs over the same time frame. The top 5% of households saw their real incomes increase by 71.5%. But real medical costs grew by a stunning 241%.
Why should economists care about "ethnicity and IQ"? -Cowen has published two lists: a list of what he thinks left-leaning economists get wrong, and a list of what he thinks right-leaning economists get wrong. Overall, they're not bad (though actually I prefer Arnold Kling's more concise version and Ezra Klein's list of what economists get wrong about politics). However, one of Cowen's line items really jumped out at me. Here's one of the mistakes he thinks liberals make: Lack of interest in discussing ethnicity and IQ as relevant for social policy, except in preferred contexts. When I first read this, I confess I got a bit angry. "So now Cowen is telling me that black people are dum-dums?!" I yelled, shaking my fist at the screen. But after my traditional attitude of cool skepticism reasserted control, I found myself simply asking: Why? Why should I, as an economist, be interested in discussing "ethnicity and IQ as relevant for social policy?"
The Fiction of Freedom in America: The "American Dream" of Social Inequality, Discrimination and Poverty - America itself is a psy op, and the American Dream a 'hollow-gram.' George Carlin said they call it the American Dream because you have to be asleep to believe it. Potemkin America creates a protective barrier, a moat between an 'opulent minority' of castle-dwellers and the immiserated majority of consumer-serfs who live in the lower reaches of the economic village. The 'opulent minority' purposefully perpetuates this situation as the means to ill-gotten gains, amassed by appropriating the 'surplus' value produced by workers, whose labor creates the real wealth of society. But there's no way around the fact that whether on the backs of serfs, indentured servants, chattel slaves, wage slaves or debt slaves, there is no production without labor. 'Labor is prior to, and independent of capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is superior to capital, and deserves much the higher consideration.' - Abraham Lincoln And labor has to eat, have shelter and medical care in order for that production to go on. The fight of the 'opulent minority,' the possessors of capital - money, assets - is to keep these 'costs' - food, shelter, medical care - to a bare minimum, and to get labor to pay for it whenever possible. This is class war, what it is, what it has been and what it will always be about - who gets what and how much."
Hard times generation: homeless kids - For some children, socializing and learning are being cruelly complicated by homelessness, as Scott Pelley reports from Florida, where school buses now stop at motels for children who've lost their homes.
A Major Problem Facing the Poor is Lack of Money - Matt Yglesias echoes my general take on poverty in the developed world Poor people, by definition, don’t have much money. And lack of money leads to a lot of problems. Oftentimes, these problems are best attacked at the source. He then repeats the story of a British program in which the homeless were simply asked what they wanted and then those things were bought for them The average cost of their requests was $1277. Yglesias concludes lots of people might like $1,277 worth of stuff. I, for example, got a notice in the mail today from the Internal Revenue Service suggesting that I owe approximately that much in back taxes due to some improper filing in the past. So why should that money go to homeless people when I could use it too? Current spending on the homeless is already much higher than that, but it overwhelmingly consists of the in-kind provision of services—shelter beds, addiction treatment, incarceration, frostbite relief—that most of us don’t actually want. From a rationalist perspective we can see that helping people in cheaper but more dignity-respecting ways will ultimately end up with all of us having more money in our pockets. But to get there you need to move past the impulse toward scolding moralizing.
Regional inequality: Divided we stand | The Economist - REGIONAL inequality, as measured by the differences in GDP per person across a country, is often huge. Such comparisons can be tricky, as the areas are not always similar in terms of size and cost of living. Nevertheless, in Britain, GDP per person in the richest area is over five times the national average and nearly ten times that of the poorest area. And the richest state in America, the District of Columbia (granted statehood in these statistics), has a GDP per person five times higher than the poorest state, Mississippi. In an analysis of seven countries by The Economist, Italy was found to have the lowest level of regional inequality, perhaps due to large fiscal transfers to the Mezzogiorno in the south. Meanwhile, China's phenomenal growth means that on a purchasing-power-parity basis, the municipality of Shanghai has a higher GDP per head than a quarter of the regions in Britain and Italy and one-tenth of those in Germany.
State Unemployment Rates generally unchanged in January - Earlier today from the BLS: Regional and State Employment and Unemployment Summary Regional and state unemployment rates were generally unchanged in January. Twenty-four states recorded unemployment rate decreases, 10 states registered rate increases, and 16 states and the District of Columbia had no change, the U.S. Bureau of Labor Statistics reported today. Nevada continued to register the highest unemployment rate among the states, 14.2 percent in January. The states with the next highest rates were California, 12.4 percent, and Florida, 11.9 percent. North Dakota reported the lowest jobless rate, 3.8 percent, followed by Nebraska and South Dakota, 4.2 and 4.7 percent, respectively. One state, Colorado, set a new series high, 9.1 percent. The following graph shows the current unemployment rate for each state (red), and the max during the recession (blue). If there is no blue, the state is currently at the maximum during the recession.
State Unemployment Gives Mixed Signals - Twenty-four states saw their unemployment rates drop in January while 10 registered increases, the Labor Department said Thursday.Nevada remained the state with the highest jobless rate at 14.2% that month, though it declined 0.7 percentage point from a month earlier. It was followed by California at 12.4% and Florida at 11.9%. The lowest was North Dakota at 3.8%, followed by Nebraska at 4.2% and South Dakota at 4.7%. State unemployment data are reported with a one-month lag. The U.S. jobless rate in January fell to 9% from 9.4%, and fell again in February to 8.9%. Overall, 23 states in January posted jobless rates significantly lower than the U.S. rate during that month, while 10 were measurably higher, the department said. See the full interactive graphic.
Why do some states have higher unemployment rates? - In a new report, the U.S. Chamber of Commerce purports to show1 that dismantling state regulations that are protective of workers would lead to large reductions in states’ unemployment rates by lessening costs on employers. It further describes such dismantling as a potential “free economic stimulus.” The chamber’s report is misleading on two counts. First, there is no evidence that what are keeping state unemployment rates high today are high employment costs. Unit labor costs economy-wide were lower in 2010 (when we had a 9.6% unemployment rate) than in 2007 (when the unemployment rate was 4.4%). Second, even if one gave the chamber the benefit of the doubt and assumed it is really talking about longerrun determinants of unemployment, its statistical approach is poorly constructed for untangling the true relationships between unemployment and its created index of employment regulation. Further, the finding does not stand up to a rudimentary check to confirm statistical robustness. In fact, the most robust finding to fall out of the chamber’s dataset is that strong employment protection is associated with higher state income. Given the thinness of the evidence in the chamber’s report, it should have little bearing on debates about states’ labor regulations. Read Issue Brief - See additional commentary
A bad answer to the wrong question - With its recent report on “The Impact of State Employment Policies on Job Growth,” the U.S. Chamber of Commerce (COC) demonstrates yet again that when the only tool somebody has is a hammer, every problem looks like a nail. In this case, the problem is a real one—high unemployment. But the chamber’s hammer—loud condemnation of any public policy that aims to help working families rather than corporations—isn’t going to help solve it.The chamber has created an employment regulation index (ERI) for each of the 50 states. In the chamber’s view a “perfect” ERI score is a zero, meaning that the state has no regulations stricter than federal minimums. In essence, the chamber is advocating that states surrender all of their policymaking autonomy.
Our best plan for growth is to set our cities free - Advanced economies are struggling to find an economic path past recession. On Sunday, David Cameron, the UK prime minister, promised an assault on the “enemies of enterprise”, while US president Barack Obama used January’s state of the union speech to promote jobs and competitiveness. But this new dash for growth is too often a battle of old ideas. To turn the corner, it must instead embrace the innovation that emerges naturally in our great urban centres.The figures are stark. Some 18 per cent of America’s output comes from its three largest metropolitan areas while Greater London is more than 50 per cent more productive than the rest of the UK. Technology and globalisation make these cities more important, because both increase the returns to knowledge and innovation.
Desperate techniques used to preserve the myth of the overcompensated public employee - Efforts to roll back public sector wages and benefits and collective bargaining are under way in many states, with proponents claiming that overpaid public sector workers are a drag on state budgets. Our widely disseminated research refuting that claim has been targeted by critics. But as this paper shows, the criticisms leveled against our analyses of public employee compensation1 are themselves unsound. This paper responds to the criticisms that suggest our results are biased because:
• We exclude part-time workers and part-year employees from the analyses.
• We include organization size controls in our analyses.
• We do not include a compensating wage differential to reflect the relative stability of public employment.
• We do not account for the greater returns earned by defined-benefit plans over defined-contribution plans.
• We do not account for government retiree health benefits.
State and Local Pay vs. Private Pay - Do state and local workers get paid more or less than their private sector counterparts? That old question has taken on renewed life with the budget and labor disputes raging in Wisconsin and other states. Unfortunately, it’s not an easy question to answer.As Ford Fessenden notes in a nice set of graphics at the New York Times,one reason is that observers disagree on what “paid” and “counterpart” mean. If you simply compare average pay and benefits, for example, state and local workers come out well ahead: But the two workforces differ. State and local workers are more educated, on average, than private ones. About 50% of state and local workers have a college degree, for example, while only 29% of private workers do. Controlling for that reduces the compensation differential.
Unions and State Economies: Don't Believe the Hype - As heated as it's been, the rhetoric over unions is fast-approaching the boiling point; Wisconsin is just the beginning. The right accuses unions, especially public sector unions, of stifling economic competitiveness and putting state economies in the red. Harvard economist Robert Barro wrote in the The Wall Street Journal: "Labor unions like to portray collective bargaining as a basic civil liberty, akin to the freedoms of speech, press, assembly and religion ....[but] collective bargaining on a broad scale is more similar to an antitrust violation than to a civil liberty." On the left, unions are seen as a bulwark against falling wages and the decline of the middle class. "Collective bargaining didn't cause the economic meltdown, and crushing unions won't solve it," For all the sound and fury, neither side has adduced much hard data to support their positions. While there have been many studies of the effects of unions on corporate profits and productivity, surprisingly few assess their effects on state economies.
Government in the cross hairs - Who are these evil workers who throw away our tax dollars so thoughtlessly? They're our neighbors, relatives and friends — they are police officers, firefighters and teachers. Oliver Sacks, in his wonderful early book, "A Leg to Stand On," discusses a neurological condition called somatoparaphrenia. Patients with this disorder experience "a denial of ownership" of their body parts. Sacks remembers being called to deal with a patient who had fallen out of bed. He came in to find the man lying on the floor with an odd look on his face. The patient reported that he had found a strange leg in bed with him. He thought it was a cadaver's leg that a nurse had put in his bed as a joke. But when he attempted to throw the horrible thing out of the bed, he somehow came after it — and now it was attached to him. I've been thinking about somatoparaphrenia lately in relation to our nation's ongoing war against the public sector. Somehow we have come to think of our government the way somatoparaphrenia patients think about their arms or legs. It is not us. It just takes our money and wastes it on foolishness. It is as if the government has nothing to do with the people, and its expenditures are no more beneficial to its citizens than when a boatload of Somali pirates spend their bloody ransom on drugs and whores
Picking on the Little Guy – The attack on public sector unions… In the second half of the 1990s, I worked as an economist for the City of New York. This was during the dot-com boom when everyday there was an article in the New York Times about the newest IPO multi-millionaire and the high tabs spent on dinner and drinks at Le Cirque. I made $36,000. My union had negotiated a five-year collective bargaining contract when the City was still recovering from the crash in the real estate market of the late 1980s, and as a result, our collective agreement specified a two-year pay freeze, followed by one, two and 4.5 percent pay increases in the subsequent years. What this meant was that public sector workers were having real pay cuts during one of the greatest economic booms in the city’s history. My pay was low by Manhattan standards and our holiday party was pot-luck, but my work was interesting, the benefits were good and I had the satisfaction of knowing that my job was safe and not subject to the whims of a boss.Like me, many workers prefer the public sector precisely because there is job stability and because there are limits on working hours that allow greater work-life balance, in a country with no legally mandated vacation and the most flexible working hours in the world. An implicit contract exists that is now under threat in Wisconsin, Ohio, Indiana, and across the U.S.
The myths about unions - THE ATTACK on teachers and other public employees in Wisconsin is based on claims that unionized workers are overpaid and society will be better off if we are stripped of our bargaining rights. In Massachusetts, most political leaders reject these contentions, but the airwaves are buzzing with misinformation that needs correcting. Our union fights to help both students and teachers. We led efforts to defeat two recent ballot questions that would have eliminated essential public services. We advocate for small class sizes and strong public colleges. In the 1990s, we funded a lawsuit to increase state funding for low-income school districts. Our efforts have paid off. Massachusetts, with one of the highest teacher unionization rates in the country, now also has the highest level of student achievement. Despite our successes, many people have bought the unexamined line that public employee compensation is excessive. In fact, numerous studies show that total public employee compensation — pay and benefits combined — is the same as or lower than compensation for similar private-sector workers.
"Where free unions and collective bargaining are forbidden, freedom is lost" - Barry Ritholz shines a light on an alternative to the current meme on public sector unions: In a Labor Day address in 1980, Ronald Reagan said: "These are the values inspiring those brave workers in Poland … They remind us that where free unions and collective bargaining are forbidden, freedom is lost." Reagan as above, in video.
Scapegoating public sector workers - At its core, the fierce debate waging in Wisconsin and several other states over public-sector unions can be traced to a single, false argument: that public sector workers are the cause of the budget crises states now face. In fact, the severe state budget shortfalls around the country are not the result of excessive compensation paid to the teachers, police officers, and firefighters who perform essential services, but to the economic downturn that left millions of workers unemployed while eroding property values. State and local tax revenues suffered as a result and today, more than three years after the nation plunged into the worst recession since the Great Depression, state and local governments are still trying to recover.In the face of a budget shortfall, austerity can seem like the simplest and the best solution. But the austerity measures proposed by Wisconsin Governor Scott Walker are misguided for a number of reasons.
The Wisconsin union fight isn’t about benefits. It’s about labor’s influence. - The battle between Republicans and labor unions1 in Ohio, Wisconsin and other states is ostensibly about public workers' pay, benefits and bargaining rights. What is really at stake, however, isn't labor's income. It's labor's influence - not just in the American workplace but in American politics. Critics of unions cast them as exclusive clubs for which the rest of Americans pay the dues. Wisconsin's GOP governor, Scott Walker, likes to say that unions are the "haves" and everyone else the "have-nots." And it's certainly true that unions aggressively pursue their own interests - sometimes to others' detriment. When asked in the early 20th century what the American Federation of Labor wanted, the union's gruff head, Samuel Gompers, famously replied, "More." But unions play another role, too - one more like that of civic groups than private associations. Although they want "more" for their members, they also want to make good middle-class jobs the norm. And the most important way they pursue this larger goal isn't by demanding concessions at the bargaining table, but by operating as a counterweight to the demands of corporations and Wall Street in the corridors of power. That is precisely why opponents of organized labor are seizing upon state fiscal troubles to try to destroy its remaining clout.
Walker, Wisconsin Democrats Dig In Over Union Bill - Tensions heightened between Wisconsin Gov. Scott Walker and the state's 14 Senate Democrats Monday, as they traded attacks over efforts to end a three-week-old impasse over legislation that would strip public employees of most collective-bargaining rights.The Republican governor accused Democrats of being divided about whether to return from Illinois to vote on his "budget-repair" bill, while Democrats said Mr. Walker overstated the progress of behind-the-scenes talks between the sides over the past week.Mr. Walker said in a news conference Monday that negotiations to bring back the Democrats, who fled the state Feb. 17 to avoid a vote on his bill, had been blocked by their leader, Sen. Mark Miller.Mr. Walker said his administration and Senate Majority Leader Scott Fitzgerald had been negotiating to persuade about five Democrats to return to Wisconsin. Republicans hold a 19-14 majority in the state Senate, but need at least one Democrat to have enough members present to vote on the bill.
How I Got to Madison, Wisconsin By Michael Moore - Early yesterday morning, around 1:00 AM, I had finished work for the day on my current "project" (top secret for now -- sorry, no spoiler alerts!). Someone had sent me a link to a discussion Bill O'Reilly had had with Sarah Palin a few hours earlier about my belief that the money the 21st Century rich have absconded with really isn't theirs -- and that a vast chunk of it should be taken away from them.They were referring to comments I had made earlier in the week on a small cable show called GRITtv (Part 1 and Part 2). I honestly didn't know this was going to air that night (I had been asked to stop by and say a few words of support for a nurses union video), but I spoke from my heart about the millions of our fellow Americans who have had their homes and jobs stolen from them by a criminal class of millionaires and billionaires. It was the morning after the Oscars, at which the winner of Best Documentary for "Inside Job" stood at the microphone and declared, "I must start by pointing out that three years after our horrific financial crisis caused by financial fraud, not a single financial executive has gone to jail. And that's wrong." And he was applauded for saying this.
Drive to recall Wisconsin GOP senators gaining steam, Dems say - So how's the drive to recall Wisconsin GOP state senators going? If these new numbers the Wisconsin Democratic Party shares with me are accurate, it's already exceeding expectations in a big way. Graeme Zielinski, a spokesman for the party, tells me that activists working on the recall push already collected over the weekend 15 percent of the total necessary signatures needed to force recalls in all eight of the GOP districts Dems are targeting. He says that the party -- which is helping to coordinate and keeping track of outside efforts to gather signatures -- set itself a goal of 10,000 signatures for the weekend, and has already exceeded it by 35 percent. Zielinski also claims that recall forces over the weekend put more than 2,000 volunteers on the street to collect signatures. He also says volunteers have collected 26 percent of the signatures required in one district, and 20 percent in another, though he wouldn't say which ones, because Dems want GOP senators to fret that they are the ones in question.
G.O.P. Tactic Ends Stalemate in Wisconsin Union Fight - The bitter political standoff in Wisconsin over Gov. Scott Walker1’s bid to sharply curtail collective bargaining for public-sector workers ended abruptly Wednesday night, as his Republican counterparts in the State Senate successfully maneuvered to adopt a bill doing just that. After a three-week stalemate, Republican senators pushed the measure through in less than half an hour, with the Senate’s Democrats still miles away trying to block the vote. Democratic Assembly members complained bitterly, and protesters, who had spent many days at the Capitol, continued their chants and jeers. The Republicans control the State Senate but had been blocked from voting on the issue after Senate Democrats left the state last month to prevent a quorum. Instead, they used a procedural maneuver to force the collective bargaining measure through: they removed elements of Governor Walker’s bill that were technically related to appropriating funds, thus removing a requirement that 20 senators be present for a vote. In the end, the Senate’s 19 Republicans approved the measure, 18-1, without any debate on the floor or a single Democrat in the room.
Wisconsin Senate Passes Bill; Ending Public Bargaining Rights, by Yves Smith: After claiming repeatedly in the media that the fight to end public worker bargaining rights was all about the budget, Governor Walker stripped the collective bargaining provisions out of the budget (which required the participation of at least one Democrat to have a big enough quorum to satisfy Constitutional requirements for fiscal votes) and the Wisconsin legislature passed it separately.Details from David Dayen: the Wisconsin State Senate rushed through and passed a bill that strips collective bargaining rights from most public employees. The vote in the State Senate, entirely composed of Republicans, was 18-1; only moderate Dale Schultz voted no. The budget repair bill was split at the last minute, cleaving the “non-fiscal” anti-union piece from the fiscal components of the bill. The non-fiscal piece did not require a quorum, so the Senate was able to pass it. This may not pass muster constitutionally in Wisconsin. ...But since the Supreme Court has a Republican majority, that would seem to cast a pall over challenges. But Supreme Court elections are on April 5, and the unions have a lot of support in the state. This bill passage (getting it through the Assembly is guaranteed) is subject to legal challenges not only on Constitutional but also on the basis of violating legislative procedures. And there is talk of a general strike, something which if you had asked me two months ago, I would have deemed to be pretty much impossible in America. They may be permissible if spontaneous, as in bottom up rather than called by union leadership.
Updated: Wisconsin GOP Rams Through Union-Busting Measure; Thousands Storm Capitol - Late Wednesday, Wisconsin Republicans rammed a measure through the Senate stripping collective bargaining rights from most public workers in the state. Although the 14 Democrats who fled the state to block Governor Walker's union-busting bill remain in Illinois, Republicans were able to push through the measure anyway by separating the collective bargaining provision from the other elements of Governor Scott Walker's "budget repair bill." (This, after claiming for months that killing public workers' right to negotiate was all about reining in the state's debt.) The measure passed 18-1, with Republican Sen. Dale Schultz voting against. Critics say the rushed legislative session -- with only one Democrat in attendance -- may have violated the state's open meetings law. So what's next? AlterNet has the latest updates and analysis:Update: Within hours of the vote, the Capitol was flooded with thousands of furious protesters: "The whole world is watching!" they shouted as they pressed up against the heavily guarded entrance to the Senate chamber," ABC reports.
Wisconsin GOP Bill Allows State to Fire Employees for Strikes, Walk-Outs - On Wednesday night, Republicans in Wisconsin's state senate rammed through a retooled version of Governor Scott Walker's controversial "budget repair bill" with the 14 senate Democrats still in hiding in Illinois. The senate bill eliminates collective bargaining rights for most public-sector unions, a provision that has labor leaders and protesters up in arms. But there's another explosive provision in the bill that's received little attention: The bill authorizes state officials to fire any state employee who joins a strike, walk-out, sit-in, or coordinated effort to call in sick. According to an analysis (PDF) of the Senate bill by Wisconsin's Legislative Fiscal Bureau (LFB), the legislation gives state officials the power to fire workers during a "state of emergency" declared by the governor under several conditions. If a state employee misses three working days without an approved leave of absence, that's grounds for being fired. State workers can also be dumped if, according to the LFB's analysis, they participate in a "strike, work stoppage, sit-down, stay-in, slowdown, or other concerted activities to interrupt the operations or services of state government, including mass resignations or sick calls."
Michael Moore Reacts To Wisconsin Union Vote: "This Is War" - Michael Moore is enraged after the Wisconsin State Senate voted to strip public unions of the ability to collectively bargain. Speaking on MSNBC's "Rachel Maddow Show," Moore said "they think they can get away with this." Moore also calls for a "student walk-out" across the nation on Friday in response to the Wisconsin vote. "This has to continue day after day and these governors have to step down," Moore declared. "The rich have committed these crimes and the people will demand your ass is in jail," Michael Moore said with a pair of handcuffs on the set of Maddow's show. Moore also shocked the audience by telling the rich and bankers that "we have a right to your money!"
Live Video Stream Of Wisconsin Protests Where Hundreds Of Protesters Rush Wisconsin Capitol, Vastly Outnumbering Security - That didn't take long. Ann Althouse writes: "Meade, who is in the building now, tells me, by phone, that he saw a window on the Wisconsin Avenue side of the building opened and protesters entering through that window. He thought it seemed as if someone in one of the Democratic legislators' offices had opened a window to let them in, and — once they were in — many doors have been opened all around, and people have streamed into the building. He says he counted 3 "troopers" — I'm not sure what the official job title is for these security people — and that they were absurdly overwhelmed by the crowd." So...Wisconsin is not Cairo? It is unknown if any Republicans were harmed in the making of this mini Cairo. At least now we know what it takes to pull the average American away from The Jersey Shore...
Awesome: Wisconsin Firefighters Shut Down Bank That Funded Walker - Everybody knows the GOP's biggest weakness is money, so why not hit 'em in the sweet spot? That's what many amazing Wisconsin firefighters did yesterday when they collectively began withdrawing their funds from Madison's M&I Bank -- whose executives and board members were among the highest donors to Governor Scott Walker's campaign.Heeding a call by Firefighters Local 311 President Joe Conway to 'Move your money,' union members withdrew over $100,000 from the bank, with some reports stating that number is as high as $192,000. Either way, it was a hefty enough chunk of change that M&I shut its doors and closed for the day at 3PM. This is a very simple, very peaceful way to inflict some serious damage on the money-grubbers; super kudos to the Firefighters Union.
Social justice and democratic stability - One thing I find interesting about the sustained demonstrations and protests in Madison, Wisconsin is the fact that people on the streets do not seem to be chiefly motivated by personal material interests. Rather, the passion and the sustainability of the protests against Governor Walker's plans seem to derive from an outrage felt by many people in Wisconsin and throughout the country, that the Governor's effort is really an attempt to reduce people's rights -- in this case, the right to come together as a group of workers to bargain together. This is a well established right in the private sector, protected by the National Labor Relations Act, and the rationale is substantially the same in the public sector.So when the Governor attempts to eliminate the right to collective bargaining for public employees, he offends the sense of justice of many citizens in Wisconsin and elsewhere -- whether or not they are directly affected, whether or not they themselves are members of unions. Restricting established social rights is a very serious thing -- well beyond the specific calculation of interests that people might make. It's morally offensive in the way that state efforts to roll back voting rights would be offensive. And this moral offensiveness can be a powerful motivator of collective resistance. So this seems to provide an intriguing clue about political mobilization more generally. To what extent is moral outrage, a perception of injustice, an important motivator of individual political engagement and activism?
Conservative Corporate Advocacy Group ALEC Behind Voter Disenfranchisement Efforts- The American Legislative Exchange Council (ALEC), a conservative organization linked to corporate and right-wing donors, including the billionaire Koch brothers, has drafted and distributed model legislation, obtained by Campus Progress, that appears to be the inspiration for bills proposed by state legislators this year and promoted by Tea Party activists, bills that would limit access of young people to vote. ALEC describes itself as a “nonpartisan membership association for conservative state lawmakers who shared a common belief in limited government, free markets, federalism, and individual liberty.” In Wisconsin, where public attention now is focused on Gov. Scott Walker’s (R) efforts to undermine the rights of workers to engage in collective bargaining, there is another piece of proposed legislation that could have a substantial negative impact on the state’s young and minority voters. Conservative representatives in the state have proposed a law that would ban students from using in-state university- or college-issued IDs for proof-of-residency when voting. This legislation, backed by Walker, would also end same-day voter registration at the polls.
Kansas bill encourages outsourcing of government jobs - After a lengthy floor debate, the House passed a bill Friday establishing an 11-member commission to study ways to outsource public jobs to private-sector companies and nonprofit groups.The group would be called the Kansas Advisory Council on Privatization and Public-Private Partnerships.According to House Bill 2194, the council's main responsibility would be to "review and evaluate the possibility of outsourcing goods or services provided by a state agency to a private business or not-for-profit organization that is able to provide the same type of good or service, and whether such action would result in cost savings to the state."The council would also identify areas where government services compete with private business, "to determine ways to eliminate such competition."Outnumbered Democrats taunted conservative Republicans, saying that in creating another commission, they are expanding government in order to shrink it.
More Public Infrastructure Sale Tales of Woe -- Yves Smith - Coming to a state or city near you, and quite possibly the one you are in….bankers bearing promises of solving budget woes by selling public infrastructure to private investors. This is in best case scenario makes about as much sense as using your house as an ATM to pay expenses, and in a worst-case scenario, is more like burning your furniture to heat the house. But desperate times lead to desperate and often short sighted measures. Reader May Sage pointed us to this Truthout article, which we recommend reading in full. Key extracts: States and cities are being told that they can fix their budgets and have money left over by leasing their infrastructure for 50, 75 or even 99 years. It sounds great, even miraculous. But we all need to slow down and do our homework, because the rule “If it sounds too good to be true, it is” still applies, and there are good reasons why state and local governments should not want any part of these deals. The truth is that, rather than making money on just tolls and fees, private contractors make their money through big tax breaks and by squeezing state and local governments for payments for the life of the contracts…. But that’s not all. Infrastructure privatization contracts are full of “gotcha” terms that require state or local governments to pay the private contractors.
Illinois Fails To Pay Its Bills (News video) A group of local human service organizations are banding together to complain about the state's failure to pay its bills. The leaders of a variety of local human services groups say that because the state has not paid them they must find some way to pay the billions of dollars it owes. They say a debt-restructuring plan is the state's best bet.
Highest Sales Tax in the United States - Vertex, a company that provides sales tax data, released its 2010 Sales Tax Report (PDF) last month, finding: [T]he average combined U.S. sales and use tax rate increased to a record high of 9.64 percent compared to the previous record of 8.63 percent in 2009. Additionally, the average combined rate of 9.64 percent marks the highest average since Vertex started tracking the data in 1982. The report valuably tracks new taxing jurisdictions and changes within existing ones: far from reducing the burdensome number of sales tax jurisdictions, there were 273 new ones created in 2010. Altogether, new and changed sales taxes have been running at about 676 per year. Interestingly, Vertex reports that the highest combined sales tax in the United States is 13.725%, in Tuba City, Arizona (pop. ~8,000), near the To'Nanees'Dizi Local Government (Navajo). Arizona does impose a 6.6% state tax, the county has a 1.125% tax, and tribal merchants collect a 6% sales tax.
U.S. municipal bond market now at $2.9 trillion: Fed - (Reuters) - The amount of outstanding municipal bonds grew by $116.2 billion last year to end at $2.9 trillion, U.S. Federal Reserve data released on Thursday showed, with almost half of that growth in the last quarter of 2010. The taxable Build America Bonds program expired in 2010, and in the final quarter issuers rushed to market to take advantage of the steep federal rebate the bonds paid, which was equal to 35 percent of interest costs.The program was created in the 2009 economic stimulus plan. Although cities, states and local governments had known it would expire along with the plan on December 31, 2010, many had expected it to be extended for at least another year.Because they were taxable and paid higher interest rates than most municipal bonds, Build America Bonds attracted investors who typically spurn tax-exempt debt. The Federal Reserve report showed municipal securities held by the rest of the world rose to a record $73 billion in the fourth quarter of 2010.
Jeffrey Gundlach: Munis Are The New Subprime - Bond king Jeff Gundlach likened municipal bonds to subprime mortgage bonds on CNBC’s Strategy Session on Wednesday. “You’ve got a history of low defaults, which is comforting. But that kind of sounds like what subprime sounded like back in 2006,” Gundlach said. Gundlach said the markets for subprime bonds and municipal bonds are similar because the buyers are similar. Muni bond buyers aren’t seeking fundamentally good credit stories—they are buying for “technical reasons,” Gundlach said. This is exactly what happened with subprimeWith subprime bonds, buyers were seeking highly-rated credit with very low default histories in order to satisfy regulatory bank capital requirements. Muni bonds are bought for a different “technical reason”—the tax benefit—and buyers are once again ignoring deteriorating fundamentals. So are munis going the way of subprime? “If by that you mean, lower, then yes. If you mean crashing, I’m agnostic on that,”
Hawaii deficit nears $1B - State lawmakers looking at new revenue or spending cuts to balance the budget have a fresh challenge: Find an additional $266 million. The state Council on Revenues lowered its revenue forecast yesterday, a recalculation that would boost the state's projected budget deficit to nearly $1 billion.The new forecast also has immediate consequences on spending this fiscal year. The council's forecast came after economists determined that the economy, while improving, would not recover quickly enough in the remaining months of the fiscal year to reach its December projection of 3 percent revenue growth.The uncertainty caused by Gov. Linda Lingle's decision last year to delay state income tax refunds also continues to influence the precision of the forecast.
Sacrifice: Only the Middle-Class Need Apply - With teachers on the ropes, New Jersey Governor Chris Christie has opened another front in his ongoing campaign against public sector workers: Governor Christie called New Jersey police and firefighters greedy and said their mass protest in Trenton on Thursday would play “absolutely zero” role in the ongoing debate over public worker benefits.The governor, speaking during a news conference inside the State House as thousands of unionized police and firefighters rallied outside, said the unions are refusing to compromise on contracts that pay expensive benefits taxpayers can no longer afford.“They’re choosing their own greed over the betterment of the public,” he said. It's hard to make a direct public/private sector comparison with New Jersey's police officers and firefighters — since there aren't equivalent professions in the private sector — but you'd be hard-pressed to say that they're overpaid or "greedy." According to a 2010 analysis from the Economic Policy Institute, the average New Jersey police officer makes $75,400 per year, while the average firefighter makes $69,620 per year. New Jersey's public employees have generous benefits, but when you compare total compensation between public and private employees, private sector workers come out on top:
Traffic tickets increase as N.J. towns look for revenue - Eager, cash-strapped municipalities have doubled -- in some cases tripled -- the number of traffic and parking tickets issued, a move some motorists call a blatant grab for money. Half of the state's boroughs, townships and cities handed out 250,000 more tickets in the last six months of 2010, when compared to the same period a year earlier, a New Jersey Press Media investigation found. The ticket boost has easily added millions of dollars to local and county coffers. And nearly half of the those new tickets were issued in municipalities that installed automated red-light cameras, which record every violation 24 hours a day, the investigation found.
Police Force Nearly Halved, Camden Feels Impact - Since the city laid off nearly half its police force in January, the mayor and police chief have tried to stay positive, with the police chief even suggesting that his leaner force will be a model for others facing similar circumstances. But after the layoffs of 163 police officers, Camden is feeling the impact. Callers to 911 who report things like home burglaries or car break-ins are asked to file a report over the phone or at police headquarters; officers rarely respond in person. “If it doesn’t need a gun and a badge at that location,” officers are not sent, the city’s police chief, J. Scott Thomson, said last week. Police headquarters now sits nearly empty, its front reception window sometimes closed, as most of the department’s staff has been pushed onto the street for patrol duty. Detectives cannot devote as much time to investigations; a widely praised bicycle unit was disbanded. Even the canine unit lost two of its three dogs.
Tight Budgets Mean Squeeze in Classrooms - Millions of public school students across the nation are seeing their class sizes swell because of budget cuts and teacher layoffs, undermining a decades-long push by parents, administrators and policy makers to shrink class sizes. Over the past two years, California, Georgia, Nevada, Ohio, Utah and Wisconsin have loosened legal restrictions on class size. And Idaho and Texas are debating whether to fit more students in classrooms. Los Angeles has increased the average size of its ninth-grade English and math classes to 34 from 20. Eleventh- and 12th-grade classes in those two subjects have risen, on average, to 43 students. “Because many states are facing serious budget gaps, we’ll see more increases this fall,” The increases are reversing a trend toward smaller classes that stretches back decades. Since the 1980s, teachers and many other educators have embraced research finding that smaller classes foster higher achievement.
CMS Budget Cuts Could Mean Hundreds Of Teacher Layoffs - Charlotte-Mecklenburg Schools is preparing to lay off hundreds more teachers, and Goodwin said she thinks veteran teachers have the advantage. “If you are an untenured teacher, unless you're in a critical area, really, start going ahead, making plans (and) looking at other options,” she said. The 2011-12 proposed budget calls for a $100 million reduction. The cuts could cost up to 600 teachers their jobs. “It's so necessary and vital for us to be in the classroom so we can give the children the quality education they deserve so they're able to compete globally," Goodwin said. "They are our future leaders.”
Layoffs Approved at FUSD; Averted in Clovis - Fresno Unified teachers and their supporters showed up in force Wednesday night as the district's Board of Trustees met to discuss their budgetary options in the face of a multi-million dollar shortfall. Carrying signs that read "Save Our Schools" and "Keep Our Teachers", the crowd gathered outside the Board of Education building in downtown Fresno prior to the trustees meeting. Despite the outcry to avoid impacting the classroom by targeting teachers, the board voted to send out more than 300 layoff notices, which by law need to be in the mail by March 15th. An official count of actual layoffs won't be known for at least two more months. As with all school district's across the state, Fresno Unified is awaiting movement in Sacramento on the state's budget, which will ultimately determine the amount of funding district's can expect to receive in the coming year.
San Diego School Board May Warn 900 Teachers Of Layoffs - California's budget crisis threatens to devastate the public-education system. Deep budget cuts are forcing school districts throughout the state to lay off thousands of teachers, expand class sizes and close programs. San Diego Unified, the state's second largest school district, will decide Thursday on whether to send layoff warnings to 900 teachers and 600 non-teaching staff to close a $120-million budget deficit. School board member Richard Barrera said the decision comes down to paying the bills or educating the kids. He said the cuts will be much worse if a tax extension measure proposed by Gov. Jerry Brown fails. “The state treasurer was in town a couple of weeks ago and he started throwing around the notion of a 130-day school year. That would mean school would end at the end of March. Five months of the year, kids are out of school,"
Education Secretary: 82% of US public schools may ‘fail’ this year - In testimony to Congress Wednesday, US Education Secretary Arne Duncan made a startling claim: This year, up to 82 percent of public schools could 'fail' the government's 'No Child Left Behind' standards. 'No Child Left Behind is broken and we need to fix it now,' he said, according to a transcript provided by the Department of Education. 'This law has created dozens of ways for schools to fail and very few ways to help them succeed,' Duncan added. 'We should get out of the business of labeling schools as failures and create a new law that is fair and flexible, and focused on the schools and students most at risk.' Last year, just 32 percent of schools were failing the government's rigorous testing standards. Duncan was speaking to the House Education and Work Force Committee.
The Best-Laid Plans - Here’s the truly scary thing about the 8.9-magnitude earthquake off the coast of Honshu Island and its resulting tsunami: Japan is a country that is lauded for doing preparedness right. “I’m still in shock,” said Ivan G. Wong, the principal seismologist of URS Corporation2 in Oakland, Calif., contemplating Japan’s efforts to resist earthquake damage and its parallels to building standards in this country. “I’m just flabbergasted by the amount of damage we’re seeing.” Mr. Wong noted that the Pacific Northwest is at considerable risk of a strong earthquake from the Cascadia fault, which lies off the coast under the seabed. And while the coastal zone of the Northwest does not have as much residential and business development as that slammed by the Japanese tsunami, the earthquake risks farther inland along the Pacific Northwest could well end up sustaining severe damage, he said. Nearly a thousand Oregon schools built in the last century have poor earthquake resilience,3 and many vulnerable dams protect urban areas in the region.
Firing Teachers with Due Process - Teachers need protection from over-zealous bosses and ideological politicians. This is the same thinking behind seniority rules, which protect more expensive teachers (i.e. veterans) from being laid off due to budget cuts. Teaching is not a high-paying job compared to jobs in the private sector, and one of the benefits is some job security. Occasionally this means bad teachers take longer to fire. But the answer to that problem is not making all teachers easier to fire. This would undermine teacher recruitment. If you take away pensions, job security, tenure, the ability to unionize, and basically all the other perks of teaching, what you're left with is a very difficult job with no job security, mediocre benefits, and relatively low pay. This is not how you attract good people to a profession, or how you guarantee a good education experience for your children. Paying starting teachers more but making their long-term prospects in the career less certain is also wrong-headed. High turnover is not desirable for any business, teaching included.
It's no fun being graded on a curve - Mark Palko points to a news article by Michael Winerip on teacher assessment: No one at the Lab Middle School for Collaborative Studies works harder than Stacey Isaacson, a seventh-grade English and social studies teacher. She is out the door of her Queens home by 6:15 a.m., takes the E train into Manhattan and is standing out front when the school doors are unlocked, at 7. Nights, she leaves her classroom at 5:30. . . . Her principal, Megan Adams, has given her terrific reviews during the two and a half years Ms. Isaacson has been a teacher. . . . The Lab School has selective admissions, and Ms. Isaacson's students have excelled. Her first year teaching, 65 of 66 scored proficient on the state language arts test, meaning they got 3's or 4's; only one scored below grade level with a 2. More than two dozen students from her first two years teaching have gone on to . . . the city's most competitive high schools. . . .You would think the Department of Education would want to replicate Ms. Isaacson . . . Instead, the department's accountability experts have developed a complex formula to calculate how much academic progress a teacher's students make in a year -- the teacher's value-added score -- and that formula indicates that Ms. Isaacson is one of the city's worst teachers.
Centrally planned education - In the room for debate on “Why Blame the Teachers?” a high school teacher offers this:“…college graduates are not going to be attracted to a profession that only encourages short stints. The majority of teachers did not choose their profession because of the vacation time, or the salary, or because they thought it would be easy. They chose teaching because they wanted to make a difference in children’s lives in the long term. Those teachers that entered the profession for the more mundane reasons don’t actually stay for very long.”This very well may be true. This means that either teacher quality will suffer as a result of getting rid of LIFO or school will have to pay teachers more to compensate them for the now riskier profession. On the other hand, a little bit of this may be worth it. If this means on the rare occasion when layoffs happen they go to worst 5% of teachers (worst obviously measured with some error) then it may be worth the slight drop in overall teacher quality that results.
Education by the states - It is often said by education reform critics that if you look at U.S. education by state, some states actually excel in international comparisons. The following charts are from a paper by Hanushek, Peterson, and Woessman on how U.S. States perform compared to other nations by looking the percent of students that scored advanced on 2006 PISA math exams. Massachusetts clearly outperforms all the other states, but is still outdone by 14 countries, 11 of which perform better by a statistically significant margin. The U.S. overall does much poorer: I thought this chart served as a useful reminder that all states have room for improvement, and it’s not true that some of them can simply pat themselves on the back, say “great job!”, and turn their backs to education reform.
Report: Illinois prepaid tuition program underfunded, risky - The prepaid tuition program in Illinois is more seriously underfunded than any other state and its new investment strategy is seen by some experts as risky, according to a published report. The College Illinois Prepaid Tuition Program has a bigger shortfall than other state programs that are still open to new investors, according to an investigation published Monday by Crain's Chicago Business. The business newspaper's analysis used the accounting system that other states use. Illinois' plan recently changed its bookkeeping methods to a system that makes its shortfall seem smaller. The accounting change puts the amount of the program's funding shortfall at 20 percent. But using the former method, the program's shortfall is 31 percent. Prepaid tuition programs allow parents to lock in college tuition prices for their children, gaining families some protection from inflation. Illinois law doesn't require taxpayers to bail out the program, so 55,000 family investors may not get what they think they paid for if the investment strategy fails, the business newspaper reported.
UC Riverside leaders consider sweeping cuts in face of budget crisis - Should library hours be cut? Could some academic programs be closed or merged? Will turning down air conditioners and fixing leaky sprinklers save much money? UC Riverside administrators are mulling such questions as they face an expected reduction in the campus' core budget next year of at least 8%, or $38 million, even as they cope with higher pension costs and energy bills. The decisions could affect the livelihoods of employees and quality of education for more than 20,000 students at the Inland Empire campus. Chancellor Timothy White recently told worried faculty and others to prepare for "the most difficult decisions you and I will ever make in our professional careers."Among the stakes, White said, are the Riverside campus' ambitions to open a medical school in 2012 and remain a launching pad for minority students and those who are first in their families to attend college.The 10 UC campuses have been through similar drills over the last three years of state budget crises, and alarms rang again recently with Gov. Jerry Brown's call to cut $500 million from the UC system for the 2011-12 school year.
Fact-Challenged Policy - Last week, Microsoft Chairman Bill Gates published an op-ed in the Washington Post, “How Teacher Development could Revolutionize our Schools,” proposing that American public schools should do a better job of evaluating the effectiveness of teachers, a goal with which none can disagree. But his specific prescriptions, and the urgency he attaches to them, are based on the misrepresentation of one fact, the misinterpretation of another and the demagogic presentation of a third. It is remarkable that someone associated with technology and progress should have such a careless disregard for accuracy when it comes to the education policy in which he is now so deeply involved. Gates’ most important factual claim is that “over the past four decades, the per-student cost of running our K-12 schools has more than doubled, while our student achievement has remained virtually flat.” And, he adds, “spending has climbed, but our percentage of college graduates has dropped compared with other countries.” Let’s examine these factual claims:
Degrees and Dollars, by Paul Krugman - It is a truth universally acknowledged that education is the key to economic success. Everyone knows that the jobs of the future will require ever higher levels of skill. ...But what everyone knows is wrong, the idea that modern technology eliminates only menial jobs, that well-educated workers are clear winners, may dominate popular discussion, but it’s actually decades out of date.The fact is that since 1990 or so the U.S. job market has been characterized not by a general rise in the demand for skill, but by “hollowing out”: both high-wage and low-wage employment have grown rapidly, but medium-wage jobs — the kinds of jobs we count on to support a strong middle class — have lagged behind. And the hole in the middle has been getting wider: many of the high-wage occupations that grew rapidly in the 1990s have seen much slower growth recently, even as growth in low-wage employment has accelerated. Why is this happening? The belief that education is becoming ever more important rests on the plausible-sounding notion that advances in technology increase job opportunities for those who work with information — loosely speaking, that computers help those who work with their minds, while hurting those who work with their hands.
College Grads, High School Dropouts and Long-Term Unemployment - In most things job-related, education matters. Except when it comes to leaving unemployment. As my colleague David Leonhardt has noted before, America’s most educated workers have been blessed with significantly lower unemployment rates and higher wages gains than their less-educated counterparts, including during the Great Recession.But on one striking measure, the suffering seems to be doled out evenly: duration of unemployment. The following chart is taken from a new report by economists at the Federal Reserve Bank of Cleveland. It shows the average number of weeks that an unemployed person has been out of work, sorted by educational attainment:
College Marauders – Student loan debt inches to $900 billion when only in 2000 it was at $200 billion – Most expensive colleges in country charging nearly $60,000 per year in tuition. - College education is a dream for many Americans. What the current recession is showing us is that having a college degree is a substantial benefit in getting ahead as long as you don’t put yourself into the abyss of student loan debt. This has been magnified by the fact that low skilled work and blue collar jobs are either outsourced or simply do not pay a competitive wage to keep up with the current cost of living. Average Americans do not have a 4-year college degree because if we look at the data 1 out of 4 adults in the United States has a bachelor’s degree or higher. Given that many of the sectors with future job growth including engineering and healthcare require advanced degrees it is crucial to have the foundational background to be competitive in these sectors. However like most anything in life, not all college degrees are created equal and chiseled from the same stone and with student loans people are able to do irreparable damage by chasing a degree that has little return on investment.
Wave of retiring teachers threatens to swamp CalSTRS reserves - As California school districts anticipate possibly the worst budget crisis in a generation, many will try to lighten their burden by enticing older teachers into retirement.But as more and more teachers retire - with a pension averaging 55 percent to 60 percent of salary - they will be straining a system that already can't meet its obligations.The California State Teachers' Retirement System is sliding down a steep slope toward insolvency, some say.Taxpayers, who already pick up 23 percent of CalSTRS expenses, will be increasingly burdened as the giant pension system fails to meet its obligations.
KPERS more than $9 billion in red - A family of four would have to write a check for $13,200 to pay off their pro-rata share of the unfunded liabilities in the Kansas Public Employees Retirement System. Kansas taxpayers are on the hook for $9.3 billion according to a new study from Kansas Policy Institute and retired University of Colorado professor Dr. Barry Poulson, an Adjunct Fiscal Policy Fellow at KPI. Reports of a $7.6 billion unfunded liability do not account for $1.7 billion in losses that have already occurred - loses largely driven by the recession and acknowledged by KPERS. "Kansas must enact pension reform quickly to ensure the future viability of the system and to prevent catastrophic funding shortfalls in the near future," writes study author Barry Poulson. "[State] contributions into the state/school plan would have to increase from $393 million to $640 million annually, a 63 percent increase. Kansas legislators are not likely to find an additional $247 million in the current budget to fully fund that portion of the KPERS pension plan."
Losses plague Tennessee's pensions - State Treasurer David Lillard recently told legislators that the $32 billion Tennessee Consolidated Retirement System ranks among the best-funded and best-run pension plans in the nation. But Lillard's report was tempered with some bad news. The plan has been fully funded since its creation in 1972, but two years of bear-market losses in its investment portfolio -- minus-1.2 percent in 2008 and minus-15.3 percent in 2009 -- left it with a $2.7 billion unfunded liability on paper that the state will amortize over 20 years. The $2.7 billion is far less than a $30.5 billion shortfall attributed to the Tennessee plan by the conservative American Enterprise Institute and $23.2 billion claimed by a pair of Northwestern University economists whose analysis Lillard said was flawed. Both claims have been used by a coalition of "free market" groups campaigning to end pensions for public workers.
How Wisconsin Can Turn Economic Austerity into Prosperity - President Obama has charged Wisconsin’s Governor Scott Walker with attempting to bust the unions. But Walker’s defense is: “We're broke. Like nearly every state across the country, we don't have any more money." Among other concessions, Governor Walker wants to require public employees to pay a portion of the cost of their own pensions. Bemoaning a budget deficit of $3.6 billion, he says the state is too broke to afford all these benefits. That’s what he says, but according to Wisconsin’s 2010 CAFR (Comprehensive Annual Financial Report), the state has $67 billion in pension and other employee benefit trust funds, invested mainly in stocks and debt securities drawing a modest return. A recent study by the PEW Center for the States showed that Wisconsin’s pension fund is almost fully funded, meaning it can meet its commitments for years to come without drawing on outside sources. It requires a contribution of only $645 million annually to meet pension payouts. Zach Carter, writing in the Huffington Post, notes that the pension program could save another $195 million annually just by cutting out its Wall Street investment managers and managing the funds in-house. The governor is evidently eying the state’s lucrative pension fund, not because the state cannot afford the pension program, but as a source of revenue for programs that are not fully funded. This tactic, however, is not going down well with state employees.
Pensions: The Rule and the Exceptions - Karen Tumulty has a good reminder, in Wednesday’s Washington Post, that while most public-sector workers are not significantly overpaid, some clearly are. As she explains, the average member of the country’s largest public-sector union, the American Federation of State, County and Municipal Employees, “earns less than $45,000 a year and receives an annual pension of roughly $19,000.” But then there are workers like Bruce Malkenhorst Sr. The retired city administrator of Vernon, Calif., pulls down a pension of $43,320.53 a month – or close to $520,000 a year – through the underfunded California Public Employees’ Retirement System, which covers about half of all government workers in the state and is the nation’s largest public pension administrator. Part of the solution to states’ long-term budget problems has to involve fixing excesses like this one. In some states — California being one of them — the excesses are a material contributor to the deficit.
State pension funds, funding, and options - Felix Salmon writes on the question of appropriate pension plans for state systems (emphasis on teacher retirement systems) in Reuters...however, the comment section offers a superb range of thoughts by non-experts on the matter of state pensions as well.
1. Is a 7-8% return reasonable to expect (smoothed over time) in the future?
2. If a different system is used from here on out? what are appropriate transitions?...Felix compares to 401k plans as being totally inadequate but there are other proposals.
3. What about the question of buyouts?
4. Interestingly several of the commenters were using the MA teachers retirement system as an example, which makes it useful for the AB post here.
5. What are the incentives inherent in the current system? (ie. most value is actually 'accrued' in the last five (?10) years of acummulated contribution for a pensioner? Not unlike any plan based on yearly contributions over decades.
6. The meme of baby boomers/versus younger contributors was brought forward but without numbers...this also could be subsumed under #2 and #3.
7. What is 'underfunding' in this context?
Why employee pensions aren't bankrupting states- From state legislatures to Congress to tea party rallies, a vocal backlash is rising against what are perceived as too-generous retirement benefits for state and local government workers. However, that widespread perception doesn't match reality. Pension contributions from state and local employers aren't blowing up budgets. They amount to just 2.9 percent of state spending, on average, according to the National Association of State Retirement Administrators. The Center for Retirement Research at Boston College puts the figure a bit higher at 3.8 percent. Though there's no direct comparison, state and local pension contributions approximate the burden shouldered by private companies. The nonpartisan Employee Benefit Research Institute estimates that retirement funding for private employers amounts to about 3.5 percent of employee compensation.
Robert Samuelson: Take from Seniors, Give to Wall Street - Yes, Robert Samuelson is at it again, spreading inaccurate and misleading claims about Social Security to justify taking money from retirees. It seems that for some reason he has a hard time understanding the idea of a pension. This shouldn't be that hard, many people have them.The basic principle is that you pay money in during your working years and then you get money back after you retiree. Social Security is a pension that is run through the government. Therefore Samuelson wants to call it "welfare."It is not clear exactly what his logic is. The federal government runs a flood insurance program. Are the payments made to flood victims under this program "welfare?" How about the people who buy government bonds. Are they getting "welfare" when they get the interest on their bonds? If there is any logic to Mr. Samuelson's singling out Social Security as a source of welfare, he didn't waste any space sharing it with readers.
Pre-Payment for Services and Social Security - I keep seeing the argument that the way Social Security is funded -- the young provide the funds needed for the retirement of the elderly -- and the fact that tax collections can be viewed as one big pot of money imply that the government is not providing a service (insurance in this case) as you might see in the private sector:The confounding problem is that many people believe the payroll taxes they pay go to fund the benefits they will receive, which is completely untrue. The payroll taxes go to pay current expenses of the US government. They are just a tax on labor. The government is spending every penny of those payroll taxes to pay for current expenditures. ... the [government] is free to use your premia to buy fighter jets and space shuttles!! Some go so far as to argue this means it must be welfare. I disagree.
Social Security is *Not* Welfare - Robert Samuelson is making the same wrong argument about Social Security being welfare that he's been making for years: Why Social Security is welfare, by Robert J. Samuelson: ...Here is how I define a welfare program: First, it taxes one group to support another group, meaning it's pay-as-you-go and not a contributory scheme where people's own savings pay their later benefits. And second, Congress can constantly alter benefits, reflecting changing needs, economic conditions and politics. Social Security qualifies on both counts. Since he is rolling out the same old column (and apparently getting paid for it), I'll just roll out the same old response. This is from March, 2005, just a few weeks after I started this blog:Fire Insurance is not Welfare and Neither is Social Security: Robert Samuelson, and many others, appear to believe that any time there is a transfer of income between individuals or groups it is welfare. This is wrong. According to Samuelson: Welfare is a governmental transfer from one group to another for the benefit of those receiving. Social Security is mainly welfare... No it isn’t. Social Security is mainly a means of insuring against economic risk. It is fundamentally an insurance program, not a saving program, and as such it is not "mainly welfare."
Means testing for social Security - In order to make this timely I am cut and pasting a note from CEPR pointing to the efficacy of cutting spending in the Social Security through means testing. The MSM and politicians have proposed this and raising the retirement age as answers to 'the deficit' crisis, some commenters indicating a 'tipping point' of disaster soon to come and saying Social Security needs to be a focus of this move to prevent disaster. Such answers can be examined one by one in this particular forum since luckily the format can offer respite from the political power plays of the moment and posturing from 'friend and foe' alike. Since means testing is in the media, let's look at the numbers. Please read the 14 page document first, and then come back with comments.
Young Americans and Social Security - Bloggers, policy experts, and politicians are urging young Americans to care more about Social Security, whether they are asking us to love it, hate it, tweak it, or scrap it. But the results are already in: we care.And if we could have it our way, Social Security would be here forever.According to findings from an AARP report, the vast majority of people of all ages believe that Social Security is important, including 90 percent of those aged 18-29. A recent Institute for Women’s Policy Research (IWPR) survey confirms this sentiment among young adults: 63 percent of those aged 18-39 don’t support cutting Social Security benefits for deficit reduction and more than 60 percent of the group don’t think we pay enough for Social Security. People my age (somewhere in my 20s) have grown up knowing and expecting that Social Security will be there for us in the future. Another IWPR report shows just how vital the program is for older Americans. It provides 50 percent or more of income for more than half of all men and women over the age of 65. Social Security also kept over 14 million people over the age of 65 out of poverty in 2009, 60 percent of whom are women.
AARP Survey: Half of 50+ African Americans in NY Will Delay Retirement If Economy Doesn't Improve - A new AARP survey of New Yorkers age 50 and older, which takes a special look at how African Americans view their financial security and retirement, finds that 49 percent would delay retirement if the economy does not improve. Of those who planned to delay retirement, 41 percent said they would delay retirement for five or more years and 13 percent expect never to retire. The survey results come from a huge AARP survey effort where the Association conducted separate surveys in each of the 50 states and the three territories where AARP has offices, plus a national survey to better gather information on the needs, interests and concerns of Americans 50+. The survey also found large gaps between what African Americans 50+ believe they need to remain healthy, secure and active and what they expect to have. Among the survey’s findings:
Overflow crowd at Idaho hearing on Medicaid cuts - Hundreds attended Tuesday's 4 1/2-hour hearing on a measure to cut some $39 million in Medicaid funding, with the crowd spilling out into the hallways of the Capitol basement to protest a key part of Idaho's painful push to balance next year's state budget. The joint House and Senate Health and Welfare committees' session ended without a vote, with the House committee likely to weigh in Thursday. There still could be amendments. Along with the $39 million in proposed cuts from Idaho's share of Medicaid, the bill would result in the loss of an additional $81 million in federal matching funds. The combined $120 million hit represents 8 percent of the total Idaho Medicaid budget. Republican Rep. Janice McGeachin of Idaho Falls, the measure's sponsor, says it concentrates on paring Medicaid services for adults -- it mostly spares children's services -- in order to help Idaho make up more than a third of the roughly $92 million gap in Idaho's fiscal year 2012 budget.
TrimTabs Says Americans Increasingly Relying on U.S. Social Welfare Programs for Income - Americans are increasingly relying on U.S. government social welfare programs, reports TrimTabs Investment Research.In a research note, TrimTabs highlights that government social benefits —including Social Security, Medicare, Medicaid, and unemployment insurance—were equal to 35% of all private and public wages and salaries in the 12 months ended January, up from 10% in 1960 and 21% in 2000.“We have no quibble with the view that the U.S. economy is expanding at a moderate pace,” says Madeline Schnapp, Director of Macroeconomic Research at TrimTabs. “But we believe Wall Street does not fully appreciate the degree to which growth depends on government support.”“The pressure on the federal government to decrease runaway spending is intense, while state and local governments are slashing payrolls to eliminate deficits,” notes Schnapp. “Further declines in public-sector employment and transfer payments bode ill for wages and salaries, and they will exact an even larger toll on final demand.” “We think very few market participants understand that the economy has become heavily dependent on government largesse,” cautions Schnapp. “We are hardly convinced that the recovery can persist without outside aid, so we expect the Fed to roll out QE3 shortly after QE2 ends at the close of June.”
Government Transfers: It's All About Health Care - There's been a rather silly news item floating around the internets and business press today about the role of government in the US economy. Here's an example from the Investors Business Daily: Is America Becoming A Welfare Nation? More than one-third of all wages and salaries in this country are actually government handouts. We should be alarmed that we've become a nation of dependents. First of all, just to set the record straight: the press is reporting the numbers wrong. The true figure, according to the BEA data, is that about 18% of personal income in 2010 was in the form of transfer payments from the government. Meanwhile, exactly zero percent of wages and salaries were in the form of transfer payments, because wages and salaries were, well, wages and salaries. I suspect that many people are conflating "wages and salaries" with "personal income" as they report this statistic. But there's actually a big difference, and wages and salaries actually make up only a bit more than half of personal income in the US. Much more importantly, one must realize that of course transfer payments were higher than usual in 2010 - we were emerging from the deepest recession in 75 years. Transfer payments are crucial automatic stabilizers for the economy, and comprise our society's safety net. Finally, the alarming statistics cited in such articles are really just due to one, and only one, phenomenon: the incredible and seemingly unstoppable rise in health care costs in the US.
Corporate Solidarity - Krugman - Matt Yglesias has a post about the remarkable solidarity of corporate executives, who seem to support their class interests even when their individual firms would benefit from the policies they oppose. I’ve often been struck by exactly the same thing, especially with reference to health care reform. Before he was replaced, Wagoner of GM used to publish op-eds decrying the burden of health care costs on his company; if you followed the line of argument, it seemed to lead clearly to a case for single-payer insurance. And in fact, GM Canada is a staunch supporter of the Canadian system, which clearly does help it compete. But Wagoner (or whoever actually wrote the op-eds) would always sheer off at the last minute into vague generalities. So why wouldn’t he support policies that would have helped his company, and maybe even saved his job? Was it fear that the GOP would exact revenge? Was he afraid of being blackballed at the country club?
The "Rationing" Switcheroo - Krugman - One thing that should be obvious about death panel arguments a la Huckabee — but which I haven’t seen pointed out — is the game of three-card monte that goes on over what it means to “ration” health care. The switch goes like this: reformers argue that Medicare needs to make choices about what it will pay for; people like Huckabee then scream that the government is going to tell people that they can’t get medical care it disapproves of. But nobody is proposing that the government deny you the right to have whatever medical care you want at your own expense. We’re only talking about what medical care will be paid for by the government. And right-wingers, of all people, shouldn’t believe that everyone has the right to have whatever they want, at taxpayers’ expense. The Declaration of Independence did not declare that we have the right to life, liberty, and the all expenses paid pursuit of happiness.
More Small Businesses Offering Health Care To Employees -The first statistics are coming in and, to the surprise of a great many, Obamacare might just be working to bring health care to working Americans precisely as promised. The major health insurance companies around the country are reporting a significant increase in small businesses offering health care benefits to their employees. Why? Because the tax cut created in the new health care reform law providing small businesses with an incentive to give health benefits to employees is working. How significant is the impact? While we won’t have full national numbers until small businesses file their 2010 tax returns this April, the anecdotal evidence is as meaningful as it is unexpected. United Health Group, Inc., the nation’s largest health insurer, added 75,000 new customers working in businesses with fewer than 50 employees. Coventry Health Care, Inc., a large provider of health insurance to small businesses, added 115,000 new workers in 2010 representing an 8% jump. Blue Cross Blue Shield of Kansas City, the largest health insurer in the Kansas City, Mo. area, reports an astounding 58% increase in the number of small businesses purchasing coverage in their area since April, 2010-one month after the health care reform legislation became law.
Senate Democrats weigh making big mistake on health-care reform - I’m getting some worried e-mails from Hill staffers who think Senate Democrats might rubberstamp a policy House Republicans passed to undermine the Affordable Care Act. It’s the sort of policy decision that won’t get much attention but could have some very big, and very bad, effects, so let’s take a moment and go through it. If you’ve been paying attention to the debate over the Affordable Care Act, you’ve probably heard about the 1099 provision. Essentially, small businesses manage to avoid paying taxes on a lot of small transactions. The 1099 provision would’ve forced them to report those transactions, raising about $20 billion over 10 years. But it would’ve require a lot of paperwork. So much paperwork, in fact, that Democrats agreed to repeal it. When the Senate repealed the provision, they paid for it by canceling other spending that Congress had authorized, but that hadn’t yet been put to a particular purpose. House Republicans took a different approach. They’re trying to sharply increase the amount of subsidies that families will have to pay back if their income increases during the course of a year. The Center on Budget and Policy Priorities has a longer explanation of how this would work, but here’s the short version:
The sorry state of health of US medicine - As the debate about healthcare in the United States rages, four insightful articles in the March 2011 issue of The American Journal of Medicine strive to add reasoned arguments and empirical research findings to the dialog. The issue leads off with the editorial, "The 800-Pound Gorilla in the Healthcare Living Room," by Journal Editor-in-Chief Dr. Joseph Alpert, Professor of Medicine, Arizona College of Medicine, Tucson. As a practicing physician and medical educator, Dr. Alpert has first-hand experience with the current environment of medical treatment. In his view, "the most important deficit in our new healthcare legislation was the failure to address the 800-pound gorilla sitting squarely in the middle of the US healthcare system: the need for tort reform." He contrasts his own training at Harvard Medical School, where the rule for good patient care was "Don't order any test or intervention (medical or surgical) that has little or no chance of improving the patient's quality or length of life" against the current rule: "Order a huge array of tests, including radiographic imaging, to rule out every conceivable clinical condition including very unlikely diagnostic entities." Without meaningful reform to stem the tide of defensive medicine with its staggering volumes of unnecessary diagnostic testing, he believes that all attempts at controlling healthcare costs in the US will be doomed to failure.
US: Most Inefficient Healthcare System In The World - If you look at the US fiscal situation, it's easy to see that Medicare is a looming black hole ready to swallow the entire economy. Reforming the entitlement seems necessary to prevent fiscal ruin. But actually that's too narrow a way of looking at things. After all, the costs borne by Medicare are no more sustainable if they're shifted to private individuals. It's just the path is different. The REAL problem is how expensive our healthcare system is compared to its benefits, at least relative to other countries. This chart is from SocGen's Albert Edwards. As you can see, the US has the same life-expectancy of Chile at 7 times the cost. Now, the root causes of this can be debated ad nauseum. We need to reform what we pay for. We need to lose weight. We need to end the doctor cartel, on and on you can go. But if you're looking for a problem THIS is it. Solve it, and the Medicare crisis goes away.
Americans have higher rates of most chronic diseases than same-age counterparts in England - Researchers announced today in the American Journal of Epidemiology that despite the high level of spending on healthcare in the United States compared to England, Americans experience higher rates of chronic disease and markers of disease than their English counterparts at all ages. Why health status differs so dramatically in these two countries, which share much in terms of history and culture, is a mystery.The study uses data from two nationally representative surveys (see info below) to compare the health of residents of the United States and England from 0 to 80 years, focusing on a number of chronic conditions and markers of disease. This research builds on previous studies by other scholars that focused primarily on older adults. Health measures based on physical examinations and/or laboratory reports included the following risk factors or conditions: obesity, hypertension, diabetes, low high-density lipoprotein (HDL) cholesterol, high cholesterol ratio, and high C-reactive protein in addition to self-reported health issues (see study for details). These are the same measures that were used in other recent analyses that compared health of older adults in the two countries. Differences between the two countries are statistically significant for every condition except hypertension.
Southeastern States Mired in the ‘Diabetes Belt’: CDC Report - People living in certain areas of the United States are more likely to develop diabetes, according to a new government analysis. Researchers from the U.S. Centers for Disease Control and Prevention have discovered that a wide swath across mostly southern U.S. states has diabetes rates above 11 percent, compared to 8.5 percent for the rest of the country. "There's a region of the U.S. that we identified as the 'diabetes belt,'" said study author Lawrence Barker, associate director for science in the division of diabetes translation at the CDC in Atlanta. "People living inside the belt are more likely to have diabetes than those who live outside the belt," he explained.The CDC currently estimates that diabetes affects almost 26 million American adults, or just over 8 percent. There are two types of diabetes: type 1, which used to be known as juvenile diabetes; and type 2, formerly known as adult-onset diabetes. Like the U.S. "stroke belt," discovered in the mid-1960s, the "diabetes belt" is located primarily in the southeastern states. The diabetes belt consists of 644 counties in 15 states, including: Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, Virginia and West Virginia, according to the study. The entire state of Mississippi made the cut.
Life Expectancy and Inequality - I’ve been reading a prepublication copy of a book titled Explaining Divergent Levels of Longevity in High-Income Countries, published by the National Academies. It’s chock full of interesting data, so it’s likely that I’ll be posting on it a number of times in the near future. Many of you don’t like comparative health data between countries, but I maintain it’s invaluable. I concede that individual data points and cherry-picked data can be manipulated, but thoughtful analyses can tell us a great deal about our health care system. Let’s start with some US-only data, though. A chapter at the end deals with the effect of inequality on life expectancy. Here, for instance, is a chart I made from data on the relationship between years of education and life expectancy at various ages by the end of the 1990′s: What I find interesting is the stark contrast between those who graduate from high school and those who do not. There is a difference between those in the lesser two educated categories, but this is dwarfed by the difference between those who make it into higher education and those who don’t.
Medical Malpractice Reform: Truth in Advertising Needed (Part Three of Three) - So in the first two articles we have addressed the historic effects of tort reform using Texas as an example, and subsequently we reviewed the effects of tort reform on so called “defensive medicine” practices, looking at both the effect of reform measures on physician/provider ordering patterns, as well as the possible effects on patient outcomes or mortality. Today, we are going to examine the last party in this carousel. The insurance agencies themselves. For starters, I wanted to examine if there was any sort of a relationship between malpractice premiums, and healthcare spending. So, using historic healthcare expenditure rates from the NHE database (CMS), I calculated the rate of healthcare growth, percentage wise, per year from 1995-2008. I then used an ISO database set to examine the growth in insurance premiums per year. As we can plainly see, there is no correlation, but out of sense of thoroughness, I even ran a simple regression.
Preemie birth preventive spikes from $10 to $1,500 - The price of preventing preterm labor is about to go through the roof. A drug for high-risk pregnant women has cost about $10 to $20 per injection. Next week, the price shoots up to $1,500 a dose, meaning the total cost during a pregnancy could be as much as $30,000. That's because the drug, a form of progesterone given as a weekly shot, has been made cheaply for years, mixed in special pharmacies that custom-compound treatments that are not federally approved. But recently, KV Pharmaceutical of suburban St.Louis won government approval to exclusively sell the drug, known as Makena (Mah-KEE'-Nah). The March of Dimes and many obstetricians supported that because it means quality will be more consistent and it will be easier to get. None of them anticipated the dramatic price hike, though — especially since most of the cost for development and research was shouldered by others in the past.
Short on sleep, brain optimistically favors long odds - Sleep deprivation can lead to plenty of unwise decisions, which researchers have long tied to flagging attention and short-term memory. But a new study shows how just one night of missed sleep can make people more likely to chase big gains while risking even larger losses—independent of their tapering attention spans. A team of Duke University researchers examined the brains of 29 healthy volunteers using functional MRI, which tracks changes in blood flow in the brain, while the subjects performed a variety of gambling tasks. After a full night of sleep, participants behaved like most people tend to in the real world: guarding against financial loses and cautiously pursuing gains. But when deprived of a night's sleep (kept awake in the lab from 6 p.m. until 6 a.m.), the volunteers "moved from defending against losses to seeking increased gains," the researchers reported. This shift "suggests an unfounded rise in expectation for gain," a condition the team describes as "an optimism bias."
Genetic Enhancement v. Artificial Intelligence - Will robots and artificial intelligences take human jobs? Perhaps but the nature of humanity is not carved in stone. Genetic enhancement (GE) is within a hairsbreadth of reality. It's true that the practical applications of AI are moving faster than GE but GE has a head start of over a billion years. Moreover, although GE is still impractical, the costs of GE are falling fast. The costs of sequencing a genome(shown at right, click to enlarge), for example, are falling far faster than even Moore's Law would predict. Sequencing takes us only part of the way towards H+ but it's an important part. Genetic engineering already works wonders, even when used haphazardly. My own efforts at GE (I had the help of a PhD microbiologist) have produced two promising NIs. When used in a more controlled manner the results of GE will be even better ("it's still us, only the best of us.") I used to worry that religious objections would prevent the evolution of H to H+, especially in the United States. But should courage fail us, the Chinese, the Indians, the Russians or perhaps even the Singaporeans will move humanity forward. In this case, the slippery slope works in favor of progress: from avoiding genetic disease towards making improvements will prove irresistible. You can't keep a better man down.
Scientists alarmed as bumblebee numbers plunge worldwide - Bumblebees, also known as Bombus terristris, are the pollinating cousins of wasps and hornets. They are the number one pollinator for wild growing plants as well as commercial agriculture; you may have seen them flitting around your Gran’s tomato plants on summer evenings, busy at work. However, these popular and beloved buzzing insects that help bring us all kinds of food– from coffee beans to fresh apples — bring alarming news. In the past few decades scientific studies have found that increasing numbers of bumblebee colonies are disappearing. It’s possible that Bombus affinis, one of the many bumblebee subspecies native to North America, have all but died out. Between 1976 and 2006, there was a huge loss in the number of wild bumblebee colonies; they are now almost completely gone. Not only North America is suffering from this bumblebee disappearance; in the UK, over the past 70 years 3 out of 24 native bumblebee species have gone extinct. Why are bumblebees suddenly taking leave of their duties as master pollinators? Well, it appears that no one person can agree on a single cause. Scientific evidence strongly suggests that the combination of insecticides and disease from imported bees, bred in greenhouses, are two main causes of bee deaths.
Decline of honey bees now a global phenomenon, says United Nations - The mysterious collapse of honey-bee colonies is becoming a global phenomenon, scientists working for the United Nations have revealed.Declines in managed bee colonies, seen increasingly in Europe and the US in the past decade, are also now being observed in China and Japan and there are the first signs of African collapses from Egypt, according to the report from the United Nations Environment Programme (UNEP). The authors, who include some of the world's leading honey-bee experts, issue a stark warning about the disappearance of bees, which are increasingly important as crop pollinators around the globe. Without profound changes to the way human beings manage the planet, they say, declines in pollinators needed to feed a growing global population are likely to continue. The scientists warn that a number of factors may now be coming together to hit bee colonies around the world, ranging from declines in flowering plants and the use of damaging insecticides, to the worldwide spread of pests and air pollution. They call for farmers and landowners to be offered incentives to restore pollinator-friendly habitats, including key flowering plants near crop-producing fields and stress that more care needs to be taken in the choice, timing and application of insecticides and other chemicals. While managed hives can be moved out of harm's way, "wild populations (of pollinators) are completely vulnerable", says the report.
Time to act on food insecurity - Global food prices increased for the eighth consecutive month in a row, according to a report released today by the United Nations Food and Agriculture Organization, soaring to record levels last month—with devastating consequences for the world’s poor. Food prices are on the rise due to growing populations and rising incomes across much of the developing world alongside tight supplies, high oil prices, and stockpiling of imports as the main factors, although profound uncertainty regarding future harvests due to global warming is also a clear catalyst. The FAO report is the latest troubling analysis to land at the feet of U.S. policymakers as they consider the possibility of deep and misguided cuts to U.S. food assistance by Congress in the coming weeks. The World Bank estimates that the spike in food prices since June has placed 44 million people into extreme poverty. And the U.S. Department of Agriculture is forecasting U.S. food prices will increase 4 percent this year, squeezing already tight family budgets.
Why Economic Security Does Not Equal Food Security - It’s pretty clear that a concerted effort to strip employees of their collective bargaining power is underway – and it appears to be succeeding. Can anyone doubt that if public unions are under attack today, it will be private sector unions tomorrow? What’s not so obvious, perhaps, is that it is unlikely that the assault on workers is going to end by simply crushing the unions. Many professional and managerial class employees may not see the connection between an attack on public workers’ rights and any threat to their own job security. But just as data entry jobs and customer service jobs were outsourced first, followed by IT and even management positions, the pattern of attack on workers rights and expectations to such benefits as job security and decent benefits is likely to follow a similar pattern. It’s easy to imagine, from a position of middle-class comfort, that the comfort and security will go on forever. But there are ominous signs that the future is going to look very different for all American workers, not just the unionized ones. The combined pressures of resource scarcity, globalization, and economic stagnation are going to be pushing more and more classes of American workers nearer to a position of food insecurity
Beyond Food Miles - A locavore is “a person who endeavors to eat only locally produced food.” What better diet could there be for an energy constrained world? After all, feeding Americans accounts for about 15% of US energy use, and the average food item travels more than 5,000 miles from farm to fork. It seems obvious that eating locally will go a long way to reducing food system energy use. Yet cracking the case of America’s energy-intensive food system demands that we look beyond the obvious. A local diet can reduce energy use somewhat, but there are even more effective ways to tackle the problem. Single-minded pursuit of local food, without consideration of the bigger picture, can actually make things worse from an energy perspective. the first step in reducing food system energy use is to figure out where all the energy is going. That’s what a team of economists working for the United States Department of Agriculture (USDA) did last year, in a report called Energy Use in the US Food System.
US farmers fear the return of the Dust Bowl - 'It was a booming town when I grew up,' Judy Shipman, who manages the bank, says. 'We had three restaurants, a grocery, a plumber, an electrician, a building contractor, a doctor. Like all the townsfolk, she knows why the fun has gone. 'It's the decline in the water level,' she says. 'In the 1950s a lot of wells were drilled, and the water went down. Now you can't farm the land.' Those wells were drilled into a geological phenomenon called the Ogallala Aquifer. It is an underground lake of pristine water formed between two and six million years ago, in the Pliocene age, when the tectonic shifts that pushed the Rocky Mountains skywards were still active. The water was trapped below the new surface crust that would become the semi-arid soil of the Plains, dry and dusty. It stretches all the way down the eastern slope of the Rockies from the badlands of South Dakota to the Texas Panhandle. It does not replenish.
Property Tax Breaks in Colorado? You Can Bet the Farm on It -- An entertaining MSN Money article today discusses Tom Cruise's little known farming career and Colorado's method of handing out property tax breaks for land designated as agricultural:The Denver Post lists the wide array of so-called Colorado agronomists who have "secured low property taxes through agricultural designations on land they own even though they personally have little or nothing to do with producing food." Among those the newspaper cites as benefiting from being deemed owners of agricultural property are actors Tom Cruise, Goldie Hawn and Kurt Russell, a network television executive and his former-actress wife, an energy industry billionaire, a professional blackjack player turned media mogul, a ski gear inventor and a Colorado state senator.
In New Food Culture, a Young Generation of Farmers Emerges - Mr. Jones, 30, and his wife, Alicia, 27, are among an emerging group of people in their 20s and 30s who have chosen farming as a career. Many shun industrial, mechanized farming and list punk rock, Karl Marx3 and the food journalist Michael Pollan4 as their influences. The Joneses say they and their peers are succeeding because of Oregon’s farmer-foodie culture, which demands grass-fed and pasture-raised meats. “People want to connect more than they can at their grocery store,” Ms. Jones said. “We had a couple who came down from Portland and asked if they could collect their own eggs. We said, ‘O.K., sure.’ They want to trust their producer, because there’s so little trust in food these days.” Garry Stephenson, coordinator of the Small Farms Program5 at Oregon State University6, said he had not seen so much interest among young people in decades. “It’s kind of exciting,” Mr. Stephenson said. “They’re young, they’re energetic and idealist, and they’re willing to make the sacrifices.”
U.S. Farmers Head Into Key Stretch for Harvests - The world is consuming grains faster than farmers are growing them, draining reserves and pushing prices to the levels that fueled food riots in poor countries three years ago. The U.S.'s role in keeping a global food shortage at bay hinges in large measure on harvests over the next several months as farmers in the U.S., the world's biggest agricultural exporter, coax wheat, soybeans and other crops from their fields. That outlook is likely to be reinforced Thursday when the U.S. Agriculture Department releases its monthly update on world agricultural markets. Economists expect world wheat production to recover this year as drought conditions ease in the Black Sea, which would reduce U.S. wheat exports and cause prices to moderate. While economists expect grain prices to ease somewhat if world harvests climb this year, prices would still be expected to remain high for years. What's more, anything less than big crops could cause wild price swings.
Biotech Companies See Food Prices Boosting GM Crops, FT Says - Rising food prices may result in greater acceptance of genetically modified seed in emerging markets, the Financial Times reported, citing leading seed companies. Daniel Rahier, who heads biotechnology policy at DuPont Co., said there’s been a change of mood in countries such as Indonesia, where the government is encouraging companies to apply for approval of biotech seeds, and “it’s a similar story in Vietnam, Cambodia and Kenya,” the newspaper reported. Stefan Marcinowski, in charge of plant science and crop protection at Germany’s BASF SE (BAS), told the FT rising food prices are “a wake-up call to use all available technologies.” Hugh Grant, Monsanto Co. (MON)’s chief executive officer, said many agricultural areas of the world “have made significant policy shifts” in the past two years, the newspaper reported.
UN Seminars Start to Help States Cope With Food-Price Surge - The United Nations’ Food & Agriculture Organization is holding seminars across four continents to help governments cope with record food prices. The meetings will include government officials and farm groups from 20 countries and cover policy responses, the Rome- based agency said in a notice on its website today. World food prices rose to a record in February, according to an index from the FAO, which is predicting higher prices in the coming decade. Rising prices contributed to riots across North Africa and the Middle East in the past several months that toppled leaders in Egypt and Tunisia. “It is essential that countries consider their policy options and steer away from decisions that might exacerbate the situation,” FAO Deputy Director General Changchui He said in the statement. “During the last food crisis, the situation was aggravated when some countries imposed export restrictions or engaged in panic buying.” The two-day seminars will be held from March through June in Europe, Asia, Africa and Latin America, with the first in Bangkok starting tomorrow.
Small-scale farms could abate world hunger: UN - Small-scale “eco-farming” could double food production in many of the world’s poorest regions and also help fight climate change, according to a United Nations report unveiled Tuesday. The spectre of world hunger looms ever larger as the global population continues to balloon, especially in the least developed nations. Today more than a billion of the planet’s nearly seven billion people live at the edge of subsistence on less than a dollar per day. Food prices have flared in recent years due to climate-related natural disasters, with the cost of several staple foods reaching unprecedented levels last month, according to the UN’s food price index. By mid-century, when the global population is expected to surpass nine billion, food shortages will become even more critical as will the need for additional output.
Lester Brown: “We’re going to be living with tight food supplies and higher food prices through this harvest and the next” - The causes are not temporary, but fundamental trends - Brown, founder and president of the Earth Policy Institute, made the comments and proffered his analysis of the present global food situation during a media call today to assess the prospects for the 2011 world grain harvest. The Earth Policy Institute is scheduled to post a recording of the news conference and you can listen here. A summary follows. In an analysis of the upcoming 2011 global grain harvest (rice, wheat, corn, and cereals) Lester Brown and EPI are predicting a modest increase of 80 million metric tons in all grains over last year’s harvest. Unfortunately, that is 20 million metric tons short of the 100 million metric tons we will need to maintain the status quo of global supplies, and 70 million metric tons below the 150 million metric tons needed for ‘normalcy’ in grain supplies, according to Brown. As a result, the FAO food price index is likely to increase over the coming few months with the poorest nations hit the hardest by higher prices.
Wheat Buying That Lifted Prices Eases After North Africa Built Stockpiles - A surge in wheat sales to North Africa that contributed to prices doubling will ease because stockpiles are now big enough to last until the harvest, said the Home Grown Cereals Authority, the U.K. crop forecaster. Algeria, Egypt, Libya, Morocco and Tunisia will import 22.3 million metric tons of wheat in the year through June, 18 percent of the global total, the U.S. Department of Agriculture estimates. Wheat prices rose until mid-February on accelerated buying as those governments sought to boost stockpiles, before falling again in recent weeks as purchases tapered off. “They have sufficient stock levels right now to cover their domestic needs,” said David Eudall, an analyst at the Kenilworth, England-based HGCA, which is funded by farmers. “There’s no reason for them to go out of their way to purchase grain to replenish stock levels.”
World Wheat Imports, Exports, and Stocks - In this report, you will see that the world stocks-to-use ratio of wheat is still at a higher level than its ten-year average. You will also see that the FSU region is the most variable in production, due to its weather volatility.Global wheat production has been concentrated (84.3%) in the top 10 wheat producing countries and regions of the World since MY 1987/88, including the top 5 of 1) the European Union, 2) China, 3) India, 4) the United States, and 5) Russia. World wheat exports are also strongly influenced by a limited group of countries and regions, with the top 10 accounting for 91.6% of World wheat exports since MY 1987/88. The top 5 World wheat exporters at this time are 1) the United States, 2) the European Union, 3) Canada, 4) Russia, and 5) Australia, followed closely by the Ukraine, Kazakhstan, and Argentina.The top 12 world wheat importing countries over the last 10 years have accounted for approximately half of World wheat imports. World wheat imports in the 2010/11 marketing year are estimated to be 122,779,000 metric tons. This compares to average World wheat imports of 107,238,000 metric tons since the 1987/88 marketing year, with average increases of 912,000 metric tons per year over the 24 year period.
Wheat Planting Falls to 4-Year Low in Russia Amid Export Ban - Russia’s ban on grain exports means the country’s farmers will plant the fewest wheat fields in four years, another sign that global prices will keep rising. Wheat plantings in the country, once the second-biggest exporter, will drop 2.3 percent to 64.2 million acres for this year’s crop, according to the median in a Bloomberg survey of as many as 19 producers, traders and analysts. Farmers can’t plant more because the ban imposed after last summer’s drought is limiting farm income. Diesel was 30 percent higher than a year earlier in January and OAO Acron, Russia’s third-biggest nitrogen fertilizer producer, raised some prices by more than 12 percent for the first half. The 84 million-metric-ton grain harvest anticipated in the survey is 1 million tons below what the government says it needs to consider lifting the seven-month-old export ban. The absence of Russian supplies comes as the U.S. says global grain inventories will drop 13 percent, riots topple leaders in Tunisia and Egypt and governments hoard food.
Russia seeks to stem rise in food prices - The good news is that the grain beloved by so many Russians, buckwheat, is now back on the shelves after an absence of several months from most stores. The bad news is the price for a kilogram has jumped by more than 180 percent.It's a phenomenon that is fairly symptomatic for foodstuffs in the country. Cabbages and potatoes - other popular mainstays of the Russian diet - nearly doubled in price in 2010, according to the Federal State Statistic Service. The prices for other staples such as bread, butter and milk rose upwards of nearly 23 percent last year.While imported foreign foods have long commanded high prices in Russian stores, shoppers have lately become accustomed to paying more for the basics. Buckwheat is just one such staple, with panic buying reported last year as customers stockpiled it at home. Until recently many stores were unable to stock the simple grain, which Russians eat at breakfast, lunch and dinner.
Rising food costs could force U.S. eatery overhaul -Record-high food prices could be the tipping point this year for U.S. restaurants already struggling with high debt loads and tight-fisted consumers. The economic downturn and drop in consumer spending has sent a handful of restaurant chains -- such as Uno Chicago Grill pizza, Fuddruckers and Charlie Brown's Steakhouse -- into bankruptcy court during the past year. And 2011 is not likely to be much better, experts say. "There are many companies that can absorb an increase in food costs,". "For companies that are teetering on the edge though, it's just one more pressure point that they are going to experience as it relates to profitability and their ability to service debt." Food prices have soared as consumers in emerging economies have grown richer and erratic climate conditions have hurt supplies. Wheat prices have surged 60 percent this year, and restaurants have also been hit by increases in beef, cheese, cooking oil and produce costs.
Peak Coffee? - We’ve been hearing about peak oil for years. But now some experts are warning of an even more serious crisis: Peak coffee. NYT (“Coffee, the New Shaky Commodity“):Coffee prices are going up and up, as fast-rising demand in China and India puts pressure on the world’s growers to increase their supplies. But, as detailed in a Times article by Elisabeth Rosenthal, farmers in a prime growing region of Colombia are finding that more intense rainstorms and warmer temperatures are making it harder to produce enough Arabica, the high-grade shade-grown varietal prized by those societies that can afford it. NYT (“Heat Damages Colombia Coffee, Raising Prices“) [I]n the last few years, coffee yields have plummeted here and in many of Latin America’s other premier coffee regions as a result of rising temperatures and more intense and unpredictable rains, phenomena that many scientists link partly to global warming. Coffee plants require the right mix of temperature, rainfall and spells of dryness for beans to ripen properly and maintain their taste. Coffee pests thrive in the warmer, wetter weather.
New UN Report on How to Feed the World’s Hungry: Ditch Corporate-Controlled Agriculture - There are a billion hungry people in the world and that number could rise as food insecurity increases along with population growth, economic fallout and environmental crises. But a roadmap to defeating hunger exists, if we can follow the course -- and that course involves ditching corporate-controlled, chemical-intensive farming."To feed 9 billion people in 2050, we urgently need to adopt the most efficient farming techniques available. And today's scientific evidence demonstrates that agroecological methods outperform the use of chemical fertilizers in boosting food production in regions where the hungry live," says Olivier de Schutter, the UN Special Rapporteur on the Right to Food. Agroecology is more or less what many Americans would simply call "organic agriculture," although important nuances separate the two terms.Used successfully by peasant farmers worldwide, agroecology applies ecology to agriculture in order to optimize long-term food production, requiring few purchased inputs and increasing soil quality, carbon sequestration and biodiversity over time.
Price of food in Canada could jump between 5 and 7 per cent in 2011: economist - Get ready to fork over a little more cash before you pick up your dinner fork. Canadians will be paying between five and seven per cent more for groceries on average by the end of the year, economists say.A family that spends about $400 a month on groceries could end up paying up to $340 extra in a year. Bad crops around the world, oil trading for more than US$100 a barrel and the economic recovery are driving prices higher. Food companies are raising prices due to the soaring costs of key commodity ingredients like wheat, corn, sugar and vegetable oil, which have gone up as much as 50 to 100 per cent over the last year at a near-record rate. With the United Nations blaming higher crude oil prices for pushing global food prices to an all time high, Canadians have been spared so far because of cutthroat grocery store competition and the high loonie making the cost of imported goods cheaper.
Britain: Rising Food Prices Could Spark Food Riots… Via: Herald Sun:A SENIOR economist at the worldwide bank HSBC has warned of civil unrest in Britain if food prices continue to soar, Sky News reported yesterday. Karen Ward cautioned that the UK was not immune to the kind of “food riots” seen in other countries around the world. “Even in the developed world I think we have very, very low wage growth, so people aren’t getting more in their pay packet to compensate them for food and energy, and I think we could see social unrest certainly in parts of the developed world and the UK as well,” she told Sky News.
Will Malthus Have the Last Laugh? - Lester Brown has the rundown on the world’s grain production — and things aren’t pretty: On the supply side, there was a time when grain production was on the rise almost everywhere. That world is now history. In a number of countries, grain harvests are shrinking because of aquifer depletion and severe soil erosion. Rising temperatures are also taking a toll. And some agriculturally advanced countries have run out of new technology to raise land productivity.In 18 countries containing half the world’s people, overpumping for irrigation is depleting aquifers. Among the countries where harvests are falling as aquifers are depleted are Saudi Arabia, Syria, and Iraq. World Bank data for India indicate that 175 million people are being fed with grain produced by overpumping, which by definition is a short-term phenomenon. The comparable number for China is 130 million people. In some countries such as Mongolia and Lesotho, grain production has fallen by half or more in recent decades as severe soil erosion has led to wholesale cropland abandonment. In North Korea and Haiti, soil erosion is undermining efforts to raise output. The bottom line: we’ll probably see an increase in grain production in the next few years, but it will be minor, and we’re heading towards a leveling off of grain production. Couple that with a growing world population, and the inevitable result is going to be higher food prices and more hunger.
1) Both supply and demand of staple grains are highly inelasitic. This means it doesn't take much of a shift in supply or demand to cause a big change in price.
2) The U.S. is hugely important in world grain markets. With the largest share of world production and a much larger share of world exports, we drive international prices for staple grains.
3) Ethanol uses about 1/3 of the U.S. corn crop, or about 5 percent of the calories produced, worldwide, of corn soybeans, wheat and rice--the key grains that feed the world. That's even with a bigger corn crop (and smaller soybean crop) that has been brought about by ethanol subsidies and mandates.
4) When prices go up, we in rich countries don't eat much less, since commodities are a trivial share of our food expenditures. Those consuming less are most plausibly the world's poorest. If not, who do you think is eating less due to the huge diversion from ethanol?
Farm Prices, Food Prices, and Biofuels - The New York Times has a very useful article this morning on booming prices for agricultural land. There's lots of nice human color in the story, but the graphic above is the heart of it. It shows average prices of Iowa farmland - focus on the black line which is adjusted for inflation. Obviously, things are increasing rapidly, and approaching the 1970s peak in real terms. I note the similar timing of this latest boom (really taking off a little after 2000) with this picture from the other day: Correlation doesn't prove causation, of course, but certainly the timing is right. To move toward a better sense of how much of the food price boom we can attribute to biofuels, let's try to examine on a global basis how much of the food supply is being diverted to fuel. Firstly, let's acknowledge that this exercise is fraught with complexities:
- The human diet involves foods taken from various trophic levels. We eat corn and soybeans directly, but we also eat cows and pigs that ate corn and soybeans, and converted a small fraction of the crops into the flesh we consume. When a certain amount of corn is diverted into making fuel, do we compare against the corn we could have eaten, or the cows we could have eaten, after they'd eaten the corn?
- To the extent biofuels have been increasing food prices, this will have caused farmers to expand land in cultivation, invest in capital improvements that increase their yields, etc, etc. So it's not as simple as all crops being used for biofuels are taken away from food: the crop supply will undergo a supply increase also.
Winning the Biofuel Future - Secretary Steven Chu - Today, the Department announced that a research team at our BioEnergy Science Center achieved yet another advance in the drive toward next generation biofuels: using a microbe to convert plant matter directly into isobutanol. Isobutanol can be burned in regular car engines with a heat value higher than ethanol and similar to gasoline. This is part of a broad portfolio of work the Department is doing to reduce America's dependence on foreign oil and create new economic opportunities for rural America. This announcement is yet another sign of the rapid progress we are making in developing the next generation of biofuels that can help reduce our oil dependence. This is a perfect example of the promising opportunity we have to create a major new industry based on bio-material such as wheat and rice straw, corn stover, lumber wastes, and plants specifically developed for bio-fuel production that require far less fertilizer and other energy inputs. But we must continue with an aggressive research and development effort.
Debating the raft of rural subsidies - It all started when Washington Post columnist Ezra Klein closed a column about the economics of cities with an offhand comment suggesting an end to the "raft of subsidies we devote to sustaining rural living." This column led to a fascinating debate between Klein and Agriculture Secretary Tom Vilsack, who said he took Klein's column "as a slam on rural America." In this debate, both participants made some rhetorical errors. Vilsack focused too much on the moral superiority of rural Americans and probably should have engaged Klein's specific concerns about subsidies more frankly. Klein conflated agricultural subsidies with broader rural subsidies, giving too little attention to the fact that most rural residents work in industries other than agriculture and get no benefit from agricultural subsidies. Brian Depew of the Center for Rural Affairs, a non-profit farm advocacy organization based in eastern Nebraska, helps clear up the whole mess in a column at Civil Eats:
A Hierarchy of Problems - The turmoil that has been sweeping the Middle East is susceptible to at least two broad and daring explanations. On the one hand, Charles Krauthammer, of The Washington Post, argues that revolts against autocratic governments in Tunisia, Egypt, Yemen and Libya are testimony to the “fundamental tenet of the Bush Doctrine that Arabs are no exception to the universal thirst for dignity and freedom.” Facebook and Twitter “may have mediated this pan-Arab (and Iranian) reach for dignity and freedom,” he wrote the other day, but the US invasion to bring down Saddam Hussein “set the premise.” On the other, the upheaval may be the result of climate change. Sharply rising food prices have been the background to street protests throughout the Middle East. As Eric Pooley and Philip Revzin wrote in a particularly intelligent cover story in Bloomberg Businessweek last month, “The hunger that has roiled the Middle East was not caused by the whims of autocrats and cops. It began last year with crippling drought in Russia and later Argentina, and torrential rains in Australia and Canada. The deluges in Saskatchewan were so sustained and intense that farmers couldn’t plant some 10 million acres of wheat….”
According To Goldman, Tsunami Puts 2011/2012 Japanese Rice Crop At Risk, Sees Vicious Snapback In Crude Prices - A just released report by Goldman's Jeffrey Currie attempts to quantify the impact of the Tsunami on the Japanese economy from a commodity standpoint. Currie summarizes his conclusions as follows: "Assuming that the broader power grid infrastructure has not been permanently damaged, we believe today’s events are likely to put upward pressure on residual fuel oil and diesel cracks, LNG, UK natural gas and rice; downward pressure on naphtha cracks and Dubai spreads relative to other crude grades." Yet the thing we found more interesting than energy related bottlenecks was the disclosure toward the end of the report discussing the threat to the Japanese rice harvest: "In addition to the damage to energy infrastructure from the earthquake, the tsunami also impacted rice producing regions in Japan. While Japanese rice inventories are large, this puts the 2011/12 crop production at risk and may in turn drive Japanese rice imports higher, posing upside risk to current prices." Granted, Japan is not a big exporter of rice, but it is a top 10 consumer. Should the country's consumption (which is estimated at around 9 million metric tons) need to be satisfied by a surge in imports, and with the price of rice already dependent on the margin on speculative money, this could be the catalyst that send the grain, which has plunged in price over the past month, finally break beyond any potential manipulative price suppression schemes.
Interactive animation of the climate change impact on agriculture - Here is an interactive flash application developed by Michael Mann and David Babb for an agricultural impacts/adaptation module of a Penn State world campus online climate change course. The results are based on results from theoretical crop models driven by global warming projections, as discussed in Chapter 5 of the 2nd working group report of the IPCC Fourth Assessment (results are based on simple polynomial fits to the model simulation results shown in the IPCC report, pg 286). There are three variables you can play around with. You can look at the climate impact on three types of crops: maize, wheat or rice. You can compare the impact on mid/high latitudes to low latitudes. And you can drag the red arrow beside the thermometer to see the impact of varying degrees of warming. Click here for a full screen version.
Henry Waxman on our “Moral Imperative to Act Now” on Climate Change - In his opening statement, Rep. Henry A. Waxman (D-CA) warned the audience gathered at the Center for American Progress Action Fund that he would be speaking “as bluntly as possible” about the legislative battle being waged over American health and environmental security. His speech this morning on Fighting Back: Defending our Public Health was indeed direct and unsparing, citing an “overwhelming disconnect between science and policy.” He lamented that Republicans have been newly reborn as the “party of science deniers” and warned against the recently revised campaign finance laws that allow companies like Koch Industries to “pour millions of dollars into electing legislators that agree with [their] extreme ideological agenda.” Waxman called on Americans’ moral responsibility to act against the forces of “science denial, partisanship, and the rising power of special interests,” noting that these “deeply intertwined” elements “feed off of each other” to the detriment of public health, economic growth, and national security.
House GOP budget bill aims to slash environmental regulation -The plan to cut $60 billion from the federal budget targets environmental programs so widely it appears to be as much an ideological gambit as a budgetary one. “The sheer scope of it is overwhelming,” a UCLA environmental law expert says.The House spending bill passed last month wouldn’t just chop $60 billion from the federal budget — it seeks to cut a broad swath through environmental regulation.From fish protections in California to water pollution limits in Florida and regulation of greenhouse gas emissions nationwide, environmental programs were targets of the Republican budget resolution, which appears to have been as much about setting a political agenda as about deficit reduction.
"A science-free Congress?" by John Abraham, Michael Mann, Michael Oppenheimer and Peter Gleick, Politico, March 8, 2011 -To our dismay, and the nation’s detriment, self-described climate change deniers – strongly supported by fossil-fuel interests — continue to mislead Congress and the public.In late January 2011, we joined 14 other leading scientists in writing a letter to every member of Congress, asking our elected representatives to separate science from policy. We called attention to the overwhelming scientific evidence of climate change, urging Congress to “address the challenge of climate change, and lead the national response…” We want Congress to understand that, with each passing day, the problem worsens. Our letter was certainly not the first plea to Congress to address climate change, and it won’t be the last. An open letter just last May 2010 from 255 members of the U.S. National Academy of Sciences urged similar actions. But the race to run away from the problem is nothing short of staggering.
Molten salts for efficient solar thermal plants - This type of power plant uses concave parabolic mirrors that focus sunlight on an absorber tube at the mirrors’ focus. A heat transfer medium flows along the tube. The heat is transferred to a conventional water-steam cycle in a downstream steam generator, where it is converted into electricity by a steam turbine and a generator. The main factor determining the efficiency of the power generation process is the maximum working temperature of the heat transfer medium. As this temperature increases, the utilization of the steam turbine approaches its optimum value. Siemens intends to use molten salts instead of thermal oil, thereby increasing the working temperature from 400 to more than 500 degrees Celsius. Eliminating the use of thermal oil would also prove beneficial as it has a relatively high vapor pressure and is highly flammable. Salts suitable for use as heat transfer media consist of, for example, a mixture of sodium and potassium nitrates. These are non-flammable and have almost zero vapor pressure. As a result, the plant can be operated without pressure—and that means more safely. Furthermore, salts have a higher heat storage capacity than thermal oil and are considerably cheaper.
Health Groups Gird for Fight Over EPA’s Power-Plant Toxics Rules - With the Obama administration required to put its plan for reducing toxic air pollution from coal-fired power plants on the table a week from today, the American Lung Association and other public health groups have started an early push to explain why U.S. EPA shouldn’t flinch on the long-delayed rules.EPA Administrator Lisa Jackson is under a legal deadline to release a proposal by March 16 and finalize it by November. Environmentalists and public health groups are pushing her to make the rules far stricter than the George W. Bush administration’s Clean Air Mercury Rule, a cap-and-trade program that aimed to cut mercury pollution by about 70 percent but did not place limits on other types of toxic emissions.According to a report (pdf) released yesterday by the Lung Association, the technology needed to control all of the toxic pollutants is already in wide use, and in most cases, it cuts emissions by more than 90 percent. Currently, the power sector produces about 40 percent of U.S. mercury emissions and 76 percent of acid gases, the report says.
As Ozone Decision Looms, EPA Finds Stronger Science Recent studies suggest that smog-filled air kills more people and causes more breathing problems than previously thought, U.S. EPA scientists say in a new draft paper, but due to a procedural twist, the findings can’t be taken into account as Administrator Lisa Jackson decides whether to set stricter limits than the George W. Bush administration chose in 2008.The new research provides stronger evidence that short-term spikes in ground-level ozone can cause premature death, according to the 996-page scientific assessment, which was released late Friday. And on top of that, EPA scientists found evidence that long-term exposure could lead to more premature deaths — a conclusion that was not reached when the agency last reviewed the state of smog science in 2006.It is well-established that ozone can have health effects at the current limit of 84 parts per billion (ppb), which still has not been met in parts of the Northeast, much of Southern California and industrial cities such as Houston.
With Spending Bills Dead, Clean Energy Supporters Brace Against Deeper Cuts - Competing plans to fund the government through September both flopped yesterday, ensuring that deeper cuts to existing programs, including perhaps clean energy portfolios, will be proposed to avoid a federal shutdown. The dueling Senate votes appear to show that lawmakers are unwilling to make large cuts totaling $61 billion as proposed by the House. It also reveals that the Democrats’ target of $10 billion in reductions is too low. The yardage between those numbers will decrease, but it’s unclear at what point agreement can be found. The back-to-back votes were largely symbolic, a method agreed to by both parties at a White House meeting last week to purge existing spending plans seen as too extreme, or too weak, by their opponents. The result means that some programs will feel deeper reductions compared to last year’s funding, as Democrats and Republicans seek to overcome their budget impasse.
If only there were an alternative to cars - SPEAKING at a conference, Ford Motor Chairman Bill Ford expressed his worry that the likely increase in global automobile ownership, from today's 800m vehicles to between 2 and 4 billion cars, could doom the world to a fate of global gridlock:“Where are these people going to go? Where are those cars going to go?” Mr. Ford asked in an interview Thursday at the Wall Street Journal’s ECO:Nomics conference here. Already, he says, daily commutes in Beijing can last five hours – and that’s when motorists don’t bog down in multi-day traffic jams as they did last summer. “People in Los Angeles and New York think they’re in gridlock,” Mr. Ford says. “It’s nothing like what they have seen already in other parts of the world.”As more of the world’s population moves into big cities, the answer to traffic congestion won’t be building more roads, Mr. Ford says, because there won’t be any space. The great hope, Mr Ford says, is technology. In the future, vehicles will be able to communicate with each other, helping cars to find alternate routes and cut traffic.
Arctic ice loss moves phytoplankton peak up to 50 days early, could “lead to crashes of the food web” - Fish, shellfish, sea birds, and marine mammals are at risk - Scientists … plotted the yearly spring bloom of phytoplankton—tiny plants at the base of the ocean food chain—in the Arctic Ocean and found the peak timing of the event has been progressing earlier each year for more than a decade. The researchers analyzed satellite data depicting ocean color and phytoplankton production to determine that the spring bloom has come up to 50 days earlier in some areas in that time span. The earlier Arctic blooms have roughly occurred in areas where ice concentrations have dwindled and created gaps that make early blooms possible, say the researchers, who publish their findings in the March 9 edition of the journal Global Change Biology. That’s from the news release at the Scripps Institution of Oceanography (where I did my Ph.D. thesis research). The study itself is here: “Are phytoplankton blooms occurring earlier in the Arctic?” (subs. req’d).
Pace of polar ice melt ‘accelerating rapidly’: study - The pace at which the Greenland and Antarctic ice sheets are melting is "accelerating rapidly" and raising the global sea level, according to findings of a study financed by NASA and published Tuesday. The findings suggest that the ice sheets -- more so than ice loss from Earth's mountain glaciers and ice caps -- have become "the dominant contributor to global sea level rise, much sooner than model forecasts have predicted."This study, the longest to date examining changes to polar ice sheet mass, combined two decades of monthly satellite measurements with regional atmospheric climate model data to study changes in mass. "That ice sheets will dominate future sea level rise is not surprising -- they hold a lot more ice mass than mountain glaciers," said lead author Eric Rignot, jointly of NASA's Jet Propulsion Laboratory and the University of California, Irvine."What is surprising is this increased contribution by the ice sheets is already happening,"
JPL bombshell: Polar ice sheet mass loss is speeding up, on pace for 1 foot sea level rise by 2050 The Greenland and Antarctic ice sheets are losing mass at an accelerating pace, according to a new NASA-funded satellite study. The findings of the study — the longest to date of changes in polar ice sheet mass — suggest these ice sheets are overtaking ice loss from Earth’s mountain glaciers and ice caps to become the dominant contributor to global sea level rise, much sooner than model forecasts have predicted. The study, led by the U.S. Jet Propulsion Laboratory, was just published in Geophysical Research Letters here (subs. req’d).It’s been clear for a while that the polar ice sheet mass loss is accelerating (see Large Antarctic glacier thinning 4 times faster than it was 10 years ago: “Nothing in the natural world is lost at an accelerating exponential rate like this glacier”).But the new study is a bombshell because of its credibility and thoroughness — and because it provides perhaps the most credible estimate to date of the sea level rise we face in 2050 on our current emissions path, 1 foot. The JPL news release runs through the calculation that leads to the 1-foot estimate:
Latest Ice Sheet Mass Balance Stats (Take 2) - The important background to the paper is to realize that there have been two completely independent approaches to measuring the total loss/gain of the ice sheets. The first of these was more of a bottom-up approach that involved estimating the amount of snowfall on the ice sheet from weather models, the loss due to surface ablation (ice vaporizing etc), the speed that glaciers were moving at (from satellite pictures), the height of the glaciers, etc, and performing a detailed cell-by-cell estimate of how much the mass in the ice sheet was changing, which then needed to be integrated across the entire ice-sheet. Eric Rignot has been a key name in this approach. The second approach has been to look at measurements of the earth's gravity field measured from NASA's Grace satellite and performing mathematical analyses of the small shifts in it that occur over time to isolate the changes that are due to changes in the big ice sheets (you can imagine you'd need to filter out all manner of other things - daily tides, changes in other glaciers and snow fields, changes in sea level due to atmospheric pressure systems, changes in ocean currents, etc). Isabella Velicogna has been an important name in this approach. Both of these are obviously enormously complex calculations that require years of work, and they didn't come up with exactly the same answers. In this paper, scientists who have worked on both approaches got together and reconciled them. They made various tweaks and corrections by looking at the differences.
Climate change ‘will wreak havoc on Britain’s coastline by 2050′ - Impacts of Climate Change on Disadvantaged UK Coastal Communities, a report to be published tomorrow by the Joseph Rowntree Foundation, an influential thinktank, records how local people have seen the coastline retreat before their eyes in just a few years. The threat posed by erosion has been exacerbated by the fact that the sea has taken material from the island’s beaches that is normally used for constructing roads and buildings. But Benbecula is not alone: the report claims that rising sea levels are likely to have a “severe impact” on much of the UK’s coastline by 2080. The authors note that “the total rise in sea levels off the UK coast may exceed one metre, and could potentially reach two metres”. They warn that “the frequency of intense storm events is expected to increase and, along with the rise in sea level, to lead to more coastal flooding”.
Study: Climate change affects those least responsible - Climate change will have the greatest impact on people least responsible for causing it, new research shows. In an eye-catching map, researchers at McGill University show the irony long suspected by scientists — that countries producing the least greenhouse gases per-capita are often the most vulnerable to climate change.The areas in red, those closest to the equator, will likely be affected the most. They include central South America, the Arabian Peninsula and much of Africa. Areas in yellow are expected to have a moderate impact and those in blue, the least effect. The United States and western Europe, which emit high greenhouse gases per capita, are projected to have moderate-to-mild impact. Areas in white lack either data or people.
Urgent steps to stop the climate door closing -There were worrying signs at the World Economic Forum in January that policymakers are becoming dangerously complacent about the scale of our climate change challenge. Now, with political unrest, economic uncertainty and soaring oil prices understandably dominating the headlines, there is a risk of further distraction from the action required to meet our current climate change goals. We must not delude ourselves. Existing commitments for emissions reductions by 2020 do represent major action. But even if implemented fully, they are collectively not enough to put the world on a path that would give us even a 50-50 chance of avoiding a warming of 2°C above 19th century temperatures. Worse still, recent work by the International Energy Agency has concluded that without full implementation there is a real risk that the 2°C goal will be pushed out of our reach altogether. A less ambitious target is not good enough: global temperatures have not been 3°C higher than today for about 3m years. Such warming would likely lead to mass migrations away from the worst affected regions, with the risk of severe and prolonged conflict.
Climate Emergency: Time to Slam on the Brakes - Global warming is an increasingly urgent problem. The urgency isn’t obvious because a large amount of warming is being delayed. But some of the latest research says if we want to keep the Earth’s climate within the range humans have experienced, we must leave nearly all the remaining fossil fuels in the ground. If we do not act now we could push the climate beyond tipping points, where the situation spirals out of our control. How do we know this? And what should we do about it? Read on. James Hansen, NASA’s top climatologist and one of the first to warn greenhouse warming had been detected, set out to define dangerous human interference with climate. In 2008, his team came to the startling conclusion that the current level of atmospheric carbon dioxide (CO2) is already in the danger zone.
Scientists try to determine whether life on Earth is quickly heading toward extinction - Life on Earth is hurtling toward extinction levels comparable with those after the dinosaur-deleting asteroid impact of 65 million years ago, propelled forward by human activities, according to scientists from UC Berkeley. This week, scientists announced that if current extinction rates continue unabated, and vulnerable species disappear, Earth could lose three-quarters of its species as soon as three centuries from now. "That's a geological eyeblink," said Nicholas Matzke, a graduate student at UC Berkeley and author of a paper describing the doom-and-gloom scenario. "Once you lose species, you don't get them back. It takes millions of years to rebound from a mass extinction event."
Humans on Verge of Causing 6th Great Mass Extinction - Are humans causing a mass extinction on the magnitude of the one that killed the dinosaurs? The answer is yes, according to a new analysis — but we still have some time to stop it. Mass extinctions include events in which 75% of the species on Earth disappear within a geologically short time period, usually on the order of a few hundred thousand to a couple million years. It's happened only five times before in the past 540 million years of multicellular life on Earth. (The last great extinction occurred 65 million years ago, when the dinosaurs were wiped out.) At current rates of extinction, the study found, Earth will enter its sixth mass extinction within the next 300 to 2,000 years. "It's bittersweet, because we're showing that we have this crisis," study co-author Elizabeth Ferrer, a graduatestudent in biology at the University of California, Berkeley, told LiveScience. "But we still have time to fix this."Others aren't so optimistic that humans will actually do anything to stop the looming disaster, saying that politics is successfully working against saving species and the planet.
Chris Hedges: This Time We’re Taking the Whole Planet With Us…Civilizations rise, decay and die. Time, as the ancient Greeks argued, for individuals and for states is cyclical. As societies become more complex they become inevitably more precarious. They become increasingly vulnerable. And as they begin to break down there is a strange retreat by a terrified and confused population from reality, an inability to acknowledge the self-evident fragility and impending collapse. The elites at the end speak in phrases and jargon that do not correlate to reality. They retreat into isolated compounds, whether at the court at Versailles, the Forbidden City or modern palatial estates. The elites indulge in unchecked hedonism, the accumulation of vaster wealth and extravagant consumption. They are deaf to the suffering of the masses who are repressed with greater and greater ferocity. Resources are more ruthlessly depleted until they are exhausted. And then the hollowed-out edifice collapses. The Roman and Sumerian empires fell this way. The Mayan elites, after clearing their forests and polluting their streams with silt and acids, retreated backward into primitivism. As food and water shortages expand across the globe, as mounting poverty and misery trigger street protests in the Middle East, Africa and Europe, the elites do what all elites do. They launch more wars, build grander monuments to themselves, plunge their nations deeper into debt, and as it all unravels they take it out on the backs of workers and the poor. The collapse of the global economy, which wiped out a staggering $40 trillion in wealth, was caused when our elites, after destroying our manufacturing base, sold massive quantities of fraudulent mortgage-backed securities to pension funds, small investors, banks, universities, state and foreign governments and shareholders. The elites, to cover the losses, then looted the public treasury to begin the speculation over again. They also, in the name of austerity, began dismantling basic social services, set out to break the last vestiges of unions, slashed jobs, froze wages, threw millions of people out of their homes, and stood by idly as we created a permanent underclass of unemployed and underemployed.
Study Says Navy Must Adapt to Climate Change - A report commissioned by the United States Navy concludes that climate change will pose profound challenges for the sea service in coming decades, including a need to secure Arctic shipping lanes, prepare for more frequent humanitarian missions and protect coastal installations from rising seas. The 15-month study, conducted by the National Research Council, accepts the scientific consensus that the climate is changing and that the effects are being felt now. Of particular consequence to American naval forces – the Navy, Marine Corps and Coast Guard – are the melting polar ice cap, rising seas and increasingly frequent severe storms and droughts that could lead to famine, mass migration and political instability. The report from research council, an arm of the National Academy of Sciences, builds on previous work by the Pentagon, State Department, the intelligence community and independent research groups that have concluded that climate change is a “threat multiplier” that adds new and unpredictable dangers to global physical and political stability.
E.U. proposes to spend $375 billion a year to ‘decarbonize’ economy by 2050 - The European Union will spend €270 billion ($375 billion) a year to cut greenhouse gas emissions by at least 80 percent by 2050 compared to 1990 levels, the European Commission said yesterday in releasing its “road map” for moving to a low-carbon economy. The commission, which is the European Union’s executive arm, for the first time also set targets for 2030 and 2040, envisioning emission cuts of 40 percent and 60 percent, respectively. It proposed increasing its target for 2020 to 25 percent from the current 20 percent, acknowledging opposition from Eastern European countries to proposals by France, Germany, the United Kingdom and Denmark to raise that goal to 30 percent. It also said that, if left unchanged, current policies are projected to only be enough to reduce emissions by 30 percent in 2030 and 40 percent in 2050. “The longer we wait, the higher the cost will be,”
Minister: China pollution remains ‘very serious’ -- Pollution in China remains very serious as the country's rapid economic growth brings on new environmental problems, with nearly 1,000 contamination incidents in the last five years, a minister said Saturday. Vice environment minister Zhang Lijun said China has made progress on environmental protection, but acknowledged that its double-digit economic growth over the past decade has had negative impacts on the environment. "Our rapid economic development has continuously brought our country new environmental problems, particularly dangerous chemicals, electronic waste and so on. These environmental pollutants bring new problems and impact human health," Zhang told a news conference on the sidelines of the annual session of the National People's Congress, China's legislature. He said that emissions of traditional pollutants remain high and some areas have failed to meet government targets. China has pledged to continue reducing emissions this year of three key air pollutants - ammonia nitrogen, sulfur dioxide and nitrogen oxide. The government has also promised to bring down demand for chemical oxygen - a measure of water pollution - by 1.5 percent from the 2010 levels.
Brain Scan: Betting On Green - “Environmentalists are fiddling while Rome burns,” says Vinod Khosla, founder of Khosla Ventures, a Silicon Valley venture-capital firm. “They get in the way with silly stuff like asking people to walk more, drive less. That is an increment of 1-2% change. We need 1,000% change if billions of people in China and India are to enjoy a Western, energy-rich lifestyle.” Forget today’s green technologies like electric cars, wind turbines, solar cells and smart grids, in other words. None meets what Mr Khosla calls the “Chindia price”—the price at which people in China and India will buy them without a subsidy. “Everything’s a toy until it reaches that point,” he says.Mr Khosla has a different plan to save the planet. He is investing over $1 billion of his clients’ money in “black swans”—ideas with the potential for sudden jumps in technology that promise huge environmental benefits, easy scalability and rapid payback. The catch? Mr Khosla expects nine out of ten of his investments to fail.“I am only interested in technologies that have a 90% chance of failure but, if they do succeed, would change the infrastructure of society in some radical way,”
House Panel Votes to Strip E.P.A. of Power to Regulate Greenhouse Gases - A House subcommittee voted on Thursday to strip the Environmental Protection Agency of its power to regulate greenhouse gases, chipping away at a central pillar of the Obama administration’s evolving climate and energy strategy. The sharply partisan vote was preordained by the Republican takeover of the House. Republicans and their industry allies accuse the administration of levying taxes on traditional energy sources through costly environmental regulations, threatening the economic recovery and driving jobs overseas.Many Republicans also argue that global warming is an unproven theory and that no action is needed to combat it, and they are backed by lobbies representing manufacturers; small businesses; agriculture; and the chemical, coal and oil industries; all of which have a big financial stake in hamstringing the E.P.A.
EPA’s Jackson lays out five ‘fictions’ about the agency’s agenda - Environmental Protection Agency Administrator Lisa Jackson sought Thursday to debunk a series of “fictions” about agency regulations that she said were pushed by “special interests with an investment in the outcome.” “I would like to take a moment today to address some of the mischaracterizations that have been, at times, unaddressed, or that need to be addressed again,” Jackson said during a House Agriculture Committee hearing on EPA regulations. Jackson has come under fire in recent months from lawmakers in farm states, who fear that upcoming EPA regulations will impose major costs on farmers’ operations.Jackson laid out five myths about the agency:
- Myth 1: EPA will impose a so-called “cow tax,” in which emissions from cows will be regulated.
- Myth 2: The EPA will regulate spilled milk under regulations for oil containment facilities.
- Myth 3: The agency will expand regulations on dust from farms.
- Myth 4: The agency will impose regulations blocking pesticides from drifting away from farms.
- Myth 5: The EPA will impose limits on pollution from “nutrients” like fertilizer and animal manure.
Sen. Rand Paul slams administration over toilets, light bulbs - Sen. Rand Paul, R-Ky., lambasted the Energy Department today, saying the agency forces Americans to buy toilets that don't flush properly and light bulbs they don't want in the name of energy efficiency. During a hearing of the Senate's Energy and Natural Resources Committee, Paul told Energy Department official Kathleen Hogan 'my toilets don't work in my house. And I blame you and people like you who want to tell me what I can install in my house.' Paul's comments came during a hearing on a bill to improve the energy efficiency of appliances and a separate proposal to repeal a 2007 law that phases out traditional incandescent light bulbs in favor of more energy-efficient options. Paul is among the Senate Republicans backing the repeal effort; similar legislation has been introduced in the House, as we reported this week. Paul said it was 'appalling' and 'hypocritical' for the Obama administration to 'favor a woman's right to an abortion but you don't favor a woman or a man's right to choose what kind of light bulb, what kind of dishwasher, what kind of washing machine.'"
Clean Energy Thwarted as Much as Coal by Rules, Group Says - Renewable-energy projects such as wind farms and solar fields are just as hard to build in the U.S. as coal-fired power plants because of regulatory obstacles and activists’ protests, the U.S. Chamber of Commerce said.Energy projects valued at $576.6 billion were abandoned, delayed or challenged by the state governments or environmentalists, according to a Chamber report released today. Wind, solar, hydropower, ethanol, biomass and geothermal projects accounted for about 45 percent of the challenged investments, according to the Washington-based trade group. “If our great nation is going to begin creating jobs at a faster rate, we must get back in the business of building things,” Bill Kovacs, senior vice president for environment, technology and regulatory affairs, said in the report. “We also need to figure out how to do it without years and years of permit delays related to our complex regulatory process that allows almost anyone to impede or stop any energy project.”
Clean-Coal Debate Focuses on Gasification Plant - A bill now on Gov. Pat Quinn’s desk to build a plant on the far Southeast Side that would supply Chicago customers with substitute natural gas made from Illinois coal has turned up the heat on the “clean coal” debate.Proponents are billing the proposed plant, to be built by Chicago Clean Energy, as a key ingredient in the Midwest’s energy future. They say it would be a model for storing carbon emissions in the ground and provide hundreds of jobs. Opponents — dozens of whom protested in front of the State of Illinois Building this week — say the plant is a bad idea environmentally and economically. They have packed two recent town-hall-style meetings to object. The emotions and rhetoric prompted by the bill in Illinois, which has an abundant supply of coal, are emblematic of the debate about technological innovation, job creation and environmental benefits at a time when the economy is weak and the benefits of so-called clean-coal technology are unproven. The proposed Chicago gasification plant and others like it will not directly replace coal as an energy source, since the proposed plant would create gas for heating and cooking — competing with natural gas — rather than for electricity
Last coal plant in Pacific Northwest to shut down starting in 2020 - The last coal-fired power plant in the Pacific Northwest will shut down completely by 2025 under an agreement announced Saturday by Washington Gov. Chris Gregoire. The first boiler of TransAlta’s 1,460-megawatt plant in Centralia, Wash., is set to go offline in 2020 and the second in 2025. “This agreement is sending a message that states are getting serious about combating global-warming pollution and are taking steps to open up markets for home-grown clean energy,” said Bruce Nilles, deputy conservation director with the Sierra Club, whose Beyond Coal Campaign has been involved in the negotiations. Nilles hinted at the breakthrough during a keynote speech at the Public Interest Environmental Law Conference in Eugene, Ore., but commented only after the announcement. The only other such plant in the Pacific Northwest, the PG&E plant near Boardman, Ore., is already under an agreement to go offline in 2020
Japan Syndrome: Tokyo Electric nuclear plant in peril after earthquake and tsunami cripple cooling system - UPDATE: Explosion rocks plant, 5 reactors at risk - Japanese authorities on Saturday were racing to find ways to deliver new backup generators or batteries to a nuclear power reactor whose cooling facilities were crippled by a loss of power caused by the deadly earthquake and tsunami that hit Japan on Friday afternoon. Without electricity, the reactor will not be able to pump water to cool its hot reactor core, possibly leading to a meltdown or some other release of radioactive material. That’s the WashPost at 5:06 PM today. It doesn’t appear the siting and fail-safe design of this plant was sufficiently thought out, given that Japan is situated along the Ring of Fire, “where large numbers of earthquakes and volcanic eruptions occur.” Here’s ABC News, which notes in its sub-hed “Nuclear Scientists Warn of ‘Very Serious’ Radioactive Event if Japanese Reactor Not Cooled”: Radiation levels inside a Japanese nuclear power plant have surged to 1,000 times their normal levels after today’s 8.9-magnitude earthquake knocked out power to a cooling system, and tsunami floods have hampered efforts to get it restored.
Could it happen here? GOP budget cuts would lead to furloughs at tsunami warning centers, undermining their ‘ability to react’ - How many U.S. nukes are at risk? - How many U.S. nuclear plants are vulnerable to a tsunami and/or a 500-year 100-year flood? If the GOP has its way, their vulnerability will rise sharply — as will that of all Americans in the path of any serious disaster. Extreme weather disasters, especially floods, are on the rise (see Two seminal Nature papers join growing body of evidence that human emissions fuel extreme weather, flooding). Craig Fugate, who heads the U.S. Federal Emergency Management Agency, said in December, “The term ‘100-year event’ really lost its meaning this year” We’ve already seen that proposed GOP budget cuts make clear the Grand Oil Party believes accurate weather forecasting and hurricane tracking are luxuries America can’t afford. But their budget — along with their proposed continuing resolution — reveals that they simply want to eviscerate America’s ability to plan for and respond to all major disasters, no matter what their cause, including ones that might threaten nuclear power plants.
Frack this: More dangers to public health from natural gas hydraulic fracturing emerge - In the past couple of years big energy has launched an aggressive defense of the drilling technique known as hydraulic fracturing, which employs a mixture of water, sand and chemicals pumped at high pressure deep underground to stimulate production of natural gas and oil. The practice is now used in about 90% of the roughly half million gas wells in the U.S. According to the American Petroleum Institute, hydraulic fracturing, or fracking as it is often called, “is well regulated and safe, and it has a proven track record.” But those assertions that fracking is a benign and well-regulated practice have done little to quell growing concerns that fracking with often undisclosed chemicals poses significant threats to surface and underground water supplies. As natural gas development has soared in areas rich in gas locked in underground shale deposits from Texas to New York State, pressure has mounted on the industry to disclose the chemicals that are used and on Congress to give the Environmental Protection Agency the authority to regulate the underground injections of fracking fluids. Congress in 2005 specifically exempted the practice from regulation under the Safe Drinking Water Act.
EPA Steps Up Scrutiny of Pollution in Pennsylvania Rivers…Radioactivity levels are “at or below” safe levels in Pennsylvania rivers, state regulators said on Monday, based on water samples taken last November and December from seven rivers. The results come at a time of growing scrutiny of the potential hazards of radioactivity and other contaminants in wastewater from natural-gas drilling. The wastewater is routinely sent to treatment plants in Pennsylvania, which then discharge their waste into rivers. In a letter sent to the state on Monday, the federal Environmental Protection Agency noted the state’s test results, but instructed officials there to perform testing within 30 days for radioactivity at drinking-water intake plants. It also said that all permits issued by the state to treatment plants handling this waste should be reviewed to ensure that operators were complying with the law. The E.P.A. asked the state for data and documents so it could check whether current permits were strict enough in requiring monitoring and in limiting the type of pollution the treatment plants can release into rivers.
Smog in Wyoming worsens due to natural gas drilling - Wyoming, famous for its crisp mountain air and breathtaking, far-as-the-eye-can-see vistas, is looking a lot like smoggy Los Angeles these days because of a boom in natural gas drilling. Folks who live near the gas fields in the western part of this outdoorsy state are complaining of watery eyes, shortness of breath and bloody noses because of ozone levels that have exceeded what people in L.A. and other major cities wheeze through on their worst pollution days. Preliminary data show ozone levels last Wednesday got as high as 124 parts per billion. That’s two-thirds higher than the Environmental Protection Agency’s maximum healthy limit of 75 parts per billion and above the worst day in Los Angeles all last year, 114 parts per billion, according to EPA records. Ozone levels in the basin reached 116 on March 1 and 104 on Saturday. The Wyoming Department of Environmental Quality urged the elderly, children and people with respiratory conditions to avoid strenuous or extended activity outdoors.
Recent Earthquakes in Central US - There are 952 earthquakes on this map. Click on an earthquake on the above map for more information. Click on an arrow at edge or corner of above map to go to an adjacent map.
Waste Wells to Be Closed in Arkansas - Two oil1 and gas companies agreed to temporarily shut down wastewater disposal wells in Arkansas that some experts believe are connected to a recent swarm of earthquakes. The State Oil and Gas Commission was scheduled to request the shutdowns at an emergency session on Friday morning, six days after Arkansas experienced its largest earthquake in 35 years. The companies that own the wells, Chesapeake Energy2 and Clarita, agreed to the request before the meeting, said Shane Khoury, deputy director of the commission, though company officials did not support the theory, held by some state researchers, that the wells may be connected to the earthquakes. Such wells are dug for the disposal of wastewater that is a byproduct of natural-gas drilling3. Researchers have long studied a potential connection between the use of disposal wells and earthquakes, a correlation that researchers for the Arkansas Geological Survey have observed in recent months.
Oil and gas blowouts onshore: Fear, pollution, uncertainty - Last year's Deepwater Horizon disaster focused international attention on offshore blowouts. But they happen more often onshore, with dangerous effect: Release of flammable and toxic gases, spills of oil and drilling fluid, and plumes of groundwater pollution.Most U.S. onshore blowouts occur at gas wells. Tracking them falls to the states. The Texas Railroad Commission lists nearly 100 blowouts in that state since 2006. Louisiana has had 96 onshore blowouts since 1987. In November 2009, a gas well blowout killed one worker, injured another and prompted the evacuation of two dozen homes 20 miles south of Shreveport, La. In June, a well spewed gas for 16 hours following a blowout in rural central Pennsylvania. In August, a 200-foot plume of oil, gas and brine erupted for more than two weeks from an exploratory well 60 miles west of New Orleans.
BP tries to wriggle off the hook - While collecting windfall profits, oil giant backs away from its commitments to restore the Gulf Coast - Nine months ago, in the aftermath of the explosion and collapse of the Deepwater Horizon offshore oil rig, the 24-hour news networks doubled as 24-hour oil spill cams, with a picture-in-picture window of the out-of-control undersea gusher serving as a constant reminder of the ongoing environmental calamity. At the time, promises to clean up the polluted waters and coastlines gushed with equivalent expedience from the mouths of BP executives testifying on Capitol Hill. Yet today, as the world’s attention is focused on political upheaval in the Gulf of Sidra and the Gulf of Aden rather than environmental upheaval in the Gulf of Mexico, BP is quietly retreating from its responsibility to restore the environmental and economic health of the Gulf coast.
Spill no reason to halt deep sea drilling: BP - Last year's massive Gulf of Mexico oil spill sparked by an explosion on a BP-leased platform is no reason to stop deep sea drilling, the group's chairman Carl-Henric Svanberg said Monday. "If we truly learn from this accident, I see no reason to close off the deep water as an area for future oil exploration and production," Svanberg told a conference in the southern Swedish city of Malmoe on oil spill risk management. "All energy extraction has its risks and it is our task and our contract with society to make sure that we can take these risks responsibly," he said. Svanberg, a Swede, took over as chairman of the British oil giant just a few months before the April 20 explosion on the BP-leased Deepwater Horizon platform in the Gulf of Mexico, which killed 11 workers and sent some 4.9 million barrels of oil gushing into the Gulf over a three-month period, wreaking havoc on the region's environment and economy.
House GOP, Dems call on administration to speed up drilling permit process - Eleven House Democrats and dozens of Republicans, including several from Texas, have introduced a resolution calling on the Obama administration to speed up the process for approving shallow and deepwater oil and gas drilling in the Gulf of Mexico and Alaska. The resolution, H.Res. 140, would ask the Department of the Interior to streamline the review and “appropriate approval” of applications for shallow and deepwater drilling permits in the Outer Continental shelf. It also asks that Interior immediately provide a sample drilling application, provide guidance on how to fill them out successfully, and provide detailed and timely explanations of why permits are not accepted.
Drill, baby, drill fails: Oil prices soar in spite of sharp increase in U.S. production under Obama - Yet Haley Barbour, right wing try to blame Obama for high prices, still push policies that EIA says will have no impact on price - US oil production last year rose to its highest level in almost a decade….As a result, analysts believe the US was the largest contributor to the increase in global oil supplies last year over 2009, and is on track to increase domestic production by 25 per cent by the second half of the decade. Domestic oil production is soaring, but so are global prices. It should be obvious that yet more drilling can’t have any significant impact on oil prices — particularly since the U.S. Energy Information Administration has been making that precise point for years now (see EIA: Full offshore drilling will not lower gasoline prices at all in 2020 and only 3 cents in 2030!). The only thing that can protect Americans from the inevitably increasing oil shocks of Peak Oil is an aggressive strategy to reduce the country’s oil intensity (oil/GDP), including a steady increase the fuel efficiency of our vehicles — policies that conservatives have fought for decades. But that doesn’t stop those same conservatives — including former Big Oil lobbyist Haley Barbour — from trying to blame Obama for high oil prices. ThinkProgress has a rundown of all the absurd attacks:
Time to worry about oil? - Until recently, the received wisdom in the city was (a) that the steep rise in the oil price would be temporary, and (b) that it would only cause serious problems if it went to $150 a barrel. At least one of those two beliefs is now being tested. Possibly both. After a brief period of treading water, the price of oil lurched up again yesterday, with Brent crude pushing back up toward the $120 mark. The last thing the Opec countries want is a market panic. That's why today you see talk of Saudi Arabia, Kuwait, the UAE and Nigeria all raising their production. But now the world is officially worried about the balance between oil demand and supply, I wonder how much long-term reassurance this can offer. Consider, first, the question of how long the oil spike will last. I was struck by the Bank of England deputy governor, Charlie Bean's blunt answer to this in a speech at the end of last week: "the bottom line is that while agricultural prices may fall back a little this year, oil (and also metals) prices are more likely to remain elevated. And there must be a risk that continued turmoil in the Middle East and North Africa results in a substantial oil price spike, present Opec spare capacity notwithstanding."
How High for Oil? - Geopolitical unrest raises the risks of another spike, which could mean some unpleasant consequences for the economy. CNBC asked Chris Lafakis to elaborate: WTI crude oil futures have risen from $86.20 to $104.72 while we have lost less than 1% of global crude oil production. Since economic analysis suggests that oil prices should rise by a lot less than 21.5 percent given a 1 percent reduction in oil supply (that has since been filled by Saudi by the way), we can be sure that there is a significant supply uncertainty premium currently embedded in the price of oil. It is difficult to predict when this premium will evaporate, but rest assured it will at some point. A supply uncertainty premium of this magnitude is unsustainable. I would be very surprised if WTI prices pierced $110.CL: Rising heating oil and diesel prices do about 44 percent as much damage as rising gasoline prices. The $18.50 increase in oil prices that we’ve experienced over the past couple weeks will, if sustained over the course of a year, cost consumers $20.4 billion just in higher home heating oil and diesel costs. It will costs consumers $46.3 billion in higher gasoline costs if sustained over a year. That’s equivalent to more than a third of the $120 stimulus that we got from the payroll tax reduction in the tax compromise last December.Read more
Yes, the world still has plenty of oil, but ...Let’s get this straight: At the moment, the U.S. has plenty of oil. Let’s get another thing straight: The price of oil is likely to keep rising because of market psychology and buyer panic about Mideast turmoil. And there’s nothing you can do about it. To understand why, start with the fact that the price of a barrel of oil or a gallon of gasoline has little or no connection to the cost of producing it. As of last week, there was some 346 million barrels of oil in American storage, according to the Department of Energy, comfortably above the five-year average range for this time of year. Reserves represent about a 25 day supply for the U.S., a comfortable cushion by historical standards. But, that has done little to keep prices from surging. On Monday, amid news that Libya’s civil war posed a new threat to that country’s oil exports, the benchmark price of U.S. crude hit $107, the highest level in over a year and a jump of nearly 30 percent in less than a month.
Oil Price Increases Exact Huge Toll on U.S. Economy - Over the twelve months ending in January 2010, the price of oil doubled. Over the twelve months ending in the last week of February, the price of oil increased by one-third as much but because the growth was from $75 per barrel to $105, the price increase has been unwelcome and attention-grabbing. For the U.S., the oil price increase is not just politically unwelcome, but also economically problematic. Higher oil prices impair the U.S. terms of trade and add to the current account deficit. Left unchecked, higher oil prices have the potential to lead to another U.S. recession as the implicit tax of oil reduces purchasing power and makes some U.S. goods uncompetitive. The U.S. is especially exposed to oil price increases because oil accounts for 94% of the energy Americans use for transportation. One way to capture the impact of oil price increases on household budgets is to compare wage rates to per-barrel oil prices. Average hourly earnings of private sector workers are $22.87. This means that the typical worker has to log 4.5 hours at work to buy a $105 barrel of oil. The chart below compares this relationship over time. When the economy was growing rapidly from March 2006 until August 2007 it took less than 3 hours of work, on average, for the typical worker to buy a barrel of oil. Starting in the summer of 2007, the price of oil began to rise rapidly and wage growth slowed. The result was a doubling in the price of oil and more than a doubling in the number of hours of work required to purchase a single barrel of oil. It took more than 6 hours of work to make this one barrel of oil purchase in June 2008
Jean Laherrère: Why Cheap Energy Is a Bad Thing - In this tenth video in the series “Peak Oil and a Changing Climate” from The Nation and On The Earth Productions, petroleum geophysicist and author Jean Laherrère explains that we are in the current energy crisis not only because fuel is running out, but because it's cost is too cheap. Laherrère, a former TOTAL oil company employee, used his insider knowledge to co-author a game-changing 1998 article, "The End of Cheap Oil," which studied oil depletion based on the most accurate database of the world’s oilfields at the time. The article's findings were not reassuring. Many European countries have responded to the impending fuel crisis with taxes on energy, driving down consumption with higher prices. But the US hasn't followed their lead, and the consequences may be disastrous for our collective future. “We have been living for the last 10,000 years with open space," Laherrère explains. When you have a problem, ‘go west,’ open space. There is no 'west' to go anymore. We have reached the end of the world limit."
Where Is U.S. Oil Production Going? - No topic is more prone to fantastic projections than oil production. People want there to be more and more oil, and if they can't get it in the Real World, they try to get it through wishful thinking. The Financial Times' US oil production revives despite offshore disruption is a case in point.As a result, analysts believe the US was the largest contributor to the increase in global oil supplies last year over 2009, and is on track to increase domestic production by 25 per cent by the second half of the decade... The revival of US production has been made possible by a rush of small and mid-sized companies into onshore regions such as the Bakken shale in North Dakota, the Permian Basin in west Texas and the Eagle Ford shale in south Texas. According to analysts at Credit Suisse, by 2016 the US could be producing an additional 2.5m b/d more oil, with the increase divided equally between deep-water fields in the Gulf of Mexico and new onshore sources. Note to analysts at Credit Suisse: lots of things could happen by 2016, but 33% increase in U.S. oil production is not one of them. According to the EIA, we produced 7.50 million barrels per day, a modest increase of about 3%.
High Oil Prices Here To Stay, Says IEA Economist - High oil prices are a threat to the global economic recovery and present a challenge the world will have to face over the long term, the International Energy Agency's chief economist said on Wednesday."The age of cheap oil is over, though policy action could bring lower international prices than would otherwise be the case," Fatih Birol said at a conference in Berlin.Flagging specific concerns for Europe, Birol said that if prices held at current levels, Europe's oil costs would be higher than in 2008, a record year for prices."Europe is the weakest link in the chain of economic recovery ... ," he said."In Europe, 75 percent of the gas prices are linked to oil prices. In a few months gas prices are going to increase."
Oil Prices: Held In Reserve - TO SEE the wider effects of unrest in Libya, visit a petrol station. Americans now face prices of nearly $4 a gallon in some parts of the country. Europeans are suffering too. Spain, which gets 12% of its oil from Libya, has cut speed limits to conserve fuel stocks. Oil traders are preparing for a lengthy absence from world markets of much of Libya’s exports of 1.4m barrels a day (b/d). The International Energy Agency (IEA) reckons that around 1m b/d has stopped flowing as a result of fighting that shows no signs of abating. That looks optimistic. Several oil facilities have been damaged and only a handful of fully laden tankers have sailed since the fighting began. Indications that other OPEC members would join Saudi Arabia in increasing output has relieved some of the pressure. The Saudis are set to pump an extra 700,000 b/d and Kuwait, Nigeria and the United Arab Emirates may add another 300,000 b/d. The price of a barrel of Brent crude, which had nudged $120, slipped back a bit this week.
US Republicans assail Obama as gas prices rise - – US President Barack Obama's Republican foes on Thursday blamed his energy policies and efforts to combat climate change for soaring oil and gasoline prices and called for boosting domestic production. "As gas prices go up, so does the cost of everyday life," Republican House Speaker John Boehner told reporters as he unveiled a campaign dubbed the "America Energy Initiative" to increase supplies and roll back regulations. "It costs more to drive to work, to buy groceries, or just to get the kids to school. And at a time when our economy already isn't creating enough jobs, rising gas prices hurt the very people we need to lead us out of our economic crisis: Small businesses," he said. Boehner said Republicans, who control the House of Representatives but not the Senate, would tackle the issue in "bite-sized chunks" rather than one sweeping energy bill.
Obama Said to Consider Tapping Oil Reserves - The Obama administration is considering tapping the Strategic Petroleum Reserve1 in response to rapidly rising gasoline prices brought on by turmoil in the Middle East, the White House chief of staff, William M. Daley2, said on Sunday. “It’s something that only has been done on very rare occasions,” Mr. Daley said on “Meet the Press” on NBC3, adding, “It’s something we’re considering.” Administration officials have sent mixed signals about the possibility of opening the reserve, which would add supply to the domestic oil market and tend to push down prices. Energy Secretary Steven Chu4 said on Friday that the administration was monitoring prices, but he has been reluctant to endorse more aggressive steps. “We don’t want to be totally reactive so that when the price goes up, everybody panics, and when it goes back down, everybody goes back to sleep,” he said.
Leave The Strategic Petroleum Reserve Alone - The pain at the pump is palpable for anyone who’s had to full up their tank anytime in the last week and that’s led, inevitably, to calls for the President to “do something,” even if that something is immensely foolish: The Obama administration is considering tapping the Strategic Petroleum Reserve in response to rapidly rising gasoline prices brought on by turmoil in the Middle East, the White House chief of staff, William M. Daley, said on Sunday “It’s something that only has been done on very rare occasions,” Mr. Daley said on “Meet the Press” on NBC, adding, “It’s something we’re considering.”The first problem with the argument, of course, is that it completely forgets why the SPR exists:The 727-million-barrel U.S. Strategic Petroleum Reserve is the largest stockpile of government-owned emergency crude oil in the world. Established in the aftermath of the 1973-74 oil embargo, the SPR provides the President with a powerful response option should a disruption in commercial oil supplies threaten the U.S. economy.
OPEC spare capacity may be below 2 mbd: Goldman - Spare capacity from the Organization of the Petroleum Exporting Countries is likely to have dropped below 2 million barrels a day with the developments in Libya, even accounting for Saudi Arabia's boost in production, analysts at Goldman Sachs said in a note to clients late Monday. Libya's unrest may have "brought forward the drawdown of OPEC spare capacity by about six months," they said. "While the current loss of supply might turn out to be short-lived as production can be restored relatively quickly once the current civil unrest settles down, the real risk is that the remaining spare capacity cannot accommodate an escalation in disruption right now," they added. Oil for April delivery
Tech Talk - Countries producing around 2 mbd - Nigeria, Angola, Libya and the UK - The growing concerns about the stability of the countries of the Middle East and North Africa (MENA), because they make significant contributions to world oil supply, adds additional meaning to these weekly posts on the world’s major oil producers. To briefly recap, I looked at the top tier oil producers as listed by the EIA (i.e. those who produce more than 3.1 mbd in 2008) in the first post of the series. (These were Russia, Saudi Arabia, the United States, Iran, China, and Canada.) In the second I looked at the next four countries on the list, namely Mexico, the United Arab Emirates (UAE) Kuwait and referred to Venezuela – subject of a series of posts earlier in the year. The third post covered Norway, Brazil, Iraq, and Algeria. And so now we move on to look at Nigeria (2.35 mbd), Angola (2.0 mbd), Libya (1.87 mbd), and the United Kingdom (1.58 mbd). The numbers in parentheses are the production numbers cited by the EIA for 2008. To put these countries in greater context, these take us down to number 18 on the list, and with one more post I will have covered all the countries that produced more than 1 mbd on average in 2008.
The Two Most Important Charts For The Near-Term Future Of Oil Prices - With nobody having any clue how the MENA situation will play out (and those who tell you otherwise can be immediately dismissed as full of feces to be ridiculed in perpetuity by everyone but CNBC where they will have a guaranteed contributor slot), and as crude has promptly become the most volatile asset class (as Zero Hedge predicted last summer when we lamented the death of equities) recently experiencing an unprecedented 7 Sigma move which likely led to the liquidation of at least one asset manager, there are two main charts which matter for the oil. On one hand, the Crude Oil non-commercial net specs are at an all time high: well over 100% more than during the oil time highs in crude in 2008. This means that speculators are anticipating an even more powerful move higher than that seen in the summer of 2008 when Crude hit $150 (it also presents the possibility of an unprecedented plunge in oil should the speculative thesis not be realized). Just as important, the performance of energy as a subsegment of all commodities is currently materially underperforming all other commodities, with Previous, Agircultural and Industrial commodity classes all doing far better than crude and its peers. Should there be a rotation out of other commodities into the energy complex, look for crude to surge far beyond $125 in the next few weeks. All it would take is one Saudi geopolitical spark.
Oman’s unrest may be a domino, not just to suppliers, but also to customers - There are reports that the unrest in the Middle East has spread to the Sultanate of Oman. While at the moment there have been only one or perhaps two deaths, small in number relative to the larger number of fatalities in countries like Libya, such a milepost, nevertheless, is sadly likely to indicate that the situation will get much worse. Oman lies east of the United Arab Emirates (UAE) South of Saudi Arabia, and north of Yemen. It is therefore within the region that is now in turmoil. And as the consequences of the unrest begin to compound, the consequences grow beyond the point where simple answers will be sufficient.
Survey of Oil Exports from North Africa - As we reach March 11, 2011, the designated “day of rage” in Saudi Arabia, and perhaps in other countries in the region, speculation is running rampant that oil will reach $200/b, and up, on fears that civil unrest will curtail the ~9 mbd of Saudi Arabia production, thereby causing oil exports to Europe, Asia and North America to sharply decline. This article rounds out my survey of petroleum export trends for the countries of the Middle East and North Africa. In a previous article, I surveyed the 14 countries of the Middle East; this article surveys the 14 countries of North Africa. The survey examines the effects such a curtailment might have on oil exports from North Africa, and the Middle East.
A Handy Guide to the Revolts in the Middle East—And Their Likely Effects On Us - Autocratic regimes never fare well during economic downturns. The Global Depression that began with the financial crisis in 2008 is slowly but surely picking up a head of inflationary steam, which has been squeezing the middle classes in these countries. A middle class being squeezed economically eventually oozes out political unrest—as we have been seeing throughout the Middle East and North Africa. Now, in early March 2011, with the fate of these various revolts still unclear, it would be wise to go over them, and see where they are in each country. And it would be wise, too, to examine how these various revolts in the Middle East will affect the rest of the world in the short- to medium-term.
Speculators Gone Wild? - At the risk of becoming involved in the ongoing Paul Krugman/Yves Smith debate regarding the influence of speculators on commodity prices, I direct readers to Colin Barr at CNN Money:The surge of speculative money into the oil futures pits shows that big financial players are expecting the price of WTI crude to surge well above the recent $105 or so seen last week. If they are right, it will bring $4 gasoline a step closer…. Money appears to be flooding into energy markets to chase a sure thing, with potentially severe consequences for a global economy still on the mend. The article continues: The speculative fervor is so remarkable that the big trading firms now have nearly twice as many long contracts open as they did in 2008, when oil spiked to $147 in the summer, a development that either foreshadowed or caused the global economic meltdown, depending on how you look at it. I think this suggests that the recent oil price gains are driven more by speculation that in 2008. And note that we know how quickly oil prices collapsed when the global recession knocked down energy demand. So if oil prices are being driven by even more extreme speculative activity today, the possibility for a sharp reversal also exists – the question is whether that reversal comes before or after oil prices bring the global economy to its knees.
Citi Hikes Its Outlook For Oil, While Questioning Saudi Arabia's Spare Capacity Claims - In light of the obvious, Citi's Mark C. Fletcher has hiked his price estimate for oil: We are raising our Brent forecast for 2011 and 2012 to $105/barrel and $100/barrel respectively from our previous estimate of $90/barrel. In part this reflects a mark to market against a stronger-than-anticipated Q1, and a view that output disruption (or at least the threat of) will support a fear premium for the rest of 2011. Perhaps the most interesting part is this. Citi is skeptical of stated spare capacity claims: Assumed spare capacity of 5.2Mbd relies on Saudi Arabia’s claim of 12.5Mbd of capacity and therefore current flexibility of 4.1Mbd. As Figure 6 below shows, Saudi Arabia has not managed to produce more than 10Mbd in recent years and the market cannot be sure of claimed productive capacity until it is tested. Grade quality and the ability of the market to manage quality substitution is also an issue which may cause logistical dislocation and therefore price issues.
The Truth Behind Saudi Arabia's "Spare Capacity" - Crude oil topped $103 this morning. The last time oil was this high was Sept. 26, 2008 – the last trading day before the US House rejected the first bank bailout bill. Wall Street then threw a snit and slashed 777 points off the Dow in one day. Good times.There doesn’t appear to be any overt reason why the price popped today. But beneath the surface, we see a series of ominous developments from Saudi Arabia, the world’s No. 1 oil exporter. Events that could make $103 oil seem as quaint as an 8-track tape left in an abandoned car for the last 40 years. First, a little background. World energy demands – and, by extension, traders in the market – rely on something called “spare capacity” or producers’ ability to jump-start new oil production within 30 days and keep it up for at least 90 days. If you listen, you’ll hear it on the tip of the “official” tongue. Yesterday, for example, Treasury Secretary Tim Geithner assured Congress: “It’s important to note that there is considerable spare oil production capacity globally.”
Saudi Arabia, Which Allegedly Hiked Output, Just Raised Crude Export Prices To Asia And Europe - Two weeks ago Zero Hedge claimed that Saudi Arabian 'gestures' to hike crude output were about as hollow as the heads of those suggesting that dealing with surging oil prices involves reducing interest rates even more (which just happen to be at zero already), mostly as a result of the country's recent adoption of 'whorism' or its doomed strategy to buy the love of its citizens. The reason is that as UBS' Andy Lees noted, Saudi 'will need to ramp up production by about 10% (more capital spending) without prices falling' to fill the suddenly gaping budget hole left from literally throwing $37 billion out of Bernanke's leased helicopter. Yesterday, BusinessWeek's Peter Coy essentially reaffirmed our theory verbatim in the piece 'Saudi Arabia Must Keep Pumping Oil to Buy Stability'... needless to say we completely agree with this. Obviously, the bigger issue here is that as WikiLeaks recently suggested, and was reconfirmed by Jim Rogers, Saudi Arabia is simply lying about its excess capacity. Because if Saudi had indeed raised output as many have hoped for, and as Saudi has represented, it would have made up for the funding differential simply by the hike in export volume. Instead, as Reuters reports, Saudi Aramco just hiked prices on oil to customers in Asia and Europe up substantially. This, at least to us, does not appear like the rational action of a player seeking to moderate surging oil prices to avoid further social conflict, and one who can plug offline capacity.
Interpreting Recent Oil Price Moves - The New York Times this morning has a debate between various experts on what the current moves in oil prices mean. It's framed as a mystery: The world has lost less than 1 percent of crude oil production during the Libyan crisis of the last few weeks, but crude oil futures have risen more than 20 percent in the same period. In the past six months, gas prices have climbed more than 70 cents, but in the past two weeks alone, they're up 34 cents. While the various contributions to the debate are worth reading, I always find it a lot more illuminating to actually look at the data myself. Here is a graph of recent spot prices, both WTI and Brent, since the beginning of Jan 2010. (Note the EIA data go through March 1st and I have added a point for March 8th based on news reports), The pale grey vertical grid lines are at four week intervals, and I have added black lines at certain key points in recent Middle East turmoil:
Talking About Oil — Complacency, Panic And Ignorance - Thirty-four years have come and gone since Energy secretary James Schlesinger described the American approach to oil supply problems.We have only two modes—complacency and panic. Nothing has changed. As popular revolt spread from Egypt into Libya, panic smoothly replaced complacency in the markets and the overwrought minds of the American people. Apparently, since Egypt blew up first, and Libya, which is west of Egypt, blew up next, it has been deemed logical to conclude that Algeria, which is west of Libya, will be the next domino to fall. The Telegraph's Ambrose Evans-Pritchard did not want to be left out of the fear fest, as his Oil could hit $220 a barrel on Libya and Algeria fears, warns Nomura attests. After years of complacency about the oil supply, fear now makes it possible to imagine all sorts of scenarios, no matter how improbable, that will bring down the world economy. Perhaps it might have been better to worry about this stuff a bit earlier. The year 1977 comes to mind, when Jimmy Carter was president and Schlesinger served in his cabinet.
The changing private value of oil in the ground -So oil prices are rising, and, inevitably, a debate is heating up about the role of speculation versus that of “fundamentals”. Ryan Avent makes a point that was commonplace last time our collective heads were on fire about oil prices and it was all the speculators’ fault:[T]he easiest and most effective way to speculate on the price of oil is to leave the stuff in the ground, and there’s not a thing the American government can do about that. I thought this was a good point in 2008, the best rejoinder to Paul Krugman’s recurring query that, if it’s speculation, where was the inventory build? But it strikes me as a less compelling point now.Suppose you are the House of Saud. Like anyone with a position in a traded asset, you face a sell or hold decision. If you expect that the real value of your asset will rise faster than the real value of financial investments you could make at equivalent risk if you sold, then you should hold. Otherwise, you should sell.But there’s a wrinkle. The House of Saud really must compare the private value of oil in the ground to the private value of alternative investments.
The supply side - ONE thing I should have added to yesterday's post about oil prices is that while the long-term upward trend in prices is reflective of growing demand, the short-term increases are often about supply fluctuations. As Kevin Drum notes here, supplies are tight—there isn't a lot of excess capacity in the system. A relatively small supply shock, like the disruption of production in Libya, can therefore influence prices quite a bit. And what's interesting is that oil supply shocks can dampen global demand for everything; a rise in the price of oil is kind of like a big tax increase. As Paul Krugman points out here, the recent oil spike associated with unrest across the Arab world has been associated with a decline in the prices of some other key commodities, reflecting the negative impact of dear oil on global output. This is one reason why expensive oil poses a challenge to central bankers, and why they should be reluctant to tighten in the face of oil-driven inflation, given the weakness in labour markets. While I'm on the subject, let me also draw your attention to this post by Steve Waldman, who makes a very nice point about non-extraction as speculation:
Gas Price Spike: A Long-term Job-Killer? - In the past two weeks, the price of gas has risen on average across the country $0.33 a gallon to $3.50. In many places in the country, the price at the pump is over $4.00. University of Maryland economics professor Peter Morici recently said that quick run up in gas prices might cost the economy 600,000 jobs. Economic forecasting firm IHS Global Insights has crunched the numbers on how rising gas prices affect the job market and they come to nearly the same 600,000 job conclusion. But IHS says the job loss could be more gradual, happening over two years, not one. But the point is the same: Even after the Prius and 40 years of conservation efforts starting in the 1970s, it appears the US economy continues to be particularly vulnerable to oil price spikes. Here's why: For a number of years now, the prevailing thought in the economics world is that oil and gas prices don't have the same effect on the economy that they once did. There are a number of reasons. Cars are more efficient than they used to be. We manufacture a lot less in the US, and oil is not as much as a factor in a service economy. Inflation has essentially been tamed.
Barclays On How The Oil Price Spike Could Crash The Housing Market Again: "The oil price spike, driven by instability in the Middle East, has the potential to cause repercussions in the U.S. housing market, according to Barclays' Luca Ricci. The simple reason why a rise in crude prices could tank the housing market is that it has done it before. From Barclays' Luca Ricci (emphasis ours): The main effect is on consumption via gasoline and energy prices. As consumption generally accounts for 60% of GDP, the effect is large. In oil exporters this effect will be offset by windfall revenues from the higher oil prices, so the overall effect is unclear. In our view, the oil price increase in 2008 significantly contributed to the recession and the financial crisis in the US, which then spread globally. By raising CPI inflation, it reduced real disposable incomes and, hence, the purchasing power of the average households, leading to a contraction in real consumer spending and lowering the ability to repay mortgages. But the big question is, at what price does this spike start to have the same, or a similar effect?"
Do rising gas prices spell doom for Obama? - In recent weeks, gas prices have risen sharply enough for people to notice: 39 cents a gallon since mid-February. Whether you want to blame revolution in Libya or a (not unrelated) speculative frenzy by oil traders or remorselessly rising demand in China is up to you. Whatever the cause, there's no getting around the fact that the average price of a gallon of gas hit $3.57 on Monday -- only 54 cents under the peak reached in the summer of 2008.At the same time, President Obama's poll numbers, after improving or staying steady for months, have suddenly slipped beneath the 50 percent approval level. Real Clear Politics's David Paul Kuhn is already wondering whether gas prices could sink Obama's reelection, while Reason's Ron Bailey reminds us that "10 out of 11 post-World War II recessions in the United States were preceded by a sharp increase in the price of crude petroleum."Few things focus the American consumer mind more than swiftly rising gas prices. Our culture is built around cheap gas, and many of us don't have readily available alternatives to escape a price hike. It's no surprise, as Kuhn also points out that "last week, the Pew Research Center found that slightly more Americans were following the rising price of oil than the violence in Libya or the Wisconsin labor dispute."
Dr. Doom Roubini: Soaring oil could push the world back into recession - Nouriel Roubini, the economist who predicted the global financial crisis, said an increase in oil prices to $140 a barrel will cause some advanced economies to slide back into recession. Underlying how fragile the global economic recovery is, Roubini said the European Central Bank may be making a mistake by raising interest rates "too soon" when debt-ridden countries on the euro region's periphery struggle to restore the competitiveness of exports. "If you had the oil price going up to where it was in the summer of 2008, at $140 a barrel, at that point some of the advanced economies will start to double dip," he told reporters in Dubai today. "In the U.S., where growth is accelerating fast, a 15 to 20 percent increase in oil prices, there won't be double dip, but growth reaching a stalled speed again."
Oil Price Spikes Often Precede or Coincide With Previous U.S. Recessions - According to Chart of the Day: The decline in crude oil prices that began in mid-2008 was historic -- plunging over $90 per barrel in just eight months. Over the past two years, however, crude oil prices have increased by over $60 per barrel. Today's chart provides some perspective on the historic decline and recent spike with a long-term view of inflation-adjusted West Texas Intermediate Crude. Today's chart illustrates that most oil price spikes were a result of Middle East crises and often preceded or coincided with a U.S. recession. It is also interesting to note that the recent spike in oil prices has brought the price of oil back to a historically high level -- a level that was surpassed only briefly during the tail-end of the major price spikes of 1980 and 2008. Click to enlarge:
The perpetual politics of petroleum - The boom-bust cycle of oil politics is booming this week on Capitol Hill, where the only thing more predictable than politicians’ policy solutions are their claims that the other side is ignoring the issue.With gas prices surging to about $4 a gallon in some places, lawmakers on both sides of the aisle are recycling … the same talking points they used the last time there was such pain at the pump. Call for “all of the above?” Check. Demand the White House open the Strategic Petroleum Reserve? Check. Find some old quotes from the other guy about high oil prices? Check.Rising oil prices are a serious issue, especially with the economy just beginning to recover. And the U.S. Energy Information Administration says prices at the pump will continue to rise because the recent increases in oil prices haven’t been fully passed on to consumers. Gasoline could average about $3.70 per gallon — or higher, depending on the region — in the peak April-September driving season, EIA says.
Reality Optional Nation - An Alzheimers fog creeps across this land, from sea to shining sea, as its intellectual class - theoretically the brains of this outfit - utterly fails to get a grip on what is transpiring in this world. The failure of leadership in America is comprehensive and deep. President Obama's top aide, Bill Daley, floated out the notion that we might draw down America's Strategic Petroleum Reserve (SPR) so that the imprudent folk who traded-in clunkers for new Ford F110s and Cadillac Escalades won't feel any pain from four-dollar gasoline. Harken, now - a reminder to the rest of you out there who do not have tubeworms boring tunnels through your brain-pans: there's a reason the petroleum reserve is called "strategic." We didn't stockpile that oil to pretend to be the world's "swing producer" for a month and a half, just to knock the price down twenty-seven cents a gallon so that soccer moms could feel more comfortable bidding for an Auslini Veneto crocodile leather handbag on The Shopping Channel. Strategic was meant to imply when something really really bad happens, like a national emergency, say, with military overtones
Too Early for Talk About Strategic Oil Reserves - Don’t do it. That’s my advice about tapping the U.S. Strategic Petroleum Reserves. Some politicians are asking the White House to release oil from the SPR in order to bring down high energy prices. The move, however, may not work and avoids the long-running need to reduce the nation’s dependency on foreign oil. After the oil embargoes of the 1970s brought the U.S. economy to its knees, the SPR was designed mainly to address supply disruptions. The problem facing the economy now is rising prices, not a cutoff in supplies. Prices, of course, are rising because of the unrest in the Middle East. Higher crude prices, in turn, are lifting the costs of processed fuels, especially gasoline. The price of gas averaged $3.52 per gallon nationwide, up about 50 cents since the end of 2010, and 77 cents higher than at the same time a year ago. Events in the Middle East are moving quickly. Today’s reported attack on the oil refinery at Ras Lanuf, Libya could mean a disruption of the global supply chain. Consequently, tapping into the SPR may make sense in a few months. But not now.
Reining in the speculators - FEW relationships in life are as tight as that between rising oil prices and increasing complaints about commodity speculators. Nation reporter Chris Hayes sees the cost of oil going up and unholsters his anti-speculation column: In the first six months of 2008, US economic output as declining while global supply was increasing. And even if supply and demand were, over the long run, pushing the price of oil up, that alone couldn't explain the massive volatility in the market. Oil cost $65 per barrel in June 2007, $147 a year later, down to $30 in December 2008 and back up to $72 in June 2009.The culprit, they concluded, was Wall Street speculators. First, it's not true that American output was falling in the first half of 2008; GDP declined in the first quarter but rose in the second. Second, the oil market is global. While American output stagnated in early 2008, growth in places like China continued to soar and demand for commodities followed. Indeed, the fundamental trend in commodity prices, including oil, over the past decade has been a general upward movement as demand growth outstrips supply growth. Third, the fact that price increases span commodities undermines the argument that speculation has played a major role, because prices for commodities that don't trade on these markets have risen alongside those that do.
Don't sweat the oil speculators - Rounding up the speculators sounds almost as appealing as killing all the lawyers. But neither will cool seething crude prices. That is a point worth considering as oil markets run wild. Big traders are making a record bet that crude prices, up 26% over the past year, will rise further as unrest rattles the Middle East. It's tempting to view that bet as irresponsibly driving up gas prices and endangering a tepid economic recovery. How can market fundamentals that justified $80 oil six months ago do the same for $105 oil now? Can't we blame some dark conspiracy? Alas no. The reality is that bets on higher oil prices are little more than a rational response to steadily rising fuel demand in a world of increasingly uncertain oil supplies. Governments in Tunisia and Egypt have fallen, and other oil-producing countries face threats of their own. Political problems aside, there are questions about whether the big oil exporters actually have it in them to fill in for further supply disruptions. And if Saudi Arabia can't pump as much as we think or is running down its inventories faster than we expect, we could soon face a world in which $105 oil and $3.50 gasoline look like a bargain.
A Note On Oil - Krugman - Just a note in the debate over speculators versus fundamentals: oil is a commodity with highly inelastic short-run demand; this means that any shortfall in supply leads to a large rise in the price. Supply from most sources is also highly inelastic; the exception used to be Saudi Arabia. So Jim Hamilton makes the needed point: there’s a real possibility that Libyan supply, which is a significant chunk, will be taken off the market — and there are real questions about whether the Saudis can or will fill the gap. As I see it, the surprising thing is that prices aren’t even higher.
What will Saudi Arabia do? - Jim Hamilton - One key question in determining the impact of instability in Libya and elsewhere on world oil markets is how much other countries can and will increase production to offset the shortfall. Here I review the critical role of Saudi Arabia in past disruptions and discuss the current situation. Figure 3 details Saudi production going back to 1973, with the two episodes highlighted above denoted as shaded regions. Throughout most of this period, the Saudis had been a force stabilizing oil prices, dropping production in an effort to moderate the price reductions in the 1980s, and increasing production in episodes like the two mentioned above. But Saudi oil production looks quite different over the last few years, as highlighted in more detail in Figure 4. The kingdom's production actually declined between 2005 and 2007. Although it subsequently increased, at the peak of oil prices in July of 2008 Saudi production was essentially only back to where it had been in 2005. The failure of Saudi production to increase between 2005 and 2008 in the face of booming demand for oil from the newly industrialized economies was in my opinion a key reason for the dramatic increase in oil prices over that period.
US says Saudi oil boost can't keep crude under $100 (EIA) - Saudi Arabia has been pumping 9 million barrels per day of crude since January, far more than earlier estimated but not enough to keep oil prices below $100 for the rest of this year, the U.S. government's energy forecasting agency said on Tuesday. The Energy Information Administration (EIA) revised its previous estimates to peg Saudi output at 8.9 million bpd in December, 300,000 bpd more than earlier forecast, and at an even 9 million bpd during January and February. That is much higher than other independent estimates, and raises more questions about the extent to which the kingdom has increased output since the Libyan crisis.As global oil markets grapple with the loss of nearly all Libyan exports, estimates of OPEC member production are more critical than ever. In its new monthly forecast, the EIA said it expected total OPEC crude oil production to fall from 29.79 million bpd in February to 28.95 million bpd in March, mainly reflecting a a loss of Libyan oil.
Chart of the week: $115 a barrel oil – who suffers and who doesn’t - With Brent oil around 115$ per barrel and expected to rise further in the light of the unrest in the Middle East, it is worth considering who will be squeezed hardest among the countries of the emerging world. China and India are the two largest net oil importers in emerging markets. But both are big consumers of coal and rely less on oil than some of their rivals. Chile and Thailand depend far more on imported oil. As the chart below the fold shows, the level of oil dependency is relates to the energy mix which varies a lot between countries..The chart illustrates energy supply by fuel for key countries and regions. Latin America is relies more on oil than any region after the Middle East. About half of its total energy consumption comes from oil and the remaining half is largely composed of gas. The region as a whole is a net exporter of oil and shortages of supply in the Middle East are likely to benefit domestic oil producers. But there is a world of a difference between oil-rich Venezuela and Chile, which is likely to be among the most affected state in Latin America by the rise in oil price. It is one of the few net oil importers and it depends on oil for almost two thirds of its energy supply.
Record Gasoline Grips Europe, California Faces $4 a Gallon - Gasoline prices are setting records across Europe and exceeding $4 a gallon in California as the rise in crude oil caused by the conflict in Libya punishes companies and consumers. Households are cutting back on travel, cinema visits and groceries in the U.K., where prices jumped to 130.68 pence a liter ($8.06 a gallon) yesterday Prices set records in the Netherlands and Italy today. In Italy, gasoline prices reached 1.544 euros a liter and diesel climbed to 1.438 euros a liter ($8.17 a gallon), according to a chart published by web energy daily Quotidiano Energia. Gasoline prices in the Netherlands reached a record 1.697 euro a liter from 1.692 euro in June 2008, according to Paul van Selms, head of UnitedConsumers, a lobby group for consumers in the Netherlands. The average price for super-grade gasoline in Germany, Europe’s largest economy, was 1.55 euros per liter today, close to the 1.58 euro record from 2008.The current average U.S. gasoline price is near a two-year high at $3.81 a gallon, according to the AAA website. “Rising fuel costs are negative because they push inflation up and slow the economy down,” “It is essentially energy costs that have resulted in ECB putting its finger on the interest rate trigger.”
Citi Hikes Its Outlook For Oil, While Questioning Saudi Arabia's Spare Capacity Claims - In light of the obvious, Citi's Mark C. Fletcher has hiked his price estimate for oil:We are raising our Brent forecast for 2011 and 2012 to $105/barrel and $100/barrel respectively from our previous estimate of $90/barrel. In part this reflects a mark to market against a stronger-than-anticipated Q1, and a view that output disruption (or at least the threat of) will support a fear premium for the rest of 2011.Perhaps the most interesting part is this. Citi is skeptical of stated spare capacity claims:Assumed spare capacity of 5.2Mbd relies on Saudi Arabia’s claim of 12.5Mbd of capacity and therefore current flexibility of 4.1Mbd. As Figure 6 below shows, Saudi Arabia has not managed to produce more than 10Mbd in recent years and the market cannot be sure of claimed productive capacity until it is tested. Grade quality and the ability of the market to manage quality substitution is also an issue which may cause logistical dislocation and therefore price issues.
Oil markets brace for Saudi 'rage' as global spare capacity wears thin - Those exhorting OPEC to boost output should be careful what they wish for. The cartel card can be played once only, and it risks exposing the fragility of the global energy system if the Gulf powers are seen struggling to deliver. Goldman Sachs suspects that OPEC has been pumping far above its agreed quota since November and therefore cannot easily raise output much without cutting deep into global spare capacity. Jeff Currie, the bank's oil guru, said Saudi output had quietly crept up by 700,000 barrels a day (bpd) even before the Libyan supply shock. Assumptions that OPEC has added 1.9m bpd over the last two years are wishful thinking. These new fields have been "largely offset" by attrition in old fields. "We believe that OPEC spare capacity has already dropped below 2m bpd. The question therefore arises how much spare capacity is left to absorb potential supply disruptions in other countries," he said. If this picture is broadly correct, spare capacity is already close to the wafer-thin levels that led to wild price moves in mid-2008.
Rising prices stoke fuel thefts in B.C - Hundreds of dollars of diesel has been stolen from a Kamloops, B.C., trucking firm as fuel prices skyrocket, and victims are confident the culprits are hard up truckers trying to keep their rigs on the road. “Guys are getting desperate. They don't know how they are going to pay for fuel,” said Marion Gamache of Dan Gamache Trucking. “People are getting desperate and they do desperate things.” In the past, theft of fuel from the log and lumber hauling company has been infrequent, she said. But with diesel clocking $1.24 a litre in Kamloops, and as much as six cents higher in Metro Vancouver, truckers are fighting to make ends meet. Which is likely why someone emptied one big rig of diesel overnight Saturday and another semi was almost bled dry. Trucker Wayne Coulson, 67, had just two inches of diesel in his tanks when he started his truck on Sunday.
Hidden energy crisis in the Middle East - An ongoing reshuffle in natural gas supplies has left at least two countries - Israel and Jordan - without much of the gas they need. In general, the politics of Middle Eastern gas will probably be just as dramatically affected by the upheaval as those of oil, but will follow a separate trajectory. Their effect will, at least initially, be more local in nature, and will vary for each country. However, the energy status quo in the region is slated to change dramatically. On February 5, at the height of the uprising against then-president Hosni Mubarak, a massive explosion rocked a gas terminal near the Egyptian town of El-Arish. The head of the Egyptian natural gas company, Magdy Toufik, blamed it on ''a small amount of gas leaking',' but it soon emerged that the most likely cause was an act of terror - in some accounts, two separate terrorist attacks. The terminal lay on the Arab gas pipeline carrying Egyptian gas to Jordan, Syria, Lebanon and even Turkey. The section that branches off of that pipeline into Israel was not affected, but Egypt shut off gas supplies to the Jewish state as well.
Kuwait, China setting up $ 9 billion joint project in oil sector - Kuwait Petroleum Corporation (KPC), the state-owned entity responsible for Kuwait's hydrocarbon interest throughout the world, said that it got final approval for setting up a joint Kuwaiti-Chinese oil project, Global Arab Network reports according to KUNA. The project will be established at Donghai island of the Zhanjiang city of Guangdong province, south of China, at a total cost of some USD nine billion.Sheikh Talal added that the project would comply with internationally accredited criteria as a self-contained enterprise that includes a Kuwaiti crude refinery with a capacity of 15 million tons annually, a petrochemical plant depending on an Ethylene Cracker Complex (ECC) with a capacity of one million tons annually and at a total cost of USD nine billion.Further, Sheikh Talal said that the project aims at meeting the requirements of the Chinese market of fuel and high-quality and high-yield petrochemical products, and it is a significant investment opportunity for getting access to the promising Chinese market, and for a safe selling of Kuwaiti crude. He also said the project will be a partnership between the biggest Chinese firm in this field, namely China Petroleum and Chemical Corporation (SINOPEC), and KPC.
Paul Krugman | Rising Oil Prices: Not Exactly Good News for Japan's Economy - Are higher oil prices good for Japan’s economy? No, they’re not.Yet some commentators believe that surging commodities costs might make Japan’s persistent deflation simply go away.“Japan could do with a little inflation. At home at least,” James Simms wrote in a recent online column for The Wall Street Journal. Noting that prices for Japanese imports jumped 4.7 percent in January over last year, he added, “Not everyone’s groaning over the rise in commodities prices. Mining equipment makers such as Hitachi Construction Machinery will benefit from sales as commodity exporters rush to increase production while prices are high.” Unfortunately, the idea that rising commodity prices might be a boon to Japan is based on a misunderstanding of some key economic principles. Let’s start by answering this question: Why does deflation, or a general decrease in the prices of goods and services, have a depressive effect on the economy?
Japan must develop nuclear weapons, warns Tokyo mayor - Tokyo's outspoken Governor says his country, which suffered history's only nuclear attack, should build nuclear weapons to counter the threat from fast-rising China. In an interview with The Independent, Shintaro Ishihara said Japan could develop nuclear weapons within a year and send a strong message to the world. "All our enemies: China, North Korea and Russia – all close neighbours – have nuclear weapons. Is there another country in the world in a similar situation?"People talk about the cost and other things but the fact is that diplomatic bargaining power means nuclear weapons. All the [permanent] members of the [United Nations] Security Council have them." The comments from the leader of Japan's second-most powerful political office come amid concerns about China's growing military muscle.
Massive earthquake hits Japan - The Big Picture - Boston Globe…An 8.9-magnitude earthquake hit off the east coast of Japan early today. The quake -- one of the largest in recorded history -- triggered a 23-foot tsunami that battered Japan's coast, killing hundreds and sweeping away cars, homes, buildings, and boats. Editors note: we'll post more as the story develops -- Lloyd Young (43 photos total)
How Much Economic Damage Will the Japanese Earthquake Do? - There is an anecdote that Robert Heinlein recounts in one of his novels, about meeting someone who had suffered through a major earthquake in California, and asking him how long the earthquake had lasted. "It's still going on," the young man replied calmly. Watching this disaster unfold on television, I can't help think about that line. The worst of the disaster is now over. But the catastrophe is only beginning. We still don't know how many people have died--and will die, before we can get to them. And even after we have pulled the last body from the wreckage, there will be economic aftershocks for years to come. It's impossible to know, at this point, how much this disaster will cost. But the 1995 Great Hanshin earthquake near Kobe cost over 6,000 lives and about ¥10 trillion--which was about 2.5% of GDP, and about $100 billion dollars. The rebuilding took seven years.
Japanese Earthquake: The Economic Hit - Unfortunately, earthquakes and Tsunamis have a much larger human toll than economic. And that is likely to be true in Japan as well. Still, the 8.9 magnitude earthquake and resultant Tsunami that hit Japan near the city of Sendai on Friday comes at a time when that country's economy was already vulnerable. The Japanese economy was hard hit by the US recession and as of the fourth quarter of last year was still shrinking. The US's economy, by contrast, was growing again, up 2.8% in the fourth quarter. Some had expected the Japanese economy to finally follow the US and begin expanding again in the first quarter. There is a strong chance now that that recovery will be delayed. What's more, Japan already runs large budget deficits. And there is a question as to whether it will be able to come up with the money to pay for the clean up. Nonetheless, the area of where the quake hit, the nature of Japan's economy coupled with the economics of natural disasters is likely to mean that despite the physical damage, the financial impact of Friday's earthquake will be minimal in Japan, and indeed in the rest of the world.
Japan Faces Another Leg Down In Its Fiscal Health After Quake - The cost of rebuilding from Japan’s strongest earthquake on record will worsen the country’s challenge of reining in the world’s biggest public debt even as damage to the economy may be limited, analysts said. The 8.9 magnitude shock devastated areas of northeast Japan including parts of Sendai, a city of 1 million that’s 300 kilometers (186 miles) north of Tokyo. The Tohoku region accounts for about 8 percent of gross domestic product, is host to factories making products from cars to beer, along with energy infrastructure including a nuclear power plant the government said is at risk of meltdown after an explosion. Factory shutdowns, power cuts and the damage to consumer confidence may hurt Japan’s GDP for a period of months, while later contributing to growth as rebuilding occurs, economists said. Paying for the rebuilding risks hurting demand for Japanese government bonds, said Alicia Ogawa. “A supplementary budget is like the last thing that people watching the JGB market want to hear,” The prospect of rebuilding “signals another leg down in Japan’s fiscal health. So I’m concerned that in the short to medium run, there’s going to have to be more borrowing,” she said.
Tragic Quake May Add To Inflation Pressures - The full economic impact of the sixth most powerful earthquake ever recorded is not yet known. Though uncertainty is rife, the earthquake is more likely to add to global growth and attendant inflationary pressures than subtract from them. It also raises concerns about Japan’s long-running fiscal dangers. The current quake will leave a large reconstruction bill — but, on current indications, a smaller one than for Kobe. Industrial and agricultural output in the area of the earthquake will be harmed. Some automobile and other industrial plants have had to close and may require repairs. Japan’s exports may be dented temporarily. Food prices in Japan may be pushed higher.But spending over the coming months to remedy the destruction will tend to more than offset the economic losses suffered. There are already calls for a supplementary budget and there is no doubt that the government will be quick to repair infrastructure in the northeastern region — and will have to borrow more as a result. The Bank of Japan has promised to provide ample liquidity. Firms, meanwhile, will rebuild capacity, with insurance companies bearing much of that cost.
Could Japan's earthquake cause a debt crisis? - My colleague Stephen Gandel has posted that the economic fallout from the quake might not be all that severe. But I wanted to focus on an issue that we simply can't ignore: how the quake will affect the feeble state of Japan's national finances. Japan already has the largest debt burden of any industrialized country, at about 200% of GDP, and even though Japan is not yet showing signs of following Ireland, Greece and the rest of the euro zone periphery into a full-blown debt crisis, pressure has been mounting for Tokyo to finally put in place a credible plan to reduce its yawning budget deficits and contain its debt levels. Standard & Poor's just downgraded Japan's credit rating in January. After the quake, it will only become more difficult for the Japanese government to curtail is deficits and debt. That's because of a combination of factors. First, the government will have to spend money to undertake reconstruction of the cities and infrastructure damaged by the quake and tsunami, putting upward pressure on fiscal spending. Secondly, we're likely to see at least a temporary hit to growth and some manufacturing, transport and consumption will be disrupted. In normal circumstances, that hit probably wouldn't be a big deal, but the recovery of the Japanese economy had run out of steam even before the quake hit. Japan's GDP in the final quarter of 2010 contracted by an annualized 1.3%. With the economy in the doldrums, and a human tragedy unfolding in the country's north, we can imagine the difficulties Japan's leaders will have even talking about fiscal austerity programs of the type being implemented in Europe
It's still too early to tell what the economic impact of the disaster will be. - Some investors and analysts are already starting to question how it will affect Japan's economy. One concern voiced in investor notes and wire stories is that the earthquake will nudge the country closer to a debt crisis. Japan is deep in the red—much deeper in the red than the United States or, really, any other developed country. Its 20-year bout of recessions has given it a massive national debt. And last quarter, despite a global return to growth, its economy actually shrank. If the Japanese government needs to issue new bonds to rebuild, the concern goes, that might further imperil its fiscal situation, raising its borrowing costs and even sparking default. The question is whether the disaster could "push Japan over the edge" financially, Brendan Brown of Mitsubishi UFJ Securities told Bloomberg. Another analyst told CNN Money that "Japan's economic recovery has lost momentum and a large part of the reconstruction costs will add to the government's significant debt burden." But it's too early to say whether an economic crisis will follow the humanitarian one. And concerns about Japan's ability to repay its debt due to the earthquake seem overblown.
Guest Post: Japanese, Russian and Indonesian Volcanoes Erupt … 5 Japanese Nuclear Reactors In Danger … 1 Is Leaking and May Melt Down Within 24 Hours Update: It’s possible that a meltdown may already have occurred at one nuclear power plant. As AP wrote 4 minutes ago:An official with Japan’s nuclear safety commission says that a meltdown at nuclear power plant affected by the country’s massive earthquake is possible. Ryohei Shiomi said Saturday that officials were checking whether a meltdown had taken place at the Fukushima Dai-ichi power plant, which had lost cooling ability in the aftermath of Friday’s powerful earthquake.Volcanoes have reportedly erupted in Japan, Indonesia, and Kamchatka Russia today, presumably due to the massive Japanese earthquake. There have been no reports of damage from the eruptions. In addition, there are problems at three Japanese nuclear power plants. The Fukushima plant is leaking radiation, and a nuclear expert says that things are getting worse, and “Fukushima has 24 hours to avoid a core meltdown scenario”.
Oil and Copper - Krugman - Via FT Alphaville, an interesting indicator of what’s going on in the world: the oil-copper spread. Copper is basically about the prospects for world economic growth: strong growth means lots of copper demand. Oil is partly about growth, but also about chaos in the Middle East. And over the past month, copper is way down, while oil has surged. That’s basically saying that markets see disturbances in the Middle East both raising oil prices and hurting world growth. A pretty picture of an ugly situation
Rocks On The Menu: Biotechnology - Rock-eating bacteria such as Acidithiobacillus and Leptospirillum are naturally occurring organisms that thrive in nasty, acidic environments. They obtain energy from chemical reactions with sulphides, and can thus accelerate the breakdown of minerals. Base metals such as iron, copper, zinc and cobalt occur widely as sulphides, and more valuable metals such as gold and uranium are also present in the same bodies of ore. With a little help from the mineral-munchers, these metals can be released in a process called bioleaching. This approach has its pros and cons. To recover large quantities of metals quickly from ores with a high metal content, smelting remains the most profitable route. Bioleaching is slower, but it is also cheaper, making it well-suited for treating ores and mining wastes with low metal concentrations. It is also generally cleaner. Material containing poisonous elements such as arsenic is unsuitable for smelting because of the risk of pollution.
Malaysia Makes Big Bet On Crucial Metals - A colossal construction project here could help determine whether the world can break China’s chokehold on the strategic metals crucial to products as diverse as Apple2’s iPhone3, Toyota4’s Prius and Boeing5’s smart bombs. As many as 2,500 construction workers will soon be racing to finish the world’s largest refinery for so-called rare earth6 metals — the first rare earth ore processing plant to be built outside China in nearly three decades. For Malaysia and the world’s most advanced technology companies, the plant is a gamble that the processing can be done safely enough to make the local environmental risks worth the promised global rewards. Once little known outside chemistry circles, rare earth metals have become increasingly vital to high-tech manufacturing. But as Malaysia learned the hard way a few decades ago, refining rare earth ore usually leaves thousands of tons of low-level radioactive waste behind.
Chinese in £750m Bid For African Uranium - A Chinese state-owned nuclear power producer has made a £756m approach for Kalahari Minerals, as the world's second largest economy searches for new sources of uranium. AIM-listed Kalahari, which holds around 43pc of Namibia-based Extract Resources, revealed yesterday that a unit of China Guangdong Nuclear Power Holding Corporation (CGNPC) had proposed a possible offer of 290p a share. Although both companies said there was no certainty CGNPC would make a formal offer, Kalahari said it would recommend one, if made on the proposed terms. CGNPC's possible offer represented an 11pc premium to Kalahari's closing price on Friday. "The Kalahari board believes this represents attractive value for Kalahari shareholders," executive chairman Mark Hohnen said
Wen Jiabao makes pledge to China's poor at National People's Congress - China's premier has promised to ensure social stability by curbing inflation and raising the incomes of those left behind by the spectacular growth of the world's second-largest economy. In his address at the opening of the National People's Congress, Wen Jiabao pledged to place the country's have-nots at the heart of its development goals for the next five years. Inequality has risen sharply in recent years despite government pledges to tackle it. The dangers of popular discontent are now higher on the agenda following the uprisings in the Middle East. "We must make improving the people's lives a pivot linking reform, development and stability," said Jiabao, in his annual work report. "And make sure people are content with their lives and jobs, society is tranquil and orderly and the country enjoys long-term peace and stability."
Competition for Brides Fuels High China Savings - One prescription for addressing China’s trade imbalance with the U.S. is to persuade the country’s tiger moms to loosen their purse strings.Shang-Jin Wei, director of the Chazen Institute and a professor at Columbia Business School, said Wednesday that China’s demographic situation — 1.15 pre-marital-age men for every one woman — is the fundamental factor behind the nation’s high savings rate. That’s because “desperate parents” are using education and wealth to make their sons stand out as catches in an increasingly competitive marriage market, Professor Wei said.
The sex trade imbalance - COULD a reproductive policy have caused the financial crisis? Could it still be wreaking havoc with the world economy? During a lively discussion at the Council on Foreign Relations yesterday, Columbia professor Shang-Jin Wei said this could be the case. He claimed that the skewed Chinese sex ratio (there are more men than women) can explain much of global trade imbalances. Mr Wei reckons the Chinese sex ratio can explain the high Chinese saving rate, and this is what's behind China's current-account surplus. China adopted the one child law in the early 1980s. It resulted in a skewed sex ratio because many couples preferred a male baby and aborted female fetuses. In 1980, 106 boys were born were born for every 100 girls. By 1997, it was 122 boys for every 100 girls. This means that today one in nine Chinese men will probably never marry and the situation is expected to get worse as time goes on. It’s been suggested that the large pool of single men with no marriage prospects can lead to social unrest. What that will mean for China’s political future is uncertain and potentially troubling. But the world may already be experiencing the economic impact of this policy. Trade imbalances, specifically the Chinese current account surplus and America’s current account deficit, are often cited as a cause of the financial crisis. They provided a glut of cheap, easy capital which fed the housing bubble.
Is China's Housing Bubble About To Burst? - Amidst all the anxiety about high oil prices, China's economy is looking shakier by the day. As I have emphasized in the past, China's oil demand growth is the principal driver of higher oil prices in future years. Even as rebellion rocks Libya, an economic meltdown in Asia could cause oil prices to tumble this year or next. You might recall that I wrote a series of articles last year in which I speculated about a possible Chinese implosion.
- Will China's Economy Collapse?
- China — The Calm Before The Storm?
- China's Economic Miracle — The Contrarian View
Some heavy hitters in the hedge fund world (e.g. Hugh Hendry) have made large bets against China. Shorting this Asian Tiger may sound foolhardy to some, but a more than reasonable case can be made that China will implode. Consider China to spend 1.3 trillion yuan to cool housing market—
ForeignPolicy: China's Big Dam Problem (slide show) Chinese rulers have always tried to control their country's massive rivers. But will they be overwhelmed by the environmental backlash?
China: A democracy is built - In many ways, property is the focus of the story of modern China. The double-digit economic growth of the past decade has been driven in part by the real estate explosion in more than 100 cities that has accompanied the process of industrialisation. It is also at the root of an apparent “super-cycle” of rising commodity prices that has lasted several years. Some observers see property as the country’s main economic vulnerability because of the potential for the growth of a bubble – “a treadmill to hell”, as Jim Chanos, the American investor, has put it. . In the past couple of years, there has been an epidemic of violent confrontations over forced demolitions as the urbanisation drive that has accelerated in the past decade has spread away from the coast, boosted by the massive stimulus programme that began in late 2008. The demolitions are behind as many as 65 per cent of large protests in rural areas, according to research by the Chinese Academy of Social Sciences.
China’s February Inflation Held at 4.9 Percent - China's February inflation stayed elevated on a double-digit rise in food prices, adding to pressure for communist leaders to cool surging living costs they worry could fuel unrest. February consumer prices rose 4.9 percent while food price inflation accelerated to 11 percent from January's 10.3 percent increase. That exceeded Beijing's 4 percent target for the year and defied forecasts by analysts who expected the rate to ease. Inflation, especially in food prices, is dangerous for China's leaders because it erodes economic gains that underpin the Communist Party's claim to power. Poor Chinese families spend up to half their incomes on food. Speaking at a news conference held in connection with the annual meeting of China's legislature, central bank governor Zhou Xiaochuan said inflation is stable, though at a "relatively high level." Zhou ruled out major changes in credit or exchange rate policy. Analysts say Beijing has fueled inflation by keeping interest rates too low to ward off the global crisis and could cut import costs by letting its tightly controlled currency rise faster against the dollar
Chinese Inflation Heats Up Again As PBoC Takes Another Step To Establish Yuan As Reserve Currency - That China's February inflation just came out at a consensus-beating 4.9% is no surprise. After all, the country miraculous slipped just below the consensus so the Department of Truth had to keep things somewhat symmetric. And yes, while this is the 5th consecutive month that Chinese inflation is higher than the official target of 4%, this is not the news of the evening: a press release just issued by the PBoC however is...But before we get there, here is Bloomberg's brief take on the latest Chinese number, which will likely have an adverse impact on the market:
It's pretty obvious how China can achieve its top economic priority of price stability - Rebecca Wilder - Premier Wen Jiabao made stabilizing prices China's top economic priority for 2011. Amid the surge in world energy costs, this story didn't make the front page. However, Chinese policymakers did take their time spent out of the limelight to allow the Chinese yuan to appreciate roughly 0.3% against the US dollar. Chinese inflation is elevated and near 5% (4.9% is the official rate as of January 2011). I understand that China's growth adjustment will take time; but if you've got unwanted inflation, then domestic policy is too loose (fiscal or monetary). And in this case, it's the monetary policy that's too loose - that goes for both currency and rates policies.On the rates front: there's a very frothy feel in domestic asset markets, specifically the property market. The Economist published a recent article to the point. But it's going to take much, much more than raising down payments and reserve requirements to shore up demand for risk assets. I mean, it really doesn't take a genius to see that real rates are entirely too low. What's the investment strategy here: nominal GDP is expected to grow at a 11% in 2011, while the lending rate is just 6.06%. There's no rocket science here: money's entirely too easy and inflationary pressures are there. Furthermore, deposit rates are too low and capping domestic consumer demand. Rates need to rise.
Is China serious about economic reform? - China's annual legislative meeting, the National People's Congress, is underway in Beijing, and the titans of the Communist Party are making all sorts of grand pronouncements on the future direction of Chinese economic reform. We've gotten a look at not just China's plans for the economy for 2011, but over the medium term as well in its 12th five-year plan. In the short run, the government said its main, immediate task is fighting inflation, which was a well-above-target 4.9% in January. But it's the long-term vision that is much more interesting. Beijing is signaling nothing less than a major shift in its economic priorities. In the past, Beijing has been extremely focused, arguably overly focused, on keeping up its economic growth rate, no matter what the consequences. Now, government leaders are saying, the priority should be on growth that is healthier, sustainable and, most importantly, does a better job of translating big GDP gains into improved human welfare. Here's how Zhang Ping, head of the National Development and Reform Commission, put it in a Sunday news briefing, according to The Wall Street Journal:
Has Anyone Noticed the Mammoth Shifts in Chinese Economic Policy? - I don’t think people realize that the Chinese have just made a rather sizable shift in economic policy. The Chinese are moving on multiple fronts now toward a new economic paradigm that includes slower growth but more domestic consumption. And this will have major implications for the rest of the world.Back in the fall, when the talk was of currency wars and Chinese currency manipulation, it was clear that China would have to move or face protectionism. The political problem for the Chinese is their massive current account surplus. And so the question was how could the Chinese reduce this current account surplus without destabilising the economy’s export-driven model.Which levers could the Chinese pull in order to meet their own national goals of continued high growth while dampening anti-Chinese protectionist sentiment abroad? Here are the variables in the mix:
Slowing China - With the world’s rich countries still hung over from the financial crisis, the global economy has come to depend on emerging markets to drive growth. Increasingly, machinery exporters, energy suppliers, and raw-materials producers alike look to China and other fast-growing developing countries as the key source of incremental demand. Chinese officials are convinced that a slowdown is coming. In response to foreign and domestic pressure, China will have to rebalance its economy, placing less weight on manufacturing and exports and more on services and domestic spending. At some point Chinese workers will start demanding higher wages and shorter workweeks. More consumption will mean less investment. All of this implies slower growth. Chinese officials are well aware that these changes are coming.So what is at issue is not whether Chinese growth will slow, but when. A significant slowdown in Chinese growth is imminent. The question is whether the world is ready, and whether other countries following in China’s footsteps will step up and provide the world with the economic dynamism for which we have come to depend on the People’s Republic.
Adding Up China's Debt Load - New Chinese government figures show its national debt load remains low compared with other major economies. But including the debts of local governments and many parts of the state-owned banking sector, as many economists say is proper, shows the constraints facing Beijing in the fight against inflation, its top economic priority. In a report issued during the annual session of the National People's Congress, China's legislature, the Ministry of Finance said central government debt at the end of 2010 was $1.03 trillion. Adding up the official data on debt from these other parts of the government as well as from state banks and an estimate of debt owed by asset-management companies puts China's total government liabilities at $3.55 trillion, equivalent to 59% of GDP. Some economists who follow the issue say those official data underestimate items like nonperforming loans created by a surge in lending over the past two years. Stephen Green, China economist at Standard Chartered Bank, estimates total debt, including contingent liabilities, at 77% of GDP. Arthur Kroeber, managing director of Beijing-based research firm Dragonomics, puts the total debt at 75% of GDP.
China Reports Unexpected Trade Deficit as Export Growth Cools - China reported an unexpected $7.3 billion trade deficit, the nation’s biggest in seven years, in February after a Lunar New Year holiday disrupted exports.Outbound shipments rose an annual 2.4 percent, the slowest pace since November 2009, and imports climbed 19.4 percent, according to a report on the customs bureau website today. Yuan forwards weakened after the announcement, which may deflect international pressure for China to strengthen its currency to redress global economic imbalances. Commerce Minister Chen Deming said March 7 that it’s “totally unreasonable” to say the yuan is undervalued after U.S. Treasury Secretary Timothy Geithner repeated calls for a faster pace of appreciation.Economists combine Chinese data for the first two months of the year to eliminate distortions caused by the annual holiday. On that basis, the nation had a deficit of about $890 million, compared with a surplus of about $22 billion a year earlier.
Can China compete with American manufacturing? - No, the headline is not a mistake. I know we're usually worried about the opposite – whether or not U.S. manufacturers can compete with a rising China. But today I'm turning that question around. What doesn't get enough attention in today's discussions about America's economic competitiveness is that the U.S. remains a robust manufacturing power, despite what is going on in China. And it has some clear competitive advantages over its emerging-market rival. So not only is American manufacturing alive, but kicking pretty aggressively as well. Just take a quick look at the numbers. According to United Nations data, the U.S. is still the largest manufacturing country in the world. In 2009, American manufacturing output (in real terms) was nearly $2.2 trillion. That's about 45% larger than China's, at just under $1.5 trillion. (For statistical reasons, I chose to use figures that include mining and utilities as part of manufacturing.) Though China, of course, is growing very quickly, the U.S. has also maintained its global share of manufacturing, at 20% in 2009 compared to just over 22% in 1980. What's more, American manufacturing is becoming more productive.
Trade Deficit increased in January to $46.3 billion - The Department of Commerce reports: [T]otal exports of $167.7 billion and imports of $214.1 billion resulted in a goods and services deficit of $46.3 billion, up from $40.3 billion in December, revised. January exports were $4.4 billion more than December exports of $163.3 billion. January imports were $10.5 billion more than December imports of $203.6 billion.The first graph shows the monthly U.S. exports and imports in dollars through January 2011. Exports are up sharply and are now above the pre-recession peak. Imports have surged over the last two months, largely due to the increase in oil prices. The second graph shows the U.S. trade deficit, with and without petroleum, through January.The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products. The petroleum deficit increased in January as both quantity and import prices continued to rise - averaging $84.34 in January, up from $79.78 in December. Prices will be even higher in February and March. The trade deficit with China was $23.3 billion (NSA) in January. Once again the oil and China deficits are essentially the entire trade deficit (or even more).
The Mauritius Miracle - – Suppose someone were to describe a small country that provided free education through university for all of its citizens, transportation for school children, and free health care – including heart surgery – for all. You might suspect that such a country is either phenomenally rich or on the fast track to fiscal crisis.But Mauritius, a small island nation off the east coast of Africa, is neither particularly rich nor on its way to budgetary ruin. Nonetheless, it has spent the last decades successfully building a diverse economy, a democratic political system, and a strong social safety net. Many countries, not least the US, could learn from its experience.
Tax Rates and Development - One of the clearest theoretical predictions in all of economics is that a high marginal tax rate on the income from an investment would depress the investment rate, and thus hinder growth or development. Yet nobody has found much evidence across countries or over time to confirm that prediction, although many have tested it (including this author a long time ago).The lack of evidence for a theory means either bad theory or bad data. The first could certainly be a problem, and the data for comparable “effective” marginal tax rates are also notoriously bad (“effective” takes into account deductions, credits, and all the million complicated beasts lurking in every tax code). However, a new paper by Simeon Djankov, Andrei Shleifer, and co-authors in a top economics journal utilizes a new standardized database on corporate tax rates by PricewaterhouseCoopers. They find that high corporate tax rates lower investment, FDI, and entrepreneurship (entry of new businesses) across countries.
Global Currency Rally Fuels Inflation - -A record rally in key global currencies against the shilling in the last few weeks has heightened Kenya’s exposure to imported inflation. This lays a heavier burden on the local manufacturing sector already hard-hit by high energy prices even as the government rules out intervention. A basket of key currencies with a strong bearing on the cost of Kenya’s imports has rallied to culminate in record highs this week, raising the costs of imported goods. The US dollar, the Japanese yen, the sterling pound, the euro, and the chinese yuan are currently trading at historic highs to the shilling.
Oil, inflation, sovereign debt and revolution - In the next six weeks we're going to get the collision of three strategic problems in economic policy and the outcome is going to shape not just the global recovery path but in particular the different continental stories. First, we're in the middle of a mini oil shock. The price of crude oil has risen 15% in three weeks and this after a sustained period of energy inflation and food price inflation. This will now take its toll on growth. Barcap's economics team estimates that if oil rises to $125 and stays there, it's going to knock at least 0.5% off the growth of the developed world (see graph on left). So we come to the second strategic problem. Monetary policy. Both the Federal Reserve and the European Central Bank have been making signals recently: the Fed that its policy will remain loose, the ECB that it is about to tighten, raising interest rates to choke off inflation. And that brings us to the third problem: the sovereign debt crisis. As I've reported before, this is building to a climax that will begin at the end of this week, and needs to come to some denouement before the summer. Ireland's new coalition will head to Budapest to try and renegotiate the bailout terms; Portugal's refusenik government will come under pressure to seek a bailout and in Greece they will struggle to hold the line against default. It was under-reported but the general strike in Greece, late February, was pretty strong and wider social unrest is simmering.
Balancing inflation and the rouble - The move by Russia’s central bank to lift the refinancing rate at its last meeting brought economic focus back to inflation, with crude and commodity prices, the rouble, and the economic recovery all factors to be balanced in the response. Inflation took off in January, with the surge in crude prices and commodities generally leading to fears it could go higher.Vladimir Tikhomirov, Chief economist at Otkritie says the full inflationary impact of the recent surge in oil prices has yet to be felt. “The current surge in oil prices will gradually worsen Russian inflation, in fact oil prices is not so far a major issue for the inflation process. When we see increase in oil prices it leads to hikes in fuel prices and the chain is further obvious for Russia meaning that inevitably food prices start rising. Taking into consideration that food products account for 38% of consumer basket it became apparent that consumer sentiments will deteriorate. Apart from oil prices, dwindling of harvest and continuous increase of tariffs amalgamate into a serious blast of inflation.”
The evidence says the ECB is overreacting - Rebecca Wilder - Earlier this week I argued that the ECB's inflation target of just below 2% is too simplistic, especially during periods of supply-side price shocks: energy, food, VAT hikes. Here's a menu of reactions to the ECB's announced rate hike (Trichet used the phrase 'strong vigilance', which historically is a leading indicator of a rate hike in the following month): Paul Krugman calls it 'madness'; David Beckworth sports the 'black eye' metaphor; Kantoos is somewhat more explicit in his language; and Warren Mosler goes for the Disney theme.And then I see that one of my favorite blogs, the Eurointelligence blog, interprets the policy response as warranted in the face of an 'overheating' export sector. From Eurointelligence: (It is our interpretation that the ECB is very keen to drive up the euro’s exchange rate against the dollar to reduce the commodity price shocks, and to reduce the overheating in the export sector. This is why the ECB was keen to signal this interest rate as early as possible, to underline the transatlantic policy gap. We don’t think the ECB intends to hike interest rates to very high absolute levels, though we consider a 2% year-end rate realistic.) RW: My initial reaction was: what? Am I missing something here? Is the ECB right to be strongly vigilant? Is the export sector (1) overheating? and (2) therefore unmooring Eurozone inflation expectations? No.
Moody’s cuts Greece rating, stokes debt fears - Moody’s Investors Service cut Greece’s sovereign-debt rating Monday by three notches to B1, infuriating the Greek government and temporarily denting the euro amid renewed worries about the ability of Greece and other debt-loaded euro-zone governments to avoid default. The ratings agency, which also assigned a negative outlook to Greece’s ratings, highlighted the government’s difficulties with revenue collection and noted a risk that Athens might not meet the criteria for continued support from the International Monetary Fund and the European Union after 2013. That could result in a voluntary restructuring of existing debt, the ratings agency said. Last June, Moody’s cut Greece's rating from A3 to junk status at BA1. The decision to deliver a further multinotch cut Monday reflected concerns that the “fiscal consolidation measures and structural reforms that are needed to stabilize the country’s debt metrics remain very ambitious and are subject to significant implementation risks, despite the progress that has been made to date,” Moody’s said.
Greece Debt Downgrade by Moody’s Sends Default Risk to Record -The cost of insuring Greek debt against default rose to a record after Moody’s Investors Service cut the country’s credit rating by three notches. The Finance Ministry in Athens called the move, which sent its rating to B1 from Ba1, “completely unjustified.” Moody’s said lagging tax collection and “implementation risks” would make it more difficult to reach budget-cutting targets in a 110 billion-euro ($154 billion) bailout. “The risk has materially increased of a default event,”. “Our central view is that the Greek government will achieve its objectives and it won’t need to impose losses on credits, but there are material risks to that outcome.” European leaders are trying to hammer out by the end of the month a package of measures to contain the debt crisis that led to bailouts last year of Greece and Ireland. Optimism that the measures would include using the 440 billion-euro European Financial Stability Facility to allow Greece to buy back some of its debt and pay lower interest rates on aid has receded with growing German resistance to the proposals.
Portugal Bonds Lead Drop Amid Concern Debt Crisis May Intensify -- Portuguese and Greek 10-year bonds dropped after a cut in Greece’s credit rating spurred bets Europe’s debt crisis may intensify. Irish 10-year bond yields touched the highest level since before the euro’s creation in 1999. German Chancellor Angela Merkel rebuffed a plea by Ireland to cut the cost of its EU bailout two days ago, before meetings of European leaders this month that aim to craft a comprehensive solution to the region’s debt crisis. German bonds dropped after a gauge of European investor confidence rose to the highest level in 3 1/2 years. “The Greek downgrade certainly re-focuses the market’s attention on the sovereign debt problems in Europe,” “The rise in the yields of these countries really underlines the risk that there might be more downgrades on the way. We’re slowly creeping towards the end- game for Portugal.”
Moody’s Downgrades Greece, And Portuguese Yields Are Surging, So Of Course The Euro Is Rallying - This is what has Euro bears tearing their hair out. Moody's downgraded Greece this morning by three notches. Portuguese yields are blowing out, to what are basically all-time highs. And... the euro is surging to $1.40. Something's wrong with this picture, it would seem. For more on the euro, see Morgan Stanley here. Here's a one-year look at Portuguese yields:
EU summit will skirt the real issues - Journalists, commentators and financial analysts really like international conferences, not only for the free food and drink, but for their scripted nature and pre-set schedules, rather like royal weddings. It’s like the difference between war movies and wars; one experience is usually entertaining and resolved satisfactorily, the other is terrifying and never works out the way it should. So it is with the euro-area summit set in Brussels for the end of this week. It will be like a war movie. The hero and heroine will survive the crisis, and it will be written so a predictable sequel can follow in good order. The financing made available from the seemingly richer countries will have stricter, notionally enforceable terms, and the “peripheral” countries’ politicians will make sincere, forgettable promises.
Germany rejects EFSF bond buying - FT Deutschland reports this morning that Germany, Finland and the Netherlands are blocking proposals to increase the scope of the EFSF to include bond purchases, or to fund any effective bond bond repurchase programmes. The article says the development was a setback for the ECB, which had hoped that the EFSF could buy part of the ECB’s own peripheral bond portfolio, which it amassed as part of its securities market programme. The article says that Germany was ready to increase the package from a nominal to a real €440bn (but what’s is the point of that without bond purchases?). The articles says it is doubtful that this would contribute to a calming of the financial markets. The business community has joined Germany’s academics in its total opposition to fiscal transfers, and in particular to bond purchases by the EFSF. The German business lobbies, including the powerful BDI industrial lobby, are also calling for an orderly state insolvency procedure. Frankfurter Allgemeine, which has the story, says the intent is to strengthen Angela Merkel’s negotiating position in this month’s European summits.
Germany’s opposition to EFSF/ESM bond purchases behind Moody’s credit downgrade for Greece - This is what happens when you think that you don’t need to anything because the markets are calm. According to Reuters, Moody’s yesterday cited uncertainty about financial support under the ESM after 2013 and its implications for bondholders as a reason to cut its rating on Greek sovereign bonds by three notches to B1with a negative outlook. We are getting close to the bottom within the Moody’s junk debt scale, with Greek debt now considered as highly speculative. A further downgrade would bring Greece into the C-group of ratings – at which point the rating agency treats the country effectively in or close to default. Moody’s said yesterday in a press release that the likelihood of a debt default or a distressed exchange of bonds had risen since the last downgrade. “The fiscal consolidation measures and structural reforms that are needed to stabilise the country's debt metrics remain very ambitious and are subject to significant implementation risks.” The Financial Times quotes Moody’s lead analyst as saying that the expectations for anti-tax evasion measures had already been quite low, and yet Greece managed to undershoot even those low expectations. Moody’s now has the lowest Greek ratings of all agencies. S&P’s rating is BB+, but warned last week that this rating, too, could be cut further.
Is Germany acting in its own interests on sovereign debt? - Although the European Summit reached agreement on how to develop the bail-out mechanism for sovereign countries after 2013, it was an agreement about process rather than content. Germany remained adamant that there would be no fiscal transfers to troubled economies, and that the best way forward is further fiscal consolidation, along with plans for the private sector to share in any losses after a sovereign default. EU finance ministers have been charged with filling in the blanks by 31 March, 2011 – if the markets are ready to wait that long. I am not confident that they will be. Nor do I believe that the present path is necessarily in the best interests of Germany itself, let alone other EU member states. The key problem with the present strategy is that it allows the markets to take matters into their own hands. This is because the interest rates, which the markets charge to refinance sovereign debt, have a very large effect on the solvency of governments over the medium term, and assessments of that solvency then have feed-back effects on the market determined interest rates. As we have seen in recent months this feed-back effect can easily overpower the actions of governments, even if they are very determined to pursue a programme of fiscal consolidation.
Long Run Impact of the Crisis in Europe: Reforms and Austerity - SF Fed -The euro area faces its first sovereign debt crisis, highlighting the fiscal imbalances of member countries. Troubled countries are implementing austerity measures, with adjustments focusing on the short and medium run. However, a long-run solution to Europe's problems requires economic reforms that increase competitiveness and reduce labor costs in the peripheral countries. Such reforms would promote convergence of the euro-area economies and enhance the long-run sustainability of monetary union.
Study Highlights Long-Term Challenges for Euro Zone - The unexpected downgrade of Greek debt by Moody’s reminds investors that the euro zone debt crisis is nowhere near resolved — even though the Middle East protests and soaring oil prices have moved euro problems to the back burner. Rating agency Moody’s Investor Service Inc. slashed Greece’s credit rating to B1 from Ba1 and hinted the rating could be cut even further, sinking the country’s debt deeper into junk-grade territory. The downgrade was a reminder of the challenges facing debt-laden governments around the globe.But a report by the Federal Reserve Bank of San Francisco, released Monday, argues euro zone members can’t just solve their fiscal problems. Long-term adjustments to labor and banking systems are also needed.The report, “Long-run Impact of the Crisis in Europe: Reforms and Austerity Measures” by Fed economist Fernanda Nechio appears in the San Francisco Fed’s “Economic Letter.”Nechio identifies the problems facing the so-called “peripheral nations” of the euro areas. The best known woes include large current account deficits, large sovereign debt levels and huge budget deficits.
Record high yield on 10-year Irish bonds - THE YIELD on Irish sovereign debt swelled to a record high yesterday as a downgrade of Greece’s credit rating by Moody’s reverberated through European bond markets. The credit ratings agency said a fresh downgrade of Irish sovereign debt was not imminent as it slashed Greece’s credit rating amid suspicion that it will default on its debts. Moody’s said it was “monitoring” the attempts of incoming taoiseach Enda Kenny to seek better repayment terms on Ireland’s €85 billion financial rescue agreement with the European Union and the International Monetary Fund. “I don’t expect the broad framework as laid out in the EU-IMF package will be changed,” said Moody’s credit analyst Dietmar Hornung.
Ireland - Mass Unemployment and Shrinking GDP - We know that Ireland is in deep economic and financial trouble. Our Timetric chart will keep pace with what is happening to Irish real national output and their unemployment rate (measured as a % of their labour force). And in the links below you can connect to recent blog posts on Ireland - one of the countries inside the Euro Zone that faces a huge sovereign debt crisis that may take years to resolve. Ireland was one of the first European countries to go into recession in 2008 and the effect on unemployment and inflation was large. Price deflation has worsened the slump since the real value of debts has grown. Consumers, businesses, banks and now the Irish government have had to embark on a painful process of de-leveraging - reducing their borrowing and potentially leading to social unrest.
Europe Update: Ireland and Greece - The eurozone debt crisis summit scheduled is on Friday and this meeting is to prepare for the next meeting of all 27 EU leaders in Brussels on March 24th and 25th - so I expect no major announcement on Friday. However it is interesting that To Vima quoted Prime Minister Georgios Papandreou as telling his cabinet that these meetings are "all or nothing", implying a comprehensive solution or ... ? Also from To Vima this morning: Nightmare: 14.8% Unemployment Explosive growth of unemployment recorded in Greece, with a total number of unemployed is at 733,645, according to data from the Greek Statistical Authority (ELSTAT) that were released Wednesday. The percentage of registered unemployed reached 14.8% in December 2010 an increase of one percentage point compared with November. The number of the employed workforce in the country fell to 4.23 million from 4.3 million the same period. Record low unemployment, record the ages of 15 -24 which rose 39% from 28.9% compared with December 2009. This is politically untenable.
The crisis is back - Greek 10-year yield reached a eurozone record, of 12.9%, as the markets are now overwhelming expecting a debt restructuring, following Moody’s three notch downgrade. Greece yesterday managed to raise €1.6bn in six month Treasury Bills at a yield of 4.75%, up from 4.64% in February. The proportion of foreign investors was one third, which is a lower proportion than last time. After Moody’s, S&P is also pondering further downgrades for Greece and peripheral countries. Moritz Kraemer, head of sovereign credit ratings for Europe at S&P’s, told Reuters Insider Television (see full Reuters interview) that the outcome of the March 24/25 European Council in respect of the operating rules of the ESM will be critical in the futher ratings process. "We have two main concerns. The first is the preferred creditor status of the ESM ... and second is the conditionality the ESM can impose to restructure debt. If both materialise, S&P would consider downgrading Greece. The same goes for Portugal,” Kraemer said. The FT reports that the debt agency PDMA quadrupled the size of this month’s six-month bond issue to help meet a jump in debt repayments this month. Greece is set to pay back a total of €12bn of debt that matures during March. Wall Street Journal reports that the Greek government plans to sell up to $3 billion of so-called diaspora bonds to U.S. retail investors.
Unemployment in Greece jumps to 14.8 percent - The unemployment rate in Greece jumped to 14.8 percent in December, the Statistical Authority said Wednesday, as painful austerity measures and the financial crisis took a toll. The agency said the figure was up from 13.9 percent in November and 10.2 percent a year earlier. Greece's largest labor union, the GSEE, called on the Socialist government to ease austerity measures demanded by European countries and the International Monetary Fund in exchange for euro110 billion ($153 billion) that the country began receiving last May. "We urge the government to take immediate steps to implement a different mix of economic policies ... away from policies that create unemployment, poverty and deprivation," a GSEE statement said.
Greece asks EU to take urgent steps on rating agencies - Greece on Thursday asked EU and ECB leaders to urgently address problems created by rating agencies for countries struggling with debt crises, just days after Moody's downgraded Athens by three notches. Such "unjustified" moves by rating agencies can hinder Greece and other troubled countries from regaining access to financial markets, the finance minister said in a letter to Eurogroup chairman Jean-Claude Juncker, EU monetary affairs commissioner Olli Rehn, EU's financial services chief Michel Barnier and ECB President Jean-Claude Trichet. "Rating agencies must be regulated effectively at a European and world level," George Papaconstantinou said in the letter, which was released by the Finance Ministry. "This is an issue that must be dealth with urgently by eurogroup and ecofin."
Greek Bond Yields, Swaps Climb to Records Before EU Leaders Discuss Crisis - Greek 10-year bond yields and credit-default swaps surged to a record as borrowing costs increased at a debt sale and before European leaders begin meetings aimed at containing the sovereign debt crisis. Spanish bonds also slid as the government sold debt through banks. Greek bond losses extended declines to a ninth day after the nation’s credit rating was cut by Moody’s Investors Service yesterday. Portuguese 10-year bonds fell for a second day before a notes auction tomorrow. German 10-year bonds dropped amid speculation the nation’s economic growth will add to pressure on central bankers to increase interest rates. Greek, Irish and Portuguese bonds are sliding before meetings of policy makers culminating in a summit of EU nations on March 24-25 that is intended to approve a package of measures designed to calm the region’s bond markets. Austrian Chancellor Werner Faymann told reporters today in Vienna that the nation opposes easing conditions of Ireland and Greece’s bailouts.
Greek Bondholders May Face 50 Percent Loss in Restructuring, Investors Say - Greece will inflict losses of about 50 percent on bondholders and extend maturities by five to 10 years as it reduces its debt load in a series of restructurings, according to investors. “The first rescheduling won’t be enough and they will have to come back,” said Louis Gargour, chief investment officer at hedge fund LNG Capital LLP in London and the panelist at the Euromoney Bond Investor Congress in London today who forecast the 50 percent loss figure. “The first problem is the amount of debt, the second is it’s not sustainable.” Almost all the 400 people present at the panel expect a European nation to restructure in the “next couple of years,” according to a show of hands during the session. Credit-default swaps on Greek government notes imply a 58 percent probability the nation will default within five years, assuming a 40 percent recovery on the debt, according to CMA. It now costs a record 1,037 basis points, or $1.04 million, annually to insure $10 million of debt for five years.
Spiralling into the Moussaka - From the morning links - Explosive growth of unemployment recorded in Greece, with a total number of unemployed is at 733,645, according to data from the Greek Statistical Authority (ELSTAT) that were released Wednesday. The percentage of registered unemployed reached 14.8% in December 2010 an increase of one percentage point compared with November. The number of the employed workforce in the country fell to 4.23 million from 4.3 million the same period. Record low unemployment, record the ages of 15 -24 which rose 39% from 28.9% compared with December 2009.The new employment figures are in contrast to the moderate estimates of the government and the IMF experts are talking about “restraint” in unemployment to 14.5% in 2011 and increased slightly to 15% next year. I am sorry but “IMF expert” is a oxymoron. This outcome was completely inevitable. Let us remember exactly what the Greeks signed up for under the illusion of a rapid prosperous outcome.
EU Debt Crisis Grows as Portugal Teeters on Edge - Europe's government debt crisis has flared up again in the run-up to two crucial meetings of EU leaders as Portugal had to pay 50 percent more to raise cash in the markets on Wednesday than it had to just six months ago. Investor tensions grew after the Portuguese government revealed it is paying 5.99 percent interest to raise €1 billion ($1.4 billion) in two-year bonds. That was way above the 4 percent demanded at the last similar auction in September and around four and a half percentage points more than the rate Germany has to offer — even though the two countries share the same currency. The yield on Portugal's 10-year bonds rose a further 0.06 percentage point to 7.68 percent, a euro-era record and above the rates Greece and Ireland saw before accepting bailouts from the EU and International Monetary Fund last year.
Europe Blinks on Bank Test - European officials are poised to let regulators in individual countries use their own definitions of a key gauge of banks' health in coming "stress tests," threatening to undermine efforts to buttress faith in the Continent's ailing financial system.The new European Banking Authority, which is running the tests on 88 of Europe's biggest banks, has told regulators and bankers that the exams are likely to rely on each country's definition of an important capital ratio known as Tier 1, according to people familiar with the matter.If the plan goes through, some skeptical bankers and regulators worry, it could undermine the effort to end the European financial crisis.
Eurozone update - It has slipped off the front page, but the underlying problems are not solved: The cost of borrowing for Portugal, Ireland and Greece has hit euro-era highs, amid concern in the market that European leaders will fail to take concerted action to dispel fears of sovereign defaults in the eurozone.The long-term market interest rate for Spain has come close to setting a record and Italy’s borrowing cost rose above 5 per cent for the first time since November 2008. The moves came as Portugal was forced to pay a sharply higher premium in a debt auction on Wednesday, raising renewed fears that it will be forced to seek an international bail-out. In Greece there is a national, and growing, anti-austerity movement.
Europe May Face More Ratings Cuts, Greek Default, S&P Says - Some countries in the euro region may have their credit ratings cut further while a Greece debt default is a “possibility,” said Moritz Kraemer, managing director of European sovereign ratings at Standard & Poor’s. Asked if the worst was over for the region’s sovereign credit-rating outlook, Kraemer said: “I wish I could say yes, but the answer is no.” The debt ratings of Portugal and Greece remain at risk of being cut due to concern about how a European Union rescue fund may affect holders of the two nations’ sovereign bonds, S&P said March 1. Ireland retained a negative outlook after S&P cuts its ratings on Feb. 2. Moody’s Investors Service downgraded Greece’s government bond ratings yesterday to B1 from Ba1, and assigned a negative outlook to the rating. “We still have a number of countries with a negative outlook or CreditWatch negative, indicating their credit ratings may be going down further,” Kraemer said in an interview at a EuroMoney conference in London. “Trigger points for that could be slippage in fiscal consolidation and structural reforms, but also decisions that will be taken at the European level later this month.”
Spain and Portugal 'in debt denial' - Traders consider Portugal a bailout certainty, while Spain's banking and property sectors face a similar problem to Ireland's – but this was the situation a week ago, so what has changed? Spain is in deep trouble. Ahead of a planned refinancing of its banking sector, the ratings agency Moody's has downgraded the country's debt. As far as the markets are concerned, the entire Iberian peninsula is overburdened with debt. Portugal is already considered a sure-fire future candidate for a European bailout. Spain, which has considered itself too big to fail, could be closer than it thinks to a rescue.Spain's problem, like Ireland's, is a banking and property sector burdened with hundreds of thousands of unsold properties, many of them still listed on balance sheets as high-grade assets when they are in fact worth a fraction of their former value – and in effect junk. As the markets see it, Ireland owned up to its massive debts and sought a rescue, while Greece was an obvious candidate for EU support. Traders consider Spain and Portugal to be countries in denial. Yet this was also the situation a week ago, which has left analysts asking themselves why Moody's has made the downgrade now.
Europe: More Record Yields, S&P sees more Downgrades coming - Bloomberg reports that Moritz Kraemer, S&P managing director of European sovereign ratings said more downgrades are possible and that a Greek default is "a possibility.” No surprise. (no story yet) From Reuters on the March 11th summit: EU summit to take only minor steps on debt crisis The top item on the agenda for the 17 heads of state and government is to agree a "competitiveness pact", a deal Germany and France are pushing the rest of the euro zone to adopt to show their commitment to overhauling their economies. The next meeting of all 27 EU leaders will be in Brussels on March 24th and 25th. The EFSF end in mid-2013, but the two year yields are already showing significant stress. The Irish 2 year yield hit a record 8.1% this morning, and the Greek 2 year yield is at 16.4%. More records for ten year yields too. The Greek ten year yield is at 12.8% (up sharply today). The Irish ten year yield is 9.6%. And the Portuguese 10 year yield is 7.6%. All new records.
Moody's Downgrades Spain's Debt - Moody's downgraded Spain's credit rating on Thursday, citing worries over the cost of the banking sector's restructuring, the government's ability to achieve its borrowing reduction targets and grim economic growth prospects. The agency reduced Spain's rating by one notch to Aa2 and warned that a further downgrade is possible if indications emerge that Spain's fiscal targets will be missed, and if the public debt ratio increases more rapidly than currently expected. On the plus side, Moody's Investors Services noted the government's resolve in dealing with its problems and added that Spain's debt sustainability is not under threat. Spanish Finance Minister Elena Salgado said the government agrees that the nation must make a better effort to push debt-laden regional governments to reduce their deficits. However, Moody's also warned that concerns could rise if funding requirements for Spain's troubled savings banks — called cajas — end up greater than anticipated. They have been hit particularly hard by a burst real estate bubble, which saddled them with unperforming loans.
Spain's Rating Downgraded to Aa2 by Moody's Over Bank Cost Concerns - Spain’s credit rating was cut to Aa2 by Moody’s Investors Service, which said the cost of shoring up the banking industry will eclipse government estimates. The euro fell and Spanish bond yields rose. Spain will spend as much as 50 billion euros ($69 billion) shoring up savings banks, Moody’s forecast, more than double the 20 billion-euro price set by the government. The risks to government finances remain “skewed to the downside,” the company said in a statement today. The outlook is “negative,” suggesting more rating cuts are under consideration. As Spain tries to convince investors that struggling savings banks won’t overburden its public finances, European leaders have set a March 25 deadline to approve a package of measures to end the sovereign debt crisis. The Bank of Spain is due to announce today the capital shortfalls of lenders. “The crisis in the euro region is going to take a long time to resolve, and the rating downgrade of Spain is a reflection of that,”
Euro slides as Spain rocked by ratings downgrade - The euro fell Thursday as a Spanish ratings downgrade stoked new concerns over the eurozone debt crisis while sterling was mixed before a Bank of England rate decision, dealers said. In London, the European single currency dropped to $1.3838 from $1.3906 in New York late Wednesday. The dollar rose to 82.89 yen from 82.70 yen on Wednesday. Moody's rating agency cut Spain's credit rating on Thursday and warned it may do so again, pounding financial markets as it raised the alarm over Spanish banking woes and spendthrift regions. New York-based Moody's cut the long-term debt rating by a notch to "Aa2" with a negative outlook, a serious setback to Spain's efforts to quell fears it may need an international financial rescue. The downgrade came on the eve of a eurozone summit in Brussels to discuss bolstering the euro's defences amid increasing speculation that weak economies such as Portugal may follow Ireland and Greece and need an international bailout.
Eurozone periphery borrowing costs soar - The cost of borrowing for Portugal, Ireland and Greece has hit euro-era highs, amid concern in the market that European leaders will fail to take concerted action to dispel fears of sovereign defaults in the eurozone. The long-term market interest rate for Spain has come close to setting a record and Italy’s borrowing cost rose above 5 per cent for the first time since November 2008. The moves came as Portugal was forced to pay a sharply higher premium in a debt auction on Wednesday, raising renewed fears that it will be forced to seek an international bail-out. Ahead of a summit of European Union leaders on Friday and another one later in the month to discuss the response to the eurozone debt crisis, Jim Reid of Deutsche Bank said: “It looks like the authorities aren’t going to do anything particularly aggressive.” Markets have not delivered a shock like those that caused Greece to seek a bail-out in May and Ireland in November. “Yes, no one has been paying attention but the situation is more fragile than they think,” said Matt King, head of credit strategy at Citi. Benchmark borrowing costs, as measured by 10-year bond yields, hit 5.51 per cent for Spain on Wednesday, 7.63 per cent for Portugal, 9.58 per cent for Ireland and 12.90 per cent for Greece. Greece’s 3-year bond yields hit a record of 17.67 per cent, suggesting that investors think a debt restructuring is increasingly likely.
Portugal 5-Year Yield at Euro-Era Record on Bailout Speculation -The yield on Portuguese five-year debt reached a euro-era record amid speculation the nation may be nearing a request for financial aid. Bunds rose for a third day as stocks fell after an earthquake struck northern Japan. Ten-year Portuguese bonds fell for a fifth day. When asked whether his country was preparing to request a bailout, Finance Minister Fernando Teixeira Dos Santos said European leaders must understand the “seriousness” of the region’s debt crisis. He made the remarks at a press conference in Lisbon before a European summit later today. Spanish and Italian bonds jumped, while Irish and Greek securities fell. The minister’s comments “might indicate that financial support for Portugal will be discussed at the weekend,” said Michael Leister, a fixed-income analyst at WestLB AG in Dusseldorf, Germany. “Yields show that the market is concerned, and is waiting for something,” he said.
Just in time for the summit, eurozone bond yields achieve new records - So much for the complacent cry that it is time to take things a little easier, as the financial crisis has subsided. Peripheral bond yields yesterday reached new heights, with Portugal’s spread breaking through 4.5%. This is a level deemed critical to avoid the trigger of higher margin requirements, imposed by clearing houses, one of the accelerators that pushed Ireland under the EFSF. Italian 10 year yields broke through 5% yesterday for the first time since November 2008, and Spanish yields were above 5.5%. The FT quoted Jim Reid of Deutsche Bank as saying that the authorities will this time not do anything aggressive (meaning the ECB is not going act to take the pressure of the European Council). Portugal yesterday paid 6% for a two-year bond issue, compared to 4.1% in September. It looks to us that the game is up. Portugal has no choice but to jump under the EFSF. Bloomberg has taken a look at the widening gap in credit default swaps between Greece, Ireland and Portugal on the one side, and Spain and Italy on the other. The markets are clearly betting now that Greece, Ireland and Portugal will default (restructure, reschedule), while Spain and Italy will not. CDS on Spain are down from 350bp at the start of the year to 250bp now, while Italy has dropped from 240bp to 179bp, according to Bloomberg.
Expectations Low for EU Talks - Market expectations that Europe's leaders will agree on a strong and flexible bailout fund to resolve the continent's debt crisis aren't likely to be met, said two senior government officials from within the currency area. The proposals to beef up the European Financial Stability Facility, or EFSF, are encountering growing German intransigence after Berlin failed to achieve its own agenda for reforming euro-zone economies, In recent meetings, German officials have shown an increasing unwillingness either to strengthen Europe's temporary bailout mechanism or to augment its powers, as Germany is forced to compromise on its own program "There will be an agreement because one has to be reached. But I fear that it will not stand up to market expectations, and this could intensify debt problems in the euro zone in the future," said a senior euro-zone government official who is party to the talks. "Germany will likely get less than expected in the competitiveness pact so, it will give less as far as the EFSF is concerned. And this is where the problem lies."
Germany Sets Steep Price to Shore Up Euro Zone - Faced with financial turmoil that has resisted every emergency fix the European Union has adopted, European leaders are considering a radical step: giving up some of their independence to set domestic economic policies and cutting back many of the wage and welfare benefits that have defined the region’s politics for decades. In return, the European Union would provide funds to shore up the weakest member states, including Portugal, Greece and Spain. The proposals, originally pressed by the newly assertive German chancellor, will be debated Friday in what is expected to be a contentious session of the leaders of the 17 countries that use the euro.Germany is calling for several measures: raising retirement ages to reduce the burden on pension funds, ending the linking of wages to increases in the cost of living, committing to debt reduction and submitting to a level of budget scrutiny that was until recently considered anathema — and is still viewed by many as a step too far. But a comprehensive deal will be difficult to reach. The proposals under debate now have already been watered down from a more robust program of integration and monitoring first put forward by Germany, and will be subject to further negotiation before a full European Union summit meeting on March 24-25, two days before an important German state election.
No hard decisions today - the tough parts will have to wait - The negotiations for a comprehensive rescue have hit a wall as officials are beginning to lower expectations. Merkel said yesterday that Germany would accept an increase in its EFSF guarantees only if the non-AAA countries provide more capital. She spoke to a closed-door meeting of the Bundestag’s European affairs committee, according to Reuters, which also quoted a member linking German agreement for lower Irish interest rates, and longer repayment period for Greece to quid-pro-quo concession from these countries. In the case of Ireland, she mentioned acceptance to harmonise the corporate tax base across the eurozone. In the case of Greece, she talked about privatisations. Both are politically sensitive subjects in those countries. The FT has an interview with Josef Pröll, the Austrian finance minister, corroborates this story. “If Ireland comes up with a proposal to reduce their interest rate, the other question will be what can they do more at a national level to reduce their debt and deficit. If we’re talking about a new package, fine, then they should make an interesting proposal. But to simply demand ‘reduce our interest rate’ is just not enough,” he said. Another interesting strand is that, according to FT Deutschland, the European Commission and the ECB have discovered a gaping hole in Portugal’s public finance. The FTD provides no details, nor does it tells how the ECB has found this hole. But it suggests that Portugal is going to come under massive pressure to clean up its act, and announce further austerity measures and reforms.
Eurozone debt deal struck - The heads of the eurozone’s 17 governments came to an unexpected deal on short-term measures to lower borrowing costs of struggling peripheral economies, agreeing to give more financial backing to the bloc’s €440bn rescue fund and lowering the interest rates on Greece’s bail-out loans. The leaders also backed a plan to buy sovereign bonds of struggling governments when they are initially auctioned, a measure that could allow countries with high borrowing costs to raise cash at much lower yields. Going into the emergency summit Friday, financial markets had expected very little from high-profile gathering, and yields on bonds for Greece, Ireland and Portugal all hit new highs in the days ahead of the gathering.The decision to allow the €440bn fund to intervene in the so-called primary bond market was particularly unexpected. But under the terms of the deal, the fund – formally known as the European Financial Stability Facility – would only be able to buy sovereign bonds if a country is willing to enter into an austerity programme similar to the current bail-outs. “It won’t make a huge difference,” said Angela Merkel, the German chancellor.The only element of a deal that was not agreed to was a cut in the interest rate for Ireland’s bail-out loans. Like Greece, Ireland was offered a full percentage point cut in its borrowing costs, from about 6 per cent to 5 per cent. But Enda Kenny, the new Irish prime minister, refused to cede ground to a Franco-German demand that he, in return, raise Ireland’s ultra-low corporate tax rate.
Axel Weber: Markets have understood ECB correctly - Markets have understood the European Central Bank's policy signals, ECB policymaker Axel Weber said on Tuesday, adding he did not want to correct expectations for rates to be at 1.75 percent by year's end. "I think President Trichet said the right thing: it's possible but not on auto-pilot," Weber told reporters when asked if a rate hike should be expected in April or May. "I think markets have understood this kind of language, which is a bit stylized, in the past very well. And I think they've got it this time." Asked if he was comfortable with market expectations that ECB rates will rise from their current record low of 1 percent to 1.75 percent by year's end, Weber replied: "I wouldn't do anything to try to correct market expectations at this point."
ECB Officials Hint at Rate Increases - Two of the European Central Bank‘s top officials signaled Tuesday that the bank may raise interest rates faster than ECB President Jean-Claude Trichet suggested last week, reinforcing market expectations that a new cycle of rate increases is on the way. Axel Weber, whose unofficial reign as leader of the hawkish faction on the ECB’s governing council ends when he leaves the German central bank at the end of next month, told the subscription TV service Deutsches Anleger-Fernsehen that:“Hitherto, it has seldom been the case that the risks of inflation were banished completely with one small interest rate step. There will be a normalization of interest rates,” Weber said. Earlier in the day, Austrian National Bank head Ewald Nowotny, a more dovish member of the ECB’s council, had used the same word to describe the outlook for the bank’s policy.
The ECB's hidden agenda - If you take your inflation target seriously and literally, as the European Central Bank does, the decision to pre-announce an almost-certain rate increase is internally consistent. I had expected the ECB to raise its short-term refinance rate in June, but it is now aiming for April. This two-month gap has nothing to do with unexpected price developments. The decision to jump early is political. I am offering three reasons, and one speculation. First, the decision counteracts concerns in Germany that the ECB is on the verge of opening the monetary floodgates should a non-German succeed Jean-Claude Trichet as president.Second, the decision signals that the ECB is serious about separating out monetary and liquidity policies. At least until July, the ECB will be conducting its main refinancing operations at a fixed interest rate with full allotment. This signal is important because the ECB wants to demonstrate that its freedom to set monetary policy is unconstrained. Third, by signalling an early interest rate increase, the ECB brings about a further appreciation of the euro. No central banker ever admits in public that he would like to see the exchange rate appreciate. But a stronger exchange rate is much more powerful than higher interest rates to counter the type of inflation the eurozone is currently exposed to...
HSBC reveals plans to quit London for Hong Kong - Britain's biggest bank, which has been headquartered in the capital for 19 years, warned key investors that last week's disappointing full-year results have made arguments for shifting HSBC's domicile to Hong Kong "overwhelming". The shareholders have been surprised by the swift gear-change in HSBC's review of its domicile but some have already told the bank that they would support the move. The loss of HSBC's headquarters in London, although threatened for months because of the increase in financial regulations, would be a severe blow to the Coalition which, despite some of its 'banker bashing' rhetoric, is relying on a private-sector-led recovery.
HSBC says “no decision to leave UK” - HSBC, Europe's biggest bank, has denied reports it is planning to move its head office from London to Hong Kong.The Sunday Telegraph quoted a major, unnamed investor as saying "we were told that a move [to Hong Kong] is now more than likely". In a joint statement, both the bank's top executives, the group chairman and chief executive said the talk was "speculative and presumptuous".The bank moved its corporate base from Hong Kong to London 19 years ago.In a rare joint statement, HSBC's chairman Douglas Flint and chief executive Stuart Gulliver, said: "Talk of imminent change in HSBC's position on this matter is entirely speculative and presumptuous."London continues to be widely recognised as one of the world's leading international financial centres, a position it has built over many decades through deliberate policy action. We have been very clear that it is our preference to remain headquartered here."
HSBC squashes reports of its flight from UK as 'speculative' - Britain's biggest bank HSBC has dismissed as "speculative and presumptuous" reports that it would quit the UK because of punitive tax and regulation. The bank's leaders blamed last week's disappointing yearly results on the government's bank levy and bonus tax and have repeatedly warned against suggestions that the banking commission should recommend breaking up the banks. But reports in the Sunday Telegraph quoted a major investor saying that it had been told that a move to Hong Kong had now become "more than likely" were denied by the chairman Douglas Flint and chief executive Stuart Gulliver. In a joint statement today they said: "London continues to be widely recognised as one of the world's leading international financial centres, a position it has built over many decades through deliberate policy action. We have been very clear that it is our preference to remain headquartered here.
Hutton pension reforms could ‘light the blue touch paper’ for a wave of industrial action -Under plans unveiled in the landmark report into the future of public sector pensions by Lord Hutton, the former Labour cabinet minister, six million workers will have to retire later and pay more for a less generous scheme. Unions and trade bodies in virtually every service immediately responded with anger to the proposals, most of which are likely to be adopted by the Government. They raised the prospect of coordinated strikes by NHS staff, civil servants, teachers and other key public sector workers. Brian Strutton, national officer of the GMB union, said "Lord Hutton had a real chance to make sure low paid public sector workers have good quality, affordable pension schemes, but in failing to address the key issue of affordability to members, that chance has been wasted. "Many of his conclusions are questionable and will infuriate public sector workers. It's not cogent enough to be a blueprint for reform but it might well light the blue touch paper for industrial action."
Why mortgage lending slumped by a quarter and house prices may fall by a fifth - Mortgage lending fell by more than a quarter in January, signalling as surely as a falling barometer that the housing market is nearing the end of the calm before the storm. Three years after the credit crisis began, the big surprise is that house prices have not fallen by more already.Now figures from the Council of Mortgage Lenders (CML) show that prospective homebuyers fear the ‘phoney recession’ will soon turn into a real one – with rising unemployment and interest rates. Government talk about reducing public deficits is turning into real job cuts and even the majority who remain employed are seeing their spending power eroded by rising inflation and taxation. Bank of England base rates frozen at historic lows for two years have helped to insulate borrowers from harsh economic reality so far but that cannot last forever. No wonder prospective homebuyers are increasingly reluctant to mortgage their future now. Even after recent marginal reductions in house prices, the average homebuyer today still needs to borrow more than five times national average earnings to buy a typical home, according to Britain’s biggest building society; Nationwide.